The Bank of England's deputy governor for prudential regulation has called for a fundamental shift in the relationship between financial regulators and the institutions they supervise, arguing that supervision should be more like clinical medicine — focused on diagnosis, treatment and prevention — and less like a compliance audit.
In a speech to a conference of bank supervisors, Sam Woods said the current model of supervision, which focuses on compliance with rules and the identification of breaches, was necessary but not sufficient. He argued that supervisors needed to develop a deeper understanding of the institutions they supervised — their business models, their cultures, their vulnerabilities — and to use that understanding to prevent problems before they occurred, rather than simply punishing them after they had happened.
Woods used the analogy of medicine to make his point. A doctor who simply checked whether a patient's test results were within the normal range, without understanding the patient's history, lifestyle and symptoms, would be a poor doctor. A supervisor who simply checked whether a bank was complying with the rules, without understanding the bank's business model, culture and risk profile, was a poor supervisor.
The speech also addressed the challenge of supervising an industry that is being transformed by technology. Woods said supervisors needed to develop new skills — in data science, in technology, in the analysis of complex systems — if they were to understand the institutions they were responsible for supervising. He announced a programme of investment in supervisory training and recruitment designed to equip the Bank's supervisors with those skills.
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