SUNANDO ROY – On Banking, Finance and Society

Banking Supervision: India’s Risk Based Approach in Global perspective

In an era marked by economic shocks, geopolitical uncertainties, and rapid technological disruption, central banks worldwide are sharpening their supervisory tools. Risk-Based Supervision (RBS) has become the global benchmark, moving beyond compliance checks to emphasize forward-looking risk identification and mitigation. For India, the Reserve Bank of India’s (RBI) Supervisory Programme for Assessment of Risk and Capital (SPARC) has been the central supervisory framework since 2013. But how does SPARC compare to international peers such as the U.S. Federal Reserve’s Comprehensive Capital Analysis and Review (CCAR), the European Central Bank’s Supervisory Review and Evaluation Process (SREP), the UK’s Prudential Regulation Authority (PRA) regime, and the Australian APRA model?

SPARC is designed as a holistic RBS framework, combining quantitative analysis, qualitative assessments, and supervisory judgment. Its core lies in the Integrated Risk and Impact Scoring (IRISc) model, which evaluates banks on two dimensions: their probability of failure and their systemic impact. The failure score is derived from indicators like capital adequacy, asset quality, profitability, liquidity, and market sensitivity, while the impact score reflects size, interconnectedness, and substitutability. Together, they yield a composite risk rating that drives supervisory intensity, ranging from routine monitoring to stringent interventions. SPARC relies on offsite surveillance, including prudential returns and the Central Repository of Information on Large Credits (CRILC), supplemented by onsite inspections and thematic reviews. Over 200 quantitative and qualitative parameters feed into IRISc, giving it depth and granularity well-suited to India’s diverse banking system. In recent years, RBI has expanded SPARC’s scope by introducing fraud risk management, cyber resilience guidelines, and, most recently, climate-related disclosure requirements to be phased in from FY26. While comprehensive, the framework has been critiqued for being less transparent than international counterparts.

By contrast, the U.S. Federal Reserve’s CCAR is a stress-test powerhouse. It applies to banks with assets over $100 billion and evaluates their ability to maintain capital adequacy under baseline, adverse, and severely adverse economic scenarios. The test is highly data-intensive, requiring granular FR Y-14 submissions covering millions of data points on loans, securities, and trading positions. Results are published annually, with banks required to maintain a minimum Common Equity Tier 1 (CET1) ratio of 4.5% post-stress. Failures trigger restrictions on dividends and buybacks, making CCAR as much a market discipline tool as a supervisory exercise. In 2025, the Fed introduced averaging of results across two years to reduce volatility in outcomes, reflecting an effort to balance rigor with stability.

The European Central Bank’s SREP offers a broader, multi-pillar evaluation under the Single Supervisory Mechanism. It assesses banks across four dimensions: business model viability, governance and risk management, risks to capital, and risks to liquidity. Each pillar is scored from 1 (strong) to 4 (weak), producing an overall rating that drives Pillar 2 capital requirements (P2R). The process draws on ICAAP and ILAAP submissions, European Banking Authority templates, and targeted inspections. In 2025, the ECB introduced a flexible risk assessment system (RAS) to streamline supervisory cycles, with proportionality for smaller banks and earlier completion timelines. Importantly, SREP has embedded climate and cyber risks into its core capital adequacy reviews, making it one of the most forward-looking frameworks globally.

The UK’s PRA takes a judgment-led approach, combining qualitative supervisory oversight with quantitative stress testing conducted by the Bank of England. Like SREP, it uses ICAAP and ILAAP reports as key inputs, but it distinguishes itself by emphasizing supervisory dialogue. Stress-test results are published annually, but rather than triggering binary outcomes, they are used diagnostically to guide supervisory discussions and set firm-specific buffers. The PRA applies proportionality, scaling requirements by systemic importance, and has been proactive in integrating emerging risks. Since 2021, the Bank of England has run pioneering climate stress tests, while the CBEST program tests firms’ cyber resilience through simulated advanced threats. This balance of transparency and discretion characterizes the UK approach.

The Australian Prudential Regulation Authority (APRA) represents another distinct model, known for being highly supervision-intensive. Its framework is anchored in the Probability and Impact Rating System (PAIRS) and the Supervisory Oversight and Response System (SOARS). PAIRS evaluates inherent risks across credit, market, operational, and insurance domains alongside the quality of risk management, generating a probability score. SOARS then translates this into supervisory responses, ranging from routine monitoring to enforceable actions such as recapitalization demands. APRA complements this with system-wide stress tests, often conducted in partnership with the Reserve Bank of Australia. These cover housing market shocks, macroeconomic downturns, and increasingly, climate-related risks. Unlike CCAR’s pass/fail outcomes, APRA’s stress tests are diagnostic, shaping supervisory expectations and capital buffers. The model is lauded for its forward-looking stance, focus on governance and culture, and transparent escalation ladder from risk ratings to supervisory interventions.

When viewed together, these frameworks reveal differing philosophies. SPARC’s IRISc provides granular, India-specific insights but lacks the transparency of CCAR’s published results or SREP’s standardized scoring. The UK PRA and APRA stand between rules and judgment, using stress tests primarily as diagnostic tools that inform supervisory dialogue rather than impose automatic restrictions. On emerging risks, Europe, the UK, and Australia are clearly ahead, with climate and cyber embedded as mainstream supervisory priorities. SPARC is making strides in these areas but remains in transition.

For India, the path forward could involve selective adaptation. From CCAR, it could adopt averaging mechanisms to smooth volatility in IRISc outcomes. From SREP, it could borrow pillar-based scoring for clarity and benchmarking. From the PRA, it could embrace diagnostic stress testing to encourage supervisory dialogue. And from APRA, it could integrate PAIRS/SOARS-style transparency, mapping risk ratings more explicitly to supervisory responses. Together, these refinements would help RBI craft a “SPARC 2.0” that is more transparent, internationally aligned, and resilient against future shocks.

Comparative Table: SPARC, CCAR, SREP, PRA, and APRA