How Supervisors Can Stop Bank Failures

In an op-ed published in Bloomberg this week, Bill Dudley, past-President of the Federal Reserve Bank of New York, explores how supervisors — often blamed when banks collapse — can be more proactive in preventing bank failures.

“Experts rightly say that the culture of supervision needs to change,” Dudley writes. “I’d go further: The priorities and goals need work, too.” Dudley contends that supervisory culture often encourages hesitation rather than intervention. Supervisors, he writes, have a tendency to avoid challenging bank leadership forcefully, defaulting to delay and procedural caution even when vulnerabilities are visible. Citing Silicon Valley Bank and Credit Suisse, Dudley argues that supervisors should have intervened earlier to compel the banks to resolve shortcomings.

He further asserts that supervisors are too focused on process rather than outcomes. “When engrossed in the issuance of findings (for example, ‘matters requiring immediate attention’ in the US) in areas such as data management, model validation or third-party vendor management, they can miss the forest for the trees,” Dudley writes. In his view, this can obscure important questions while issues that are immaterial to safety and soundness consume supervisory attention.

Dudley goes on to criticize the complexity of existing regulatory frameworks. He argues that capital rules, stress tests, and resolution planning have become overly intricate and insufficiently aligned with their objectives, generating high compliance costs while offering limited practical value in a crisis. Improved communication and engagement, Dudley adds, is also essential. Supervisors and banks may share the goal of safety and soundness, but approach risk from different perspectives. Finally, he argues that incentives for remediation are weak, proposing greater transparency around supervisory constraints to pressure banks to address problems more quickly.

“Supervisors can’t micro-manage banks,” Dudley concludes. “Given clear and simple rules aimed at safety and soundness — and with proper incentives in place — they shouldn’t need to.”

Bill Dudley participated in the stocktake exercise for our recently-released Deeper Dive report, “Supervisors on Supervision.” For more from Bill Dudley and others on supervision, governance, and culture, you can read the full report on Starling Insights.