G-30 call for better scrutiny of bank boards

Financial leaders urge supervisors to assess the culture of banks

The supervision of boards of directors in financial institutions needs to be improved, according to a report released by the Group of 30 (G-30), a think-tank of former financial leaders.

The report, entitled 'A New Paradigm: Financial Institution Boards and Supervisors', calls for changes in the ways supervisors and boards of directors work together. In particular, this includes supervisors having a greater role in assessing the culture of firms, as well as boards focusing more on risk culture. Boards also need to be more transparent with supervisors.

"Exchanges of candid and detailed views between supervisors and board directors, which could have a profoundly beneficial impact on the ways banks are run, are not in many cases taking place. This needs to change," said Jean-Claude Trichet, G-30 chairman and former president of the European Central Bank, at a press conference at the Bank of England in London on Monday.

"Experience since the financial crisis shows that new banking rules and regulations are not sufficient. The exercise of judgment by banking supervisors, coupled with more active leadership by bank boards of directors, is essential to good governance," Trichet added.

Roger Ferguson, former vice-chairman of the board of governors of the US Federal Reserve System, said that forming this relationship would not be an easy task.

"We do not underestimate the difficulty in attaining this goal, it will require major changes in approach for each party. But we see it as essential to improving the safety and soundness of major financial institutions and restoring public trust," he said.

Ferguson added governments must review how they support the supervisory function: "Supervisors are not accorded the stature and independence they need to do their work well. Better training is needed. When compensation is insufficient to attract and retain the best people for supervisory roles, more resources should be found."

There also needs to be a better understanding among both boards and supervisors of cultural factors in effective governance, the G-30 report found.

William Rhodes, former senior vice-chairman at Citigroup, said too little attention had been paid to reforming culture in many institutions. He added 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," he said.

Bank boards also have a role to play.

"Boards should identify and deal seriously with risky culture, make sure their compensation practice supports the desired culture, and monitor risk culture," said Rhodes. "A culture that places too great an emphasis on profit maximisation and risk is one that can damage the financial strengths and reputation of the bank – and once a reputation is lost, it is incredibly difficult to restore it."