DBRS Morningstar: ESG Factors for Banks, Part 2 – Governance Factors

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NEW YORK–(COMMERCIAL THREAD) – This is the second in a series of comments on environmental, social and governance (ESG) factors that could affect the ratings of banks rated by DBRS Morningstar. In this second commentary, DBRS Morningstar discusses the three governance risk factors that DBRS Morningstar takes into account in analyzing bank ratings. The negative impact of poorly managed governance usually spills over into bank profits resulting from penalties and / or indemnity payments and / or loss of business.

Highlights:

  • DBRS Morningstar considers good governance a prerequisite for rating a bank.

  • Although banks are exposed to a number of ESG risk factors, governance-related risk factors have had the most negative impact on banks’ credit profile.

  • Governance risk factors tend to be tied to intangibles such as culture and accountability and are difficult for external parties to monitor and assess.

  • DBRS Morningstar considers three governance risk factors. These are: (i) bribes, corruption and political risks; (ii) business ethics; and (iii) Corporate governance

    • Bribery, Corruption and Political Risks: Suspected or actual bribes can pose a financial or reputational risk to banks. In addition, political risks can affect a bank’s financial situation and / or its reputation.

    • Business Ethics: General professional ethics can present a financial or reputational risk to banks. Deficiencies in business ethics would generally result from the absence of a strong risk culture which can be associated with a lack of responsibility, accountability and / or a lack of respect for controls.

    • Corporate governance: Corporate governance failures can have a negative impact on the financial well-being or reputation of banks. The most recent examples would be the money laundering failures that many banks continue to face.

“Although banks are exposed to a number of ESG risk factors, governance risk factors have had the most negative impact on banks’ credit profile, and a large number of examples have shown that Banks may face damaging reputation issues that are accompanied by significant following governance-related issues. In this commentary, we discuss the three governance risk factors that we take into account in our analysis of bank ratings. Said Vitaline Yeterian, Senior Vice President, Global FIG.

To read the full report, click here: https://www.dbrsmorningstar.com/research/386141/esg-factors-for-banks-part-two-governance-factors

To read the first part of the series, which deals with environmental factors, click here: https://www.dbrsmorningstar.com/research/377394/esg-factors-for-financial-institutions-part-one-environmental-factors

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