Aussie banks: a right Royal mess

Misconduct probe sparks board changes and bout of introspection at Big 4

Board table
Knowledge gap: survey finds skillset diversity but not much frontline risk management experience

It’s been a rough year for Australia’s banks. Last April, Ian Narev, chief executive of the nation’s largest lender, Commonwealth Bank of Australia (CBA), departed following probes from several of the country’s regulators into widespread money laundering violations and the mis-selling of payment protection insurance, among other offences.

The scandals sparked a national outcry, and helped prompt a Royal Commission inquiry into misconduct in the banking, superannuation and financial services industry. When the 500-page tome finally thudded onto desks on February 4 this year, it made for grim reading, finding the nation’s big banks guilty of everything from paying cash bribes to branch staff as an incentive to hit quarterly targets, to selling life insurance policies to long-dead customers.

The fallout from the report was still being felt, with National Australia Bank announcing on February 7 that its chief executive Andrew Thorburn and chairman Ken Henry would both step down.

The events in Australia have thrown into sharp relief the challenge faced by those charged with overseeing banks’ risk-taking activities: their risk committees. A new survey of the board-level risk committees at the region’s banks, offers for the first time a comprehensive list of the 136 board risk committee members at 24 of Asia-Pacific’s largest banks.

The findings reveal a wide diversity of skillsets, but not much frontline risk management experience: only four directors are former chief risk officers, while almost two-thirds have never worked for a bank.

Does that matter? It depends who you ask. Some argue it shows banks deliberately tailoring the skillsets of their boards to the risk profiles of their institutions. In India and China, for example – where most banks were until recently publicly owned, and most of the counterparties they deal with still are – making risks in the political sphere a key consideration, banks’ boards feature a host of former regulators and government officials.

As the scandals in Australia show, even where boards have a heavy presence of former bankers with risk management experience, learned the hard way from running trading and sales businesses, that alone may not be enough to tackle the complex array of non-financial and conduct risk challenges banks face today.

Take the case of the prudential inquiry into CBA. It found that, although the bank’s chief risk officer and its risk committee were highly experienced, “with the benefit of hindsight, their strengths were heavily weighted toward financial risk management, and brought less experience to bear in operational risk and compliance matters”.

In this regard, CBA has taken its medicine. Last year, under the watch of new chief executive Matt Comyn, it established a non-financial risk committee at the group management level, as well as strengthening its risk management function by including members with compliance and operational risk experience. Anne Templeman-Jones, who held a number of roles at rival Westpac – including risk director and head of strategy for operational risk – joined the risk committee in March last year.

Westpac, in turn, last week appointed former Morgan Stanley Australia chief Steven Harker to its board, while ANZ has recently added former New Zealand prime minister John Key.

In the wake of the Royal Commission’s findings, those seem unlikely to be the only director-level changes among the country’s banks.

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