Supervision as Clinical Practice

In a speech delivered last week, Sam Woods, CEO of the UK Prudential Regulation Authority, offered a wide-ranging reflection on the nature, history, and future of banking supervision, and proposed that the closest analogy for the supervisory role is not the inspector or the enforcer, but the doctor.

Woods opened by distinguishing supervision from regulation. While prudential regulators set rules, supervision is a separate and more intrusive activity, he noted. With its close, continuous oversight of firms’ internal workings, supervision has no real parallel in other parts of a capitalist economy, he explained. Woods explored five possible characterizations of the supervisor’s role: the inspector, the prosecutor, the fire warden, the gap-filler, and the meta-regulator. None, he argued, fully captures the role. A closer analogy, he said, is to the work of a doctor or public health official.

“Doctors work with their patients to identify any troubling symptoms, diagnose the underlying condition, and prescribe the appropriate course of treatment,” Woods said. “In doing so, they do not simply consult a checklist of simple quantitative metrics, but instead develop hypotheses of what is afflicting their patient, through diagnostic testing and discussion.” The supervisor, he argued, operates in much the same way, building relationships underpinned by trust, maintaining independence of mind, and enabling firms to raise problems early before they become acute.

The public health dimension matters as well, Woods added. The ill-health of one firm can pose risks to others through contagion, and ultimately to the public at large. This is why supervisors, like public health authorities, are empowered to direct others in the public interest. That power, however, requires robust safeguards and accountability to guard against abuse.

Woods argued that supervision may benefit from being recognized more formally as a “profession,” akin to medicine or law. The demands of the role are considerable: technical proficiency in capital, liquidity, and group consolidation is necessary but not sufficient. Effective supervisors also require a deep understanding of financial institutions, the risks they face, and “the psychology of organisations and individuals.” Looking ahead, Woods envisaged a more senior and specialized workforce, with supervisors devoting greater effort to risk identification, analysis, and supervisory engagement, and less to activities that can be standardized or automated.

“I would strongly encourage others to join a profession that demands technical expertise, judgement, independence of mind and imagination — and whose work ultimately underpins trust in the financial system and in money itself,” Woods concluded. “I suspect we will continue to ask a great deal of the supervisors of the future, as we do today, but in return the role offers continual learning, intellectual stretch, and the opportunity to exercise judgement on issues that matter deeply for economic and financial stability.”