The March 2023 banking turmoil exposed fundamental failures in bank governance and supervisory oversight. While the affected banks met applicable quantitative requirements, they faced unprecedented liquidity runs, due to poor board oversight, flawed risk management and unsustainable business models.

Supervisory delays allowed these issues to linger until they culminated in a crisis of confidence, providing a stark reminder that no feasible amount of capital and liquidity requirements can offset severe qualitative shortcomings in banks. It also underscored the critical importance of supervisors taking timely qualitative measures to foster the safety and soundness of banks and the banking system.

This paper examines various supervisory frameworks that underpin the use of qualitative measures and identifies key attributes that can enhance supervisory effectiveness. To strengthen supervision, a comprehensive approach, targeting each step of the supervisory process, can help supervisors to make the nuanced judgments needed to determine the timing, nature and severity of qualitative measures to address weaknesses in governance and bank business models, before they manifest in financial metrics.

JEL classification: G20, G21, G28

Keywords: supervision, Pillar 2, risk-based supervision, governance, business models, early intervention, early action, supervisory effectiveness, enforcement, SREP, supervisory review, judgment, qualitative measures, supervisory tools, supervisory methodology