Developing a framework for risk-based supervision
Since 2020, the Central Bank of Armenia has been implementing Risk Based Supervision by ensuring that supervisory potential and intensity are focused on the riskiest areas and institutions.
The principles of RBS are applied in all supervisory processes, from the entrance of financial institutions to the financial market, supervising their day-to-day activities, enforcing and sanctioning, and exit from the market. This framework ensures a harmonized and dynamic approach to risk identification and mitigation processes in financial institutions, thereby contributing to improving the overall well-being of the population and strengthening consumer trust in the financial system, which also contributes to the CBA's mandate to achieve financial stability.
The effective implementation of RBS requires changes in different supervisory processes:
- Adjusting the supervisory organization and framework, which includes structural changes within the supervisory directorate to align with the processes of RBS, the distribution responsibilities within different departments of supervision, and assuring the availability of horizontal functions.
- Defining the concept of Supervisory Risk Tolerance to ensure that supervisory resources are deployed in the areas with the greatest risk and impact on the financial system.
- Revamping the supervisory methodology and tools to align with risk-based procedures and harmonized assessment of risks in all financial institutions, in addition to implementing a new supervisory evaluation system for banks (SREP).
- Enhancing supervisory procedures, such as the implementation of a micro-prudential stress testing system, to ensure proactive and forward-looking supervisory processes.
- Setting minimum standards for internal risk identification and mitigation systems of financial institutions to make sure that significant risks in the financial system are properly managed and to determine the overall recovery capacity.
- Boosting the effectiveness of the CBA’s range of early intervention measures. Financial crises of recent years highlighted the need for supervisors to have a wide array of tools for addressing bank weaknesses at their disposal that they can use at an early stage when there is still a realistic prospect of rehabilitating a distressed bank and guiding it toward commercial viability.
- Continuously developing internal capabilities to ensure dynamic and proactive supervision in line with best international practice.
- Maintaining open and transparent communication with external stakeholders forms an environment of trust and effective cooperation.
The key objective of RBS is to focus on available supervisory resources and direct the supervisory intensity to areas and institutions that possess the greatest prudential and integrity risks. Our main goal is to ensure that significant risks in the financial system, organizations, and infrastructures are properly managed and the consequences of possible disruptions are minimized and managed.
In the constantly changing world, with new risks emerging in financial markets, agile and proactive supervision targeted at the riskiest areas is imperative to ensure a sound financial system. Having a comprehensive supervisory framework in place will help us deploy our scarce supervisory resources effectively to address the risks that impact the stability of the financial institutions and the financial system.
Final fine-tuning of all supervisory methodologies, tools, and practical implementation of the RBS framework for banks by the end of 2024.
- Continuous staff training is held by international experts.
- As part of capacity building for financial institutions, seminars, and discussions were hosted by the CBA to present different aspects of the RBS framework and supervisory expectations to banks.
- Seminars with EAEU countries were hosted by the CBA to share our experience of implementing RBS and the challenges we faced in the process.
- The methodology for operational risk assessment was presented at the FinSAC annual conference.