Frameworks for early supervisory intervention by Basel

The “Frameworks for early supervisory intervention” presents a range-of-practice study on how supervisors around the world have adopted frameworks, processes, and tools to support early supervisory intervention.

Based on practices observed, it was concluded that early supervisory actions taken by supervisors depend not only on the expert judgment of supervisors but also to a large extent on an organizational infrastructure that sets in place:

• supervisory reinforcement through both vertical and horizontal risk assessments to maximize the early detection of risks;
• a clear framework for when actions should be taken; and
• internal governance processes and programs to support supervisory development and capacity-building.

“Early supervisory intervention is defined as supervisors taking actions at an early stage to address unsafe and unsound practices or activities that could pose risks to banks or to the banking system.

These early supervisory actions can range from supervisory measures that encompass moral suasion to more corrective sanctions, which are triggered when banks are deemed to be in danger of failing.”

The use of early supervisory measures is part of the supervisory review process and is guided by forward-looking assessments, risk and impact frameworks and specialist supervisory teams.

For early supervisory intervention, many jurisdictions performed important developments and changes to supervisory frameworks, processes and organization to support early and pre-emptive intervention including:

• supervisory reinforcement through both vertical and horizontal risk assessments to maximize the early detection of risks;
• a clear framework for when actions should be taken; and
• internal governance processes and programs to support supervisory development and capacity-building.

Tools used for early risk detection and forward-looking supervision:

• Early warning systems - are particularly important for helping supervisors to direct limited resources towards banks or activities where weaknesses are most likely to be found, interested examples can be analyzed in the report
• Stress testing - Supervisors are using a range of stress tests, including system-wide, firm-specific and reverse stress testing.
• Horizontal, thematic and targeted reviews
• Governance and risk management - a critical element of the supervisory review process is to evaluate a bank’s corporate governance practices, including the quality of board and senior management oversight and the effectiveness of risk management and control functions
• Business model analysis - which supports supervisory understanding of a bank’s business model and can be an effective tool for early detection of risks and vulnerabilities, thus assisting supervisors in early and effective intervention
• Risk culture analysis - understanding the governance and culture of the bank is critical for understanding whether early supervisory intervention may be needed. Some authorities have increased their focus on understanding the extent to which the risk culture of individual institutions supports their formal governance structures and management of risk. This includes assessing incentive structures, remuneration and misconduct risk.

For those seeking a better understanding of the approaches observed in a number of jurisdictions, programs and processes aimed at intervening, the report “Frameworks for early supervisory intervention” is essential reading.

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