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In a report published last week entitled "Good Supervision: Lessons from the Field," the International Monetary Fund (IMF) emphasizes the importance of effective banking supervision and discusses what can be done to achieve it.

The bank failures of earlier this year have been widely attributed to failures in risk management that deteriorated trust and confidence in those institutions. Some have focused on heightened capital requirements in the wake of these collapses, but the IMF report is clear that "an institution can never have enough capital or liquidity if there are material flaws in its risk management practices."

Instead, supervisors must be able to identify these deficiencies early, and be empowered to compel an institution to resolve them quickly, the IMF argues. This will necessitate a greater supervisory focus on governance, risk management, and business models — the problems at the root of the bank failures. It may also require that supervisors fill data gaps and adopt risk-based, forward-looking analytical tools.

Supervisory agencies must also attend to their own culture to ensure that their supervisors can take action quickly. In the case of Silicon Valley Bank, examiners had identified the bank's risk management deficiencies but failed to compel the firm's leadership to rectify them. "Supervisors that fail to follow through in supervisory intervention allow weak banks to continue problematic business strategies and actions," the IMF writes.

"Supervision is essential," the IMF concludes. "As the dozen United States senators who wrote to the Federal Reserve Board, 'Irresponsible and excessive risk taking by SVB […] should serve as a clear reminder that banks cannot be left to supervise themselves.'"

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