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The importance of Good Corporate Governance in the Banking Sector SUERF Seminar: Corporate Governanc

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Title: The importance of Good Corporate Governance in the Banking Sector SUERF Seminar: Corporate Governanc


1
The importance of Good Corporate Governance
in the Banking SectorSUERF Seminar Corporate
Governance in Financial Institutions, Panel
Discussion
  • Andreas Ittner, DirectorFinancial Stability and
    Bank Inspections Section

30 March 2007
2
Why does Good Corporate Governance (CG)
particularly matter in the banking sector?
  • Dealing with depositors funds
  • Role as financial intermediaries
  • Role as agents of the payment systems
  • Dependent on trust and confidence
  • Confronted with comparably high and complex
    risks
  • High costs of bank failures/contagion effects

Checks balances are required!
3
Theory versus practice
  • In theory, the importance is well known, since
    the manner in which banks are governed affects
  • the setting of corporate objectives,
  • the running of the day-to-day business,
  • the management of risks,
  • the handling of conflicts of interest,
  • the exercise of accounta-bility and control.
  • In practice, CG/IG some-times not given
    sufficient attention
  • focus on other risks or only on profits
  • CEOs fit proper tests but CG not warranted!

4
Framework for banks governance
  • Regulations/Standards
  • OECD CG Standards BCBS Guidance on CG for
    banks/Core principles CEBS Principles for
    banks IG (Pillar 2 Guidelines)
  • Clear understanding of the respective roles and
    responsibilities
  • Banks
  • main responsibility for implementing sound CG/IG
    policies and practices
  • Supervisors
  • promote strong governance and consider issuing
    guidance,
  • examine banks CG/IG and hold board/senior
    management accountable,
  • be attentive to warning signs of management
    deterioration.
  • Framework conditions
  • Social framework and practices, (business) law
    system, accounting standards, supervisors
    authority, market integrity and transparency.

5
Basel II will further contribute to Good CG/IG
  • Basel II is neither a precondition nor a
    guarantee for good CG/IG, but promotes good
    governance!
  • Pillar 1 requirements for IRB models
  • Pillar 2 the institutions risk
    managementstrategy, approaches and systems are
    integrated with its capital planning.
  • Management body has to set
  • the business objectives and appetite for risk,
  • how the business is organised and
    responsibilities/authority allocated,
  • how reporting lines are set up/what information
    they convey and
  • how internal control is organised.
  • Assessment in a dialogue process
  • Pillar 3 Market Discipline/Transparency

6
Lessons from CG regulation/practice
  • CG/IG principles rather than detailed rules?
    flexibility!
  • Proportionality
  • Internal transparency
  • Banks adoption of sound policies is not
    sufficient ? effective implementation necessary
  • Qualification/character/behaviour of acting
    persons to be considered
  • Auditors could play a decisive role in case of
    bad actors
  • however public function versus customer
    relationship potential conflicts of interest!

Where corporate governance works well, it
re-enforces ethical standards where it fails, it
permits unethical practices (Malcom
D. Knight)
7
Thank you for your attention!
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