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IOPS Toolkit for Risk-based Supervision. Module 5: Supervisory Response. Supervisory Response Matrix.

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iops toolkit for risk based supervision

IOPS Toolkit for Risk-based Supervision

Module 5: Supervisory Response

supervisory response matrix
Supervisory Response Matrix
  • A fundamental aspect of risk-based supervision is that a logical connection should be made between the outcome of any risk analysis undertaken and the nature of the subsequent supervisory action taken in response
  • Supervisory response matrixes help plan supervisory actions + timetables, allow resources to be used efficiently and make the supervisory approach more transparent
  • The number of rows and columns in the response matrix will depend on the preferences of the supervisory authority and the environment in the country
  • Thresholds need to be set which highlight suitably risky cases, but equally do not place too much burden on what is often a limited number of supervisory staff (most funds should fall into the lower risk categories)
control mechanisms
Control Mechanisms
  • Quality control mechanisms ensure he supervisory response is proportionate and consistent
  • Balance needs to be struck between individual supervisor’s judgement and central control
  • Mechanisms include:
    • peer reviews
    • sign off protocols
    • benchmarking sessions
    • internal comparisons and validations
    • training
  • Ensuring that internal control mechanisms do not become too cumbersome is key
  • The matrix and supervisory response categories should be reviewed regularly / back tested
  • Special attention needs to be given to prioritising between ‘high risk’ institutions
  • Oversight tools for ‘low risk’ institutions include:
    • information campaigns (informing small entities of their regulatory requirements)
    • random inspections (detecting non-compliance, acting as a deterrent and protecting the supervisors credibility)
    • and / or themed inspections, including sampling
  • A risk-based approach to supervision involves different dynamics in terms of communication between the supervisory authority and the supervised entity
  • Rather than simply notifying the entity that a rule has been broken, the assessment of supervisory judgement needs to be communicated
  • The supervisory authority has to decide whether to disclose the results of the risk assessment to the institution itself and, if so, the extent to which details are communicated
  • Conditions under which public disclosure of risk assessments might be appropriate must also be considered
  • When it comes to releasing a risk-score to the public as a whole, clearly a balance needs to be struck between clarity and dialogue between the authority and the institution (and publicity acting as a deterrent factor) and confidentiality (so that panic and flight from institutions is not induced)