The New Face of Bank Leadership

Should top bankers also be technical experts or should leadership roles be defined by leadership qualities alone? After all, bosses should be making decisions and not sweat over technicalities when they already have arrays of teams to do that. For a while, this seemed like an open debate. Now, there are indications and trends to shape the discussion. 

Running a bank is a balancing act between profit, safety and services. Banks must service four functions:

(i) Be utility grade service providers to public in an age of inclusive banking.

(ii) Take credit risks as the core and overwhelming business model and yet,

(iii) Generate healthy profits to support balance sheet, ensure shareholder returns

(iv) Ensure that pursuit of credit risk and profits do not endanger continuity of business.

Banks also carry massive amounts of market risks, in addition to operational risks in form of errors, frauds, etc. It is a risk-management game.

The business itself involves intricacies, with banks assuming credit risks in industrial sectors ranging from infrastructure to electronics and in retail sector by lending to individuals for purposes ranging from house purchase to unsecured tiny loans. They also have off balance sheet credit exposures in the forms ranging from guarantees to derivative counterparty risk.

One needs to appreciate that banking is a complex business today. Even though Indian banks do not voluntarily take risks in pursuit of profit, significant amount of risk lands on their balance sheets, which is purely incidental to their core business. This is one significant difference in the business model of Indian banks compared to their international peers.

Think of Indian banks in early 1990s. And now. And in 5-10 years when they would likely be running alongside their global peers in size and complexity.

Response to Complexity
As banking gained sheer scale and complexity, managements and regulators had to respond to it with steps of their own. Basel accords were born at the end of the decade of 1980s. Managements’ responses based on risk management were integrated into regulations, beginning with absorption of JP Morgan’s value-at-risk in 1996. Things never looked back.

Today’s bank regulatory framework is based on sophisticated measurements derived from sound empirical research and clever risk management techniques. None of this is of the sort of a plain manual. Think of value-at-risk and expected shortfall, internal ratings, PD estimations, stress testing, simulations and scenarios, CreditVaR, …. And the list could go on.

For banks, it requires a learning curve, development of the algorithms and technology, testing, demonstrating, and recalibration. All of these are ongoing processes.

The intensity is so much so that a top international bank I worked with, had converted some of these areas into an SBU with its own dedicated staff and P&L, trying to assure regulators of the independence they long to see in the banks’ such units.

As a result of the complexity, its solutions, and the challenges that both pose, international banks have responded by raising their own game. People with deep quantitative financial skills have populated teams that undertake such work. Banks have been trying to educate more of their staff across their organisations to risk management goals of the company and articulating where each employee fits in.

Decision Makers
The most important element in ensuring the robustness of management of risks and regulations in such complex environments is the set of decision makers. The top international banks, by looking at where they are today, may have supposedly made their own transitions.

Let’s look at a few among the Top 5. I chose three at random. The most relevant top management positions at them were occupied by a (i) career fixed income & quantitative finance, market risk professional, (ii) ditto as the former, (iii) career bank risk management and quant professional, respectively. Looking deeper at international banks with balance sheets comparable with the average Top 10 Indian banks, a couple of banks were drawn at random. And the relevant position was occupied by career credit rating cum risk management experts.

Back to the three of the Top 5. Let’s look at key governance positions in banks. I found Risk Committee chairs held respectively by (i) an ex-CRO of two-decade vintage, (ii) a renowned academic with reputable work in financial crises, treasury, derivatives and risk management, and (iii) a treasury and risk management expert. What was common among them was record of executing or establishing some credible demonstration of work in their areas. That was not all. At least three Independent Board Members at each bank had comparable background and credibility to that of the RMC Chair, that is, having expertise in banking, bank supervision, risk-based audits, quantitative finance, credit risk management, etc.

Way Forward
The Basel framework and related banking regulations emphasise the need for boards to strengthen their focus on three critical domains—audit, risk management, and compensation. These are not mere procedural requirements but essential pillars of sound governance. The regulations stipulate that every bank’s board must constitute dedicated committees on risk and audit, each led by seasoned professionals with proven expertise in their respective areas. The Risk Committee, in particular, carries the responsibility of defining the institution’s risk appetite, framing policies related to risk identification, measurement, and control, and ensuring that robust mechanisms are in place for continuous monitoring and mitigation. Similarly, the Audit Committee must maintain rigorous oversight over internal controls and compliance systems to safeguard the integrity of financial reporting.

Over the past two months, the banking landscape has witnessed a wave of regulatory reforms aimed at aligning domestic practices more closely with international banking standards. This marks a significant elevation in expectations, making compelling demands on banks to enhance their learning, development, and operational demonstration to meet these higher benchmarks. The ability of institutions to place the right individuals in the right roles will determine how effectively they navigate this evolving environment. Even more crucial, however, will be the quality of decision-making at the leadership level, as strategic oversight becomes increasingly central to regulatory compliance and institutional resilience.

These mandates collectively represent a shift from a compliance-driven approach to one rooted in proactive governance. The success of these reforms will ultimately depend on how effectively institutions embed these principles into their governance culture, transforming regulatory compliance into a driver of sustainable performance and trust in the financial system.