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Fly on the wall

7 May 2015 By Fiona Maharg-Bravo

The European Central Bank plans to crash bank boardrooms across Europe. The euro zone’s financial stability gnomes will observe meetings. As part of the effort to foresee banking sector trouble, this makes sense – at least to a point.

Most decent-sized European banks, like U.S. counterparts, are used to supervisors roaming headquarters. At big banks like Spain’s Santander, central bank inspectors have permanent offices. But European watchdogs haven’t tended to show up in board meetings. One exception is Holland, where the Dutch central bank sends supervisors or psychologists on occasional visits to boards. The UK’s Prudential Regulation Authority has also observed board activity regularly since taking over bank oversight in 2013.

Watchdogs have other board-level tools, for example screening bank directors to ensure they’re fit for the job. But since corporate culture and governance starts at the top, a window into more boardrooms should provide regulators with extra insight into whether bank bosses are thinking and behaving rationally – particularly, as far as the ECB’s observers are concerned, in terms of functionality and risk management, according to Spanish newspaper el Pais.

One danger is that if critical discussions take place when its representatives are present, the ECB may be implicated by association if decisions made result in a bank losing money or otherwise end badly. It should be easy enough, though, to ensure that everyone concerned understands that observers are just that – they don’t participate in decision-making.

A more concrete concern is that the one-off visits initially planned by the ECB may not reveal what’s really going on. It’s fairly safe to assume that most controversial issues won’t be on the agenda at those meetings. And directors will both show up and be on their best behaviour, not necessarily reflecting their performance year-round.

Regular sessions with smaller groups of directors and executives would probably reveal more. Being a fly on the wall at the occasional board meeting is a worthwhile step. But sitting down periodically with the heads of the risk, audit or remuneration committees may provide Frankfurt with more useful insight about how its 123 charges really operate.


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