Speech

I am pleased to welcome you to this second day of the 23^rd FED-IMF-World Bank Annual International Conference on Policy Challenges for the Financial Sector. This year’s theme, centered around the importance of strengthening fundamentals to better adaptation to the dynamic and evolving risk landscape, is very timely.

In my contribution to your discussions during this week, I would like to briefly touch upon the overall global financial environment that sets the scene for the risk landscape and also underscore the importance of full, timely, and consistent implementation of the Basel standards.

Financial Stability

The latest edition of the IMF's Global Financial Stability Report offers a comprehensive assessment of the current state of global financial markets and identifies potential risks and vulnerabilities.

Even though the global economy has exhibited resilience in the face of multiple shocks, several factors—such as persistent inflationary pressures, tightening financial conditions, and geopolitical tensions—continue to cast shadows of uncertainty.

The banking sector has demonstrated remarkable resilience, bolstered by robust capital and liquidity buffers. However, our findings caution against complacency, emphasizing the need for continued vigilance and proactive risk management in the face of potential asset quality deterioration and profitability pressures.

The growing systemic importance of nonbank financial intermediation and its growing interconnectedness with the global banking system calls for vigilant management of vulnerabilities arising from leverage and liquidity mismatches. As we have emphasized in April, the rising prominence of private equity and credit underscores the importance of closing data gaps and intensified monitoring.

The GFSR continues to highlight the macro-financial criticality of ongoing structural transformations, notably, the intensifying cybersecurity threats landscape and the profound implications of climate change and sustainability considerations on financial stability.

Implementation of Basel Standards

Overall, these developments underline the need to make progress in implementing international standards as part of strengthening fundamentals on the side of supervisors.

For banking supervision, the Basel Committee on Banking Supervision has been at the forefront of developing and promoting global regulatory standards for the banking sector. The latest reports from the Basel Committee on the implementation of the Basel III package highlight the progress made in standards implementation worldwide and the importance of full, consistent, and timely implementation in ensuring a level playing field and maintaining the integrity of the global financial system.

Effective implementation is crucial for a number of reasons, including promoting a robust and well-capitalized banking sector that can better withstand shocks to support growth, thereby fostering confidence in the financial system—both domestically and cross-border.

The IMF provides important feedback on the robustness of the framework and on national implementation through its Financial Sector Assessment Program, the FSAP. FSAP assessments of the quality of banking regulation and supervision are benchmarked against compliance of rules and supervisory practices with the Basel Core Principles for Effective Supervision. Given the wide range of size, scale, business scope, and complexity of banking systems across the Fund’s membership, the principle of proportionality allows—in individual cases—for analysis of compliance with Basel III and additional guidelines, in a manner depending on their relevance.

Alongside standards implementation, ongoing monitoring and evaluation to identify potential gaps and areas for improvement is significant given the evolution of the financial landscape in response to structural transformations—nonbank financial intermediation, digitalization of financial services, and climate change. The Basel Committee provides essential guidance in this context, for instance, on operational resilience and supervision of climate-related financial risks.

On Good Supervision

While much attention is typically devoted to the needed upgrading of regulations following episodes of bank distress, upgrading of supervisory effectiveness should not be left bereft of corresponding attention. In our paper on Good Supervision: Lessons from the Field that we published last year, we reflected on lessons learned from the banking turmoil in the United States and Switzerland in March 2023 on the basis of FSAP findings during 2012–23 on progress in delivering effective supervision across our global membership.

At a broad level, we have found evidence suggestive of pervasive imbalance between upgrading of regulation versus supervision. Countries have been performing better against higher benchmarks on capital and liquidity regulation even as progress on supervision has been markedly slower. Despite a strong association between the institutional setting for supervision and bank soundness and stability, many advanced, emerging, and developing economies lack independent bank supervisors with clear safety and soundness mandates, adequate powers, and legal protection in the conduct of their duty. Deficiencies in supervisory approaches, techniques, tools, and especially corrective and sanctioning powers are also widespread. The deficiencies are even more apparent in the areas that require a complex approach and the deployment of unconventional tools.

The role of supervisors is paramount to ensuring that issues requiring attention in the banking and financial system are spotlighted and addressed in a timely and consistent manner. Supervisors need strong policy and supervisory tools as well as rich data sets and proportionately sophisticated methodologies that these tools can rely on for calibration. But they also need to take decisive, timely, and consistent action—notably by following up with concrete steps to ensure that existing and emerging issues are being addressed and corresponding risks contained.

In fact, good supervision might be thought of as a construction site—where design, material, and skill all come together to culminate in a resilient structure. Supervisors require operational independence to carry out their tasks free of outside pressures, along with accountability. They need a clear mandate to ensure they are focused on the right trouble spots. And they need adequate legal powers to back their actions. Sufficient resources, appropriate skillsets, and the application of sound judgment and deep analysis based on accurate situational awareness of the outlook, risks, and vulnerabilities, are also vital to supervisors taking timely and conclusive action.

The global financial crisis highlighted the importance of supervisors needing to be assertive and intrusive, that is, demonstrating the will and ability to act. 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, as well as the build-up and concentration of risks inside and outside the banking sector. “Light touch” supervision, often invoked as part of efforts to encourage economic activity and foster competition, had proved unsuccessful—institutional and systemic distress had followed in its wake, with the blame inevitably placed, after the fact, on the absence of intrusive and timely supervisory effort.

Our review found much progress in risk monitoring and analysis across advanced, emerging, and developing countries, with many of them having incorporated forward-looking supervisory approaches, in some cases harnessing data-intensive and technology-driven tools.

Wider adoption of stress tests has also been a great advance. These tools help broaden supervisors’ views of threats facing individual banks, the banking sector, and the financial system, beyond the historical data and past experiences. Likewise, business model analysis has become integral to supervisory frameworks in many countries, helping flag vulnerabilities early on and convey these in their dialogue with banks.

But in other key respects, progress on supervision has been insufficient. Our findings show that more than half of the jurisdictions in our sample do not have independent bank supervisors with a clear safety and soundness mandates, with sound internal governance, or with resources appropriate to their assigned responsibilities. Deficiencies also remain in supervisory approaches, techniques, tools, and (use of) corrective and sanctioning powers.

As a result, undertaking timely action based on supervisory findings continues to be a challenge. The ongoing structural evolution of the financial sector, such as the growth of nonbank financial intermediation, the digitalization of finance, and climate change, adds to supervisory challenges and makes these weaknesses even more relevant.

These issues are thrown into sharper relief in the current context of structural transformation that will make fulfilling supervisory mandates even more challenging.

In Conclusion

The challenges we face are multifaceted and complex, transcending national boundaries and institutional silos. 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. It is through our shared dedication to rigorous oversight, sound prudent regulation, and proactive risk management that we can collectively navigate these challenges and fortify the resilience of the global financial system.

I am confident that these three days that we are spending together in Washington, to discuss these important topics, will solidify the spirit of collaboration and will bring many vital ideas for our future work. I also hope this conference will be a pleasant experience for all of us.