they were sirens alerting the global financial community to critical flaws in bank supervision. While capital and liquidity regulations were tightened after the Global Financial Crisis, the IMF has long maintained that rules alone cannot safeguard financial stability. Supervision, not just regulation, is where the system either succeeds or fails. This central message, emphasized in the IMF’s 2023 paper Good Supervision: Lessons from the Field, is a culmination of insights from over a decade of Financial Sector Assessment Program (FSAP) reviews. And in the wake of recent turmoil, its relevance is undeniable.
The importance of supervision lies in its capacity to see beyond compliance. Good supervision isn’t about ticking boxes—it’s about having the will and authority to intervene when a bank is heading toward trouble. The IMF warned of this even during the post-GFC reform wave: risk detection is meaningless without the courage to act. Unfortunately, that warning has proven prescient. In the cases of SVB and Credit Suisse, supervisors had flagged risks—poor risk management, concentrated funding, weak governance—but failed to push for timely corrective action. The lesson is glaringly clear: awareness without escalation achieves nothing.
This supervisory gap is not confined to individual cases. Across its global FSAP reviews, the IMF finds systemic weaknesses in supervisory frameworks that persist despite stronger regulatory backbones. Operational independence, sufficient legal powers, adequate resources, and clear mandates remain elusive in many jurisdictions. Supervisors in some countries still operate under political or industry pressure, lack the authority to enforce remedial actions, or are simply under-resourced. These deficits create space for vulnerabilities to grow unchecked—even in banks that appear compliant on paper.
Credit Suisse exemplified this duality. Though it met capital and liquidity requirements, the bank’s deteriorating governance, reputational issues, and risk concentrations made it a house of cards. The Swiss supervisory regime, while robust in some respects, relied heavily on external auditors and had limited tools to intervene in corporate governance—a critical shortfall. Meanwhile, SVB’s collapse illustrated how even mid-sized banks, under lighter regulation, can bring systemic risks if supervision is ineffective. U.S. authorities admitted that greater reliance on supervision, in the absence of stricter rules, left a critical gap in oversight—one that SVB slipped through.
Emerging markets are no exception. Many supervisory agencies face legal ambiguities, limited mandates, and a lack of skilled personnel. Some operate in environments where informal persuasion substitutes for formal enforcement. In systems where small and mid-sized banks hold significant market share, these supervisory blind spots are especially dangerous. A failure in one such institution can set off chain reactions, particularly when market exposure is concentrated or digital panic spreads swiftly through interconnected networks.
So, what does “good supervision” look like? According to the IMF, it is a craft—part science, part art. At its core, good supervision demands skepticism, proactivity, adaptability, and decisiveness. Supervisors must look beyond static indicators, challenge assumptions, and continuously evolve tools to keep up with changing risks, including those related to digital finance and climate exposure. And when red flags arise, supervisors must act—forcefully and promptly.
Crucially, these traits must be embedded in institutions that are legally empowered, adequately funded, and staffed with professionals capable of nuanced judgment. Supervisory bodies need the authority not only to monitor but to enforce—to take conclusive actions rather than issue repeated warnings that go unheeded. They must also embrace forward-looking practices like stress testing, business model analysis, and integrated risk assessments that account for macro-financial linkages.
Another key takeaway from the IMF’s findings is that supervision must not focus solely on “too big to fail” banks. Smaller institutions, when interconnected or overly reliant on fragile business models, can pose equal if not greater systemic risks. Supervisory approaches must therefore be risk-based and proportional, but never complacent. A bank’s size should not be the sole determinant of supervisory intensity.
To strengthen the global supervisory agenda, the IMF urges countries to revisit and reinforce their legal frameworks. Supervisors must be given unambiguous mandates focused on bank safety and soundness, free from conflicting policy goals. They must also be shielded from political interference and held accountable not for inaction, but for failing to act when empowered. Tools under Basel III’s Pillar 2 must be fully leveraged—not only to catch emerging risks but to contain them before they evolve into crises.
Ultimately, the message is stark: the resilience of the financial system depends not just on good rules but on those who enforce them. Supervisors must be trusted with authority, equipped with knowledge, and supported by institutions that value financial stability over short-term gains or political expediency. Bank failures may be inevitable at times, but supervisory failures need not be.
If the post-2008 era was defined by regulatory reform, the post-2023 period must be one of supervisory renewal. Only by investing in stronger, smarter, and more decisive supervision can we hope to prevent the next crisis before it starts.
Reference:
Adrian, Tobias, Marina Moretti, Ana Carvalho, Hee Kyong Chon, Katharine Seal, Fabiana Melo, and Jay Surti. Good Supervision: Lessons from the Field. IMF Working Paper WP/23/181. Washington, D.C.: International Monetary Fund, September 2023.
Leave a Reply