A Starling Insights Deeper Dive Report

Supervisors on Supervision

— Chapter One Executive Summary —

Why this chapter exists

For over a decade, culture has been recognized as central to the risk management failures and misconduct scandals that have scarred global finance — in every major jurisdiction. Post-Crisis inquiries have often identified the same culprit: organizational norms and incentives that rewarded the wrong behaviors, silenced challenge, and tolerated misconduct. That is, “culture” features in nearly all post-mortem studies.

Yet despite this consensus, supervisory practice has not kept pace. Capital, liquidity, and operational risk standards were revised in detail, and supported by the development of robust quantitative measures. But culture supervision has lagged; it is treated as the subject of speeches, working groups, and after-the-fact assignation of blame, rather than developed as a structured part of the supervisory toolkit. Supervisors acknowledge its importance, and yet many hesitate to define or act on it. Why?

Because culture is difficult to pin down. It cannot be reduced to ratios. It is social as much as structural, qualitative rather than quantitative. That ambiguity has fostered a cycle of hesitation. Supervisors, unsure of boundaries, avoid addressing culture operationally. Definitions stay vague, methods underdeveloped, expectations unclear. Firms respond with symbolic gestures — values statements, glossy reports, survey scores — that placate but do not transform.

The cost of this cycle has become stark. Bank failures and renewed fears of contagion risk in 2023 showed that strong capital ratios are not enough if cultural reflexes corrode governance from within. Credit Suisse’s history of tolerated misconduct, SVB’s insular decision-making, and the muted escalation within supervisory agencies, all underscored that culture is not a peripheral concern. It is an upstream determinant of prudential resilience — and of supervisory legitimacy.

It is also noteworthy that supervisors often point to poor culture in firms as a root cause of trouble, but rarely do they interrogate their own cultures with a view to determining whether they are fit for purpose. Yet failures in escalation and delayed interventions reflect cultural tendencies at work within supervisory bodies. Culture in this context also demands close study.

Culture supervision is not about moralizing. It is about addressing a systemic weakness at the heart of governance, prudence, and trust. The turbulence of 2023 made clear that we must address culture as a legitimate supervisory concern. Current political tensions make clear that we must come to terms with culture risk governance and supervision now.

What you’ll see along the way

This chapter addresses four dimensions of the problem.

Definitional ambiguity and supervisory hesitancy. Supervisors differ on what “culture” means. Some reduce it to risk appetite compliance. Others describe it as an intangible reputational risk or conflate it with values and ethics. These inconsistencies leave expectations uneven and firms uncertain. The result: culture is acknowledged as critical and yet largely avoided in practice.

The case for supervisory concern. Culture is not a soft afterthought; it is an upstream condition shaping whether governance structures and risk controls succeed or fail. Cultural fragilities — lapses in challenge, complacency in risk assessment, silence in escalation — serve as leading indicators of potential prudential and conduct crises. As a result, supervisory lapses are only identified by post-hoc analysis and once the pain has been addressed, key learnings may not be carried forward.

Global convergence and divergence. Many jurisdictions are experimenting with qualitative diagnostics, but approaches are fragmented. Different legal traditions and appetites for discretion produce divergent expectations. For global firms, this means higher costs and lower clarity. For supervisors, gaps and arbitrage risks loom. The goal must not be uniformity but coherence: a shared vocabulary, interoperable tools, and a common evidentiary basis.

Legitimacy and trust. Supervisory discretion is both a strength and a vulnerability. Without structure, it invites skepticism — first from firms, then from courts and politicians. Supervisors who cannot explain their culture judgments risk accusations of arbitrariness or overreach. Trust in supervision depends on being able to show the evidentiary trail: what was examined, how it was weighed, and why it matters for safety and soundness.

Where this leaves us

By the close of this chapter, three conclusions are clear.

First, culture is firmly supervisory terrain. Culture is the upstream condition of governance, prudential soundness, and public trust. Supervisors cannot credibly claim to oversee safety and stability while ignoring the dynamics that shape whether governance infrastructures function in practice.

Second, ambiguity is itself a supervisory risk. A cycle of hesitation has left supervisors inconsistent and firms uncertain. The result has been symbolic compliance and delayed intervention.

And third, legitimacy is now on the line. Supervisory authority rests not only on statute but on trust. Discretion without explanation erodes that trust. Once lost, it is difficult to restore. Culture risk supervision is therefore not optional. It is structural to the credibility of the system. The task now is to move from conviction to convergence.

This need not mean harmonization. But it will require a shared grammar that supervisors can defend, firms can respond to, and courts can test. The events of 2023 underscored the current urgency discussed here. Capital strength alone did not offset cultural weaknesses. Governance frameworks faltered where escalation was muted. And supervisory credibility suffered when warning signs were missed.

This chapter therefore leaves us with a reframing. The question is no longer whether culture belongs within the supervisory mandate, it is how supervisors can engage with qualitative risk challenges in ways that are structured, explainable, and defensible.