A Starling Insights Deeper Dive Report

Supervisors on Supervision

— Closing Comments to Chapter Three —

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The preceding chapters to this stocktake report have made a compelling case: that culture is not merely relevant to supervision, it is intrinsic to it. The question this chapter sought to address was whether supervisors have begun to treat it that way in practice.16F10F[1]

What we find is a supervisory community that has not stood still. Whether responsible for prudential concerns, conduct issues, or both, supervisory agencies have been experimenting with new methods, new tools and, in some cases, new mindsets. We have seen pilot programs and thematic reviews, structured boardroom diagnostics and attempts at forward-looking frameworks, the integration of behavioural science and the early use of SupTech. 

These are encouraging signs of progress, but the job is far from done.

Moreover, many of the efforts to grapple with culture that have been made to date remain fragile. Some have been scaled back or halted altogether. Others still rely on individual champions rather than enjoying institutional commitment. And, unfortunately, culture-related initiatives too often sit at the margins of the supervisory playbook — interesting, but not trusted; informative, but not decisive; visible, but not integral. They remain, by and large, in the experimental phase. 

That progress has been slow is not a criticism. Culture presents difficult terrain to navigate, and supervisors are rightly cautious. As Amy Edmondson notes in her preamble to this chapter, no matter how well designed, not all experiments will prove successful: ideas that look good in theory, but do not deliver in practice, should be halted. But there are always lessons to learn and we must allow these well-intended attempts at innovation to inform us as we iterate and continue to experiment going forward. 

And there is no going back, unless we want to ignore the lessons of history. 

Time and time again, we have seen episodes — in the financial sector and elsewhere — in which cultural factors were a critical driver of disastrous outcomes. Many supervisors in this chapter identified the genesis of their increasing focus on culture as having stemmed from a failure or crisis within their jurisdiction. So, it would be negligent for supervisors to pay no heed to this, or leave it to languish in the ‘too hard’ basket. The alternative — continued attempts to correct behavioural failures with traditional capital and liquidity requirements — will not only be ineffective, but will erode confidence while adding cost without solving root causes.

What’s more, culture is a matter of significance not only because the right cultural attributes are important for good risk management, but because they are also important for broader organisational success and reputation. Indeed, the right culture can be a meaningful competitive advantage. There is a business need, as well as a supervisory one, to understand these issues better. That should open opportunities for supervisors and financial firms to work together.

Since there is no going back, the task ahead is therefore to shift beyond the experimentation we have seen to date and toward a broader institutionalisation. That requires structure, discipline, cooperation and above all, it requires a continuing commitment to act.

An added bonus would be to make that shift in a consistent way, across national boundaries. The largest financial institutions operate in a multitude of jurisdictions. A consistent and robust framework for assessing culture — a common lingua franca, if you will — would be an extremely valuable addition to the supervisory toolkit, of benefit to both supervisors and those they supervise. International standard-setters can therefore play a useful helping hand in this process, even if by doing nothing more than facilitating the sharing of ideas, learnings, and good practices. 

Assessing the behaviours, mindsets and motivations of people — both individually and collectively — is not easy. In part, that’s because behaviour and culture, and data and metrics, have not traditionally gone hand-in-hand. If what gets measured gets managed, then it is not surprising that issues that are difficult to quantify in dollars and cents, or percentages and basis points, have less well-developed frameworks and techniques to address them. 

But the foundations to change that are increasingly in place. 

Supervisors have identified quite clearly the relevance of culture to their mandate. Supervisory capabilities are being built, both in terms of human expertise and structured frameworks for assessment. And we have seen from the experiences of contributors to this chapter that an increasing availability of data, combined with modern technology and insights from behavioural sciences, is allowing supervisors to develop a more structured and evidence-based approach to the task of culture risk supervision. 

The right culture can be a meaningful competitive advantage.

Of course, expert judgement still plays a central role, but it is now possible to do much more than simply rely on gut feel, anecdotes, and intuition. And the unique vantage point of a supervisor, which allows them to compare and contrast different firms, can provide valuable insights that are not available to individual firms on their own. 

With the foundations increasingly set in place, the key now is ongoing commitment. Commitment to refine, improve, and embed culture assessment as an integral part of the supervisory process. Enormous strides have been made since 2008 in strengthening regulatory architecture. But the “unfinished business”, as I have written elsewhere, is to strengthen the human systems that ultimately determine whether that architecture is effective.

That applies both to financial firms and to supervisors alike. The latter part of this chapter highlights that, for supervisors to be effective, they must not just be able to comprehensively assess the risk profile of the firms they supervise, but they must also demonstrate the right supervisory culture themselves. Supervisors can only be truly effective if they have the institutional confidence and cultural posture to take difficult decisions and act when needed. 

That is why this chapter also insists that supervisory culture must itself be a subject of regular inquiry and, where necessary, improvement.

Some jurisdictions are doing just that. Efforts to assess supervisory culture, to define internal risk tolerance frameworks, and to clarify when and how discretion should be exercised are steps in the right direction. But they remain the exception, not the rule. And without broader coordination and support, these pockets of innovation will struggle to lift the global supervisory baseline.

Supervisory culture is not shaped by mandates or frameworks alone. It is shaped by tone from the top, by how incentives are structured, by how discretion is governed and supported, and by the examples set by senior leaders. That is why I’ve argued that international bodies — particularly those concerned with supervisory effectiveness — must begin to focus more directly on supporting and encouraging the cultural attributes that in turn support good supervision.

The legitimacy of supervisory decisions depends not on being ‘right’ in all things, but on being able to demonstrate that decisions were consistent, proportionate, and explainable. If supervisory assessments cannot meet those benchmarks, they will inevitably be deemed unfit for purpose.

That is the challenge this chapter leaves us with. There are ample case studies to demonstrate the connections between culture and financial (in)stability. If supervisors fail to supervise those risks — early, consistently, and credibly — then the cycle of missed signals, delayed action, and eroded confidence will simply be repeated. It is not enough to identify what works in isolated settings. Supervisors must find ways to embed those practices, to replicate them, to adapt them to different institutional and legal contexts, and to raise the floor of supervisory effectiveness. 

Failure to do so will not be a failure of foresight. It will be a failure of follow-through.

What this chapter has shown, however, is that follow-through is possible. The tools, knowledge and momentum all exist. The concluding chapter that follows will take up the question of how we might look to build the institutional architecture to make that happen — through partnerships, standards, and the better use of data and technology. But this chapter, I hope, makes clear why that work is necessary, and must continue.

[1]  In this chapter, we have valuable insights from those who describe themselves as supervisors, and those who describe themselves as regulators. Regulation and supervision — whether for prudential or conduct purposes — are both means to an end: protecting the community from various forms of harm. In these concluding reflections I have used the terms supervision and supervisors, primarily because the assessment of culture is unlikely to lend itself to prescribed regulation in the same way that, when it comes to financial soundness, minimum capital and liquidity ratios can be prescribed in black letter law. Necessarily, the assessment of culture will involve a significant degree of judgement. That judgement will ideally be founded on good data and robust analysis, but it cannot be mechanical. And what is ‘good’ inevitably needs to be considered in light of individual circumstances.

Wayne Byres served as the Chair of the Australian Prudential Regulation Authority (APRA) from 2014 to 2022. Prior to this, he was Secretary General of the Basel Committee on Banking Supervision. Earlier in his career, he served in several regulatory and supervisory roles at APRA, the Reserve Bank of Australia, and the Bank of England.