The supervisory approach: a critique
View / Open Files
Authors
Ward, Jonathan
Publication Date
2002Series
CFAP Working Paper
02
Publisher
CFAP, Cambridge Judge Business School, University of Cambridge
Language
English
Type
Working Paper
Metadata
Show full item recordCitation
Ward, J. (2002). The supervisory approach: a critique. http://www.dspace.cam.ac.uk/handle/1810/225214
Abstract
Rules suffer from two serious defects. The world is complex, and so the creation and application of rules is difficult; and it changes, so that rules become obsolete. In recent years, the conventional wisdom on financial regulation has shifted away from reliance on rules and back towards a ‘supervisory approach’, in which regulators rely more on banks’ own estimates of risk, and focus more on banks’ risk management systems and controls than on their compliance with crude rules. The Basel Committee’s proposals for a new Capital Accord (‘Basel 2’) follow this approach. In this paper I identify four problems with this approach. First, relying on banks’ estimates is not a solution to the problems caused by externalities. Secondly, for supervision to be effective, supervisors must have the skills, incentives and legal powers to change banks’ behaviour. It is difficult and costly to design a regime in which supervisors have desirable incentives. The supervisory approach appears ill-suited to the circumstances of developing countries, at least. Thirdly, the supervisory approach is based on qualitative standards and general principles. This delegates a great deal of discretion to bureaucrats, which is legally and politically difficult in many countries. Fourthly, the implementation of standards is essentially unobservable. As a result, the international regime will shift significantly towards decentralisation. An alternative approach would be to retain an emphasis on quantitative rules, and to improve the process for interpreting, enforcing and revising them.
Keywords
international banking law, bank regulation, bank supervision
Identifiers
This record's URL: http://www.dspace.cam.ac.uk/handle/1810/225214
Statistics
Recommended or similar items
The current recommendation prototype on the Apollo Repository will be turned off on 03 February 2023. Although the pilot has been fruitful for both parties, the service provider IKVA is focusing on horizon scanning products and so the recommender service can no longer be supported. We recognise the importance of recommender services in supporting research discovery and are evaluating offerings from other service providers. If you would like to offer feedback on this decision please contact us on: support@repository.cam.ac.uk