Banks, as we know, are a critical component of any economy. They provide financing for commercial enterprises, basic financial services to a broad segment of the population and access to payments systems. In addition, some banks are expected to make credit and liquidity available in difficult market conditions. The importance of banks to national economies is underscored by the fact that banking is virtually universally a regulated industry and that banks have access to government safety nets. It is of crucial importance therefore that banks have strong corporate governance.

Let us have a look at the Basel Committee Publication on corporate governance for banking organisations.

Basel Committee published a paper on Corporate Governance for banking organisations in Sep 99. Let me share with you some of the issues and concerns shared in that Paper. The Committee feels it is the responsibility of the banking supervisors to ensure that there is effective corporate governance in the banking industry. Supervisory experience underscores the need of having appropriate accountability and checks and balances within each bank to ensure sound corporate governance, which in turn would lead to effective and more meaningful supervision. Sound corporate governance could also contribute to a collaborative working relationship between bank managements and bank supervisors.

Basel Committee underscores the need for banks to set strategies for their operations. The committee also insists banks to establish accountability for executing these strategies. Unless there is transparency of information related to decisions and actions it would be difficult for stakeholders to make management accountable.

From the perspective of banking industry, corporate governance also includes in its ambit the manner in which their boards of directors govern the business and affairs of individual institutions and their functional relationship with senior management. This is determined by how banks:

• set corporate objectives (including generating economic returns to owners);

• run the day-to-day operations of the business and;

• consider the interests of recognised stakeholders i.e. employees, customers, suppliers, supervisors, governments and the community and

• align corporate activities and behaviour with the expectation that banks will operate in a safe and sound manner, and in compliance with applicable laws and regulations; and protect the interests of depositors.

You may be aware that the Committee has issued several papers on specific topics, where the importance of corporate governance is emphasised. These include

• Framework for internal control systems in banking organisations (September 1998),

• Enhancing bank transparency (September 1998),

• and Principles for the management of credit risk (issued as a consultative document in July 1999).

These papers have highlighted the fact that sound corporate governance should have, as its basis, the following strategies and techniques:

• the corporate values, codes of conduct and other standards of appropriate behaviour and the system used to ensure compliance with them;

• a well-articulated corporate strategy against which the success of the overall enterprise and the contribution of individuals can be measured;

• the clear assignment of responsibilities and decision-making authorities, incorporating an hierarchy of required approvals from individuals to the board of directors;

• establishment of a mechanism for the interaction and cooperation among the board of directors, senior management and the auditors;

• strong internal control systems, including internal and external audit functions, risk management functions independent of business lines, and other checks and balances;

• special monitoring of risk exposures where conflicts of interest are likely to be particularly great, including business relationships with borrowers affiliated with the bank, large shareholders,

• senior management, or key decision-makers within the firm (e.g. traders);

• The financial and managerial incentives to act in an appropriate manner offered to senior management, business line management and employees in the form of compensation, promotion and other recognition; and

• appropriate information flows internally and to the public.

For ensuring good corporate governance, the importance of overseeing the various aspects of the corporate functioning needs to be properly understood, appreciated and implemented.There are four important forms of oversight that should be included in the organisational structure of any bank in order to ensure the appropriate checks and balances:

1. oversight by the board of directors or supervisory board;

2. various business areas;

3. direct line supervision of different business areas; and

4. independent risk management and audit functions. In addition to these, it is important that the key personnel are fit and proper for their jobs.