Improving the Supervision of Bank Governance

In a speech delivered earlier this week, Fernando Restoy, Chair of the Financial Stability Institute (FSI), argued that fostering sound governance and culture in banks requires a decisive shift in emphasis from regulation to supervision.

“If we examine the Great Financial Crisis as well as more recent crisis episodes — such as the 2023 banking turmoil that caused the failure of several US regional banks and Credit Suisse in Europe — it is evident that bank failures were often caused by inadequate risk management and unsustainable business models,” Restoy said. “Such shortcomings can only be explained by a deficient culture and poor governance.”

No feasible amount of capital can compensate for the risks arising from deficiencies in risk management and governance, he stressed. Yet despite this evidence, international regulatory standards have historically focused on quantitative rules, including capital and liquidity requirements, that are necessary but insufficient on their own to ensure safety and stability. “Good corporate governance cannot be guaranteed by rules alone, even if they look conceptually solid,” Restoy noted.

Overly prescriptive requirements risk reducing oversight to "a simplistic tick-the-box exercise," he explained, diverting attention away from the behavioral vulnerabilities that matter most. Qualitative governance weaknesses are more efficiently addressed by supervision than by new regulatory requirements, he contended, because supervision can identify and address issues at an early stage that regulation simply cannot reach.

However, supervision is not without its own problems. “A key challenge — and frequent criticism — of supervision is its reliance on supervisory judgment, which can lead to either excessive intervention or delayed action, often after a firm's financial health deteriorates,” Restoy acknowledged. “This is a fair criticism — but the solution is not to curtail supervision; instead, we should introduce structure to guide judgment.”

Supervisory risk appetite frameworks (RAFs) are a promising means to introduce such a structure, Restoy argued. Adapted from the frameworks regulators already require banks to develop, RAFs can establish an authority's tolerance for supervisory risk, operationalize that tolerance through qualitative and quantitative indicators, and ensure consistent application through independent governance arrangements.

“When it comes to governance and culture, there should be little doubt that supervision is the most effective policy tool, and that supervisory effectiveness requires a fair amount of judgment,” Restoy concluded. “Yet how judgment is applied merits attention at the highest level within supervisory authorities to avoid arbitrariness and to ensure sufficient transparency … To achieve this, supervisory judgment should be anchored within a well-established framework of supervisory objectives, priorities, tools and measures that need to be consistently applied to all supervised institutions.”

For more from Fernando Restoy on culture risk governance and supervision, read his contribution to our “Supervisors on Supervision” Deeper Dive study, as well as his In Focus article from the 2025 Compendium.