Contributions to the Supervisors on Supervision Stocktake
How do inconsistent definitions and the lack of a common framework by which to discuss culture impact the practice of supervision, particularly as regards material but qualitative risks?
We know how important good governance is, but can we measure it in a consistent manner and ultimately craft a regulatory standard that, (i) recognizes the risk of loss arising from poor governance, and (ii) provides incentive for a firm to improve its governance?
As the expression goes ‘If you can’t measure it, you can’t manage it,’ and if you can’t measure or effectively manage a risk then the prospects of regulating it are even more challenging. This is where we are today with risks related to poor governance.”
“Financial indicators, such as high profitability or strong capitalization levels, are not reliable indicators of sound governance, and can even mask weaknesses that can be detected through the examination/inspection process.”
How do supervisors need to adapt in order to accelerate progress in culture supervision?
“With stress testing around governance, a regulator — as a result of its horizontal reviews and observations of firms’ governance practices — could say to a firm, ‘your stress testing efforts are laudable and noted but here are some other factors you ought to consider.’ A financial institution therefore has primary responsibility to continuously improve its governance, but there is an important complementary role for the official sector.”