This is important because, even though we might think that our rules and regulations are now in much better shape, history tells us that the commercial incentives of firms will create pressures to find ways to minimise the impact of those rules. I am especially mindful that financial institutions will always be able to innovate faster than we are able to modify the prudential rulebook. In order to remain fit for purpose, the prudential regulatory framework must be responsive to changes in the behaviour and structure of the financial system and identify any gaps, faults or incoherence that can lead to perverse behaviour. This is why we need well-informed rule-makers and alert supervisors, who together can smell when something is off and decide what to do about it. And this is one reason, in my view, why supervision will be particularly important in the coming phase. The financial services industry that we regulate is highly developed, highly innovative and highly sophisticated. But, stripped bare of this complexity, it remains a business in which individuals need to exercise judgement, skill and care. The role of the supervisor is to observe this behaviour and form judgements about the extent to which the firm – and the individuals running it – meet the intention, as well as the letter of, the regulation. Some innovation by financial institutions in response to regulation will be intended by regulators, or, if not intended, at least benign.
With that strongly in mind, supervisors will maintain the normal supervisory approach and focus on the biggest risks at each firm. For some businesses, Brexit will be a key risk and will, justifiably, warrant supervisory attention – we must not lose sight of risks as structures and business models change, or as activities move around or adapt. Equally, firms’ management should remain focused on the full spectrum of risks that they face. As we would any other identified risk, we expect to have discussions with firms about their contingency plans as part of our regular interaction. But in terms of how supervisors go about their day-to-day business, we remain focused squarely on the task in hand – safety and soundness of all firms and policyholder protection for insurers. Returning to the punchbowl? As well as a determination to inform our approach to current risks by having regard to lessons learned in the past, PRA supervisors are forward-looking and pay close attention to emerging trends and potential future 16  All speeches are available online at www.bankofengland.co.uk/speeches  16  risks. I would like to take this opportunity to highlight some issues of particular relevance for building societies. We observe that net interest margins at societies are coming under increasing pressure, and, although they are still well above levels seen in 2010, the trend seems to have turned downwards.