The American central bank’s vice chair decisively maintains intensively supervised banks are safer and just as profitable – a seeming disavowal of principle-based regulators including Finma. 

Although there is no way anyone can prove it, the relative advantages of strict rules or basic principles have likely been discussed for as long as banks or money lenders have been around. 

If you go down that path, you can almost imagine the heated arguments of angry, empty-handed Florentine merchants supplicating a local prince or two and the church after being caught flat-footed by a failed Lombard lender in the early Renaissance.

Continued Debate

More recently, the debate flared up around the turn of the millennium as European and Swiss banks massively expanded into the US.

Hordes of internal book-keepers and lawyers were suddenly faced with impenetrably named 20-Fs, 8-Ks, 10-Ks, and 10-Qs SEC filing documents, including a notoriously excruciating ‘risk factors’ passage section guided by an indefatigable, almost insatiable, mix of tutoring and feedback from specialized external counsel and accountants.

Very Academic

On the other side, Wall Street bankers would casually fling around the combined hyphenated numerals and letters as if they had learned them in pre-school. 

Their fluency had a deeper, unintended meaning that seemed to belie the difference between rigid awareness of specific rules and disclosures while having little to no idea of the ultimate principles involved.

New Salvo

The Europeans gloated at what they considered to be inferior bureaucratic check listing, but the discussion raged until into the very depths of the 2007-9 financial crisis.

But now, a new salvo in the long-running argument has been fired by Michael S. Barr, the vice chair for supervision at the Federal Reserve. 

No Doubt

There is very little doubt about what side he falls on just from the title of his speech, «Supervision with Speed, Force, and Agility» held exactly a week ago. 

His comments seem squarely aimed at the principles-based crowd. As part of an in-depth look at Silicon Valley Bank’s failure, he made no apologies for keeping his banking subjects on a very tight leash. 

Getting In Early

«Proactive supervisory action helps firms address issues before they grow so large as to threaten the bank, and earlier intervention means that firms may have more options to fix their problems,» he said.

Taking such an approach also leads to less volatile income and fewer loan losses, particularly when markets are stressed, and contagion risks are more pronounced, he said.

Big Regrets

As a clear aside, it is more than likely that many in the established corridors of power in Switzerland, bankers and legislators among them, go to bed at night regretting the fact that they weren't more proactive related to Credit Suisse years ago when its problems were already apparent and severe.

Moreover, according to Barr, there also seem to be positive facets to strict supevision.

Just as Profitable

«Economic research on supervision's impact shows that more intensively supervised banks are safer and no less profitable than their peers,» he said.

Not only that, but the Fed has also been quick to jump into action and it is more than likely that UBS and its rescued cohort Credit Suisse are directly feeling the impact of that, as both the number of industry-wide inspections and enforcement actions have been on the up and up. 

«For large banking organizations, we are planning to conduct more horizontal, or cross-firm supervisory examinations, to put our assessment of an individual bank in context and improve the consistency in how we look across banks,» he indicated.

Pattern Detection

He even took a page out of the principles-based enthusiasts’ book, by even bringing in a piece of regulatory blue-sky thinking into the mix.

«Most people are skilled at pattern detection, but often have trouble contemplating the consequences of events outside of our historical experience. It is important to find ways to break these strictures and think more critically about scenarios that could lead to acute distress at firms,» he maintained.

Changing Understanding

That is a sharp contrast to Finma’s rules-based approach, although in its defense the Swiss government and society’s understanding of a banking regulator's role will have to change, drastically, before it can be given any kind of stronger apparatus, regardless of approach.

Still, everyone should be paying close heed to speeches by American central bankers, particularly when they admit they are wrong.

Failures Revealed

«But we also must be humble about our challenges; the failure of Silicon Valley Bank one year ago revealed our own failures. It showed that in some cases, such as when banks grow rapidly or take on new risks, that supervision can lack the speed, force and agility required to keep up with those changes. Since that time, we have been hard at work to address those issues,» Barr maintained.

That kind of attitude and urgency is needed in the upper reaches of the domestic finance-legislative machinery, not least given its second-largest bank collapsed just about a year ago and was saved at government prompting by the largest, which itself needed to be rescued in 2008.

No Banks Left

Depending on how you count, Finma and its predecessors have seen the number of major Swiss banks go from five (Bank Leu, Swiss Bank Corp, and Schweizerische Volksbank included) to exactly one in a little over 30 years.

Just from that point of view - you have to give a big 1:0 for the rules-based crowd against their principle-based cohorts.