Today a group of more than 60 directors and senior management from various banks in Hong Kong gathered at the HKMA’s offices for the first director development programme organised by the Hong Kong Institute of Bankers (HKIB), a professional institute for the banking industry.
This initiative, organised at the HKMA’s request, is part of a wider effort to develop the quality of governance, in particular risk governance, at the board level in Hong Kong’s banking sector.
Let me share my view on what defines a bank as a sound, trustworthy and respected institution: simply the 3Cs – Competence, Control and Culture.
The 3Cs are qualities that are developed from within a bank and are not something that can be substituted by external rules or supervision.
The financial crisis that began in 2008 revealed a number of shortcomings at boards of financial institutions around the world, especially in the area of risk governance. A report published in February 2013 by the G20 Financial Stability Board entitled Thematic Review on Risk Governance1 highlights those failings and concludes that some boards were not up to the job of identifying and effectively managing the risks that their institutions were facing. In some cases, directors did not have the necessary knowledge and skills to understand fully the businesses of institutions that had become increasingly complex in the years before the crisis.
I should stress that the report is not talking about Hong Kong. But just because we were spared the worst effects of the crisis this time is no reason to be complacent. The crisis underlined the crucial importance of sound risk governance which is the core function of the board. Strong risk culture must come from the top and therefore it is the job of directors – especially the independent directors – to challenge the proposals and decisions of the senior management. To perform their roles, directors must not shy away from asking hard questions and making sure risk tolerances are properly assessed and applied to every major decision that is taken.
A bank, under the leadership of the senior management and guidance of the board of directors, must ensure there are robust and sound controls over risk taking as well as staff conduct and behaviour. In this context, it is not enough for a bank to stipulate a set of properly designed rules. It is equally, if not more, important that banks do not adopt the wrong incentive system that would induce excessive risk taking or misbehaviour by their staff members. Incentive system is in turn determined by the corporate culture and values of the institutions. The leadership in shaping and nurturing the appropriate culture and values can only come from the very top, i.e. the board of directors.
Given the importance of the 3Cs, the HKMA has taken a number of initiatives to assist banks to upgrade their own 3Cs. Today’s HKIB programme for director development is one of such initiatives sponsored by the HKMA for this purpose.
To sum up, Hong Kong can only succeed in making its banking industry robust, trustworthy and respected if the regulators and the top bank management share the common goal and work together to enhance the governance and nurture the appropriate cultural values of banks.
Norman T. L. Chan
Hong Kong Monetary Authority
4 September 2013
1 Interested readers can find the report on the Financial Stability Board’s website (http://www.financialstabilityboard.org/publications/r_130212.htm).