Home Data Banking supervision ‘more stretched’ in major finance centres: FSI paper

Banking supervision ‘more stretched’ in major finance centres: FSI paper

Supervising the world of finance: the 10-page ‘Under pressure: taking stock of supervisory resources’ paper is based on data across 57 jurisdictions | Credit: Malachi Witt (Pixabay)

Banking supervisors overseeing major financial centres ‘appear to be relatively more stretched’ in respect of their resourcing than their counterparts in many of the world’s smallest financial markets, according to a newly published paper published by the Financial Stability Institute (FSI).

The assessment is based on data analysis comparing supervisory resources, specifically staff numbers and budget, to banks’ total assets across 57 jurisdictions – from Angola to Uruguay.

Effective banking supervision relies on factors including authorities having relevant powers, operational independence, legal protection and the willingness to take timely actions, the paper states. But, even if all these conditions are met, ‘supervision will not be effective without adequate resources’, it warns.

‘Jurisdictions with smaller banking systems as well as those where supervisory authorities are financially independent tend to have [relatively] more resources,’ the paper states. ‘Conversely, banking supervisors overseeing major financial centres appear to be relatively more stretched than their counterparts elsewhere.’

The resources needed for banking supervision depend on factors such as financial system size, banks’ business models, and the supervisor’s mandate, perimeter and approach, the paper points out. ‘The actual resources available for supervision, meanwhile, are limited by budgetary constraints and the availability of skilled professionals. Hence, actual resources often fall short of optimal levels.’

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Better supervision ‘will not come easy’

The FSI was jointly created in 1998 by the Bank for International Settlements (BIS) and the Basel Committee on Banking Supervision. Its mandate is to assist supervisors in improving and strengthening their financial systems.

‘Views differ regarding the extent to which changes to the regulatory framework are necessary to tackle the deficiencies highlighted by recent bank failures,’ the paper – ‘Under pressure: taking stock of supervisory resources’ (published as part of its ‘FSI Briefs’ series) – states, setting the context. ‘In contrast, there appears to be a growing consensus on the imperative to enhance the effectiveness of banking supervision. Attaining this goal will not come easy.’

The 10-page analysis co-authored by the FSI’s head of policy benchmarking Rodrigo Coelho and associate Rebecca Guerra – states that ‘in certain jurisdictions, this will require adjustments to the legal framework to endow banking supervisors with the necessary powers and tools’; while, in other cases, ‘supervisors have long possessed such powers and tools, but a cultural shift might be needed to promote supervisory intervention aimed at tackling identified weaknesses at an early stage.’

But it adds that ‘while necessary, such adjustments may not be sufficient to make banking supervision effective if other conditions are not met’. Supervisory effectiveness, the authors point out, ‘hinges on multiple factors, including the adequacy of supervisory skillsets, technology and processes.’

‘This implies, among other things, that an effective framework is predicated on authorities having a financial budget that matches their responsibilities, enabling them to make regular investments to ensure that banking supervision remains fit for purpose,’ they state.

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Banking supervision: ‘inherently labour-intensive’

The past few years have seen an increase in the use of SupTech (supervisory technology) across supervisory authorities. But the FSI paper’s focus is on human and financial resources.

‘Importantly, while technology can certainly help increase its productivity, banking supervision is inherently labour-intensive,’ the authors state. ‘Regular on-site inspections, for example, are an essential element of banking supervision that allows authorities to verify the adequacy of banks’ policies, procedures and controls. Similarly, interactions with board members and senior management provide invaluable insights into the bank’s risk management culture and corporate governance.’

Supervisory authorities of the largest financial systems often operate with fewer resources in relative terms than their counterparts in other jurisdictions, the paper states. ‘On one hand, this may be justified on the basis of potential economies of scale associated with the larger structures in such jurisdictions. In other words, while it is expected for required resources to increase with the size of the banking system, the relationship between these variables is unlikely to be linear. On the other hand, large financial centres are often home to banks performing more complex activities, for which presumably additional, specialised supervisory resources are required.’

Surveyed authorities that collect levies and fees from banks have, on average, greater financial resources compared with counterparts that do not. This is likely, it states, because such fees are often determined based on estimates of what these authorities need to effectively carry out their responsibilities. Consequently, the financial support available to such supervisors ‘tends to grow in line with the expansion of their responsibilities’.

‘In contrast, authorities relying exclusively on funding from the government will likely face fiscal constraints,’ it states. ‘As for central banks, the availability of resources hinges on their degree of independence. Financially dependent central banks tend to face fiscal constraints comparable to government-funded authorities, whereas independent central banks have more flexibility.’

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SupTech use: ‘expanding disparity’

The ‘Cambridge SupTech Lab State of SupTech Report 2023’, published last month (February 2024), found that 81 per cent of surveyed financial authorities indicated an involvement in SupTech initiatives, an increase from the 71 per cent reported in the previous year’s report.

The 164-page report – published by the Cambridge Centre for Alternative Finance (CCAF)’s SupTech Lab – found ‘expanding disparity’ in SupTech adoption rates between authorities in advanced economies (AEs) (79 per cent) and those in emerging market and developing economies (EMDEs) (54 per cent) compared with 2022, when 50 per cent of financial authorities from AEs had deployed one or more SupTech applications, compared to 31 per cent from EMDEs.

Financial authorities are described as being at ‘first- and second-generation stages’ in the adoption of a ‘complete’ SupTech digital infrastructure.

In respect of barriers to SupTech take-up, financial authorities cited challenges arising from a lack of adequately trained personnel possessing essential IT skills (69 per cent) and data science capabilities (73 per cent).

The Cambridge report for 2023 was based on a survey of 64 financial authorities from across the world.