- with great powers come with great responsibilities

Not so long ago, if your young son or daughter were to ask you, “What is a bank?”; your answer would be a simple and straight forward explanation like, “you put your savings in a bank to earn interest and the bank in turn gives out your money in the form of loans to individuals and business people at a higher interest rate”.

Today, you may find it a challenge to define a bank. Banks of today are a very complex entity; especially the larger, household name banks. The past two decades have witnessed tremendous transformation of banks to become even larger and more diversified. They have become global enterprises engaged in not only the traditional personal and commercial lending, but also into investment banking, insurance, credit cards, asset management, mutual funds, management consulting, pension funds and related activities. Often, they give consulting services to the same clients who place funds with them. They are also deeply involved in new and complex credit instruments which are difficult to evaluate. To fuel their expansions and expectations, banks are giving out excessive credit, lowering credit standards, and relying heavily on leverage. And so this went on and on until the US subprime loans crisis brought the global financial system to a sudden halt and a rather belated realization that something is fundamentally wrong with our oversight system.

But, there are checks and balances in place right? The problem is everyone, from the man in the street to the federal government officials are caught up with the euphoria of economic boom. Few doubted the competency of board members of banks and even fewer dared to question the policies of regulators who used strange financial language and jargons that only they could understand. Board members have been too passive; simply rubber-stamping the actions of their managers who could easily convince them because many board members lack the intimate knowledge of operational matters. These financial institutions are so powerful and influential and their reach into the financial system is so broad and deep that no central bank is willing to allow them to fail.

Financial reforms are now top agenda. The immediate measure taken by the US Government is to pump US$700 billions into the market to shore up investors’ confidence. But monetary easing is only a temporary relief. It will not help prevent similar recurrences. Investors will like to see regulations and safeguards are put in place to ensure reasonable financial behaviour over the longer term.

I would recommend commencing discussion papers, leading to the issuance of two standards for the boards of financial institutions:
(i) Standard of Competency for Boards of Financial Institutions (SCBFI); and
(ii) Code of Corporate Governance for Boards of Financial Institutions (CCGBFI).

What say you?