Sir David Walker said “trust and respect” is needed in the relationships, and that bankers “need to be able to trust what [they] say to regulators won’t lead to a knee-jerk reaction.”
He was speaking at the launch of a report by the Group of 30 global finance heavyweights, urging regulators and banks to “reset” their relationship and become more open and honest with each other.
The group, which includes former European Central Bank boss Jean Claude Trichet, UBS chairman Axel Weber and former New York Fed president William McDonough, is worried regulators do not understand banks and banks do not know what to expect from authorities.
“Experience since the financial crisis shows that new banking rules are not sufficient,” said Trichet. “Improving governance requires careful nuanced judgement by banking supervisors, and more active leadership by boards of directors.”
The group also called for regulators to be paid more and given more prestigious positions so they attract the best in the industry.
And the report said bank boards also need to be beefed up with more experienced directors.
EIGHT THINGS THE GROUP OF 30 WANTS TO ACHIEVE
1 Paying regulators more. The Group is worried that banks can always outbid the authorities for the best finance staff and so wants more resources – and more prestige – to be given to watchdogs.
2 Supervisors need to understand banks. Banks and policymakers do not think regulators fully understand either how banks work or how their regulations apply to lenders. The G30 wants them to meet boards more to understand banks’ culture.
3 Legislators need to know this too. That means they need to speak with regulators when they design policies to make sure it will work with the range of banks the rules will govern. If not, it will be harder to supervise banks effectively.
4 But supervisors also need to stay tough. Regulators should not get too close to boards, and must be in a position to assess boards’ effectiveness periodically. That may mean recommending changes to weak boards.
5 Boards should hire more experienced directors. At the moment some boards are too weak or inexperienced to understand what is happening at banks. More audit or risk experience will help, the G30 believes.
6 Directors must challenge executives more often and more rigorously. A more experienced board should put management through their paces in all areas like strategic proposals, key risk policies and major operational issues, the finance heavyweights said.
7 Boards should study culture more closely. Without an understanding of how staff work directors will not be able to govern well, the report argues. That includes promoting good behaviour, particularly when nobody is looking.
8 And both sides need to talk to each other more. The G30 said it would be a slow process, but only by meeting regularly – especially when there are no imminent problems – can regulators and banks get back on good terms.