“limited words, unlimited thoughts”

Banks have been, in recent times, under the hammer of regulatory bodies for a lot of reasons. Be it non conformity of transactions, fraudulent practices, insecure online banking, credit card scams and more importantly improper knowledge of customer profiles and risk management (both internal and external) Since banks manage something which is so sensitive and integral to humans i.e. money it becomes utmost essential for them to have systems in place that is capable of protecting the interest of shareholders and lenders, both in known and unknown circumstances. With the growing pressure from shareholders and the nature of competitive markets many financial institutions have gone and shopped for risky assets in order to deliver above average returns. Banks are also one of the worst hit sectors in times of economic downturns, since they have a direct impact on monetary flows and are the first to hit in case of defaults. Thus, this puts a whole new perspective for the modern day banker.  The case for social responsibility – with billions of dollars of money floating around the financial system, exchanging hands, it is difficult to recognize the good money from the bad money. What we mean by bad money is what is generated out of illegal activities such as drug trafficking, illegal arms deals, smuggling, acts of terrorism etc. Any society or organization or body wanting to undertake and benefit from these activities would ideally require movement of capital from one place to another. Capital again can be in both, in cash(or its convertible equivalent) and electronic form. Now institutions or individuals who promote these activities are likely to remain discreet at the same time have enough indulgence that they would be able to facilitate and finance the above mentioned. Thus, the most common way of how these people operate is through a series of bank accounts spread over geographies with different banks under dubious or fake names opened with forged documents with simultaneous transfer of funds happening in lower denominations that will not be able to catch the attention and eye of the regulator. Thus for every bomb blast that you hear about, or act of terrorism that you see or any criminal activity, there would be some or more banks in either Bermuda, Cayman Islands or any place as a matter of fact that would have received an incoming SWIFT of wire transfer. Thus to control these acts is to restrict the financing and movement of capital associated with it. Compliance is the modern day norm and so are the practices associated with it such as Know Your Customer (KYC) and Anti Money Laundering (AML). The reason why these have grown in importance is because officials have realized how easy it is to convert bad money into good money by flushing it in the financial system. Banks are being used as washing machines and are therefore indirectly financing these activities. Therefore it becomes the apex obligation of every bank to have policies and practices in place that would be capable of detecting at an early stage and give a warning bell to the regulator The case for corporate governance – banks are in to business of borrowing and lending. It looks very lucrative in times of economic prosperity since banks borrow at cheaper rates and lend at higher. But what happens when the rate of defaults starts to escalate. And also what happens when banks are sitting with a portfolio of collateralized assets which are worth lemons in the market. What happens to the lenders? We have seen many instances in the past where banks have gone bust and defaulted on payments, an example would be few of the central and nationalized banks which defaulted on bonds and deposits during the Asian and Argentinean crises. Thus to protect the interest of lenders and depositors banks have to maintain a minimum capital as expressed in percentage terms for every dollar borrowed.  Thus we can say that, for a given portion of risky assets which the bank owns it would have to maintain a minimum amount of capital or in other words for a given amount of capital it can only own the prescribed quantity of risky assets. This expressed in percentage terms is the Capital Adequacy Ratio (CAR). CAR is the sum total of Tier I and Tier II capital divided by the Risk Weighted Assets. The constituents of Tier I and Tier II capital are the core equity of the bank, disclosed and undisclosed reserves, subordinated debt and more. This is where the role of the bank manager comes into play. Efficient risk management systems and credit policies can help a bank mitigate the risk of a possible default or bankruptcy. Basel II accord which is a set of international banking regulations and also an extension of Basel I which was first issued in 1988, is aiming to bring practices in place which will provide greater stability in the financial system. Thus governance of internal policies and applications and appropriate risk management measures would aid banks and financial institutions to strengthen the pillars of the financial system, control the systemic risk, promote sound regulatory and compliant practices, support the resilience of the financial infrastructure which is quintessential for the broader health of the economy.  Modern day society deserves a safer environment to bank in. They also want the assurance that in the whirlpool of money flying in all directions the wrong sources are not being funded. This places the modern day banker in a whole new paradigm. His role far above than just being a money manager.