Woods defines 'clinical' banking supervision

Sam Woods, Deputy Governor for Prudential Regulation, defined banking supervision as a distinctly interventionist and continuous monitoring activity, setting it apart from mere regulation.

He noted that while regulation involves setting rules, supervision entails a more intrusive oversight, which is unusual in a capitalist economy.

This 'clinical' approach is now even being exported to other sectors like energy and water.

Woods explained that the fundamental rationale for such deep engagement stems from the immense economic costs of financial crises, estimated at 43 percent of GDP, which are largely borne by the wider economy.

Banks also provide critical public infrastructure by creating money in the form of deposits, making their safety and soundness paramount for economic functioning.

This unique role necessitates the state's close monitoring of private actors licensed to create money and credit.

Woods traced the evolution of banking supervision through two case studies: the US and the UK.

In the US, oversight began in the early 19th century in response to private note-issuing banks, with New York State introducing periodic checks by 1829. The Office of the Comptroller of the Currency (OCC) established a systematic, nationwide supervisory approach in the 1860s.

In contrast, UK bank supervision remained largely informal until the 1970s.

The Bank of England's Discount Office conducted market surveillance, but formal powers were limited.

The secondary banking crisis of the 1970s exposed the limits of this informal approach, leading Parliament to grant the Bank a formal supervisory role in 1979, though a flexible, judgement-based philosophy persisted.