Regulatory reforms - incentives matter (can we make bankers more like pilots?)

Remarks by Wayne Byres, Secretary General of the Basel Committee on Banking Supervision, to the Bank of Portugal conference on "Global Risk Management: Governance and Control", Lisbon, 24 October 2012.

Thank you very much for your invitation to be part of this conference today. The topic you have chosen - Global Risk Management: Governance and Control - is an important one at any time, but it is particularly crucial in the current environment when banks need the strongest possible governance and control if they are to successfully navigate a very difficult external environment.

The banking industry today faces many challenges, and the need for strong internal governance and control has never been more important. Whether you are here today as a banker, a regulator, an auditor, or indeed as a bank customer, you have an interest in the strength of internal governance and risk control systems, not just of your own bank but, due to the interconnectedness that characterises banking, of all banks.

The revelations from the ongoing financial crisis have shown us that the previous systems of control imposed within banks, as well as those prescribed by regulators, were manifestly inadequate. It is easy to see now that banks, markets and regulators allowed banks to take on too much risk: risk was underestimated and as a result risk limits were set too high. But systems of governance and control are not just about managing the level of risk. Controls, rules and limits within a bank - and in particular, the interactions of those controls, rules and limits - do more than just limit risk; they also create incentives. Ideally, those incentives should be aligned towards the long-run health of the bank as a whole. We can see now that, in many instances, they were not.