Supervisors on Supervision

“When it comes to issues of behaviour and culture, data and metrics as a means of understanding risk are much more scarce [than financial data and metrics].”

“There can be direct risks to financial soundness and the community’s trust and confidence in an institution from poor customer outcomes as well as indirect impacts from the root causes of those outcomes, e.g. systemic deficiencies in governance risk management or risk culture.”

“In examining the lessons of the Global Financial Crisis prudential supervisors quickly recognised that risk culture had been a critical determinant of financial success or failure.”

“15 years on [from the Financial Crisis], one important issue remains largely unaddressed by the international regulatory and supervisory community: establishing and reinforcing a strong supervisory mindset and culture. It would be a pity if this remained consigned to the “too-hard” basket. 

The financial system is a global one, and weaknesses in supervision can impact well beyond national boundaries. It’s time for the relevant international bodies tasked with promoting good supervision to take a closer look at the issue, and to play their part in promoting a stronger supervisory culture more widely

It’s time for the relevant international bodies tasked with promoting good supervision to take a closer look at the issue, and to play their part in promoting a stronger supervisory culture more widely.”

“[O]ne important issue remains largely unaddressed by the international regulatory and supervisory community: establishing and reinforcing a strong supervisory mindset and culture. 

We have learnt that [an] emphasis on risk governance infrastructure over risk culture is insufficient in financial institutions, and it’s no different in supervisory agencies.”

“Time and time again the issue of supervisory mindset and culture are prominent features of postmortems conducted in the wake of a financial failure. 

That the issue has emerged in many different jurisdictions, each with different supervisory architecture and powers, suggests that this problem is not a product of any particular supervisory structure, approach or methodology. Yet little seems to have been done by the international community to help address the challenge.”

“Moreover, evidence shows that organisational governance and cultural failings are not just confined to financial firms. If poor culture and governance can produce poor decisions and practices in any sort of firm, why should we not expect these issues to challenge a financial supervisor too?”

“Ex-post reviews of crises and periods of turmoil since 2008 have inevitably raised questions about whether supervisors did enough, and quickly enough. While hindsight is a wonderful thing, rarely has it been concluded that supervisors didn’t have enough information, or sufficient powers, to identify problems. Rather, supervisory inaction, or insufficient action, has often been called out. And yet steps to tackle this issue head-on remain, at best, piecemeal and largely left to domestic supervisors to pursue individually.

Because good supervision is forward-looking, it must involve a degree of judgement applied (judiciously and proportionately) in a proactive manner. It’s therefore often rightly said that supervision is more art than science. 

Good supervision isn’t mechanistic — it requires a blend of experience, intuition, foresight, a degree of scepticism, and a healthy dose of courage, to be effective. A supervisor obviously needs the requisite analytical tools to identify potential vulnerabilities, but identification without action achieves little.”

“Establishing the right supervisory mindset and culture — especially a bias to action — is critical to effective supervision.

That seems fairly well accepted in principle. So the relative lack of attention given to the issue by the relevant international bodies tasked with promoting good supervision (primarily the BCBS, IAIS and FSB) is perhaps somewhat surprising.

Globally, supervisors have rightly recognised governance and culture as important contributors to the financial safety and soundness of regulated firms. More attention has therefore been given to drivers of culture, and particularly to the design of incentives for risk-taking. And yet this attention to culture within firms has not flowed into similar international efforts to strengthen the mindset and culture of financial supervisors.

The current guidance on establishing an effective supervisory function focuses primarily on the necessary infrastructure — mandates, legal powers, skillsets, etc — but neglects any mention of the role of leaders in setting the right culture for their organisation. We have learnt that this emphasis on risk governance infrastructure over risk culture is insufficient in financial institutions, and it’s no different in supervisory agencies.”

“Supervisors are far from having an internationally agreed framework or the necessary skillsets for comprehensively reviewing culture within banks and other financial institutions, let alone agreeing an approach that could be applied to supervisors themselves. 

Despite repeated shortcomings being identified, relatively little has been done over the past couple decades, from an international perspective, to support the strengthening of supervisory mindset and culture towards one of action. 

Supervisory successes — problems averted — are largely unseen. Yet, when problems in the financial sector occur — as they are wont to do — the supervisor will often be critiqued and told it should have done more. It is the supervisor’s lot to grapple with this tricky balancing act. More support from international bodies to help national supervisors strike this balance this would be a welcome development.”