The supervisor must have the authority and expertise to review and intervene in risk management processes, where necessary. This involves monitoring and evaluation of the risk profiles of supervised institutions in relation to their business strategies and risks.
Regulators and supervisors must fully understand any new financial innovations, instruments and market practices in order to have the expertise to develop models, assumptions and views of financial institutions, and certify the risk management of those supervised institutions. Of course, the effectiveness of any risk-based approach owes a lot to the supervisor’s ability for early identification and monitoring of new and emerging risks.