## Let Bank Supervisors Do Their Jobs

_IMF Blog, February 13, 2019_

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**Canonical URL:** [Let Bank Supervisors Do Their Jobs](https://www.imf.org/en/blogs/articles/2019/02/13/let-bank-supervisors-do-their-jobs)

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## Bibliographic details
- Authors: Tobias Adrian, Aditya Narain
- Published: February 13, 2019

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### Key message
- Healthy banking sector supports a healthy economy; strong and stable banking systems are a matter of public concern.
- Supervisors must have freedom and flexibility to identify weak points and take prompt corrective action to preserve financial stability.
- Operational independence prevents supervisors from succumbing to “capture” by industry or political actors.

### Lessons from the global financial crisis
- The crisis demonstrated the costs of insufficient supervisory independence and capture.
- The IMF and World Bank highlight that diluting regulatory frameworks or failing to take corrective action increases systemic risk.
- A decade after regulatory lapses helped provoke the most painful financial crisis in a century, policymakers must renew their commitment to vigilant, independent, and accountable supervision.

### International standards and developments
- The Financial Stability Board’s 2010 report on enhanced supervision stated that operational independence of supervisory agencies “is critical to ensuring supervisory effectiveness.”
- The Basel Committee on Banking Supervision elevated the issue in the 2012 revisions to its core principles for effective banking supervision.
- The revised standards require supervisors to possess:
  - operational independence,
  - transparent processes,
  - sound governance,
  - legal protection, and
  - sound budgetary processes.
- Laws should spell out banking supervisors’ responsibilities and objectives; objectives should be published and regulators held accountable through a transparent framework.

### Observed shortcomings and compliance
- Of the 29 Basel Core Principles, the IMF and the World Bank found progress to be weakest on independence and resources—to the extent that almost no country is fully compliant.
- Weak governance and inadequate human and budgetary resources remain the greatest shortcomings, creating opportunities for outside influence and pressure.
- These vulnerabilities affect both emerging market economies and advanced economies, and are a concern whether supervision is housed inside or outside the central bank.
- Joint financial sector assessment reports by the IMF and the World Bank often identify potential for government interference in prudential decisions, especially in countries where state-owned financial institutions play dominant roles.

### Balancing independence and accountability
- Operational independence is not unlimited; supervisors must be held accountable for actions and inactions.
- Diluting the regulatory framework—easing supervision or failing to take corrective action—undermines the mandate of banking supervisors.
- If policymakers wish to support specific sectors or industries, they should use budget resources rather than creating market distortions or weakening prudential regimes.

### Policy recommendations
- Give supervisors a clear mandate.
- Provide adequate human and budgetary resources.
- Establish strong governance structures and legal protections.
- Require publication of supervisors’ objectives and a transparent accountability framework.
- Resist political or industry pressure that would weaken prudential oversight.
- Use targeted budgetary support for sectors that need nurturing, rather than undermining supervisory standards.

*Tobias Adrian and Aditya Narain — February 13, 2019*

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## References

- [global financial crisis](https://www.imf.org/en/Publications/IMF-Staff-Position-Notes/Issues/2016/12/31/The-Making-of-Good-Supervision-Learning-to-Say-No-23799)
- [https://www.imf.org/wp-content/uploads/2019/02/eng-october-17-cotwbaselcore.png](https://www.imf.org/wp-content/uploads/2019/02/eng-october-17-cotwbaselcore.png)
- [financial sector assessment reports](https://blogs.imf.org/2019/01/16/countries-in-the-imf-financial-spotlight-in-2019/)

_Source: https://www.imf.org/en/blogs/articles/2019/02/13/let-bank-supervisors-do-their-jobs_