Global regulators shift focus to risk and conduct

Global regulators, which have so far focused on repairing banks' balance sheets, are starting to look at conduct and risk-management issues as fears grow that recent scandals in the sector could create new 'systemic risks'.

The Financial Stability Board, which advises the Group of 20 Nations on improving the resilience of markets worldwide, and the Basel Committee on Banking Supervision, which writes global rules that the UK's biggest lenders must conform to, have said they will focus on risk and how banks behave.

"The scale of misconduct in some financial institutions has risen to a level that has the potential to create systemic risks," Mark Carney, the governor of the Bank of England who also chairs the FSB, wrote to his fellow G20 finance ministers and central bank governors last month.

The FSB has said it will develop an international response to the BoE's Fair and Effective Markets Review, due in June and launched in response to the scandals over traders rigging Libor interest rates and foreign exchange markets.

The Swiss-headquartered body will also target the withdrawal from correspondent banking, scrutinising claims from banks that biting penalties for breaching sanctions or terrorist-finance laws, particularly from US authorities, have caused them to exit markets deemed too risky.

Several of the big US dollar clearing banks have severed ties with lenders in developing nations to limit the risk of being hit by massive fines.

Three of the world's biggest banks have withdrawn from correspondent banking relationships in 30 jurisdictions in the wake of a regulatory crackdown. They are believed to be HSBC, JPMorgan and Citigroup, the Financial Times previously reported.

The Basel Committee, meanwhile, published proposals on corporate governance for lenders in late 2014 and will make final recommendations later this year. The proposals focused on boards' role in improving culture and risk management.

The scrutiny of the FSB and the Basel Committee come amid wider concern among regulators and policy makers that heavy fines for misconduct such as breaching sanctions or rigging benchmarks could weigh on the financial health of institutions.

Andrew Bailey, head of the UK's Prudential Regulation Authority that supervises the largest lenders and insurers, said last year that there needed to be more consultation between watchdogs before the imposition of large penalties on banks.

The FSB has said it will look at co-ordination between regulators around the world in their investigations as part of its new emphasis on conduct.

While it is unclear what action the FSB will take, the industry welcomes more co-ordination between watchdogs in the wake of increasingly heavy fines and overlapping investigations that often require similar material going to different authorities around the world.

"Conduct is becoming a bigger part in the discussion of global market infrastructures," one senior European banker told the Financial Times. "You have to have someone in charge of it, an organisation that drives the co-ordination of conduct regulations."

Additional reporting by Laura Noonan in London

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