Let Bank Supervisors Do Their Jobs

from the International Monetary Fund

This post authored by Tobias Adrian and Aditya Narain

Healthy banking sector. Healthy economy. So goes the thinking. Banks play a vital role in economic life - whether for individual consumers, or more broadly across an entire economy - and a strong and stable banking system is a matter of public concern.

As part of their work, supervisors identify potential weak points in the system and take prompt corrective action. They need the freedom and flexibility to carry this out. The world learned this lesson all too well during the global financial crisis. Operational independence prevents supervisors from succumbing to “capture" - either by the industries they oversee or by political actors promoting self-interested agendas, but too many policymakers fell short of that standard in the run-up to the crisis.

Since the crisis, operational independence became a top priority. For instance, in its 2010 report on enhanced supervision, the Financial Stability Board said operational independence of supervisory agencies “is critical to ensuring supervisory effectiveness." The report highlighted the particular importance of independence as agencies’ roles widened to include authority to take countercyclical (and potentially unpopular) actions, for example, imposing more conservative underwriting standards in boom times or raising capital requirements.

Give supervisors a clear mandate, adequate resources, and strong governance structures.

Global importance

Strong supervision of systemically important financial institutions is particularly challenging given the size, complexity, and influence of these institutions. Yet global financial stability depends on it.

The Basel Committee on Banking Supervision agreed when it gave this issue greater prominence in the 2012 revisions to its core principles for effective banking supervision. The standards now require supervisors to possess operational independence, transparent processes, sound governance, legal protection, and sound budgetary processes. Importantly, the standards also call for laws spelling out banking supervisors’ responsibilities and objectives, along with a requirement their objectives be published and that regulators be accountable through a transparent framework.

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Disclaimer: The views expressed are those of the author(s) and do not necessarily represent the views of the IMF and its Executive Board.

No content is to be construed as investment advise ...

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