Governor Tetangco announced that the Monetary Board of the Bangko Sentral ng Pilipinas (BSP) approved on 19 January 2006 the Guidelines on Supervision by Risk. The guidelines are intended to communicate to the financial community the expectations of the BSP on how banks and other financial institutions under BSP supervision should manage their risks. They are also designed to provide guidance on how the risk-focused supervision will be applied to these risks.
As conveyed in the guidelines, the primary responsibility of ensuring that an effective risk management process is in place rests with the bank management. The guidelines recognize that the business of banking involves risk-taking. Thus, the existence of risk is not necessarily a cause for concern for as long as bank management exhibits the ability to properly identify, measure, monitor and control risk. The role of the BSP is to check if this is indeed happening, its primary concern being that of seeing that the supervised entities operate in a safe and sound manner and maintain capital commensurate with their risks.
The guidelines list and define eight categories of risk for supervision purposes, namely: credit risk, market risk, interest rate risk, liquidity risk, operational risk, compliance risk, strategic risk and reputation risk. This is to facilitate understanding between BSP and regulated entities.
The guidelines present general idea on how BSP will conduct supervision following the risk-based approach. This approach, which shifts the emphasis from transactions review to process (risk management) review, will enable BSP to focus attention on the most significant risks within a particular financial institution and within the industry as a whole. International best practice on banking supervision has adopted this approach primarily because of its more forward-looking orientation rather than the after-the-fact view of traditional supervision. In addition, risk-based supervision is expected to generate benefits in terms of operational efficiency, cost efficiencies, as well as greater value added to the supervised entities through better focused post-examination recommendations.