Bank supervision or banking supervision refers to the oversight of banks by a specialized public agency known as a supervisor or supervisory authority. It has developed gradually since the 19th century and has been eventually adopted by most jurisdictions. Its main component is prudential supervision whose aim is to ensure that banks are "safe and sound", to reduce the likelihood and impact of bank failures that may trigger systemic risk. Other components include supervision aimed at enforcing consumer protection, sometimes also referred to as conduct supervision (or "conduct-of-business supervision") of banks, and anti-money laundering supervision that aims to ensure banks implement the applicable AML/CFT framework. "Bank supervision" is often used as a shorthand for the prudential supervision of banks, even though that is not the only kind of supervision to which banks are subjected.

Bank (prudential) supervision is a form of "microprudential" policy to the extent it applies to individual credit institutions, as opposed to macroprudential regulation whose intent is to consider the financial system as a whole.

Supervision and regulation

Bank supervision is closely articulated with bank regulation, to the extent that in some jurisdictions (particularly the United States) the words "regulator" and "supervisor" are often used interchangeably in its context. Policy practice, however, makes a distinction between the setting of rules that apply to banks (regulation) and the oversight of their safety and soundness (prudential supervision), since the latter often entails a discretionary component or "supervisory judgment". The global framework for banking regulation and supervision, prepared by the Basel Committee on Banking Supervision, makes a distinction between three "pillars", namely regulation (Pillar 1), supervisory discretion (Pillar 2), and market discipline enabled by appropriate disclosure requirements (Pillar 3).

Licensing and supervision

Licensing, which sets certain requirements for starting a new bank, is closely connected with supervision and usually performed by the same public authority. Licensing provides the licence holders the right to own and to operate a bank. The licensing process is specific to the regulatory environment of the jurisdiction where the bank is located. Licensing involves an evaluation of the entity's intent and the ability to meet the regulatory guidelines governing the bank's operations, financial soundness, and managerial actions. The supervisor monitors licensed banks for compliance with the requirements and responds to breaches of the requirements by obtaining undertakings, giving directions, imposing penalties or (ultimately) revoking the bank's license. Bank supervision may be viewed as an extension of the licence-granting process. Supervisory activities involve on-site inspection of the bank's records, operations and processes or evaluation of the reports submitted by the bank.[1] Arguably the most important requirement in bank regulation that supervisors must enforce is maintaining capital requirements.[2]

Bank supervisors

Most jurisdictions designate one public authority as their national prudential supervisor of banks: e.g. the National Administration of Financial Regulation in China, the Financial Services Agency in Japan, or the Prudential Regulation Authority in the United Kingdom. The European Union and United States have more complex setups in which multiple organizations have authority over bank supervision.

European Union

In the banking union (which includes the euro area as well as countries that join on a voluntary basis, lately Bulgaria), the European Central Bank, through its supervisory arm also known as ECB Banking Supervision, is the hub of bank supervision but works jointly with national bank supervisors, often referred to in that context as "national competent authorities" (NCAs). ECB Banking Supervision and the NCAs together form European Banking Supervision, also known as the Single Supervisory Mechanism. Countries outside the banking union rely on their respective national bank supervisor.

United States

The United States relies on state-level bank supervisors (or "state regulators", e.g. the New York State Department of Financial Services), and at the federal level on a number of agencies involved in the prudential supervision of credit institutions: for banks, the Federal Reserve, Office of the Comptroller of the Currency, and Federal Deposit Insurance Corporation; and for other credit institutions, the National Credit Union Administration and Federal Housing Finance Agency.

See also

Notes

  1. ↑ Richard Apostolik, Christopher Donohue, and Peter Went (2009), Foundations of Banking Risk. Hoboken, New Jersey: John Wiley and Sons, p. 62-63.
  2. ↑ Investopedia:Capital Requirement
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