Efforts to improve supervision need ongoing focus: report

It notes that “supervisory attitudes have changed radically” over the past five years, and that regulators have become determined to raise supervisory standards and their expectations for systemically important firms. However, despite the progress in some areas, more remains to be done, it notes.

The report notes that supervisors need to remain focused on ensuring that the efforts at improved supervision — such as more frequent, more effective discussions with boards and senior management, higher expectations for risk identification and measurement, and greater understanding of firm’ business models — become fully embedded. And, it says that they also need to push firms to do more to strengthen risk management and measurement.

“Enhancements to risk governance practices need ongoing focus as does supervisory interactions with boards, particularly on more difficult topics such as risk appetite and risk culture,” it says.

Embedding new supervisory tools and approaches “is a difficult process, which requires changes at many levels within supervisory authorities, especially in terms of the adequacy (quantity and quality) of their resources”, it says, adding that, “To be successful, this change phase requires support from all stakeholders, starting from governments.”

In addition to the progress report published today, the FSB also published a final framework for assessing risk culture and guidance, which takes into account comments received on the consultation in this area, which was issued in November 2013. “The guidance forms a basis for supervisors and firms to promote and develop a shared understanding of the firm’s risk culture and have informed conversations with the board and senior management who set the tone on culture from the top,” the FSB says.

Julie Dickson, Superintendent of the Office of the Superintendent of Financial Institutions (OSFI) and chair of the FSB Supervisory Intensity and Effectiveness Group, noted that, “Risk culture has long been an informal part of supervision. The guidance will help to form and articulate a view on an institution’s risk culture, and intervening early to prevent behavioural weaknesses from taking root and growing. Enhanced risk awareness and the ability to have meaningful supervisory conversations around an institution’s risk culture are powerful preventive tools.”

The FSB says that its ongoing work on more effective supervision will focus on “drivers of supervisory empowerment and the measurement of supervisory effectiveness. This includes the related assessment of whether all the supervisory focus on boards and risk governance is paying off and institutions are becoming more effective in their governance framework.”