Supervision is about how we use it in practice. For me, two critical elements of supervision are that it is forward-looking, and it requires the use of judgement. Sounds obvious, but sadly hasn’t been consistently done well in the past, with bad consequences. Supervision is therefore a skill – in fact it’s quite a few skills. The essence of the job is to understand risks in firms, and where necessary to step in and do a number of things: point out risks, or their significance when the firm seems to have failed to notice – through either lack of awareness or intent; or point out that while the firm may have identified the risk, it has failed to understand or calibrate its significance. This leads me to a couple of important points. First, our assessment of risks can differ from firms because our objective represents the public interest, and there is an externality in the risk in question which affects the public interest in ways that do not register with a definition of private interest. The causes of the financial crisis sadly remind us of this. It means that we have to be very clear and forthright on what is the public interest, and thus why we supervise. Second, risk is our business. This conference is about supervising large, complex financial institutions. I read too often the criticism of supervision that we cannot understand the risks of these institutions, and so we should give up all hope of doing so.
Closer coordination will be increasingly important to avoid fragmentation in regulatory frameworks and improve the surveillance of risks to global financial stability. As lessons from previous crises should teach us, we would be well served to ensure that the growth of Islamic finance – on a global scale – is well supported by the strengthening of our collective capacity to understand, monitor and manage the attendant risks. Conclusion In concluding, Islamic finance, through its emphasis on risk-sharing for the attainment of socio-economic goals based on the objectives of Shariah, provides the discipline that enhances the prospect of strengthening the link between finance and the real economy, thus contributing towards overall financial stability. With the global economy now on the recovery path, Islamic finance offers enormous potential in supporting a more inclusive and sustainable economic growth. Developing and emerging economies in particular stand to reap the largest benefits from this potential. To fully realise this potential, regulatory priorities in strengthening financial stability taking into consideration the specificities of Islamic finance will ensure its continued resilience and its potential to effectively service the functioning of economies and the economic wellbeing of societies. 6  BIS central bankers’ speeches