An 8% capital ratio vs. a 40% share of women in boards

Posted by bankingunion on 26/11/12
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Bank regulation has always been very much like a cat-and-mouse game in which banks are always a step ahead of regulators. As banks have incentives to engage in excessive risk-taking, regulation has been desperately trying to limit such behaviour, most importantly in the form of capital requirements. But wouldn’t gender quotas do the same job better?

From the technical approaches to the human dimension

In the recent decades the main bank regulatory frameworks – Basel I, II and now III – have become increasingly sophisticated to keep pace with the growing complexity of banking. While Basel I was mainly based on a single and simple capital ratio, Basel III uses not only two capital ratios but also two liquidity ratios, and the capital ratios themselves are calculated according to much more detailed rules. Many have already voiced concerns that this complex web of bank regulation may not be the right answer to the market failures of banking.

Banks and financial products themselves have always been highly innovative. Ways were always found to get around regulation which was sometimes the source of problems itself – securitisation which was partly inspired by bank capital regulation is nice example for this. This is not to say that solvency or liquidity rules are useless, but the limitations of such technical regulations is fairly obvious. This is why it is easy to sympathize with all the initiatives that take another approach, namely focus more on the human perspective of banking. If we cannot efficiently contain risk taking of banks as corporate entities, it is worth trying to focus rather on the people running them – at least as a complementary tool beside traditional regulation. The composition of decision-making bodies is an obvious option in this direction.

Many have suggested that the overrepresentation of men in the management of banks might have been one of the factors contributing to the current financial  crisis. That is why having more women in banks’ governance is  increasingly seen as a possible means to counterbalance the excessive risk  taking tendency of men. It is however not only more women what is needed, but more diversity in management boards in general.

Third time lucky?

This was  also the idea behind the original approach of the European Commission’s Green Paper on Corporate Governance for financial institutions, followed by the Capial Requirements Directive IV and the MIFID 2 proposals which comprised provisions to ensure an adequate diversity in terms of gender, age and education in management bodies of banks and investment firms. Using a bottom-up approach in which financial institution themselves would set their targets for female board representation, these first two  proposals did not include any specific quantitative “gender” objective. (This was most probably to avoid inconsistencies with the other,  more general Commission initiative (then based upon self regulation)  with regard to gender balance on companies’ boards.) This did not however stop the Parliament from pushing harder with an explicit 1/3 gender quota idea for banks’ management bodies.

While CRD IV and MIFID 2 are still being debated by the Council and the  Parliament, it unlikely that a female quota for banks or investment firms will be included in the finally adopted versions. However, the debate continues in the  context of the Commission’s new initiative called “Women on Boards” to target a 40% share for female non executive board members of publicly listed companies, which includes many banks, too.

Through a glass, darkly

Thus the issue of female underrepresentation in boards can be debated further in a broader context. Without being a gender policies expert, I think it is fair to say that there is convincing evidence about women’s different risk appetite and also about the positive impact of diversity on groups’ decision making quality. At the same time, one has to admit that we do not have sufficient evidence yet that having more female board members would lower risks of banks and would mean in general better banking. (In fact, based on the few data that is available about women board members, there is even some research claiming the contrary.)

Of course, sufficient evidence will never be found if the glass ceiling remains in place. Increasing women representation in banking is a reform direction that inevitably requires a leap of faith.  But one must not forget that the efficiency of almost any element of our current bank regulation raises questions too – to mention just one example, doubts were raised about the usefulness of capital requirements already in the nineties and also today.

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