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This Technical Assistance report on the Lao People’s Democratic Republic was prepared by a staff team of the International Monetary Fund. It is based on the information available at the time it was completed in May 2018.

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© 2018 International Monetary Fund

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International Monetary Fund

Monetary and Capital Markets Department

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LAO P.D.R.

Implementation of Risk-Based Supervision

In Won Song, Joel Hefty, Richard Nun (External Experts)

May 2018

Contents

• Glossary

• Preface

• Executive Summary

  • I. Background

    • A. Introduction

    • B. Progress Since the Previous TA Mission

  • II. Implementation of RBS Approach

    • A. Formal Approval of RBS Manual

    • B. Practical Application of RBS Methods – Initial Efforts

    • C. Training BSD Staff and Informing Bankers

  • III. Supporting Framework for Effective RBS

    • A. Banking Law and Prudential Regulations

    • B. Appropriate Responses and Corrective Measures

  • IV. Capacity Building and Future TA

    • A. Continued “Hands-on” Training Using Actual Data

    • B. Future TA Needs

Glossary

Preface

At the request of Bank of Lao P.D.R. (BoL), a Monetary and Capital Markets Department (MCM) technical assistance (TA) mission visited Vientiane, Lao P.D.R., during the period April 30-May 11, 2018. This mission is part of a FIRST financed project. The main objective of the mission was to further assist the Banking Supervision Department (BSD) of the BoL in implementing risk-based supervision (RBS) of banks. The mission team held discussions with senior management and staff from the BSD. The mission is grateful to the BoL’s management and staff for their excellent cooperation and warm hospitality which greatly facilitated its work.

Executive Summary

The BoL has been implementing risk-based supervision (RBS) methods on a pilot basis. The RBS manual is now substantially complete, and the BSD staff are applying the RBS methods on a pilot basis. The BSD staff have drafted Institutional Profiles (IP) and Risk Assessment Summaries (RAS) for more than half of the banks; benchmarks and peer groups are being implemented; on-site reports of examination (ROX) have been utilized for several banks.

The mission worked with off-site and on-site teams analyzing data for two pilot banks. Utilizing actual results for two pilot banks, the mission assisted BSD staff in identifying the risks, measuring and evaluating the impact on banks’ condition, and formulating appropriate conclusions and ratings.

Achieving an effective RBS system requires significant capacity building of BSD staff. Initial results are encouraging, but staff must now significantly improve their analytical skills in order to explain their assessments and defend conclusions. Thus far, efforts have focused mainly on developing the RBS manual and implementing on a pilot basis; going forward, efforts must concentrate on practical application of RBS methods for wider group of banks. This will be an incremental process requiring additional assistance to help examiners develop their skills and gain experience.

The mission welcomes the BSD plan for informing bankers of the RBS approach. In addition to building capacity of BSD staff with more hands-on training, BSD plans to conduct an informational seminar for bankers to explain RBS methods, expectations, and measures that BoL will take to address weaknesses and mitigate risks.

Changes to legal and regulatory frameworks will require review to ensure compatibility and support for RBS. It is anticipated that the amended banking law could be adopted by end-2018, after which prudential regulations need to be updated. BSD staff recognize that amendments to the law and regulations must support RBS and that RBS is a necessary prerequisite for transition to the Basel-II capital framework.

A formal policy for response and corrective measures is an appropriate next step. BSD recognizes that RBS will enable better risk identification and that prompt follow-up will be critical to the success of RBS. In this regard, a formal policy for applying corrective measures is appropriate.

Key recommendations of the report are summarized in Table 1. The report also presents an agenda for the future IMF TA missions.

Table 1.

Main Recommendations

¹ ST means short-term (3–6 months), MT means medium-term (6 month to one year), LT means long-term (more than one year).

Table 1.

Main Recommendations

Recommendations	Priority	Timeframe1
General
Formally approve RBS manual and supporting tools	High	ST
Continue practical application of RBS methods to strengthen the risk-focused analysis and examination skills of BSD staff	High	Ongoing
Assess changes needed (if any) to ensure compatibility between legal/regulatory frameworks and risk-based methodology	Medium	ST
Draft an internal BoL policy for applying appropriate responses and corrective/enforcement actions.	High	ST
Off-site Supervision
Prepare and utilize IP and RAS for all banks	High	ST
Incorporate peer group benchmarks in analysis and commentary in IP and RAS documents	High	ST
Include system average FSIs and supporting risk analysis in quarterly banking system analyses; use peer group averages to contrast performance of domestic versus foreign banks	Medium	ST
Add consolidated supervision concepts to risk analyses	Medium	LT
On-site Supervision
Develop an internal BoL policy establishing appropriate criteria for scope and frequency of on-site examinations.	High	ST
Review progress and update on-site examination schedule for 2018; prepare 2019 examination schedule during Q4-2018 using appropriate risk priority criteria.	High	ST
Apply RBS tools to plan and conduct on-site examinations	High	Ongoing

¹ ST means short-term (3–6 months), MT means medium-term (6 month to one year), LT means long-term (more than one year).

View Table

Table 1.

Main Recommendations

Recommendations	Priority	Timeframe1
General
Formally approve RBS manual and supporting tools	High	ST
Continue practical application of RBS methods to strengthen the risk-focused analysis and examination skills of BSD staff	High	Ongoing
Assess changes needed (if any) to ensure compatibility between legal/regulatory frameworks and risk-based methodology	Medium	ST
Draft an internal BoL policy for applying appropriate responses and corrective/enforcement actions.	High	ST
Off-site Supervision
Prepare and utilize IP and RAS for all banks	High	ST
Incorporate peer group benchmarks in analysis and commentary in IP and RAS documents	High	ST
Include system average FSIs and supporting risk analysis in quarterly banking system analyses; use peer group averages to contrast performance of domestic versus foreign banks	Medium	ST
Add consolidated supervision concepts to risk analyses	Medium	LT
On-site Supervision
Develop an internal BoL policy establishing appropriate criteria for scope and frequency of on-site examinations.	High	ST
Review progress and update on-site examination schedule for 2018; prepare 2019 examination schedule during Q4-2018 using appropriate risk priority criteria.	High	ST
Apply RBS tools to plan and conduct on-site examinations	High	Ongoing

¹ ST means short-term (3–6 months), MT means medium-term (6 month to one year), LT means long-term (more than one year).