Financial supervision: the importance of comprehensive risk management in supervision and market regulation

What it is about

The Superintendency of Banks of the Dominican Republic explained at the First Annual Risk Conference (September 21, 2023) why comprehensive risk management is central to financial market supervision and regulation. It starts from international evidence: institutions with robust risk control functions are less likely to fail.

The 30-slide presentation analyzes the synchronized monetary tightening cycle of 2022 and its effects on net interest margin, banking book interest rate risk and market risk; explains risk-based supervision versus compliance-based supervision; and reviews the changes in Dominican supervision, institutions' progress, gaps and next steps.

Objectives

• Explain what risk-based supervision is and how it differs from compliance-based supervision.
• Show the state of credit, interest rate and market risk in the financial system after the 2022 monetary tightening.
• Present the changes in Dominican financial supervision and the pending challenges.

Key takeaways

1. Risk-based supervision prioritizes by risk level and materiality, allocates resources according to each institution's systemic importance and allows timely intervention.
2. Risk management matters for supervision because it helps identify risks that can lead to crises, protects stakeholders and promotes compliance with regulation.
3. State of the system: stressed delinquency continues to decline and coverage of past-due loans remains high, although the stock of provisions is still elevated.
4. The Superintendency has a technical assistance agreement with the Toronto Centre (2022 to 2024) to strengthen risk-based supervision, and issued an ICAAP instruction for public consultation.
5. Gaps noted include: standards are minimums, not maximums; proportionality is needed between large and small banks; a forward-looking supervisory culture is needed; and more resources are required.
6. Next steps: stress tests, business model analysis as an early warning, data governance, supervisory technology (Suptech) tools and convergence to international standards such as Basel III and IFRS 9.