Written by Bank supervision is the whole sets of processes aimed at ensuring that banks adopt safe and sound banking policies.
It is a statutory function of a specialized agency aims at ensuring the safety and soundness of the banking system.
Bank supervision is also the monitoring of the activities of banks to ensure that they are consistent with acceptable standards, rules, and regulations.
It refers to the regulatory oversight and monitoring of banks and financial institutions by the government or other authorized entities to ensure their safety and soundness, and compliance with applicable laws and regulations.
Bank supervision is usually done through on-site surveillance and off-site surveillance of the books and affairs of banks.
On-site surveillance involves physical inspection of banks to assess their operational and financial health, while off-site surveillance involves the analysis of financial reports and data submitted by banks.
The agencies responsible for bank supervision vary from country to country.
In some countries, it is the responsibility of the central bank, while in others, it is the responsibility of deposit insurance agencies or other regulatory bodies.
For example, in Nigeria, banks are supervised by the central banks of Nigeria(CBN) and by the Nigeria Deposit Insurance Corporation(NDIC).
In the US, the office of the comptroller of the currency(OCC) supervises banks.
The main objective of bank supervision is to ensure the safety and soundness of the banking system.
This is achieved through the enforcement of sound banking policies, such as requiring banks to maintain adequate capitalization, adopt appropriate risk management practices, and ensuring compliance with legal and regulatory requirements.
Types of Bank Supervision
There are three main types of bank supervision, namely; transaction-based supervision, consolidated supervision, and risk-based supervision.
1. Transaction-based supervision: This supervisory approach focuses on individual group entities.
Each individual entity is supervised separately, based on the specific capital requirements established by its respective regulatory authority.
The transaction-based supervision of individual entities is usually complemented by a general qualitative assessment of the group as a whole and, usually, by a quantitative group-wide assessment of the adequacy of capital.
2. Compliance-based supervision: This is a method of bank supervision that involves checking or enforcing bank compliance with rules, legislation, regulations or policies that applies to the banking industry.
It is a regulatory approach that focuses on ensuring that banks and other financial institutions comply with laws, regulations, and industry standards
In other words, compliance-based supervision is a supervisory approach in which banks are monitored and regulated based on their adherence to laws, regulations, and standards governing their operations.
The downside of compliance-based supervision is that it is a reactive, not a proactive form of bank supervision.
That means that regulators only become involved after a violation has occurred or a bank issue has been identified.
In addition, compliance-based supervision is static, which means that it is not well-suited to a dynamic, or constantly evolving banking environment.
3. Risk-based supervision: This is a comprehensive form of bank supervision whereby banks are assessed based on the risks that they faced.
It is a proactive and efficient bank supervisory approach that involves profiling the risks of each bank and tailoring supervisory packages that suit the risk profile of the bank.
Risk-based supervision recognizes that different banks have different risk profiles and, as such, supervisory resources should be allocated based on the level of risk that each bank presents.
It involves differentiating banks in accordance with their risk profiles so that supervisory resources could be diverted on a priority basis to those areas or banks which have a higher risk profile.
That is, banks with higher risk rating receive more intensive supervisory attention and banks with lower risk ratings receive less intensive supervision, thus allowing regulators to allocate their resources more efficiently.
The benefit of risk-based supervision is that it allows supervisors to focus on large risks by channelling resources to banks that have a higher risk profile.
Due to its dynamic nature and suitability to today’s constantly evolving Banking environment, risk-based supervision is fast becoming the dominant approach to the regulatory supervision of banks worldwide.
On-site and Off-site Supervision of Banks
Bank supervision is usually done either on-site or off-site surveillance.
On-site supervision of banks
On-site supervision is a form of bank supervision that involves examining the bank’s reports, documents and other materials within the premises of the bank to determine whether they are in accordance with the information derived from off-site supervision.
It is a regulatory approach that involves physically observing and examining the bank’s operations and activities.
On-site supervision involves the supervisory agencies visiting the bank in a bid to reconcile the information derived from the examined documents( in off-site supervision) with physical realities such as cash and other inventories to determine whether the bank complies with bank regulation.
It is the visitation of banks premises to determine whether or not banks are complying with the necessary regulatory and supervisory frameworks.
In on-site supervision, the regulatory authorities conduct physical inspections and regulations of the bank operations and activities to ensure compliance with applicable laws and regulations.
On-site bank supervision may be conducted annually, biennial or may be conducted in response to specific concerns identified by regulatory authorities.
Off-site supervision of banks
Off-site bank supervision is a regulatory process that involves monitoring and assessing the financial condition and risk management practices of banks and other financial institutions without conducting physical inspections or examinations at the bank’s premises.
It is a form of bank supervision that involves the periodic receipt and analysis of returns from banks to ascertain the banks compliance with prudential regulations.
Returns, basically, are requirements of the regulatory/supervisory authorities of the banking institutions which are made on determined periodic basis to assist in ensuring that the banks conform to desired operating rules.
In off-site supervision, the supervisory authority review the bank’s financial statements, internal reports, and other data to assess the bank’s compliance with regulatory requirements and to identify potential areas of concern.
