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Banks’ risk managers call for review of Prudential Guidelines

By Babajide Komolafe
Banks’ risk managrs, under the aegesis of  Risk Managers Association (RIMAN), have called for a review of the prudential guidelines and the entrenchment of  whistle blowing policies as measures to check poor corporate governance practices in the industry.

Commenting on the recent development in the banking industry in a statement issued yesterday, the Association said, “The recent sacking of the CEOs of five banks by the Central Bank has been attributed largely to poor management of credit risks, causing ripples in the system.

“As a body of risk practitioners in the financial industry, we are highly interested in ensuring that lessons are learnt from these developments and that the practice of financial risk management is positively impacted upon. It is in this regard that we would therefore like to recommend as follows:
Risk Strategy: Financial institutions should re- strategize to ensure proper focus on risk management in order to stabilize their operations and protect their franchise.

Corporate Governance: Enthrone and comply with stipulated corporate governance standards and practices that effectively ensure process compliance and manages power concentration with adequate checks and balances. Banks should also emplace “whistle blowing policies” to encourage well-meaning employees raise concerns on corporate governance and professional conduct without fear of reprisals.

Credit Reporting: Ensure that banks comply with Central Bank of Nigeria guidelines on credit reporting and obtaining references from at last two credit bureaus. The required financial infrastructure to support this process has been put in place by all the three recently licensed credit bureaus and banks have no more excuses not to use them to enhance risks assessment.

It is however not sufficient for financial institutions to patronize them, the information so obtained must be used as critical elements of the assessment criteria in decision making and credit reviews.

Compliance with BOFIA: All staff of financial institutions should be conversant with, and comply with provisions of Banks and Other Financial Institutions Act. (BOFIA).Compliance will modify some behavior patterns positively.

Autonomy of Chief Risk Officers: Regulatory guidelines should drive autonomy for the function of Chief Risk Officers who, by virtue of being Executive Directors, can be hired and fired only by the Board. The more independent the recruitment process of the CRO, the more independent we expect him/her to be, with a reporting line directly to the Board Risk Committee. Capacity building: It is a widely held opinion that the Board often sees what senior management wants it to see. Even then, the ability to ask relevant questions and analyze risk reports depend on the risk knowledge of directors. We therefore recommend full training of all directors in risk management.

Insider Credits: A radical review of existing guidelines to include enforceable sanctions on those who violate them should be considered by the regulatory authorities. Though it borders on the integrity and moral standards of those concerned, regulatory impetus is required to begin to enforce.

Review of Prudential Guidelines: We believe that a total review of the existing prudential guidelines for loan classification needs to be undertaken to make them more dynamic and relevant through financial cycles. The protection offered to Spanish banks that had long adopted dynamic provisioning during this financial crisis is a good reference and justification for this review.

Basics of Banking: The banking business is by nature conservative. We therefore call on banks to go back to the basics and maintain the principles of good banking viz: Identifying risks, setting limits, compliance with solid policies and procedures, independent review functions, knowledgeable senior management and board, and continuously maintaining strong capital and reserves. Large exposures (consolidated basis) and prudent lending limits are part of basic portfolio planning strategies banks need to comply with.

Professionalism & Code of Conduct: We call on all banks to maintain professionalism and comply with applicable codes of conduct in their daily banking transactions. Not only should they register with appropriate bodies and associations to access the right knowledge and information, we also expect such bodies to firmly enforce sanctions where there are violations and instill other disciplinary measures.

Financial institutions should by now clearly acknowledge that risk management is at the core of managing their businesses. It is therefore a strategic function that requires high-level manning and expertise, ensuring that risks assumed are well-understood, risk responses well articulated and implemented and potential impact on earnings, capital and reputation continuously assessed and managed to bring residual risk within tolerable limits.”


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