Why supervise commercial banks?

30 April 2018

Why supervise commercial banks?

To safeguard an essential service

Banks provide financial services that we all use. We deposit our money with them, borrow from them, take out mortgages with them. We as individuals rely on them, as do households, businesses and governments. Banks enable the financial markets to function, thereby enabling economic activity.

To instil confidence

The financial system is tightly knit. Its components are held together by confidence. The failure of just one bank could shake confidence in the system and jeopardise its integrity. For example, bank runs can quickly spread from troubled institutions to healthy ones, harming them in turn. Like dominoes, the fall of one bank can lead to the collapse of many more.

Knowing that banks are supervised reassures both markets and depositors, reducing the likelihood of bank runs and other forms of financial contagion.

To protect savers

Ordinary savers are not able to evaluate a bank’s safety and soundness. They do not have access to the necessary information and perhaps lack the required background knowledge. Therefore, supervisors act in the public interest by regularly checking banks’ risk culture and corporate governance, and by granting (or withdrawing) banking licenses.