Barry Whiteside: Risk focused supervision
Address by Mr Barry Whiteside, Governor of the Reserve Bank of Fiji, at the
APECFRTI workshop on "Risk focused supervision", Nadi, 18 November 2013.
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Dr Sungbok Lee - APEC FRTI/KSP Secretariat
Ms Sue Jefferey - APEC FRTI/KSP Secretariat
Distinguished Resource Persons
Workshop Participants
Ladies and Gentlemen
Introductory Comments
Good morning and Bula Vinaka.
I am delighted to be asked to deliver the welcome address and open this very important
workshop organised by the APEC Financial Regulators Training Initiative (FRTI) in
conjunction with the Knowledge Sharing Programme of the Republic of Korea (KSP). I might
add that the Reserve Bank of Fiji is also honoured to host this event and showcase our
country to our visitors.
Let me take this opportunity to extend to you, and especially to our foreign guests, a warm
Fijian welcome to this workshop, which is being held at this famous tourist destination of
Denarau Island.
I am informed that apart from the resource persons who are from Korea, the Philippines and
Australia, we have assembled with us participants from as far away as Mongolia and
Zambia. We don't often have visitors from these parts of the world, so let me say a warm
welcome to Gaadulam, Said and Joseph! Indeed I see this gathering as an opportunity for
great cultural exchanges, in addition to the specialised knowledge and skills you will be
acquiring.
Importance of the workshop
Ladies and Gentlemen, there could not have been a better time for this workshop than now,
given the strategic importance of financial stability to the overall performance of our
economies. Risk-Based or Risk-Focused Supervision is a subject area which continues to
receive the attention of supervisory authorities worldwide.
The international banking scene has, in recent years, witnessed strong trends towards
globalization and consolidation of financial systems. Stability of our respective financial
systems has become the central challenge to bank regulators and supervisors throughout
the world. The multi-lateral initiatives leading to the evolution of international standards and
codes, and evaluation of our compliance to these standards and codes, represent solid
attempts to address this challenge.
The key objective of prudential supervision is to maintain stability and confidence in the
financial system in our jurisdictions, thereby reducing the risk of loss to depositors and other
creditors. In addition, supervision is also directed towards verifying compliance with laws and
regulations governing financial institutions and their activities.
We cannot deny that the growing diversities and complexities of banking business, the spate
of product innovation with complex risk phenomena, the contagion effects that a crisis can
spread given the linkages and interdependence of financial institutions, and the growing
trend of businesses without borders, all call for a new approach to ensuring the financial
health of our economies. And that, ladies and gentlemen, is what Risk-Focused Supervision
is all about.
Role of the supervisor in risk focused supervision
The role of the supervisor in modern financial system supervision is to ensure that the risk
management systems in place and the capital held, are appropriate for the variety of
identifiable risks to which supervised financial institutions expose themselves on a day-to-day
basis.
The supervisor must have the authority and expertise to review and intervene in risk
management processes, where necessary. This involves monitoring and evaluation of the
risk profiles of supervised institutions in relation to their business strategies and risks.
Regulators and supervisors must fully understand any new financial innovations, instruments
and market practices in order to have the expertise to develop models, assumptions and
views of financial institutions, and certify the risk management of those supervised
institutions.
Of course, the effectiveness of any risk-based approach owes a lot to the supervisor's ability
for early identification and monitoring of new and emerging risks. Supervisors can devote a
lot of time and effort toward trying to prevent or mitigate a risk incident but, as we have been
taught, a good supervisor should target patterns of behaviour that give rise to excessive
risktaking in the first place.
When it comes to supervising for risk, behaviours matter. Things like:
•
corporate governance
•
risk appetite;
•
risk management;
•
alignment of incentives to risk taking; and
•
organisational culture;
are all important.
Institutions that have, and effectively implement these things, are likely to be well-run and
would portray a good grasp of their risk environment. Institutions that merely have them and
do not effectively take action in ensuring that these are implemented, are inviting trouble.
Ladies and gentlemen, getting to grips with matters of risk management requires a more
proactive approach from supervisors.
•
It takes a deep understanding of an institution's operations and appetite for risk for
its significant activities;
•
It takes frequent interaction with regulated institutions at both board and
management levels;
•
It takes a capacity to assess the effectiveness of risk management and control
functions, (including how the institution is governed and the prevailing risk culture);
and,
•
It takes a capacity and willingness to act when inadequacies are identified.
None of these are easy to implement. Risk-based approaches are resource-intensive. They
require a hands-on, active approach to prudential supervision. They require experienced
supervisors with deep industry knowledge. Even after all that, there is no guarantee that
supervisors will always make the right calls on risk.
However in spite of such isolated moments where we as supervisors may not have made the
right call, by targeting specific risk outcomes, risk-focused approaches to prudential
supervision are better placed to enable us to make a material difference to the prudential
health of the institutions we supervise, for any given level of resources.
Concluding remarks
Let me take this opportunity to thank the APEC Financial Regulators Training Initiative and
the Knowledge Sharing Programme of the Republic of Korea for organising this workshop.
I wish you a productive and exciting week and encourage you all to draw on the wealth of
knowledge of the facilitators, as well as the rich experience of your fellow participants.
Do take some time to explore our wonderful islands, if this is at all possible. Your Fijian
colleagues will only be too pleased to assist. We are known to be pretty friendly!
On this final note, it gives me great pleasure to declare this Workshop on Risk-Based
Supervision open.
Vinaka vakalevu.