Supervisors on Supervision

“I would define governance, basically, as managing complexity and credibility. You only can go into a regulator and say, ‘we’re complying with the laws,’ if in fact you have a governance structure that does that. And you can only go to a shareholder’s meeting and say, ‘our product/business is safe, reliable, etc.,’ if you have a governance program that ensures that.”

Analysis from economists at the Office of the Comptroller of the Currency demonstrates the importance of ‘M’ [in CAMELS ratings] and how it can help predict future bank performance and risk. The importance of ‘M’ explains why regulators have repeatedly implored banks to ensure they only accept risk commensurate with their ability to manage and mitigate that risk. 

If one accepts the premise that ‘effective management is not infinitely scalable,’ enhancing and expanding management capabilities remains prudent for banks of all sizes, as does recognizing that there are business and regulatory consequences to failures in management, regardless of bank size.

A bank of any size can be viewed as [too big to manage], if its management is not up to the task. Of course, that task becomes more difficult as the size and the complexity of the institution increase — but not impossible. The challenge lies in enabling management to oversee institutions of increasing size and complexity with greater competence. 

Bank management and regulators need better means of assessing complexity in a predictive manner that enables them to make better decisions and produce better outcomes for shareholders. That is, we need to improve how we assess ‘M’ — proactively, in advance of failed risk governance and supervision. 

While this discussion has focused broadly on financial risks and outcomes, improving management’s ability to understand complexity, and to act effectively when faced with it, has perhaps greater import in the context of managing non-financial risks — such as operational, compliance and reputational risks — that also have a direct impact on a bank’s performance and survival.”

“There are limitations to what a board can do. They don’t manage the company. But the more information you can get to them in discrete increments that allows the firm to develop a reputation for good governance and compliance, then the less the board will probably have to do.”

“Science and technology can help industry participants to push the upper bounds of management capability much further today than ever before with predictive computing capabilities and better risk analysis tools. 

Tools and expertise need to become more accessible and more mature for a wider number of industry participants to benefit, and so bank managers and regulators can better understand how complexity affects the performance of organizations in predictable ways, thus enabling them to make better decisions and to avoid lapses in consumer protection or even economic crises.”