WASHINGTON — The Financial Stability Board on Monday issued more than two dozen recommendations to improve supervision of systemically important financial institutions to make them less susceptible to failure.
"The crisis clearly revealed, albeit under highly stressed and largely unforeseen circumstances, that some supervisors were not successful in achieving an appropriate risk assessment/capital requirement balance," the board said in a 26-page report.
Instead, the board said, supervision should be "more intense, more effective and more reliable."
"Stronger supervision of systemically important financial institutions in good times as well as bad, is necessary to support policy changes," the report said.
The board's recommendations cover areas from supervisory powers to horizontal reviews, stress tests and macroprudential surveillance.
The board recommended an expansion of supervisory powers.
"Since the crisis, the need for tools such as increased liquidity requirements, large exposure limits, imposing dividend cuts, requiring additional capital etc. have come to the forefront," its report said. "Given that a full suite of powers is critical to a supervisor executing their role, the inventory of required tools should be updated."
Separately, the board called for a more in-depth discussion of the use of horizontal reviews and to develop a way to share results of domestic horizontal reviews with international regulators to determine which supervisory issues are receiving more attention in other countries.
It also called on the Basel Committee on Banking Supervision to conduct a peer review of its 2009 paper on stress-testing practices.
"Both the financial industry and the supervisory community are highly supportive of these tests," according to the report. "It would be beneficial in the future to a more patterned approach (supervisors and firms) to stress testing. A mutual approach to things like systemwide reverse stress testing, and common scenario development, can make this an even more powerful tool for identifying risks in the future."
The board also urged supervisory authorities to have a well-developed macroprudential surveillance approach designed to identify trends and developments that might harm its firms' risk profiles.
"Leading up to the crisis, the forward-looking surveillance functions at some supervisory authorities were either nonexistent or failed to work," the report said. "From a surveillance perspective, frequent discussions with active players in the market including nonbanks, can help to develop a fuller view of what trends are developing and why."