Under systemic risk monitoring, SBP has under taken a number of initiatives for monitoring of systemic risk exposures. These include periodic stress testing designing frameworks for ‘domestic systemically important banks (D-SIBs)’, and consolidated supervision.
Stress Testing: SBP’s existing framework applies top-down and bottom-up approaches of stress testing. For gauging industry’s resilience against adverse shocks, sensitivity analysis is being carried out both at banks’ and supervisory level, while macro stress testing (scenario analysis) is being performed for supervisory surveillance at SBP. Latest ‘Guidelines on Stress Testing’ are available at the following link: http://www.sbp.org.pk/bsrvd/2012/C01.htm.
D-SIBs: To better manage the vulnerabilities associated with systemic risk exposures of financial institutions and further strengthen surveillance of the system, SBP has initiated work for identification, regulation and supervision of D-SIBs. For assessment of D-SIBs, customized BCBS proposed ‘indicator based’ methodology has been applied. The indicators used for gauging systemic importance include – Size, Substitutability and Interconnectedness. These selected indicators are aggregated in composite indices to calculate systemic importance score for each bank. Currently, the department is in the process of formulating instructions for self evaluation; designation of potential D-SIBs and designing of relevant regulatory and supervisory measures.
The complex structure and wide ranging activities of financial conglomerates posed various challenges for regulators, which necessitated the need for more sophisticated supervisory methods capable of capturing the diversification in terms of revenues and risks attributable to financial conglomerates, all over the world. As a result, various regulatory authorities across the globe have initiated consolidated supervision of the financial conglomerates. Consolidated supervision is a comprehensive approach to banking supervision which seeks to evaluate the strength of an entire group to which a bank belongs, taking into account all the risks which may affect the bank, regardless of whether such risks are carried in the books of the bank or the related entities.
Financial sector in Pakistan has grown in complexity. Keeping in view the risks posed by the increasing conglomeration in the financial sector, SBP has developed a mechanism for ongoing supervision of banking groups. For the purpose, SBP has adopted multipronged strategy; banks are required to provide periodic information on “related parties exposures and transactions”, a dedicated joint task force (JTF) has been set-up with SECP (securities, insurance and NBFI supervisor) for coordination and cooperation on matters related to financial conglomerates; and working on improving the legal framework to effectively conduct consolidated supervision.