BSP tightens rules on risk management

MANILA, Philippines - The Bangko Sentral ng Pilipinas (BSP) has issued the guidelines strengthening the risk management systems to promote sustained safe and sound operations of supervised financial institutions.

“Cognizant that operational risk is inherent in all activities, products and services, and is closely tied in with other types of risks such as credit, liquidity and market risks, the BSP is issuing these guidelines to clearly set out its expectations and define the minimum prudential requirements on operational risk management,” BSP Governor Amando Tetangco Jr. said in the circular.

Tetangco said the new guidelines align existing regulations to the extent possible, with international standards and best practices.

He added the bank regulator expects BSP supervised financial institutions to adopt an operational risk management framework, as part of the enterprise-wide risk management system, that is suited to their size, complexity of operations, and risk profile.

The BSP would continue to implement the Basel reform agenda and follow through the implementation of the approved policies aimed at enhancing bank risk management, improving market conduct and strengthening banking supervision.

Operational risk is among the top risk exposures of BSP supervised financial institutions cutting across all activities, products, and services, and may even come in tandem with the other types of risks such as credit, liquidity, and market.

Although operational risk is inherent in all areas of operations, it is more often managed on a fragmented basis, which tends to discount its overall impact on BSP supervised financial institutions’ operations.

The BSP expects financial institutions to be sensitive to sources of operational risk and to adopt a holistic framework that would facilitate identification, assessment, monitoring, and management of said type of risk as part of the enterprise-wide risk management system.

The approved guidelines highlight that each personnel has a responsibility in the effective implementation of the operational risk management framework.

“It is therefore critical to have personnel who are competent to carry out their respective duties and responsibilities, and possess a high degree of integrity,” the BSP said.

The guidelines require the board of directors of BSP supervised financial institutions to adopt policies in the areas of recruitment and selection, performance management, training and development, remuneration and compensation, and succession planning to promote a culture of high standards of ethical behavior and consistency of performance in the organization.

The bank regulator said the policies should require continuing assessment of the fitness and propriety of personnel, with the results of said assessment considered in the development of individual training and development programs.