Supervisory Review
Supervisory review is the regulatory process through which authorities evaluate a financial institution’s risk profile, governance, and capital adequacy.
Meaning in Practice
In practice, supervisors assess banks’ internal risk management, capital planning, and compliance with prudential standards. The review may result in additional capital requirements or corrective measures. It forms a core component of ongoing prudential supervision.
Why It Matters
Supervisory review ensures that institutions maintain sufficient capital relative to their risk exposure. It promotes sound governance and proactive risk mitigation. This process strengthens overall financial system stability.
Market Impact
Adverse supervisory findings can lead to higher capital buffers or operational restrictions. Positive assessments enhance credibility and investor confidence. Markets closely monitor regulatory outcomes for systemically important banks.
Example
Following its annual review, a regulator requires a bank to increase its capital buffer due to elevated credit risk exposure in its loan portfolio.