Risk-based supervision by central bank

The central bank has announced that it will roll out risk-based supervision (RBS) of banks on a full scale starting from January next year. According to the central bank governor, a pilot programme of the RBS framework is already underway with the trial runs in all commercial banks scheduled for completion by the end of this year. Reports indicate that trial for implementation has already been completed in 20 banks. Speaking at the launch of Google Pay in Bangladesh, the governor expressed optimism that this landmark regulatory shift-the first of its kind in the country-will play a crucial role in bringing greater discipline to the banking sector.

Risk-based supervision is a modern regulatory approach in which supervisory attention and resources are allocated based on the risk profile of each financial institution. Unlike the traditional one-size-fits-all model of rules-based supervision, RBS tailors oversight intensity according to the specific risks posed by each bank. This allows regulators to focus more closely on institutions or operational areas that present greater threats to financial stability. The core objective of RBS is to identify, assess and mitigate potential risks before they become systemic threats. This involves evaluating each bank's size, complexity, business activities, and internal controls to determine its risk profile. Based on this assessment, supervision becomes more frequent and intensive in high-risk areas, thereby ensuring that regulatory resources are deployed where they are most needed. One of the key benefits of RBS is its proactive stance. Instead of relying solely on historical performance or routine compliance checks, it seeks to uncover weaknesses that may lead to future instability. By emphasising early detection and preemptive intervention, the RBS model enhances the central bank's ability to forestall crises and reinforce the resilience of the financial system.

Despite its many advantages, transitioning to risk-based supervision is not without challenges. Moving away from the traditional rules-based framework involves a fundamental shift in regulatory culture. Supervisors must develop a deep understanding of the dynamic risk environment in which banks operate. This demands not only a skilled and well-trained supervisory workforce but also robust institutional support-both political and organisational. Furthermore, supervisors must be empowered with appropriate tools and authority to act decisively. They need to continuously update their understanding of evolving risks and refine their supervisory approach accordingly. This makes ongoing training, access to high-quality data, and enhanced analytical capabilities critical to the success of the RBS framework. If effectively implemented, RBS can significantly improve the governance and operational discipline of banks. For regulators, it allows more precise identification of emerging risks and vulnerabilities. For banks, it serves as an early warning system-alerting them to potential pitfalls arising from internal lapses or external shocks, whether caused by misjudgment or deliberate actions.

Adoption of risk-based supervision marks a major step forward for banking regulation in Bangladesh. While the transition will require significant institutional effort, capacity building, and mindset change, the long-term benefits in terms of enhanced financial stability and systemic resilience are certainly worth the effort.