The Making of Good Supervision: Learning to Say 'No'

22 Pages Posted: 2 Feb 2012

See all articles by Jonathan Fiechter

Jonathan Fiechter

International Monetary Fund (IMF)

Aditya Narain

International Monetary Fund (IMF)

Jennifer Elliot

affiliation not provided to SSRN

Ian Tower

International Monetary Fund (IMF)

Pierluigi Bologna

Bank of Italy

Michael Hsu

International Monetary Fund (IMF)

Date Written: May 18, 2010

Abstract

The quality of financial sector supervision has emerged as a key issue from the financial crisis. While most countries operated broadly under the same regulatory standards, differences emerged in supervisory approaches. The international response to this crisis has focused on the need for more and better regulations (e.g., in areas such as bank capital, liquidity and provisioning) and on developing a framework to address systemic risks, but there has been less discussion of how supervision itself could be strengthened.

The IMF’s work in assessing compliance with financial sector standards over the past decade in member countries suggests that while progress is being made in putting regulation in place, work remains to be done in many countries to strengthen supervision. How can this enhanced supervision be achieved? Based on an examination of lessons from the crisis and the findings of these assessments of countries’ compliance with financial standards, the paper identifies the following key elements of good supervision - that it is intrusive, skeptical, proactive, comprehensive, adaptive, and conclusive.

To achieve these elements, the 'ability' to supervise, which requires appropriate resources, authority, organization and constructive working relationships with other agencies must be complemented by the 'will' to act. Supervisors must be willing and empowered to take timely and effective action, to intrude on decision-making, to question common wisdom, and to take unpopular decisions. Developing this 'will' to act' is a more difficult task and requires that supervisors have a clear and unambiguous mandate, operational independence coupled with accountability, skilled staff, and a relationship with industry that avoids 'regulatory capture.'

These essential elements of good supervision need to be given as much attention as the regulatory reforms that are being contemplated at both national and international levels. Indeed, only if supervision is strengthened can we hope to effectively deliver on the challenging - but crucial - regulatory reform agenda. For this to happen, society must stand with supervisors as they play their role as naysayers in times of exuberance.

Keywords: financial sector supervision and regulation, financial crisis

JEL Classification: G01, G28

Suggested Citation

Fiechter, Jonathan and Narain, Aditya and Elliot, Jennifer and Tower, Ian and Bologna, Pierluigi and Hsu, Michael, The Making of Good Supervision: Learning to Say 'No' (May 18, 2010). The Making of Good Supervision: Learning to Say “No”; by José Viñals and Jonathan Fiechter with Aditya Narain, Jennifer Elliott, Ian Tower, Pierluigi Bologna, and Michael Hsu; IMF Staff Position Note SPN/10/08; May 18, 2010 . Available at SSRN: https://ssrn.com/abstract=1670831 or http://dx.doi.org/10.2139/ssrn.1670831

Jonathan Fiechter

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Aditya Narain

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Jennifer Elliot

affiliation not provided to SSRN

No Address Available

Ian Tower

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Pierluigi Bologna (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Michael Hsu

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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