Bank boards must work more closely with top management to ensure risk taking matches a lender’s corporate strategy, said Michael Alix, senior vice president at the Federal Reserve Bank of New York.
“The ultimate responsibility of the board is to oversee management, and their ability to do that will depend on their own skills and experiences, and their ability to ask the right questions and to challenge management where they aren’t getting good answers,” Alix said at an Institute of International Finance conference in Copenhagen today. Boards must do more to have a “clear understanding” of the risk their bank takes on, he said.
Alix warned that “excessive” profits in a particular business segment could be one signal to boards to take a closer look at the risk their institutions are taking on. Speaking to reporters after the panel, he declined to comment on how that principle might have applied to JPMorgan Chase & Co., which last month revealed a trading loss of more than $2 billion.
“I can’t comment on our supervisory response to an individual institution,” he said.
JPMorgan, the biggest U.S. bank by assets, faces regulatory scrutiny and even criminal probes after the trading losses at its chief investment office. The unit’s drive to make bigger and riskier bets with the bank’s money in recent years had been backed by Chief Executive Officer Jamie Dimon. He has since called the positions that led to the loss “poorly monitored” amid calls in Congress for tighter regulation.
Overall, U.S. financial supervisors are working more closely with bank boards, particularly their risk and audit committees, Alix said.
Closer cooperation between supervisors and boards of directors could help prevent future financial shocks across the banking system, according to Alix. That relationship should “be an open and trusting one, as opposed to an adversarial one, and I think there’s still more work to be done in that direction,” he said.