Improving Banking Supervisory Mechanisms
In the OIC Member Countries
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ensure that Sukuk instruments are rated appropriately depending upon their unique
Sharī`ah compliant structures. Malaysia has two rating agencies that rate locally issued
papers. The importance of rating agencies has been highlighted following the default of
Sukuk instruments in the past few years. The defaults were largely an outcome of poor
credit quality of the issuer as opposed to fundamental problems in the Sukuk design and
structure."
 The most crucial ingredient of a successful rating system is good and relevant large
historical bad loan or customer data. For this purpose, a joint effort to collect and share
historical data for the OIC member states would be very beneficial. Also, supervisors may
incentivize banks to use Internal Risk models. Supervisors can help the banking sector to
calculate loss given default (LGD) calculations for the banking sector. These calculations
are useful for calculating expected loss (EL) and unexpected loss and important input for
loss provisions. As stated by COMCEC (2012), credit information and credit registry
system, risk measurement and management systems should be strengthened.
 Market risk seemed to be less of a concern compared to credit risk. However, standard
Basel II-based risk weights may not be sufficient to assess the true risks in OIC countries.
Therefore, Value at Risk (VaR) or Expected Shortfall (ES)-based risk measures should
accompany the standard risk measures used for measuring market risk. In addition,
Basel III has an additional market risk requirement, which is the calculation of Stress
VaR. Choosing a relevant sample period for Stress VaR may require a coordinating effort
from the OIC member states. In addition, financial and accounting treatment of trading
portfolios, available for sale (AFS) portfolio, and derivative assets during market
turbulences is also very critical. Under liquidity shortages, valuations and risk
measurement becomes very difficult. Regulators should have contingency plans to treat
the different segments of securities portfolios.
 Improving operational risk issues would be useful for supervision in OIC countries.
Setting an operational loss database is critical to accurately assess the potential
operational risk issues in OIC countries. Banks that want to adopt Advanced
Measurement Approaches (AMA) in their capital adequacy calculations will be faced
with a shortage of sector-wide historical loss data. In this context, historical data on
operational risk is one of the most important inputs to measure and manage operational
risk. Therefore, supervisors may help to set up a central operational loss data center.
Historical databases on operational risk can be particularly important for Islamic
banking. Since the operations of Islamic banking are somewhat different than those of
conventional banking, different operational risks might arise for these activities. As a
result, collection of data for the past operational risk episodes will be useful for OIC
countries. Therefore, banks in OIC countries might need to collect past operational risk
data from their local banks. Coordination and guidance in this context is extremely
critical and helpful. Institution such as IFSB can play a role for coordinating the local
authorities in the OIC member states.
 Recent banking regulations and particularly Basel III put more weight on macro-
prudential regulation and supervision. ECB and FED produce financial stability reports
for their banking sectors. The recent trend in banking is to set up a strong coordination
between monetary policy and banking supervision. IFSB will play the intermediation
role between international financial stability institutes and member states. This way,