Supervisory risk assessment and early warning systems

December 2000

This paper is based on a study of a number of new bank monitoring systems currently in use or under development in various G10 countries. Such systems are collectively termed "supervisory risk assessment and early warning systems". The objective of the paper is to provide an overview of the different approaches taken by bank supervisors and to make a preliminary general assessment of the methods that are being used or developed. The study reveals that supervisory authorities are now clearly moving towards putting in place more formal, structured and risk-focused procedures for ongoing banking supervision. Individual approaches and systems have been developed and adopted, typically in the 1990s, with a greater focus on risk profiles and risk management capabilities of individual banking institutions and on the generation of timely warning of potential changes to a bank's financial position. These new and modified systems have contributed positively to the supervisory process, and supervisors are working towards refining the systems further in order to improve the systems' accuracy and predictive power. It is expected that in the future, formal risk assessment and early warning systems will continue to be developed and adopted by bank supervisors in developed and emerging market economies for risk-based supervision and will contribute significantly to strengthening the process of ongoing banking supervision.