Introduction to PRISM
The Probability Risk and Impact SysteMTM (PRISMTM) is the Central Bank’s risk-based framework for the supervision of regulated firms. It supports our challenging firms, judging the risks they pose to the economy and the consumer and mitigating those risks we judge to be unacceptable.
Under PRISMTM, the most significant firms - those with the ability to have the greatest impact on financial stability and the consumer - receive a high level of supervision under structured engagement plans, leading to early interventions to mitigate potential risks. Conversely, those firms which have the lowest potential adverse impact are supervised reactively or through thematic assessments, with the Central Bank taking targeted enforcement action against firms across all impact categories whose poor behaviour risks jeopardising our statutory objectives including financial stability and consumer protection.
What is risk-based supervision?
Risk-based supervision starts with the premise that not all firms are equally important to the economy and that a regulator can deliver most value through focusing its energies on the firms which are most significant and on the risks that pose the greatest threat to financial stability and consumers.
A risk-based system will also provide a systematic and structured means of assessing different types of risk, ensuring that idiosyncratic approaches to firm supervision are avoided and that potential risks are analysed for the higher impact firms using a common framework. This will allow judgements about potential risk in different firms to be made using a common risk typology on a common scale.
At its core, risk-based supervision accepts the premise that resources are finite, that there is no unlimited pool of public or industry funding on which to draw and that every regulator has to make choices as to what it will do and what it will not do. It makes no a priori judgement on what the right level of resources should be but seeks to deploy the available resources in the most efficient fashion.
What is PRISM?
PRISMTM is the vehicle that we have developed to put the theory of risk-based supervision into practice. It is designed to be implemented by a few hundred supervisors on several thousand regulated firms. PRISMTM is both a supervisory tool and a software application.
PRISMTM is designed to allow us to:-
- adopt a consistent way of thinking about risk across all supervised firms;
- allocate resources based on impact and probability;
- undertake a sufficient level of engagement with all higher impact firms;
- assess firm risks in a systematic and structured fashion;
- ensure that action is taken to mitigate unacceptable risks in firms;
- provide firms with clarity around our view of the risks they pose;
- operate a risk-based supervisory framework similar to that operated by significant financial regulators such as OSFI in Canada, APRA in Australia, the US Federal Reserve, De Nederlandsche Bank, and the Prudential Regulation Authority in the UK;
- use quality control mechanisms to encourage challenge and sharpen our supervisory approach; and
- analyse better management information about the risk profiles of the firms and sectors we supervise.
For more information on PRISMTM, please read our booklet.
PRISM Impact Review
The paper, "PRISM Impact Review – Revised Prudential Impact Models", provides a high-level overview of the PRISM Impact Review.
The paper will give you information about the revisions to the prudential impact models, including their metrics, in the Asset Management, Market Infrastructure, Payments e-Money, Fund Service Providers, Insurance and Credit Union sectors.
This paper should be read as a supporting paper to "PRISM Explained", as it explains how the Central Bank's approach towards the prudential impact models is evolving.