Banking supervision: CAMELS to SAFr in 2021

Today’s environment presents unprecedented challenges for the banking sector.  The lingering uncertainties brought about by the constantly evolving economic and financial landscape require us to rethink the way we operate and respond to these attendant risks. Regulators are not exempted. Banking supervisors continue to step up efforts in strengthening supervisory, examination and enforcement powers and aligning regulations with international best practices.

BSP Deputy Governor Chuchi Fonacier, in a memorandum to all BSP-supervised financial institutions (BSFIs) dated March 5, officially announced the implementation of a new rating system called Supervisory Assessment Framework (SAFr).

What is SAFr? How will the existing supervisory approach of the BSP change SAFr? These and more were answered during the recent General Meeting of the Association of Bank Compliance Officers (ABCOMP) headed by President Amelia Amparado.

Thea Josefina Santos, BSP Director of the Treasury and Asset Management Supervision Department, explained the adoption of SAFr (pronounced “safer”) is part of initiatives to improve BSP’s existing prudential regulatory and supervisory framework and is also aimed at aligning the framework with guidance and best practices issued by international standard-setting bodies.

SAFr is a single integrated risk-based assessment framework and is anchored on business models where the supervisory activities consider not only the BSFI’s risk profile but also its impact on the financial system. This new framework replaces CAMELS (capital adequacy, asset quality, management, earnings, liquidity, and sensitivity to market risk), the current primary rating system for banks and quasi-banks.

It has become a challenge to assess and determine the continuing coherence and effectiveness of these numerous rating systems, which prompted the BSP to adopt an overarching framework that will use a common language, facilitate consistent application, and ensure the prioritization of appropriate supervisory activities across the sector.

SAFr has three major elements: a) the BSFI’s impact / importance to the financial system in the event of its failure; b) the risk profile derived through an assessment of BSFI’s material risks as identified through the significant activities that serve as the key driver of the risk; and c) the supervisory intensity which is a function of the first two elements.

The combination of the first two factors will let the BSP determine the level /degree of its supervisory attention with the BSFI. A BSFI with a higher impact and risk would essentially require higher degree of supervisory intensity.

The key feature of SAFr is its emphasis on the importance of business models. In the SAFr, it is explicitly recognized that the business model is the starting point of a robust assessment of a BSFI’s risk profile. As such, supervisors would identify a BSFI’s significant activities in its business models which represent the basic units of assessment.

This activity-based approach shifts the conversation to the activities of the BSFI that are most important to its viability/sustainability, and those that are most likely to increase the institution’s exposure to existing/emerging vulnerabilities.

Another key change introduced is the frequency of the onsite examination.  Currently, onsite examinations are conducted yearly for small/simple, and big/complex banks. With SAFr, the impact assessment will be taken into account in the design and implementation of the supervisory plan/activities. Nevertheless, Mary Ann Cube, Director and Head of Financial Supervision Department VII, stressed that there will still be a process of monitoring the BSFIs in between examinations, with the benefit of offsite surveillance.

Originally scheduled to be implemented in July, the BSP moved the deployment of SAFr to January 2021 to give BSFIs ample time to prepare. Lualhati Caguiat, Director of Financial Supervision Department IV, further added that the impact assessment is now being conducted, for the design of BSP’s examination program starting 2021.

The adoption of SAFr is a welcome development the banking community as we embark on a pivotal time, marked by greater opportunities to strengthen the safety and soundness of the financial system, which in turn, increases public confidence and trust.  At PNB, I must say, compliance is more than just an obligation, it’s a way of doing business and serves as a serious commitment to integrity, ethics, and good governance.

Oprah Winfrey said: “Real integrity is doing the right thing, knowing that nobody’s going to know whether you did it or not.”

Flor Gozon Tarriela is chairman of the Philippine National Bank and PNB Capital. She is a former Undersecretary of Finance and the first Filipina vice-president of Citibank N.A. She is a trustee of FINEX Foundation, FINEX Academy and an Institute of Corporate Directors fellow.