ECB raises the bar on bank governance
Opinion piece by Yves Mersch, Member of the Executive Board of the ECB and Vice-Chair of the Supervisory Board of the ECB, published in several European media outlets on 1 October 2020
1 October 2020
The integrity and competence of a bank’s directors is one of the most important lines of defence against mismanagement and fraud. Unfortunately, it is not always the strongest. First and foremost, it is the banks that shoulder the responsibility for ensuring the suitability of their directors. The ECB performs the ultimate “quality control” – in supervisory jargon, the fit and proper assessment – for the biggest banks in the euro area. And this is one of our most challenging supervisory tasks.
Last year alone, the ECB assessed the suitability of 2,967 individuals for more than 100 banking groups. We expect similar figures this year.
It is not only the sheer numbers that make this task so difficult. We assess the profiles of directors against the standards laid out in a 2013 European directive. More specifically, we assess their profiles against these standards as they have been transposed into national legislation. However, the way Member States have transposed – or, for that matter, not (yet) transposed – this directive into national legislation differs. Among other things, the directive requires bank directors to be of “sufficiently good repute”, and to possess the sufficient knowledge, skills and experience to fulfil their functions. They must act at all times with honesty, integrity and independence of mind, and be able to commit sufficient time to perform their functions.
Concepts such as reputation, independence of mind and time commitment are often construed differently from one set of national legislation to another. For example, what sort of misconduct could potentially affect someone’s suitability to become or remain a bank director? To what extent should pending legal proceedings be taken into account? How relevant is a past criminal conviction? In addition, different national laws set short, long or even no deadlines for conducting fit and proper assessments, while some require supervisory approval before appointments are made. Others may only require this approval after the appointment has been made.
To help us take these national differences into account and adhere to the standards outlined in the directive, the ECB has worked with national banking supervisors to develop a common interpretation of fit and proper criteria where it has been possible and legally feasible to do so. This has enabled us to address some of the main obstacles. But it is not enough.
We are now going one step further. The ECB will close existing gaps by implementing stricter and more intrusive fit and proper assessments. We will continue to strengthen our focus on the impact we expect managers to have on the health and stability of banks. If our assessment finds that an individual is not suitable for the position envisaged, we will issue a negative decision in line with EU rules. We will also more closely scrutinise any relevant facts which may have a negative impact on the reputation of the individual in question, such as previous criminal convictions or ongoing judicial 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 harmonisation of national legislation, which ideally would come through a directly applicable EU regulation.