FSI Insights No 66
The March 2023 banking turmoil revealed fundamental failures in both bank governance and supervisory oversight. Although the affected banks complied with applicable quantitative requirements, they experienced severe liquidity runs due to poor board oversight, deficient risk management, and unsustainable business models.
Delays in supervisory action allowed these problems to persist, eventually resulting in a crisis of confidence. This serves as a stark reminder that no realistic level of capital and liquidity requirements can compensate for serious qualitative weaknesses within banks.
The episode highlighted the critical importance of timely qualitative supervisory measures to safeguard the stability of individual banks and the broader banking system.
This paper examines various supervisory frameworks that underpin the use of qualitative measures and identifies key attributes that can enhance supervisory effectiveness. To strengthen supervision, a comprehensive approach, targeting each step of the supervisory process, can help supervisors to make the nuanced judgments needed to determine the timing, nature and severity of qualitative measures to address weaknesses in governance and bank business models, before they manifest in financial metrics.
