Pandemics and Financial Stability (Part 5)
Wednesday, Jul 15, 2020

Pandemics and Financial Stability (Part 5)

This is the fifth part of a Toronto Centre Webcast Series to help financial Supervisors and Regulators gain insights and perspectives on COVID-19 and its impact on the global financial system from supervisory experts. This episode features:

  • Clive Briault – Chair, Toronto Centre’s Banking Advisory Board
  • Paul Wright – Program Leader, Toronto Centre

 

Full transcript

May 14, 2020

Babak Abbaszadeh:

Good morning, good afternoon, good evening. Welcome to Toronto Centre's webinar on Pandemics &
Financial Stability, not to be confused with our Pandemics & Financial Inclusion series. I am Babak
Abbaszadeh, CEO of Toronto Centre. This is the fifth episode we are presenting to you. The first one was
launched in the middle of March, so there was a bit of time for reflection. So just a couple of quotes I'd
like to read to you that are indicative of the times. This first one is from the IMF, "The coronavirus
pandemic is a different kind of shock. Never before have modern economies shut down at the drop of a
hat. Unlike the 2008 crisis, banks are not the source of the problem this time." There's no bad guy to
catch. But this time, banks should be part of the solution. "Central banks, treasuries, and also
supervisors of the authorities have stepped up in unprecedented ways. Anything short of that would
have been considered probably unpatriotic and insensitive to the many who are in the main street and
are suffering from the current conditions on a daily basis."

Babak Abbaszadeh:

This is the final quote I'm going to read you. It's from the ECB, European Central Bank Supervisory
Authority, "Extraordinary liquidity measures, very large public guarantees, historically high support for
households and firms and last but not least, unprecedented flexibility and supervision." That's
something that is to keep in mind. Some of the rules may have been relaxed. Some of the oversights
may have been postponed. "This is truly a panoply of public initiatives that will play the role in helping
banks absorb the shock, remain sound, and keep providing vital support for the real economy." Let's
reflect on that for a second.

Babak Abbaszadeh:

In today's episode, we sit down with two prominent supervision veterans to cover the supervisory and
financial stability dimensions of this unprecedented pandemic. We circulated their bios to you in
advance. I have certainly enjoyed very much working with them, and they have had profound influence
in my thinking on issues regarding supervision, leadership and change management.

Babak Abbaszadeh:

Clive Briault is the chair of banking advisory board of the Toronto Centre and a long time program
leader. He's taught in many of our courses around the world. Paul Wright is a member of our banking
advisory board, and also a long time instructor, program leader at Toronto Centre. I don't want to
embarrass them, but together, they have about 80 years or so experience in matters related to
supervision, oversight, financial regulation. Each of them has had distinguished careers in the U.K.
financial oversight authorities, different kind. I would like to thank our sponsors, Global Affairs Canada,
Swedish International Development Cooperation Agency, or CEDA, the International Monetary Fund,
Jersey Overseas Aid, the USAID and Comic Relief, without whom we could not bring this kind of a
program for you, and also achieve our mission.

Babak Abbaszadeh:

Before I start, I know that many of our viewers have questions. We encourage you to see your
questions, and we have allowed a time for them to respond to them. Please type your questions in the
Q&A button at the bottom of your screen, not the chat box, the Q&A, and we will answer as many as the
time allows.

Babak Abbaszadeh:

Welcome, gentlemen. It's really great to have you. Okay, Clive, I'm going to start with you. In addition to
being a healthcare catastrophe, the COVID-19 pandemic has been a major economic crisis. You are the
author of a Toronto Centre Note, or TCNs as we call them, on Business Continuity Planning for
Supervisors. In the midst of such a shipwreck, how can business continuity plans help supervisors today?
What should be in them, and how should supervisors ensure their BCPs are up to date? Thank you.

Clive Briault:

Okay, well thanks for that, Babak. Good morning, good afternoon and good evening, everybody. I think
the correct starting point here is to remind ourselves of the purpose of a business continuity plan,
namely how an institution should respond to a serious incident in order to maintain or resume its critical
activities. For that reason, it's also important that that business continuity plan is very much owned by
and monitored, when in preparation and implementation, by the board and senior management of the
institution. In this case, we certainly have a serious incident. We have the COVID-19 outbreak. One
result of that has been that staff have been finding it difficult to travel to work or that they have been
not allowed to travel, and the offices of the supervisory authority have been shut. In this case, you can't
simply all go to the backup site, because that doesn't work either in this kind of problem. Or regrettably
in some cases, staff may be too ill, and therefore unable to work.

Clive Briault:

What should a business continuity plan help the supervisory authority with? Well, first of all, in
identifying its critical activities, especially given the negative economic impact arising from the COVID-19
outbreak. That implies that the critical activities might include the potential soundness of supervised
firms, the monitoring of market conduct, the close monitoring of retail conduct and money laundering
activities, because those things might conceivably be easier for people to manipulate during a crisis. Last
but not least, crisis preparedness, in case a number of financial institutions begin to fail as a result of the
COVID-19 repercussions.

Clive Briault:

Second, the less critical activities. Those activities and the supervisory authority which, if necessary,
could be delayed, undertaken less frequently, phased over a longer period, or repurposed. Examples of
those might include the length of time it takes to do the authorization of a new institution. It may mean
the delay in some policy measures, cutting back on regulatory reporting by at least some firms, less
frequent risk assessments, and perhaps a lower quantity of thematic visits to firms and repurposing
those thematic visits to focus more on the implications of the COVID-19 outbreak.

Clive Briault:

The third element of the business continuity plan would be asking the question, what resources are
needed for the supervisory authorities to deliver the critical activities? What does that require in terms
of people, technology, data, information, decision-making processes, documentation of those decisions,
and the ability to access outsourced services. Clearly in the case of this particular incident, there is
particular focus on the ability of staff to work from home in terms of the availability of hardware,
software, some sort of home office space, connectivity and so on. Those issues were covered at some
length in previous webinars in this series, particularly those involving supervisors from Jersey and Peru.

Clive Briault:

Perhaps just a final point to make here is that as with any activation of a business continuity plan, this is
always an opportunity to learn lessons, to run a live test and therefore an opportunity also to go back at
the end of the incident and update the business continuity plan accordingly. Because if you don't have
an updated business continuity plan or you don't have a business continuity plan at all, you're starting
from a very low base, and it's much more difficult to undertake those core elements that I described a
moment ago. Thank you.

Babak Abbaszadeh:

Thank you, Clive. Paul, let me turn to you. Building on what Clive was saying, could you please elaborate
on your recent publication for Toronto Centre on Ten Issues for Supervisors During a Crisis? I am
primarily interested, Paul, to know, what do you see as the main issues that supervisors need to
consider in a crisis, and what are the potential suggestions for how these might be addressed, both
generally and in the current crisis? Thank you.

Paul Wright:

Yes, I'm very happy to do that. Thank you, Babak. The first point to make, I think, about the 10 points or
the Ten Issues paper is that we were very well aware when writing this paper that most supervisors
around the world were almost certainly already in some sort of crisis mode. So we were rather keen not
to produce something that was telling people they knew already, but rather than that, the intention
really was to produce a sort of checklist which said, look, these are the issues you really need to be
thinking about, and it would be a good idea to measure yourself against these. It wasn't really
something to be done from scratch. We were aware that a lot of people were doing these things
already. I'll talk about some of the themes that came up.

Paul Wright:

The first one was BCP, business continuity, and Clive's talked about that obviously at length, and I won't
repeat it other than to say one thing, which is that it's in the nature of business continuity planning that
this should be something that firms and supervisors do anyway. They should do it in business as usual, in
a sort of generic sense. So, if something went really wrong and we couldn't carry out our functions in the
normal way, how would we respond? In this particular crisis, what a number of supervisors did, and it
was very wise, was to take a short period, I mean 24 hours, one working day or maybe two at the most,
to say, okay, we have our generic plan. What are the specific issues of this crisis which we now need to
deal with? In other words, let's go from the general to the specific. It quickly became apparent that
when they did that, of course this is an unprecedented event, both in terms of its severity, but also in
terms of the breadth of the implications of it. So the first element was BCP.

Paul Wright:

The second was communication. I hesitate to say this, because it sounds rather obvious. People always
talk about communication, communication and all that. But it really is important in a case like this. To
take an example, supervisors need to be able to communicate with their firms in uniquely difficult
circumstances. Many of the firms, most of the firms actually, the staff will be working from home. It's
not possible to do on-site visits, to which a great many supervisors attach great importance. The
message here is that there's a need for creativity and flexibility and the use of unconventional channels
to get the information that you need to enable you to do your supervisory job. If that means, for
example, that some things that you do on-site you have to re-engineer to be able to do off-site, if it
means that sometimes firms aren't able to produce data in the form that you would normally wish but
are willing to give you their management information instead, you should be willing to be creative and
flexible in that way.

Paul Wright:

You also need, of course, to communicate with other stakeholders. Most crises involve some other
stakeholder, the central bank, for example, if that's not the same as the supervisory authority. I think it's
clear that this crisis, the number of stakeholders involved, is unprecedentedly large: finance ministries,
central banks, financial crime specialists, agencies and so on. All of those need to be communicated
with, because of the breadth and the multi-faceted nature of the crisis.

Paul Wright:

Finally, under communication, staff. Of course you need to communicate with your staff, who are likely
working off-site, working at home. But don't forget that many staff find this incredibly difficult. I mean, I
know of many people, members of my own family who are not supervisors, but who are working at
home, and they're telling me how difficult this is, particularly when they're not used to doing it. That
creates all sorts of challenges which need to be managed.

Paul Wright:

The next point I make in terms of the 10 issues is prioritization of tasks on the basis of risk. I mean,
again, I hope to be able to say a bit more about this later on. But what's clear is that risk has increased
across the board as a result of this crisis. Hard to think of an area where risk has not increased: financial
crime, prudential issues, conduct issues and so on. But supervisory resources, of course, have not
increased and they've diminished to some extent. Certainly, they're possibly less effective when people
are working from home. So supervisors have had to think very carefully about their priorities and about
their risk tolerances, if I can put it that way, and have had to prioritize, and that the most effective or the
optimum prioritization may well not be the most obvious one. Of course, people are looking at high
impact system firms and the prudential soundness of those. But don't lose sight of other things, like
conduct issues, financial crime issues. And for that matter, smaller firms, lower impact firms, don't
ignore them. You can't ignore them, because they could be a significant source of risk.

Paul Wright:

Two more points, briefly. Don't lose sight of your internal governance and management processes.
When people are working away from the office, when they're working at home, it's very easy for them
to lose sight of normal confidentiality rules. There are data security issues. It's easy for them to forget to
record issues or to go through proper channels for making decisions. Those are really important. They're
important anyway, which is why we do them as business as usual, but they're also important because
supervisors will be called to account for what they did and why they did it. It's very important that those
processes, bureaucratic though they may appear, are complied with, even though it may be difficult
when people aren't in the office.

Paul Wright:

The final point, really, that came out of the Ten Issues paper is don't forget that this issue, this
emergency, is both unprecedented in terms of its breadth and may well last for a very long time. Even as
we get some signs in some countries of normalization, it isn't really. This is going to go on for some time.
The nature of the risks will change over time. So if you think you've got a handle on all the risks that are
out there now, that's good. But be alert, because they are likely to change. They will mutate into other
risks. Unexpected issues will arise, and you need to be alert to those as well.

Paul Wright:

I was thinking of an example of that, and I think I put it in the paper, that came out of some previous
crises, where when in some countries, where there's been a problem with insurance, for example, the
insurance sector, motorists have found suddenly that they weren't covered. There's a statutory
requirement for them to have insurance, third-party insurance for motoring, and they suddenly found
they didn't have it, and they weren't able to drive. Now, I haven't heard of any examples of that
particular issue in this instance, but it's an example of how a crisis like this can produce broader
consequences, and you need to be alert to them. Thank you.

Babak Abbaszadeh:

Thank you very much. No, you're underscoring some very important points. I mean, at the end of the
day, we also have to recognize supervisors are humans, like everybody else, human beings, like
everybody else. Even when we are all working from home, one of the things that we are watching, those
of us who are lucky enough to be able to work, is the blurring of the boundaries, time and space, and
the burnout that comes with that, and all the other dislocations that happen. On a personal level, not
that anyone should care, but I'm relegated to work in the basement here, trying to do all this stuff here,
and then others in the house are occupying other spaces there and it's not always the most convenient
arrangement, but we do what we can. But your points are absolutely critical.

Babak Abbaszadeh:

Also, just to connect some dots here, Toronto Centre, a few weeks ago, launched a Community of
Practice on BCPs. I would like to ask my colleague, Diana, to please put up the notice for the next one
that's coming up, which is on Wednesday, May 20, as you can see. If you haven't registered, please do.
Space is limited. These are high-quality interactive formats, forums, and our dedicated program leader
for this is Chuin Hwei Ng, who's an expert in supervision. Also, for any information on matters related to
BCP or other support that's there, including the papers that Clive and Paul have written, please check
our dedicated website, This email address is being protected from spambots. You need JavaScript enabled to view it.. Again, This email address is being protected from spambots. You need JavaScript enabled to view it.. By now, all our
followers know how to spell centre the Toronto Centre way. Thank you, Diana.

Babak Abbaszadeh:

Also, big shout-out to our participants. We have a couple hundred participants, basically. They cover all
letters of the alphabet, pretty much, from Armenia to Zimbabwe. Welcome to all of you. I'm just going
to shout out a few. If I'm missing you, doesn't mean I'm ... we're not grateful to have you, it's just that I
want to leave time for Clive and Paul. So, yeah, Bank of Ghana, Malaysia. We have Honduras, ECCD
Guernsey FSC, IMF, IAD, Peru, World Bank, on and on and on. Thank you so much.

Babak Abbaszadeh:

Clive, turning back to you, these are difficult unprecedented times. How many times have you said that?
But misery is an important thing to commiserate around. This pandemic has had a significant adverse
impact on credit quality. In other words, created difficulties for people accessing credit, or for the
unemployed not to lose their home. In another recent TC Note, you would discuss some of the
immediate and medium term options for bank and supervisors to address these issues. Could you please
elaborate?

Clive Briault:

Yes, certainly. Thanks, Babak. I think probably the simplest way of approaching this is to think of three
key elements that are going on out there. The first, absolutely clear, is that the COVID-19 outbreak has
had a significant negative impact on economic growth, indeed to the extent to which most countries, or
at least countries on average now according to the IMF, are very much in negative territory in terms of
economic growth. That inevitably has a negative impact on credit quality.

Clive Briault:

The second is that as a result of either banks offering it or customers asking for it or governments or
conduct supervisors mandating it, a lot of borrowers are currently taking payment holidays. So yes, they
are supposed to pay up the backlog eventually, but at the moment they are not necessarily obliged to
make interest payments or repayments of principal.

Clive Briault:

The third is that there are a lot of measures in various countries involving government subsidies, central
bank actions, macro prudential measures to reduce the capital buffers that banks need to hold,
whatever it might be, all attempting to sustain the position of both economies as a whole and individual
firms and individual households, broadly speaking in the hope that there will be a reasonably rapid,
often called V-shaped, economic recovery in the near future.

Clive Briault:

Those are the three key backdrops. In response to that, what should supervisors be thinking about? Well
first, there's a question about the accounting and regulatory capital treatments of loans where those
payment holidays have been put in place. The advice there, generally speaking, is to say that people
should take a flexible approach. So that, if as a result of the payment holiday, a borrower does not meet
payments for, say, 90 days, that does not mean that that loan is automatically put into default and
therefore treated differently under accounting and prudential capital purposes.

Clive Briault:

However, it's very important that that flexibility is not over-used. Banks still need to distinguish, as far as
possible, between those borrowers who should be able to repay in full in due course once this is all over,
and those borrowers who may not be able to. And indeed in some cases, as many countries have
already seen, those corporates who have already failed and gone into administration or liquidation.
There's no way they're going to repay in full.

Clive Briault:

What should supervisors be doing here? Well first, they should be monitoring supervised firms' own
processes for making that distinction between different types of borrower. How are they doing that?
How robust is it? How consistent is it? To some extent, supervisors could do that by speaking to each
individual lender. But the other thing that supervisors are uniquely able to do is to look across the
spectrum, and ask, who are the outliers? Who is making a lot of use of this flexibility, to such an extent
that it's probably gone too far? Or indeed, with major borrowers, the supervisor might take its own view
of the creditworthiness of that borrower, and then question any bank who also lends to that borrower
in terms of what view they're taking.

Clive Briault:

The second main thing is that banks themselves, and of course supervisors, should be undertaking their
stress testing for different scenarios. Generally speaking, people say, well, what if it's not a V-shaped
rapid recovery? What if it's a U-shaped recovery? What if it's L-shaped, which I think means there's no
recovery at all? Or what if it's W-shaped, which means that it's pretty slow and wobbly and not to be
relied on? It's very important that supervisors, either by looking at banks' own stress tests or by running
their own stress tests, are able to form a view of that longer term prospect under different economic
scenarios. So how bad is it, how bad could it be?

Clive Briault:

Finally, and this is perhaps looking a bit further ahead, but perhaps we're beginning to move towards
this, and you'll certainly expect, again, both financial institutions and supervisors to be thinking about
this, what does the new normal look like? What is that likely to look like in terms of interest rates,
spreads, credit margins, the creditworthiness of borrowers including sovereigns, international capital
flows, use of technology, global supply chains, sections of continuing government support or otherwise?
Because all of those things will also feed into the creditworthiness of at least some borrowers and will
be important parts of the equation further ahead.

Clive Briault:

Just to summarize, I think it's a question of, first of all, looking at the immediate position, making use of
the flexibility, but not too much use of it, but also looking ahead and asking a question, well, where
would the banks be if, in practice, we do not have an economic recovery, if credit quality continues to
worsen? If all of the interventions and governments and central banks and the rest are less effective
than is hoped, are we then looking down the barrel of a rather difficult position whereby a number of
banks may reach a point to which they are failing or indeed have failed, and are you prepared for
dealing with that? Thank you.

Babak Abbaszadeh:

Thank you, Clive. That was a pretty comprehensive answer in a very short, compact form. Thank you
very much for that. One of the things that is very apparent during the course of this interview is that you
gentlemen have contributed to a lot of Toronto Centre Notes, TCNs, and TCNs are being viewed and
read by a large group of supervisors out there, and also others in the public policy domain. Clive, I'd like
to thank you for being the lead editor for our TCN series and really putting it on the map. Thank you for
that.

Babak Abbaszadeh:

One more thing, Clive, you mentioned here. You touched on a very interesting term, new normal, which
is close to our hearts. There's a lot of conversations and talk today about re-opening. Sometimes earlier,
in fact, people were talking about recovery. It became very apparent that the use of the term recovery is
very insensitive, given that all the suffering that's still going on. So people started talking about reopening.
However in our view, it's really about the new normal. Until there is a vaccine, and vaccine in
such a high quantity, things are not going to happen in a way that goes back to the past normal.

Babak Abbaszadeh:

One of the things I would like to ask Diana to please put up for us is the ... an important event that we
are organizing on the very topic of the new normal. We're bringing three very good speakers. Dr.
Navarro of the WHO was at our very first inaugural Pandemics & Financial Stability. Dr. Stefan Ingves is
in the forefront of the European international central banking drive for creating financial stability in the
world, and Socorro Heysen, a new member of our Toronto Centre's board of director, from Peru, is a
very senior supervisor. They're going to be bringing us their perspective on the new normal. Please tune
in on Tuesday, May 26th. This is going to be a very good quality event. We have provided expanded
time, an hour-and-a-half, to allow for more of your questions. Thank you very much, Diana.

Babak Abbaszadeh:

Now, going back to you, Paul, staying on the course of where we are today, as an author of another
Toronto Centre Note and series of Notes on risk-based supervision, RBS is a useful too to identify and
assess emerging risks, everybody would agree, and also allocate resources accordingly. In the wake of
COVID-19, do you see significant changes in how supervisors should be setting their new priorities?

Paul Wright:

Well, the answer to that is, the response to the COVID emergency needs to be a risk-based one. The
basic ideas of risk-based supervision are as important as ever, but the outcomes of the process may be
different. Let me explain what I mean by that.

Paul Wright:

Let's go back a couple of steps to a time when we're not in an emergency, we're in something like
business as usual, and remind ourselves what risk-based supervision is. Risk-based supervision is about
focusing your resources in the areas of greatest risk. That sounds incredibly obvious. I'm sure every
supervisor in the world would say, well, we do that already. Of course we do. We have to prioritize our
work, so we do it on that basis. But it's a more rigorous, analytical process than that. It requires you to
be clear about two things.

Paul Wright:

First of all, what do you mean by risk? Normally, what we say about that is that these are risks to your
statutory objectives. As a supervisor, there are certain things that you are required to do. Those will vary
from country to country, but prudential soundness, conduct regulation, fighting financial crime, usually
included in there somewhere. Those are your objectives. The question is, what is going out there in the
firms or in the financial markets which compromise your ability to meet those objectives? That's the first
thing you need to know.

Paul Wright:

The second thing you need to know is, once you've identified those risks, how do you differentiate
among them? How much do you care, to put it crudely, about different types of risk? For some, you may
have absolutely zero tolerance. You may say, well, we will not have the systemic consequences of a high
impact firm failing. We just simply won't. We have zero tolerance for that. Other things, we would
prefer to avoid, but we may not be able to avoid them altogether, so we have a different level of
tolerance. That's what we mean by risk tolerance in supervision.

Paul Wright:

Now, when we then look at a crisis or an emergency like the current one, and we put it into that
framework, what can we say about the COVID emergency? Well, there are three things I think we can
say. The first one is that risks have pretty much increased across the board. As I said earlier, it's hard to
imagine an area where risks have not increased. Firms are inevitably more fragile. There is a greater
scope now for consumers to be damaged by misconduct in firms. The FATF has reminded us recently of
the greatly increased scope for financial crime and cyber crime. Risk has increased across the board, first
point. Second point is that those risks may be distributed differently. They may not have increased
across the board to exactly the same amount. Some of them may have become much more acute than
others, and we need to be aware of that. The third point is, we've already made this point, the
supervisory resources available to address those risks are stretched. We may have fewer supervisors
available. Some of them may be sick, but even those that aren't sick would be working at home, they'll
be less effective. Frankly, it would be harder for them to do their work.

Paul Wright:

Where all of that takes us is, it's necessary to address our risk tolerance, if I can put it that way. Some
risks will have increased, and there's frankly not much we can do about it. If your staff are working at
home, you can tell them to keep observing security protocols and keep recording decisions and so on
and so forth. We hope they will, but it's almost inevitable that some of those risks would have increased,
and probably we just have to accept it to some degree. There's not much we can do about it. But we
have to make decisions about the others. The question, as always is, how do we trade of things like the
soundness of our highest impact firms against the possibility of misconduct by other firms and
consumers losing out against the greatly heightened risk of cyber crime and other kinds of financial
crime? In other words, the distribution of those risks will have changed, and we need to have a rational
process for allocating our resources to them. As I said earlier, remember also that even if we think we
know what the distribution of risks is today, it may well be different next week, or next month, as this
crisis is likely, or this emergency is likely, to persist for some time.

Paul Wright:

Two other points I would make about the is, as I said earlier, don't ignore what you may see as the lower
risks. It'd be tempting to say, we've got lots of small firms. They're not very high risk. They're not very
high impact. We'll ignore them. Well, that would be a very bad idea. First of all, you shouldn't ignore any
risks, even the lower risk ones. But also, small firms failing, particularly if they do it collectively, can be a
big problem. So don't take your eye off the ball, even if you think you are looking at lower risk. At least
have a mechanism for monitoring, even if they don't command the highest priority.

Paul Wright:

The overall message here is, you should know what critical risks you face and you should know how
those are changing and you should have a rational discussion about how to prioritize your resources to
take account of those. It's a dynamic process, it's not a static one, so you need to keep on doing it. Thank
you.

Babak Abbaszadeh:

Thank you very much, Paul. Paul, I'm just taking a look at the questions from the audience. There's one
question that's actually very appropriate, could be a good follow-up to ask you. So Clive, if I could ask
your patience for a second, this is from our friend, Chris Cardoza. I'm trying to be confidential about the
people, but if I recognize some of them, I'll give them a shout-out. What would be top three, or let's say
top three questions that supervisors should be asking risk management and boards to determine if they
are being pro-active in managing through the crisis, and making pro-active decisions and acting on
them? What would be your top line suggestion on that?

Paul Wright:

Well first of all, hello, Chris. Nice to hear from you. Look, I think this is very interesting, and I think it may
anticipate something we're going to talk about later. It's a very good question, because as I said earlier
on, this communication issue is absolutely key. It's very difficult to communicate with firms at the
moment. It may be even harder to communicate with boards at the moment, who are probably not
meeting, but they certainly are not meeting physically.

Paul Wright:

The questions I would ask are, and Chris I think, knows that I'm very attached to this idea, what I call
open-ended questions. Yes, I want to know that your risk management function is functioning, that you
have a risk manager, that their staff are functioning properly, that you are identifying and monitoring
risks, and doing all the things that people normally do. But I would additionally ask in this case, in the
current circumstances, what are those risks? What have you concluded about those higher risks? What
are you de-prioritizing, and what are you giving the highest priority to, in terms of your risk
management? How do you know what they are? How are you monitoring them? How are you
measuring them? Questions you'd ask normally in business as usual, but I'd ask them in the context of
these changed circumstances.

Paul Wright:

You critically hit on the question of the boards, which we may come to a little bit later on, I suspect. But
many supervisors don't have much interaction with banks' boards in particular, or supervised firms'
boards. We make the point in, I think certainly two of the papers that we've published recently, that is
wrong. You should have a lot of interaction with boards, and especially you should be having it now. The
question I would ask is, okay, board. You can't meet at the moment. You understand it, but you probably
don't want to get in the way. You want to leave it to the management to manage the firm. That's quite
understandable. But no, sorry, you have a crucial leadership role to play. You need to demonstrate
leadership. You need to do the usual things a board is supposed to do, which is providing strategic
direction, and making sure that risks are controlled.

Paul Wright:

I would start off by asking the chairman of any board, of any large financial institution, what are you
doing? How are you doing that? How are you meeting? How are you interacting with the senior
management? You tell me, board, three things that you've done in the last six or seven weeks to help
give the firm direction, and to make sure that controls are functioning. I would ask those open-ended
questions and expect to be given a convincing answer to them.

Babak Abbaszadeh:

Excellent. Excellent. Thank you very much. Clive, we're entering an area where a lot of the questions are
interrelated. Going back to you, strong corporate governance is key. For us at Toronto Centre, it's a
motherhood statement, it is a foundation of a lot of our leadership thinking and courses. What are the
main issues that supervisors need to address in supervising corporate governance? What additional
pressures and challenges does COVID-19 outbreak bring to corporate governance?

Clive Briault:
Yeah, thanks, Babak. I think this relates back partly to Paul's answer to Chris Cardoza's question. But just
to state first, I think that in a crisis, if anything, good corporate governance becomes even more
important. It's important in the normal times, but it becomes even more important. Because the things
that Paul was talking about, the leadership, the direction, the challenge and support of the executive, all
need to happen during a crisis and perhaps they need to happen even more during a crisis.

Clive Briault:

It's clear, as Paul said, that firms are facing difficulties. As he said, the risks have gone up across the
whole spectrum of risks, and they are facing the operational constraints and pressures that all firms are
facing in terms of staff working at home, boards and senior management having to operate virtually. But
coming back to Paul's point, yes, it is important that supervisors keep monitoring this subject. It's not so
difficult to do. I sometimes get the feeling that supervisors think, well, I don't know much about
corporate governance. I don't know much about the way the firm operates. I don't want to look silly by
asking questions, and anyway, I don't really want to start having discussions with the chair of the board
of a major institution.

Clive Briault:

One of the points we make in the Notes is that actually, this is an opportunity to do more, not an excuse
to do less in this area. There is actually no reason why a supervisor shouldn't arrange a phone call with a
member of a board or senior management, or indeed have a conference call and bring in a number of
them, and run through the sorts of questions that Paul was mentioning. The questions themselves are
not all that difficult. They are deliberately open-ended and they are designed to elicit how a board is
exercising leadership and direction in these troubled times.

Clive Briault:

There's no reason why you shouldn't ask questions like, how is the board operating during the crisis?
How does that work? Has the firm implemented its business continuity plan? In which case, what went
well? What went less well? Who is monitoring that implementation? As Paul mentioned, do members of
the board clearly understand, monitor and manage the shifting pattern of risks facing their firm? How
can they provide assurance to you as a supervisor that their risk governance and risk management is
working properly and that they know they have adequate capital, solvency, liquidity and other
resources? Are they cooperating fully with the supervisors? Are they keeping the supervisors informed
of developments? Are they, which is equally important for the supervisors themselves, keeping sight of
other key issues during the crisis? Are they still focusing on areas like climate change and the risks
arising from that? Are they still focusing on financial inclusion and such issues?

Clive Briault:

Finally, as the crisis begins to unwind and we come back to the new normal terminology, are they
beginning to think about how their strategy and business plan might need to change in order to cope
with those pressures? Because if they leave that thinking too late, they may find themselves in a
situation where they are no longer viable, because the world has moved on whilst they were dealing
with the immediate crisis. Unless a board is focusing on that strategic aspect of the business, that isn't
going to happen, and the firm may therefore find itself in a difficult position as a result.

Clive Briault:

That's just a sample, really. That's just seven or eight areas which supervisors could literally pick up a
phone or arrange a video conference to discuss with members of the board of a firm that they
supervise. They may be difficult questions to answer, but they're not difficult questions for a supervisor
to ask. I think they'll learn an awful lot about the running of the firm from the answers they receive from
members of the board to those questions. Thank you.

Babak Abbaszadeh:

Thank you very much, Clive. Paul, I'm just going to give you, as the last structured question, to give you
an opportunity to maybe wrap it up on the corporate governance that Clive's very ably put forward. In
your view, what are the tools for supervisors to monitor and very necessary to improve the standards of
corporate governance in the firms they supervise, especially in the context of COVID?

Paul Wright:

I will answer that question in just a moment, if I may. But I'd just like to say something else, first. First of
all, I completely agree with everything Clive has just said. If I could just go back a little bit, it is my
experience that a lot of supervisors have real difficulty in supervising corporate governance. I think there
are two reasons for that.

Paul Wright:

One is because in many countries, there's a cultural issue. The people who get appointed to the boards
of banks, particularly big banks, are often the great and the good, former ministers or generals or
whatever they are. A lot of supervisors say, oh, it's very difficult to go and have a full conversation with
people like that, asking potentially difficult questions. I don't feel comfortable doing that. Well, my
response to that is, that should not be an issue. It is your duty as a supervisor to ask those difficult
questions, and it is the duty of the board member, whoever they are, to respond to them fully. Of
course, you will ask them in an appropriately polite and respectful way. But I'm sorry, it's your job to ask
difficult questions and it is the job of the board member to answer them. It doesn't matter who they
are, in terms of their former role or their seniority or whatever. That's one reason people find it hard.

Paul Wright:

The other reason they find it hard, and this goes to something Clive was just saying, is because when
you're assessing corporate governance, it is one area where what I might call the architecture, the
structures, only take you so far. So sure, yes, you want to know there's a board, you want to know it
meets six times a year, you want to know that it has meetings and minutes and it has committees and all
the rest of it. That's fine. Those are essential conditions. You won't get anywhere without those. But
those things in themselves don't tell you what you want to know, which is whether the board is
effective, whether it's doing anything that's worthwhile. The only way you can really get to that is to ask,
Clive put his finger on it, open-ended questions. How do you function? What is your attitude towards
risk? When was the last time the board took a decision which had a material impact on the firm's risktaking
behavior?

Paul Wright:

Now, those are hard questions, but board members should be able to answer them. That's why they're
there. Those open-ended questions are quite hard to formulate. It is also quite hard to evaluate the
answers. So there's a real skill that supervisors have to develop in order to be able to pursue that line of
questioning. But it is critically important, in my view, that they do it.

Paul Wright:

Actually, I very much agree with Clive. If you don't do this already, for whatever reason, you should do it.
In fact, the crisis gives you an opportunity to start doing it, because boards are an essential source of
information about how firms are being run and how they're being controlled. Once we are back to this
new normal, whenever that is, carry on doing it, because it is really important. But it does involve the
development of certain skills, particularly to do with evaluation of complicated answers to complicated
questions. Sorry, complicated answers to simple questions, actually. You'll often ask a simple question,
tell me about how you evaluate risk? The question then is, how do you evaluate the board member's
answer, which may not be completely straightforward. It's a skill that has to be developed. Thank you.

Babak Abbaszadeh:

I guess one of the biggest things you learn in life is simple can be complicated, or simple is not easy,
right? That's very true. Thank you very much for that. We have some interesting questions. It's always
important to understand that supervisors have limited resources, right? So this next questioner says,
how do supervisors balance between not ignoring lower risks, yet prioritizing higher risk areas when
financially constrained amidst COVID-19? Clive, would you like to take this question?

Clive Briault:

Yeah, certainly. Thanks, Babak. Well, I think as Paul was saying, it is inevitable that if the risks have
increased most for the most important, systemically important financial institutions in your country,
then almost inevitably, there's going to be some shift of supervisory resources towards that. As Paul was
saying, in a way, risks have increased everywhere, but on the risk-based approach, you then need to
focus on where they've increased most. That may well be that the systemically important firms are what
you should be focusing most on, even more in a crisis, but in normal times. But that said, having some
ability to monitor the risks to lower impact firms or some of the risks which may be bubbling up under
the surface and beginning to emerge is important.

Clive Briault:

I think what that requires is a very clear decision by the board and senior management of the
supervisory authority on how the resources should be allocated and doing so in a way which makes that
clear to staff, so that they understand what they should be doing in each area. But I think as Paul was
saying, don't lose sight of anything completely. But it may be that you need to look at it in a different
way in the crisis. It may be that you need to take an even more thematic approach. So, you're looking at
the sector of small firms as a whole, rather than in any sense trying to think about the position of any
individual small firm, and to think about the way in which those types of firms may be affected by the
shifting risks that we've been talking about.

Babak Abbaszadeh:

Thank you very much. The next question is also from another friend of Toronto Centre, George Brady.
I'm going to try to keep all these confidential, but as I said, if I see them, I'll shout out. Could you
comment on these challenges in the context of supervision of global firms, specifically related to
communication and cooperation across boarders? Pretty important point. Paul, over to you.

Paul Wright:

Thank you, Babak. I think it's striking really, from this discussion, how many times we have said,
although these are exceptional times, and goodness knows they are exceptional times, in a way what we
need to see is a kind of accentuation of what we do already. There are some things we're doing which
are most unusual. But in some respects, we're continuing to do risk-based supervision, even though the
outcomes may be different from the ones we're used to. I think this question is another example of that.
What we say to people in business as usual where we have global firms, again, is communication. We
need colleges when there is a crisis. We need crisis management groups. What we need is a network
where supervisors of a particular group, a global group, can talk to each other freely about emerging
issues and about the measures that they are taking.

Paul Wright:

Now, it seems to me that in the current circumstances, none of that changes. It may well be the need for
it is heightened. I used to be supervisor, actually, of global groups, non-U.K. ones in the U.K., all the
major global groups except the U.K. ones, and we had a relationship with the home supervisors there
where we would expect them, and typically they did do this, to tell us when there was a problem that
we needed to know about, and which would affect either a branch or a subsidiary. Similarly, those ...
working with the home supervisor, we would aim to keep those supervisors well-informed. I don't think
I see the architecture of this as necessarily being any different from the one that we normally have in
terms of, as I say, colleges and crisis management groups. What I would say is, the need for that
continuous communication and vigilance in respect of risk is probably greater than it ever has been.

Babak Abbaszadeh:

Okay, great. Thank you. This next question is actually, brings a human touch, which is interesting. Both
of you gentlemen are very cerebral, intellectual in thinking through these issues and highlighting them
well. So Clive, this one goes to you. We, as supervisors, sometimes forget in our BCPs the risk to staff of
isolation, including the psychological impacts of working from home away from office. This can lead to
loss of productivity and shortness of staff resources. What can supervisors do to mitigate this significant
risk?

Clive Briault:

Well, I think this is clearly a tricky one. It's also clearly an issue that faces all firms, not just supervisory
authorities. Any firm where its staff is working at home faces these same issues. I think looking at what
firms are doing successfully in this area is an approach which involves perhaps more frequent efforts to
ensure that there is communication between managers and their staff, so quite a lot of checking in. At
the beginning of the day, make sure everyone's prepared for the day. Do they all have the appropriate
software and hardware and data and information to do whatever tasks are required of them?

Clive Briault:

Also, checking in individually with people on a perhaps slightly more formal basis than you might, where
you just bump into them in the office, because you're not doing that anymore. But saying, let's just have
a chat later this afternoon, and see how you're getting on. Let's be prepared to discuss some of these
issues which are certainly arising in terms of the effect on people of working from home, be that about
psychology and mental health, be it about the ability to do so in perhaps a very cramped location where
there are two other people in the household who are also trying to hold business conversations at the
same time, or in a country where the connectivity is a problem, so people keep losing touch because
they simply cannot connect virtually through the networks. As I say, it's a matter of making an effort,
perhaps making more effort than usual, to communicate with staff and to bring staff together to discuss
some of these things.

Clive Briault:

On a previous webinar, which I think has been recorded, so I guess people can go back and watch it from
the Toronto Centre Resources, Martin Melody, who's the chief supervisor in Jersey, was saying how
much effort they had put into making sure that people could work from home, not just in terms of do
they have the equipment, but again, do they have these other capacities? Do they have particular issues
that need raising? Do they have particular constraints on them working from home, and how best can
they be addressed by the supervisory authority? As with most of these types of issues, the most
important thing, as the questioner here has done, is to identify that this is a potential issue and then to
think through the myriad of ways in which it can be addressed.

Clive Briault:

I don't know how many people in the audience are members of LinkedIn, for example, but one of the
things that has been very noticeable in the last few months on that particular network has been the
number of people who have been contributing ideas and lessons on things that have worked well or less
well in their own organization about working from home. There does seem to be a growing database, if
you like, of information about what people could do to try to avoid the unfortunate circumstances
which the questioner alluded to.

Babak Abbaszadeh:

Yeah, thank you, Clive. That was a very good answer. I'd really like to thank the questioner for this
important question. The human dimension always is very key. We also had a podcast in which we
interviewed a registered therapist who talked to us about this issue. One of the big insights I remember
from that is, during these times of isolation, protect your relationships. Clive talked about the business
side of it. There's also the personal side of it, right? Let's not take any of these things for granted,
because in this fast-paced changing life of technology and everything is getting integrated, at the end of
the day, we still are a bundle of nerves and emotions, on top of all the mental facility and capacities that
we have. Keep your equanimity in check.

Babak Abbaszadeh:

The next question I'm going to pose to you, Paul. Both you and Clive worked in integrated ... I mean, you
are known at the Toronto Centre for what you teach in our banking programs. But throughout your
careers, you did work in integrated supervisory authority, so you have an understanding of the other
sectors as well. So, do your insights related to the challenges supervisors face affect the insurance sector
differently? Paul?

Paul Wright:

No, I don't think they do. I mean, well the first point I should make is that I'm aware that in some of the
comments I've made earlier, I've been talking about trading off, for example, prudential things against
conduct issues and financial crime issues. I should point out that I'm aware that, of course, in many
supervisory bodies, those things are separate. We have a twin peaks model where conduct issues are
not dealt with in the same supervisory body as prudential ones. Now, where that's the case, of course,
that still further heightens the need for communication amongst different functional regulators.

Paul Wright:

But to go to this particular question, do the issues differ when it comes to the supervision of insurance? I
would say absolutely not. The risks of course might, in terms of we know that insurance balance sheets
are almost the inverse of banks' balance sheets. They have very long liability structures, for example.
The risk characteristics of those sectors are different. The basic issue, which says that we need to
understand what those risks are, we need to understand how those potentially impact our statutory
objectives, so we are just as much concerned about the soundness of insurers as we are about the
soundness of banks. If we have responsibility for it, we're just as concerned about conduct issues and
possibly even more so, because the contracts are longer term in insurers than in banks.

Paul Wright:

As with all risk-based activities, it may be that the ways in which those risks manifest themselves,
obviously will differ as between banks and insurers. But the basic job on ensuring that we understand
those risks, that we calibrate them, that we allocate our resources appropriately, I think is exactly the
same. I see no conflict at all between banking supervision and insurance. Prudential supervision and
where we have conduct, of course we have to take account of that, as well. But no, the answer is, in
brief, no. I don't see any difference.

Babak Abbaszadeh:

Okay. Thank you very much, Paul. Clive, going back to the premise of where I started, where the
economy, the world economy basically came down to it's knee because of this virus, and at the drop of a
hat, this questioner goes on and says, in some situations, moral suasion can only go so far when financial
institutions are concerned about survival. How do supervisors balance between using moral suasion and
using a firmer approach in these circumstances?

Clive Briault:

Well, that's a very wide question. I think the first point I would make is that it is very important that
there's a mechanism to address some of the inherent trade-offs, possibly even tensions and conflicts,
that operate here. Yes, it may be that governments and conduct supervisors in particular are pushing for
banks to be as flexible as possible in dealing with the position of borrowers, and being prepared to
implement payment holidays and various other helpful facilities for the borrowers. On the other hand,
the prudential supervisors are sitting there thinking, well, this is all very well. This is all a good thing. We
can see the value of that. But it may be storing up problems down the road. If you are overly flexible, as I
was saying in the context of credit risk, you may end up in a situation where the non-performing loans
have piled up to an extent that actually borrowers are not able to repay them in full in the future, and
the bank is facing a serious shortfall in capital as a result.

Clive Briault:

I think the most important thing, therefore, is to analyze what the potential impacts are of these
potential measures, and to think about, well, where are these trade-offs, and how are we going to
resolve it? What is the institutional structure for resolving them? How do we get together in a room, the
finance minister, the central bank, the supervisors, the macro prudential authority, whoever it might be,
to think all of this through?

Clive Briault:

Then, if the question is in terms of moral suasion about, well, hang on a minute, we're trying to
persuade the banks to be flexible and helpful to their borrowers. But if we do that, we are running too
many risks in the future. But nevertheless, the authorities think that is the best thing to do, having
balanced all of these trade-offs. If moral suasion doesn't get you there, then you may have to do what a
number of countries have done, which is the government steps in, and declares some form of payment
moratorium and just says that the obligation to repay is temporarily removed from the borrower. If a
government does that, there isn't very much that the bank can do about it, because you no longer have
any right to demand immediate payments from the borrower. The borrower can say, no, there's a
moratorium. I don't need to pay until six to 12 months time, whatever it might be.

Clive Briault:

I think it depends, as ever with this balance between moral suasion and some form of regulatory or even
legislative intervention, how desperate are you to achieve the object? How much resistance are you
facing, and therefore, at what point do you need to switch from moral suasion and persuasion into
taking a more legislative or rule-based approach? But it's a difficult one. No doubt about that. A number
of countries are clearly wrestling with precisely these sort of issues at the moment, and will continue to
do so for the next few months.

Babak Abbaszadeh:

Yeah, that's true. It's a complex question and covers the waterfront. Thank you very much, gentlemen. I
wanted to thank you again for your participation today. It was a full hour. We still left a couple of
questions on the table, but they will not be gone to black space. We will actually take a look at them
more carefully for our other programs and other webinars. Once again, thanks so much for your
goodwill, your time for Toronto Centre, and all the efforts that you put into our programs.

Babak Abbaszadeh:

One observation I have is, sometimes we try to think outside of the box. It's very refreshing to see that
you gentlemen stayed inside the box of supervision and provided a lot of interesting insights and
connected the dots very carefully in these very difficult times. Thanks again, and we will bring you back
to our other webinars in the future, and we hope to see our audience at another one of Toronto
Centre's webinars in this series. Thanks again. Bye-bye.

Paul Wright:

Thank you.

Clive Briault:

Thank you.