The Basel Committee on Banking Supervision published Frameworks for early supervisory intervention, which presents a range-of-practice study on how supervisors around the world have adopted frameworks, processes, and tools to support early supervisory intervention. Since the global financial crisis, supervisory authorities have increasingly focused their attention on how early supervisory intervention can promote financial stability by reducing the probability and impact of a bank failure. There is also a common recognition that for supervision to operate effectively, identification and intervention at an early stage are critical to prevent problems from escalating or becoming acute.
There have been important developments in supervisory practices in this regard since the crisis. National supervisory authorities have adopted more forward-looking approaches, incorporating both quantitative and qualitative elements into their risk-based supervisory assessments. In addition to institution-specific supervision, supervisors are also adopting benchmarking exercises and thematic reviews as part of their toolkit to better detect emerging risks and potential outlier banks. Many national authorities have also undergone organisational changes to support these approaches, and have introduced dedicated teams and oversight functions to ensure early supervisory actions are taken and followed up.
Organisational infrastructure
Based on practices observed, this study finds that early supervisory actions taken by supervisors depend not only on the expert judgment of supervisors but also to a large extent on an organisational infrastructure that sets in place: (i) supervisory reinforcement through both vertical and horizontal risk assessments to maximise the early detection of risks; (ii) a clear framework for when actions should be taken; and (iii) internal governance processes and programmes to support supervisory development and capacity-building.
Background
The international regulatory framework has been significantly strengthened since the global financial crisis to promote a more resilient banking sector. The Basel III framework sets higher minimum requirements for loss absorption, places greater emphasis on higher-quality capital and captures a broader scope of risks faced by banks. The framework has been further strengthened by a leverage ratio requirement, capital buffers to mitigate various sources of systemic risk and a set of standards limiting liquidity and maturity transformation.1 Lessons from the crisis have also highlighted the important role of supervision and, importantly, that effective supervision must complement regulation. Across jurisdictions, the safety and soundness of both individual banks and the banking system as a whole are recognised as a fundamental objective of supervision. There is also a common recognition that for supervision to operate effectively, identification and intervention at an early stage are critical to prevent problems from escalating or becoming acute.
Source: https://www.bis.org
