Just as important, we want to generate ideas for how to better assess the effectiveness of supervisory activities. In a world of limited resources, how do we deploy our people and technology in the most effective way to limit disruption and distress at individual firms and to the financial system, while still fostering an efficient and innovative financial system? In considering these questions, a good starting point is to understand more fully what supervisors do and how they do it in the current environment. The papers that are being presented here today are largely aimed at achieving this goal. As described in the first paper – “Supervising Large, Complex Financial Institutions: What do Supervisors Do?” – bank supervision has long been an integral component of the Federal Reserve’s  1  Beverly Hirtle, David Lucca and Joseph Tracy assisted in preparing these remarks. BIS central bankers’ speeches  1  responsibilities. At a broad level, Federal Reserve supervision of large financial institutions is guided by two key objectives: “enhancing the resiliency of a firm to lower the probability of its failure or inability to serve as a financial intermediary [and] reducing the impact on the financial system and the broader economy in the event of a firm’s failure or material weakness.” 2 In addressing these objectives, bank supervisors enforce laws and regulations, but there is much more to supervision than just enforcement.
While these evaluations form the core of the supervisory program for large, complex banking companies, they are far from the only important activities pursued by supervisors. Day-to-day oversight of individual firms is a critical complement to these cross-firm, horizontal evaluations. There are three key channels that generate insight on firms: 1) continuous monitoring through meetings with bank senior management, business line management, risk managers, auditors and others; 2) review and analysis of internal reports; and 3) independent analysis by supervisory teams. These insights guide supervisory assessments and supervisory actions for individual institutions, as well as contributing to the assessments made as part of CCAR, CLAR and other horizontal exercises. We have come a long way since the financial crisis, and the financial sector today is much more resilient as a result of the evolving supervisory framework. However, more work still lies ahead. A key challenge in assessing the effectiveness of supervision is that much of what supervisors do, by necessity, is confidential. This reliance on confidential information and confidential actions can make supervision seem mysterious to outsiders, which complicates the evaluation of what policies may be effective or ineffective. For example, if a bank fails, is this evidence of poor supervision, or instead evidence that even good supervision can’t prevent all bank failures? Improving our ability to do this diagnosis is critical. I am confident that today’s panels and paper discussions will help us move forward in this direction. Thank you for participating in this conference. BIS central bankers’ speeches  3