## 1laoea2020001

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### Mission, participants, and financing
- IMF Monetary and Capital Markets Department (MCM) TA mission visited Vientiane, Lao People’s Democratic Republic (P.D.R.) during September 16‑27, 2019 to assist the Bank of Lao P.D.R. (BoL) in implementing risk-based supervision (RBS).
- Mission comprised Ms. Hee Kyong Chon (mission chief), Mr. Joel Hefty, Mr. and Richard Nun (external experts).
- Ms. Chon (mission chief) participated in the mission during September 26–27 to conclude the project and to meet the Deputy Governor.
- The mission was conducted within the framework of a TA program to adopt RBS and strengthen capacity of Banking Supervision Department (BSD) staff.
- The mission was financed by the Financial Reform and Strengthening Initiative (FIRST).
- A TA project was approved in December 2015 with FIRST funding; a Phase II project was approved in December 2017 with FIRST funding.

### Executive summary — key findings
- BSD of the BoL is implementing RBS methods; BoL staff show favorable results in understanding and applying RBS while still in early stages of capacity development.
- A new commercial banking law became effective in June 2019; the law:
  - incorporates expectations that financial institutions establish appropriate risk management systems and maintain adequate capital and liquidity;
  - gives the BoL purview over the adequacy of risk management in banks.
- The RBS Manual has been formally approved and is being applied; the manual is considered an internal document though parts may be shared with the banking industry in the future.
- Institution Profiles (IP) and Risk Assessment Summary (RAS) documents have been prepared for all banks and foreign bank branches (FBBs); mission suggested minor changes to IP and RAS to improve efficiency and strengthen focus on risk in the RAS.
- Mission identified need to strengthen measures for liquidity and clarify calculation of the foreign exchange net open position (FX NOP).
- Recommendation to streamline treatment of branches of the same bank: for FBBs and branches of domestic banks, all branches of the same entity are best analyzed using a single IP, RAS, and report of onsite examination (ROX). Onsite examinations may be conducted separately but should use the same financial statement date.
- BoL improved systemic report using key risk indicators and identifying trends over time by institution type; mission recommends finalization and quarterly submission to senior management.
- Planning and conducting onsite examinations has significantly improved; number of banks not examined for long intervals has been reduced; planning and timelines have incorporated prior recommendations though identification of areas of focus can improve further.
- BSD conducted 18 onsite examinations to date in 2019.

### Main recommendations (priorities and timeframes)
- Note: ST means short-term (3–6 months), MT medium-term (6 months to one year), and LT long-term (more than one year).

1. Implementation of RBS
  - 1. Streamline supervision of multiple branches of the same bank: use a single IP and RAS for each bank. Use a single ROX for each foreign bank (internally); continue using a separate ROX for each FBB (to notify the bank). — High LT
  - 2. Enhance cooperation and communication among offsite and onsite for planning inspections; prepare planning memo jointly. — High ST
  - 3. Establish Memoranda of Understanding (MOUs) with regulators of all countries with banks operating in Lao P.D.R. — High LT
  - 4. Give priority to conducting bankers’ information seminar to explain RBS, Capital, CAMELS rating system, and roles and responsibilities of bank boards of directors and senior managers. — Medium LT
  - 5. As new regulations are issued pursuant to the new banking law, align and update RBS Manual to new requirements. — Medium LT

2. Offsite and Systemic Analysis
  - 6. Use revised IP and RAS formats for all banks starting 2019:3Q.
    - Emphasize bank business models (primary risk-taking and earning sources) in IP.
    - Identify summarized sources of significant risks in RAS. — High ST
  - 7. Expand the scope of data collection and enhance liquidity analysis in RAS and systemic report.
    - Collect remaining maturity information so that short-term assets and liabilities may be presented.
    - Present other measures of liquidity until short-term assets and short-term liability indicators are available. — High MT
  - 8. Align calculation of total foreign exchange net open position (FX NOP) relative to capital to the Financial Soundness Indicator (FSI); continue to monitor each NOP FX to capital. — Medium ST
  - 9. Rely mainly on onsite examiners to rate “M” – management, as explained during the mission. — Medium LT

3. Onsite Examinations
  - 10. Begin analysis with “big picture” view of performance, governance, and risk management; then look for anomalies and identify causes and possible risks. Focus first on asset quality and provisions, and then earnings, liquidity, and capital strength. — High ST
  - 11. Continue to focus the examination schedule on the largest and riskiest banks, and those with longest interval since last inspection; use targeted/limited scope inspections for smaller and low-risk banks. — High ST

### Background — sector structure and scale
- Gross assets of the banking sector are LAK 144,318 billion (95 percent of estimated GDP).
- The banking sector consists of 36 commercial banks and 1 specialized bank.
- As of end‑2019:Q2, asset shares were:
  - 3 state-owned commercial banks held 38 percent of banking assets;
  - 20 foreign bank branches held 30 percent;
  - 8 private banks, 14 percent;
  - 8 foreign bank subsidiaries, 7 percent;
  - 3 joint-venture banks, 8 percent;
  - 1 specialized bank, 2 percent.
- Clarification on foreign banks and branches: previous mission reports showed 42 banks operating in Lao P.D.R.; mission clarified that 4 of the 14 foreign banks operate a total of 10 branches in Lao, and the BoL licenses and treats each foreign branch as a separate “bank.” In reality, there are only 14 foreign banks operating branches in the Lao P.D.R.; 1 has 4 branches, and 3 have 2 branches each.

### Progress since previous TA mission (selected status items)
- RBS Manual: Officially approved — High — Done.
- IP and RAS for all banks: Completed — High — Done.
- Amend IP to focus on static profile data, RAS on dynamic risk data — Medium — Done.
- Use ROX format as recommended; focus on risk assessment, support of supervisory response action/s — High — Done.
- Prepare draft for bankers’ seminar — Low — Not done.
- Provide better definitions for CAMELS ratings in RBS Manual — High — Done.
- Strengthen qualitative assessments for CAMELS ratings (offsite and onsite) — High — Being done; progress noted.
- Develop qualitative criteria for FBB ratings — High — In progress.
- Strengthen banking system reporting; show system averages for key FSIs; add peer group averages — High — Report drafted.
- Support system report with most recent RAS for largest banks and all problem banks — Medium — In progress.
- Conduct targeted or limited scope inspections for banks not examined for long time and systemically important banks — High — Substantially done.
- Adopt internal BSD policy for onsite examination scheduling and timeline — Medium — Criteria are included in Annex of the Manual.
- Adopt policy for supervisory response, corrective measures — High — Awaiting regulations being drafted.

### MOUs and cross-border supervision
- Fourteen foreign banks operate 20 branches in the Lao P.D.R., but so far, an information sharing agreement has only been agreed with the Bank of Thailand.
- Informal communication and cooperation are occurring through various channels, but more formalized MOUs are a requisite to effective cross-border supervision of multi-national banking organizations.
- Recommendations:
  - Establish MOUs with home country regulators for all banks operating in Lao P.D.R.
  - Consider applying qualitative criteria for FBBs mentioned above in assessing the “M” component of the CAMEL rating.

### Supervisory response, regulations, and internal policy
- BoL/BSD is drafting/updating several regulations and has requested TA from World Bank for this.
- Two regulations, “Early Intervention” No. 811, and “Bank Resolution,” are expected to address supervisory responses.
- BSD managers indicated that, once these regulations are adopted, an internal policy for applying supervisory responses can be considered.
- The mission cautioned that the BSD should not delay implementation of corrective actions while awaiting final regulations.
- Recommendation:
  - When developing internal policy for applying response and corrective measures, refer to Appendix I.

### Offsite supervision — IP and RAS, data quality
- Since transition to RBS began, the offsite team has completed IP RAS documents for all banks in the Lao P.D.R.
- Mission reiterated:
  - Make the IP more static and the RAS more dynamic.
  - IP should reflect bank size, significance, ownership, leadership, business model, products, and markets.
  - RAS should discuss recent performance and identify types and sources of net risk to be monitored and examined.
- Recommendations:
  - Implement revised RAS and IP format for all banks starting from 2019:3Q.
  - Evaluate and supervise multiple branches of the same bank as a group preparing one IP, one RAS, and one ROX.
- Data quality issues:
  - Liquidity measures need additional attention; calculation and monitoring of the total net open position (NOP) in foreign currencies should be clarified.
  - BoL had plans to collect data to calculate liquid assets and short-term liabilities in 2018; this has not yet been completed.
  - Until requisite data is available, use other liquidity indicators in RAS reports (e.g., (Cash + Due From Correspondents) / Customer Deposits; Gross Loans / (Deposits + Borrowings)).
  - Total NOP calculation should be reviewed to ensure harmonization with the FSI; if BoL regulations reference a different method, both methods should be presented and monitored.
- Recommendation:
  - Enhance liquidity indicators presented in RAS; clarify calculation of total net open position in FX to capital ratio.

### Systemic report
- Offsite supervisors have drafted a report on the banking system for senior management of the BoL; prudential and risk ratios are clearer by institution type and time period.
- Some data can be presented better in table format rather than narrative; some graphs may require a secondary scale.
- Additional institutional and systemic liquidity indicators that BoL calculates and monitors should be included.
- Recommendation:
  - Add additional indicators of liquidity to the systemic report.

### Training, coaching, and collaboration
- Completed IP and RAS documents for two banks were used for hands-on training with BSD staff.
- Need for a more holistic view of risk and clearer identification of root causes; shift from compliance focus to risk-based focus requires practice, expertise, coaching, and validation.
- Mission noted the “M” rating for bank management is best assigned during an onsite inspection; offsite examiners’ view is backward-looking and less accurate.
- Recommendation highlights:
  - Emphasize bank business models in IPs.
  - Identify and summarize root causes of risk areas in RAS reports.
  - Rely primarily on onsite examiners to assign “M” rating for management.

### Onsite supervision — planning, conduct, ROX, and staffing
- BSD planning process is generally good but remains compliance-focused rather than risk-focused.
- Current pre-planning is a joint effort of offsite and onsite staff using IP, RAS, previous inspection, and offsite monitoring.
- Mission provided improved format for planning memo and used real bank data to assist staff to concentrate on asset quality, impact on capital, and necessary BoL actions.
- For most banks, lending and deposit-taking are main activities; review of asset quality is usually the most important examination task followed by provisions, earnings, liquidity, and capital.
- If FX trading or FX-funded loans/investments are substantial, FX NOP analysis becomes important.
- Credit analysis should focus on repayment capacity and collateral support; valuations must be reasonably supported by reliable information.
- Staffing and schedule progress:
  - 2019 schedule originally contemplated 17 inspections but was revised to 19.
  - As of 2019:Q3, 18 inspections have been completed, 1 is being done during this mission, and it is possible that 2 or 3 more could be done by year’s end.
  - A schedule has not yet been prepared for 2020, but it is anticipated that 20–23 inspections can be made.
  - Using available data, the mission helped BSD staff identify six banks that should be top priority for inspection in 2020.
  - Recommendation: targeted or limited scope inspections requiring only one week could be conducted for many smaller banks where the interval since last examination is 18 months or more.
- ROX (examination reporting):
  - ROX format is largely as recommended and has been adopted.
  - Two copies of ROX are prepared: one internal copy shows individual CAMELS component ratings and overall rating; a second copy provided to the bank does not show the ratings.
  - Examiners verbally discuss risk levels in wrap-up meetings but do not yet disclose ratings; disclosure may occur in the future.
  - Recommendations:
    - Prepare statistical data, FSI ratios, and some analytical text prior to onsite activities; finalize findings and conclusions after examination.
    - Give priority to conducting bankers’ informational seminar to explain RBS and CAMELS rating system so that ratings can be shared and discussed with board of directors and managers.

### Future TA needs and proposed modality
- Deputy Governor and senior management expressed desire for continued TA. Transition to RBS requires extensive capacity building and hands-on training for all BSD staff.
- Most TA activity so far focused on developing concepts, manual, and tools; going forward there must be more practical application, experience, and learning-by-doing/on-the-job training for BSD staff, preferably related to specific bank(s) being evaluated.
- BoL does not presently have its own experts in RBS; mission encourages development of RBS skills so BoL can provide its own introductory and intermediate courses.
- Proposed modality for future missions:
  - Classroom training on specific risk areas (e.g., credit, liquidity, or market risks) for one week; followed by an onsite examination of that risk area for one week.
  - Subject matter experts to assist with pre-examination planning, risk analysis, and coach onsite examination activities.
  - On completion, experts would work with examiners to collate findings and conclusions and develop a draft report of examination.
- TA visits at regular intervals are recommended; peripatetic visits to be examined if funding and authorities approve.

### Appendix I — CAMELS-based Supervisory Categories (summary)
- Supervisory Categories reflect Composite CAMELS, Risk Profile, Capital Adequacy, and other characteristics and determine supervisory response.
- Categories and key criteria:
  - Sound; Non-problem
    - Composite CAMELS: 1, or 2 with no adverse trends
    - Risk Profile: Low; or Moderate and decreasing
    - Capital Adequacy: Adequately to well-capitalized
  - Potential Problem
    - Composite CAMELS: 3, or 2 with only modest adverse trends
    - Risk Profile: Low but increasing, or Moderate and steady, or High but decreasing
    - Capital Adequacy: Inadequate; somewhat under-capitalized
  - Problem; Troubled
    - Composite CAMELS: 4, or 3 with adverse trends
    - Risk Profile: Moderate and increasing, or steadily High
    - Capital Adequacy: Under-capitalized to significantly under-capitalized
  - Failing; Imminently Insolvent
    - Composite CAMELS: 5, or 4 with serious adverse trends
    - Risk Profile: Steadily High and or increasing
    - Capital Adequacy: Significantly under-capitalized
    - Other: Tangible equity capital less than 2.0 percent of total assets and bank operationally unprofitable
  - Failed; Insolvent
    - Composite CAMELS: 5 (Risk Profile irrelevant)
    - Capital Adequacy: Critically under-capitalized
    - Other: Negative tangible equity capital

- Types of supervisory responses:
  - Informal Responses: Board Resolution; Memorandum of Understanding.
  - Formal Actions: Corrective orders imposed by BoL citing legal authority and required measures.
  - Penalties and Fines: Possible but limited value for improving a weak bank.

- Minimum recommended supervisory responses by category:
  - Sound; Non-Problem Bank: Normal Surveillance and Examination; Meeting with board; Bank to send Written Response.
  - Potential Problem Bank: Above plus Board Resolution; Memorandum of Understanding; Corrective Order; Corporate Leverage controls.
  - Problem; Troubled Bank: Above plus Order to Appoint Consultant/Advisor; Removal/Suspension of Directors or Officers; Reorganization; Notice of Intent to Cancel License; Restrictions on activities.
  - Failing/Failed Banks: Above plus Capital Demand and Order Taking Control; Liquidation and Revocation of License; Vesting; Monetary Penalties.

### Appendix II — Intervals between onsite examinations (counts)
- Interval (in months) — Last Mission Mar-2019 — This Mission Sept-2019
  - > 24 — 11 — 4
  - 24 — 5 — 2
  - 21 — 7 — --
  - 18 — 1 — 8
  - 15 — 4 — 5
  - 12 — 7 — 1
  - 9 — 1 — --
  - 6 — -- — 7
  - 3 — 2 — 4
  - < 3 — -- — 4
  - No Exam — 5 — 2
- Totals: 43 (Last Mission) and 37 (This Mission)

*Source: IMF MCM TA mission report — Preface and Executive Summary (September 16–27, 2019).*

### Preface.................................................................................................................

### 1laoea2020001 - Preface

### Mission, participants, and financing
- IMF Monetary and Capital Markets Department (MCM) technical assistance (TA) mission visited Vientiane, Lao People’s Democratic Republic (P.D.R.) during September 16‑27, 2019 to assist the Bank of Lao P.D.R. (BoL) in implementing risk-based supervision (RBS).
- Mission comprised Ms. Hee Kyong Chon (mission chief), Mr. Joel Hefty, Mr. and Richard Nun (external experts).
- Ms. Chon (mission chief) participated in the mission during September 26–27 to conclude the project and to meet the Deputy Governor.
- The mission was conducted within the framework of a TA program to adopt RBS and strengthen capacity of Banking Supervision Department (BSD) staff.
- The mission was financed by the Financial Reform and Strengthening Initiative (FIRST).
- A TA project was approved in December 2015 with FIRST funding; a Phase II project was approved in December 2017 with FIRST funding.

### Executive summary — key findings
- BSD of the BoL is implementing RBS methods; BoL staff show favorable results in understanding and applying RBS while still in early stages of capacity development.
- A new commercial banking law became effective in June 2019; the law:
  - incorporates expectations that financial institutions establish appropriate risk management systems and maintain adequate capital and liquidity;
  - gives the BoL purview over the adequacy of risk management in banks.
- The RBS Manual has been formally approved and is being applied; the manual is considered an internal document though parts may be shared with the banking industry in the future.
- Institution Profiles (IP) and Risk Assessment Summary (RAS) documents have been prepared for all banks and foreign bank branches (FBBs); mission suggested minor changes to IP and RAS to improve efficiency and strengthen focus on risk in the RAS.
- Mission identified need to strengthen measures for liquidity and clarify calculation of the foreign exchange net open position (FX NOP).
- Recommendation to streamline treatment of branches of the same bank: for FBBs and branches of domestic banks, all branches of the same entity are best analyzed using a single IP, RAS, and report of onsite examination (ROX). Onsite examinations may be conducted separately but should use the same financial statement date.
- BoL improved systemic report using key risk indicators and identifying trends over time by institution type; mission recommends finalization and quarterly submission to senior management.
- Planning and conducting onsite examinations has significantly improved; number of banks not examined for long intervals has been reduced; planning and timelines have incorporated prior recommendations though identification of areas of focus can improve further.
- BSD conducted 18 onsite examinations to date in 2019.

### Main recommendations (Table 1)
- Note: ST means short-term (3–6 months), MT medium-term (6 months to one year), and LT long-term (more than one year).
1. Implementation of RBS
  - 1. Streamline supervision of multiple branches of the same bank: use a single IP and RAS for each bank. Use a single ROX for each foreign bank (internally); continue using a separate ROX for each FBB (to notify the bank). — High LT
  - 2. Enhance cooperation and communication among offsite and onsite for planning inspections; prepare planning memo jointly. — High ST
  - 3. Establish Memoranda of Understanding (MOUs) with regulators of all countries with banks operating in Lao P.D.R. — High LT
  - 4. Give priority to conducting bankers’ information seminar to explain RBS, Capital, CAMELS rating system, and roles and responsibilities of bank boards of directors and senior managers. — Medium LT
  - 5. As new regulations are issued pursuant to the new banking law, align and update RBS Manual to new requirements. — Medium LT
2. Offsite and Systemic Analysis
  - 6. Use revised IP and RAS formats for all banks starting 2019:3Q.
    - Emphasize bank business models (primary risk-taking and earning sources) in IP.
    - Identify summarized sources of significant risks in RAS. — High ST
  - 7. Expand the scope of data collection and enhance liquidity analysis in RAS and systemic report.
    - Collect remaining maturity information so that short-term assets and liabilities may be presented.
    - Present other measures of liquidity until short-term assets and short-term liability indicators are available. — High MT
  - 8. Align calculation of total foreign exchange net open position (FX NOP) relative to capital to the Financial Soundness Indicator (FSI); continue to monitor each NOP FX to capital. — Medium ST
  - 9. Rely mainly on onsite examiners to rate “M” – management, as explained during the mission. — Medium LT
3. Onsite Examinations
  - 10. Begin analysis with “big picture” view of performance, governance, and risk management; then look for anomalies and identify causes and possible risks. Focus first on asset quality and provisions, and then earnings, liquidity, and capital strength. — High ST
  - 11. Continue to focus the examination schedule on the largest and riskiest banks, and those with longest interval since last inspection; use targeted/limited scope inspections for smaller and low-risk banks. — High ST

### Background — sector structure and scale
- Gross assets of the banking sector are LAK 144,318 billion (95 percent of estimated GDP).
- The banking sector consists of 36 commercial banks and 1 specialized bank.
- As of end‑2019:Q2, asset shares were:
  - 3 state-owned commercial banks held 38 percent of banking assets;
  - 20 foreign bank branches held 30 percent;
  - 8 private banks, 14 percent;
  - 8 foreign bank subsidiaries, 7 percent;
  - 3 joint-venture banks, 8 percent;
  - 1 specialized bank, 2 percent.
- Clarification: previous mission reports showed 42 banks operating in Lao P.D.R.; mission clarified that 4 of the 14 foreign banks operate a total of 10 branches in Lao, and the BoL licenses and treats each foreign branch as a separate “bank.” In reality, there are only 14 foreign banks operating branches in the Lao P.D.R.; 1 has 4 branches, and 3 have 2 branches each.

### Progress since previous TA mission and implementation status (Table 2 highlights)
- RBS Manual: Officially approved — High — Done.
- IP and RAS for all banks: Completed — High — Done.
- Amend IP to focus on static profile data, RAS on dynamic risk data — Medium — Done.
- Use ROX format as recommended; focus on risk assessment, support of supervisory response action/s — High — Done.
- Prepare draft for bankers’ seminar — Low — Not done.
- Provide better definitions for CAMELS ratings in RBS Manual — High — Done.
- Strengthen qualitative assessments for CAMELS ratings (offsite and onsite) — High — Being done; progress noted.
- Develop qualitative criteria for FBB ratings — High — In progress.
- Strengthen banking system reporting; show system averages for key FSIs; add peer group averages — High — Report drafted.
- Support system report with most recent RAS for largest banks and all problem banks — Medium — In progress.
- Conduct targeted or limited scope inspections for banks not examined for long time and systemically important banks — High — Substantially done.
- Adopt internal BSD policy for onsite examination scheduling and timeline — Medium — Criteria are included in Annex of the Manual.
- Adopt policy for supervisory response, corrective measures — High — Awaiting regulations being drafted.

### Implementation of RBS — law, manual, training, and FBB criteria
- Banking law and prudential regulations:
  - New commercial banking law effective June 2019; law explicit that banks develop comprehensive systems for corporate governance, risk management, and internal audit.
  - BoL has broad authority to ensure safe and sound operations, adequate capital and liquidity, risk management, disclosures, consumer protection, and defines criteria/measures for early intervention and resolution.
  - Practical application requires promulgation of detailed regulations; 16 regulations are in process of drafting or revision. It is anticipated by BSD staff that the regulations will be completed by mid-2021.
  - BoL should ensure RBS Manual is updated to coincide with any significant changes to regulations.
- RBS Manual:
  - Lao language version is final and approved by BoL senior management as an internal working document for BSD to conduct RBS.
  - Recommendation: prepare a summary document that can be shared publicly to help inform bankers of RBS methods and BoL supervisory expectations.
- Training and banker information seminar:
  - Continued hands-on training of all BSD staff using actual bank data is needed; learning-by-doing is optimal.
  - BSD managers requested more training; specific expertise by risk topic should be developed as capacity strengthens.
  - A seminar to explain RBS objectives and methods to bankers remains very important; BSD may share a condensed version of the manual with bankers in the future.
  - Recommendation: BSD staff should prepare and conduct an informational seminar for bankers to share supervisory priorities and expectations as soon as possible.
- Criteria for supervision of foreign branches (FBB):
  - Analysis for FBBs differs from domestic banks; IP should summarize parent bank strength, parent support and oversight, and influence on the Lao branch.
  - Since FBBs do not have “capital” in the normal sense, examiners should focus on access to sources of capital including extent of parent support, quality of parent risk management oversight, level of head office funding support, level of profits for head office repatriation, and other factors affecting safety and soundness of the Lao branch.
  - Examiners should consider home country regulator onsite examinations; BoL should request home regulator participation, discuss findings and remedial actions, and share the report.

*Source: IMF MCM TA mission report — Preface and Executive Summary (September 16–27, 2019).*

### 14. Memoranda of Understanding (MOUs) provide a basis for information sharing

### 14. Memoranda of Understanding (MOUs) provide a basis for information sharing

### MOUs and cross-border supervision
- Fourteen foreign banks operate 20 branches in the Lao P.D.R., but so far, an information sharing agreement has only been agreed with the Bank of Thailand.
- Informal communication and cooperation are occurring through various channels, but more formalized MOUs are a requisite to effective cross-border supervision of multi-national banking organizations.
- Recommendations:
  - Establish MOUs with home country regulators for all banks operating in Lao P.D.R.
  - Consider applying qualitative criteria for FBBs mentioned above in assessing the “M” component of the CAMEL rating.

### Supervisory response (BoL regulatory developments and internal policy)
- The BoL/BSD is drafting/updating several regulations and has requested TA from World Bank for this.
- Two regulations, “Early Intervention” No. 811, and “Bank Resolution,” are expected to address supervisory responses.
- BSD managers indicated that, once these regulations are adopted, an internal policy for applying supervisory responses can be considered.
- The mission cautioned that the BSD should not delay implementation of corrective actions while awaiting final regulations.
- The mission suggests BoL begin developing a more defined range of supervisory responses to be used based on identified risk levels, trends, compliance, managerial capacities and cooperation. An example is provided in Appendix I.
- Recommendation:
  - When developing internal policy for applying response and corrective measures, refer to Appendix I.

### III. OFFSITE SUPERVISION — IP and RAS
- Since transition to RBS began, the offsite team has completed IP RAS documents for all banks in the Lao P.D.R.
- The mission reviewed IP and RAS documents for one commercial bank and one foreign branch; progress is noted but some streamlining and additional practice/coaching are needed.
- The mission reiterated:
  - Make the IP more static and the RAS more dynamic.
  - IP should reflect bank size, significance, ownership, leadership, business model, products, and markets.
  - RAS should discuss recent performance and identify types and sources of net risk to be monitored and examined.
- The mission provided sample IP and RAS documents with minor changes to emphasize a holistic view, streamline workflow, and improve risk focus. BoL management supports the slight rearrangement.
- Multiple branches (domestic or foreign) should be viewed and evaluated together; branches of the same bank should be supervised as a group with a single IP and RAS and one ROX prepared.
- Recommendations:
  - Implement revised RAS and IP format for all banks starting from 2019:3Q..
  - Evaluate and supervise multiple branches of the same bank as a group preparing one IP, one RAS, and one ROX.

### Data quality and performance ranges
- Use of real bank examples identified two data issues: liquidity measures need additional attention; calculation and monitoring of the total net open position (NOP) in foreign currencies should be clarified.
- Additional indicators of liquidity are needed. Previous missions recommended more than one measure of liquidity; two FSIs were agreed. BoL had plans to collect data to calculate liquid assets and short-term liabilities in 2018; this has not yet been completed.
- BoL reiterated it would begin collecting data to calculate liquid assets and short-term liabilities. Until requisite data is available, the BoL should use other liquidity indicators in RAS reports (e.g., (Cash + Due From Correspondents) / Customer Deposits; Gross Loans / (Deposits + Borrowings)).
- Calculation of Total NOP should be reviewed. BoL monitors net open positions in individual banks but has not been calculating the overall NOP correctly. Total NOP calculation is recommended to be reviewed to ensure harmonization with the FSI. If BoL regulations reference a different method, both the BoL method and the FSI method should be presented and monitored.
- Recommendation:
  - Enhance liquidity indicators presented in RAS; clarify calculation of total net open position in FX to capital ratio.

### Systemic report
- Offsite supervisors have drafted a report on the banking system for senior management of the BoL; prudential and risk ratios are clearer by institution type and time period.
- Some data can be presented better in table format rather than narrative; some graphs may require a secondary scale.
- Additional institutional and systemic liquidity indicators that BoL calculates and monitors should be included in the report (see paragraphs 21 and 22).
- Recommendation:
  - Add additional indicators of liquidity to the systemic report.

### Training, coaching, and collaboration
- Completed IP and RAS documents for two banks were used for hands-on training with BSD staff, enabling effective training and identification of areas for additional work.
- A more holistic view of risk and clearer identification of root causes of risk are needed. Shifting from compliance focus to risk-based focus requires practice, expertise, coaching, and validation.
- Initially, better analysis and use of data already supplied by banks will identify causes; as skills strengthen, targeted communication with bankers will deepen analysis and enhance transition from RAS to onsite planning.
- The mission noted the “M” rating for bank management is best assigned during an onsite inspection; offsite examiners’ view is backward-looking and less accurate.
- Collaboration between offsite and onsite teams has improved significantly and should continue to enhance understanding of banks and supervision effectiveness.
- Recommendations:
  - Emphasize bank business models (primary risk-taking and earnings sources) in IPs.
  - Identify and summarize root causes of risk areas in RAS reports.
  - Rely primarily on onsite examiners to assign “M” rating for management.

### IV. ONSITE SUPERVISION — Planning and conducting onsite examinations
- The BSD planning process is generally good but remains compliance-focused rather than risk-focused.
- Current pre-planning is a joint effort of offsite and onsite staff using IP, RAS, previous inspection, and offsite monitoring. Onsite staff prepare a memo to the division manager detailing issues to investigate.
- The mission reviewed a planning memo that emphasized compliance: seven of eight items listed for review pertained to compliance, only one dealt with risk.
- Data review showed negative trends for key ratios such as nonperforming loans (NPL) and capital, a high level of large credit exposures, and one large exposure that was more than one-third of capital and in excess of the single borrower limit.
- The mission provided an improved format for the planning memo and used real bank data to assist staff to concentrate examination activities on asset quality, impact on capital, and necessary BoL actions.
- The mission reviewed BSD’s timetable for onsite inspections and noted the timeline is similar to the sample provided at the previous mission, slightly shorter.
- For most banks in Lao, lending and deposit-taking are the main activities and loans are the bulk of assets; review of asset quality is usually the most important examination task followed by analyzing adequacy of loan loss provisions, impact on earnings and liquidity, and adequacy of capital.
- If FX trading or loans/investments in FX funded by FX deposits/borrowings are substantial, FX NOP analysis becomes important.
- Credit analysis should focus on repayment capacity and collateral support; valuations must be reasonably supported by reliable information.
- Compliance is important, but risk management and governance should receive greater emphasis. If loans to a single customer exceed single borrower limits, examiners should determine reasons and review loan committee and board minutes.
- Staffing and schedule progress:
  - 2019 schedule originally contemplated 17 inspections but was revised to 19.
  - As of 2019:Q3, 18 inspections have been completed, 1 is being done during this mission, and it is possible that 2 or 3 more could be done by year’s end.
  - Table 5 (Appendix II) shows intervals since previous exam; the interval exceeds 18 months for only a few banks and those banks have much lower size and risk than noted at previous missions.
  - A schedule has not yet been prepared for 2020, but it is anticipated that 20–23 inspections can be made.
  - Using available data, the mission helped BSD staff identify six banks that should be top priority for inspection in 2020.
  - The mission recommended targeted or limited scope inspections requiring only one week could be conducted for many smaller banks where the interval since last examination is 18 months or more.
- Recommendations:
  - Identify areas of focus through closer cooperation between onsite and offsite teams; exam memo outlining areas of focus should be prepared jointly.
  - Analysis should start with a “big picture” view of bank performance, governance, and risk management; then look for anomalies and outliers. For most banks, focus first on asset quality, then probable impact on provisions, earnings, liquidity, and capital strength.
  - Continue to focus examination schedules and activities on the largest and riskiest banks and those with longest interval since previous exam.

### ROX (examination reporting)
- A sample ROX was provided; some data elements and analytical narrative may be completed in advance, but conclusions should only be drafted after facts gathered during the onsite exam are analyzed.
- The ROX format is largely as recommended; BSD has adopted and is using the recommended ROX format.
- The challenge is for examiners to identify and properly evaluate risk levels, trends, causal factors, and to provide well-supported analytical comments—condition, cause, impact—in the ROX. This requires on-the-job work and coaching from TA experts.
- Current practice: BSD prepares two copies of an examination report (ROX): one internal copy shows individual CAMELS component ratings and overall rating; a second copy provided to the bank does not show the ratings. Examiners verbally discuss risk levels and concerns in wrap-up meetings but do not yet disclose ratings. BSD staff indicated disclosure of ratings may be done in the future.
- Recommendations:
  - Statistical data, FSI ratios, and some analytical text can be prepared prior to start of onsite activities; however, properly verified and well-supported examination findings and conclusions can only be written after conducting an examination.
  - BSD should give priority to conducting bankers’ informational seminar to explain RBS and CAMELS rating system so that ratings can be shared and discussed with board of directors and managers of each examined bank.

### V. FUTURE TA NEEDS
- Deputy Governor and senior management of BoL expressed desire for continued TA. Transition to RBS requires extensive capacity building and hands-on training for all BSD staff.
- Most TA activity so far focused on developing concepts, manual, and tools; going forward there must be more practical application, experience, and learning-by-doing/on-the-job training for BSD staff, preferably related to specific bank(s) being evaluated.
- Bankers must be better informed about RBS methods and expectations.
- Future TA will depend on priority and funding. If funding is available and authorities approve, mission would examine option of peripatetic visits.
- BoL does not presently have its own experts in RBS; mission encourages development of RBS skills so BoL can provide its own introductory and intermediate courses.
- Capacity development is best achieved by working closely with staff analyzing actual bank data; offsite analysts and onsite examiners need more coaching and on-the-job experience to identify risks, assign ratings, and prepare well-supported narrative reports. TA visits at regular intervals are recommended.
- Proposed modality for future missions:
  - Classroom training on specific risk areas (e.g., credit, liquidity, or market risks) for one week; followed by an onsite examination of that risk area for one week.
  - Subject matter experts would assist with pre-examination planning, risk analysis, and coach onsite examination activities as needed, covering pre-examination discussions, documenting preliminary risk assessments, formal presentation requests from a bank, and team interviews with bank executives and functional heads.
  - On completion, experts would work with examiners to collate findings and conclusions and develop a draft report of examination.

*Source: 1laoea2020001 - 14. Memoranda of Understanding (MOUs) provide a basis for information sharing*

### 44.   The future missions on RBS will be designed in consultation with the World

### 1laoea2020001 - 44.   The future missions on RBS will be designed in consultation with the World

### Coordination of future RBS missions
- Future missions on RBS will be designed in consultation with the World Bank to avoid overlaps and ensure consistency in TA advice.
- The BoL has requested the World Bank to provide TA covering a broad range of financial sector issues in Lao P.D.R., including TA on prudential regulations (e.g., capital adequacy, liquidity, large exposures, consolidated supervision, etc.) and reporting and disclosure requirements of banking data.
- The IMF will provide TA on hands-on coaching with a focus on supervisory tools and practical implementation of these new rules.

### Appendix I — Supervisory categories (CAMELS-based)
- At the conclusion of an onsite examination, banks will be assigned a CAMELS rating and grouped into one of five Supervisory Categories. The Supervisory Category reflects the CAMELS rating, Risk Profile and Capital Adequacy of the bank and will be the basis for an initial decision on the type of supervisory response.

- Supervisory Categories and descriptions:
  - Sound; Non-problem
    - Composite CAMELS: 1, or 2 with no adverse trends
    - Risk Profile: Low; or Moderate and decreasing
    - Capital Adequacy: Adequately to well-capitalized
    - Other Characteristics: No material problems or matters of significant supervisory concern; deficiencies are correctable in normal course of business.
  - Potential Problem
    - Composite CAMELS: 3, or 2 with only modest adverse trends
    - Risk Profile: Low but increasing, or Moderate and steady, or High but decreasing
    - Capital Adequacy: Inadequate; somewhat under-capitalized
    - Other Characteristics: Limited to moderate supervisory concern; capital ratios may be slightly above minimums but not adequate; deficiencies require immediate, ongoing attention to avoid financial deterioration.
  - Problem; Troubled
    - Composite CAMELS: 4, or 3 with adverse trends
    - Risk Profile: Moderate and increasing, or steadily High
    - Capital Adequacy: Under-capitalized to significantly under-capitalized
    - Other Characteristics: May still be operationally profitable and tangible equity capital may be above 2.0 percent of total assets, but adverse reports indicate poor condition.
  - Failing; Imminently Insolvent
    - Composite CAMELS: 5, or 4 with serious adverse trends
    - Risk Profile: Steadily High and or increasing
    - Capital Adequacy: Significantly under-capitalized
    - Other Characteristics: Tangible equity capital less than 2.0 percent of total assets and bank operationally unprofitable (losing money before loan loss provisions and non-cash charges for depreciation and amortization).
  - Failed; Insolvent
    - Composite CAMELS: 5 (Risk Profile irrelevant)
    - Risk Profile: —
    - Capital Adequacy: Critically under-capitalized
    - Other Characteristics: Negative tangible equity capital, i.e., liabilities exceed assets after making adjustments to establish adequate loan loss provisions and eliminate assets of negligible or non-bankable value.

### Appendix I — Types of supervisory responses
- Objectives of responses:
  - (a) restore troubled banks to an acceptable condition as quickly as possible;
  - (b) remove banks that are not salvageable at least possible cost.

- Informal Responses
  - Used under general authority to supervise and regulate banks.
  - May be developed in cooperation with a bank; strong encouragement for boards of directors to agree to corrective measures suggested by the BSD.
  - Common types: Board Resolution; Memorandum of Understanding.

- Formal Actions
  - Taken as circumstances or the Banking Law requires.
  - Formal actions cite the legal authority, unsafe and unsound practices/conditions, and list specific measures to correct problems.
  - Failure to substantially comply can lead to more restrictive sanctions.
  - Formal actions are unilaterally imposed by the Bank of Lao P.D.R.; major provisions will not be negotiated with bank directors, managers, or shareholders. Banks must acknowledge receipt and understanding of an action.

- Penalties and Fines
  - Violations of the Banking Law or applicable regulations are a basis for imposing fines.
  - Fines have limited value for improving a weak bank and may weaken a bank further if paid from bank resources; limited value for correcting unsafe and unsound practices because of time and legal challenges.
  - Fines can be useful to deter future misconduct.

### Appendix I — Minimum recommended supervisory responses by category
- Sound; Non-Problem Bank
  - Normal Surveillance and Examination.
  - Meeting with board of directors at end of examination.
  - Bank to send Written Response to examination findings.
- Potential Problem Bank
  - Any or all of the above plus:
  - Board Resolution to address deficiencies.
  - Memorandum of Understanding.
  - Corrective Order.
  - Corporate Leverage (e.g., branch approvals).
- Problem; Troubled Bank
  - Any or all of the above plus:
  - Order to Appoint Consultant/Advisor.
  - Removal/Suspension of Directors or Officers.
  - Reorganization, Restructuring, Merger.
  - Notice of Intent to Cancel License.
  - Directions/Conditions after Notice of Intent to Cancel License.
  - Restriction/Suspension of Banking Activities.
- Failing, Imminently Insolvent; and Failed, Insolvent Banks
  - Any or all of the above plus:
  - Capital Demand and Order Taking Control.
  - Liquidation and Revocation of License.
  - Vesting.
  - Monetary Penalties.

### Appendix II — Intervals between onsite examinations (counts)
- Interval (in months) — Last Mission Mar-2019 — This Mission Sept-2019
  - > 24 — 11 — 4
  - 24 — 5 — 2
  - 21 — 7 — --
  - 18 — 1 — 8
  - 15 — 4 — 5
  - 12 — 7 — 1
  - 9 — 1 — --
  - 6 — -- — 7
  - 3 — 2 — 4
  - < 3 — -- — 4
  - No Exam — 5 — 2
- Totals: 43 (Last Mission) and 37 (This Mission)

*Source: Bank of LAO P.D.R.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1laoea2020001.pdf_