1、The role of good governance, disclosure and transparency in banking stability,David Carse Deputy Chief Executive Hong Kong Monetary Authority 22 February 2001,Introduction,Two important trends in banking regulation and supervision have become evident in recent years stress on the key role of the dir
2、ectors and senior management in ensuring that banks are prudently managed the role of disclosure and market discipline in promoting the accountability of directors/management and in discouraging excessive risk-taking These trends are the subject of this presentation,The role of bad corporate governa
3、nce in the Asian crisis,Weak corporate governance in Asian banks was one of the key factors in the Asian crisis many banks were controlled by owner-managers and the board of directors played little role banks were often parts of wider conglomerates and were used to fund other parts of the group or t
4、he owners (connected lending) management was not professional and lacked self-responsibility growth was more important than return on capital risk management was poor,The situation in Hong Kong,Corporate governance of Hong Kong banks is relatively good by regional standards as has been shown by thei
5、r ability to survive the Asian crisis intact However, there were some weaknesses in the performance of the boards of a few local banks during the Asian crisis in these cases, the board of directors failed to play a proper leadership role To address this situation, the HKMA issued a guideline on corp
6、orate governance in locally incorporated authorized institutions in May 2000,The role of the HKMA,Promotion of good corporate governance is part of the supervisory responsibilities of the HKMA Corporate governance is particularly important for banks because of the risks they take on and because they
7、 safeguard other peoples money Directors need to ensure that the risks in banks are properly managed, and under the Hong Kong Banking Ordinance they have a specific legal responsibility to do so This does not mean that the directors should themselves formulate policies for managing risk, but they sh
8、ould certainly approve such policies,Contents of the HKMA Guideline,Major responsibilities of the board ensure competent management approve objectives, strategies and business plans ensure that the banks operations are conducted prudently and within the framework of laws and board policies ensure th
9、at the banks affairs are conducted with a high degree of integrity Legal obligations of directors The use of auditors, including internal audit Specific requirements,Specific Requirements (1),The board should ensure that the bank establishes policies, procedures and controls to manage the various ty
10、pes of risk with which it is faced 8 types of risk specified by HKMA (i.e. credit, interest rate, market, liquidity, operational, reputation, legal and strategic risk) board should approve relevant policies to manage these risks while senior management should put them into effect policies should not
11、 exist merely for forms sake (e.g. to satisfy the regulator), but should dictate how the bank is actually run in practice,Specific Requirements (2),The board should ensure that the bank fully understands the provisions of section 83 of the Banking Ordinance on connected lending and establishes a pol
12、icy on such lending section 83 of the Ordinance limits the unsecured advances of banks to connected parties (e.g. directors and their relatives) board should ensure that the bank fully understands its legal obligations and establishes a policy on connected lending according to the minimum standards
13、specified in the Guideline,Specific Requirements (3),The board should ensure that it receives the management letter from the external auditor without undue delay, together with the comments of management management letter should normally be received within 4 months from the financial year-end board
14、and/or audit committee should ensure appropriate action is taken to address any weaknesses identified in the management letter copy of the management letter should be given to the HKMA,Specific Requirements (4),The board should maintain appropriate checks and balances against the influence of manage
15、ment and/or shareholder controllers, in order to ensure that decisions are taken with the banks best interests in mind. board should have at least 3 independent non-executive directors to provide the necessary checks and balances and bring in outside experience banks should notify the names of their
16、 independent directors to the HKMA HKMA may require additional independent directors to be appointed,Specific Requirements (5),The board should establish an audit committee with written terms of reference specifying its authorities and duties audit committee should be made up of non-executive direct
17、ors, the majority of whom should be independent Board meetings of a bank should be held preferably on a monthly basis but in any event no less than once every quarter banks should keep full minutes of board meetings HKMA will require banks to provide it with a record of the number of board meetings
18、held each year,Specific Requirements (6),Individual directors should attend at least half of board meetings held in each financial year and all meetings where major issues are to be discussed participation of directors in board meetings can be facilitated by video or telephone conferencing HKMA will
19、 monitor the attendance records of individual directors The HKMA will meet the full board of directors of each bank every year. HKMAs intention is not to participate in board meetings but to strengthen communication between the HKMA and the banks at the highest level,How can good corporate governanc
20、e of banks be achieved?,Main responsibility rests with shareholders, directors and management Regulation and supervision also play a role Both of the above need to be supplemented by adequate public disclosure This facilitates private sector oversight of the risk-taking and financial condition of ba
21、nks disclosure makes directors and senior managers more accountable to the various stakeholders increases the number of “watchful eyes”, thus reinforcing supervisory efforts,What should banks disclose? (1),Financial performance (breakdown of income and expense etc) Financial position (breakdown of o
22、n and off-balance sheet items, including capital position and liquid assets) Risk management strategies and practices Risk exposures (including quantitative and qualitative information on credit, market, liquidity, operational, legal and other risks),What should banks disclose? (2),Accounting polici
23、es Basic business, management and corporate governance information (including business strategies, group structure, board and management structure, remuneration policies etc),Disclosure and transparency,Disclosure doesnt necessarily achieve transparency To achieve transparency, disclosure must enabl
24、e users to properly assess the banks risk profile, financial condition and performance, business activities etc Therefore disclosure must be comprehensive relevant and timely reliable comparable material,The benefits of disclosure (1),Well managed banks should benefit, e.g. from improved access to c
25、apital markets and more secure funding at a lower cost Enable a more efficient allocation of capital between banks by helping shareholders to more accurately assess and compare the risk and return prospects of individual banks Enable a wider set of shareholders to participate effectively in the gove
26、rnance of the banks and make the corporate governance process more transparent,The benefits of disclosure (2),Enable depositors and other creditors to better decide which banks they should place their money with and to curb excessive risk-taking Reduced risk of market disruptions - ongoing disclosur
27、e should make market participants less likely to overreact to negative information Strengthened incentives for banks to behave in a prudent and efficient manner,The benefits of disclosure (3),Reduction in systemic risk through better ability to distinguish higher risk banks from those that are funda
28、mentally safe and sound should reduce the risk of contagion Reinforce supervisory guidance by making banks disclose when they are non-compliant Reduce moral hazard faced by supervisors,How can disclosure be made effective?,Two broad goals in designing effective disclosure standards how to achieve tr
29、ansparency how to achieve market discipline,The problems of achieving transparency,The financial strength and riskiness of banks are inherently difficult to evaluate problem of how to value loan portfolios how to communicate meaningfully the risk appetite and quality of risk management of a bank dif
30、ficulty of comparability of financial information o/a differences in accounting standards, supervisory guidelines, interpretation, enforcement limits on disclosure of customer information and proprietary information, e.g. on risk management techniques and strategies problem of keeping up to date wit
31、h rapid changes in banks risk profiles,The problems of achieving market discipline,Market participants may not respond to information in a way that promotes financial stability publicly disclosed information may not be regarded as sufficiently credible participants may rely on official safety nets f
32、or protection retail depositors may be unable to monitor a banks condition via public disclosure shareholders may fail to discipline management management may lack incentives to behave prudently,Necessary conditions for disclosure to be effective,Effective disclosure depends on the infrastructure wi
33、thin which banks operate the nature and adequacy of corporate law the adequacy of accounting standards and auditing requirements the expertise and integrity of the auditing profession the adequacy of the financial news media and market commentators and analysts,Potential drawbacks of public disclosu
34、re,Cost of producing and providing information Market may react more harshly than desirable when it becomes aware that a bank is weakened potential that bank may fail from liquidity problems even if it is solvent other banks may be affected through contagion, particularly in times of financial stres
35、s However,contagion risk should be reduced in an environment of adequate ongoing public disclosure Also, the market incentives provided by disclosure should help to correct bank-level problems at an early stage,The role of supervisors in improving transparency (1),Supervisors should try to promote c
36、omparability, relevance, reliability and timeliness of information disclosed issue disclosure standards and guidelines or at least influence the debate on these Encourage the use of supervisory definitions and reporting classifications for public disclosure purposes to facilitate comparison of data
37、Mediate if banks fail to agree privately on standards in order to speed up the process of disclosure convergence,The role of supervisors in improving transparency (2),Publication of aggregate information received from banks Difficult to go beyond this to disclose information on individual banks, e.g
38、. supervisory ratings would conflict with the supervisors role to maintain banking stability and make it more difficult to resolve individual banks problems could make supervisors more reluctant to make independent judgments about banks if these were to be made public could make it more difficult to
39、 obtain confidential information from banks,The role of supervisors in improving transparency (3),Supervisors can help to ensure compliance with disclosure standards through regular review of what banks disclose taking action against banks that provide insufficient or misleading disclosure ensuring
40、that banks have effective accounting standards and practices maintaining close liaison with internal and external auditors,The Hong Kong experience of bank disclosure (1),Prior to 1992, banks in HK maintained inner reserves and disclosed little balance sheet or P/L information, e.g. one line P/L acc
41、ount: “net profit after tax and transfers to inner reserves” Rationale was to smooth out large fluctuations in profits and thereby help maintain public confidence in the banking system This was a vital issue in the run-up to the Handover in 1997,The Hong Kong experience of bank disclosure (2),While
42、the stability objective was valid, pressure for change became irresistible HSBC disclosed inner reserves in 1992 accounts following merger with Midland Bank lack of disclosure seen as incompatible with HKs position as an international financial centre criticism from rating agencies and analysts SFC/
43、SEHK concern about listed banks HKMA persuaded other local banks to disclose transfers to inner reserves in 1994 accounts and accumulated amount of inner reserves in 1995 accounts,The Hong Kong experience of bank disclosure (3),The market reaction to the disclosure of inner reserves was uneventful A
44、mount of disclosure (e.g. of non-performing loans) has been increased each year through annual HKMA Guidelines Experience has been positive and stabilising image of HK banks has improved public and media seem to accept that bank profits will fluctuate announcement of losses by a few banks during the
45、 Asian crisis was absorbed without incident,The Hong Kong experience of bank disclosure (4),Disclosure by banks in HK has been rated the best in the Region (e.g. by the IMF) But banks here cannot afford to relax other countries in the Region are catching up and even moving ahead in some respects (e.
46、g. Thai banks now publish NPLs on a monthly basis) the international standards for disclosure are being raised all the time The New Capital Accord just announced by the Basel Committee on Banking Supervision is a prime example of this,The New Basel Capital Accord,Will replace the present 1988 Accord
47、 in 2004 More risk-sensitive framework for calculating capital requirements More emphasis on banks internal methodologies More options for banks Disclosure and market discipline play a central role,Structure of the New Accord,Three pillars First Pillar - minimum capital requirement Second Pillar - s
48、upervisory review process Third Pillar - market discipline All three pillars are intended to be mutually reinforcing,The Third Pillar,This aims to bolster market discipline by ensuring that market participants can better understand banks risk positions and the adequacy of their capital disclosure ma
49、inly directed at wholesale counterparties The greater use of internal methodologies for calculating capital requirements has increased the need for disclosure ensure that these are exposed to public scrutiny knowledge of methodologies used by different institutions will make comparability easier,Dis
50、closure policy statement,Disclosure should be embedded in the management process and given sufficient status“Banks should have a formal disclosure policy approved by the board of directors. This policy should describe the banks objective and strategy for the public disclosure of information on its financial condition and performance. In addition, banks should implement a process for assessing the appropriateness of their disclosure, including the frequency of disclosure.”,
