There’s been plenty of talk about reforming rules and regulations in the financial sector, but more attention needs to be paid to how to supervise financial firms, says Julie Dickson, Superintendent of Financial Institutions.

Speaking at a Women in Capital Markets luncheon in Toronto Wednesday, Dickson noted that, in the wake of the financial crisis, most of the reform discussions have focused on creating new rules and changing existing ones, and she called this approach “inadequate”, adding, “We need to focus on supervision to the same degree.”

“Supervision is all about when we intervene, how we intervene, and the focus of our intervention. Do we assume that innovation is good or bad and how does that affect supervisory behaviours? These questions are as important as focusing on capital and liquidity and other rules. This is because a financial sector with strong regulatory rules (such as robust capital requirements) but with weak supervision of risk management practices, is not a safe and sound financial sector,” she said.

Additionally, she suggested that supervision can obviate the need for new rules. “Effective supervision can often be a better way to deal with a risk, rather than imposing a new rule,” she added.

Dickson said that regulators from around the world generally try to agree on rules, but then all go their own way when it comes to supervision. “So in addition to focusing on the rules, regulators would be well advised to assess how supervisory processes worked in different countries – what worked well, and what did not. Another reason why this is important is that supervision can have a significant effect on resource allocation, and on competition, and is often much less transparent than regulations,” she added.

A recent report commissioned by the World Bank provides some useful insights on supervisory processes and whether they needed to be re-thought in light of the crisis, Dickson noted. “The World Bank report concluded that a commitment to robust and relatively intense on-site supervision, using permanent regulatory staff (not subcontracting to third parties), was important. Fewer lawyers involved in front-line supervision was also cited as a feature of systems that worked well. Finally, a results-oriented system, which emphasized early intervention and prompt correction of perceived weaknesses in risk management processes, was seen as being key,” she said. “These are important conclusions that stress effectiveness of oversight. More attention needs to be paid to this area.”

For the Office of the Superintendent of Financial Institutions, Dickson said that a high priority is “fostering an atmosphere that stresses open communication between the industry and [the regulator].” She noted that OSFI is also updating its supervisory framework.

“We are also developing guidance on minimum expectations for firms in setting risk appetite. We are putting more focus on risk management around the use of models. We are also adding expertise to our own staff, in areas such as operational risk, and credit risk,” she said. “However, as we focus on lessons learned and areas in which we need to be vigilant, we are sticking to the same principle we have always had: the more active the institution is in having systems and processes that allow for the early identification of risk, and following-up and resolving issues identified, the less intervention they will see from OSFI.”

IE