Supervisors on Supervision

“Culture feels more fundamental than governance; governance is the outward-facing mechanism, while culture accounts for attitudes toward responsibility and accountability — for instance, do individuals truly own outcomes, or do committees diffuse that?”

“I’ve seen organizations where committees are created to ‘oversee’ a function that’s underperforming, but then the committee undermines individual accountability. Sometimes you create the committee because the individual is failing, and you won’t deal with it. 

Government adds another dynamic: historically, government jobs have been treated as a property right of sorts — it’s difficult to remove people in government jobs, even when their performance is demonstrably inadequate. 

That breeds risk-aversion: the surest way to lose your ‘property’ is to take a risk and get it wrong. So inaction becomes the safest choice — especially in licensing, bank M&A, or anytime someone asks for a decision. ‘No response’ is common. 

But inaction compounds risk; deferring decisions does not eliminate risk, it builds it. These are incentives problems, not ‘bad people.’ The incentives produce a culture that struggles to act with speed and clarity. Some of this is changing, but the legacy mindset is real.”

“I lived through the pre-2008 approach and have watched the post-Crisis shift in supervision. To over-generalize, the post-2008 supervisory culture has been in a defensive posture. 

We’ve tried to focus on everything for fear of missing anything — and by doing that, we often focus on nothing.
We have limited resources — time, attention, exam teams — yet we’ve sometimes lacked the confidence to concentrate on what actually matters, the wisdom to know the difference between what matters and what doesn’t, and the self-restraint to avoid distracting management and boards with the things that don’t matter.

The result: our message gets lost, and I’m not sure we always know what truly matters because we’re busy covering ourselves. I’ve heard repeatedly, even in my short time here, that examiners are afraid of being criticized for missing something, so the process becomes an exercise in ‘CYA.’ That’s a cultural shortcoming. You saw elements of that in SVB supervision — lack of focus, hesitation to decide, to escalate — though that shades into governance, too. 

There’s also an extremely low risk tolerance among regulators. No one wants to be wrong, and somewhere along the way the public came to believe supervision should prevent all bank failures — which is neither the law nor realistic. We must restore confidence in teams to focus on the few things that matter and back them when they do.”

“With regard to the CAMELS rating system, my initial instinct is that management and governance weaknesses ultimately surface in the quantitative elements — capital, asset quality, earnings, liquidity, sensitivity. They’re often early warnings further up the causal chain. 

The farther out you are on that causal chain, the harder it is to measure consistently. But over time, the problems that we seek to capture with the “M” rating (Management Quality) flow through to the quantitative elements. 

I’m open-minded about metrics, but it’s genuinely difficult work. Those are my initial thoughts as I continue to learn.”