Less Likely to Fail: Sharper Supervision

Abstract

Stronger regulation is not the only reason banks will become less likely to fail. Sharper supervision will play a role as well, both at the level of the individual firm and at the system as a whole. With respect to micro-prudential (individual firm) supervision, the authorities have become more forward-looking and more pro-active, making judgements on firms’ business models and strategies and on firms’ ability to execute their chosen strategy successfully. The authorities have also introduced a new concept, macro-prudential (economy-wide) supervision. Here, the authorities aim to analyse the system as whole, asssess the risks to financial stability and devise measures to mitigate these risks, including the risks that may arise from non-bank financial institutions and from shadow banking. Together, these supervisory measures reinforce regulatory reform and should make banks less likely to fail.