Behind each toxic bank asset there is a toxic executive. Bank failures and the recent financial crisis are not hard to understand. We have a saying in Arabic: unattended money encourages theft. This is exactly what happened. Many of the failed banks and other financial institutions have taken every possible step to mitigate risk except one step. Mitigating risk against corrupt bank executives who want to make quick buck from a certain deal, and move to another institution for the same purpose.
Corruption in financial institutions is not easy to uncover because a bank loan executive can inflate loan proposals to have it approved although he knows repayment is unlikely. Approval process in some banks is based on information passed from one executive to another and very few in the bank have actually met the borrower. Bank supervisors and regulators also bear part of the blame. They have been remote-supervising, i.e. evaluating financial institutions based on reports supplied by the institution itself. Regulators also depend more on external parties to make inspection visits to financial institutions rather having their own inspectors on sight. Window dressing of a financial institution's balance sheet, which can happen with the help of external auditors, have blinded regulators from the reality in financial institutions. External auditors get most of the information they need to evaluate an institution, from the institution itself, and their (external auditors ) reports are as good as the information they get. Management of a financial institution also can window-dress information it provides to the board to have the approval which will mean reaching the target and getting the bonus.
Why have so many regulations and restrictions not saved the failed banks? Simply because the financial institutions were not required to implement them. They were only required to produce what proves they have implemented them. There is a big difference. Once again. Unattended money encourages theft.
Hamad S Alomar
Riyadh
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