Tarisa Watanagase: Risk-focused supervision and risk assessment
Opening address by Dr Tarisa Watanagase, Deputy Governor of the Bank of Thailand, at the APEC
Financial Regulators Training Initiative Regional Seminar on Risk-Focused Supervision and Risk
Assessment, Bangkok, 6 September 2004.
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Distinguished Guests,
Ladies und Gentlemen,
lt is a pleasure for me to be here at the opening of the APEC Financial Regulators Training Initiative on
Risk-Focused Supervision und Risk Assessment. In making this opening address, I would like to
personally extend a warm welcome to all the participants and to express my appreciation to the
Federal Reserve experts who have kindly agreed to share with us their knowledge und experience on
risk-based supervision.
This regional seminar is held at an opportune time, about two months after the Basel Committee on
Banking Supervision released the Basel II capital framework. As you all are undoubtedly aware of,
Basel II aims to strengthen financial stability by encouraging sound risk management practices at
banking organizations. The tools uscd are a more risk-sensitive capital regime (Pillar 1); the
application of risk-based supervision (Pillar 2); und improved public disclosures to enhance market
discipline (Pillar 3).
Of the three pillars, one of the most formidable challenges for emerging market supervisors will be to
properly implement the Pillar II risk-based supervisory framework.
Since risk-based supervision is the main topic of this seminar, it may be useful to provide a few
thoughts on some of the broader regulatory und supervisory implications associated with implementing
this framework.
On the regulatory side, thc adoption of a risk-focused supervisory framework entails a shift away from
a rigid, rules based approach to regulation and towards more "incentive compatible" prudential
standards. By "incentive compatible", I am referring to broad, principles based standards that
encourage banks to develop and continuously update their internal risk management systems to
ensure that it is commcnsurate with the scope and complexity of its operations. While the benefits are
obvious, there are also some consequences for the supervisory side of our business that may not be
readily transparent.
First, an emphasis an broad prudential standards - while useful rot fostering sound risk management
practices - will inevitably create significant challenges for front-line supervisors. This is because they
will need to rely much more on sound professional judgment and critical analysis, and less on
rules-based compliance criteria, in order to make proper risk assessments. This in turn, will require
supervisory staff members to have a fundamental grasp of risk-based supervisory concepts and how it
is applied in the field. The challenge for every emerging market supervisory authority is to equip our
front line supervisors with the requisite knowledge, skills, and abilities, in order to help make their
transition to a risk-based framework as smooth as possible.
At the Bank of Thailand, we have placed greater reliance an this risk-based philosophy during the past
several years. Wc are increasingly moving towards more principles based prudential standards; in
addition, we have revamped our supervisory framework to provide a more structured and risk-oriented
approach to the on and off-site examination process, while encouraging our front-only supervisors to
think analytically. Despite these achievements, we still have substantial work ahead of us. Above all,
our experience with risk-based supervision indicates that there is no going back to the mles-based
approach of supervision given the dynamic nature of the banking business. And second, building a
robust risk-based supervisory regime requires substantial time and resources and it will necessitate a
material shift in the way both supervisors and bank managcment think about risk and risk
management.
I must therefore, commend APEC for this initiative in bringing together bank supervisors from the
AsiaPacific region to learn and to share views on this very important topic. It is my sincere hope that all of
you take this opportunity to gain insights from our highly experienced and knowledgeable experts as
well as from each other on the practical aspects of risk-focused supervision.
Ladies and Gentlemen, I am pleased to declare open the APEC Pinancial Regulators Training
Initiative Regional Seminar on Risk-Focused Supervision and Risk Assessment. I wish you all
stimulating discussions in the week ahead and a very pleasant stay in Bangkok.
Thank you.