Dhaka, Jan. 9 -- Risk-based supervision is one of the most important changes in modern banking supervision. It is important not because it creates new rules, but because it changes how supervisors think and work. In the past, supervisors treated most banks in the same way. They depended mainly on periodic inspections and compliance checks. Risk-based supervision changes this approach. It focuses attention on areas where risks are higher and where problems can threaten financial stability.

At the heart of risk-based supervision lies supervisory judgment. Supervisory judgment is the professional and evidence-based assessment used by supervisors. It helps them interpret information, assess governance and controls, and decide when and how to...