Sunday, February 10, 2013

All really conscientious bank board directors should resign immediately, because of their regulators

All board directors should be the-buck-stops-here responsible for a bank’s risk management. 

But what if some external actor, in this case their own regulator, messed around and imposed his own capital allocation formulas, based on perceived risks, like indeed the regulator has done with Basel II, and wants to do even more with Basel III, when he now also wants to add liquidity requirements based on perceived risks. 

Should not then all really conscientious bank board directors immediately resign, telling the regulators “You have made our mission impossible”? 

I think they should! If they take their bank to where the regulator wants them to go with his capital requirements, and where therefore they have to go if they want their bank to remain competitive, they, and their competitors alike, are all doomed to mess up the whole real economy of the world, by lending too much to “The Infallible” and too little to “The Risky” 

The capital and liquidity requirements for banks based on perceived risk, imposed by bank regulators, is such a fundamental distortion of the markets that no really responsible bank director should accept it.

PS. I extract the following from one official Bank Director’s Responsibility statement 

Primary Role (among other): To act as trustees for all of the Bank’s constituencies. 

Duties and Responsibilities (among other): Provide that risk management policies (broadly defined) and internal controls are in place and functioning, and provide a balance between the risks and benefits of the Bank’s activities. 

Each Director should exhibit:

Integrity and Accountability: Character is the primary consideration in evaluating any Director. Directors must have high ethical standards and integrity in their personal and professional dealings. Directors must be willing to act on and remain accountable for their Boardroom decisions. 

Informed Judgment: A Director should be able to provide wise, thoughtful counsel on a wide range of issues. Directors should possess high intelligence and wisdom, and be able to apply it to decision making. Directors should be able to comprehend new concepts quickly. 

Financial Literacy: Directors should be financially literate. Directors should know how to read a financial statement and understand financial ratios. Directors should have a working familiarity with basic finance and accounting practices. 

Mature Confidence: Directors should approach others in a self-assured, responsible and supportive manner. Directors should be able to raise tough questions in a manner that encourages open discussions. Directors should be inquisitive and curious and ask questions of management.