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The dynamism of the global economic environment requires more robust tools and skills to mitigate risks arising from the rapid development of the financial sector.  In response to the changing financial landscape, advancement in, and widespread use of information/communications technology, a more effective approach is required.  Although effective risk management has always been central to safe and sound banking activities, it has assumed added importance for two main reasons.  Firstly, new technologies, product innovation, size and speed of financial transactions have changed the nature of banking.  Secondly, there is need to comply fully with the Basel Core Principles on Supervision and to prepare an enabling environment for the implementation of the New Capital Accord.

The foregoing, amongst others, premised the imperative of the adoption of RBS Framework.

RBS is a robust, proactive and sophisticated supervisory process, essentially based on risk profiling of a bank.  It enables the supervisor to prioritize efforts and focus on significant risks by channeling available resources to banks that have high-risk profiles.

RBS assesses the efficacy of a bank’s ability to identify, measure, monitor and control risks.  It designs a customized supervisory programme for each bank and focuses more attention on banks that are considered to have potentially high systemic impact.

By the very nature of banking business, banks are inextricably involved in risk-taking.  The major risks banks face in the course of business include, but not limited to, credit, market, liquidity, operational, legal and reputational risks.  In practice, a bank’s business activities present various combinations of these risks, depending on the nature and scope of the particular activity.  To the financial sector regulatory and supervisory authorities, what constitute risks are those factors that pose threat or portend danger to the achievement of statutory objectives.

In Nigeria, these objectives include the promotion of a stable, safe and sound financial system, ensuring an efficient payment system, necessary for the achievement of the wider economic objective of welfare improvement, ensuring effective consumer protection and the reduction of financial crimes, among others.

RBS presents a framework with which banks are assessed regarding the probability and impact of risks as opposed to the intuitive assessment by the traditional approach.  In contrast to the traditional form of supervision which is biased in favour of risk-avoidance and hence against innovative products and services, risk-based supervision treats risks mitigating and offsetting as valid approaches to risk management.

A risk-focused supervisory process provides flexible and responsive supervision to foster consistency, coordination as well as communication among supervisors, relies on the understanding of the institution, the performance of the risk assessment as well as the development of a supervisory plan and procedures tailored to the risk profile of individual institutions.  In that regard, risk-based supervision identifies, measures and controls risks; and monitors the risk management process put in place by a financial institution during a supervisory period.
 
The main objective of risk-based supervision is to sharpen supervisory focus on:

i) the activity(ies) or institution(s) that pose the greatest risk to banks and financial institutions and/or financial system; and
ii) the assessment of management process to identify, measure, monitor and control risks.
The main benefits of this approach to supervision include, amongst others:
i) The allocation of supervisory resources according to perceived risk, i.e. focusing resources on the bank’s highest risk or devoting more supervisory efforts to those banks that have a high-risk profile.  It will, therefore, enable the regulator to target and prioritise the use of available resources.
ii) The supervisor will be better placed to decide on the intensity of future supervision and the amount and focus of supervisory action in accordance with the perceived risk profile of the bank.
iii) The supervisor may also focus more attention on banks whose failure could precipitate systemic crisis.