Supervisors can bring financial institutions unique insights on emerging systemic risks as well as comparative data across the industry.
Supervisors that more fully comprehend FI strategies, risk appetite and profile, culture and governance effectiveness, will be better able to make the key judgments their mandate requires.
Most FI boards applaud this expansion in the supervisors' focus from control process details to include a broader grasp of issues and context. To be effective, however, this expansion requires regular interaction between senior people in supervisory agencies and boards and board members.
Supervisors need to broaden their perspectives to include FI strategy, people, and culture. They should focus their discussions with senior management and the board on the real issues – through both formal and informal communications.
But they must also maintain their independence and accept that they will at best have an incomplete picture. Similarly, they shouldn't try to do the board's job.
According to the G30, there are several things supervisors must do if they are to play an effective role in bank governance:
- Understand the overall business, strategy and risk appetite of each FI, and focus on FI reactions to real-world events.
- Develop a sophisticated appreciation of how corporate governance works, including governance structures and processes, board composition and new director selection, and the internal dynamics of effective FI boards.
- Develop trust-based relationships with senior executives and directors by regularly engaging them in an informal dialogue on industry benchmarks, emerging systemic risks and supervisory concerns.
- Set realistic expectations of FI boards to ensure boards and management govern effectively. Adjust regulatory guidance accordingly.
- Avoid overstepping the supervisory role and allow the board and management to shoulder their respective responsibilities.
Unfortunately, in the policymaking debate, the qualitative aspect of supervision is sometimes overshadowed by quantitative, rules-based regulatory requirements. Clearly, new capital, liquidity, and related standards are essential to a more stable global financial architecture, but enhanced oversight of the performance and decision-taking processes of major FIs is also essential.
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