17 April 2023

SSM's McCaul: Rising to the challenge: the role of boards in effective bank governance

Effective governance has been a priority of our supervision for several years, and will continue to be in the years to come. As part of our work on this priority, we are carrying out an update of our supervisory expectations on governance

Today’s seminar is a wonderful opportunity for dialogue between you, as non-executive directors, and us, as representatives of the supervisory community, on what constitutes effective bank governance, especially in the current environment. Indeed, if ever we needed a reminder of the importance of effective governance, management oversight and accountability, the past month has provided one in spades.

While we are looking forward to the results of the reviews that are being conducted by the US authorities, there are already some discernible themes emerging – in particular with regard to the failure of Silicon Valley Bank, or SVB – which are of the utmost relevance to our seminar on governance today, and the importance of which cannot be stressed enough. These are proper board oversight, having sufficient banking and risk management expertise in the board, and setting the right incentives in driving strategy while also recognising and mitigating risks. Of course, the fact that SVB did not have a Chief Risk Officer for most of 2022 was most certainly not sufficient.

In my remarks today, I will cover three main areas.

First is the obvious starting point: why we continue to place strong governance and comprehensive risk management at the heart of our supervisory priorities.

Second, I will explain our approach to addressing deficiencies in the functioning, oversight and composition of the boards of the banks that we supervise.

Finally, I will highlight our expectations in areas related to our supervisory priorities, such as capital planning and risk data aggregation, IT and cyber risk, and diversity.

Governance in times of change and uncertainty

Effective governance has been a priority of our supervision for several years, and will continue to be in the years to come.^[1] As part of our work on this priority, we are carrying out an update of our supervisory expectations on governance.^[2] Today’s seminar is an important opportunity to listen to the industry as we fine-tune those expectations, and marks one of many milestones along the way.

Particularly in the current climate, it is essential for banks to have strong and effective governance. A bank needs a board that can steer it through calm and stormy waters alike, setting the compass on the strategy for the bank, while ensuring a sustainable business model and monitoring risks in a forward-looking manner.

In today’s environment, backward-looking indicators of risk might be misleading. It is therefore more important than ever for boards to be vigilant. Boards need to take a proactive approach to identifying emerging risks and trends, assessing potential impacts on the bank, and taking appropriate actions to mitigate them.

Your role as non-executive directors is critical to setting the right tone within the boardroom in terms of openness, challenging the management, creating an inclusive atmosphere in which probing questions and rigorous analysis are welcomed, and promoting a strong risk culture by setting appropriate incentives.^[3]

We see you as our eyes and ears at the table. Fostering that culture of transparency and constructive challenging of ideas is essential for ensuring that the risk profile remains consistent with the risk appetite. Challenge is not something that is just for the sake of challenge. Around the board table we need the right level of expertise and intellectual discourse for such challenge to be effective. An isolated board which does not invite different perspectives into the boardroom, and which is dominated by a handful of individuals, risks instead inviting a very real enemy of effective debate: groupthink. Groupthink is slow to recognise changes in the weather; it cannot visualise the storm ahead to see the risks which strike at the heart of its business model. For banks to safely navigate these dangers, we need independent directors to be thinking about how they can facilitate boardroom discussions that fully reflect the diverse perspectives around the table.

Internal governance and risk management continue to be a cause of concern for us, despite the progress made in recent years.^[4] The results of the 2022 Supervisory Review and Evaluation Process (SREP) reflect those concerns, with 73% of institutions assigned a score of 3 for internal governance, indicating room for improvement across the board...

 moe at SSM

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