BIS: Supervision in a post-Basel III world

28 February 2018

The BIS General Manager Agustín Carstens outlined three key challenges in the conduct of effective supervision.

One key development in the past year has no doubt been the finalisation of Basel III. It is a landmark achievement that significantly strengthens the capital and liquidity shock absorbers within the global banking system and at individual banks.

But this does not mean that its time to let guard down and be complacent. Indeed, the heavy lifting for banking organisations and prudential authorities - that is, effective implementation of the new rules and robust supervision in the post-crisis environment - has only just begun.

Indeed, the demands placed on supervisors are greater than ever. On the one hand, they must be able to digest and oversee a complex set of new rules. On the other, they must also have a nuanced understanding of each regulated entity's overall risk profile and be able and willing to take actions at an early stage, perhaps well before there is tangible evidence of deterioration in a bank's financial condition.

The latter responsibility, in particular, is critical because effective supervision is countercyclical in nature and can be much more powerful than any regulatory-oriented countercyclical tools that have been developed post-crisis.

Mr Carstens concludes with three key messages:

• First, completion of the Basel III reforms is a significant milestone and provides much needed regulatory certainty to the banking sector.
• Second, effective supervision continues to be an important, but sometimes forgotten, element of the post-crisis reforms. It provides context to, and reinforces, Basel III. In a post-crisis world, supervisors will need to stay focused on traditional risks such as asset quality. At the same time, they must keep an eye on emerging risks, such as the evolving fintech landscape and the way it can transform traditional approaches to identifying and assessing risk. In both cases, they will need to utilise new forward-looking assessment tools and to better employ existing ones to identify and resolve problems at an early stage.
• And third, although it may not be sufficiently emphasised, perhaps the most powerful countercyclical tool available to prudential authorities is their army of front-line supervisors. They are the eyes and ears of policymakers and they see first-hand the impact of, for instance, monetary policy decisions on bank behaviour and risk-taking. Working in concert with risk managers at banks, supervisors are best positioned to say "no", even when society and indeed some governments are saying "yes".

Full speech

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