The financial crisis highlighted that for many banks, governance had fallen short. Change was necessary. Hearing the call to action, bank directors, executives, and supervisors have begun a journey toward strengthened governance. Supervisors are pushing for deeper board engagement and working to understand governance effectiveness. Boards are engaging more on strategy, risk, capital and talent, and have improved their ability to oversee the overall control and risk environment. And management understands its duty to support board oversight.
Boards remain at the center of governance. Bank directors have a major role to play in helping their institutions navigate the challenging regulatory, political, and economic waters that lie ahead. Never passive observers, directors today are even more involved in overseeing and guiding management, contributing materially to the creation of trustworthy institutions that perform well over the long term.
Bank directors have proactively engaged key external stakeholders, notably regulators and long-term shareholders. Increasingly, this communication is two-way: directors listening and reacting to external views, while helping shape their constituents' expectations. All parties are working towards the common goal of a strong international economy bolstered by a thriving, well-functioning banking sector.
The changing shape of international banking and the future of Europe
BGLN participants met on November 28, 2017 in London. They were joined over dinner by Lord Jonathan Hill, former European commissioner. Banks remain under pressure to focus on core businesses, reduce costs, and update their technology, while still in the midst of implementing a range of new regulations. European banks, particularly in wholesale and investment banking, face global competition, while retail banking faces the greatest threat of disruption from new entrants. These pressures reopen debates about the relative benefits of simplicity and scale in various businesses. Participants discussed these issues, as well as Brexit, subsidiarization, and other challenges for international banking models, including the implications of Brexit for European operations.
Data governance: securing the future of financial services
Data is an increasingly valuable asset. Technology is enabling the creation of more data, improving the ability of financial institutions to gather, store, and analyze it. Protecting that data from cyber-attacks or breaches of customer privacy is imperative. Getting the balance right between managing the risks and grasping the opportunities increasingly requires a strategic approach to data governance and attention from boards of directors. On October 11th and 12th participants in the Bank and Insurance Governance Leadership Networks – directors, executives, regulators, and subject matter specialists – met in New York for the Financial Services Leadership Summit to discuss related issues. ViewPoints synthesizes key themes emerging from discussions, before, during, and after the Summit.
Innovation in banking and the changing financial services policy landscape
Rapid advances in technology, changing customer expectations, and competitive pressures are driving bank leaders to identify opportunitites for innovation. But encouraging innovation in the context of large, international institutions, which are closely supervised, is not easy. Nor is it easy for boards to understand what is possible and how quickly and in what areas they should be investing in innovative approaches. Regulators are determining how best to encourage responsible innovation, while politicians debate significant changes to regulation in the US and internationally. BGLN participants discussed these and related issues over the first half of 2017, culminating with a meeting in New York on June 8.
Banking in transition: overseeing non-financial risk in the midst of technological and business model transformation
Non-financial risks have been among the greatest sources of risk for large banks since the financial crisis. Conduct and compliance issues, systems failures, and cybersecurity have risen to the top of risk committee agendas, but remain difficult to monitor, measure, and predict. Even as technology offers new mitigation tools, the transformative changes underway in large banks are creating new and different sources of non-financial risks. As banks overhaul systems, operations, business models, and structures to become more agile and efficient, the pace and scale of change is creating execution risk. As banks navigate their way through this transformation, boards and executives are identifying ways to improve management and oversight of these risks.
Cyber risk management: the focus shifts to governance
Cyber risk has attracted a great deal of attention in recent years, and banks, who are among the most-targeted, have made substantial investments in cybersecurity. Despite this investment, cyber vulnerability continues to present unique challenges for risk management and oversight. As technology is increasingly embedded in all aspects of banking, cyber risk is expanding, requiring greater board attention. In response, boards are taking steps to improve governance and oversight of cybersecurity. At the same time, regulatory authorities are becoming increasingly prescriptive in defining cyber risk expectations and emphasizing the role of governance and controls.
Revolutionary change is transforming the financial services landscape
In October 2016, Tapestry Networks and EY hosted the Financial Services Leadership Summit, which brought together more than 80 financial sector leaders to discuss the extraordinary changes happening across the financial services landscape. Participants included directors and executives of the largest global banks, insurers, asset managers, regulators, fintech entrepreneurs, and other subject matter experts. ViewPoints synthesizes these and other discussions with participants in the Bank and Insurance Governance Leadership Networks over the second half of 2016. Technology is lowering the barriers to entry for emerging competitors and transforming the way incumbents do business, rapidly altering the competitive marketplace. At the same time, unprecedented macroeconomic and geopolitical conditions, driven by underlying structural changes, are creating a degree of uncertainty about the environment through which leaders must guide these institutions. Regulation will need to continue to evolve in response. A summit participant summarized, “Revolutions only get called with hindsight … We are in a period of accelerated evolution that will be called a revolution in financial services.”
Accelerating the technological transformation of banking
Technology is reshaping the competitive and operating landscape for banks. They face competition from tech-enabled competitors with new models, and pressure to reduce costs and improve efficiency. As technology becomes increasingly central to all facets of bank strategy and operations - from compliance and data analysis to the customer interface - bank boards need a more holistic, strategic view of technology investment. Regulation meanwhile, is slowly adapting to the changing environment.
Clarifying supervisory expectations for non-executive directors and boards
Governance is now a cornerstone of supervision. As such, effective boards are important to supervisors, who have been raising expectations for boards and directors, accompanied by increasing calls for board and individual accountability.
Over the last several months, directors and supervisors shared perspectives on expectations for bank boards and directors, including roundtable discussions in New York and London. These discussions highlighted that while directors accept heightened expectations for engagement, including a significant time commitment relative to other corporate boards, there remain opportunities to improve clarity regarding the role of a bank board and realistic expectations for what it can accomplish.
The future of banking in Europe: regulation, supervision, and a changing competitive landscape
All large banks continue to face political, regulatory, and market pressure. European banks face particularly daunting challenges. As Europe pushes for a banking union, the ECB’s role as a single regulator and supervisor for the Eurozone becomes an important player in the transformation of European banking. Having completed its first year, it wants to establish itself as a strong regulator and ensure the stability of the European banking system. At the same time, many European banks are faced with the need to fundamentally address their business models in the context of a broader policy debate about what banking structures will best support European economic growth.
Building sustainable models for banks and their investors
At the seventh BGLN Summit, participants focused on how banks are adapting strategies, business models, and operations to a changing competitive landscape. Non-executive directors and senior executives from among the largest global banks were joined by regulators and other participants representing investor and other stakeholder perspectives for discussions on some of the challenges and opportunities for banks as they seek to improve returns and attract investment. This ViewPoints synthesizes themes emerging from the summit discussion including how regulation is driving changes to bank structures, the need to build more agile banks to attract investment, increasingly active investors and requests for board-shareholder engagement, and potential systemic risk stemming from reduced market liquidity.
Addressing conduct and culture issues in banking
Persistent misconduct caused commentators, bank leaders, and regulators to question whether something is fundamentally wrong with the culture of banks and banking. BGLN discussions over the last six months, including two meetings in March, focused on how bank boards, management, and supervisors can address cultural issues within their institutions and across the industry. This is a long-term, multifaceted challenge that will require changes to hiring, accountability, incentives, governance, and business models.
Too big to govern? Expectations for bank boards continue to evolve
A number of conduct and compliance issues have emerged in banking, even for banks that have reputations for being well managed and well governed. This has renewed questions about the governability of the largest, most international, and most complex banks, and the roles and responsibilities of group and subsidiary boards.
Leading the digital transformation of banking
Regulators, directors, and executives all concluded that digital transformation is now one of the most critical strategic issues for bank leaders. The competitive landscape is changing as new and existing players adopt digital models. Not all boards have fully appreciated the scale of digitization as a core strategic issue, and therefore may not be spending enough time discussing the implications, but the opportunity for banks is substantial.
A new standard for effective board governance
Expectations for bank boards increased during and immediately following the financial crisis. While continuous board-supervisor engagement is essential, both are conscious of the need to balance a focus on regulatory compliance with the core roles of boards: ensuring management is effectively executing the agreed strategy and protecting the reputation of the bank. Boards therefore, need to hold senior management accountable for the firm’s performance and controls and ensure there is sufficient depth and succession planning in place, while offering support to management under continuing regulatory pressure.
Strengthening board-supervisor relationships
Bank Governance Leadership Network participants have discussed increasingly "intensive" supervision for several years, including supervisors' increasing engagement with senior management and boards. Supervisors and directors are still learning how best to establish trust-based relationships that will allow for constructive, candid engagement. This ViewPoints outlines practical steps that can help cultivate these relationships and focus board-supervisor dialogue on core issues.
Increasing clarity in the global regulatory agenda: focusing on implementation and implications
At the fourth Bank Directors Summit, participants recognized the need to stop waiting for the pendulum to swing back and accepted some 'hard truths' about the regulatory environment banks will face in the next decade. This ViewPoints covers this new regulatory reality, including increasingly clarity that: global regulators are working towards minimum standards, not a level playing field; national approaches to regulation are challenging global banking operations; and regulators are intensifying supervision, particularly for banks designated systemically important.
Reforming bank culture: transforming values into action
Since 2009, Bank Governance Leadership Network (BGLN) participants have been discussing the need to rebuild their industry's reputation. A key component is culture reform, with bank leaders looking at ways to engender real change, including: identifying levers boards have in shaping change; rebalancing stakeholder interests, with customers coming first; and improving behavior monitoring to provide insight into bank culture.
Understanding and assessing governance effectiveness: a challenge for supervisors
Many supervisors have a stated goal of developing a better understanding of governance effectiveness within the institutions they supervise. ViewPoints outlines the challenges this presents, but also the steps that can assist supervisors in effectively fulfilling this objective, including developing a shared understanding of the role of the board; developing trusting relationships over time, via a mix of formal and informal interactions with directors; and ensuring supervisors are equipped for the task. Discussions highlighted broad agreement that regulators and supervisors are putting too much burden on directors, making it hard for them to focus on the truly important issues of strategy, risk, and talent.