The recent banking turmoil in the U.S. and Europe has led to calls for greater accountability for bank executives. These include an extraordinary statement from President Joe Biden on the need to hold senior executives accountable for bank failures. Similar demands were made over a decade ago in the aftermath of the 2007-2009 great financial crisis (GFC) as public anger mounted over numerous bank failures, taxpayer bailouts, and scandals, while few bank executives faced regulatory sanctions for their actions or inaction.
A common playbook for banking authorities has been to levy fines on banks for egregious corporate wrongdoing. These fines are borne by bank shareholders rather than the executives who presided over the misconduct. Such an outcome gives the impression of immunity for those at the top and provides limited incentives for bank executives to address transgressions before problems escalate and threaten the firm’s reputation or financial viability.
Why has it been so difficult for banking authorities to hold senior executives accountable? Is it due to shortcomings in regulation or enforcement powers or perhaps to the difficulties of identifying the role of bank executives in the alleged wrongdoing? These questions point to a broader need for banking authorities to assess whether their frameworks for overseeing bank executives are fit for that purpose in the digital era, where serious breaches or excessive risk-taking can quickly evolve into an existential crisis.
In a recent paper (Oliveira et al 2023), we take stock of the post-GFC evolution of regulatory approaches to foster executive accountability and outline their implementation challenges. We also unveil “the accountability stack” that illustrates the multi-dimensional tools that are needed to enhance executive accountability in banks.
Regulatory approaches to fostering executive accountability
International regulatory initiatives started with an update of the BCBS Corporate governance principles for banksand the 2018 FSB toolkit for mitigating cultural drivers of misconduct and enhancing oversight of misconduct risk. A key part of that toolkit are measures to identify core senior responsibilities, allocate them to specific individuals, and allow those individuals to be held responsible for breaches within the business areas under their purview. The goal is a change in culture, backed by credible regulatory enforcement.
We divide regulatory approaches to accountability into two categories. The first comprises the introduction of self-identified, standalone “individual accountability regimes” (IAR). Our paper focuses on the IARs in Australia, Singapore, and the UK. Those regimes share several features. They require firms to allocate certain management functions to senior executives and to produce “statements of responsibility” for those individuals detailing the areas for which they are accountable, coupled with accountability mapping to show reporting lines and demonstrate how all relevant functions are allocated. In addition, senior executives can be held accountable for failings in their areas of responsibility unless they have taken reasonable steps to prevent or rectify those failings. The duty to take reasonable steps links senior executive responsibility to the conduct of the business they oversee. While they can delegate tasks, they remain responsible for the outcomes. Such standalone IARs were adopted and operate as more targeted tools alongside existing prudential frameworks.
The second, much larger, category consists of general prudential frameworks relied on by some jurisdictions to pursue personal accountability. Approaches in this category are more diverse, and the paper focuses on three jurisdictions – the EU Single Supervisory Mechanism (SSM) [1], Hong Kong SAR, and the U.S. – to illustrate that range. In Hong Kong, accountability is pursued though several long-standing provisions of the bank regulatory framework, and the prudential rulebook incorporates some measures that characterize IARs. The SSM pursues accountability mainly through supervisory “fit and proper” (FAP) assessments of some senior executives who are subject to regulatory approval for (re)appointments and has updated its FAP guidance to provide a hook to hold executives to account. The U.S. approach to individual accountability relies on supervision and onsite examinations and is backed by enforcement. Individuals who have violated a law, engaged in “unsafe or unsound practices,” or breached fiduciary duties of care or loyalty can be held accountable, and U.S. agencies have a broad range of penalties at their disposal.
Implementation challenges
The general philosophy that motivates the current interest in accountability is that making senior executives accountable will improve the tone at the top and this will drive improvements in culture, risk management, and conduct throughout the organization. But the desired outcomes depend on effective implementation, and that has its own challenges.
Early assessments indicate some positive outcomes. Greater clarity about senior executives’ areas of responsibility has reduced the risk that certain functions are not “owned: and helps supervisors pinpoint who to approach to rectify shortcomings. In theory this helps to address wrongdoing before it poses a more significant threat to a firm’s viability or harms consumers. Embedding accountability within firms’ governance is also considered to have improved the quality of internal oversight and decision-making.
Nevertheless, effective implementation ultimately depends on supervision and a credible prospect of enforcement. For example, determining whether senior executives have fulfilled their IAR obligation to take “reasonable steps” to prevent compliance breaches requires a nuanced assessment. For jurisdictions without an IAR, the lack of a similar obligation that establishes expectations compounds the challenge. In their absence, supervisors must fall back on broader prudential frameworks that may not have been designed to hold executives accountable.
Willingness to take enforcement action is an important component of any approach to accountability and a powerful deterrent to misconduct. It relies on clear legal powers and enough supervisory resources to pursue individuals and a range of appropriate penalties. There is as yet no evidence that IARs have increased enforcement actions against individuals. While this may not negate the observed improvements within firms’ governance, it does point to enforcement barriers.
The “Accountability Stack” – a multi-disciplinary solution to a multi-faceted challenge
There is no single, best way to hold bank executives accountable. Our research suggests that some banking authorities have taken a piecemeal approach to tackling a multi-faceted issue. A more holistic approach, which we label “the accountability stack”, may help cover all aspects of senior executive behavior. The parts of the stack consist of various regulatory, supervisory, and enforcement frameworks. While some authorities have adopted many elements of the stack, no authority has adopted them all.
In terms of regulation, all authorities prescribe corporate governance and risk management standards for bank boards and executive officers. Such rules may be necessary but are not sufficient to hold senior executives accountable. Mandatory “statements of responsibility” for senior executives, and laws requiring those executives to take “reasonable steps” in overseeing their areas of responsibility, strengthen authorities’ ability to determine executive accountability. Other regulations for fostering accountability include heightened conduct standards, guidance on senior executive compensation, and prohibitions on the use of directors and officers insurance to offset regulatory fines or clawbacks of compensation.
As for supervision, a fundamental challenge is developing an infrastructure that supports supervisors’ ability and will to act. This may include designing tools, techniques, and guidance to help supervisors assess whether bank executives provide sufficient oversight in their areas of responsibility and to determine their culpability when wrongdoing occurs.
As for enforcement, all jurisdictions can benefit from a range of tools, including the ability to impose fines on individuals and to remove executives for egregious breaches. Guidance outlining when and how enforcement may occur, with thresholds for what constitutes a severe case, can help support their use.
Tools that target specific aspects of accountability – rather than general policies that may have been developed for a different purpose – may help to facilitate the oversight of executives. These collective tools – “the stack” – provide a whole that may be more effective in holding individuals accountable than the sum of its parts.
ENDNOTE
[1] The EU SSM is the system of banking supervision in Europe. It comprises the European Central Bank and national supervisory authorities of member states of the European banking union.
This post comes to us from Rita Oliveira, a banking supervisor at the Single Supervisory Mechanism of the European Central Bank, and Ruth Walters and Raihan Zamil, senior advisers at the Financial Stability Institute of the Bank for International Settlements. It is based on their recent paper, “When the music stops – holding bank executives accountable for misconduct,” available here.