## 1mmrea2020004

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---

### Missions and objectives
- At the request of the Central Bank of Myanmar (CBM), Mr. Ian Tower, IMF short-term expert for the IMF’s Monetary and Capital Markets Department (MCM), conducted five missions to Yangon in 2018 and early 2019.
- Mission dates:
  - March 5–16, 2018
  - June 11–22, 2018
  - September 17–28, 2018
  - November 26–December 14, 2018
  - March 25–April 5, 2019
- Objectives:
  - Support the CBM in development of bank regulation and supervision, in particular introducing a more risk-based approach to supervision.
  - Develop practical supervisory tools, templates and procedures for offsite and onsite supervision.
- Principal counterpart engagements:
  - Meetings with Deputy Governor U Bo Bo Nge; Director-General of the Financial Institutions Supervision Department (FISD), Daw Than Than Swe; Deputy Director-General of FISD; Directors and many supervisory staff.
  - Close collaboration with IMF Long-Term Experts (LTX) on Banking Supervision, Ms. Carmencita Santos and Mr. Inwon Song.
- Financing: Japan Administered Account for Selected IMF Activities (JSA).
- Note: Expert records the death during the TA program of Ms. Carmencita Santos and acknowledges her outstanding contribution.

### Approach, methodology, and outputs
- Workstream and methods:
  - Initial focus on offsite supervision, progressing to a full risk-based supervision framework including examinations.
  - Activities: drafting guides; producing templates (examination reports, questionnaires); pilot applications (complete set of processes for one large bank and risk assessments for others); presentations to FISD staff and banking sector representatives.
  - Risk assessment methodology (risk matrix) closely based on the Monetary Authority of Singapore approach and adapted to Myanmar.
- Coordination:
  - Coordinated with IMF staff (including Ms. Katharine Seal, Financial Regulation Division) and development partners (including GIZ and World Bank staff).
  - Guides to be translated into Myanmar language by IMF translator Ms. Zar Chi Phyoe Wyint, working with FISD.
- Main deliverables:
  - Guide to Offsite Supervision (English version: Objectives and Tasks of offsite Supervision of Banks: A Guide for Central Bank of Myanmar Bank Supervisors (Version 1, Issued September 2018)).
  - Guide to Risk-Based Supervision (draft April 2019) including extensive risk-based examination questionnaires and pilot completed documents (risk assessment, supervisory strategy and plan, examination scope, schedule, and a partially-completed examination report).
- Standard cycle of risk-based supervision (Process Overview):
  - Institutional profile (including impact) → Risk Assessment (CAMEL, risk matrix) → Supervisory Strategy and Plan, including risk mitigation → Supervisory action / Enforcement → Updating of Risk Assessment.
- Additional outputs:
  - Small stress-testing exercise for three banks using Stress Tester 3.0 and an illustrative presentation of findings and lessons.
  - Advice on directives and regulation drafts, residential mortgage lending supervisory issues, organization of supervision resources, and ad hoc staff training (market and liquidity risks).

### Guide to Offsite Supervision — features and implications
- Focus and structure:
  - Detailed approach to financial analysis including key ratios, thresholds and benchmarks to guide early supervisory intervention.
  - Emphasis on in-depth reviews of developments in the risk profile of each bank and use of a quarterly process as the key output of individual bank supervision.
- Reporting and analytical processes:
  - Processes for monthly and quarterly reporting of financial condition and developments.
  - Quarterly reviews expected to:
    - identify significant developments over the period (management, business model, movements in key ratios and outlier status via peer comparison);
    - draw out material supervisory concerns from analysis;
    - propose appropriate supervisory action where necessary.
- CAMEL methodology:
  - Determination of CAMEL ratings based on qualitative as well as quantitative criteria.
  - Supervisors expected to review and revise CAMEL ratings as part of the quarterly review.
  - Annex sets out issues to consider on each CAMEL item and for each of the one to five ratings (for example, under Capital: capital quality, access to new capital, adequacy of capital management, as well as level of capital ratios).
  - Represents a significant change from FISD’s previous mainly quantitative approach.
- Stress testing and enforcement:
  - Stress-testing by the CBM incorporated as part of the supervision process, starting with an annual exercise using supervisory information; detailed procedures require further development, with IMF TA support recommended.
  - Guide includes guidelines for supervisors on when to consider use of CBM enforcement powers.
  - Recommendation that FISD be ready to use formal powers (require corrective actions, impose administrative penalties) and that internal procedures and decision-taking arrangements to govern use of powers be established.
- Groups and foreign bank branches:
  - Offsite processes applied to bank groups and foreign bank branches.
  - Guide classifies different types of group in Myanmar (many banks are part of wider nonfinancial groups or share ownership with nonfinancial entities).
  - For foreign bank branches, monitoring of parent bank developments and coordination with the home supervisory authority are required.

### Guide to Risk-Based Supervision — scope, framework, and process
- Purpose:
  - Sets out approaches to risk assessment and risk mitigation based on international practices, adapted to Myanmar.
  - Includes a risk matrix approach to risk assessment and procedures for examinations.
- Key risks identified:
  - legal, regulatory and reputational risk
  - strategic risk
  - group and related parties risk
  - credit risk
  - market risk
  - operational risk
  - liquidity risk
- Risk measurement and supervisory strategy:
  - Initial approaches to measuring impact (based on size) and supervisory risk appetite were developed.
  - Supervisors to apply risk mitigation tools within the context of a supervisory strategy and plan; examination plans to be developed based on risk assessment and mitigation priorities.
- Tooling and templates:
  - Risk matrix developed for use in preparing the supervisory plan and for scoping examinations.
  - Risk-based questionnaires produced to facilitate conduct of examinations.
  - FISD will run the risk matrix approach in parallel with CAMEL for the present, using CAMEL only in offsite supervision.

### Offsite supervision enhancements and data needs
- IT infrastructure needs:
  - Development of an Information Technology (IT) infrastructure, including electronic reporting by banks and a database and analytical capacity; current paper-based approach:
    - exposes the process to high risks of error and inaccuracy; and
    - is inefficient to operate in practice.
- Data gaps to fill (paragraph 13 items):
  - full details of off-balance sheet business;
  - more detailed information on nonperforming loans (including the economic sectors of borrowers);
  - data to support fuller analysis of liquidity such as maturity gap information, sources of deposits (by sector etc.,) and analysis of large deposits.
- Accounting, auditing and data quality:
  - Many banks working towards implementation of International Financial Reporting Standards, but they are not required to do so until 2023.
  - Supervision exposed to shortcomings in underlying accounting information.
  - CBM maintains an active dialogue with auditors; process for reviewing audited annual financial statements and meeting with auditors is included in the Guide to Offsite Supervision.

### Risk assessment details, examinations, and reporting
- Risk assessment approach:
  - Supervisors identify inherent risks and assess adequacy of risk management using judgment.
  - Focus on inherent risk and adequacy of controls in each significant activity of the bank, with only a small number of activities identified per bank.
  - Need to deepen supervisors’ understanding of inherent risk (e.g., credit risk requires evaluation across corporate, SME, and retail lending).
  - Combination of inherent risk ratings and quality of risk management used to derive net risk, with final judgments for supervisors to make (subject to challenge and peer comparison).
  - Overall governance, capital and earnings assessed for mitigation or amplification of activity-level risks.
- Institutional Profile:
  - Records nature of bank’s business, organization and management, regulatory history, and risk assessment results.
  - Institutional Profiles must be updated regularly.
- Supervisory strategy and plan:
  - Supervisors should record chosen risk mitigation action in an annual supervisory strategy and plan for each bank.
  - Strategy considers scope for reliance on board and senior management; plan includes planned work such as meetings with auditors and involvement in supervisory colleges.
- Supervisory risk appetite:
  - Suggested aim to mitigate all significant activities or risks rated High or Medium High (net of controls) and any Medium Low risk where direction of risk is assessed to be increasing.
  - Large banks should be supervised more intensively than small banks with the same risk assessment; CBM’s appetite for problems and failure at larger banks is relatively low.
  - Risk appetite needs regular review given high demands on FISD resources and large number of high risks emerging from initial applications.
- Examinations:
  - Remain a key activity but must be tailored to risk assessment and impact (peer group).
  - Frequency and scope of examinations will vary more than in the past.
  - FISD aims to undertake at least one examination for each bank in each year for the present.
- Examination process changes:
  - More work on scoping and advance planning of meetings to be held onsite.
  - Documentation request sent to the bank in advance.
  - More time spent with senior management and members of the board and heads of control functions.
- Risk-Based Examination Questionnaires (ICQs):
  - Developed for each of the seven assessed risks and an additional questionnaire on overall risk governance.
  - Include up to around 20 main questions with bullet point follow-ups, suggested procedures, and space to record observations.
  - Need adaptation to assessment of significant activities.
- Examination reports:
  - Should follow risk-based scoping, focus on key findings and required actions.
  - Likely shorter than current reports—typically around 20 pages.
  - Final report should reflect revised risk assessment and supervisory plan and communicate composite risk rating and main reasons.
  - Suggestion that only key findings, required actions, and composite risk rating be shared with bank management; over time consider communicating peer group average rating as an incentive.

### Roles, organization, and decision-making within FISD
- Roles:
  - Offsite supervisors: lead on risk assessment, supervisory strategy and plan, and scoping of examinations (cooperating with examiners); may be involved in conducting examinations.
  - Examiners: focus on each examination as scheduled; cooperate with offsite supervisors on scoping and reporting and on revising risk assessments after examinations.
  - FISD senior management: make decisions on FISD’s supervisory risk appetite and priorities for resource use; provide challenge and support to supervisors on supervisory judgment.
- Organizational implications:
  - Recommended review of FISD organization, decision-taking processes and resources to reflect demands of risk-based supervision.
  - FISD introduced a structure dividing supervisors into offsite and onsite units in mid–2018; advice provided on organization of supervision resources.
- Possible governance measures:
  - Consider “challenge/validation panels” at key stages to pool expertise and challenge proposed judgments before communicating to banks.
  - Consider, medium term, a dedicated person or team to manage and develop the risk-based supervision framework and evaluate/report on its implementation (resource limitations may make this difficult near term).
  - Design procedures for exercise of formal powers (e.g., imposition of administrative penalties under Chapter XXIV of the FIL) to demonstrate due process and reduce risk of successful challenge by banks.

### Implementation timeline, capacity, and rollout plan
- Adoption and translation:
  - CBM has adopted the Guide to Offsite Supervision; the Guide to Risk-Based Supervision should be finalized, translated, and adopted.
- Implementation period and targets:
  - CBM is implementing the new approach over the period until 2020.
  - CBM statement: "While perfecting a complete risk-based approach will take years, the CBM is committed to implementation and is, for example, already undertaking risk assessments using the new risk matrix tool as examinations come due."
  - 2020 is an appropriate target for adopting the risk-based methodology across all banks and supervisory processes, though full implementation will take much longer.
  - Perfecting the approach likely requires two or more complete supervisory cycles per bank to build confidence and expertise.
- Capacity and bank readiness:
  - Risk-based supervision will place demands on Myanmar banks; risk management practices are likely to require significant improvement.
  - The overall approach was presented to banks at a seminar in April 2019.
- Initial implementation status:
  - CAMEL rating guide is being used.
  - Risk assessments are being developed using the new risk matrix tool as examinations come due.
  - A small number of examinations have been conducted using the proposed planning approach and risk-based examination questionnaires.
  - Initial indications: supervisors are adjusting to focus on risk and risk management while continuing to address high levels of non-compliance.
- Resource constraints and priorities (weak banks) will affect CBM’s timetable.

### Recommended priorities and policy actions
- Finalize the Guide to Risk-Based Supervision, with further TA support as required, and once translated, adopt it (the Guide to Offsite Supervision has been adopted already).
  - Timeframe: End 2019
- As part of implementation, CBM should consider further:
  - how best to work with the banks to support their preparation for risk-based supervision, which might include issuing a short document describing the approach;
  - the best way to issue the planned guidance to banks on expected risk management practices;
  - whether the demands of risk-based supervision, such as exercising supervisory judgment, require changes in the organization, decision-taking processes and resources of FISD.
  - Timeframe: September 2019
- Continue to undertake internal training on the processes set out in the guides and the use of supervisory tools.
  - Timeframe: On-going
- To support effective risk-based supervision, CBM should:
  - review the need for reporting by the banks of additional data on a regular basis, for example as necessary to support further stress testing by supervisors (which should be supported by IMF TA, if available);
  - consider whether it needs further development of IT infrastructure in addition to the planned introduction of electronic reporting and enhanced database capacity;
  - consider developing a timetable and plan for the implementation of new risk-based regulatory capital and liquidity requirements based on the Basel Committee’s Basel II/III framework.
  - Timeframe: End 2019
- High-priority technical steps:
  - Issue guidance to banks on expected risk management practices (high priority).
  - Introduce electronic reporting and database capacity as planned (high priority); current risk matrix relies on spreadsheets.
  - Continue training and seminars for supervisory staff; extend training to cover the Guide to Risk-Based Supervision.
  - Identify and act to fill gaps in confidential supervisory data reported by banks.

### Methodology and supervisory areas requiring further development
- Supervisory strategy and plan: more pilots recommended to develop good practices in strategic planning for supervisory work.
- Thematic supervision process: not yet piloted; may be a medium term objective.
- Approach to stress-testing, including expectations of banks regarding use of stress tests for risk management.
- Approach to using formal powers, including enforcement tools (corrective action powers and imposition of administrative penalties).

### Technical assistance and support needs
- Further TA could support stress-testing, internal organization issues, and implementation of the guides.
- Recognized competing high-priority TA demands related to weak banks and crisis management.

*Preface and Executive Summary from IMF technical assistance report: Myanmar: Banking Regulation and Supervision (missions March 5–16, 2018; June 11–22, 2018; September 17–28, 2018; November 26–December 14, 2018; March 25–April 5, 2019).*
*Source: IMF Expert.*

### Preface____________________________________________________________________5

### Preface

### Missions and objectives
- At the request of the Central Bank of Myanmar (CBM), Mr. Ian Tower, IMF short-term expert for the IMF’s Monetary and Capital Markets Department (MCM), conducted five missions to Yangon in 2018 and early 2019.
- The final mission in the series took place from March 25 to April 5, 2019; the series comprised missions from March 5–16, 2018, June 11–22, 2018, September 17–28, 2018, November 26–December 14, 2018 and March 25–April 5, 2019.
- Objectives:
  - Support the CBM in development of bank regulation and supervision, in particular introducing a more risk-based approach to supervision.
  - Develop practical supervisory tools, templates and procedures for offsite and onsite supervision.
- Principal counterpart engagements:
  - Meetings with Deputy Governor of the CBM, U Bo Bo Nge; Director-General of the Financial Institutions Supervision Department (FISD), Daw Than Than Swe; Deputy Director-General of FISD; Directors and many supervisory staff.
  - Close collaboration with IMF Long-Term Experts (LTX) on Banking Supervision, Ms. Carmencita Santos and Mr. Inwon Song.
- Financing: This technical assistance was financed by the Japan Administered Account for Selected IMF Activities (JSA).
- Note on personnel: The expert records the death during the TA program of Ms. Carmencita Santos and acknowledges her outstanding contribution.

### Approach and methodology
- Workstream and methods:
  - Initial focus on offsite supervision, progressing to a full risk-based supervision framework including examinations.
  - Activities included drafting guides, producing templates (examination reports, questionnaires), pilot applications (complete set of processes for one large bank and risk assessments for others), and presentations to FISD staff and banking sector representatives.
  - The risk assessment methodology (risk matrix) was closely based on the Monetary Authority of Singapore approach and adapted to Myanmar.
- Scope and coordination:
  - Coordinated with IMF staff (including Ms. Katharine Seal, Financial Regulation Division) and development partners (including GIZ and World Bank staff).
  - Guides will be translated into the Myanmar language by the IMF translator, Ms. Zar Chi Phyoe Wyint, working with FISD.

### Outputs of the missions
- Main deliverables:
  - Guide to Offsite Supervision (English version: Objectives and Tasks of offsite Supervision of Banks: A Guide for Central Bank of Myanmar Bank Supervisors (Version 1, Issued September 2018)).
  - Guide to Risk-Based Supervision (draft April 2019) including extensive risk-based examination questionnaires and pilot completed documents (risk assessment, supervisory strategy and plan, examination scope, schedule, and a partially-completed examination report).
- Standard cycle of risk-based supervision set out (Figure 1: Risk-Based Supervision—Process Overview):
  - Institutional profile (including impact) → Risk Assessment (CAMEL, risk matrix) → Supervisory Strategy and Plan, including risk mitigation → Supervisory action / Enforcement → Updating of Risk Assessment.
  - Thematic work and sector-wide assessments are included but less fully developed to date.
- Additional TA outputs:
  - A small stress-testing exercise for three banks using Stress Tester 3.0 and an illustrative presentation of findings and lessons.
  - Advice on directives and regulation drafts, residential mortgage lending supervisory issues, organization of supervision resources, and ad hoc staff training (market and liquidity risks).

### Guide to Offsite Supervision — key features and analysis
- Focus and structure:
  - Detailed approach to financial analysis including key ratios, thresholds and benchmarks to guide early supervisory intervention.
  - Emphasis on in-depth reviews of developments in the risk profile of each bank and use of a quarterly process as the key output of individual bank supervision.
- Reporting and analytical processes:
  - Processes for monthly and quarterly reporting of financial condition and developments.
  - Quarterly reviews expected to:
    - identify significant developments over the period (management, business model, movements in key ratios and outlier status via peer comparison);
    - draw out material supervisory concerns from analysis;
    - propose appropriate supervisory action where necessary.
- CAMEL methodology:
  - Approach to determining CAMEL ratings based on qualitative as well as quantitative criteria.
  - Supervisors expected to review and revise CAMEL ratings as part of the quarterly review.
  - Annex sets out issues to consider on each CAMEL item and for each of the one to five ratings (for example, under Capital: capital quality, access to new capital, adequacy of capital management, as well as level of capital ratios).
  - This represents a significant change from FISD’s previous mainly quantitative approach.
- Stress testing and enforcement:
  - Stress-testing by the CBM is incorporated as part of the supervision process, starting with an annual exercise using supervisory information; detailed procedures require further development, with IMF TA support recommended.
  - Guide includes guidelines for supervisors on when to consider use of CBM enforcement powers.
  - Recommendation that FISD be ready to use formal powers (require corrective actions, impose administrative penalties) and that internal procedures and decision-taking arrangements to govern use of powers be established; further TA support could be provided in this area.
- Groups and foreign bank branches:
  - Offsite processes are applied to bank groups and foreign bank branches.
  - The guide classifies different types of group in Myanmar (many banks are part of wider nonfinancial groups or share ownership with nonfinancial entities).
  - For foreign bank branches, monitoring of parent bank developments and coordination with the home supervisory authority are required.

### Guide to Risk-Based Supervision — scope and risk framework
- Content and purpose:
  - Sets out approaches to risk assessment and risk mitigation based on international practices, adapted to Myanmar.
  - Includes a risk matrix approach to risk assessment and procedures for examinations.
- Key risks identified in the Myanmar context:
  - legal, regulatory and reputational risk;
  - strategic risk;
  - group and related parties risk;
  - credit risk;
  - market risk;
  - operational risk;
  - liquidity risk.
- Risk measurement and supervisory strategy:
  - Initial approaches to measuring impact (based on size) and supervisory risk appetite were developed.
  - Supervisors to apply risk mitigation tools within context of a supervisory strategy and plan; examination plans to be developed based on risk assessment and mitigation priorities.
- Tooling and templates:
  - Risk matrix developed for use in preparing the supervisory plan and for scoping examinations.
  - Risk-based questionnaires produced to facilitate conduct of examinations.
  - FISD will run the risk matrix approach in parallel with CAMEL for the present, using CAMEL only in offsite supervision.

### Implementation, capacity and timeline
- Adoption and translation:
  - The CBM has adopted the Guide to Offsite Supervision; the Guide to Risk-Based Supervision should be finalized, translated, and adopted.
- Implementation period:
  - The CBM is implementing the new approach over the period until 2020.
  - Statement: "While perfecting a complete risk-based approach will take years, the CBM is committed to implementation and is, for example, already undertaking risk assessments using the new risk matrix tool as examinations come due."
- Capacity and bank readiness:
  - Risk-based supervision will place demands on Myanmar banks; risk management practices are likely to require significant improvement.
  - The overall approach was presented to banks at a seminar in April 2019.
- Recommended priorities and actions (from Executive Summary and Table 1: Key Recommendations):
  - Finalize the Guide to Risk-Based Supervision, with further TA support as required, and once translated, adopt it (the Guide to Offsite Supervision has been adopted already).
    - Timeframe: End 2019
  - As part of implementation, CBM should consider further:
    - how best to work with the banks to support their preparation for risk-based supervision, which might include issuing a short document describing the approach;
    - the best way to issue the planned guidance to banks on expected risk management practices;
    - whether the demands of risk-based supervision, such as exercising supervisory judgment, require changes in the organization, decision-taking processes and resources of FISD.
    - Timeframe: September 2019
  - Continue to undertake internal training on the processes set out in the guides and the use of supervisory tools.
    - Timeframe: On-going
  - To support effective risk-based supervision, CBM should:
    - review the need for reporting by the banks of additional data on a regular basis, for example as necessary to support further stress testing by supervisors (which should be supported by IMF TA, if available);
    - consider whether it needs further development of IT infrastructure in addition to the planned introduction of electronic reporting and enhanced database capacity;
    - consider developing a timetable and plan for the implementation of new risk-based regulatory capital and liquidity requirements based on the Basel Committee’s Basel II/III framework.
    - Timeframe: End 2019
- Organizational implications:
  - Recommended review of FISD organization, decision-taking processes and resources to reflect demands of risk-based supervision (for example, exercising supervisory judgment).
  - FISD introduced a structure dividing supervisors into offsite and onsite units in mid–2018; advice was provided on organization of supervision resources.

### Thematic work and sector-level analysis
- The CBM will identify risks that affect multiple banks (or financial stability) for assessment and mitigation using a "thematic" approach.
- Thematic supervisory work may involve horizontal comparisons, coordinated mitigation across multiple banks, and publication of non-confidential results.
- This aspect is less fully developed in the guides; no worked examples were produced, though CBM has used thematic approaches in practice (for example, the overdraft review).

_Italic: Preface and Executive Summary from IMF technical assistance report: Myanmar: Banking Regulation and Supervision (missions March 5–16, 2018; June 11–22, 2018; September 17–28, 2018; November 26–December 14, 2018; March 25–April 5, 2019)._

### 13. While the guide is fit for immediate implementation, the effectiveness of offsite

### 1mmrea2020004 - 13. While the guide is fit for immediate implementation, the effectiveness of offsite

### Offsite supervision — enhancements to increase effectiveness
- Development of an Information Technology (IT) infrastructure, including electronic reporting by banks and a database and analytical capacity; current paper-based approach:
  - exposes the process to high risks of error and inaccuracy; and
  - is inefficient to operate in practice.
- Action to fill gaps in confidential supervisory data reported to the CBM, including:
  - full details of off-balance sheet business;
  - more detailed information on nonperforming loans (including the economic sectors of borrowers); and
  - data to support fuller analysis of liquidity such as maturity gap information, sources of deposits (by sector etc.,) and analysis of large deposits.

### Accounting, auditing and data quality
- Many banks are working towards implementation of International Financial Reporting Standards, but they are not required to do so until 2023.
- Supervision is exposed to shortcomings in underlying accounting information.
- CBM maintains an active dialogue with auditors of banks; a process for reviewing audited annual financial statements and meeting with auditors is included in the Guide to offsite Supervision.

### Guide to Risk-Based Supervision — main features
- Sets out a risk matrix approach to risk assessment, based on the Monetary Authority of Singapore framework and adapted to Myanmar circumstances.
- Risks to be assessed include legal, regulatory and reputational risk, strategic risk, and group and related parties risk in addition to standard financial risks.
- Group and related parties risk is included to reflect the significance of wider groups to Myanmar banks and related party lending experience.
- Impact of the bank is assessed; impact is derived simply from size. Peer groups:
  - private domestic banks: large, medium, and small;
  - state-owned banks and foreign bank branches each form their own peer groups.
- Risk assessment approach:
  - supervisors identify inherent risks and assess adequacy of risk management using judgment;
  - focus on inherent risk and adequacy of controls in each significant activity of the bank, with only a small number of activities identified per bank;
  - need to deepen supervisors’ understanding of inherent risk (e.g., credit risk requires evaluation across corporate, SME, and retail lending);
  - default ratings for certain inherent risks could be developed (examples provided to FISD);
  - combination of inherent risk ratings and quality of risk management used to derive net risk, with final judgments for supervisors to make (subject to challenge and peer comparison);
  - overall governance, capital and earnings assessed for mitigation or amplification of activity-level risks.
- Institutional Profile:
  - records nature of bank’s business, organization and management, regulatory history, and risk assessment results;
  - Institutional Profiles must be updated regularly.
- Use of risk assessment:
  - basis for choice of supervisory actions (standard list includes reliance on banks’ control functions and coordination with home supervisors for foreign branches);
  - scoping examinations.
- Supervisory strategy and plan:
  - supervisors should record chosen risk mitigation action in an annual supervisory strategy and plan for each bank;
  - strategy considers scope for reliance on board and senior management;
  - plan includes planned work such as meetings with auditors and involvement in supervisory colleges.
- Supervisory risk appetite:
  - suggested aim to mitigate all significant activities or risks rated High or Medium High (net of controls) and any Medium Low risk where direction of risk is assessed to be increasing;
  - large banks should be supervised more intensively than small banks with the same risk assessment; CBM’s appetite for problems and failure at larger banks is relatively low;
  - risk appetite needs regular review given high demands on FISD resources and large number of high risks emerging from initial applications.
- Examinations under risk-based supervision:
  - remain a key activity but must be tailored to risk assessment and impact (peer group);
  - frequency and scope of examinations will vary more than in the past;
  - FISD aims to undertake at least one examination for each bank in each year for the present.
- Examination process changes (compared with current practice):
  - more work on scoping and advance planning of meetings to be held onsite;
  - a documentation request sent to the bank in advance;
  - more time spent with senior management and members of the board and heads of control functions.
- Risk-Based Examination Questionnaires (ICQs):
  - developed for each of the seven assessed risks and an additional questionnaire on overall risk governance;
  - include up to around 20 main questions with bullet point follow-ups, suggested procedures, and space to record observations;
  - need adaptation to assessment of significant activities.
- Examination reports:
  - should follow risk-based scoping, focus on key findings and required actions;
  - likely shorter than current reports—typically around 20 pages;
  - final report should reflect revised risk assessment and supervisory plan and communicate composite risk rating and main reasons;
  - suggestion that only key findings, required actions, and composite risk rating be shared with bank management; over time consider communicating peer group average rating as an incentive.

### Roles and responsibilities within FISD
- Offsite supervisors:
  - lead on risk assessment, supervisory strategy and plan, and scoping of examinations (cooperating with examiners);
  - may be involved in conducting examinations.
- Examiners:
  - focus on each examination as scheduled;
  - cooperate with offsite supervisors on scoping and reporting and on revising risk assessments after examinations.
- FISD senior management:
  - make decisions on FISD’s supervisory risk appetite and priorities for resource use;
  - provide challenge and support to supervisors on supervisory judgment.

### Next steps, timeline and implementation
- CBM is already implementing parts of the recommended approach:
  - CAMEL rating guide is being used;
  - risk assessments are being developed using the new risk matrix tool as examinations come due;
  - a small number of examinations have been conducted using the proposed planning approach and risk-based examination questionnaires.
- Initial indications: supervisors are adjusting to focus on risk and risk management while continuing to address high levels of non-compliance.
- Rollout plan:
  - CBM plans to roll out the approach over the period until 2020;
  - 2020 is an appropriate target for adopting the risk-based methodology across all banks and supervisory processes, though full implementation will take much longer;
  - perfecting the approach likely requires two or more complete supervisory cycles per bank to build confidence and expertise.
- Resource constraints and priorities (weak banks) will affect CBM’s timetable.

### Recommended priorities for implementing risk-based supervision
- Continue working with banks to support preparation for risk-based supervision; build on April 2019 seminar; consider issuing a short document describing the approach in more detail.
- Issue guidance to banks on expected risk management practices (high priority); this will:
  - complement prior communication to banks;
  - equip supervisors to highlight deficiencies by reference to guidance and enforce corrective actions.
- Continue training and seminars for supervisory staff; extend training to cover the Guide to Risk-Based Supervision.
- Identify and act to fill gaps in confidential supervisory data reported by banks (see paragraph 13 items).
- Introduce electronic reporting and database capacity as planned (high priority); FISD needs electronic reporting and enhanced database and analytical capacity to make risk-based supervision work efficiently and effectively; current risk matrix relies on spreadsheets.

### Regulatory change, organization, decision-taking and resourcing
- Regulatory change plan suggestions:
  - implement more risk-based approaches to capital adequacy and liquidity of banks;
  - Basel II/III complements risk-based supervision by aligning capital requirements to risk and providing a process for assessing individual banks’ capital adequacy in relation to risk (“Pilar 2”);
  - liquidity requirements of Basel III could provide a more risk-focused approach than the current liquid assets ratio but require careful consideration.
- Review of FISD organization, decision-taking processes and resources:
  - risk-based supervision imposes new demands on limited expert staff while they deal with weak banks;
  - recommended that FISD review staff numbers and skills needs, accounting for demands such as supervisory judgment.
- Possible organizational/decision-taking considerations:
  - further develop roles and responsibilities of offsite and onsite supervisors, including potential future integration;
  - consider “challenge/validation panels” at key stages to pool expertise and challenge proposed judgments before communicating to banks;
  - consider, medium term, a dedicated person or team to manage and develop the risk-based supervision framework and evaluate/report on its implementation (resource limitations may make this difficult near term);
  - design procedures for exercise of formal powers (e.g., imposition of administrative penalties under Chapter XXIV of the FIL) to demonstrate due process and reduce risk of successful challenge by banks.

### Methodology elements requiring further development
- Supervisory strategy and plan: more pilots recommended to develop good practices in strategic planning for supervisory work.
- Thematic supervision process: not yet piloted; may be a medium term objective.
- Approach to stress-testing, including expectations of banks regarding use of stress tests for risk management.
- Approach to using formal powers, including enforcement tools (corrective action powers and imposition of administrative penalties).

### Technical assistance and other support needs
- Further TA could support stress-testing, internal organization issues, and implementation of the guides.
- Recognized competing high-priority TA demands related to weak banks and crisis management.

*Source: IMF Expert.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1mmrea2020004.pdf_