Banks need systems and controls at all levels that foster the accurate measurement and monitoring of risk, and permit risk to be accurately priced and rigorously controlled. This goes well beyond the maintenance of certain balance-sheet ratios which, we all know, are at best an imperfect measure of the riskiness of a portfolio. Third, good supervision is no substitute for a developed ‘credit culture’.
The best supervisors in the world cannot enforce a culture when the basic soil is not receptive. As I noted earlier, the onus here lies squarely with banks’ management and their boards of directors. Fourth, to keep a banking system healthy, it is necessary to have clear procedures for dealing with institutions that get into difficulties.