June 28, 2012 / 4:37 PM / 5 years ago

Regulators tighten up bank in-house checks

3 Min Read

LONDON (Reuters) - Global banking regulators published rules on Thursday to strengthen in-house checks on risks at lenders, plugging a gap highlighted by the record fine on Barclays for rigging Libor interest rates.

Regulators say so-called internal auditors must report directly to a bank's board or audit committee, and not to senior management - as is often the case - who could then block or slow down the flow of any problematic information to the board.

It also makes it harder for board members to ignore what internal auditors say or claim they were not told about something.

"An internal audit function, independent from management and composed of competent auditors, is a key component of a bank's sound governance framework," said Stefan Ingves, chairman of the Basel Committee on Banking Supervision which authored the rules.

Internal auditors check how banks manage risks and comply with rules. They are separate from external auditors who sign off on annual reports.

Internal auditors were discredited in the financial crisis where there were clear lapses in managing risks. The U.S. reform of Wall Street, known as Dodd-Frank, puts responsibility for implementing the reform on a bank's internal audit committee.

The internal audit profession largely escaped fallout from the financial crisis which mostly hit regulators, credit rating agencies and external auditors.

There is no direct supervision of internal auditors though the sector is trying to become more professional in pushing for higher standards and profile.

Intervention by the Basel Committee will be welcomed by internal auditors to help bolster their role.

"It's an absolutely vital function in banks, but it hasn't always had the attention it needs. It forces bank boards to take their internal audit functions seriously," the Institute of Internal Auditors said on Thursday.

"Part of the remedies proposed by the U.S. Commodity Futures Trading Commission in response to the Libor scandal is improved internal auditing," the IIA said.

Barclays will pay $453 million to U.S. and British authorities to settle allegations that it manipulated Libor rates.

The authorities are also probing Citigroup, HSBC, Royal Bank of Scotland and UBS for possible manipulation of Libor.

Reporting by Huw Jones; Editing by Jon Loades-Carter

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