Banking Supervision: A Welcome Return to Basics
The banking industry is witnessing a welcome and necessary shift towards tried-and-tested risk-based supervision and regulation. Recent announcements from banking agencies and the joint release from the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) indicate a renewed focus on streamlining bank supervision and regulation. This development is encouraging and offers much-needed balance in an industry that is continuously evolving and facing new challenges.
Bloomberg
Striking a Balance in Bank Supervision
While this renewed focus on core banking risks is a positive development, it is important to remember the lessons from the past. In the pursuit of balance, there is a risk of swinging too far towards laxity. We must ensure that we do not lose sight of the importance of experienced bank supervisors, who have honed their skills over decades. Their ability to intervene effectively in times of trouble and to maintain a balanced and professional approach is invaluable.
The Danger of Complacency
The move towards lighter supervision comes with its own set of challenges. While it is essential to avoid unnecessary criticism, there is a danger that this could be confused with complacency. This could potentially lead to a period of supervisory “wait and watch” that extends beyond the point of no return, resulting in problems remaining undetected and unaddressed for too long.
The Importance of a Strong Appeals Process
Bank examiners will undoubtedly face allegations of overzealousness and nitpicking. These claims must be addressed seriously, ideally through formal and informal appeal mechanisms. Unfortunately, these mechanisms have been weakened over the years, to the detriment of both the banking agencies and the industry. A strong appeals process, overseen by the head of the agency, is crucial to prevent complacency and ensure high levels of supervisory diligence.
Building a Skilled Workforce
Risk-based supervision requires a workforce that is well-versed in the complexities of banking risks. The OCC’s focus on enhancing its examiner training programs and offering apprenticeships is a step in the right direction. There is also a need to attract industry experts, particularly those with experience in the rapidly evolving areas of banking innovation.
Striking the Right Balance
In the face of deficiencies, it’s crucial to strike the right balance between recommending change and implementing it. This calls for the right people with the right skills – not too aggressive, yet not too passive. Anything less puts the industry, the economy, and the entire supervisory mechanism at risk.
As we move forward, maintaining a balance in supervision and regulation will be key to preventing future crises and ensuring a resilient banking industry. While this shift to basics is encouraging, we must remember to stay vigilant and proactive.
Source: Here
