Strong and Modern Supervision

In a speech delivered this week, Erik Thedéen, Chair of the Basel Committee on Banking Supervision, argued that “strong and modern” supervision depends on seeing risks early, exercising sound judgment, and having the authority to act, while ensuring that supervisory decisions remain evidence-based and accountable.

Thedéen noted that during past crises, including the 2023 banking turmoil, failed or distressed banks often met their minimum capital requirements and, in some cases, applicable liquidity requirements. “Yet beneath apparently satisfactory regulatory ratios sat deep weaknesses in governance, risk management and business models,” he said, adding that these qualitative weaknesses eventually became quantitative shocks after “weak governance allowed vulnerabilities to grow unchecked.”

Thedéen described how supervisors must not only see risks early and clearly articulate what needs to change — they must also act when change does not happen. Taking action, he said, requires supervisors to exercise judgment before risks fully crystallize. While judgment is sometimes criticized as subjective or opaque, Thedéen argued that it is essential because rules cannot anticipate every risk or bank-specific vulnerability.

However, he stressed that good judgment must be structured, evidence-based, contestable within the supervisory authority, and accompanied by institutional accountability. “[Effective supervision] uses judgment, but disciplines it,” he said. “It provides discretion, but makes it accountable. And, above all, it gives supervisors the confidence to act while action can still make a difference.”

Thedéen further argued that an authority’s effectiveness relies heavily on human and organizational factors, including institutional memory, operational independence, and organizational culture. He questioned whether supervisory teams have the expertise to connect risks across silos and whether difficult messages are softened as they move up the hierarchy. To ensure supervisory effectiveness, traditional prudential expertise must be integrated with an understanding of technology and human behavior, Thedéen said.

He highlighted the growing impact of AI, noting that while it has benefits, the technology creates new vulnerabilities regarding data quality, model risk, explainability, cybersecurity, and accountability. In addition, the use of AI deepens banks’ reliance on a small number of third-party providers. This presents a particular challenge, especially for smaller banks that may lack the internal capacity to understand and govern these external tools.

To meet these challenges, Thedéen outlined three commitments for the supervisory community:

• Invest in institutions: Protect clear mandates, operational independence, and the legal authority to intervene early.
• Invest in people: Ensure supervisors have the expertise to understand evolving risks, the culture and confidence to challenge senior bankers, and the institutional backing to escalate concerns.
• Invest in trust: Ensure supervisory judgment is evidence-based, structured, and accountable, without allowing confidentiality to become a shield against accountability.

“Strong supervision means having the mandate, independence, powers and determination to act,” Thedéen concluded. “Modern supervision means having the people, information, technology and methods to act intelligently.”