Big Banks Flunk Corporate Governance 101

Monday, 18 Feb 2013 11:48 AM

By Michael Kling

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Large banks took a corporate governance test – and failed miserably.

The Office of the Comptroller of the Currency rated the 19 largest national banks on five factors, revealing the scorecards to bank directors at a closed door meeting, according to American Banker magazine, which obtained the results.

Not one met the regulator's requirements for internal, auditing, risk management or succession planning, American Banker reported. Only two met requirements for defining the bank's appetite for risk-taking and communicating it across the company. Only two banks have boards of directors willing to stand up to their CEOs.

Editor's Note: Economist Warns: ‘Money From Heaven a Path to Hell.’ See Evidence.

Bank boards should provide a "credible challenge" to top management, Mike Brosnan, the OCC official overseeing bank supervision, told American Banker. "Providing credible challenge means you are informed, and that you also realize you have a fiduciary duty to the community and the employees," Brosnan says. "If they are just going to say 'yes,' then they have failed. They have to be informed, invest the time and then ask the right questions."

The banks had a total of 1,083 "matters requiring attention," or an average of 57, the banking publication reported, citing conference materials.

Still, Brosnan was not downhearted, saying he sees progress, according to the banking magazine. He expects each of the banks to meet the regulator's minimum requirements in at least one category by July.

"I'm satisfied with where they have come from, and I like the momentum," he told American Banker. "I think we're at a C-plus/B-minus point, and what we are looking to get to is B-plus or A-minus. We are not looking for A-plus."

Regulators have strengthened requirements for the big banks, he said. "We've raised the bar significantly."

Regulators, he said, feel they missed banking practices – traditional problems like poor loan underwriting, overleveraging, rapid growth and asset concentrations – that led to the 2008 financial crisis and are determined not to be caught off guard again.

The Financial Stability Board, an international watchdog, is calling for tighter corporate governance in the banking sector in order to prevent another financial crisis.

"The recent global financial crisis exposed a number of risk governance weaknesses in major financial institutions, relating to the roles and responsibilities of corporate boards of directors," the FSB stated in a press release. "Without the appropriate checks and balances provided by the board and these functions, a culture of excessive risk-taking and leverage was allowed to permeate in many of these firms."

Editor's Note: Economist Warns: ‘Money From Heaven a Path to Hell.’ See Evidence.

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