Abstract
This chapter distinguishes seven global trends that will improve financial supervision by making it more forward-looking, supra institutional and integral. Financial supervisors need to continuously monitor and sharpen their effectiveness. The chapter analyzes the quality controls within the new supervisory approach of De Nederlandsche Bank. This framework of quality management consists of an organizational structure and culture aimed at continuous improvement and rapid transition from analysis to action as well as a focus on the ability to adequately measure supervisory performance.
This chapter represents the personal views of the authors, who would like to thank the editors as well as Paul Hilbers (DNB), Ivo Bruijn (DNB) and Dirk Broeders (DNB) for their helpful comments.
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- 1.
The terms ‘regulation’ and ‘supervision’ are generally used interchangeably in financial literature, but have different meanings. Palmer and Cerruti (2009), amongst others, argue that ‘regulation’ consists of setting the framework of laws, regulations and rules within which financial actors must operate, while ‘supervision’ consists of monitoring the behavior of the financial actors and intervening when needed to ensure they are acting in ways that are consistent with the letter and spirit of the regulatory framework.
- 2.
Basel III includes many changes based on lessons from the crisis, such as a limit on the amount of leverage in the banking system, an additional capital charge for systemically important financial institutions (SIFIs) as well as a countercyclical buffer.
- 3.
Some financial supervisors state their objective more explictly. The Australian APRA, for instance, mentions in its annual report that prudential regulation should not pursue a ‘zero failure’ objective, but should maintain a low incidence of failure of supervised institutions (APRA 2011). Also note that market conduct supervisors naturally have a different primary goal such as ensuring market transparency.
- 4.
Note that these assumptions have long been challenged. Shiller (2000), for instance, illustrates that market efficiency does not imply market rationality. The fact that asset prices move as random walks and cannot be predicted from prior movements does not imply absence of herd effects and prices overshooting rational equilibrium levels.
- 5.
A randomised controlled experiment consists of multiple measurements (pre-event as well as post-event), a randomised intervention as well as a randomly selected control group.
- 6.
Forming a control group is difficult as it presents the supervisor with a reputational risk as institutions are in the control group without prior consent. Moreover, it will typically be hard to effectively separate the institutions in the control group from exogenous influences that influence the rest of the population.
- 7.
The BIS-ratio represents the ratio between a bank’s risk-bearing capital and its total risk-weighted assets. The tier-1 capital ratio depicts the ratio of a bank’s core equity capital to its total risk-weighted assets.
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Sijbrand, J., Rijsbergen, D. (2013). Managing the Quality of Financial Supervision. In: Kellermann, A., de Haan, J., de Vries, F. (eds) Financial Supervision in the 21st Century. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-36733-5_2
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