Enhancing Corporate Governance for Banking Organizations The Basel Committees Updated Bank Governanc

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Enhancing Corporate Governance for Banking
Organizations (The Basel Committees Updated
Bank Governance Principles)

• Developing a National Reform Agenda for Bank
  Corporate Governance
• Abu Dhabi, UAE
• Laura Ard, World Bank
• Operations Policy Department
• 5 March 2006

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Outline

• Background
• Selected Highlights
• World Bank Support
• Summary

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Why guidance for banks?

• Importance of trust and confidence
• Need to safeguard depositors funds
• Critical role in the economy
• High cost of bank failures
• Sensitivity to liquidity crises
• Increasing complexity of bank activities

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Enhancing Bank Governance Process of developing
revised Guidance

• Incorporated elements of 2004 OECD principles
• Discussed lessons learned from corporate
  governance breakdowns
• Exchanged national guidance/legislation/regulation
  
• Met with industry groups and rating agencies
• Consulted with non-BCBS supervisors

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Basel Committee Guidance

• Applies to a wide range of banks and countries
• Applicable to diverse corporate and board
  structures
• Principles, not rules
• Not as prescriptive as some national legislation
• Commensurate with bank size, complexity and risk
  profile
• Not part of Basel II applicable regardless
• Not intended to add new layer of regulation

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2006 vs. 1999 Guidance

• Introduction of know your structure guidance
• Expanded to consider group structures
• Protection for whistleblowers
• State-owned and other non-listed banks

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2006 vs. 1999 Guidance

• More in-depth discussion of
• Conflicts of interest
• Role of the board of directors
• Audit and control functions
• Role of banking supervisors

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Outline

• Background
• Selected Highlights
• World Bank Support
• Summary

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Selected Highlights

• Fundamental Underpinning
• Role of owners in promoting sound governance,
  fit proper
• Board qualifications, priorities
• Board Audit Committee members independence
  qualifications
• Corporate values, professional conduct
• Disclosure transparency

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1. Underpinning of Sound Bank Governance

• Banks are considered
• public interest entities.
• Through the taking of deposits, dealing with
  their customers, and facilitating funds flow
  through the economy, owners, directors, senior
  mgmt. assume responsibility for the public trust
  - first.

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Ownership transparent promote sound
governance(document overview / Princ.7)

• Banks with family or controlling ownership can
  provide beneficial resources, but should not
  impede sound governance
• Beneficial or ultimate owners should be known, at
  a minimum to supervisor, to facilitate evaluation
  by stakeholders
• Fit proper

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3. Boards qualified act in the best
interests of the bank (Princ.1,4,5,6)

• Qualified, updated, evolve as complexity of the
  bank grows, not over-committed
• Independent in judgment from the controlling
  owners and other external influences
• Responsible for receiving adequate external
  audits financial accuracy
• Understand risk profile of bank
• Not be involved in mgmt activities ensure
  qualified mgmt, fair compensation linked to L-T
  objectives
• Ensure a concrete succession planning process

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4. Board Audit Committee members independent
qualified (Princ.1,5,8)

• Good practice comprised of non-executive
  directors, independent directors
• Have pertinent qualifications for the function
• Receive audit results mgmts corrective
  actions accuracy of financial reporting
• Ensure proper review of special structures
• Promote independence / elevate internal audit
• Periodically meet independently of mgmt

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5. Corporate values gt professional conduct
(Princ. 2/3)

• Responsibility of board, tone _at_ the top
• Code of conduct applicable to all parties
  (including senior mgmt, board)
• Define related parties of the bank, conflict of
  interest, controls therein
• Establish identification and monitoring systems
  to identify both

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6. Disclosure transparency (Princ.7,8)

• Accurate full financial statement (incl.
  supporting notes disclosures)
• Nature extent of related party transactions,
  including affiliates
• Activities in jurisdictions that impede
  transparency through complex structures

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Overall

• Regulatory requirements form minimum thresholds
  for sound governance however
• good governance requires the initiative of
  owners, boards, senior mgmt over above the
  basic constructs

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Outline

• Background
• Selected Highlights
• World Bank Support
• Summary

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World Bank Support Banking Sector Governance
Reviews

• Development of a review process for corporate
  governance in the banking sector
• Follows Basel Committee Principles of good bank
  governance incorporates good practices from
  other supervisory agencies
• Reviews high to mid-level bank governance
  practices elements of supporting environment
• Product technical note with pertinent
  suggestions

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Outline

• Background
• Selected Highlights
• World Bank Support
• Summary

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Summary

• Banks unique role in the economy, so targeted
  corporate governance guidance is appropriate
• Key elements
• Owners fit proper, responsible
• Board of directors oversight
• Senior management internal controls
• Supervisors promote and assess sound governance
• Practice is just as important as written policies
  and procedures

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Summary

• Effective bank governance cannot be legislated
• sound bank governance is an attitude, a way of
  doing things, and the manner in which owners,
  directors, management fulfill the obligation
  assigned by the public trust.