ECB: Governance and Risk Management in banks

In light of banking sector unrest in the US and Switzerland, ECB Chair Andrea Enria underlines the need for robust governance and risk management. Euro area banks' resilience, she says, is due to firm capital and quality assets, despite global shocks

ECB:  Governance and Risk Management in banks
EU Governance

The Importance of Governance in Banking Crises

Source: European Central Bank - Banking Supervision Keywords governance asset quality

Addressing the recent turmoil in the US and Swiss banking sectors, Andrea Enria, Chair of the Supervisory Board of the ECB, stressed the significance of sound governance and risk management in banks. Despite facing major shocks such as the COVID-19 pandemic and the Russian war in Ukraine, the euro area banking sector has remained resilient due to strong capital, liquidity, and asset quality. Enria emphasized that the primary responsibility of managing risks lies with the banks themselves and not with supervisors. Banks should have strong risk management and governance, with boards that challenge management, promote a strong risk culture, and set appropriate incentives. Supervisors, on the other hand, should focus on empowering supervisory teams within a strong accountability framework, rather than designing ever-more precise regulations. In conclusion, Enria urged banks and supervisors to prioritize governance and risk management to ensure stability in the banking sector.

Banking Industry: The Central Role of Risk Management

The recent turmoil in the US and Swiss banking sectors highlights the importance of governance and risk management in ensuring stability in the banking industry. As such, several implications can be derived from these events.

Firstly, banks must take ownership of identifying and managing risks through robust governance and sound risk culture. This includes strong boards that challenge management and set appropriate incentives, as well as fostering a culture of transparency and constructive challenge. By doing so, banks can better prepare themselves for adverse circumstances and maintain stability.

Supervisors should shift their focus from designing increasingly precise regulations to empowering supervisory teams within a strong accountability framework. This implies a more targeted approach to supervisory actions, grounded in a strong risk prioritization framework. By focusing on risk prioritization and escalation processes, supervisors can ensure that banks remediate problems in a timely manner and maintain stability in the industry.

Both banks and supervisors must be prepared for emerging risks related to digital transformation and climate transition. This includes strengthening governance and risk management frameworks to address these new challenges and ensuring that digital strategies are driven by a strong governance framework with adequate attention to internal controls and risk management.

It is essential for banks and supervisors to remain adaptable and responsive to the changing risk environment. This involves practicing strong internal processes to identify and measure risks, setting clear priorities for supervisory work, and being accountable for the choices made. By doing so, banks and supervisors can continue to ensure stability and resilience in the banking sector.

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Well-run banks don’t fail – why governance is an enduring theme in banking crises
European banking supervisors contribute to keeping the banking system safe and sound. European banking supervision comprises the ECB and national supervisors of the participating countries.

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