The ECB raises the bar on banking governance

Speech by Mr. Yves Mersch, member of the ECB Executive Board
01 October 2020

The integrity and competence of the directors of a bank is one of the main lines of defense against mismanagement and fraud. Unfortunately, it's not always the strongest. First and foremost, it is the banks that take responsibility for ensuring the quality of their directors. The ECB performs the ultimate "quality check" - in prudential jargon, the assessment of relevance and relevance - for the largest banks in the euro area. And this is one of our most difficult supervisory jobs.

Last year alone, the ECB assessed the suitability of 2,967 people for more than 100 banking groups. We expect similar numbers this year.

It's not just the numbers that make this task so difficult. We assess the profiles of directors against the standards set out in a 2013 European directive. More specifically, we assess their profiles against these standards as and when they are transposed into national legislation. However, the way in which Member States have transposed - or, for that matter, not (yet) transposed - this directive into national law differs. Among other things, the directive requires bank managers to be 'sufficiently reputed' and to possess sufficient knowledge, skills and experience to perform their duties. They must act at all times with honesty, integrity and independence of mind, and be able to devote sufficient time to the performance of their duties.

Concepts such as reputation, independence of mind and time commitment are often interpreted differently from one set of national laws to another. For example, what type of misconduct might affect a person's ability to become or remain a bank manager? To what extent should ongoing legal proceedings be taken into account? What is the relevance of a previous criminal conviction? In addition, different national laws set short, long or even non-existent deadlines for carrying out adequate and appropriate assessments, while some require the approval of the supervisory authorities before appointments are made. Others may only require this approval after appointment.

To help us take these national differences into account and adhere to the standards set out in the directive, the ECB has worked with national banking supervisors to develop a common interpretation of suitability and adequacy criteria where possible. and legally possible to do so. This has allowed us to overcome some of the main obstacles. But it's not enough.

We now go further. The ECB will fill the existing gaps by implementing stricter and more intrusive adjustment assessments and appropriate assessments. We will continue to focus more on the impact we expect managers to have on the health and stability of banks. If our assessment reveals that a person is not suitable for the proposed position, we will issue a negative decision in accordance with EU rules. We will also take a closer look at any relevant facts that may have a negative impact on the reputation of the individual in question, such as previous criminal convictions or pending legal or administrative proceedings.

This gradual raising of the bar will be accompanied by increased transparency to better convey our expectations for bank directors. The ECB will publish a revised Guide to fit and proper assessments. We will examine more closely the individual accountability of board members: directors who are guilty of misconduct, or who turn a blind eye to the misconduct of their peers, will no longer be able to hide behind the collective responsibility of the board. The Guide will also clarify when and how the emergence of new material facts could result in us reassessing the suitability of existing bank directors.

The assessment process will be made more efficient and accessible through an online portal which banks can use to submit applications for fit and proper assessments of prospective directors. The ECB will encourage banks to submit their applications before individuals take up their positions, thus making it possible to frontload supervisory assessments. At the same time, the ECB has reinforced its internal decision-making by creating a dedicated fit and proper department and an enforcement and sanctioning committee to strengthen independence and ensure due process.

The European banking sector is still not properly integrated in several areas. This is also true for the rules on the suitability of bank directors. Inadequate governance and diverging national standards have become increasingly less tolerable. The incomplete and disparate transposition of EU legislation into national legislation should not undermine the ECB's efforts to pursue even higher governance standards in European banks. This process would undoubtedly benefit from greater harmonization of national legislation, which ideally would come through a directly applicable EU regulation.

This gradual raising of the bar will be accompanied by increased transparency to better reflect our expectations of bank managers. The ECB will publish a revised guide for adequate and appropriate assessments. We will take a closer look at the individual liability of board members: Directors who are at fault, or who turn a blind eye to the fault of their peers, will no longer be able to hide behind the collective responsibility of the board. The Guide will also clarify when and how the emergence of new material facts might cause us to reassess the suitability of existing bank managers.

The assessment process will be made more efficient and accessible through an online portal that banks can use to submit requests for assessment of the suitability and suitability of potential directors. The ECB will encourage banks to submit applications before individuals take office, allowing for prior prudential assessments. At the same time, the ECB has strengthened its internal decision-making process by creating a competent and appropriate service and an enforcement and sanction committee to strengthen independence and ensure due process.

The European banking sector is still not well integrated in several areas. This also applies to the suitability rules for bank managers. Inadequate governance and divergent national norms have become less and less tolerable. The incomplete and disparate transposition of European law into national law should not undermine the ECB's efforts to apply even higher standards of governance in European banks. This process would undoubtedly benefit from further harmonization of national legislation, which would ideally involve a directly applicable EU regulation.

Original speech
https://www.bankingsupervision.europa.eu/press/interviews/date/2020/html/ssm.in201001~1f7f9235a4.en.html

Virginie Gastine Menou
RISKS AND YOU
http://www.risquesetvous.fr/
https://www.linkedin.com/company/risques-et-vous

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