Banks’ Board Members and Policy Makers: A Conversation
Report on the online seminar held on 28 May 2021
by Nikita Divissenko
The speakers provided a number of insights into (i) the evolution of the banks’ internal governance, (ii) the preparedness of the bank boards to face the new challenges, including Covid-19 crisis, and (iii) the banks’ role in sustaining the new European economic recovery.
(i) Evolution of the banks’ internal governance
Andrea Enria outlined the key aspects of the evolving internal governance, emphasising the essential role of the increasing quality of the boards, and awareness of board members of their role and influences on banks’ culture and governance. He noted the increasing number of non-executive board members (>80%), and the increasingly robust knowledge and experience of non-executive board members. Board expertise has been expanding and diversifying across new risk areas. Importantly, the number of non-executive board members with sole expertise on IT has doubled in recent years. The study conducted by the ECB found a correlation between the presence of IT expertise on the boards and the number of cyber-attacks. In addition, Andrea Enria emphasised a number of critical aspects that require improvement, including the limited oversight capacity of non-executive directors. Moreover, diversity remains a significant problem: one-fifth of the supervised banks does not have a policy, whereas women still make up for less than a one-third of non-executive and less than a fourth of executive board members. Looking ahead, Andrea Enria noted the need to further harmonise the fit and proper assessment across the Banking Union.
(ii) New challenges
Carlos Torres Vila focused on the banks boards’ role in addressing the new challenges. Preparedness and robustness of the banks’ internal governance structures for swift response to Covid-19 has been crucial for the banks’ role in the global effort to tackle the crisis. Amidst the positive outlook on recovery, Carlos Torres Vila underlined a number of challenges, that require close oversight: high liquidity, new entrants (BigTech and FinTech), accelerating digitalisation, low rates and changing credit quality. In the longer run, technological disruption represents both a crucial challenge and a great opportunity. ‘The age of opportunities’ prompted by new technologies, including AI, robotics, and DLT (distributed ledger technology), lead to exponential change in every industry. Effective boards not only need to oversee management and risk factors, but need to be forward looking to ensure banks adapt to change. The boards need to understand the change, the technology, and need to be able to see and allow for innovation and its implementation. Risk avoidance is a problem in times of such drastic change. Additionally, Carlos Torres Vila emphasised that evolving board composition reflects the changing environment, and concurred with Andrea Enria on the persistent issue of boards’ diversity.
(iii) Banks’ role in the new European economic recovery
Elena Carletti asked the panellists to reflect on the role of banks in the next generation EU. Carlos Torres Vila underlined the need for public funds to be used to create incentives for private investment, since the higher levels of private investment positively correlate with higher GDP. Banks role, thereby, would be critical in employing their reach to provide access to the funds, advice, and amplify recovery efforts with additional financing. From the supervisory perspective, Andrea Enria reiterated the importance of solid credit risk management. The upcoming recovery will be robust but uneven – some sectors will bounce back from the crisis less well than others. It is crucial for banks to identify and support counterparts who will benefit from the future initiatives, but also identify counterparts who might not be able to repay, and implement early measures.