Supervisors on Supervision

“How do you measure incremental progress in building a desired culture? How do you do that in a way that is consistent and replicable across a number of institutions? How do we support that from the official sector side? To the extent that this can be operationalized, there would be a huge benefit to having a data driven, analytically rigorous process that provides reliably comparable metrics by which to assess incremental progress on culture improvement.”

“Risk culture is supposed to reflect the core values the institution should pursue — chosen by the board, executed by senior management, properly propagated within the organisation, and then measured: how well are you doing when frontline colleagues act on those values? The collection of risk appetite and tolerance (in the form of a statement), the propagation mechanisms, and performance measures. Collectively I would call that ‘risk culture.’ 

Governance, on the other hand, is the structure with which you pursue those values: how the board discusses these risk values, how they review institutional performance, what mechanisms they put in place to collect feedback on what’s happening on the ground, how accountability is built, and how remuneration reflects the values.

Rules shape behavior. But, particularly for institutions engaged in complex activities, there’s potential for trouble when you try to operate with too many rules and not enough buy-in to those rules. So, rules, and the enforcement of rules — both within the institution and from supervisors outside of the institution — remain important. 

But culture is of central interest because rules will never take you all the way there.”

“All the financial metrics we require as supervisors are aimed at ensuring that confidence in institutions remains solid, and justifiably so. For institutions that rely so heavily on that confidence, the success of a firm’s culture in contributing to that confidence is of critical importance.”

“Conduct regulation tends to be viewed as consumer protection... But I think [culture is] really a prudential matter, as opposed to a conduct matter as typically understood. These issues have obvious implications for consumer protection, but what we’re talking about here is really more concerned with the safety of the firm — and, perhaps, the financial system itself. That’s a real challenge for the official sector. And it’s something critically important — particularly since financial institutions depend fundamentally on confidence.”

“Particularly at this moment, there’s a lot of focus — appropriately in my mind — on the culture of institutions. Firms spend a lot of time, attention, and money in seeking to establish and maintain a strong culture. They expect to see the reward for that investment in their firm’s subsequent performance. 

But from my point of view, and in the official sector roles I’ve held, it’s been very difficult to think about how we might measure management’s success at shaping desired culture effectively — apart from either, ‘oh, the company is performing well,’ or ‘wow, the company has blown up.’”

“We need a supervisory culture that is less focused on administration and more focused on key risks that can be measured and ameliorated — which again puts a premium on seeking to find ways to measure and monitor key cultural risks.”

“It is incumbent on governments to act in ways that are predictable, transparent, and rules based. That’s important not only to avoid inefficiency, delay, and politicization — although that’s very important — but because those are the minimum requirements for government action in a democracy. My strong interest in seeing the advancement of work to develop measurable markers of culture derives precisely from the desire to ensure that this key element of bank risk can be supervised in a way that is consistent with these core principles.”

“Credit Suisse had a number of financial surprises that led to an erosion of confidence, in addition to several non-financial surprises. But it is fair to say that all of them could be traced to a bank culture that was not sufficiently alive to the measurement and management of risks of all sorts.”

“I do think that part of the reason supervisors were unprepared for [SVB’s collapse] was a result of supervisory culture. In my view, the Fed’s supervisory culture is not adequately focused, and lacks the right prioritization of attention.”

“I’m keenly aware that the most important aspect of a high-performing firm is its culture, and that building and maintaining a strong culture focused on making a fair long-term profit is probably the single most important task of a financial firm’s leadership.

It is also, though, a very difficult task to make culture analyzable, measurable, and replicable — which makes it very hard to supervise. The challenge for bank examiners is how to assess a firm’s culture, and a management team’s work in fostering that culture, in a way that doesn’t simply devolve into vague, subjective, personal preferences — which are as likely to be wrong as right.”

"The more work we can do on identifying specific markers of culture the more we can also make progress in developing ways to measure advancement in those markers which is fundamental to making culture a subject of supervisory review. That’s a real challenge for the official sector. And it’s something critically important — particularly since financial institutions depend fundamentally on confidence.”

“The supervisory personnel are talented, experienced, and smart people, it’s just really hard to determine the key things for an institution that need attending to, and it’s hard to devise a way of measuring things that are hard to measure, so it all just ends up being very diffuse. That’s a supervisory culture issue as much as a bank issue. 

We need a supervisory culture that is less focused on administration and more focused on key risks that can be measured and ameliorated — which again puts a premium on seeking to find ways to measure and monitor key cultural risks.”

“If banks view the supervisor simply as an adversary — and one that may act unreasonably or inconsistently, without regard to the rules — then the management will view its job as determining, ‘Okay, what’s the minimum amount of effort I need to expend to get this person off my back so I can go back to running my bank?’ This is not the sort of interaction we want in a bank’s relationship with its supervisor.

What needs to be done is something that is very difficult to know how to do — and certainly not something that’s being done on any widespread basis currently. 

We need to try to come up with data-driven methods for testing management’s ability to shape firm culture — credibly, consistently, and with the right degree of transparency — so we can better assure that we’ll see good performance outcomes. 

Nothing of the sort is in evidence today, either within the industry or among its supervisory bodies. And, so, we have inefficiency, delay, and politicization.”

“Bureaucratic inertia is a powerful obstacle particularly in developing international conventions. To get traction among supervisors, we’d need a combination of (1) the emergence of a compelling data-driven method for assessing these culture questions, and (2) we’d need that to be presented at a time when the world has been moved off its inertial access. This may be such a time. 

And inertia in the supervisory system can be overcome through leadership from industry. I think there would be less inertia among banks which, right now, are looking for what concrete things they can do to help demonstrate that they are worthy of confidence — from their supervisors, their depositors, and the market. Firms should view this moment in time as an opportunity to demonstrate leadership on this culture issue.”

“Culture is important across all financial institutions, not just banks. Thus the development of identifiable markers of culture should be sponsored by a body that spans all financial institutions — which, in our current international regulatory architecture, is the Financial Stability Board. 

The FSB worked with the private sector over many years in a public-private partnership to develop and encourage the use of broad disclosures on exposure to climate risk (the Task Force on Climate-related Financial Disclosures, or ‘TCFD’). A similar project on data-driven cultural metrics would be a very sensible topic for the FSB.”