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
2Why 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!
3Theory 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!
4Framework 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.
5Basel 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
6Lessons 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)
7Thank you for your attention!