Corporate Governance for Banks

1. Corporate Governance for Banks November 2008

2. Why is Corporate Governance in Banks so important? • Banks have unique characteristics so corporate governance of banks differs from governance of other companies. • Banks are accountable for public savings and loans to businesses that must be managed properly • Banks are subject to risk and it must manage risk effectively • Bad governance of a bank can expose not only the bank itself but also national economy to severe financial troubles.

3. International Standards for Corporate Governance in Banks: • The Basel Committee on Banking Supervision is a committee of banking supervisory authorities that was established by the central bank governors of the Group of Ten countries in 1975. • The Committee produced the revised Basel Guidelines in 2004, based on OECD principles. • The guidelines encourage banks to identify the risks they may face, today and in the future and to better manage those risks. • Sets a minimum standard for capital adequacy that national supervisory authorities implement. • Aligns regulatory capital requirements to the underlying risks that banks face.

4. Primary Elements of CG in Banks • Corporate governance is an essential element in the safe and sound functioning of a bank and may affect the banks risk profile if not implemented effectively • Sound corporate governance contributes to the protection of depositors of the bank and permits the supervisor to place more reliance on the banks internal processes • Helps offset moral hazards from deposit protection • Particular problems where bank ownership structure either lacks transparency or insufficient checks and balances

5. Benefits of Corporate Governance

6. Weak Corporate Governance

7. Primary Elements of CG in Banks • Corporate governance is an essential element in the safe and sound functioning of a bank • Sound corporate governance protects depositors of the bank and offset moral hazards • Supervisors place more reliance on the banks internal processes. • Addresses problems where bank ownership structure lacks transparency or has insufficient checks and balances

8. Effective Board Members • Are qualified for their positions and have prior experience • Has a clear understanding of their role in corporate governance • Exercises sound judgement about the affairs of the bank • Approves and oversee the banks strategic objectives and corporate values • Sets the expectation and creates a culture of responsibility, transparency, and accountability • Identify, avoid and manage conflicts of interest e.g. related lending

9. The Role of Board Members • Ensures that there is appropriate oversight of senior management consistent with board policy. • The Board should have overall responsibility for the operations and the financial soundness of the Bank. • Analyzes the Bank’s risk profile and ensures that capital levels adequately reflect such risk. • Ensures that compensation policies and practices are consistent with long term objectives and strategy • Understands clearly the bank’s operational structure and what might impede transparency

10. The role of supervisors • Provide guidance to banks on sound corporate governance • Determine whether the bank has effectively implemented sound corporate governance practices • Assess the quality of banks audit and control functions • Evaluate the effects of the banks group structure • Alert the board and management of problems that they detect through their supervisory efforts.

11. Boards of Subsidiaries • Board of a subsidiary retains its responsibilities • The Parent Board provides adequate oversight of subsidiaries • Parent level matrix and business line management structures must coincide with banks legal structure • Management and control structures should ensure good corporate governance

12. Good corporate governance is more than meeting regulatory requirements. Good corporate governance is about creating a culture of accountability and actual practices.