The Institute of International Finance (IIF) published a new report drawing on interviews and feedback with industry leaders as well as survey data from 17 systemically important banks, that reveals a troubling persistence of supervisory challenges that threaten the effectiveness, efficiency and credibility of banking supervision.
The following significant challenges and concerns have been raised across the global industry:
- Far-reaching Supervisory Expectations and Approaches: Excessive supervisory discretion can lead to inconsistency and supervisory overreach. Some supervisory authorities, in effect, use their powers to set rules across the sector or prescribe guidelines that must be met without following the jurisdiction’s due processes required to set a sector-wide prudential requirement.
- Inefficiencies and Excessive Focus on Non-Material Issues: Some supervisors put an over-emphasis on issues that are, objectively, not material to manage the fundamental risks and enhance the resilience of the bank. In some cases, there is a lack of coordination between different supervisory bodies or teams, leading to duplicative and overlapping information requests.
- Concerns with Outcomes of Supervisory Reviews: Banks experience unpredictability in supervisory decision-making with some decisions being unexpected, hard to understand and, in some cases, arbitrary. Some supervisory decisions give limited consideration to firm-specific factors, such as business model or geographical footprint, and in some cases are based on a single observation rather than a number of findings.
- Limited Mechanisms to Challenge or Appeal Supervisory Decisions: The lack of options to challenge or appeal supervisory judgments presents a challenge for firms and compounds the other issues with supervisory engagement. The existing appeals processes are ineffective, underutilized and have a low success rate, which signal deficiencies in their design.
The report outlines a series of industry proposals aimed at restoring balance, transparency, and efficiency to supervisory engagement – such as establishing clear frameworks for supervisory discretion, having supervisors truly focus on the most financially material risks, and enhancing the accountability of supervisory bodies.
