Governance in Corporate Sector

Traditionally approach of corporate governance in the financial sector often involved the regulator or bank supervisor relying on statutory authority to devise governance standards promoting the interests of shareholders, depositors and other stakeholders.

Corporate governance in the banking and financial sector differs from that in the non-financial sectors because of the broader risk that banks and financial firms pose to the economy. As a result, the regulator plays a more active role in establishing standards and rules to make management practices in banks more accountable and efficient. Unlike other firms in the non-financial sectors, a mismanaged bank may lead to a bank run or collapse, which can cause the bank to fail on its various counterparty obligations to other financial institution and in providing liquidity to other sectors of the economy.

For reason of financial stability, national banking law and regulation should permit the bank regulator to play the primary role in establishing governance standards for banks, financial institutions and bank/financial holding companies. The regulator represents the public interest, including stakeholders, and can act more efficiently than more stakeholder groups in ensuring that the bank adheres to its regulatory and legal responsibilities.

Another contrasting view is need for remedies should be strengthened to enforce corporate governance standard by banks. This would involve expanding the scope of fiduciary duties beyond shareholders to include depositors and creditors.

Increasingly, international standards of banking regulation are requiring domestic regulators to rely less on a strict application of external standards and more on internal monitoring strategies that involve the regulator working closely with banks and adjusting standards to suit the particular risk profile of individual banks. Indeed, Basel II emphasis that banks and financial firms should adopt, under the general supervision of the regulator, internal self-monitoring systems and processes that comply with statutory and regulatory standards. Basel II provides for supervisory review that allows regulators to use their discretion in applying regulatory standards.

International Standards of Corporate governance for banks and financial institutions

Ø  Organisation for Economic Co-operation and Development

Ø  Basel II Capital accord Pillar II

o   Regulatory framework for banks

§  Internal Capacity Adequacy Assessment Process (ICAPP)

§  Risk management

o   Supervisory framework

§  Evaluation of internal systems of banks

§  Assessment of risk profile

§  Review of compliance with all regulations

§  Supervisory measures

Ø  National financial regulation and corporate governance

Ø  Company law

Ø  Anti-money laundering rules

http://www-cfap.jbs.cam.ac.uk/publications/downloads/wp17.pdf