But, the auditors failed to make that alert, because at that time, the audit programmes were confined to a simple financial compliance audit only. What the auditors should look for Since a central bank is a systemically important institution in an economy, the auditors of central banks should take extra care when the accounts of central banks are audited. The old maxim relating to the role of auditors is relevant here: “an auditor is a watchdog and not a blood hound”. Accordingly, auditors are required to keep vigil on central banking activities and alert the relevant parties when there are signs of risks emerging. The central bank management and the legislators should take serious note of such alerts and take appropriate corrective and protective measures. What are the signs of distress that auditors should look for? First of all, a sign immediately visible would be the change in the structure of the assets of a central bank from foreign assets to domestic assets. The depletion of foreign reserves drives a central bank to a future risky situation. It will have to borrow abroad from foreign sources in  7  As reported by The New York Times, June 14, 1993. 8  Ibid. 9  Ma. Cyd Tuano-Amador, “Central Banking in the Philippines since 1993”, in Money and Banking in the Philippines, BSP, 2003, p 210  6  BIS Review 58/2009  order to fund the immediate foreign exchange requirements raising both the income risks and foreign reserve risks.
And I find it encouraging that Citi has been at the fore of this refocus on the basics of banking and finance. You’ve gone through a process of introspection in the last few years, because of the crisis and through the crisis, and you’ve come out stronger. Not just because of better capital and liquidity – although that’s obviously a pre-requisite for strength in the post-crisis era. But more fundamentally because you’re asking yourselves important questions about culture – questions about responsibility, and about the source of your profitability as an enterprise that intends to be around for a long time to come. So the story of Citi, and like the story of several other global institutions, is also about the recurring importance of certain basics. And the most important basics in banking have to be about serving your clients and growing with your clients, and about managing risks well. There’s a risk that we’re placing a too much importance in recent policy debates on the structure of banking. You read the headlines, you’ll find a continuing debate about how large banks should be, whether we should have narrow banks or universal banks, about the role of national banks and global banks, about the role of commercial banks versus investment banks and the rest of the shadow banking system. These are important questions of structure, but I think we risk an overemphasis on structure and an inadequate focus on the culture of banking and finance, and an inadequate emphasis on the need for active supervision.