The supervisory review process (SRP) of bank management is intended not only to ensure that banks have adequate capital to support all the risks in their business, but also to encourage banks to develop and use better risk management techniques in monitoring and managing their risks. SRP includes assessment by the supervising authority to ensure how well the banks are evaluating the capital needs commensurate with their risk. Supervisor shall intervene wherever necessary to encourage them to develop and use better risk management techniques for monitoring and managing the risks.
As part of the supervisory review process, supervisors must ensure that the particular bank has been meeting all the conditions like risk management standards and disclosure and also monitor them for on-going compliance. Besides, Pillar 3 makes a series of recommendations for disclosure on the area of scope of application of the New Basel Capital Accord, capital, risk exposure and capital adequacy. The Committee expects supervisors to use the supervisory review process, as applied their respective jurisdiction, to encourage banks to meet the disclosure recommendations set out in Pillar 3.5. The supervisory review process is based on four key principles:
Principle 1: Banks should have a process for assessing their overall capital adequacy in relation to their risk profile and a strategy for maintaining their capital levels.
Principle 2: Supervisors should review and evaluate banks’ internal capital adequacy assessments and strategies, as well as their ability to monitor and ensure their compliance with regulatory capital ratios. Supervisors should take appropriate supervisory action if they are not satisfied with the result of this process.
Principle 3: Supervisors should expect banks to operate above the minimum regulatory capital ratios and should have the ability to require banks to hold capital in excess of the minimum.
Principle 4: Supervisors should seek to intervene at an early stage to prevent capital from falling below the minimum levels required to support the risk characteristics of a particular bank and should require rapid remedial action if capital is not maintained or restored.
