The role of banking supervisors in identifying emerging systemic risk

As the banking industry and financial markets have evolved, so has the role of bank supervisors. Lessons learned through time, including the financial crisis of 2008, have forced supervisors to reassess their supervisory approach to more proactively identify and understand risks in the financial system as a whole vs the historic focus of assessing the condition of individual banks. Recently, supervisors have begun conducting ‘horizontal’ reviews across a range of entities, instruments and practices, thereby providing a macroprudential perspective and informing appropriate supervisory or policy responses. Additionally, the introduction of simulation models, including stress tests, into supervisory programmes provides a forward-looking assessment of how individual firms and the banking sector would perform under adverse operating scenarios. A forward-looking supervisory approach focused on identifying and understanding emerging macroprudential and systemic risks positions supervisors and policymakers to proactively respond to systemic threats.