Woods details unique, intrusive bank supervision
Sam Woods, Deputy Governor for Prudential Regulation at the Bank of England, explained the unique and often intrusive nature of bank supervision. Speaking at the Henry Thornton Lecture, he explored its rationale, historical evolution, and future implications.
The high cost of financial crises
Prudential regulation is essential due to the high and persistent cost of financial crises, which research suggests average around 43% of GDP.
These costs are an externality, largely falling on the wider economy through impacts on growth rather than solely on bank executives or shareholders.
Banks provide critical public infrastructure by issuing money in the form of deposits, which are fundamental for daily payments and value storage.
Ensuring the consistent value of these deposits is crucial for economic functioning.
The state's interest in monitoring private actors who create money and credit, given their role in this vital public infrastructure, is a key driver for regulation.
This framework aims to make banks internalise the public concern more fully, balancing state interest with private ownership and shareholder demands.
Beyond inspection: The supervisor's many faces
Bank supervisors engage in comprehensive, continuous monitoring, an intrusive activity unusual in a capitalist economy.
Woods outlined several potential roles: the inspector, checking compliance; the policewoman, punishing malfeasance; the fire warden, watching for emerging risks; the "gap-filler," addressing insufficient regulations; and the "meta-regulator," leveraging banks' own risk management.
Historically, US bank oversight began in the early 19th century, evolving into a structured approach with the OCC and Federal Reserve.
In contrast, UK supervision remained informal until the 1970s, relying on Bank of England suasion, which proved limited during crises.
A necessary intrusion
Supervisors hold broad powers, from licensing to management approval, enabling intrusive monitoring often reinforced by "meta-regulation.
" This extensive oversight is justified by banks' unique role as the primary vector of public interest, providing essential money infrastructure tied directly to the corporate entity's health.
This judgement-based approach, though broad for a capitalist economy, is a common global arrangement reflecting the severe costs of financial crises.
Source: Clinical supervision − speech by Sam Woods
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