Soundness and Safety of Major Banks Calls for New Paradigm in Relations Between Banking Supervisors and Bank Boards of Directors

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Group of Thirty releases report on banking supervision and corporate governance of global financial institutions.

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We must enhance the effectiveness of boards and supervisors by making a long-term commitment to closer, more open communication and cooperation.

Far-reaching changes are now needed in the ways supervisors and the boards of directors of financial institutions work together to improve the safety and soundness of banks, stressed the Group of Thirty (G30) today. The group of financial leaders called on boards of major financial institutions and supervisors to make a long-term commitment to building and sustaining closer, trust-based relations.

Jean-Claude Trichet, G30 Chairman and former President of the European Central Bank, stated: “We propose a new paradigm between bank supervisors and the boards of banks. Trust in bank governance has been eroded and it needs urgent repair. That means more effective supervision. Banks and financial institutions should not resist this reset in relations. Instead they should work to make the new paradigm work to their mutual benefit.”

Speaking at a London press conference, Mr. Trichet said, “Experience since the financial crisis shows that new banking rules and regulations are not sufficient. Improving governance requires careful nuanced judgment by banking supervisors, and more active leadership by boards of directors. Achievement of effective supervisory outcomes will depend on the establishment of better relationships of mutual trust between supervisors and boards.”

The G30 today published a report, A New Paradigm: Financial Institution Boards and Supervisors, which responds to requests from members of the Financial Stability Board for a deeper investigation into the relationships between boards and supervisors. These requests followed FSB and G30 discussions of the April 2012 G30 report, Toward Effective Governance of Financial Institutions.

Both reports have been developed by a G30 steering committee chaired by Roger W. Ferguson, Jr., President and CEO, TIAA-CREF, and former Vice Chairman of the Board of Governors of the U.S. Federal Reserve System. He stated, “We are seeking to improve the safety and soundness of major financial institutions and to restore public trust in bank governance. Such improvement cannot be imposed through new regulations alone. We must enhance the effectiveness of boards and supervisors by making a long-term commitment to closer, more open communication and cooperation.”

While the new paradigm emphasizes more robust and continuous exchanges of views between supervisors and board directors, the G30 noted that its recommendations do not reduce, and should respect, the importance of management’s regular and frequent interaction with supervisors. It underscored the need for a vibrant triangular relationship between supervisors, boards, and management.

Key Roles of Supervisors

Today’s report is based in part on interviews with more than 60 senior supervisors and board members of many of the largest, most complex global or domestic banks in 15 countries. The interviews and analysis were led by Project Director Nick Le Pan, former Supervisor of Financial Institutions of Canada, with support from James Wiener, Davide Taliente and Dominik Treeck of the consulting firm, Oliver Wyman.

Many of those interviewed emphasized that international and domestic standard setters need to do a better job in making sure that the supervisory implications of new regulatory initiatives are understood and resources to adequately implement those initiatives are provided. Supervisory implications must also be taken into account in policymaking.

The G30 report stresses that, for supervisors to be most effective within the newly proposed paradigm, their roles and stature within many governments should be substantially enhanced; their independence must be assured; their pay levels need to be sufficient to attract top quality people and retain them; and training needs to be strengthened.

John G. Heimann, a G30 steering committee vice chairman, founder of the Financial Stability Institute, and a former U.S. Comptroller of the Currency, said, “Supervision is more than checking compliance with rules and regulations. It is making judgments about the risks inherent in institutions, the quality of their management and governance systems, and intervening when necessary. Enhanced stature for the job of supervision is needed and will contribute to effective engagement with global banking organizations at the most senior levels and to the ability to attract and retain staff. High-quality supervision is a lot less expensive than a financial crisis.”

More Engagement by Boards

Steering committee vice chairman Sir David Walker, Chairman of Barclays plc, said, “Supervisors need to be better informed. They must make judgments on whether boards are doing an effective job. Boards can also benefit from the insights that supervisors have about the institution itself, governance trends and peer comparisons.”

Sir David added, “For this new paradigm to work, boards need to be proactive and take supervisory relations seriously. Boards need to be open to supervisors so supervisors can do their job. Boards need to focus on risk culture. Boards also need to be adequately resourced and to include members with the right mix of skills and experience. More time commitment by board members is inevitable. But the potential pay-off is large.”

Addressing Corporate Culture and Reputational Risk

G30 steering committee vice chairman William R. Rhodes, President and CEO, William R. Rhodes Global Advisors, and former Senior Vice Chairman, Citigroup, stated that the new G30 report provides detailed recommendations with regard to corporate culture. He emphasized, “Every bank has its own culture. Boards and supervisors must better understand cultural factors, including reputational risk, that underpin effective governance. Culture is about behavior. It is about how individuals and groups act even when they are not being observed. A good culture is reflected in the actions of a company’s employees. A problematic culture will also be reflected in how a firm and its employees perform. Making judgments on culture is subtle, complex, but essential and needs to be elevated in discussions between supervisors and boards.”

Mr. Rhodes said, “Far too little attention has been paid to reforming culture in many institutions. Boards must be proactive in understanding the culture of their organization, and how that translates and supports their business model. Supervisors should be prepared to share their observations about an institution’s risk culture with the board. Supervisors should be alert for serious culture issues that raise alarm and need correction. But because this is such a complex issue supervisors and policy makers should be cautious about writing rules or guidance about culture, and they should set realistic expectations about what they can achieve.”

International Dimensions of Reform

The G30 report not only looked at the domestic setting, but made recommendations about coordination between supervisors when addressing global banks. It stated in part, “The G30 believes that the principal international policy making bodies including the Basel Committee on Banking Supervision, the Financial Stability Board, the International Monetary Fund and others do not have adequate representation of senior supervisors in their policy making committees and initiatives. We believe this also true for policy making within local jurisdictions. We would strongly encourage such bodies to increase representation from senior supervisors and consult with supervisors throughout the policy making process.”

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Stuart Mackintosh
Group of Thirty
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