The changing role of a bank supervisor

Closing comments by Ms Carolyn Rogers, Secretary General of the Basel Committee on Banking Supervision, for the 2021 Starling annual Compendium.

The last decade has been a challenging one for bank supervisors; there was a lot of work to do to fill the gaps laid bare by the Great Financial Crisis. However, the decade ahead is likely to be even more challenging. What's more, the solutions deployed in the last decade are not likely the same ones needed in the decade ahead.

Early in my career as a supervisor, I was taught to stick very closely to my legislated mandate. Over-regulating was considered as big, or bigger, a risk as under regulating since it would surely lead to competitive and market distortions and stifle innovation. A good supervisor was like a good referee: they kept the game fair and competitive but remained largely invisible.   

Over my career, I also learned to mind the clear line between conduct supervision, or the fair treatment of consumers, and prudential supervision, or financial safety and soundness. In Canada, where I have spent most of my career as a supervisor, those mandates are considered distinct enough to be held by different authorities and even subject to different jurisdiction for some parts of the financial sector. This is true in many other countries, though not all.

Finally, for most of my career, I could define what a bank was, and what it was not, and by extension, what my responsibilities as a bank supervisor were.

Each of these bright lines seem to be rapidly disappearing. Banks and banking are increasingly diverging. Conduct and prudential risks on the other hand, are increasingly converging. Supervisors need to have one eye on the macro risks and the other on micro risks, and there is an open debate about the role of financial regulation in affecting social policy outcomes from climate change transition to decreasing inequality. All of this is happening in an environment of increased transparency and heightened public expectations. Combined, these trends mean that the legislated mandates given to many supervisors can leave them ill equipped to be a good referee or to meet public expectations.

This evolving landscape requires us to think differently about the job of bank supervision.  More forward-looking supervision and a greater willingness to use judgement and to act without perfect information will need to replace the dominant focus on rules and standards. Rules and standards are a necessary part of an effective regulatory regime but they will never keep pace with change and human ingenuity. We know this because time after time, when a crisis happens, we find that someone found a way around the rules and the risk management culture didn't detect or stop the behaviour before it was too late.

If the last decade of bank supervision was about designing rules that lead to more resilient bank balance sheets, the next will be about designing supervisory tools and strategies that lead to more resilient bank cultures. And the goal in the decade ahead must be for banks to improve their risk culture and operational resilience by at least the same margin as they have improved their financial resilience in the decade past.

The Basel Committee and its member jurisdictions have incorporated this shift in focus into our thinking and future planning.  It's no small challenge; but like the last one, it's a challenge I think we can meet.