Florence School of Banking and Finance online seminar “Banks’ Board Members and Policy Makers: A Conversation”
Thank you for inviting me to speak today and to take part in the
conversation about the role that boards have to play in steering banks
through the challenges ahead, be it those posed by the coronavirus
(COVID-19) crisis or those that will remain thereafter. As food for
thought before our conversation starts, I will also look at how banks’
internal governance has developed in recent years. In addition, I will
highlight areas where improvements are still needed and discuss the
supervisory tools that we will use to encourage banks to further improve
the effectiveness of their boards.
Sound governance and strong
internal controls are crucial for fostering responsible decision-making
and mitigating the risks that banks face during normal times – and even
more so in times of crisis. As part of our ongoing supervision, we
encourage banks to have clearly established lines of responsibility,
adequate risk management and effective controls, and checks and balances
at every level of their organisation, starting at board level.
Boards of European banks: progress and shortcomings
supervisors, we know that over the last few years, the boards of
European banks have improved: they have become more effective, more
mindful of their role, and more likely to challenge their executive
management. The enhanced clarity that ECB Banking Supervision has
provided in terms of how we expect boards to behave seems to have raised
the bar on governance. Let me give you some examples.
members’ knowledge and experience is becoming more robust. The
percentage of board members with more than five years’ experience in
banking, finance and economics has increased over the last few years,
and is now higher than 80%. We do not expect it to get much higher given
the indisputable value of having a diversity of backgrounds at board
Board expertise is also expanding and becoming more
diversified across new risk areas. In my view, it is particularly
relevant that the number of non-executive board members with solid
experience in IT almost doubled over the last years, from 13% in 2017 to
24% in 2020. This also reflects banks’ recent digitalisation efforts.
banks are also making room on their boards for more formally
independent members, with the proportion in relation to non-executive
members increasing from around 50% in 2017 to almost 60% at the end of
2020. Experienced members who are independent and able to foster
critical debate about strategic decisions and to challenge the executive
board contribute directly towards increasing a bank’s resilience to
challenges. At the same time, their involvement will help banks navigate
the transformation that will ensue as our economies become more digital
and we start to tackle the climate crisis.
Having an effective
board is important at all times, but becomes absolutely critical in
times of crisis, and banks seem to be aware of that. Since the start of
the COVID-19 crisis, most banks have enhanced the interaction between
senior management and their supervisory boards through the use of
existing committees or by establishing new crisis committees to deal
with the most pressing challenges. In this respect, good governance has
also paid off: banks with strong governance have been quicker to
reprioritise projects and make good use of teleworking and digital
opportunities to adjust their strategy as required.
Shortcomings in board composition and oversight capacity
and despite the progress observed, the oversight capacity of boards in
most banks is still not strong enough. Although the proportion of formal
independent board members has increased, they still make up only 15% of
most boards. This has hampered the quality of debate regarding the
executive decisions taken during the pandemic and may damage the quality
of future decisions, not only on coronavirus-related topics, such as
credit risk management and capital planning, but also on longer-term
topics that will ultimately determine the sustainability of banks from a
business perspective in the years to come, such as climate risk, their
digitalisation strategy, or information technology and cyber risks.
Another area where progress can still be made is diversity in the
composition of bank boards. Around a fifth of euro area banks have still
not implemented a diversity policy, while those that have still have a
long way to go in terms of implementing them fully. Furthermore, women
still make up less than a third of non-executive directors and only a
quarter of executive directors for SSM significant institutions.
all the widely documented benefits that diverse boards bring to any
organisation, this is a matter of concern, and one that we will continue
to encourage progress on. In this context, the work being developed by
the European Banking Authority to benchmark diversity policy practices
and gender representation in the management bodies of European banks is
also very important.
The revised guide to fit and proper assessments helps address the challenges ahead
help address the shortcomings that remain and tackle the challenges
ahead, ECB Banking Supervision has decided to upgrade its guide to fit
and proper assessments and further clarify our expectations on the
suitability of board members. We trust that this revised methodology
will offer more support to banks in their internal recruitment processes
and their assessment of board members.
This guide, on which we will launch a public consultation soon, details
the policy stances, supervisory practices and processes applied by the
ECB when assessing suitability of members of the management bodies of
significant credit institutions. Within this remit, and although
national laws apply to our assessments, the guide will enable us to
increase the consistency and level playing field of our analysis and
outcomes, which is crucial in this area of European banking supervision.
When looking at bank boards, we will devote more attention to
assessing their diversity and their ability to deal with emerging risks.
Regarding gender diversity, we are striving to make sure that existing
national frameworks and internal rules for the enforcement of gender
quotas are tackled as part of fit and proper assessments and ongoing
supervision. Regarding climate risk, and in line with the guide
published in November 2020, we will encourage banks to consider
climate-specific skills and expertise when recruiting members for their
Fit and proper supervision needs to be harmonised within the European Union
the undeniable importance of boards and their composition in
determining banks’ resilience – and ultimately their sustainability
after a crisis like the COVID-19 one – fit and proper supervision is
still one of the most fragmented topics in banking supervision.
Divergent national approaches to the supervision of board member
suitability make it difficult for the ECB to ensure a level playing
field within its supervisory remit.
In this context, we would
very much like to see a further push for harmonisation in this area in
the next legislative package. For example, the timing of the fit and
proper assessment should be the same in all banking union countries,
i.e. before the candidate takes up the position. The same should be true
for the assessment of the heads of internal control functions. We would
also like to see a reinforcement of banks’ responsibility for
implementing adequate internal suitability policies and processes at
In conclusion, thanks to our
revised approach to fit and proper supervision, we are strengthening our
call for diverse and experienced board members who can effectively
oversee the executive management function and promote a culture whereby
board members constructively challenge each other on issues that will
arise in the context of the COVID-19 crisis and in the longer term in
relation to climate and environmental risks, business model
sustainability and digitalisation strategies.
As always, the
dialogue between bank non-executive directors and supervisors is also
key to ensuring mutual understanding and expectations. I now look
forward to today’s conversation.
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