FSB identifies the need for more intense supervision

The Financial Stability Board (FSB) identified as a priority the need for more intense and effective supervision, particularly of systemically important financial institutions (SIFIs), after the financial crisis.  The FSB has published two papers:

- Supervisory Intensity and Effectiveness - progress report on enhanced supervision. This describes the changes in supervisory practices since the financial crisis and identifies that institutions’ progress toward consistent, timely, and accurate reporting of top counterparty exposures meets neither supervisory expectations or industry self-identified best practices. 

The area of greatest concern remains institutions’ inability to consistently produce high-quality data. Work identified for supervisors is to:

o   remain focussed on ensuring the necessary changes are embedded in firms;

o   confirm that risk management and measurement are strengthened in firms;

o   enhance their own IT systems for using data collected; and

o   focus on ongoing monitoring of the improved BCBS bank capital models.

In parallel with supervisors implementing these changes toward more effective supervision, the FSB’s future work will focus on the measurement of supervisory effectiveness.

- Guidance on Supervisory Interaction with Financial Institutions on Risk Culture - framework for assessing risk culture. This sets out that a sound risk culture should ensure that:

o   an appropriate risk-reward balance consistent with the institution’s risk appetite is achieved when taking on risks;

o   an effective system of controls commensurate with the scale and complexity of the financial institution is properly put in place;

o   the quality of risk models, data accuracy, capability of available tools to accurately measure risks and justifications for risk taking can be challenged; and

o   all limit breaches, deviations from established policies and operational incidents are thoroughly followed up with proportionate disciplinary actions when necessary.

Related links:

http://www.financialstabilityboard.org/publications/r_140407.pdf

http://www.financialstabilityboard.org/publications/140407.pdf