A Starling Insights Deeper Dive Report

Supervisors on Supervision

— Chapter Two At-A-Glance —

Signals | Shared observations across stocktake participants

• Culture eats governance for breakfast: culture is a precursor to governance failures, exacerbated when governance is not aligned with desired culture; impairs effectiveness of controls and processes.
• Hesitancy and reactivity: lacking forward-looking tools, late interventions dominate, leading to supervisory hesitancy; organizational complexity and an inability to define ‘good culture’ increases ambiguity.
• Patchwork treatment: variable appetite for supervisory discretion; rising scrutiny of subjective assessments; uneven integration of culture into prudential frameworks; coherence is needed.
• What follows: provides context for why current approaches in supervision fall short and points towards why inscrutable supervisory judgment is experiencing forceful push-back.

Stakes | Observed consequences of the status quo

• Culture risk drives outcomes: lapses in supervision have roots in the culture of firms and supervisors alike; lack of clear frameworks and agreed metrics leaves culture a matter of subjective assessment.
• Governance 2.0: effective firm governance starts with culture; offers opportunity for more effective compliance and risk management; culture either underpins or undermines control environments.
• Trust in supervision: supervisory culture that does not rely on consistency and transparency leads to reduced trust and legitimacy; without a foundation of trust, supervisory effectiveness falters.
• Enforcement clarity: enforcement is inherently backward looking and evidence-based; lacking forward looking tools, supervisors struggle to prevent adverse outcomes; persistently back-footed.
• What follows: these stakes provide impetus for the efforts and experiments described in the next chapter and for the call for continued engagement around these issues that is sounded in the closing chapter.

Summons | Opportunities and challenges to take up

• Examiners: need an integrated approach to culture risk governance; must engage with firms on a forward-looking basis rather than continue reliance on ex post enforcement tools.
• Boards and executives: must recognize opportunity to build stronger governance through attention to culture; effective and proactive engagement with supervisors is key.
• Policymakers: must regard reform of culture risk governance and supervision as a collective action problem; coordinated global effort required to establish effective methods and level playing-field. 
• What follows: public-private partnership needed to determine how best to overcome shared challenges.