The Imperative of Strong Corporate Governance for Financial Stability

Dr. Alvin Hilaire, Governor, Central Bank of Trinidad and Tobago

Launch of Financial Stability Report June 13, 2017

www.central-bank.org.tt; email: info@central-bank.org.tt © Central Bank of Trinidad & Tobago, 2017

Main points

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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.

3.  International experience led to improvements in the governance framework for financial institutions.

4.  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.

9.  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.

The global financial crisis highlighted the dangers of weak governance for economic stability.

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GOVERNANCE WEAKNESSES

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ECONOMIC DEVELOPMENTS

SUBPRIME DIFFICULTIESSUPERVISORY

GAPS

Source: BBC

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• Misalignmentofshareholderandmanagementinterests

• Unqualified, weak board members

• Ignorance toward risk facing the institution

• Incentives encourage excessive risk taking

REMUNERATION & INCENTIVE

RISK MANAGEMENT/

CONTROLS

SHAREHOLDERS RIGHTS

BOARD PRACTICES

Company incentive systems can sow the seeds for failure in the absence of diligent oversight. 2

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International experience led to improvements in the governance framework for financial institutions. 3

Beh

avio

ur a

nd C

ultu

re

Clear Mandate

Political Independence

Operational Independence

Financial Independence

Accountability Transparency

Internal Governance

Cre

dibi

lity

and

Trus

t

Low and Stable

Inflation

Financial Stability

6

Considerably more attention is being paid to Governance in Central Banks worldwide. 4

Consistent Policy Framework

Effective Monetary

Operations

Timely and Clear Communication

Effective Internal Organization

Consumer Sentiment

Index

7

Market manipulation and collusion have tainted well-established statistical indicators. 5

Silver Prices

LIBOR

Assets 216%: GDP

Financial System Assets (2016)

TT$314.9 Bn

Commercial Banks 44%

Nonbanks 3%

Credit Unions 4%

Insurance Companies

15%

Occupational Pension Funds 16%

Other 2%

NIB 8%

UTC 7%

DIC 1%

Share of Assets in 2016

Source: Central Bank of Trinidad and Tobago

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Trinidad and Tobago’s financial institutions play a crucial role in saving and investment activities. 6

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Episodes of financial failure in Trinidad and Tobago can be linked in part to governance issues. 7

Nonbank Financial Institutions

Indigenous Commercial Banks

Major Insurance Company and Associated Entities

1980 1981 1982 1983 1984 1985 1986 1987 1988 1988 1989 1990 1991 1992 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Central Bank of

Trinidad and Tobago

Commissioner for Cooperative Development –

Ministry of Labour

Securities and

Exchange Commission

Central Bank Act

Financial Institutions

Act

Insurance Act

Cooperative Societies

Act

Companies

Act

Securities Industries

Act

Money Lenders

Act

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The current two-layer governance framework needs to evolve further. 8

§  BATT Code of Banking Practices

§  ATTIC Code of Conduct

§  Corporate Governance Code

(2013)

§  Company Bye-Laws / Internal

Procedures

Layer One: Legal / Regulatory

Layer Two: Company Specific Codes

Corporate Governance

Guideline; Fit and Proper

Guideline

Onsite Examinations - Assessment of Board, Board Committees and

Senior Management

Fit and Proper assessments of Directors and Main Management

Positions

Quarterly Meetings with Institutions

Review of Board Minutes and Papers

Governance in

Licensees

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The Central Bank is moving to fortify governance internally and in the oversight of licensees. 9

Overall Board

responsibility

Appropriately qualified Board

members

Efficient Senior

Management

Independent Risk

Management

Strong Internal Audit

Supportive remuneration

structure

Adequate disclosure

and transparency

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Companies themselves must adhere to principles of integrity, transparency and proper controls. 10

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.

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There must be concerted vigilance to ensure that good governance remains well entrenched. 11

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Thank You