x Abu Dhabi, UAEFriday 19 January 2018

Banks need their own 'risk champions'

Early warning measures should be introduced by all regulators to protect the financial sector.

Gulf banks need to reform their management structures to reduce their susceptibility to future financial crises, industry experts say. Financial institutions have been urged to appoint specially trained "risk champions" to flag potential risks to their board members before they make decisions on investments and lending.

Directors should also undergo recognised certified training and annual appraisals on risk management, said Saleh Hussain, the deputy chairman of the Bahrain Association of Banks. Such reforms needed to be introduced under early warning regulations by central banks to cover the entire financial sector, Mr Hussain said. "Financial companies have to look to make sure they have early warning systems in place," Mr Hussain said yesterday at an event in Abu Dhabi organised by the Arab Monetary Fund. "We know only too well that this crisis caught many banks unaware and we need to keep our eyes open for future risks."

Ineffective or non-existent risk assessment meant that, before the financial crisis, some banks in the GCC followed other international financial institutions by taking reckless decisions, while failing to notice growing asset price bubbles, Mr Hussain said. Banks have been forced to write down billions of dollars in the crisis due to falling asset prices and a build-up of bad loans. Exposure to the troubled Saad and Al Gosaibi conglomerates of Saudi Arabia accounted for some of those losses.

"Empowerment of risk champions is a necessity across the hierarchy at boards and management levels," said Riyad al Dughaither, the principal consultant of Developed Solutions Consultancy, a Bahrain-based financial institution advisory firm. Mr al Dughaither recommended the appointment of at least two independent "expert" directors on the boards of Gulf banks' risk and audit committees. Early warning systems had to be introduced across the sector by regulators to identify asset bubbles such as over-valued prices in property markets, he said.

"Warnings when they occurred were dismissed," Mr al Dughaither said. "There was too much faith placed in recent history and models in debt-correlation assumptions." Credit growth supported by large inflows of foreign capital and rising oil prices contributed to a property-led boom in the six years before the crisis in the region. But that came to an abrupt halt towards the end of last year as the price of oil began to fall and foreign investors withdrew capital from local banks.

To increase cross-border communication between banks in the GCC, supervisory colleges could be set up to share information on risk profiles and planning between regulators in the countries where banks are based and their host countries, said Rudi Bonte, a member of the management committee of the Banking, Finance and Insurance Commission in Belgium. Sultan al Suwaidi, the Governor of the Central Bank, said on Monday that the bank was considering how to devise a better risk management system to protect the sector from future crises.

Mr al Suwaidi said the regulator was reviewing the type of securities banks hold - which are categorised as liquid assets - during times of financial meltdown. @Email:tarnold@thenational.ae