United States: BCBS Provides Guidance On Early Supervisory Intervention

The Basel Committee on Banking Supervision ("BCBS") published a report titled Frameworks for early supervisory intervention. In the report, the BCBS emphasized the importance of early supervisory intervention to provide for the safety of individual banks and the banking system. The BCBS identified challenges faced by supervisors and provided characteristics of effective frameworks for early intervention.

In the report, the BCBS described how early intervention contributes to financial stability. The BCBS also expressed support for recent efforts to improve early supervisory practices, including adopting qualitative and quantitative risk-assessment measures and deploying system-wide reviews on particular areas of concern in addition to institution-specific assessments. The BCBS highlighted the challenges supervisors may face in evaluating risks, dealing with unintended consequences, compelling banks to take remedial action, and gaining public support.

The BCBS encouraged supervisors to establish a risk-based approach to early supervision, and underscored the importance of implementing a system that (i) uses vertical and horizontal risk assessment to increase early detection of risks, (ii) gives clear instruction as to when actions should be taken, and (iii) incentivizes and supports supervisors through an internal governance process.

Commentary / Steven Lofchie

Although the notion of "early intervention" sounds prudent and responsible, it actually raises quite difficult policy issues. In short, what are the circumstances under which the government should assert control over a bank that is in current compliance with applicable capital regulations? When it does so, is there any reason to believe that the regulators will run the troubled bank more successfully than current management? Is it even possible to establish procedures that are not susceptible to political judgments?

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.