Supervisors are unsung heroes of the European sector in ensuring it remained trouble-free during the various convulsions of recent years: the pandemic, Russia’s war on Ukraine, inflation and cost-of-living stresses, and the demise last spring of SVB, Signature, First Republic, and Credit Suisse.  Each such convulsion triggered “the crisis is back” market panic about the sector. Each time, to paraphrase Mark Twain, the reports of a new crisis were greatly exaggerated.

Still, Sam Theodore argues that bank supervision is facing several growing challenges, which in relative terms should move it in new and more complex directions. Specifically, there is the need to supplement quantitative tools – like prudential metrics – with qualitative and scenario-based elements which fill in the blanks when relating to non-financial risks: cyber, digital-transformation, business model, misconduct, and fraud (including money laundering and terrorism finance), climate, etc.

The fast-evolving and increasingly complex financial ecosystem makes it evident that supervisors’ reliance mostly on the classic prudential metrics – capital, leverage, liquidity, and funding – is no longer capturing the full range of banking and financial risks.  There is significant systemic risk in banking even when capital and liquidity remain adequate.  This is not always recognised by the markets – which focus mostly on banks being profitable and complying with prudential metrics – but supervisors are increasingly moving in this direction.  More recent speeches and documents published by supervisory authorities attest to that.

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