Für ein grösseres Vertrauen in die Selbstregulierungskräfte der Finanzmärkte hat sich heute in Liechtenstein Prof. Dr. Manfred Weber (Bild), Geschäftsführender Vorstand des Bundesverbandes deutscher Banken, ausgesprochen. Gleichzeitig plädierte er für eine Regulierungspause bei  der Beaufsichtigung von Banken. Zahlreiche Regeln seien gerade im Bereich Risikomanagement und Corporate Governance in den letzten Jahren erlassen worden, die sich nun erst einmal in der Praxis bewähren müssten.

Den Banken stellte Weber insgesamt ein gutes Zeugnis aus. Sie hätten in den vergangenen Jahren erhebliche Anstrengungen unternommen, um ihr Risikomanagement weiter zu entwickeln und den Anforderungen an eine gute Corporate Governance gerecht zu werden. Nachholbedarf erkannte Weber hingegen noch bei einigen anderen, bislang nicht beaufsichtigten Finanzmarktteilnehmern, wie etwa den Hedge-Fonds. Hier seien noch Verbesserungen notwendig, jedenfalls was die Transparenz der Investitionsentscheidungen und der internen Anreiz- und Kontrollstrukturen angehe.

„Wirkungsvolle Corporate Governance und effektives Risikomanagement sind zu wichtigen Faktoren der Entscheidungsfindung von Investoren geworden“, so Weber. Bei Investoren und Aufsichtsbehörden wachse der Wunsch nach mehr Transparenz ständig. Es liege daher im Interesse aller Finanzmarktteilnehmer, diesen Ansprüchen zu genügen. Nicht zuletzt die aktuelle Schieflage eines Hedge-Fonds habe gezeigt, dass noch Verbesserungspotenzial bestehe. Es sei nun Aufgabe der betroffenen Marktteilnehmer auf die wachsenden Sorgen von Investoren, Aufsehern und Öffentlichkeit angemessen zu reagieren.

Das vollständige Redemanuskript finden Sie nachfolgend:

Good governance and risk management: The formula for success

[Manfred Weber, Chief Executive Officer Association of German Banks]

The Liechtenstein Dialogue 2006
- Global Risks and Investor Confidence -
Liechtenstein University of Applied Sciences, Vaduz, Liechtenstein

Ladies and gentlemen,

The Enron, Tyco and WorldCom scandals, accounting fraud and insider trading, pleasure trips by employee representatives using company funds, executive pay packages widely seen as over-lucrative and stock-option manipulation in this connection – these are just some of the things that boards have come under fire for in the media in recent years. They have also triggered a broad public debate, which shows the need for good corporate governance and its growing importance.

The same holds true for risk management. “Black Monday”, the stock market crash of 1987, the Asian and Russian crises of 1997 and 1998, the bursting of the dot.com bubble in 2000, the large write-offs required on property and corporate loans at the start of the new millennium in Germany, natural disasters and the threat of terrorism – these are only a few examples that illustrate the growing importance of this discipline.

Only a fortnight ago there were first reports of losses by the Amaranth Advisors hedge fund. A lack of controls and poor risk management saw Amaranth lose over 6 billion dollars.

So it is no surprise that both corporate governance and risk management have recently attracted so much public attention. Yet, how do we understand them? What developments have we witnessed in recent years and how are both terms linked to a “formula for success”?

In the OECD Principles of 2004 “corporate governance” is defined as follows:
“Corporate governance involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined.
Good corporate governance should provide proper incentives for the board and management to pursue objectives that are in the interests of the company and its shareholders and should facilitate effective monitoring. ”

So much for the OECD definition, which is, of course, not binding. But there are a number of other understandings of the term “corporate governance”, some of which go further and include, among other things, companies’ responsibility towards society and the environment.

All definitions have in common the aim of ensuring responsible, risk-sensitive and transparent corporate management in a sustained and reliable way. Only then will companies manage to gain the trust and loyalty of shareholders, customers and employees and win over the public at large.

In other words: Given the complexity of our modern world, given the claims that companies face today, trust and transparency, as well as responsibility and reliability, have become a crucial set of production factors.

A lack of trust may have serious economic consequences: The presence of an effective corporate governance system, within an individual company and across an economy as a whole, helps to provide a degree of confidence that is necessary for a market economy to function properly. As a result, the cost of capital is lower and firms are encouraged to use resources more efficiently, thereby underpinning growth.

To win investors’ confidence, good corporate governance is not enough, however. It must be backed by sound risk management, which is now generally understood to mean recognising, measuring, and controlling all kinds of risks. Although a relatively new discipline, risk management has gained growing recognition and importance over the past few years. It is important not only for the financial services sector but for all fields of business.

Risk is a fascinating subject: First of all, winning without risk is impossible, as any entrepreneur knows. Then, as French dramatist Pierre Corneille put it,
“to win without risk is to triumph without glory.”

However, it is the task of the military to get us back down to earth. That’s why US general George S. Patton told us:
“Take calculated risks. That is quite different from being rash.”

And this is what banks do. For banks, handling risks has always been part of the basics of their business. The management of credit risk, market risk and liquidity risk has a fundamental impact on their earnings, stock performance and thus on their long-term viability. Banks experience has been used for a long time to detect and assess risks and to adopt measures to address them.

During the past few decades the management of banking risks drawing on this experience has evolved into mathematical and statistical measurements of risk exposure and their extrapolation into the future. Starting with market risk, ever more sophisticated methods of measuring credit risk, operational risk, interest rate risk, liquidity risk, concentration risk, transfer risk, business risk and so on have been developed in this way.

Against this background, how have market players, politicians and regulators taken up the challenges raised by recent events?

As far as banks are concerned, they have, in my view, responded well overall to the growing demands relating to corporate governance and risk management.

Banks and all other listed companies have to try to satisfy their investors. In the process, they have to bear in mind that investment decisions are usually based on two important factors:

Firstly, the anticipated performance of the potential investment and,
secondly, trust.

An investment’s anticipated performance will always be set against the risk exposure. So investors want proper management of the risks of their investment.

Financial services providers, and banks in particular, are pioneers in the development and introduction of risk management systems. During the past few years the great majority of banks have therefore considerably expanded risk management and risk control departments. For some time now the supervisory boards of many big listed banks have had risk committees of their own.

But sound risk management is not enough. Investor confidence also calls for reliable management along with openness and transparency in general. That does not only apply to company figures, but also for a company’s organisation and strategy. Investors are strongly interested in companies complying with this requirement and disclosing such compliance.

Financial services providers, and banks in particular, place great emphasis on the application of corporate governance codes and on transparent operations. Being capital market players, they realise the importance of reliability and transparency in the way a company is organised.

However, both corporate governance and risk management are performed and fostered not only at banks but also by banks. This is the second role of banks in the process of widespread implementation of risk management and corporate governance in the economy.

Being professional investors, banks do not only demand suitable risk management instruments and corporate governance rules; they also expect detailed information that is prepared and explained competently. That goes for both classical lending business and for investment banking. State-of-the-art risk strategies and transparent decisions by a company’s board have a positive impact on the company’s rating and thus on its refinancing terms and lending rates. The growing importance of institutional investors, which include banks in particular, has spurred these developments.

But the progress made in corporate governance is not only the work of market players. Legislators and supervisors have not rested in the past either but have responded to and influenced developments in the marketplace.

During the last few years many national legislators have implemented guidelines for good and responsible corporate governance in consultation with market players. These guidelines, issued in the form of laws, rules or codes, were designed to win back trust.

In Germany, the Act on Corporate Transparency and Control was passed in 1998. The OECD principles of corporate governance I mentioned earlier, which were first issued in 1999 and redrafted in 2004, had a strong impact on developments in Germany. It was understood by all internationally active companies that the formulation of a code of best practice would be a useful tool in communication with capital markets abroad. Against this background the German government set up the so-called “Cromme Commission”, which issued the German Corporate Governance Code in early 2002. This code, which was redrafted in 2006, describes in a transparent manner the main legal conditions for the management and supervision of stock corporations in Germany and is in line with the relevant international standards.

Similar initiatives were launched at EU level, where the European Commission set up a European Corporate Governance Forum in October 2004, leading to the revision of the Fourth and Seventh Company Law Directives. The last amendment of these directives in June 2006 provides for clear annual statements relating to the members and the activities of both the management board and the supervisory board of all listed companies.

Regulators drove forward the development of sound risk management systems to a large extent. For example, the Basel Committee on Banking Supervision issued the Basel I Capital Accord in 1988, a simple system for measuring credit risk and backing it with capital. This framework has been progressively introduced not only in member countries of the Basel Committee but also in virtually all other countries with internationally active banks.

In June 2004, after years of discussion, the Basel Committee finalised the revised Capital Adequacy Framework, called “Basel II”. Besides introducing more finely tuned capital charges for credit risk in the so called Pillar I, Basel II expands the types of risk subject to capital charges to include operational risk.

Banking supervisors have, however, also realised that prudential limits on banking risks in the form of minimum capital requirements are no longer sufficient. Systems for measuring and managing the different risks are evolving fast.

The upshot of this perception is that Basel II is built on more than just capital requirements. Pillar II, containing the Supervisory Review and Evaluation Process (SREP), opens a new chapter in banking supervision: qualitative assessment and oversight.

In addition to supervisors’ assessment of a bank’s risk management, strengthening market discipline is regarded as highly important. As a result, the disclosure requirements for banks were defined in Pillar III, which aims at enhancing banks’ transparency vis-à-vis the market.

Both Pillar II and Pillar III embrace the idea and the basic features of good corporate governance. Pillar II sets out the requirements for good risk management, while the disclosure requirements in Pillar III ensure transparency of corporate operations from a risk angle.

However, supervisors are aware that good risk management is not enough. So, in addition to the Basel II framework, the Basel Committee sets out basic principles of corporate governance in 2006.

Let me just mention in passing that Basel II is designed to create a level playing field in the area of banking supervision. However, recent developments in the United States suggest that the US is seeking to go it alone and adopt an approach that is incompatible at international level. This is at odds with the original objective of Basel II.

Having said that, let me express very clearly that Basel II has some shortcomings. What I am referring to is the treatment of operational risk in the simpler approaches, where gross income are taken as the basis for measuring risk.

Nevertheless, as far as other financial market players besides the traditionally regulated ones like banks and insurance companies are concerned, a discussion is taking place as to whether these can and should be regulated. I am referring to, above all, rating agencies, private equity firms and hedge funds, which are becoming increasingly important and powerful in the financial marketplace.

When it comes to hedge funds, many of these still have considerable shortcomings, especially as regards the transparency of their operations, their investment decisions, and their control and pay structures. This is why we see growing pressure from private investors, from regulators and from the media for more transparency in particular.

May I, however, also mention one important group of banks where corporate governance requirements are not being fully implemented in Germany simply because these banks are not covered by the Corporate Governance Code.

I am referring to the Sparkassen and Landesbanken, which generally are public banks that publish neither executive salaries nor quarterly reports. They don’t hold any shareholders’ meetings either and stubbornly refuse to acknowledge their public owners’ property rights.

In its 2004 guidelines on corporate governance of state-owned enterprises the OECD highlighted that – and I quote –
“the legal and regulatory framework for state-owned enterprises should ensure a level-playing field in markets where state-owned enterprises and private sector companies compete in order to avoid market distortions. The framework should build on, and be fully compatible with, the OECD principles of corporate governance”.

The Basel Committee has taken up this call and expressly stated that
“the general principles of sound corporate governance should also be applied to state-owned banks”.

This is a clear message. It cannot go unheard and ought to encourage this group of banks to fall into line with the rest of the banking industry.

Ladies and gentlemen, let me sum up:

• Strong banking and capital markets are the foundation on which our economy, our prosperity and the economic growth needed for our social system to work is built.

• Internal risk management, government supervision of financial market players and control of players by their peers in the financial marketplace will be linked more and more closely in the future.

• At banks, we shall see the development of common standards of risk management that are understood and accepted by both supervisors and investors.

• An even stronger control function will be exercised by market players. These are able to exercise a control function at global level.

• All financial market players will be forced increasingly to be more open to the market and, in keeping with good corporate governance, to make their business policy and risk management transparent.

• Some financial market intermediaries – take hedge funds, for example, but public banks as well – still have some catching-up to do here.

• This development will not, however, completely replace public regulation and supervision of the financial markets. Supervisors will continue to provide an important impetus to the evolution of the financial markets.

• Banks and other institutional investors have a dual role in fostering the widespread implementation of sound risk management and good corporate governance.

• Basel II is currently one of the biggest and most important projects for further developing and improving corporate governance at banks and their customers.

The combination of sound risk management and good corporate governance in day-to-day business is the “formula for success” that brings benefits for banks and for the economy as a whole.

In view of the rapid evolution of both corporate governance and risk management rules we have seen over the past few years, it would now be wise to stop and draw breath. The call for a “year of observation”, as Mr Cromme, the chairman of the German government commission on corporate governance, put it, or for a “regulatory pause”, as requested by the Institute of International Finance (IIF), is growing louder. Politicians and supervisors should heed this call.

Anyway, the regulatory screw shouldn’t be turned too far. Now is the time to gather experience with the new rules.

Investors, banks and supervisors will pull together more and communicate more openly to ensure functioning and stable financial markets.

Again, trust is both the aim and the way to get there. So let me conclude with the words of an American clergyman and columnist, Frank Crane, who died in the late 1920s. His “formula for success” was:
“You may be deceived if you trust too much, but you will live in torment if you do not trust enough.”