#1The Imperative of Strong Corporate Governance for Financial Stability CENTRAL BANK OF TRINIDAD & TOBAGO Dr. Alvin Hilaire, Governor, Central Bank of Trinidad and Tobago Launch of Financial Stability Report June 13, 2017 Financial Stabilty fo www.central-bank.org.tt; email: [email protected] Central Bank of Trinidad & Tobago, 2017#2Main points PG 區 1. The global financial crisis highlighted the dangers of weak governance for economic stability. 2. Company incentive systems can sow the seeds for failure in the absence of diligent oversight. International experience led to improvements in the governance framework for financial institutions. Considerably more attention is being paid to governance in Central Banks worldwide. 5. Market manipulation and collusion have tainted well-established statistical indicators. 6. Trinidad and Tobago's financial institutions play a crucial role in saving and investment activities. 7. Episodes of financial failure in Trinidad and Tobago can be linked in part to governance issues. 8. The current two-layer governance framework needs to evolve further. The Central Bank is moving to fortify governance internally and in the oversight of licensees. 10. Companies themselves must adhere to principles of integrity, transparency and proper controls. 11. There must be concerted vigilance to ensure that good governance remains well entrenched. 2#31 The global financial crisis highlighted the dangers of weak governance for economic stability. 區 PG GOVERNANCE WEAKNESSES ECONOMIC DEVELOPMENTS SUPERVISORY GAPS SUBPRIME DIFFICULTIES 3#42 Company incentive systems can sow the seeds for failure in the absence of diligent oversight. •Incentives encourage excessive risk taking •Unqualified, weak board members REMUNERATION & INCENTIVE RISK MANAGEMENT/ CONTROLS BOARD PRACTICES SHAREHOLDERS RIGHTS •Ignorance toward risk facing the institution LEHMAN BROTHERS BEAR Failed كالا The 區 PG RBS Misalignment of shareholder and management interests Llover Bailed Out FreMe Bailed northern Nationalised S AIGL Freddie Bank of America Bradford & Dingley Nationalised Merrilynch Baffe out HBO Spic Taken OVG Alliance on over Leicest Source: BBC 4#53 International experience led to improvements in the governance framework for financial institutions. PG Dodd-Frank Legislation OECD CORPORATE GOVERNANCE PRINCIPLES FINANCIAL Stability Board CARIBBEAN Group of Banking SUPERVISORS NATIONAL FRAMEWORKS LO 5#6Behaviour and Culture 4 Considerably more attention is being paid to Governance in Central Banks worldwide. Clear Mandate Consistent Policy Framework Political Independence Operational Independence Effective Monetary Operations Financial Independence Accountability Transparency Internal Governance Timely and Clear Communication Effective Internal Organization Credibility and Trust Financial Stability Low and Stable Inflation CO 6 區 PG#75 Market manipulation and collusion have tainted well-established statistical indicators. Silver Prices M Consumer Sentiment Index LIBOR 區 PG 7#8CO 6 Trinidad and Tobago's financial institutions play a crucial role in saving and investment activities. 區 PG DIC Share of Assets in 2016 Assets 216%: GDP 1% UTC 7% NIB Commercial Banks 44% 8% Other 2% Occupational Pension Funds 16% Insurance Companies 15% Source: Central Bank of Trinidad and Tobago Nonbanks 3% Credit Unions 4% 8#97 Episodes of financial failure in Trinidad and Tobago can be linked in part to governance issues. AG 區 2000s 90s 80s 1980 1981 1982 1983 1984 Nonbank Financial Institutions 1985 1986 1987 1988 1988 1989 1990 1991 1992 1992 1993 Indigenous 1994 Commercial Banks 1995 1996 1997 1998 1999 2000 2001 Major Insurance Company 2002 2003 and Associated Entities 2004 2005 2006 2007 2008 2009#108 The current two-layer governance framework needs to evolve further. Layer One: Legal / Regulatory Layer Two: PG 區 Company Specific Codes Central Bank of Trinidad and Tobago Commissioner for Cooperative Development - Ministry of Labour Securities and Exchange Commission BATT Code of Banking Practices ATTIC Code of Conduct Central Bank Act Cooperative Societies Act Securities Industries Act Financial Institutions Act Insurance Act Companies Act Money Lenders Act Corporate Governance Code (2013) Company Bye-Laws / Internal Procedures 10 10#119 The Central Bank is moving to fortify governance internally and in the oversight of licensees.mm.com AG 區 CENTER BAK STRATEGIC PLAN BLOW THE WHISTLE INTEGRITY. HONESTY, ACCOUNTABILITY PUBLIC INTEREST CONCERNS Financial Malpractice Fraud Criminal Offences Breaches of Legal Obligations Ethical Misconduct Corporate Governance Guideline; Fit and Proper Guideline Onsite Examinations - Assessment of Board, Board Committees and Senior Management Governance in Licensees Fit and Proper assessments of Directors and Main Management Positions Quarterly Meetings with Institutions Review of Board Minutes and Papers 11#1210 Companies themselves must adhere to principles of integrity, transparency and proper controls. Adequate disclosure and transparency Appropriately qualified Board members Overall Board responsibility Supportive remuneration structure Strong Internal Audit Efficient Senior Management Independent Risk Management PG 區 12#1311 There must be concerted vigilance to ensure that good governance remains well entrenched. Stakeholders (depositors, shareholders, regulators, investors etc.) must insist on regular and timely access to relevant, sufficient and reliable information They must freely communicate their concerns about illegal or unethical practices to the board and to the competent public authorities Employees should also insist on high standards and form an active part of the governance processes. 區 PG 13#14區 Thank You 14