- Jay Maharjan
Whether in North America, Europe or in Asia, banks are going through major transformation. While parts of Asia are looking bullish, the story is different in the United States and in Europe. Storied demise of the banks like Indymac in the United States points to the new need for reform within corporate governance in the banking sector.
The new role of the Board
The sixty four thousand dollar question is – whose interests should the bank boards serving? The boards traditionally focused on increasing shareholders value and ignored the risks that would take place at the depositors end. All was well until the hell broke loose – that we saw with 2008 bailout mayhem. In hindsight, if the banking sector was regulated in the manner that the boards were required to monitor closely the credit risk, trading risks and be aware of the activities of the executives – appropriate measures, decisions could have been taken at the right time.
This begs the question – What types of information that the board members need to possess to make appropriate decisions at a given time? In most cases, boards are not fully aware of the over all stress tests that the banks that they represent go through. In this era of rapid innovation and implementation of new products and services – the boards need to be aware of the risks associated with their products and services.
Changing roles of banks
The banks of today are different from the ones from yesteryears. The level of risks that banks are taking is obviously relative to the economies and the geographies they represent – but, this past decade saw massive risks being taken by banks in all parts of the word. From the outside, the perception remained the same that there was vested interest for banks to safeguard the depositors. In reality, some costly mistakes were made, including experimenting in the futures market to investing in private equity – heavily influencing, inflating the market value. The prime example is what happened in the real estate market in the United States and Europe.
Boards need to protect the overall banking system and not just the shareholders. A good banking system is the backbone of a sustainable economy – and the banks’ vested involvement in influencing the market is not good for the economy.
Greater Independence for regulators
There are some strong measures being taken in the United States to give greater independence for regulators. In many parts of the world, including in the parts of the EU – some of the processes, data were not consistent (case in point, according to research done by INSEAD, under political pressure, European stress tests conducted last year didn’t disclose the full extent of the risk in the European Real Estate market, the disparity in the data was as high as 35% between what The Economist reported versus what the regulators disclosed ). Wrong data leads to misguided information – leads to the basis for wrong dicisions by the executives. It is critical that regulators get to perform their tasks independently and the boards within the banks have access to relevant, accurate and timely information on the state of institutions that they govern.Start Slide Show with PicLens Lite