The regulatory framework surrounding the financial sector has evolved significantly since the onset of the 2008 financial crisis, with a more than exponential increase in the number of requirements faced by credit institutions, which has resulted in higher levels of capital and liquidity.
Thanks to the authorities’ dedication in designing this set of regulations and the global effort by banks, particularly Spanish ones, to implement them, the latter are now in a solid position to face the potential effects that the health crisis caused by Covid-19 may have on their balance sheets.
Bank governance is one of the aspects that has evolved the most over the last decade. During these years, robust corporate governance frameworks have been implemented, including appropriate credit granting policies and rigorous risk monitoring and control systems that allow for anticipating stress situations. Remuneration schemes have also been established to align the interests of shareholders with those of management. Furthermore, transparent and simple corporate structures have been developed, and organizational structures have been designed based on a proper definition of roles and responsibilities to minimize potential conflicts of interest within entities. Finally, banks have invested in systems that allow them to manage the information needs of various stakeholders, from senior management to investors and, especially, supervisors.
In recent years, the analysis of corporate governance has been a priority for supervisors, particularly for the European Central Bank (ECB) in the case of significant institutions, leading to several recommendations that banks have implemented as they were communicated.
Since March 12, almost all supervisory and regulatory authorities have, without exception, published their intention, on the one hand, to relax the interpretation of certain rules to ensure the flow of credit to families and businesses and, on the other hand, to ease supervisory intensity so that entities can concentrate their resources on managing the exceptional situation we are experiencing.
Regarding supervisory work, while it is true that some non-essential initiatives have been postponed, as recommended by the European Banking Authority (EBA) in its statement of March 12, banks have noted a very significant increase in the intensity of information requests from supervisors, both in terms of volume and deadlines. These deadlines are so peremptory that they sometimes conflict with the quality of the content.
Supervisory authorities need information from banks for the proper exercise of their control functions. These information needs should, as a general rule, be inversely related to the sophistication of the corporate governance framework. Thus, it would be expected that industries with robust corporate governance, subject to continuous and exhaustive supervision, such as banking, would require less data-intensive supervision and more focus on policy analysis.
Although the origin of the health crisis that banks will have to face in the future is unprecedented, the channels through which potential losses will materialize will be the traditional ones, mainly credit risk and liquidity risk.
In this regard, it is important to remember the notable improvement in banks’ corporate governance frameworks and their capacity to manage these risks in recent years; improvements that allow supervisors to extend their trust in how entities are addressing the coronavirus crisis.
The banking industry is aware of the supervisor’s need to monitor the evolution of entities in a stress situation, but a balance must be found to harmonize supervisory and management efforts. An excess of supervisory requirements does not necessarily lead to better supervision or greater capacity for entities to manage risks, which is what concerns us most now.
Only coordinated action between the supervisor and the supervised will ensure that joint efforts yield a result that improves upon the sum of its parts and avoids frictions that distract much-needed resources at this time to overcome the major challenges we face in the immediate future. The effort already made by banks to strengthen their good governance is a cornerstone upon which to build a framework of trust and best practices in supervision during this very complicated period we are experiencing.
Pedro Cadarso Palomeque, Advisor to the Spanish Banking Association
