The Reserve Bank, Bank of Botswana (BoB) says commercials banks need to understand the risks associated with the technological advances and product innovations they are adopting and devise ways to effectively manage risks.
In its latest supervisory report, BoB observes that changes in the environment within which banking institutions operate is increasingly becoming more complex and dynamic, and it impacts on the way banking institutions conduct their business.
“Supervisors should continually enhance the traditional supervisory process to ensure that it effectively incorporates supervision of risk management systems in banking institutions,” reads the Banking Supervision 2014 report.
The report further stated that the technological advances and introduction of new banking products, which normally characterise the complexity and dynamism of financial markets, bring about changes in the risk profiles of these institutions which, in turn, call for improved risk management systems by these institutions as well as enhanced prudential supervision methods.
“The adoption of Risk Based Systems (RBS) has a number of benefits. RBS places strong emphasis on understanding and assessing the adequacy of each financial institution’s risk management systems,” reads the report.
It also stresses the process of risk identification, measurement, monitoring and control on an on-going basis. From the report, as a result, a supervisor following RBS will identify banks in which risks are greatest, identify within each bank those areas or activities in which risks are high and apply supervisory resources to assessing and measuring those risks.
“In this regard, RBS emphasises the development of a customised supervisory programme for each bank and focuses much attention on banks that are considered to have potentially high systemic risk,” the report stated.
BoB stated that the basic framework for RBS as adopted by it includes understanding the financial institution, assessing the financial institution’s risk profile as well as planning and scheduling supervisory activities.
The report however state that the goal of RBS is not to attempt to limit risk-taking by financial institutions, but rather to ensure that institutions understand and control the types and levels of risks they assume.
BoB report further stated that the assessment of risk incorporates both a current and prospective view of the institution’s risk profile. It also stated that the specific objectives for the RBS approach are to promote a safe and sound financial system by assessing how well financial institutions manage
Risk as well as to focus on qualifying problems by identifying system flaws and poor management practices that cause both current and potential problems.
“We want to enable examiners to identify problems and their root causes and carry out a proper evaluation of the institution’s risk management,” report stated.