likelihood of failing, while at the same time taking into consideration their systemic importance when budgeting the time and resources devoted to their monitoring. The information contained in PCRs can be used to enhance those risk-based supervisory practices. When bank supervisors have detailed data of bank loans, they can depict a more accurate risk profile of bank loan portfolios and perform more efficiently and effectively the two dimensions of the supervisory framework: the regular off-site monitoring and the less frequent on-site inspections.<sup>19</sup> According to survey data collected by the World Bank between 1999 and 2001,<sup>20</sup> of the 34 central banks or bank superintendences that had a PCR (of near 60 surveyed), 33 indicated that PCR data information is used for bank supervision, mainly to determine the total indebtedness of borrowers across the system. The PCR data also helped supervisors to revise, and when necessary rectify, the classification that financial institutions assign to their borrowers. PCR data also help to evaluate the sufficiency of provisions for problem loans, to identify lending trends and to flag banks that had significantly increased their exposure to riskier credits. Also, 31 authorities indicated that PCR data were reviewed on a periodic basis as a complement to off-site monitoring and prior to on-site inspections. When asked how important PCR data were for strengthening supervision, 23 central banks/superintendences indicated they were very important and 10 stated they were somewhat important.

# _On-site inspections_

The on-site supervision is a time-tested tool to monitor and assess banks solvency and resilience. The results of on-site supervisions are usually translated into a rating. For example, initiated by the US supervisors and now also used in other countries,<sup>21</sup> the CAMELS rating system yields a composite rating of an institution's overall condition and performance by assessing six components: capital adequacy, asset quality, management quality, earnings, liquidity, and sensitivity to market risk. Asset evaluation is of paramount importance: it measures to what extent the financial institutions are exposed to credit risk, usually the most important driver of bank losses which is present in the trading book (e.g. in OTC credit derivatives) but most prominently in the loan portfolio (broadly defined, including off-balance sheet exposures). These examinations can be streamlined using the information in PCRs.

The assessment of bank loan portfolio quality is usually based on samples of borrowers. It is not feasible that supervisors conduct a one-by-one review of every credit, particularly when dealing with large banks. Although samples of credits can be obtained from the banks themselves, they can also be produced with PCR data. By knowing beforehand the number and amount of credits that each bank has granted by type of borrower, type of credit and risk rating at the minimum, samples can be customized and supervisory efforts better allocated. Samples may be stratified to ensure representativeness of the banks’ activity in the geographic regions, business

> 19 On-site inspections and off-site monitoring are closely interrelated components of bank supervision. However, for exposition purposes we will here refer to them in separate sub-sections. 20 World Bank Survey on Public Credit Registry for Central Banks.

> 21 Argentina, Bangladesh, Chile, Colombia, Honduras, Hong Kong, India and Kenya are a few examples of countries that have adopted the CAMEL rating system - or similar approaches - as an element of their supervisory toolkit. For a review of the models used by G10 countries, see Sahajwala and Van den Bergh (2000).

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