SBP-Newsletter7 feb2013

7/29/2019 SBP-Newsletter7 feb2013

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SBP News Bulletin

Mr. Yaseen Anwar stresses the need for

inculcating risk culture for sound management of

operational risks

r. Yaseen Anwar, Governor, StateBank of Pakistan (SBP) has stressedthe need for inculcating a risk culture

within the organization

with open communicationchannels between

business lines and controlfunctions for the soundmanagement of

operational risks.

While delivering hisopening remarks at theConference on

Operational RiskManagement at SBPLearning Resource Centre

in Karachi on February 7,2013, he said that SBP is

cognizant of itsresponsibilities regardingsound operational risk

management frameworks

in banks. SBP willcontinue to play its role inensuring effectiveness ofthe establishedframeworks in banks. We expect each bank todevelop and continuously improve its risk

management and control framework dependingon nature, location, size, sophistication,

complexity of business operations and approvedrisk appetite, Mr. Anwar added.

Stressing the need forclose cooperation

between banks and SBP,Mr. Anwar said that the

exchange of ideas is veryimportant in capacity

building for operationalrisk management. He

expressed the hope thatthis conference would

provide a good

opportunity to exchangeour thoughts on riskmanagement and learn

from each othersexperiences.

SBP Governor, in hisaddress, dwelt at length

on three main areas of

risks includingOperational riskmanagement the issuesand challenges; Basel

Accord treatment of operational risk andemergence of sound principles on risk

management and Regulatory developments &supervisory expectations to strengthen the

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SBP News Bulletin

operational risk management within the bankingsector.

Highlighting the importance of risk

management, Mr. Anwar said that the SBP willexpand its existing reporting mechanismin order

to have comprehensive and current informationon operational risk of banks.

Mr. Anwar said that SBP has adopted a twopronged strategy for effectively addressing theissues of operational risks: i) to update the exist

ing instructions on frauds & forgeries andmonitoring in banks, ii) issuance of guidelineson operational risk data collection to enhance the

scope of loss data gathering in line with theBasel Accord requirements and to provide the

industry with minimum set of instructions for

consistent recognition of losses and theirreporting to a centralized data consortium.These projects are at an advanced stage ofconsultations with the industry and these

guidelines/ instructions will help banks improvetheir operational risk management processes, he

added.

SBP Governor observed that it is imperative for

our banks to develop requisite capacities tomanage their operational risks, collect their lossdata, implement risk indicators and set asidecapital to cover potential operational risk losses.It is necessary for risk managers to develop

awareness of operational risk and effectively use

the emerging management techniques, headded.

Mr. Anwar further observed that there is a

pressing need that banks modify theirfragmented approach of operational risk

management in favour of a much morecomprehensive governance and managementframework through clearly defined roles and

responsibilities along with reporting procedures.

SBP Governor was of the view that those at the

top of the organization should take the lead inestablishing a strong risk management culturethrough sound internal governance. He said that

the board of directors needs to regularly reviewthe framework and ensure that senior

management is actively monitoring the

effectiveness of risk management and controls.For this purpose, the board should establish amanagement structure based on clear lines ofresponsibility, accountability and reporting. The

board should set the banks risk appetite throughthe approval of operational risk management

policy. SBP expects that the board should seekperiodic reports from management to monitorthe operational risk profile of the bank in a

proactive manner, he added.

The two-day conference is being attended bycommercial bankers, SBP officials, international

participants and subject specialists. Staff Report

SBP Governor's press conference on MPS

The Governor, State Bank of Pakistan, Mr. Yaseen Anwar will unveil the Monetary PolicyStatement (MPS) for the next two months at a press conference scheduled to be held at SBPLearning Resource Centre Auditorium on February 8 at 4.15 P.M. Earlier, the SBP Central Boardof Directors will meet under the Chairmanship of Mr. Yaseen Anwar at SBP Karachi to approvethe MPS.Staff Report


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SBP News Bulletin

Pakistans economy grows by 3.7%in FY12:

SBP Annual Report

akistans economy witnessed amodest improvement in FY12 realGDP grew by 3.7 percent during the

year, compared with 3.0 percent in FY11,says the State Banks Annual Report onthe State of the Economy for the year2011-12 released on January 30, 2013. Itsaid the growthwas more broad-based compared toFY11, as it was

evenly distributedacross agriculture,industry and theservices sector.

The demand sidewas moreinsightful, as thegrowth in FY12was primarilydriven by private

consumption, itsaid, adding thatstrong workerremittances, avibrant informaleconomy andhigher fiscalspending,supportedconsumptiongrowth during the year.

SBP Report said that food prices haveremained relatively stable during FY12,which helped bring down overall inflationto 11.1 percent better than the 12.0percent projected earlier. It was thiseasing that allowed the central bank to

reduce the policy rate by 200 bps duringthe year; this was done to partially reviveprivate sector borrowing, and encouragebanks to improve their intermediationbetween private savers and borrowers,the Report added.

According tothe Report, theexternal frontwas positive as

remittancesposted yetanother year ofstrong growth,which not onlyhelped narrowthe currentaccount deficit,but alsocontributed to

economic

activity. Inoverall terms,the externalsector has beenless worrying

thananticipated atthe beginningof the year;however, as

financial inflows dried up, the burden of

financing the current account deficit andexternal debt, has fallen on the countrysFX reserves, the Report added.

While services continued to support theeconomy, commodity producing sectors(agriculture and industry) posted an

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SBP News Bulletin

improvement over FY11, the Report said,adding that the growth in agriculturecame from livestock and kharifcrops, butminor crops witnessed a decline due tothe floods in Q1-FY12.

It said the positive spillovers fromagriculture, coupled with strongremittances and income support schemes,boosted construction activities andhousehold consumption both of whichhelped the manufacturing sector. Interms of services, there was a sharpimprovement in financial sector earnings,driven primarily by the volume ofcommercial bank financing of the fiscal

deficit, and deceleration in fresh non-performing loans (NPLs), the Reportadded.

Among other factors, SBPs decision to cutits policy rate by a cumulative 200 bps inH1-FY12 was partially motivated by itsconcern over commercial banksreluctance to extend credit to the privatesector. However, in the presence of arisk-free dominant borrower, average

bank lending rates fell by only 112 bps,which suggest that banks remainapprehensive about (or uninterested inlending to) the private sector, and werewilling to accept lower earnings ongovernment securities, according to theReport.

It said the actual outcome in the externalsector in FY12 was better: a currentaccount deficit of US$ 4.6 billion, and anoverall gap of US$ 3.3 billion, meant thatPakistans FX reserves fell by US$ 4.0billion, against an initial projection of US$4.4 billion. Nevertheless, this contributedto a 9.1 percent depreciation of the Rupeeduring the course of the year. The Rupeedepreciated from November to late

December 2011, and sharply so in the lastweek of May 2012. The first event mayhave been triggered by the closure ofNATO supply routes to Afghanistan, andsustained by rising oil prices; the second

adjustment was a brief market panic inresponse to international developments.In effect, the Rupee was impacted moreby one-off events than the underlyingeconomic fundamentals, the Reportadded.

According to the Report, the Pakistaneconomy will grow at about the same ratein FY13 as it did last year (FY12). We areconfident that milder flooding this year

and the underlying factors that allowedfor 3.7 percent growth in FY12 willlargely remain in play, the Report added.

The Report observed that the structuralproblems in the energy sector, PSEs andthe fiscal side, may not be tackled in thenear-term. However, since thegovernment paid-off the accumulatedsubsidies in FY12, we do not expect thesame level of fiscal pressure this year.

While the government hopes to achieve afiscal deficit target of 4.7 percent of GDP,we think a range of 6 7 percent is morerealistic, the Report added.

According to the Report, a key concern forthe central bank is the on-going decline indomestic investment. Although theinvestment environment in Pakistan islikely to remain challenging, we believethe recent 250 bps cut in the benchmarkinterest rate, could revive privateinvestment and provide some relief tocommercial enterprises, In our view, withinterest rates at current levels,commercial banks may be incentivized tobook high-return private assets, ratherthan just place money with the


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SBP News Bulletin

government. Although SBP does not tellbanks what to do, commercial banksshould be cautious about how theirbalance sheets are evolving, and look todiversify their asset portfolio with a long-

term view, the Report added.

Since the size of the fiscal deficit last yearwas mainly due to one-off factors, we arehoping things will be better this year, theReport said, adding: We are alsooptimistic that with the opening of NATOsupply routes, Coalition Support Fund(CSF) will be realized in a timely manner.SBP remains hopeful that inflows fromprivatization (Etisalaat) and the 3G

licenses will also be realized in FY13.

In making our interest rate decisions, SBPlooks closely at the likely impact on theFX market. One must note that the FXmarkets reaction to the discount ratecuts in August and October 2012 wasquite muted, the Report said, adding thatin late November 2012, some pressure,however, appeared, even though thecurrent account posted a surplus in the

first four months of FY13. In our view,this pressure can be traced to net

outflows to the IFIs (around US$ 1.5billion during Jul-Nov FY13). Althoughthese payments do not impact the FXmarket directly, the drawdown of SBPsforex reserves has impacted market

sentiments, the Report added.

In terms of tradeables, our exportprojections assume that cotton priceshave bottomed-out, while Pakistans lowvalue-added textiles may be insulatedfrom the demand contraction in theOECD, the Report said, adding that we donot expect any spike in imports given thesluggishness in domestic investment, andour view on global commodity prices.

We also remain optimistic that inwardremittances will continue to post stronggrowth, the Report said.

The State Bank Report stressed upon theurgent need to embark on structuralreforms in the energy sector, PSEs andpublic finances. This, together with amore balanced deficit financing mix inFY13, would ease a great deal of pressurefrom domestic sources of financing

especially the commercial banks, theReport added. Staff Report


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SBP News Bulletin

SBP pursuing multi-

pronged strategy to tackle

the challenge of financial

exclusion in Pakistan:

Yaseen Anwar

Mr. Yaseen Anwar, Governor, State Bank ofPakistan has said that the SBP is pursuing a

multi-pronged approach to tackle the

challenge of high financial exclusion in the

country. In particular, SBP is aiming todevelop an efficient and sustainable market-

based financial structure meeting thefinancial needs of the marginalized

population of the country including womenand young people, he said while addressing

the Closure Ceremony of Term Finance

(Sarmaya) Certificate (TFC) of TameerMicrofinance Bank on January 24, 2013.

He said that the issuance of this TFC will goa long way in diversifying funding for the

microfinance sector. I strongly encourage

all the financial market players to develop along term vision for making the financialsector in Pakistan more inclusive, SBP

Governor added.

Mr. Anwar observed that the estimated

microfinance market of 25-30 million clients

may not necessarily just need credit

services. It is of utmost importance that theindustry should aim to provide holistic and

appropriate financial services, including

deposit, credit, insurance and remittanceservices, he said, adding that the SBP iswell aware of the fact that the industry is

beset with a number of challenges in the

way of achieving this high objective. SBPis actively engaged with all stakeholders to

address the sector specific challenges in a

sustainable manner, he said.

He noted that the financial sector in Pakistanremains restricted in its outreach both interms of its depth and breadth. According to

the Access to Finance Study of 2008, hardly

12% of the population has access to formalbanking services and another 32% is

informally served whereas 56% of the adult

population is totally excluded, he saidadding that similarly in Pakistan, the

estimated size of the microfinance market is

in the range of 25-30 million clients which

indicates that the current level ofmicrofinance access at 2.4 million clients is

only 10% of the potential market.

Mr. Anwar said that the SBP with the help

of UKs DFID had launched the

Microfinance Credit Guarantee Facility

(MCGF) in 2008 to match the massivescarcity of funding to the majority of the

microfinance market. Prior to the launching

of this Facility, and apart from one-off

funding deals between the few Microfinance(MF) providers and commercial banks, the

commercial funding market was nonexistent

for microfinance providers and themicrofinance industry was severely

handicapped and highly donor dependent for

its funding needs, he added.


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SBP News Bulletin

SBP Governor said the scope of the Facility

has recently been enhanced to allow

microfinance providers to mobilize non-bank financing from capital markets, further

diversifying sources of financing for micro

borrowers, he said, adding that it isheartening to see that a number ofmicrofinance providers, including Tameer

Microfinance Bank, while benefitting from

the MCGF, has helped the facility to attainthis objective.He briefly shared with the audience that the

MCGF of UK 15 million has beeninstrumental in relaxing funding constraints

of the microfinance sector in Pakistan which

are as under:

So far, 25 guarantees have beenissued under MCGF, mobilizing over

Rs. 7 billion for 5 leading MFproviders, enabling microcredit

access to around 350,000 new micro

borrowers.

The Facility, due to its risk sharingstructure has achieved a leverage of

3 times, mobilizing an additional Rs.

5 billion from private capitalmarkets, establishing that

microfinance may not be that risky

as a business proposition, and

Most of all, the Facility has engaged16 commercial banks and recentlyretail investors in funding the

microfinance providers.

Mr. Anwar said the MCGF has helped build

links between micro borrowers and

banks/DFIs. The familiarization of the

banks/DFIs with the client will eventuallylead to mainstreaming and graduation of the

micro borrower.

The SBP Governor said the Facility hasintroduced microfinance business to

banks/DFIs as banks have to evaluate themicrofinance providers which must havehelped them develop their own sense of the

risks involved in microfinance. As a result,

banks are now more willing to invest inmicro banking.

Mr. Anwar said the Facility has helpedmicrofinance providers to offer small ticket

sizes for retail investors. This has offered

small retail investors an alternate channel for

investing their savings and earning relativelyhigher returns, encouraging the concept of

micro-savings, he added. - Staff Report


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SBP News Bulletin

SBP Deputy Governor calls for building inclusive

and stable financial sector in Pakistan

he Deputy Governor, State Bank of

Pakistan, Kazi Abdul Muktadir hasadvised the consumer associations,

trade bodies, Banking Ombudsman, financial& legal functionaries, banksand CompetitionCommission to join hands ineradicating financialconsumer malpractices forbuilding an inclusive andstable financial sector inPakistan.

Delivering his key noteaddress on FinancialInclusion, ConsumerAwareness and Protectionat the 4th Conference onFinancial Services andConsumers at a local hotel inKarachi on January 31, 2013,he regrettably pointed outthat financial sector inPakistan remains restrictedin its outreach as the

majority of population remains eitherexcluded or informally served. This limitedaccess is reflected in the total number of bankaccounts, presently around 32 million, andthe total number of borrowers, which is only5.7 million, he added. This high level offinancial exclusion is largely attributed to twomajor factors, i) lack of appropriate productoffering by financial service providers and ii)lack of public awareness about availability offinancial services and products, he said.

Mr. Abdul Muktadir said that SBP is cognizantof high financial exclusion in the country andcommitted to tackling the associatedchallenges in a sustainable manner. Heoutlined the multi-pronged financial inclusionstrategy of SBP as under:

Introduction of Basic BankingAccount (BBA), requiring commercialbanks operating in Pakistan toprovide basic banking facilities to the

low income people ofthe country. A BBA canbe opened with aminimum deposit ofRs1, 000 carrying nofee, no limit ofminimum balance andoffering full ATMfacility.

Introduction ofthe Annual BranchLicensing Policy whichrequires commercialbanks with 100branches or more toopen at least 20% oftheir branches outsidebig cities and set upbranches in TehsilHeadquarters where

no branch of any bank exists.

A world class regulatory frameworkto enable commercial microfinanceand branchless banking in Pakistan.

A national microfinance strategySBP with the assistance of UK Department forInternational Development (DFID) and otherdonors launched programs to increase access

to finance in the country, he said, adding thatthe DFID-funded Financial Inclusion Program(FIP) aims to address financial exclusionthrough a variety of interventions.

Mr. Abdul Muktadir pointed out that FIPinterventions largely focus on addressingmarket failures and industry bottlenecks,

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while addressing issues of fair treatment ofclients and consumer protection.

FIP is supporting the establishment of aseparate national level Credit InformationBureau for microfinance clients, he said,

adding that FIP is also supporting PakistanMicrofinance Network (PMN) to introducethe Transparent Pricing Initiative in Pakistan.This initiative will make the prices for themicrofinance market available for the firsttime in history, SBP Deputy Governor added.

SBP Deputy Governor said that FIP is alsosupporting strengthening consumerprotection under the industry-led SMARTcampaign that is seeking to improve clientprotection mechanism in the microfinancesector.

The first-ever Nationwide Financial LiteracyProgram (NFLP) launched in January 2012intends to create awareness about basicfinancial concepts such as budgeting, savings,investments, debt management, financialproducts, branchless banking and rights andobligations of consumers etc., he said, addingthat the pilot phase of the program has beenconcluded successfully by targeting about

50,000 beneficiaries in various provinces,regions and districts with emphasis on low

income strata and its effectiveness iscurrently being evaluated. Following a thirdparty independent assessment, the programwill be scaled up to the national level in itsnext phase, SBP Deputy Governor added.

Mr. Abdul Muktadir said that due to lack of aFinancial Consumer Protection legalframework at the National level, SBP has beenpromoting financial consumer protection inthe industry through regulatory initiatives onthe basis of its powers under the BCO, 1962.These include: issuance of PrudentialRegulations for Consumer Financing; fixationof minimum rate of return on deposits;issuance of guidelines for internal controls forcheque payments; issuance of guidelines onsale of third party products; issuance ofoperational guidelines for credit cardbusiness in Pakistan; issuance of operationalguidelines on ATMs; issuance of guidelines oncollection of utility bills and issuance ofguidelines on priority to senior citizen andpension disbursement through Banks.

I believe that financial consumer protectioncould be best achieved if the financial serviceproviders develop and adopt moreresponsible business practices, encompassing

their entire product value chain, SBP DeputyGovernor said. Staff Report

State Bank reduces refinance rate

The State Bank of Pakistan (SBP) has decidedto cut the rate of refinance under the ExportFinance Scheme (EFS) by 0.1 percentagepoint from February 01, 2013. This is thesecond rate cut announced by SBP in a month.Earlier, it had reduced the refinance rate by

0.2 percentage point.

It has been decided that rate of refinanceunder the Export Finance Scheme applicablefrom February 01, 2013 and onward will be8.20% p.a. till further instructions. Thecommercial banks shall ensure that wherefinancing facilities are extended by them to

the exporters for availing refinance facilitiesunder the Export Finance Scheme, theirmaximum margin/spread does not exceed1% p.a., according to a Circular issued by SBPon January 31, 2013.

The revised reduced markup rate would alsobe applicable on outstanding loans grantedunder EFS. Accordingly, banks have beenadvised by SBP to immediately re-price theiroutstanding loans granted under EFS, keepingin view the revised reduced markup rate.Simultaneously SBP BSC offices would alsoapply reduced markup on outstanding


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SBP News Bulletin

refinance loans granted under EFS. In orderto reconcile the position of re-priced loans,banks should submit particulars ofoutstanding loans re-priced by the bankunder EFS on the prescribed format to theconcerned SBP BSC office(s) within 10 days

from January 31, 2013.

.The reimbursement of mark-up rate benefitto exporters, on excess performance underPart-II of the Scheme, as specified in SMEFDCircular No.15 dated October 31, 2009, willbe adjusted accordingly while keeping in viewthe revised mark-up rates, the SBP Circular

added. Staff Report

SBP issues licence to U Microfinance Bank to operate atnational level

The State Bank of Pakistan (SBP) has issued anationwide microfinance banking licence to U

Microfinance Bank Limited (formerly RozgarMicrofinance Bank Limited) to operate atnational level.

It may be pointed out that Rozgar MicrofinanceBank Limited was a district wide microfinance

bank (MFB) operating in Karachi district withone branch and 6 service centres. In August,2012, Pakistan Telecommunication CompanyLimited (PTCL) was allowed by SBP to acquire

100% shareholding of Rozgar MicrofinanceBank Limited with the condition that PTCLwould a nationwide MFB within one year by

bringing in a professional management team.

After completion of all relevant formalities andchange in name of Rozgar MFB to UMicrofinance Bank Limited, SBP issued a

nationwide Microfinance Banking Licence to UMicrofinance Bank Limited. Staff Report

SBP issues licence to exchange companies

The State Bank of Pakistan (SBP) has issuedlicence to M/s Sadiq Exchange Company (Pvt)Ltd, Gujrat and M/s ZeeQue ExchangeCompany (Pvt) Ltd, Lahore to operate as full-fledged exchange companies.

SBP has cancelled the licence of a non-operational exchange company, M/s SIBL

Exchange Company (Pvt.) Limited, Karachi asthe central bank declined to renew theauthorization/licence issued to M/s SIBLExchange Company to operate as an exchangecompany some time ago. SBP has also advisedthe company to ensure that no business iscarried out in the name of the company infuture. - Staff Report


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SBP News Bulletin

SBP-Panthers win 4th state bank inter-department

cricket tournament

SBP-Panthers won the 4th State Bank

Inter Department Tape Ball CricketTournament 2012-13 by beating SBP-Dolphins by 15 runs in the final played atSBP Sports Complex, North Nazimabad,Karachi.

Batting first, SBP-Panthers scored 106 for7 in 10 overs. In reply, SBP-Dolphinscould score 91 for 8. Suleman of SBP-Panthers showed all round performanceby scoring 32 runs and taking 3 wickets.

Earlier, SBP-Dolphins beat SBP-BSC-Stallions by 7 wickets in the semi-final ofthe Tournament.

Batting first, SBP-BSC-Stallions scored 93for 6 in allotted 10 overs. In reply, SBP-Dolphins scored 94 for 3.

In the 3rd Festival Match played at SBPSports Complex, North Nazimabad, Karachi,Karachi Bankers Club XI beat State BankGovernors XI by 2 wickets.

Batting first, State Bank Governors XIscored 69 for 8 in 10 overs. In reply,Karachi Bankers Club XI scored 74 for 8wickets.

The Deputy Governor, State Bank of Pakistan,Kazi Abdul Muktadir, who was the Chief

Guest on the occasion, distributed prizes.

SBP-Panthers emerged as the Champion ofthe Tournament and won the cash prize ofRs.50,000/- where as SBP-Dolphins stood

runners-up and won the cash prize ofRs.25,000/-. The 3rd position was clinched bySBP-BSC-Stallions who received the cashprize of Rs.10,000/-.

Speaking on the occasion, Mr. Abdul Muktadirappreciated the efforts of SBP SportsCommittee for organizing such events for theemployees of the Bank and their families. Hesaid that the employees of the Bank shouldvisit SBP Sports Complex at North Nazimabadto use the sports facilities provided by theBank.

At the end, Mr. Cornell J. B. Fernandes,

Secretary, Karachi Bankers Club thanked theChief Guest and all guests for attending theoccasion. He also lauded SBP SportsCommittee for organizing the Tournament.Staff Report


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SBP News Bulletin

Cyber-securityWar on terabytes

As banking has gone electronic, it has also

become vulnerableIN THE dusty hillsnorth of Madrid, inlow-slung buildingsguarded closely likebank vaults of old, arethe rows of serversthat run the far-flung

banking empire ofSantander, a biginternational bank.Ever since the 2001attacks on the WorldTrade Centre, bankslike Santander haveinvested billions in safeguarding andduplicating their data centres to protect themfrom terrorist attacks and natural disasters.

The threat against banks has, however,

evolved. Although the physical infrastructureof the worlds financial system is largelysecure, the software that runs on it is not.Bank bosses and regulators are becomingmore concerned by the threat posed tofinancial stability by networks of hackers thathave launched a series of attacks on banksover the past few months.In that time some 30 large global banks,mostly American, have suffered from a seriesof assaults designed to shut down theirwebsites. These attacks are known as

distributed denial of service (DDoS) attacksbecause hackers harness an army of infectedcomputers to bombard the target withinternet traffic with the intention ofoverloading it. They are relativelyunsophisticated. But they have periodicallyfrustrated customers trying to use onlineservices at banks including JPMorgan Chase,Wells Fargo, Citigroup and PNC.

They have also shownsome novel features,such as theconscription ofcomputers in cloudcomputing datacentres, increasing the

amount of spurioustraffic generated.Several peoplefamiliar with theseattacks say there arestrong indications thatthe hackers are state-

backed; many suspect the involvement ofIran.The attacks have caused little more than briefinconvenience, mainly because they weretargeted at the public face of the affected

banks rather than their connections to otherbanks and to payment systems. Even so, theyhave brought to light vulnerabilities inbanking and payment systems. RossAnderson, a professor of security engineeringat the University of Cambridge, frets thathackers could cause mayhem if they were toaim DDoS attack at banks crucialinfrastructure instead of their websites. If20,000 machines started hammering Britishpayment gateways on the last weekendbefore Christmas, people wouldnt be able toshop except with cash, says Mr Anderson.Another risk is that hackers may graduatefrom crude DDoS attacks to moresophisticated ones that secretly penetratebanks systems and then steal or delete data.From what weve seen the threats haventbeen life-threatening, says one regulator. Atthe same time we want to be ahead of this

Foreign News


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SBP News Bulletin

curve. The fundamental challenge is that therisk morphs quickly and can be difficult todetect.The official responses include increasingregulators oversight of banks computersystems and war-gaming attacks on banks

and the networks that connect them. Yetmuch remains to be done. At the momentbanks have little incentive to shareinformation on attacks and vulnerabilitieswith regulators or competitors. Supervisorsalso appear to be unwilling to talk publiclyabout their concerns or about investigationsinto lapses by banks, such as the systemsfailure in mid-2012 at the Royal Bank ofScotland that left many customers unable tocarry out transactions.One step is for regulators explicitly toacknowledge that an IT failure at one bankcan spread financial instability or undermine

trust in payment methods such as debit cards.They could then grade banks publicly on thequality of their systems and force them toimprove things if they fall short of requiredstandards.

But that approach raises another, thornierquestion: whether governments should justforce banks to invest more of their ownmoney in cyber-security, or whether theyshould devote their own resources toprotecting banks from attacks by enemystates and their surrogates? No one in theUnited States is expected to provide for theirown air defence, points out Richard Bejtlichof Mandiant, a computer-security firm. Wehave an army to repel a land invasion, so whois out there protecting the cyber lanes of

control? Nobody. It is a free for all. - TheEconomist

The cost of making bankers behave

The problem with values statements is how to make

them stick, writes Philip Augar

The rules have changed. You wont feel

comfortable at Barclays and, to be frank, wewont feel comfortable with you ascolleagues. The message in this monthsletter to staff from Antony Jenkins, the banksnew chief executive, was plain: if you dontlike our values, get out.

It is a strong start to reforming the banksculture but, as Barclays recent history shows,the problem with values statements is makingthem stick. For, even as some employeeswere fiddling the London interbank offeredrate and selling customers interest rate swapsand unnecessary payment protectioninsurance, the bank already had anapparently robust code of conduct. Ourorganisation, read one crucial section, wasfounded on traditional values of trust andhonour and our success has been, andcontinues to be, dependent not only on thequality of our products and services, but on

the way in which they are delivered. We

expect every Barclays employee, and otherswho work on our behalf, to conductthemselves according to consistently highprofessional and ethical standards.

That statement was signed by John Varley,chief executive until 2010, and reinforced byhis successor. Bob Diamond said in a radiolecture in late 2011: Culture is difficult todefine. I think its even more difficult tomandate. But, for me, the evidence of cultureis how people behave when no one iswatching.

We did not have to wait long to know howsome Barclays people were behaving. Thebanks involvement in the scandals that cameto light the following year showed, as MrJenkins noted coyly, that: We were notimmune at Barclays from these mistakes.Email evidence suggests senior management


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SBP News Bulletin

may have known about the lowballing of theLibor rate as far back as 2007.

Today, the top of the bank is wearing belt andbraces. Sir David Walker, a City of Londongovernance expert, has been appointed

chairman, supported by Sir Hector Sants,former Financial Services Authority chiefexecutive, who will oversee regulatoryrelationships. They will shortly receive aboard-commissioned report from leading Citylawyer Anthony Salz on the banks cultureand ethics.

It is essential that they follow through. By thepeople they appoint, the actions they rewardand those they punish, senior executives setthe tone. Signals will be read and conduct

accordingly amended.

There are three steps that would reinforcethe message. First, training in all aspects ofBarclays code should be compulsory foremployees, no matter where they are basedor in which line. Adherence should be hard-wired into employees terms and conditionsand annual appraisals.

Second, senior managers should be requiredto make an annual personal, signed statement

describing how this code has beenimplemented in their area of responsibility.For board-level post holders, this should beaudited and separately verified by non-executive directors.

Third, pay practices must change. Ininvestment banking, recent moves from

short-term bonuses towards longer-termincentives and clawback provisions are theway forward. But bankers dealing withprivate individuals, small and medium-sizedenterprises, and other less financiallysophisticated customers should have further

constraints. In retail banking, seniorexecutives rewards should be linked tocustomer measures such as overallsatisfaction, complaint levels, and their fairresolution and regulatory compliance.Remuneration for frontline staff should neverbe linked to sales.

But the problem does not start and end withBarclays. The bank was the first to settle itsLibor case with regulators in the US and UK. Itwould help if further measures it took

ideally both radical and prompt wereintroduced in conjunction with an industry-wide code of good financial practice overseenand enforced by an independent body. It is asubject on which the UKs ParliamentaryCommission on Banking Standards is likely tospeak when it reports next month. The UKfinancial services industry, meanwhile, thisweek will launch a voluntary scheme to raisethe quality of boardroom leadership.

This is an important moment, offering the

potential for banking to begin to restore thestatus it lost after the big bang of the 1980s.

The writer is a former group managing

director at Schroders, and author of Reckless:

the rise and fall of the City -Financial Times

SBP-Newsletter7 feb2013

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