17
The Bank of Italy checked the state of preparedness of Italy’s eight largest banking groups in
2005 and concluded that management was well aware of the imminence of the changes and
that statistical systems were adequate. However, it identified a need for improvements in the
quality of data and in IT systems for modelling.
There will be a single consolidating supervisor through which cross border groups will
channel applications to use the IRB and AMA methodologies. Decisions will be made within
six months by the different supervisors acting together.
The US
Risk Based Supervision in the US
The Federal Reserve also operates according to a risk-focussed method of supervision which
was adopted not only as a result of the ever growing size and complexity of banks, but also
because of the continuity inherent in its nature - as opposed to a point-in-time examination.142
The risk based approach was also introduced following the 'savings and loans' debacle of the
late 1980s and 1990s.143 The risk-based supervision process aims to ascertain the greatest
risks to a banking organisation and evaluate the ability of the organisation’s management to
identify, measure, monitor and control those risks.144 Businesses which have the potential to
produce the greatest risks form the main focus of examination carried out by Federal Reserve
examiners.145 The risk management component consists of four sub components which
indicate the effectiveness of the banking organisation’s risk management and controls namely:
Board and senior management oversight; Policies, procedures and limits; Risk monitoring
management information systems and Internal controls.146 According to Alan Greenspan, a
combination of improved risk management and the utilisation of financial derivatives to
manage the risk portfolio has enabled banks to calculate risks more efficiently in business,
which in turn has resulted to a reduction of the burden of the banking system on its
regulators.147
The move towards a risk-based approach is an attempt to realign bank regulation and
supervision with the commercial realities faced by banks and this involved institutions
managing their risks in a more efficient way to reflect the increase in modes of obtaining
finance for business and also to hedge risks.148 The risk based approach in the USA
concentrates on both small 'community banks' and 'large banks' and the mode of supervision
has developed in distinct ways as a result of the existence of more than one bank regulator at
the federal level.149
The risk based approach consolidates on the extent to which a risk could adversely affect the
safety and soundness of a bank.150 Benefits of the OCC's risk based approach include:151 Core
142
143
144
145
146
147
148
149
150
151
The Federal Reserve System Purposes and Functions p 63
D Singh 'Legal Aspects of Prudential Supervision' 2007 p 127
The Federal Reserve System Purposes and Functions p 63
ibid
ibid
A Greenspan, ‘Banking’, Federal Reserve Bulletin, 7 October (2002)
D Singh, Bank Regulation of UK and US Financial Markets:The Legal Aspects of Prudential Supervision
2007 p 129
ibid
ibid p 130; The OCC sets out its policy on supervision of national banks in its Comptrollers Handbooks of
1996 and 2001. It emphasises that the supervisory process does not seek to restrict risk taking but that it
expects banks to maintain such risk taking by having appropriate risk management processes available to
capture those risks. Also see OCC Large Bank Supervision, Comptrollers Handbook, (2001) at p. 3
D Singh, Bank Regulation of UK and US Financial Markets:The Legal Aspects of Prudential Supervision