A Starling Insights Deeper Dive Report

Supervisors on Supervision

— Perspectives: Supervisory Standards and the Slow Rise of Culture —

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The development of international supervisory standards has been shaped as much by institutional caution as by crisis. Since the 1990s, efforts to strengthen supervisory frameworks have focused on structure and independence, with culture long treated as a second-order concern. That posture is beginning to shift — albeit slowly — as regulators confront the limits of formal authority in the face of informal behaviors.¹

The Asian financial crisis of the late 1990s catalyzed the earliest moves toward a shared global supervisory framework. The Basel Core Principles for Effective Banking Supervision (BCPs), first issued in 1997, reflected a G10-led effort to ensure comparability of standards in an increasingly globalized banking system. The 25 original principles offered a blueprint for sound supervision — spanning licensing, risk management, consolidated oversight, and enforcement powers. But the early emphasis was structural rather than behavioral. The principles called for legal authority, not yet for cultural awareness.

Early assessments of supervisory practice underscored weaknesses in the legal and institutional foundations of supervision. In response to the systemic weaknesses revealed by the Asian financial crisis — and following broad international calls for stronger international financial surveillance — the International Monetary Fund (IMF) and the World Bank launched the Financial Sector Assessment Program (FSAP) in 1999. The initiative was designed to provide a comprehensive and independent assessment of the strength and resilience of national financial systems, including the effectiveness of their regulatory and supervisory frameworks.

Initially, participation in the FSAP was voluntary and focused largely on emerging and developing economies, reflecting concerns about institutional capacity and crisis prevention. Among its various modules, FSAP reviews benchmarked jurisdictions against the BCPs, offering a structured assessment of supervisory integrity and capability. Yet findings were uneven. By 2008, after over 130 assessments, the IMF found that more than a third of countries lacked operational independence and credibility. Formal powers were rarely exercised, and government ministers often exerted undue influence over supervisory decisions. The legal design was in place; the will to act was often not.

From Statute to Judgement

The Global Financial Crisis of 2008 made this dynamic impossible to ignore. Supervisory inaction, driven by institutional hesitancy and political pressure, had proven as consequential as regulatory failure. In response, the IMF published a paper in 2010 titled “The Making of Good Supervision: Learning to Say ‘No’.” It called for greater supervisory assertiveness and laid the intellectual groundwork for addressing the cultural drivers of passivity.

That same year, FSAP reviews became mandatory every five years for jurisdictions with systemically important financial sectors, under the authority of the IMF’s Article IV surveillance program. While this did not introduce legal penalties for noncompliance, it created a strong expectation of participation among major economies. For all other jurisdictions, participation in the program remained voluntary.

Reviews now placed greater weight on how supervisors exercised judgment in practice. A well-drafted statute was no longer sufficient — there had to be evidence of supervisory responsiveness, clarity of mandate, and insulation from political pressure. Nonetheless, subsequent assessments continued to find weaknesses in key areas: supervisory leadership appointments, budgetary autonomy, and enforcement consistency remained vulnerable to external influence.

This shift also began to surface in formal standards. The 2012 revision of the BCPs marked a pivot from design to implementation. The updated framework added new principles and sharpened expectations around risk-based supervision, early intervention, and supervisory discretion. Importantly, it introduced the term “risk management culture” — likely the first such reference in a Basel standard — acknowledging that governance failures often reflect norms, not just controls. Supervisors were encouraged to assess not only compliance, but the tone, incentives, and attitudes that shape firm behavior.

Parallel efforts emerged in the global standard-setting community. In 2010, the Financial Stability Board (FSB) launched a regular program of peer reviews — both thematic and country-specific — as a way to benchmark the implementation of international standards and share lessons across jurisdictions. Over time, these reviews have examined areas such as compensation practices, corporate governance, and resolution regimes. Their emphasis has been on the structural and technical dimensions of reform, with cultural considerations remaining more implicit than explicit.

In 2014, the FSB issued cross-sector guidance on assessing risk culture, drawing from work by its Supervisory Intensity and Effectiveness Group. The FSB outlined key indicators of sound risk culture, including tone from the top, accountability, effective challenge, and incentive alignment. These were high-level principles, not prescriptive metrics, but they shifted the field. Culture was no longer relegated to internal firm policy — it became a supervisory concern.

In 2015, the Basel Committee on Banking Supervision incorporated aspects of the FSB’s work into updated corporate governance guidance. Yet progress remained uneven. Many supervisors lacked the mandate, expertise, or tools to assess culture systematically. And while expectations had 
evolved, capacity-building had not kept pace. In practice, few FSAP assessments treated culture as a core pillar of supervisory effectiveness.

Early Movers

While global standards began to acknowledge culture in broad terms in the early 2010s, it was left to early movers in individual jurisdictions to translate the concept into concrete supervisory practice. We will not provide a comprehensive account of all of the regulators and supervisors involved in this effort, many of whom have contributed to Starling’s Compendium series of reports. However, it is worth discussing some of the key innovators.

In the Netherlands, for instance, De Nederlandsche Bank embedded behavioral science into its supervisory efforts in an effort to assess cultural signals inside firms. Many other supervisors globally have followed suit, using structured interviews, behavioral reviews, and “deep dives” to surface risks not evident in financial statements. 

In the United Kingdom, the Financial Conduct Authority (FCA) also emerged as an early leader. From its establishment in 2013, the FCA embedded culture into its supervisory approach, linking business models, governance, incentives, and behavioral drivers to the outcomes it expected from firms and their treatment of customers. This emphasis was later reinforced by the Senior Managers and Certification Regime (SM&CR), which sought to strengthen individual accountability in part as a means to improve industry culture.

In addition, the UK’s now defunct Financial Services Culture Board (FSCB) — originally established as the Banking Standards Board in the aftermath of the LIBOR scandal — provided an industry platform to benchmark culture. Using employee surveys, structured assessments, and cross-firm comparisons, the FSCB generated insights into conduct norms and risk attitudes, offering boards and supervisors an external perspective on the health of organizational culture. 

In the United States, the Federal Reserve Bank of New York launched its “Governance & Culture Reform Initiative” in 2014, motivated by a wave of global misconduct scandals that had eroded trust in the financial system. The initiative created a forum for senior regulators, supervisors, bankers, and academics to examine how norms and incentives shape behavior in financial institutions. Through conferences, publications, and podcasts, the NY Fed has emphasized that culture and conduct are not just matters of compliance, but of prudential soundness. In so doing, it has sought to encourage firms to take responsibility for culture as a core dimension of prudential soundness.

In Australia, the Australian Prudential Regulation Authority (APRA) also recognized around this time that governance and culture were central to prudential soundness. In his first public speech as the head of APRA in 2014, then-Chair Wayne Byres highlighted work on risk culture and incentives as critical, if “under-appreciated and under-developed,” components of the global post-Crisis regulatory response.² APRA followed this with its 2016 “Information Paper on Risk Culture,” which encouraged executives and boards to evaluate how behavioral norms and accountability structures influenced risk outcomes in their organizations.

The 2018 “Prudential Inquiry into the Commonwealth Bank of Australia” and the subsequent “Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry” (commonly referred to as the “Hayne Commission”) reinforced these concerns, revealing how weaknesses in governance, accountability, and organizational culture can undermine effective risk management and, ultimately, erode the public trust that underpins the stability of the financial system. In response, APRA, alongside the Australian Securities and Investments Commission, strengthened expectations around governance, remuneration, and accountability, and required that firms take ownership of resolving longstanding deficiencies in these matters.

In Asia, the Hong Kong Monetary Authority (HKMA) launched its “Bank Culture Reform” initiative in 2017, aiming to strengthen governance and conduct standards across the banking sector. The HKMA urged boards and senior management to take ownership of cultural drivers — including incentives, leadership behavior, and escalation mechanisms — and followed up with industry-wide reviews in 2019 and 2020. These thematic assessments highlighted both progress and persistent weaknesses, making culture a visible and recurring element of prudential supervision in the region.

Much has occurred in the intervening years that is worthy of discussion, and we would encourage you to read the Compendium series of reports for a more complete history. However, taken together, these initiatives demonstrated that culture could be examined, assessed, and influenced in practice. But it was left to global standard-setters to determine whether — and how — such lessons might be codified into practicable international standards. 

First Steps Toward a Global Framework

The FSB sought to move this conversation beyond principles with its 2018 Toolkit for Firms and Supervisors to Mitigate Misconduct Risk. The document emphasized three dimensions of cultural risk: the behavioral drivers of misconduct, individual accountability, and the “rolling bad apples” problem of employees re-entering the system after prior failings. For supervisors, it suggested embedding culture programs, applying risk-based prioritization, and drawing on both qualitative and quantitative indicators. Yet the toolkit ultimately stopped short of offering specifics that supervisors could readily operationalize. 

By the 2020s, new incidents in the non-bank sector — often entangled with major banks — renewed attention on cultural risk. These events underscored that compensation reform alone could not correct misaligned norms or toxic leadership. Supervisory tools needed to evolve beyond traditional risk-rating models and enforcement triggers.

The 2024 update to the BCPs reflected that shift. For the first time, risk culture was embedded across multiple principles, no longer confined to governance or conduct. Supervisors were expected to assess how culture influenced risk management, internal audit, and board oversight. The language remained non-prescriptive, but the message was clear: culture is a matter of prudential and systemic importance.

Unfinished Business

Despite this progress, there is no single authority tasked with distilling the growing body of supervisory knowledge on culture. The IMF holds substantial data through FSAPs, technical assistance reports, anti-money laundering reviews, and governance diagnostics. But that insight remains dispersed. Experts have noted the need for broader disciplinary integration — bringing in organizational psychologists, anthropologists, and others who can bridge the gap between formal frameworks and informal practice.

Deeper integration of cultural analysis into supervisory regimes will likely require broader institutional change. It also depends on the internal cultures of supervisory bodies themselves, including their openness to reflection, challenge, and learning. Supervisors that model the same cultural qualities they seek in firms are better positioned to assess them credibly and to sustain the trust on which effective and legitimate supervision ultimately rests.

The trajectory of the BCPs over the past three decades shows clear institutional learning. From foundational rules to implementation emphasis, from structural design to cultural awareness — the evolution is evident. But challenges remain. Supervisory independence, a core tenet of the BCPs since 1997, is still inconsistently protected. Accountability mechanisms, an oft underappreciated pillar of that independence, vary widely and are frequently opaque. And supervisory courage, the willingness to act in the face of political, institutional, or market resistance, remains difficult to codify.

As supervision continues to evolve, its credibility will depend on more than the refinement of rules. The demands of an interconnected, behavior-driven system require frameworks that can account for both structural safeguards and the cultural forces that shape how they operate. The measure of future progress will be how well these elements are brought into alignment, translating design into practice and authority into action.

Cameron Lawrence is the Director of Research at Starling Insights.

Sarah Dahlgren is the former Head of Supervision for the Federal Reserve Bank of New York. In that role, she oversaw many of the largest domestic and foreign banks operating in the U.S. and developed new supervisory approaches.