The potential consequences of disruption in the financial system are so far-reaching, and the erosion of market discipline resulting from the government safety net sufficiently material, that it is neither safe nor reasonable to rely entirely on after-the-fact enforcement to ensure regulatory compliance. Supervisors are in a good position to monitor individual firms’ idiosyncratic risks.
And in addition to what they do at individual banks, supervisors monitor for risk that may be building among clusters of banks or across the banking system. These “horizontal” exams across multiple banks help highlight new or emerging risks and help examiners understand how banks are managing these risks.