Concurrently, there has been a realization that the traditional supervisory practices were out of step with the sophisticated risk management techniques being employed by the complex financial institutions and a risk-based approach to supervision was required to capture the various risks that the firms were undertaking and the controls built for addressing these risks.
Although there are key differences in design and methodology of risk-based supervision framework in countries like America, Canada, UK and Australia, yet the underlying principles remain the same: the supervisory processes and tools are reoriented in accordance with the risks in the supervised firms; specific tools of supervision are targeted to the areas of greatest risk and concern in individual firms and this results in a cost effective allocation of the finite supervisory resources across the regulated entities.