Business Times

Resistance to banking regulation from directors

The regulators try to ‘accommodate’ a lot of nonsense as much as they can because the laws (in the country) are such that it is like driving a ‘Rolls Royce on a rutty road’, according to the Attorney General (AG). “The regulatory environment for directors is evolving, which has led to a range of risk-averse behaviour in the market, and there is a great resistance to regulation,” Mohan Pieris told a gathering of bankers on Monday.

The AG -Mohan Pieris speaking at the event. Pic by M. A. Pushpakumara

The AG, chief guest at the Bank Directors’ Symposium and speaking on ‘Responsibility of Directors in Banks’, noted that many directors find comfort from the principle in Company Law that directors are generally held to the standard that they must exercise a degree of skill and care reasonably expected of one with their knowledge and experience. He noted that they are not expected to be experts (unless appointed as such) and that they are held to the standard of care and diligence of reasonable persons.

He said that the legal obligations imposed on directors underpin good corporate governance practices. “However, these need to be balanced with commercial realities so that directors can make prudent business decisions and, as a result, drive the maintenance of reputable financial markets,” he said.

“The challenge that is faced by directors of banks is truly daunting, not only in terms of the issues that they have to address, but also the responsibility that they carry in performing their functions.

Even though we were spared of the devastating consequences of bank failures elsewhere, the crisis should open our eyes to what could have happened, hopefully making us take heed of the responsibilities that we owe to our stakeholders in assuming these positions of power and prestige,” he noted. Speaking on importance of financial system stability, Dr Ranee Jayamaha, Advisor to the President on Banking, noted that directors bring in instability to banks by not focusing on board meetings, lack of responsibility and commitment, ignoring risks, unwillingness to comply with governance, vested interests in other ventures and excessive borrowing.

Despite most of it being common sense, she read out a ‘do list’ for directors to help maintain financial stability – “Understand the status of the institution, go for directors’ training courses, watch out for macro prudential indicators, understand them, read board papers and go for board meetings, collect market information, be alert to risk and alert others, read credit evaluation by staff carefully, ensure adoption of governance, give up personal interest and uphold ethics.”

Reyaz Mihular , Partner KPMG, Ford, Rhodes, Thornton and Company speaking on the need to align prudential and regulatory requirements with international best practices said that many challenges are faced by regulators in developing regulatory measures locally. “There is much time spent on developing the regulations, this requires skilled expertise which may not be available in all countries, once they are implemented it is difficult to reverse the effects and there is also the uncertainty of the outcomes.

He noted that the advantages of adopting international regulatory measures are the compatibility (they facilitate easy cross border application), they also expedite requisite sanctions for regulations as they are broadly similar to already implemented international regulations, while also granting the regulators some comfort since they are able to learn from lessons from other countries.

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