People still don’t trust banks.
Post-crisis reforms aimed at improving their reporting, conduct and culture, while increasing resilience, are all now well into their implementation phases. But past scandals, whether to do with mis-selling or improper behaviour, are still affecting banks’ profits, with large fines and even bigger customer settlements. And public perceptions continue to be ruled by banks’ past behaviour.
Market data supports this – banks’ low price-to-book ratios suggest that either savers are all missing out on incredible investment opportunities or, as far as the market is concerned, confidence remains low.
This may seem unfair. When you look behind the scenes, there are encouraging signs. Regulators and policy-makers have spent almost a decade strengthening the rules to make banks and the financial system safer. Banks themselves have been examining their business models, bolstering their balance sheets and improving their disclosures.
One area where a lot of work has been done is on banks’ capital, liquidity and leverage. Capital ratios are key to assessing a bank’s stability, which is why they are the focus of so much interest.
But these numbers are very complex to produce, particularly for the biggest banks, who design and use their own internal models to calculate how much capital to hold. While the regulator pre-approves these models, neither they nor a bank’s auditors are required to do an annual audit of these numbers.
In 2014, ICAEW started a project to examine what an assurance report on capital ratios might look like. We were asked to look at this by the Prudential Regulation Authority (PRA). Today, we publish an exposure draft of an assurance framework for bank regulatory ratios.
When we started our project, many banks relied on their executives to get these numbers right, and audit committees and senior managers saw scrutinising them as outside their remit, or as the job of the regulator. In the past two years, however, we have seen this change. Now, audit committees are asking much more of bank internal audit teams and sometimes asking for external audit firms to give them assurance that things are operating as they should be.
We cannot claim the credit for this. Other developments may be more significant, including the UK Senior Managers Regime, which made individual accountability clearer, and a new Basel Committee rule strengthening bank data governance requirements.
But it feels like we have moved from being radicals to swimming with the tide. Our new assurance framework will allow banks to set a scope for assurance that meets their needs, while guiding internal or external auditors on how to perform this work in a robust and professional way.
PRA chief Sam Woods, in his address to the Mansion House City Banquet, heralded the end of the revolution in regulations, but said that the focus now shifts to the implementation of the new rules. Assurance is not a panacea but can give confidence that the system is working properly.