« October 2007 | Main | December 2007 »
The three pillar approach
The three pillar approach to banking supervision rests on three main pillars:-
1. A ‘self-discipline’ pillar, whereby sound corporate governance and risk management practices are encouraged by the central banks.
2. A ‘market discipline’ pillar, whereby central banks seek to reinforce the incentives for depositors and other creditors of banks, and the market generally, to exercise scrutiny of banks and reinforce bank self-discipline; and
3. A ’regulatory discipline pillar’ whereby central banks apply some prudential requirements on banks, such as minimum capital ratio requirements and limits on lending to related parties, to further encourage sound risk management. Central banks also need to monitor banks on continuous basis, meet with senior management of banks annually and have extensive powers to deal with bank distress or failure events.
Central banks need to review these three pillars taking into account national and international developments in banking and changes in the structure of the banking system. In this context, it is necessary to review the self-discipline pillar, by looking at whether corporate governance arrangements in banks continue to be sufficient to ensure a strong level of risk management. Central banks need to ensure that corporate governance arrangements are effective - not only for the benefit of the shareholders, but also for the benefit of the bank depositors and other creditors in addition to the benefit of the local banking system in its entirety.
This recognizes the fundamental role that governance plays in a bank – and in any organization for that matter. Sound governance provides the foundation for everything else, including maintaining systems and controls for identifying, monitoring and managing business risks effectively. Conversely, poor corporate governance tends to undermine any other efforts to promote a strong risk management culture in a company, including a bank.
Promoting Sound Corporate Governance and Risk Management
Amongst the common policies which central banks normally adopt to promote sound corporate governance and risk management in banks:
Taken together, these policies go a long way in reinforcing existing incentives for banks to maintain strong corporate governance practices. However, in view of the importance we attach to corporate governance as the foundation for sound risk management in banks, we are currently reviewing aspects of bank governance arrangements, with a view to assessing the scope for further improvements.
These are important factors in shaping the dynamics of bank management and have important implications for bank governance structure. In particular, the nature of bank ownership has a significant effect on the roles of directors and senior management of banks, on the nature of potential conflicts between the interests of the parent banks and the interests of the local banks, and the capacity of local banks to maintain core operations on a stand-alone basis if the parent bank fails or otherwise becomes dysfunctional.
With these factors in mind, the kinds of issues the central bank is taking into account in its review of bank corporate governance include:-
1. The role of a board of directors of a bank that is wholly owned by another bank. This includes the extent to which the local board places reliance on the parent in satisfying itself on the local bank’s system and controls, the interaction between the local board and parent board, and the extent to which local senior management is accountable to the local board.
2. The role of independent directors, the acceptable minimum number of independent directors on a bank board, and what an acceptable level of independence should be. Consideration is also being given to the roles of independent directors in reviewing the dealings between a bank subsidiary and its parent, and in assessing the bank subsidiary’s capacity to operate on a stand-alone basis.
3. The role of board committees, especially audit committees and risk management committees, and whether these should be mandatory.
5. The scope director attestations in bank disclosure statements, including whether attestations should be widened to include reference to outsourcing arrangements and some other specific risk areas.
6. Whether the CEO of each bank should be required to make attestations in respect of their bank’s risk management systems and related matters.
7. The independence of bank auditors, including whether additional requirements might be appropriate to ensure an adequate degree of auditor independence.
8. Whether it might be appropriate for the central bank to provide high-level guidance to bank directors, setting out our expectation of their role in overseeing their banks.
9. The nature of the Central Bank’s interaction with bank directors and auditors.
Focusing on Authority and Accountability of Bank Boards
The ‘bottom line’ in all this, from the central bank’s perspective, is to ensure that the local bank board’s have unambiguous authority and capacity to ensure that their banks are being managed prudently in the interests of their banking systems in its totality.
Central banks must ensure that their bank’s management teams are in the driver’s seat, within the constraint of being part if a wider banking group if ever. The boards must ensure that their banks are able to maintain core business functions if the parent bank if other outsource functionality provider were to fail. And the boards must be fully accountable for responsibilities.
The Banking Consultants and Educators, J. Sifri Consulting Services www.graincon.com
A recent poll revealed that General Michael Aown is the Lebanese favourite candidate to win the forthcoming elections. General Aown, known to be a man of peace, has returned from France after a long exile following the take over of the presidency by President Emile Lahoud. A close allied to the Shi’a and holder of the American Nationality, General Aown today enjoys a wide popularity in Lebanon and is expected to win the forthcoming presidential elections in Beirut.
Quoted from the Internet with permission:-
"Today, I met a fine fellow from Lebanon who moved to Canada and has been here only 22 days.
We spent almost two hours talking, about many things, about his new life, about our work, about his difficulty speaking english, about family, about foods that we each liked,etc.
We did not talk about religion, or politics, or of any ideologies.
These things seemed totally unimportant in the face of the commonality of all that we shared, that, as human beings, we all desired to make a natural place for ourselves, with our families and in our communities, and in our world.
Samer, I know you recently expressed that you sometimes like to “share” your religion with others because you see it as something positive in your life.
I understand this, but I think you also understand that religion, as well as nationality or ethnicity, or any of a number of other things, too often only serves to divide us from one another.
Perhaps we should concentrate on the essential aspects of those things that we cherish, of those things we find valuable.
Some religions say there are a billion names for god, some say there is one, some even say there is no name, that god is the “unnamable” and “unknowable”.
But all these beliefs (and rational science as well) should teach us humility, and should teach us the connectedness of us all.
After meeting my new friend, I thought about all these things.
I did not know if he was Muslim or Christian or whatever.
It did not matter. Those two hours flew by, we shared many laughs, we communicated very well despite the language difficulties.
We did not need dictionaries or encyclopedias to understand one another; this was our common aim, so we managed just fine.
This is what we should be teaching our children and each other, that, for the most part, we are the same; those things which separate us are really trivial and unimportant.
To teach and profess otherwise is to promulgate untruth and hatred.
We should instead follow a different path, of wisdom, of light, of peace… "
