Source: Capital IQ, SNL, published accounts, Laeven and Valencia (2010) and Bank calculations. (***) Denotes null hypothesis of mean equality rejected at the 1% significance level. (a)  The classification of bank distress is based on Laeven and Valencia (2010), updated to reflect failure or government intervention since August 2009. (a)  The classification of bank distress is based on Laeven and Valencia (2010), updated to reflect failure or government intervention since August 2009. (b)  For the purposes of the leverage ratio calculation, total assets have been adjusted on a best-efforts basis to achieve comparability between institutions reporting under US GAAP and IFRS. (b)  Total assets have been adjusted on a best-efforts basis to achieve comparability between institutions reporting under US GAAP and IFRS. Chart 6: Risk-based capital ratios of FDIC-insured banks, end-2006  (a)  Source: FDIC and Bank calculations. (a)  Sample has been truncated to remove outlier observations with very large risk-based capital ratios. BIS central bankers’ speeches  29  (a)  Chart 7: Leverage ratios of FDIC-insured banks, end-2006  Source: FDIC and Bank calculations. (a)  Sample has been truncated to remove outlier observations with very large leverage ratios. Chart 8: In- and out-of-sample performance of different models of bank risk (100 (a)(b)(c) observations)  Source: FDIC and Bank calculations. (a)  Different models estimated using 10,000 random samples of 100 observations each. Samples are rejected if there are no observations of bank failure. The different models are used to predict bank failure for approximately 4,300 banks out-of-sample.
In other professions, such as medicine, prescriptive rules have generated a wood-from-trees problem. They have also caused defensive, backside-covering behaviour. Both may have increased risk in the system. What is true of doctors is almost certainly true of bank supervisors. In the pre-crisis period, being required to monitor many small, rule-based risks may have caused supervisors to overlook potentially life-threatening ones. This ticked-box approach failed to save the banks, just as in medicine it fails to save lives. Supervision suffered the same fate as the autistic savant – penny-wise but pound-foolish. Breaking free of that psychological state calls for a fresh approach, one which is less rules-focussed, more judgement-based. That alternative approach to financial supervision is beginning to be recognised. For example, this approach will underpin the Bank of England’s new supervisory model when it assumes prudential regulatory responsibilities next year (Bank of England and FSA (2011)). Accompanying this will be a streamlined approach to regulatory reporting in the UK. In line with US reporting from the 1860s, more regulatory data will be available “on call”. In future, the limits of Excel will hopefully no longer be tested. This will reduce the complexity quotient, making easier the wood-and-trees task for supervisors. It will also hopefully streamline compliance costs for both regulator and regulated. This approach does not come without risks. As when catching a frisbee or a criminal, catching crises relies on a lengthy sample of past experience. Good supervision means developing well-honed rules of thumb.