Why Corporate Governance in Banks?
If we examine the need for improving corporate governance in banks, two reasons stand out:
Banks exist because they are willing to take on and manage risks. Besides, with the rapid pace of financial innovation and globalization, the face of banking business is undergoing a sea-change.
Banking business is becoming more complex and diversified. Risk taking and management in a less regulated competitive market will have to be done in such a way that investors’ confidence is not eroded.
Even in a regulated set-up, as it was in India prior to 1991, some big banks in the public sector and a few in the private sector had incurred substantial losses. This, along with the massive failures of non-banking financial Companies (NBFCs), had adversely impacted investors’ confidence.
Moreover, protecting the interests of depositors becomes a matter of paramount importance to banks. In other corporates, this is not and need not be so for two reasons:
The depositors collectively entrust a very large sum of their hard- earned money to the care of banks. It is found that in India, the depositor’s contribution was well over 15.5 times the shareholders’ stake in banks as early as in March 2OO1. This is bound to be much more now.
The depositors are very large in number and are scattered and have little say in the administration of banks. In other corporates, big lenders do exercise the right to direct the management.
In any case, the lenders’ stake in them might not exceed 2 or 3 times the owners’ stake.
Banks deal in people’s funds and should, therefore, act as trustees of the depositors. Regulators the world over have recognized the vulnerability of depositors to the whims of managerial misadventures in banks and, therefore, have been regulating banks more tightly than other corproates.
To sum up, the objective of governance in banks should first be protection of depositors’ interests and then be to “optimise” the shareholders’ interests. All other considerations would fall in place once these two are achieved.
As part of its ongoing efforts to address supervisory issues, the Basel Committee on Banking Supervision (BCBS) has been active in drawing from the collective supervisory experience of its members and other supervisors in issuing supervisory guidance to foster safe and sound banking practices.
The committee was set up to reinforce the importance for banks of the OECD principles, to draw attention to corporate governance issues addressed by previous committees, and to present some new topics related to corporate governance for banks and their supervisors to consider.
Banking supervision cannot function effectively if sound corporate governance is not in place and, consequently, banking supervisors have a strong interest in ensuring that there is effective corporate governance at every banking organisation.
Put plainly, sound corporate governance makes the work of supervisors infinitely easier. Sound corporate governance can contribute to a collaborative working relationship between bank management and bank supervisors.
Recent sound practice papers issued by the Basel Committee underscore the need for banks to set strategies for their operations and establish accountability for executing these strategies.
In addition, transparency of information related to existing conditions, decisions and actions is integrally related to accountability in that it gives market participants sufficient information with which to judge the management of a bank
If we examine the need for improving corporate governance in banks, two reasons stand out:
Banks exist because they are willing to take on and manage risks. Besides, with the rapid pace of financial innovation and globalization, the face of banking business is undergoing a sea-change.
Banking business is becoming more complex and diversified. Risk taking and management in a less regulated competitive market will have to be done in such a way that investors’ confidence is not eroded.
Even in a regulated set-up, as it was in India prior to 1991, some big banks in the public sector and a few in the private sector had incurred substantial losses. This, along with the massive failures of non-banking financial Companies (NBFCs), had adversely impacted investors’ confidence.
Moreover, protecting the interests of depositors becomes a matter of paramount importance to banks. In other corporates, this is not and need not be so for two reasons:
The depositors collectively entrust a very large sum of their hard- earned money to the care of banks. It is found that in India, the depositor’s contribution was well over 15.5 times the shareholders’ stake in banks as early as in March 2OO1. This is bound to be much more now.
The depositors are very large in number and are scattered and have little say in the administration of banks. In other corporates, big lenders do exercise the right to direct the management.
In any case, the lenders’ stake in them might not exceed 2 or 3 times the owners’ stake.
Banks deal in people’s funds and should, therefore, act as trustees of the depositors. Regulators the world over have recognized the vulnerability of depositors to the whims of managerial misadventures in banks and, therefore, have been regulating banks more tightly than other corproates.
To sum up, the objective of governance in banks should first be protection of depositors’ interests and then be to “optimise” the shareholders’ interests. All other considerations would fall in place once these two are achieved.
As part of its ongoing efforts to address supervisory issues, the Basel Committee on Banking Supervision (BCBS) has been active in drawing from the collective supervisory experience of its members and other supervisors in issuing supervisory guidance to foster safe and sound banking practices.
The committee was set up to reinforce the importance for banks of the OECD principles, to draw attention to corporate governance issues addressed by previous committees, and to present some new topics related to corporate governance for banks and their supervisors to consider.
Banking supervision cannot function effectively if sound corporate governance is not in place and, consequently, banking supervisors have a strong interest in ensuring that there is effective corporate governance at every banking organisation.
Put plainly, sound corporate governance makes the work of supervisors infinitely easier. Sound corporate governance can contribute to a collaborative working relationship between bank management and bank supervisors.
Recent sound practice papers issued by the Basel Committee underscore the need for banks to set strategies for their operations and establish accountability for executing these strategies.
In addition, transparency of information related to existing conditions, decisions and actions is integrally related to accountability in that it gives market participants sufficient information with which to judge the management of a bank