Defining forward looking, judgement-based supervision

Rosa M Lastra

Journal of Banking Regulation, 2013, vol. 14, issue 3-4, 227 pages

Abstract: This brief article tries to cast some light on the understanding of the concept of judgement-based supervision, an approach favoured in the United Kingdom following the legislative reforms that have seen the dismantling of the Financial Services Authority and the establishment a Prudential Regulatory Authority as a subsidiary of the Bank of England, as well as a Financial Conduct Authority. The adoption of a ‘more judgement-focused approach to regulation so that business models can be challenged, risks identified and action taken to preserve financial stability’ is presented as a key feature of the new supervisory regime. However, what does it exactly mean? The article commences with a review of the notions of supervision (micro and macro) and regulation. It then assesses the domain of judgement or discretion in each supervisory stage, from the licensing or entry into the market to the sanctioning stage and crisis management. Back in 1942, in the context of the proposals that led to the establishment of the International Monetary Fund, John Maynard Keynes famously stated: ‘Perhaps the most difficult question is how much to decide by rule and how much to leave to discretion’. This is the eternal challenge in administrative law, as it is in monetary policy. It is also the challenge the authorities face when trying to establish what exactly judgement-based supervision is. As regards the ‘forward-looking’ feature, it is worth recalling that though the law can be proactive, regulation after crisis (hence reactive, backward looking) is a constant in the history of finance.

Date: 2013
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