Effective Relationships Between Banks and their Regulators

Transcription

1 Finance and Private Sector Development Forum Washington April 2007 Effective Relationships Between Banks and their Regulators Jeffrey Carmichael CEO 25 April 2007 Date 1

2 Outline Regulatory relations as a form of risk management What a bank wants from its regulatory relationships What the regulators want Characteristics of a good relationship Some universal guidelines 2

3 Regulatory Relations is Risk Management Reputational risk is The risk that a Bank s performance is affected by adverse perceptions about its integrity, professionalism, effectiveness, etc Stakeholders in reputational risk: Investors Customers Counterparties Tax Commissioner Regulators Reputational damage means lost profits, lost opportunities, and lost competitive edge if damage is great enough, it can mean forced industry exit 3

4 Examples of Relationship Failures Threat to sue the regulator Different information to different regulators Failure to respond to regulatory requests Consistent response to reporting regulatory breaches Consistent responses to regulatory enforcement actions Agreements with regulators on product/capital treatments Lack of line of sight over regulatory problems 4

5 Who are the relevant regulators? Prudential Conduct Competition Stability AML Internationally-operating banks could interface with 100 or more regulators worldwide Different regulators require different approaches depending on country and style Managing regulatory relations is therefore more of an art than a science though there are some fundamental rules of the game that apply pretty much universally 5

6 What does a bank want from its Regulatory Relationships? A fair hearing on applications for regulatory consideration A reasonable response to compliance and other breaches A seat at the table on policy development Under Basel II banks will want to be treated no worse than their competitors under Pillar 2 6

7 What does a regulator want from RR? If you want a friend get a dog? Not all regulators are born equal Prudential regulators want the closest relationship but even conduct regulators still want a relationship Focus on prudential for rest of this presentation Spare a thought for the prudential regulator. Under resourced Under paid Under skilled No recognition if things go well but all hell to pay if something goes wrong Who should be the regulator s best resource? 7

8 So what does a prudential regulator want? Regulator s dream: Total confidence in the soundness of the bank Litmus tests: Financial performance Effective risk management systems and skills Effective risk culture from the top down Trust in what it is told A good RR is one that engenders and maintains trust Repeated sampling so credibility and trust are hard won but easily lost 8

9 Characteristics of an Effective RR Bank should be open and transparent in its communications with regulators Bank views should be communicated consistently to different stakeholder groups Requests for information should be addressed quickly and accurately Emerging concerns should be communicated early Communications should be by appropriately qualified individuals While this may vary from regulator to regulator, most prefer to have a single gatekeeper or group of gatekeepers to deal with 9

10 Building an effective RR - the Bank s Perspective Guiding Principles: Focus on how to minimize reputational risk Ensure that the image put forward is: Professional Honest Consistent Responsive 10

11 Some Universal Guidelines An Authorization system for contact with regulators Establish an integrated Corporate Centre/Subsidiary Regulatory Relationship Structure Guidance for communicating with regulators Relationship Managers to have veto power Central Regulatory Database Coordination with managers of other stakeholders User Groups for individual Prudential Standards, with a designated owner for each 11

12 Discussion 12