In today’s rapidly evolving environment, the question arises: Must supervision always follow regulation? The short answer is — not necessarily. While regulatory frameworks are essential for maintaining accountability and structure, effective supervision can, and often should, move ahead of formal regulation. Supervision grounded in best practices can anticipate risks, promote innovation, and maintain stability, even before new rules are enacted.
The Case for Proactive Supervision
Supervision that merely reacts to regulations is often too slow to respond to real-time challenges. Industries, especially the financial sector, are undergoing continuous transformation driven by digitalization, artificial intelligence, and evolving consumer expectations. In such times, supervisors cannot afford to wait for regulations to stabilize; instead, they must act proactively to address emerging risks and systemic vulnerabilities.
As the Bank for International Settlements notes, proactive supervision plays a crucial role in maintaining financial stability by adapting flexibly to new market realities and identifying potentially destabilizing behaviors early on (BIS 2015). This proactive mindset ensures that supervisors can act swiftly and decisively, rather than relying on outdated or incomplete regulatory frameworks.
Global Best Practices as a Foundation
Supervisory systems around the world increasingly rely on global best practices to guide decision-making and oversight. The International Association of Insurance Supervisors (IAIS) emphasizes that effective supervision must be “forward-looking” and capable of adjusting to industry innovation without waiting for formal rulemaking (IAIS 2019). Similarly, the Financial Stability Board (FSB) argues that supervisory intensity and effectiveness depend on the ability to identify risks before they materialize (FSB 2014).
By benchmarking against international standards and learning from global peers, supervisors can evolve rapidly and remain relevant. Feedback loops between regulators, supervised entities, and industry experts can help create an adaptive regulatory environment that evolves alongside market conditions rather than lagging behind them.
Supervision and Regulation: A Symbiotic Relationship
While proactive supervision is crucial, it does not diminish the importance of regulation; rather, it complements it. Regulation provides the boundaries, while supervision ensures the spirit of those boundaries is maintained and adapted as conditions change. As the Basel Committee’s Core Principles for Effective Banking Supervision (2023) outlines, supervisory frameworks must remain “effective and relevant to changing industry and regulatory practices.”
Academic research also supports this interplay. Agarwal (2024) describes regulation and supervision as a symbiotic relationship, where supervisory precision and agility are necessary to realize the full benefits of well-designed regulations. The International Monetary Fund (IMF) similarly notes that maintaining financial stability depends as much on empowered supervisors as on strong regulations (IMF 2023).
Therefore, in times of transformation, supervision should not be confined to merely enforcing existing rules — it must be a driving force for progress. Proactive, best-practice-based supervision can guide industries through uncertainty, shape future regulations, and ensure long-term resilience.
References
Bank for International Settlements (BIS). “Regulatory Stability and the Role of Supervision and Regulation.” Speech by Jaime Caruana, General Manager of the BIS, at the 7th High-Level Meeting on Banking Supervision, Cape Town, November 3, 2015. https://www.bis.org/speeches/sp151103.htm
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International Association of Insurance Supervisors (IAIS). Application Paper on Proactive Supervision of Corporate Governance. February 2019. https://www.iais.org/uploads/2022/01/190227-Application-Paper-on-Proactive-Supervision-of-Corporate-Governance.pdf
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Financial Stability Board (FSB). Supervisory Intensity and Effectiveness: Progress Report on Enhanced Supervision. April 2014. https://www.fsb.org/uploads/r_140407.pdf
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International Monetary Fund (IMF). “Financial Stability Needs Supervisors with the Ability and Will to Act.” IMF Blog, September 18, 2023. https://www.imf.org/en/Blogs/Articles/2023/09/18/financial-stability-needs-supervisors-with-the-ability-and-will-to-act
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Basel Committee on Banking Supervision. Core Principles for Effective Banking Supervision. Basel: Bank for International Settlements, September 2023. https://www.bis.org/bcbs/publ/d573.pdf
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Agarwal, Ishita. “Bank Regulation and Supervision: A Symbiotic Relationship.” Journal of Banking & Finance 160 (2024): 107191. https://www.sciencedirect.com/science/article/pii/S037842662400102X
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