 Banks. We use them every day, whether we're buying groceries, having coffee with a friend or paying a bill. Banks are there, making sure we can carry out these small but important daily activities. We also entrust them to look after our savings. That's why it's so crucial that banks are always safe and sound. But they're also facing challenges on several fronts, such as climate change, digitalisation and coping with the impact of the pandemic. Making sure that banks can keep playing their important role in the economy starts at the top with their leaders, their management boards. They need to bring the right skills to the table to navigate these big challenges. And that's the topic of today's episode. What makes a good leader in a bank? And what do we at the ECB have to do with this as Europe's banking supervisor? You're listening to the ECB podcast, bringing you insights into the world of economics and central banking. My name is Katie Ranger. I'm joined today by Frank Elderson, vice chair of our supervisory board. Frank, unfortunately, we can't be in the same room today, but it's very nice to at least see you on video and to welcome you back to the podcast. Thank you, Katie. My pleasure. We want to talk about the people that manage banks, but let's zoom out a bit first to talk about leadership in general. Now, Frank, you have years of experience in different leadership roles yourself. You're currently vice chair of the supervisory board here at the ECB. You also sit on our executive board and you chair the network for greening the financial system. Before that, you spent most of your career at the Dutch central bank in management positions. So with all that experience, Frank, what does leadership mean for you personally? Well, thank you, thank you, Katie, for the question. I would highlight three aspects. One, the ability to listen. Second, fostering diversity and third, exemplary behavior, fostering the right culture. So maybe to first talk a little bit about listening. I think that's really one of the most important skills that a leader can have. In my experience, the ability to listen is a key driver of trust. It encourages those around you to be open and honest and making them feel that their opinion is valued and taken into account. You know, many times, the most quiet, the most timid person in the room or in the virtual room now may have the best idea, the most original insight, the most useful contribution. So creating space for other people's views inherently fosters diversity and diverse perspectives. And that is key to taking better decisions. And maybe there's this one other aspect to this, because it's not just listening, it is also sharing one's own doubts, admitting your own mistakes, admitting that you don't know everything, admitting that you might have forgotten something, admitting that you don't understand something, being humble, being modest as a leader, create space so that other people can blossom. Happens to all of us, doesn't it? Right. And then the second point would be fostering diversity. Europe's very foundation, our motto, is united in diversity. On a practical level, that means that we should actively seek and incorporate this diverse perspectives in our decisions, in our policies. And apart from that, diversity should be looked at in a very broad sense. So yes, I'm a very strong defender and advocate of gender diversity, which is extremely important, but it is more, it is broader than that. We have to think in terms of ethnic diversity, geographical diversity, people coming from different countries, people having disabilities. And to be very honest, if I look at the ECB itself, we still have a long way to go. If you look at the composition of our staff, although we are very diverse in terms of people from all the countries of the European Union, if you look at our people, we are not a true reflection yet of the European population, of those who are on the streets of Frankfurt and Madrid, of those who now populate our universities and our schools. So there, I think we have a way to go. And it's not a nice to have for us, but also not for the banks and for any institution, I would say it's not a nice to have it is an absolute must. So going then from diversity to what I said, behavior and culture earlier. I think these are very, very important aspects as well. We have to make sure that the culture of the organization, that the behavior of the top of bank directors, the tone that they set, and not just the tone, but also the actions, the daily actions of the top, create an open culture, create a safe space for people to be themselves, to speak up, to challenge. So here, here you are. These are, I think, the various elements that go into being a leader. So we know what leadership means to you, Frank, listening, fostering diversity and that all important behavior and culture. Let's talk now about banks and their leaders. I'd like to kick things off with quite a blunt question. Why should I care who runs my bank? Well, it's a blunt, but it's also a very, very good question. So maybe to just start out by saying why are banks important? Banks are key for all of us, aren't they? We rely on banks. I do. I think everyone listening here, you keep money in the bank, should be kept safe. You use bank accounts to buy food to pay your bills. It's where we keep the money that we earn. And some of us might also rely on a bank loan for bigger things, maybe one day you buy a house. So it is in all our interest that banks are run by reliable people who have, not their own, but their customer's best interest in mind. So that's one thing. Now, banks also play a very important role in how the economy functions. They lend money to people and businesses, keeping most of our favorite jobs open and the economy going. And it was actually, to a large extent, the banks who made it possible that a lot of our companies stayed open throughout the pandemic crisis. So banks have been able to keep credit flowing, as we call this, to those who needed it most during the crisis, helping them to weather the storm, helping many people to keep their jobs. So we need banks, and therefore we need banks to be managed well. That makes it so important that their leaders, their directors, are fit and proper for the job. So what would you say a good leader of a bank needs to bring to the table? What are the key things that you'd look for there? I think first and for all, I would go back to the elements I mentioned earlier about what it is to be a good leader. So I think that leaders of banks, they need to foster through their behavior, through the tone at the top, through their actions at the top of culture, that is open, that is diverse, that is safe, that is challenging, established wisdom, ingrained ways of doing things need to be challenged. A culture that is conducive to people speaking up their minds, people admitting to their mistakes, people soliciting and truly valuing feedback, people daring to be critical and people willing to be criticized. So a culture that as a consequence of all these things leads to a continuously learning organization. So leaders that are able to foster that and if you have a diverse leadership and it's easier to do so because they bring to the table a diverse set of skills, diverse experiences, knowledge will be conducive to such a culture and I think those leaders are the leaders that we need. Now Frank, there are also some big challenges facing banks at the moment and one of them that I'm thinking of is climate change. It's huge for banks risk management, obviously, but they're also going to play a key role in financing our transition to a greener economy. Now, what does that concretely mean for their top managers, for the skills that they have to bring and the kind of people that they are? Indeed, you want the leaders of our banks to look to the horizon and see what comes new and climate is clearly one of them. So let's talk about that, but digitalization is another risk management is a third thing that people need to really focus on. So talking about climate and of course we talked about this in this earlier podcast, so people can go back to that as well. So it's very important that banks indeed do these two things. First of all, they have to understand what climate change means for them and manage the related risks for the bank's balance sheet as we call it. But it also clear that moving of the economy to a net zero economy is maybe one of the biggest changes that we will see in our lifetimes and banks are crucial in financing that transition. So what we need is directors and members of boards of banks who understand what that means, who understand, who have the skills and the knowledge and the ability to steer their organizations through that great transformation from where we are today to a truly sustainable net zero economy. So it's not necessarily about having climate scientists at the top or environmentalists, but just making sure that they're well versed in these challenges? That is right. Of course you cannot be an expert in everything, but within these banks there is of course many, many experts on many different things, but people in all different parts of a bank need to understand what climate change and what this transition means for their jobs. So the risk managers need to understand the people thinking of products that are being sold, the people in human resources that attract new staff members and new employees. So everyone needs to make that translation to their own job. Now maybe going on on some other very important development, digitalization, digital is really a key aspect of running a bank today. And if you like it or not, the pandemic sends hurdling into this digital age and much faster maybe than many people expected. And people are now more used to online banking and to meeting their bank's managers virtually. So here again, leaders need to have a vision and a direction to ensure that their banks can provide the services that people are now expecting from them and to make the big changes that are needed to operate all that. So again, not everyone needs to be a digital expert, but there needs to be a clear vision. And then maybe third, risk management. Now risk management sounds maybe a little bit boring and technical, but it is in the end the bread and butter of what determines the success of a bank. So you need suitable and committed people with a lot of integrity, taking strategic decisions. But a key part is also setting their limits right to how much risk a bank can actually take, making sure that these limits are not exceeded, making sure that there is enough buffers that if something goes wrong, that the bank can actually deal with that. So banks leaders need not only be focused on how much money they need to be focused on how do we do that in an environment where all the risks are being managed adequately. It's quite a challenging time to be a bank leader. In fact, I mean, there are lots of things that they need to have on their radar and be well versed in. I'd like to go back to something that you did mention at the beginning. And that's another word that we hear a lot when talking about how boards are composed and that's diversity. It's a topic that we've actually covered quite a bit on this podcast, specifically gender diversity in episodes with our President Christine Lagarde and other guests. Now, Frank, you already mentioned why you think diversity is important in leadership. I suppose banks aren't necessarily well known for having very diverse leadership boards. What can be done on that front? Okay, well, like I said, diversity in leadership fosters independence of opinions and the openness to critically challenge decisions. So diversity, whether it be gender or ethnic, age, geographical, educational or professional background leads to a richer set of information, a richer set of experiences and values. And this results in better decision making and sounder approaches in the way companies operate. And of course, when I say companies, that also includes banks. So the more diverse a bank's board is, the more open, the more balanced and robust its decision making processes will be. And the more resilient and safer it is likely to be, which is very good news, not only for us as supervisors, but also for banks customers. So this is also why banks are already now required by EU law to have diversity policies in place. So for example, how to ensure a fair balance of gender representation in the management body, so on the board, and to make these policies known to us as a supervisor. So if anyone working for a bank is now listening, if you don't have such a policy, you better put it in place right away because there is a legal requirement to do so. Now, we see that some progress have been made in the diversifying, managing boards of banks, but we are clearly far from where we should be. So there isn't still a lot more to be done. So we've covered what a good leader of a bank should look like and what they need to bring to the table, especially in light of these big challenges like climate change and the pandemic. Let's now turn to our role in all of this. Now, as I mentioned earlier, you're here as the Vice Chair of our supervisory board. Now, we supervise banks and one part of that is ensuring everything we've just talked about, that bank managers come with the right skills to lead. Now, we're not the ones choosing the managers, right? Banks are primarily responsible for selecting suitable people for their boards. So, Frank, what do we do as supervisor to help make sure that this happens? Well, I think you could describe our role as a gatekeeper. We ensure that the people who steer the banks are qualified enough to do so. So this point is dealt with in a process that we call fit and proper supervision. So why do we need that process? Let me say this. Many of the problems during and before the great financial crisis were due to banks being gravely mismanaged. Banks managers took excessive risks in search of higher returns and they did so without having enough capital, without having enough buffers, enough for the safety net, if you like, to take on these losses when they actually materialize. So then global reforms made sure that banks have stronger safety nets now in difficult times and we benefited greatly from that during the pandemic crisis. But the behavioral weaknesses that were laid bare during the crisis were also addressed. Then we established in the European banking supervision and back in 2014, one of our goals was actually to ensure that reckless strategies would no longer go unchecked. And fit and proper supervision is one of the ways to do just that. So fit and proper supervision, that's the technical term. Let's unpack what's behind that. What is the process actually entail, Frank? What are the steps behind it? So essentially, when a bank operating in the countries under our supervision, so that is the entire Euraria and Bulgaria integration, when such a bank wants to appoint a new member of the board, or to reappoint an old one, we assess whether this person is experienced and qualified enough and has enough independence of mind to be part of the board of that bank. And we also look at whether they have enough time to dedicate to that role and potential conflicts of interest that they might have and how well, and this is an important element as well, how well they complement each other as a board as a whole. Now, of course, they should not only be suitable at the beginning when they join the board, but all the way throughout their mandate. Now, what we did is we wrote down all this in a fit and proper guide, which explains in greater detail the policies and the processes that we apply when assessing the suitability of appointees to the boards of banks. And this year, we revised that guide. Why now? Why did we revise it now? We've gained quite a lot of experience now in this area over the past year. So the guide really needed an upgrade, a 2.0 version, if you like. And because it dates back to the early days of European banking supervision, so that was in 2014. So it was really time to reflect the most up-to-date insights that we now have in terms of fit and proper supervision, addressing a new important topics that we talked about earlier, climate and environmental related risks and diversity. And also actually to underline and reinforce some of the elements that were already there, but that are maybe even more important today than they were before. And that is the fight against money laundering and terrorist financing. Now, another reason I was now coming out with this revised guide is the desire to be more transparent and more accountable. We want to be a modern supervisor as well. So we need to be transparent and accountable for our actions. And I think this guide is really a milestone in that journey to help banks better understand what we expect from them so that it's easier for them to predict the outcome of the process of such a fit and proper suitability assessment, but also, and this goes back to something you said earlier, Katie, for them to make their own processes, their internal processes within the banks that we supervise on how to select new board members, how to prepare new board members so that they can align this better with our expectations. Because in the end, there are thousands of banks out there and we don't have the resources, the staff members to do all this for the bank. So it's very important that the bank themselves, and in the end, of course, it's very much in the interest of the bank itself, that they make sure that they are being led by people who are very much up to their job. So it's all about helping banks to know what to expect when selecting their board members and kind of make sure that they're traveling in the right direction in some of these areas, climate change, diversity, which perhaps have a concrete example about that. Sure. In member states where national laws require institutions to have targets for female board members, we will make a recommendation in our assessment to respect these gender targets. And it's important to link our recommendations to national law because these are different, as I said earlier. It's not the same in every country. Now, we are asking banks whether they have any targets for diversity and whether they are meeting them. And whenever targets are not met, we will issue recommendations to remedy such imbalances. And we also may need to oblige banks to comply. Okay. Interesting. Very interesting. Now, I just want to focus on the leaders themselves. Obviously, a bank isn't just run by one person, but it's run by a group of people. Let's look a bit more closely at what happens when a board member gets appointed. Now, as a supervisor, you assess the individual candidate and their credentials and behavior, but you also look at the board as a whole. And what I'd really like to talk about here are two concrete terms, individual and collective accountability. Frank, what's behind that? And how do you handle these two areas? So we look at both. And you can think of it like a team on a rowing boat. Maybe that is a good metaphor. Just like you might think that bankers are all the same, people often think that rowers in a boat are all the same. They move in a synchronized way with the rhythmic precision. But in fact, if you look at it more closely, that is not true at all. They are not all the same at all. In a rowing team, for example, each rower brings a different set of skills and strengths to the team. Two of them steady and steer the boat. The four in the middle power it forward, and the two in the front set the rhythm with somebody in the front of the boat in command. So communication and being attentive is key. And they have to be highly aware of what their teammates are doing to make sure that the boat doesn't capsize, of course, and nobody falls overboard. Now it's not so different in a bank. The board is collectively responsible for keeping the bank on the right path together. But each person in that team has a role to play for which they are individually accountable. And they must keep their eyes open to everything that is going on around them. It's all about listening, keeping the boat afloat together, but each playing their individual role in that. Exactly. And going back to how we then supervised this, the revised guide reinforces our expectations on collective suitability of bank sports. So as banks have faced new challenges, and we talked about this, the climate, digitalization, the boards have to have the right skillset as a whole to deal with these new realities. And this means that we expect banks to have members that have expertise in climate and environmental-related risk topics, in IT risks, cybersecurity, all issues that has become increasingly prominent. But we are also looking more closely at individual accountability of each board member. And we are looking at past failings to see whether an individual could have done more to prevent a specific outcome. Usually each member of the management board is collectively accountable with the other members for decisions on very different areas, even if each individual member is responsible for a specific area, such as risk management or IT. But this is not, and I think this is a key insight, it does not exempt them from the need to have a proper understanding of the topic and intervene in board discussions and decisions in an informed and active way. So to make this very concrete, directors should not hide behind the collective responsibility of the board. Everyone together has this responsibility, although each individual also have the focus areas that they are particularly responsible for. But there's no place to hide. Very clear message there, Frank. Thank you. Thank you very much. Now, before we finish, and you're familiar already with this part of the podcast, we always ask our guests if they have a tip for our listeners linked to the topic that we're discussing today. Frank, what's your hot tip for our listeners today? Well, thank you very much. I like this tradition a lot. I thought about it a little bit and there's two things that I would like to say. One is to take everyone who is listening to a meeting I had with our diversity and inclusion network. And I must say that I was struck by how many unconscious biases there still are, also in this very multilateral, international European Central Bank that I'm so privileged to work for. And I was struck with how much pain there still is among colleagues of color that there's such a long way still that we have to go before we also at the European Central Bank, before we truly value, truly embrace, truly celebrate the diversity that each of us brings to the table. So that's the first thing I want to say. Then the second, sometimes these very big issues, you know, one wonder, how can I, what can I do? And then it helps to just bring it, bring it back to very small, small things that you can start doing today in the next hour. And that is whenever you have to take a decision, you ask someone else to give a different perspective. This can be in work, but it can also be at home. Ask someone to play the devil's advocate. And I think actually, it's a good metaphor, but it's actually not a good thing because devil sounds like very bad. But many times this new angle actually brings the solution, shows a way that nobody thought of, or stops everyone from too enthusiastically doing something which in the end is improved. So inviting someone to be a devil's advocate. And then there's other small things you can do in meetings, for example, we call this microaffirmative behavior. But what it actually means is just saying what you have done, Katie, very well also in this talk, you react to what the other said, you ask additional questions, you say, thank you, you explicitly say that you agree with someone. These are small things that you can do. And then maybe the last thing here, and that is especially for those who are a little bit more in leadership positions, make yourself small, be humble, don't speak the first. Invite the most timid to bring their perspectives to the table. So now I've been talking a lot. But actually, the real lesson I think is to invite others to speak. And that we can all do. These are great tips and a great way to end what's been a fascinating conversation. Thank you so much for being on the podcast, Frank. Thank you, Katie. Well, that brings us to the end of this episode. Check out the show notes for further reading on this topic. You've been listening to the ECB podcast with Katie Ranger. If you like what you've heard, please subscribe and leave us a review. We'd love to hear from you, so do share your feedback and ideas with us via social media. Until next time, thanks for listening.