twin objectives of examining whether the supervised entity follows the regulatory prescriptions and whether its internal risk management practices are in line with regulatory expectations. pre - requisites for the success of risk based supervision effective risk management system at the core of supervisory monitoring under rbs is an assessment of the quality of a bank's procedures for evaluating, monitoring and managing risk, and of the bank ’ s internal models for determining economic capital. these models link capital to risk - taking and help banking organizations compare risks and returns across diverse business lines and locations. since under the rbs supervisors, essentially, rely on the inputs provided by banks ’ risk management systems, the rbs can only be as effective as banks ’ risk management systems. it is, indeed, true that the risk management challenge for banks has been steadily growing over the last two to three decades. this can be attributed to several developments in the financial sector like deregulation of financial markets, banks ’ diversifying into newer business lines such as providing custodial services, securities underwriting and corporate advisory services, growing inter - connectedness of the financial system, emergence and growth of complex financial products, etc. for the success of rbs, it is imperative that, as part of their risk management framework, banks are oriented towards identifying the path and passage of bis central bankers ’ speeches risks and towards pricing such risks appropriately. i would like to add that as non - executive directors you must focus on identifying the specific areas in the bank which pose greater risks and devote more time and energy to those areas. need for an effective management information system that, however, tempts me to pose some more very basic, but interesting questions. we are talking about identification of risk, their management and mitigation. but how many banks today can tell me the number of products and services they offer at their branches? also, do they have an idea of the number of customers they have? i am not talking about number of accounts here. the difference between the two is that an account is a ledger page while the customer is a live individual. can the banks tell me how many products or services each customer of theirs uses? if you don ’ t have such basic information, what kind of a risk management system can you develop? unless you have a fair idea of the number of products, number of customers, number of products and services per customer, cost of providing each product / service, returns from providing each product / service and risk involved in each product

basic function of the supervisor is to enforce the rules and norms laid down by the regulator. there is a marked difference between merely monitoring whether the entities are adhering to the regulations and actually making sure that the regulated entities adhere to them in practice. the job of the supervisor is to ensure that the entities necessarily comply with whatever mitigation plan is given to them. the supervisor should ask questions of the supervised entities even when the going seems good, let alone during bad times. not only ask questions, but to also effectively intervene. no doubt, this is an arduous task as the supervisors would be seen and treated like party poopers, but that is precisely the role that they ought to play. i believe many of the supervisors, in the lead up to the crisis, simply failed to enforce the regulations and instead, relied too heavily on the merits of the efficient market hypothesis or the bank managements ’ inner conscience. all of you, as non - executive directors, have important roles to play. you need to ask questions when the going seems good. you must focus on specific issues and seek precise clarification. you would also need to ensure that there is an appropriate internal mechanism which makes certain that the directions given by the board are properly implemented down the line. that brings me to the third question – what are the attributes of a good supervisor? when could supervision be considered effective? an imf staff position1 has very lucidly explained five attributes of a good supervisor. the note mentions that good supervision has to be intrusive. this does not mean being involved with the day to day affairs of the bank or micromanaging things. it, essentially, means knowing the bank, its institutional structure and its risk profile very intrinsically. listing the other attributes of a good supervisor, the note mentions that supervision has to be sceptical but proactive, implying that the supervisor should not take things for granted. the note also mentions that good supervision should be comprehensive - meaning that the supervisors need to look holistically at the entire banking group on a consolidated basis. in fact, many of the supervisory failings have been on imf staff position note spn / 10 / 08 dated may 18, 2010 on the making of good supervision : learning to say “ no ”. bis central bankers ’ speeches account of a lack of understanding of the risks at the periphery – in perceptibly low risk subsidiaries or low risk business verticals. the paper further mentions being “ adaptive