Danièle Nouy of ECB on the ECB Approach to Supervising Governance

While discussing the ECB approach to supervising bank governance, she outlined the tools being used by ECB. The tools included the fit and proper assessments; Supervisory Review and Evaluation Process or SREP, including risk appetite frameworks; the "deep-dive" tool; on-site inspections; and benchmarking banks from across the euro area. "All the tools I just mentioned have proven to be quite useful and we can already see that banks have significantly improved their governance and risk management," said Ms. Nouy. Banks have started to follow the recommendations on fit and proper assessments and self-assessment has become a common practice for bank boards. Banks are striving to enhance the structure and organization of their boards in line with the highest international standards. Some banks have split risk and audit committees while others have set up clear reporting lines to the risk and audit committees for certain functions. Additionally, banks have made progress in designing their risk appetite frameworks (RAFs). They have clarified the roles of the different stakeholders and internal audit functions have become increasingly involved in the independent review of their RAFs. 

Next, she discussed the ways in which banks can implement further improvements in the area of governance. The size of banks’ boards should not impede their decision-making, especially in crisis situations that require quick decisions. The collective knowledge of boards can still be improved. Banks also need to maintain an adequate level of control. Under no circumstances should banks cut costs at the expense of risk management and of the quality of risk data aggregation and reporting. It is also important that banks’ budgetary processes are aligned with their risk appetite frameworks. RAFs should be further enhanced, particularly for non-financial risks such as compliance, reputational, IT, legal, and conduct risks. Moreover, banks should work toward a balance between risk and reward and remuneration schemes should be better aligned with RAFs. Finally, data quality should be improved, especially for data underlying the risk reports presented to banks’ boards or data used in designing the IT architecture. IT and management information systems are crucial for the ability of banks’ boards to easily obtain key information on the bank’s risk capacity, risk appetite, risk limits and risk profile across business lines and subsidiaries.

Ms. Nouy highlighted that supervisors and regulators can further improve their toolkit. "Fit and proper rules are a case in point. They are an “old” part of the Capital Requirements Directive (CRD) IV, drafted under “minimal harmonization principles” and would benefit significantly from further harmonization." Policymakers should address three main issues to achieve this goal. First, all fit and proper assessments should be carried out before the candidate is appointed and takes up the new function. Second, a single methodology is needed to determine whether members of the management body are truly independent and have no conflicts of interest. At present, national law and supervisory practices on independence differ across the euro area, resulting in an uneven playing field for banks. Third, there needs to be full clarity on the definition of “key function holders.” Overall, she highlighted the importance of governance and emphasized that good governance is "a timeless asset for every bank."

Related Link: Speech

Keywords: Europe, EU, Banking, Banking Supervision, Governance, CRD IV, Risk Appetite, ECB