Financial Stability Needs Supervisors With the Ability and Will to Act

IMF Blog, September 18, 2023

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Canonical URL: Financial Stability Needs Supervisors With the Ability and Will to Act

Title: Financial Stability Needs Supervisors With the Ability and Will to Act
Authors: Tobias Adrian, Fabiana Melo, Marina Moretti, Jay Surti
Date: September 18, 2023
Central message: Keeping banks safe and sound, and anchoring financial stability, hinges as much on good supervision as on effective risk management and governance in banks, robust regulation, and vigilant markets.

Good supervision requires:
- operational independence to carry out tasks free of outside pressures, along with accountability;
- a clear mandate focused on safety and soundness;
- adequate legal powers to back actions;
- sufficient resources and appropriate skillsets;
- sound judgment and deep analysis based on accurate situational awareness of the outlook, risks, and vulnerabilities.
Historical context:
- The 2012 update of the global standards for banking supervision—the Basel Core Principles—raised expectations for supervisors to take account of economic and business trends and the build-up and concentration of risks.
- “Light touch” supervision proved unsuccessful, leading to institutional and systemic distress when intrusive and timely supervisory effort was absent.
Recent reflections:
- The IMF paper Good Supervision: Lessons from the Field draws on recent bank turmoil in the United States and Switzerland and on the IMF’s surveillance and capacity building work of the past 10 years.

Progress noted:
- Much progress in risk monitoring and analysis across advanced, emerging, and developing countries.
- Wider adoption of forward-looking supervisory approaches, including data-intensive and technology-driven tools.
- Wider adoption of stress tests to broaden supervisors’ views beyond historical data and past experiences.
- Business model analysis has become integral to supervisory frameworks in many countries.
Key shortcomings:
- More than half of the jurisdictions do not have independent bank supervisors with a clear safety and soundness mandate, with sound internal governance, or with resources appropriate to their assigned responsibilities.
- Deficiencies remain in supervisory approaches, techniques, tools, and in the use of corrective and sanctioning powers.
- Timely action based on supervisory findings continues to be a challenge.
- Structural evolution of the financial sector—growth of nonbank financial intermediation, digitalization of finance, and climate change—adds to supervisory challenges and makes weaknesses more relevant.

Take a more systematic approach to requiring banks to go beyond quantitative regulatory thresholds and prudential rules when business and macro-financial risks are high.
Overcome the tendency to under-allocate resources and attention to all but the largest of banks, as vulnerabilities at smaller banks can also trigger or amplify adverse systemic impact.
Ensure that trained and experienced supervisors are available and can focus attention on governance, business models, and risk management at banks.
Develop internal processes for decision making and escalation of actions that are clear and effective.

Supervisors’ efforts alone are insufficient; other policymakers, including parliaments, must:
- ensure a vigilant, independent, well resourced, and accountable supervisory structure;
- strengthen institutional foundations to enhance supervisors’ will and ability to act;
- purge perceived or actual vulnerability to government or industry influence to yield substantial benefits.

Source: Financial Stability Needs Supervisors With the Ability and Will to Act (IMF blog, September 18, 2023).