Claudia Buch: Contribution - 10th ECB Annual Research conference
Comments by Prof Claudia Buch, Chair of the Supervisory Board of the European Central Bank, at the 10th European Central Bank Annual Research conference, on the paper by Sumit Agarwal, Bernardo Morais, Amit Seru and Kelly Shue entitled "Weighted Noise: Discretion in Regulation", Frankfurt am Main, 18 September 2025.
The views expressed in this speech are those of the speaker and not the view of the BIS.
Summary and findings of the paper
The discussion on "rules versus discretion" has a long tradition in central banking. Since a seminal paper by Kydland and Prescott in 1977 "Rules rather than discretion: the inconsistency of optimal plans", there has been an intensive debate over the years about which rules central banks should follow in setting their monetary policy rates, and how much discretion to allow for. Almost 50 years on from the original paper, the debate is still ongoing.
Banking supervision has its own version of the debate on rules versus discretion. Should supervisory assessments rely mainly on quantitative metrics or should they also incorporate qualitative judgement? How can decisions remain consistent across banks while still reflecting institution-specific circumstances? To what extent should supervisory processes be codified into rules or models, as opposed to depending on expert judgement? These debates have shaped supervisory practice over the past decades and remain highly relevant today.
The paper by Sumit Agarwal, Bernardo Morais, Amit Seru and Kelly Shue makes a key contribution to this debate. It uses data for the United States to shed light on the supervisory decision-making process, analysing the determinants of CAMELS ratings.