Download - The corporate governance of banks
Chapter 1
INTRODUCTION
The Corporate Governance of Banks
The dominant model of corpora te governance in law
and economics i s tha t the corpora t ion i s a “complex se t of
expl ic i t and impl ic i t cont rac ts .” In o ther words , one
should v iew the corpora t ion as nothing more (or less) than
a se t of cont rac tua l a r rangements among the var ious
c la imants to the product and earnings genera ted by the
bus iness .
Every bus iness organiza t ion , inc luding the corpora t ion ,
represent nothing more than a par t icular ‘s tandard form’
cont rac t . The very jus t i f ica t ion for having d i f ferent type
of bus iness organiza t ions i s to permi t inves tors ,
ent repreneurs , and o ther par t ic ipants in the corpora te
enterpr ise to se lec t the organiza t ion des ign they prefer
f rom a menu of s tandard-form cont rac ts . The v i r tue of the
s tandard-form arrangement charac ter i s t ic of modem
corpora te enterpr ise to take advantage of an ar rangement
tha t su i t s the needs of inves tors and ent repreneurs in a
wide var ie ty of s i tua t ions . On a theore t ica l level , the
problems of corpora te governance resul t f rom the
exis tence of incomple te cont rac ts . The ru les of corpora te
governance are a imed a t resolving the gaps le f t in these
cont rac ts in ways consis tent wi th maximizing the va lue of
the f i rm. In the case of shareholders cont ingent cont rac ts
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in the Uni ted Sta tes , these background ru les are ca l led
f iduciary dut ies . The economic jus t i f ica t ion for having
f iduciary dut ies i s s t ra ight forward: Fiduciary dut ies are
the mechanism invented by the legal sys tem for f i l l ing in
the unspeci f ied te rms of shareholders cont ingent
[cont rac ts ] . The presence of f iduciary dut ies a t tempts to
address these cont ingencies . In th is gap-f i l l ing ro le ,
f iduciary dut ies essent ia l ly ca l l on d i rec tors to work hard
and to promote the in teres ts of shareholders above the i r
own.
The duty of care requi res tha t d i rec tors exerc ise
reasonable care , prudence , and d i l igence in the
management of the corpora t ion . Direc tor l iabi l i ty for a
breach of the duty of care may ar i se in two discre te
contexts . F i rs t , l iab i l i ty may f low f rom “ i l l advised or
negl igent” dec is ion –making. Second, l iabi l i ty may be the
resul t of fa i lure of the board to moni tor in “c i rcumstances
in which due a t tent ion would , a rguably , have prevented
the loss .” ‘Signi f icant ly , in both c lasses of cases ,
d i rec tors a re ent i t led to re ly on informat ion, repor ts ,
s ta tement , and opinions prepared by the company’s
of f icers and di rec tors as wel l as outs ide consul tants .
Separat ion of Ownership and Control
The problem of corpora te governance i s rooted in the
Ber le-Means (1932) paradigm of the separa t ion of
shareholders ‘ownership and management’s cont ro l in the
modern corpora t ion . Agency problems occur when the
pr inc ipa l (shareholders) lacks the necessary power or
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informat ion to moni tor and cont ro l the agent (managers)
and when the compensat ion of the pr inc ipa l and the agent
i s not a l igned. Severa l fac tors work to reduce these
pr inc ipa l -agency cos ts , the “market for managers”
penal izes management teams tha t t ry to advance the i r own
in teres t a t shareholders’ expense .
On poss ib le so lu t ion to the agency cos t problem is to g ive
shareholders d i rec t cont ro l over management . This i s the
case when management and shareholders are the same
par ty and cont ro l r ight automat ica l ly res t in the hands of
shareholders .
Al though these are potent ia l ly powerful concerns about
the ef fec t iveness of shareholder cont ro l , recent research
sugges ts tha t the more fundamenta l t rade-offs may guide
the des i red involvement of shareholders in corpora te
cont ro l . Burkhar t Gromb, and Panunzi (1997) , for example
show tha t d i rec t shareholder cont ro l may discourage new
in i t ia t ives on the par t of managers .
These observat ions are consis tent wi th rea l -wor ld
corpora te governance ar rangements , which a lmost wi thout
except ion l imi t d i rec t shareholder involvement . In some
cases –par t icular ly in the Uni ted Sta te- th is i t fac i l i ta te by
re la t ive ly d ispersed ownership .
Banks are organized in a var ie ty of ways , f rom s tand-
a lone corpora te ent i t ies and s ingle bank holding
companies to mul t ip le bank holding companies and the
pos t -Gramm- Leach –Bl i ley Act (GLBA) divers i f ied
holding company.
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This d ivers i f ied s t ruc ture permi ts such holding companies
to reduce or e l iminate the f i rm- speci f ic r i sks associa ted
wi th the banks they own. The GLBA s igni f icant ly
enhanced th is d ivers i f ica t ion abi l i ty by permi t t ing bank
holding companies and cer ta in o ther res t r ic ted f i rms to
become a new ent i ty : a f inancia l holding company (FHC)
This d ispers ion of ac t iv i ty throughout the holding
company s t ruc ture a lso g ives incent ives to bank holding
companies to put more r i sky behavior in the i r federa l ly
insured banks .
Special Problems of Banks
The discuss ion so far has focused on a genera l overview
of corpora te governance . We now know turn to speci f ic
problems of banks and a t tempt to address why the scope of
the dut ies and obl iga t ions of corpora te of f icers and
di rec tors should be expanded in the case of banks . Our
argument i s tha t the specia l corpora te governance
problems of banks weaken the case for making
shareholders the exclus ive benef ic iar ies of f iduciary
dut ies . Our focus here i s on es tabl i sh ing why banks are
not l ike o ther f i rms and thus should be t rea ted d i f ferent ly .
The Liquidi ty Product ion Role of Banks
Many di f ferent types of f i rms extend credi t . S imi lar ly , a
var ie ty of non-bank f i rms most notably money market
mutual funds and non-bank credi t card companies , of fer
the equivalent of a check t ransac t ion account . What
d is t inguished banks f rom other f i rms i s the i r capi ta l
s t ruc ture , which i s unique in to ways . F i rs t , banks tend to
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have very l i t t le equi ty re la t ive to o ther f i rms. Second,
banks , l iabi l i t ies a re la rge ly in the f rom of deposi t s ,
which are avai lable to the i r c redi tors /deposi tors on
demand, whi le the i r asse ts of ten take the f rom of loans
tha t have longer matur i t ies (a l though increas ingly ref ined
secondary market have mi t iga ted to same extent mismatch
in the te rm s t ruc ture of banks’ asse ts and l iabi l i t ies) .
Thus , the pr inc ipa l a t t r ibute tha t makes banks as f inancia l
in termediar ies ‘specia l ’ i s the i r l iquidi ty product ion
funct ion . By holding i l l iquid asse ts and i ssuing l iquid
l iabi l i t ies , bank crea tes l iquidi ty for the economy.
The l iquidi ty product ion funct ion may cause a col lec t ive-
ac t ion problem among deposi tors because banks keep only
a f rac t ion of deposi t s on reserve a t any one t ime.
Deposi tors because banks keep only a f rac t ion of deposi t s
on reserve a t any one t ime. Deposi tors cannot obta in
repayment of the i r deposi t s s imul taneously because the
bank wi l l not have suff ic ient funds on hand to sa t i s fy a l l
deposi tors a t once .
The Deposi t Insurance Fund
In the wake of the mass fa i lure of deposi tory ins t i tu t ions ,
Congress passed the Banking Act of 1933 es tabl i sh ing the
Federa l Deposi t Insurance Corpora t ion (FDIC) and giv ing
the federa l government the power to insure deposi t s in
qual i f ied banks . The crea t ion of federa l deposi t insurance
has been t remendously ef fec t ive in prevent ing bank runs
and keeping the fa i lure of individual banks f rom affec t ing
the la rger economy. Deposi t insurance “has succeeded in
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achieving what had been a major objec t ive of banking
reform for a t leas t a century , namely the prevent ion of
banking panics .”
Despi te the pos i t ive ef fec t of FDIC insurance on
prevent ing bank runs , the implementa t ion of deposi t
insurance poses a regula tory cos t of i t s own-i t g ives the
shareholder and manager of insured banks incent ives to
engage in excess ive r i sk- taking.
The problem of mora l hazard i s exacerbated in s i tua t ions
where a bank i s a t of near insolvency. In such a s i tua t ion ,
the shareholders have a s t rong incent ive to increase r i sk
because they can a l loca te the i r losses to th i rd-par t ies
whi le s t i l l rece iv ing any gains tha t might resul t f rom the
r i sky behavior .
Asset Structure and Loyalty Problems
The presence of federa l insurance fund a lso increased the
r i sk of f raud and se l f -deal ing in the banking indust ry by
reducing incent ives for moni tor ing . In the 1980, i t was
es t imated tha t f raud and se l f -deal ing t ransac t ion were
“apparent” in as many as one- th i rd of today’s bank
fa i lures . 28 A s imi lar s ta t i s t ic shows tha t be tween 12990
and 1991, ins ider lending cont r ibuted to 175 of 286bank
fa i lures ,29 Such behavior , of course , i s a poss ib i l i ty in
any large f i rm, s ince i t i s ineff ic ient for owners to
moni tor a l l employees a t a l l t imes . These sor ts of
problems are par t icular ly acute in f inancia l ins t i tu t ions ,
however , because of the la rge por t ion of the i r asse t he ld
in h ighly l iquid form.
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The same regula tory s t ruc ture tha t c rea tes a problems i f
excess ive r i sk- taking by banks a lso leads to a reduct ion in
the normal levels of moni tor ing wi th in the f i rm, resul t ing
in a h igher inc idence of bank fa i lures due to f raud.
Shareholders have an incent ive to moni tor to prevent f raud
and se l f -deal ing in banks , but such moni tor ing i s
notor ious ly ineffec t ive in many cases because individual
shareholders rare ly have suff ic ient incent ives to engage in
moni tor ing because of col lec t ion-ac t ion problems.
One might a rgue tha t FDIC insurance s imply replaces one
se t of c redi tors : deposi tors , wi th another se t of c redi tors :
s ta te and federa l regula tors . These o ther c redi tors might
more f inancia l ly sophis t ica te than rank-and – f i le
deposi tors and thus appear in a be t te r pos i t ion to conduct
the moni tor ing necessary to prevent bank f raud.
Regula tors have f ive main enforcement tools : cease and
des is t powers , removal powers , c iv i l money penal ty
powers , wi thdrawal or suspension of federa l deposi t
insurance power and prompt correc t ive ac t ions powers .
Cease and des is t powers genera l ly address both unsafe and
unsound banking as wel l as v io la t ions of the law or
regula t ions governing deposi tory ins t i tu t ions .
Federa l banking agencies a lso have to impose c iv i l
monetary penal t ies agains t a banking ins t i tu t ion and i t s
a f f i l ia tes . Prompt correc t ive-ac t ion powers are a lso
t r iggered by capi ta l requi rements , and these a l low
regula tors to reach every s igni f icant opera t ional aspect of
a bank. Fina l ly , the FDIC has the author i ty to revoke a
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bank’s deposi tor insurance i f necessary , Never the less ,
replac ing pr iva te- sec tor c redi tors wi th publ ic-sec tor
regula tors as the f i rs t l ine of defense agains t bank f raud
and se l f -deal ing presents two problems. Pr iva te-sec tor
c redi tors have s t ronger incent ives than publ ic-sec tor
regula tors to moni tor c lose ly for f raud and se l f -deal ing .
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Chapter 2
IS CORPORATE GOVERNANCE DIFFERENT FOR
BANK HOLDING COMPANIES ?
The governance s t ruc ture in banks should a im a t
enhancing Accountabi l i ty and ef f ic iency. Corpora te
governance in Banks i s d i f ferent f rom tha t of
manufac tur ing companies on account of number of fac tors
Governance reforms requi red for banks should be indust ry
Composi t ion and compared to the board in manufac tur ing
companies . Fur ther research on corpora te Governance in
banks would de termine the opt imal board Size tha t
maximizes shareholder va lue subjec t to the Const ra in ts
imposed on these f i rms.
Shle i fer and Vishny def ine corpora te governance as
dea l ing “wi th the ways tha t suppl iers of f inance to
corpora t ions assure themselves of ge t t ing a re turn on the i r
inves tment” i f managers opera te independent ly , they may
make f inancing, inves tment , and payout dec is ions tha t a re
de t r imenta l to shareholders . The governance of banking
f i rms may be d i f ferent f rom tha t unregula ted , non-
f inancia l f i rm for severa l reasons . For one , the numbers of
par t ies wi th a s take in an ins t i tu t ion’s ac t iv i ty compl ica tes
the governance of f inancia l ins t i tu t ions . As a resul t , the
board of d i rec tors of a banking f i rm is p laced in a cruc ia l
ro le in i t s governance s t ruc ture . Al though the boards of
BHCs are ass igned the same legal responsib i l i t ies as o ther
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boards , regula tors have p laced addi t ional expecta t ions on
bank, as opposed to BHC boards tha t de l inea te the i r
responsib i l i t ies even fur ther .
These and other d i f ferences in the opera t ion of f inancia l
and non-f inancia l ins t i tu t ions have led many to v iew
regula tory overs ight of the indust ry as a subs t i tu te for
corpora te governance as less c r i t ica l to the conduct and
opera t ion of banking f i rms. Other argue tha t e f fec t ive
supervis ion could lead to board overs ight becoming a
more cr i t ica l e lement of banking f i rm governance tha t i s ,
these could be complementary forces .
Thus , a l though in non-f inancia l f i rm s tock opt ions may be
appropr ia te ins t ruments to provide incent ive for managers
to crea te va lue , as wel l as to protec t the credi tors of
d is t ressed companies ; the opt ions may conf l ic t wi th pol icy
objec t ives tha t seek to protec t the non-shareholding,
s takeholders , such as deposi tors and taxpayers in f inancia l
f i rms.
Resolut ion of a f inancia l ly d is t ressed condi t ion or
out r ight insolvency in the banking indust ry can a lso have
an impor tant e f fec t on top manager’s incent ive s t ruc tures .
In an unregula ted envi ronment , f inancia l d is t ress
genera l ly leads to reorganiza t ion and in most cases ; the
incumbent top manager i s g iven the oppor tuni ty to turn
the corpora t ion around.
Board Size and Composi t ion
An average of e ighteen d i rec tors makes up each BHC
board , a l though there i s a wide d is t r ibut ion of board s ize
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in the sample (a minimum of e ight d i rec tors and a
maximum of th i r ty-s ix) . Over the sample per iod, i t i s
apparent tha t banking f i rm boards are becoming smal ler .
An average board in1999had 17 d i rec tors (median: 18) ,
down f rom 20.3 in 1986 (median: 20) . The t rend i s
cons is tent wi th the f inding of Adams and Mehran (2002) ,
who examine BHC board s ize over the 1959-99 per iods .
As Table 3 indica tes , an average S&P manufactur ing f i rm
had s ix fewer d i rec tors than an average BHC did over the
sample per iod. Booth , Cornet t , and Tehranian (2002) a lso
provide evidence tha t banks have la rger boards , us ing a
sample of the 100 larges t BHCs and the 10-0 la rges t
manufac tur ing f i rms in 1999.
Since such regula tory res t r ic t ion genera l ly apply to board
s t ruc ture a t the bank level and not the holding level ,
which i s the focus of th is s tudy, the regula tory
envi ronment a lone does not expla in BHC board s ize and
composi t ion However , regula t ion may have an indi rec t on
the s t ruc ture of BHD board to the extent tha t i t i s
inf luenced by the s t ruc ture of the board of the BHC’S lead
bank and other subs id iary banks .
CEO Compensat ion
The increased use of s tock opt ion in execut ive
compensat ion packages in banking fo l lows the pa t te rn of
o ther indust r ies even though the growth and level of s tock
opt ion use are s igni f icant ly lower than in manufac tur ing
f i rms.
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One potent ia l explanat ion for the lower re l iance on s tock
opt ion in the banking indust ry found in smi th and wat ts
(1992) , who show tha t -growth indust r ies re ly less on
s tock-based compensat ion (a lso see Mehram [1992]) .
Smith and Wat ts sugges t tha t board can observe , moni tor ,
and evaluate the ac t ion of CEOs of f i rms and indust r ies
wi th low-growth oppor tuni t ies much eas ier than they can
in f i rms or indust r ies wi th h igh-growth oppor tuni t ies .
Thus , board in such indust r ies should re ly more on f ixed
ra ther than on s tock-based compensat ion .
Final ly , g iven the low s tock-re turn vola t i l i ty in the
banking indust ry , a l l e l se equal , the va lue of s tock opt ion
in banks wi l l be lower . To compensate the CEO for a
g iven dol lar va lue of granted opt ions , the bank has to g ive
a la rger number of opt ion re la t ive to those g iven by an
average manufactur ing f i rm.
CEO Ownership
CEO ownership across BHCs and manufactur ing f i rms may
di f fer for severa l reasons . One can argue tha t the smal ler
f low of opt ions to bank holding company CEOs leads to
smal ler ownership . There may a lso be are a mechanica l
i ssue inf luencing the percentage of ownership . S ince
BHCs are s igni f icant ly more leveraged and have more
asse ts than manufactur ing f i rm, ownership levels across
the two types of f i rms may not be comparable .
An impor tant ins ight of Modigl iani and in a word wi th
corpora te taxes i s tha t the case f low c la ims of an
ownership s take in an a l l -equi ty f i rm di f fer f rom those
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associa ted wi th the percentage of equi ty ownership of an
ident ica l f i rm wi th a pos i t ive debt level .
Block Ownership
To compi le our s ta t i s t ics on b lock ownership , we re ly on
the CDA/Spect rum Ins t i tu t ional Holding Database of
Thomson Financia l . Ins t i tu t ional shareholding i s our
proxy for moni tor ing by b lockholders . However , the
corpora te governance l i te ra ture a lso emphasizes the
impor tance of the ident i ty of the ident i ty of b lockholders
and individuals , as opposed to jus t the s ize of ins t i tu t ion
holdings .
Bank-aff i l ia ted ins t i tu t ions are unl ike ly to moni tor the
BHC over the course of these ac t iv i t ies ; therefore , to
const ruc t our summary s ta t i s t ics on ins t i tu t ion holders , we
dele ted a l l bank-aff i l ia ted ins t i tu t ion f rom the l i s t of
ins t i tu t ion holders of our BHCs in a l l year . We a lso
examined the ident i ty of ins t i tu t ional holding shares of
manufac tur ing f i rms; however , found very few cases of
b lockholders tha t were af f i l ia ted wi th manufactur ing
f i rms.
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Chapter 3
BASEL II AND ROLE OF PILLAR 2: ENSURING
HIGH STANDARDS OF CORPORATRE GOVERNANCE
A. The Basel Committee
The Basel Commit tee on Banking Supervis ion i s a
commit tee , of banking supervisory author i t ies , es tabl i shed
by the Centra l Bank Governors of the G10 developed
countr ies in 1975. The commit tee in 1988 in t roduced the
concept of capi ta l Adequacy Framework, Known as Base l
Capi ta l Accord , wi th a minimum capi ta l adequacy of 8
percent . This accord has been gradual ly adopted not only
in member countr ies but a lso in more one hundred o ther
countr ies , inc luding India .
B. Basel II : The New Basel Capital Accord
The commit tee i ssued a consul ta t ive document t i t led “The
New Basel Capi ta l Accord” in Apr i l2003, to replace the
1988 Accord , Which re-enforce the need for capi ta l
adequacy requi rements under the current condi t ions . This
accord i s commonly known as Base l I I and i s current ly
under f ina l iza t ion . Base l I I wi l l be appl ied on a
consol ida tes bas is to in ternat ional ly ac t ive banks .
However , supervisors are requi red to tes t tha t individual
banks are adequate ly capi ta l ized on a s tand – a lone bas is
a lso . Base l I I i s based on three Pi l la rs .
P i l la r 1 – Minimum Capi ta l Requirements .
Pi l la r 2 – Supervisory Review Process .
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Pi l la r 3 – Market Disc ip l ine .
Pi l la r 1 d iscusses the ca lcula t ion of the to ta l minimum
capi ta l requi rements for c redi t , market and opera t ional
r i sks and mainta ins the level of minimum capi ta l adequacy
a t 8 percent . P i l la r 2discussed the key pr inc ip les of
supervisory review, r i sk management guidance and
supervisory t ransparency and accountabi l i ty wi th respect
to banking r i sks . P i l la r 3 complements Pi l la r 1 and 2 by
encouraging market d isc ip l ine through enhanced
disc losures by banks to enable market par t ic ipant ’s asses
the capi ta l adequacy of banks .
D. Enhancing Corpora te Governance in Banks
The Basel commit tee had i ssued, in August 1999, a
guidance paper ent i t led “Enhancing Corpora te Governance
for Banking Organiza t ions” to supervisory author i t ies
Worldwide to ass is t them in promot ing the adopt ion of
sound corpora te governance prac t ices by banks in the i r
countr ies . The key fea tures of th is guidance are d iscussed
here .
Importance of Corporate Governance for Banks
Banks are a c r i t ica l component of any economy. They
provide f inancing for commercia l enterpr ises , bas ic
f inancia l services to a broad segment of the popula t ion
and access to payments sys tems. From a banking indust ry
perspect ive , corpora te governance involves the manner in
which the i r boards of d i rec tors and senior managements
govern the bus iness and af fa i rs of individual banks ,
a f fec t ing how banks .
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Set the i r corpora te objec t ive ;
Run day- to-day opera t ions ;
Consider the in teres ts of var ious s takeholders ;
Align corpora te ac t ives wi th the expecta t ion tha t
bank wi l l opera te in a safe and sound manner and in
compl iance wi th appl icable law and regula t ions ; and
Protec t the in teres t of deposi tors .
II . Sound Corporate Governance Pract ices for Banks
The Prac t ices ment ioned below are cr i t ica l to any
corpora te governance process in banks:
Establ i sh ing s t ra tegic objec t ives and a se t of corpora te
va lues communica ted throughout the organiza t ion .
St rong r i sk management funct ions independent of bus iness
l ines , in ternal cont ro l sys tems, in ternal and external audi t
funct ions and other cheeks and balance .
Specia l moni tor ing of r i sk exposures where conf l ic ts
of in teres ts a re l ike ly to be par t icular ly grea t ,
inc luding bus iness re la t ionships wi th borrowers
af f i l ia ted wi th the banks .
Set t ing and enforc ing c lear l ines of responsib i l i ty
and accountabi l i ty .
Ensur ing tha t banks’ board members are qual i f ied for
the i r pos i t ions , have a c lear unders tanding of the i r
ro le in corpora te governance and are not subjec t to
under inf luence .
Ensur ing tha t there i s appropr ia te overs ight by senior
management .
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Ensur ing tha t compensat ion sys tems are consis tent
wi th the banks , objec t ives and cont ro l envi ronment .
Conduct ing corpora te governance t ransparent ly .
Flow of appropr ia te informat ion in ternal ly and to the
publ ic .
III . The Role of Supervisory Authori t ies in Ensuring
Effect ive Corporate Governance in Banks
Supervisors should be aware of the impor tance of
corpora te governance and i t s impact on corpora te
performance . Supervisors should be a t tent ive to any
warning s igns of de ter iora t ion in the management of the
banks ac t iv i t ies . They should consider i ssuing guidance to
banks on sound corpora te governance and the proact ive
prac t ices tha t need to be in p lace .
F. Corporate Governance for the Internal Rat ings-
based (IRB) Approach to Credit Risk as per Pert 2
Pi l lar 1
I IRB Approach [ In ternal Rat ing –based]
Internal r i sk ra t ings are an impor tant tool in moni tor ing
credi t r i sk . In ternal r i sk ra t ings should be adequate to
suppor t the ident i f ica t ion and measurement of r i sk f rom
a l l c redi t r i sk and capi ta l adequacy Subjec t to cer ta in
minimum condi t ion and disc losure requi rements , banks
tha t qual i fy for the IRB approach may re ly on the i r own
in ternal es t imates of r i sk components inc lude measures of
the probabi l i ty of Defaul t (PD) Loss Give defaul t (LGD)
the Exposure a t Defaul t (EAD) and ef fec t ive matur i ty .
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G. The second pi l lar “supervisory review process”: I ts
role in Ensuring High Standards of Corporate
Governance
Par t 3 of Base l l l dea ls wi th the i r impor tance of
supervisory review, i t s key pr inc ip les , speci f ic i ssues to
be addressed under the supervisory review process and
supervisory t ransparency and accountabi l i ty i t se l f in
ensur ing ef fec t ive corpora te governance .
Importance of Supervisory Review
The supervisory review process of Base l l l i s in tended not
only to ensure tha t banks have adequate capi ta l to suppor t
a l l the r i sk in the i r bus iness , but a lso to encourage banks
to develop and use be t te r r i sk .
This in terac t ion i s in tended to fos ter an ac t ive d ia logue
be tween banks and supervisors such tha t when
def ic iencies are ident i f ied , prompt and decis ive ac t ion can
be taken to reduce r i sk or res tore capi ta l .
II Four Key principles of supervisory Review
Principle 1
The f ive main fea tures of such a r igorous process are as
fo l lows:
1. Board & Senior Management overs ight
A sound r i sk management process i s foundat ion for an
ef fec t ive assessment of the adequacy of a bank’s
capi ta l pos i t ion . The analys is of bank’s current and
fu ture capi ta l requi rements in re la t ion to s t ra tegic
objec t ives i s a v i ta l e lement of the s t ra tegic p lanning
process .
18
The bank’s board should ensure tha t management
es tabl i shes a f ramework for assess ing the var ious r i sks , to
the bank’s capi ta l and moni tor ing compl iance wi th
in ternal pol ic ies . I t should suppor t s t rong in ternal
cont ro ls and wri t ten pol ic ies and ensure tha t a re
ef fec t ive ly communica ted throughout the bank.
2. Comprehensive Assessment of Risk
All mater ia l r i sks faced by banks should be
addressed in the capi ta l assessment process . Whi le
not a l l r i sk can measured prec ise ly , an adequate and
comple te model should be developed es t imate the
var ious r i sk , such as , c redi t r i sk , opera t ional r i sk ,
in teres t ra te r i sk , l iquidi ty r i sk and o ther r i sk l ike
reputa t ion and s t ra tegic r i sk .
3. Monitoring and Report ing
The bank should es tabl i sh an adequate sys tem for
moni tor ing and repor t ing r i sk exposures in order to :
Evaluate the level and t rends of mater ia l r i sks and
the i r a f fec t on capi ta l levels ;
Evaluate the reasonableness of key assumpt ions used
in the capi ta l assessment measurement sys tem;
Determine tha t the bank hold suff ic ient capi ta l
agains t the var ious r i sk in compl iance wi th
es tabl i shed capi ta l adequacy goals ; and
Assess the i r fu ture capi ta l requi rement based on the
r i sk prof i le and make necessary adjus tments to the
s t ra tegic p lan .
4. Internal Control Review
19
The banks should regular review the fo l lowing aspects of
the i r sys tem of in ternal cont ro l to ensure wel l -ordered
conduct of bus iness : appropr ia teness of the capi ta l
assessment process ; ident i f ica t ion of la rge exposures and
r i sk concent ra t ions ; accuracy and comple teness of da ta
inputs in to the assessment process ; va l id i ty of scenar ios
used in the assessment process ; and s t ress tes t ing and
analys is of assumpt ions and inputs .
Principle 2
Review of Adequacy of Risk Assessment
Supervisors should assess the degree to which in ternal
ta rge ts and processes incorpora te a l l mater ia l r i sks faced
by the banks . Supervisors should a lso review the adequacy
of r i sk measures used in assess ing in ternal capi ta l
adequacy and the extent to which these r i sk measures are
used opera t ional ly in se t t ing l imi ts . Supervisors should
consider the resul t s of sens i t iv i ty analyses and s t ress tes ts
conducted by the banks and how these resul t s re la te to
capi ta l p lans .
Assessment of Capital Adequacy
Supervisors should review the banks processes to
de termine tha t the ta rge t levels of capi ta l chosen are
comprehensive and re levant to the current opera t ion
envi ronment , a re proper ly moni tored by senior
management , the composi t ion of capi ta l i s appropr ia te for
the banks’ bus iness and the extent to which the banks have
provided for unexpected events in se t t ing the i r capi ta l
levels .
20
Assessment of the control Environment
Supervisors should consider the qual i ty of the banks’
management informat ion sys tems; the manner in which
bus iness r i sk and ac t iv i t ies a re aggregated and
management’s record in responding to emerging or
changing r i sks . They should a lso consider the external
fac tors l ike bus iness cycle ef fec ts and the macroeconomic
envi ronment in de termining the capi ta l levels .
Supervis ion Act ion
Having carr ied out the review process descr ibed above,
supervisors should take appropr ia te ac t ions , such as those
se t out under Pr inc ipa ls 3 and 4 be low, i f they are not
sa t i s f ied wi th The resul t of the bank’s own r i sk
assessment and capi ta l a l loca t ion .
Principle 3
Supervis ion should requi re banks to opera te wi th a buffer ,
over and above the Pi l la r1 capi ta l requi rement , for a
number of reasons .
A large number of banks prefer to be h ighly ra ted by
in ternat ional ly recognized ra t ing agencies .
In the normal course of bus iness the type and volume of
ac t iv i t ies keep on changing as wel l as the d i f ferent r i sk
requi rements caus ing f luc tua t ions in the overa l l capi ta l
ra t io .
I t may be cos t ly for banks to ra ise addi t ional capi ta l
dur ing emergency need.
I f i t so happens , to fa l l be low minimum regula tory capi ta l
requi rements i s a mat ter of ser ious concern for banks .
21
Among other methods , the supervisors may se t t r igger and
targe t capi ta l ra t ios or def ine ca tegor ies above minimum
ra t ios for ident i fy ing the capi ta l iza t ion level of the banks .
III Speci f ic Issues to be Addressed under the
Supervisory
Review Process
1 . Interest Rate Risk
I f supervisors de termine tha t banks are not holding
capi ta l commensura te wi th the level of in teres t ra te r i sk ,
they must requi re the banks to reduce the i r r i sk , to hold a
speci f ic addi t ional amount of capi ta l or a combinat ion of
the two.
2. Operat ional Risk
The Supervisors should examine whether the capi ta l
requi rement genera ted by the Pi l la r 1 ca lcula t ion g ives a
cons is tent p ic ture of the individual bank’s opera t ional r i sk
exposure , for example , in compar ison wi th o ther banks of
s imi lar s ize and opera t ions .
3. Credit Risk
Stress Tests under IRB : A bank should ensure tha t i t has
suff ic ient capi ta l to meet the Pi l la r 1 requi rements and the
resul t s , in case of a def ic iency, of the credi t r i sk s t ress
tes t performed as par t of the Pi l la r 1IRB minimum
requi rements . Supervisors may review how the s t ress tes t
has been carr ied out and in case of a shor t fa l l , reac t
appropr ia te ly .
22
Residual r isks : Supervisors should requi re banks to have
in p lace appropr ia te and ef fec t ive wri t ten CRM pol ic ies
and procedures in order to cont ro l the res idual r i sks , such
as . Inabi l i ty to se ize or rea l ize in t imely manner col la tera l
p ledged, refusa l or de lay by a guarantor to pay and
ineffec t iveness of untes ted documenta t ion .
Securi t izat ion: Fur ther to the Pi l la r 1 pr inc ip le tha t banks
should take account of the economic subs tance of
t ransac t ions in the i r capi ta l adequacy determinat ion ,
supervisors should moni tor whether banks have done so
adequate ly . As a resul t , regula tory capi ta l t rea tments for
speci f ic secur i t iza t ion exposures may exceed those
speci f ied in
Pi l la r 1 . The supervisors wi l l have to address the key
i ssues involving secur i t iza t ion t ransac t ions such as
s igni f icance of r i sk t ransfer , market innovat ions ,
provis ion of impl ic i t suppor t , f i r s t loss credi t
enhancements , ca l l provis ions and ear ly amort iza t ion .
Chapter 4
23
BANK PERFORMANCE AND CORPORATE
GOVERNANCE
Financial Condit ion of US Banks
Last year was except ional in many respects , wi th the
Uni ted Sta tes s l ipping in to a recess ion, the September
te r ror is t a t tacks , the s tock market dec l ines , and a l l of the
re la ted events . In response , the Federa l Reserve reduced
in teres t ra tes a t every meet ing of the Federa l Open Market
Commit tee in 2001 and an addi t ional three t imes be tween
meet ing , for a to ta l of e leven ra te cutes accumula t ing to
475 bas is points .
The d i rec t e f fec t of the pas t year’s s t ressful events was
pa inful enough. In addi t ion , abus ive account ing and
corpora te governance prac t ices made condi t ions worse , as
la rge corpora te bankruptc ies imposed subs tant ia l losses on
inves tors , lenders , and employees .
Throughout th is per iod the US banking sys tem remained
s t rong, repor t ing cont inuing record earnings and
prof i tabi l i ty , despi te a s l ip in asse t qual i ty . Dur ing the
f i rs t ha l f of th is year , US insured commercia l banks
earned more than $44.5 b i l l ion and an annual ized re turn
on asse ts of 1 .37 percent .
Net in teres t income was the pr imary dr iver of increased
revenue, despi te a notable dec l ine in commercia l loan
volume. Loans loss provis ions remained re la t ive ly h igh by
24
the s tandards of most of the pas t decade but d ipped
notably f rom the second hal f of 2001. Net charge –offs ,
which were concent ra ted among commercia l loans of la rge
banks and credi t card specia l ty lenders , a l so dropped.
As noted current weaknesses appear to be la rge ly wi th in
the commercia l loan por t fo l ios of la rge regional and
money center banks ra ther than those of smal ler
ins t i tu t ions . Even the problems of la rge banks could be
v iewed as mi ld , however , g iven the shocks fe l t by many in
the i r cus tomer base . I f smal ler banks , genera l ly , a re not
see ing the commercia l loan weakness tha t some large
ins t i tu t ions are fac ing, which areas may present them wi th
he ightened r i sks?
Most Reserve Banks are repor t ing genera l ly weak
commercia l rea l es ta te markets , as fa i l ing companies
vacate of f ice and re ta i l space and renters in to s ingle
fami ly homes commercia l rea l es ta te credi t s a re s t i l l
per forming re la t ive ly wel l for th is s tage of the cycle , and
my comments are not in tended to sugges t a mater ia l
concern .
The second areas of potent ia l r i sk re la tes to in teres t ra tes .
For the indust ry overa l l , the Federa l Reserve’s in teres t
ra te cuts las t year cer ta in ly appear to have he lped bank
earnings , but they present management wi th new
chal lenges , too . Lower ra tes undoubtedly eased payment
pressures on many borrowers , and prevented fur ther
de ter iora t ion in the qual i ty of bank loan por t fo l ios .
25
Indeed, many banks have responded to the low ra tes by
sharply reducing the i r inves tments in Treasur ies and
shi f t ing funds in to mortgage-backed secur i t ies in the
search for h igher y ie lds . That banking organiza t ions and
inves tors genera l ly , should recognize tha t domest ic
in teres t ra tes are h is tor ica l ly low and tha t the poss ib i l i ty
for r i s ing ra te envi ronments should not be over looked.
Even s table ra tes could present increased r i sks , i f saving
and money market deposi t accounts f low out of banks as
quickly as they came in when equi ty markets dec l ined. At
some point , even loyal cus tomers- those on f ixed income,
in par t icular -may bl ink and take s teps to improve the i r
own yie lds .
Managing Risks
The heal th of f inancia l ins t i tu t ions today i s a lso a resul t
of improvement in the r i sk management process tha t has
been ongoing a t banks for years , increas ingly; the ent i re
r i sk management process has become data a t lower cos t ,
but a lso improved techniques for measur ing and managing
r i sks . Bank regula tors a re working to develop a more
modern in ternat ional approach to bank capi ta l - ca l led
Basel I I . Al though those s tandards , in the f i s t ins tance ,
a re be ing des igned to address changing prac t ices a t la rge ,
in ternat ional ly ac t ive banks , we can expect the lessons
learned about r i sks management to have much border
ef fec ts . In quant i fy ing credi t r i sk , la rge banking
organiza t ions a re taking the lead , measur ing a borrower’s
probabi l i ty of defaul t , the bank’s loss g iven defaul t and
26
i t s l ike ly exposure to the borrower a t the t ime of defaul t ,
tak ing in to considera t ion fu ture draw downs.
The grea ter of c redi t scor ing in re ta i l t ransac t ions
provides a s t ronger f ramework to asses r i sk and ensure
tha t loan pr ic ing ref lec ts the credi t qual i ty . Such tools
should perform even bet te r as the ef fec ts of the most
recent economic s lowdown are incorpora ted in to bank
s ta t i s t ics .
The measurement and management of in teres t ra te r i sk has
a lso improved grea t ly in recent years , perhaps par t icular ly
a t communi ty banks . Asse t l iabi l i ty commit tees a t banks
throughout the country now rout ine ly consider the resul t s
of models developed e i ther in ternal ly or by vendors to
ident i fy the market sens i t iv i ty of loans , inves tments , and
deposi t s .
Recent abuses of corpora te account ing prac t ices and other
mat ters provide good lessons in r i sk management as
bankers t ry to increase earning by cross- se l l ing more
products , g iven the dominant ro le of c redi t r i sk a t banks ,
to chief c redi t of f icer should ensure tha t pressures to
increase fee income do not lead to unacceptable levels of
c redi t r i sks .
Corporate Governance
Sound corpora te governance i s an essent ia l of a s t rong
r i sk management process . As banker and bank and bank
di rec tors ,you have speci f ic responsib i l i t ies to manage the
r i sk a t your f inancia l ins t i tu t ions and ef fec t ive ly oversee
the sys tems of in ternal cont ro ls Not only are the ac t iv i t ies
27
of cent ra l to credi t in termedia t ion , but , in th is country ,
banks found the i r ac t iv i t ies in par t wi th federa l ly insured
deposi t s . Those deposi t s a re the lowest – cos t source of
found tha t banks have , speci f ica l ly because of the
government guarantee .
In teragency pol icy holds boards of d i rec tors
responsib le for ensur ing tha t the i r organiza t ions have
an e f fec t ive audi t process and in ternal cont ro ls tha t
a re adequate for the na ture and scope of the i r
bus inesses . In ternal audi t i s a key e lement of
management’s responsib i l i ty to va l ida te the s t rength of a
bank’s in ternal cont ro ls .
In ternal cont ro ls a re the responsib i l i ty of l ine
management . Line managers must de termine the level
of r i sk they need to accept to run bus inesses and
must assure themselves tha t the combinat ion of
earnings , capi ta l , and in ternal cont ro ls i s suff ic ient to
compensate for the r i sk exposures . The resul t s of
these independent reviews should be rout ine ly
repor ted to execut ive management and boards of
d i rec tors . The level of independence form execut ive
management tha t a board can demonst ra te has , of
course , become a fa r more v is ib le and more
impor tant fac tor in evalua t ing corpora te governance .
Other provis ions of the ac t se t for th potent ia l ly
broad ranging s tandards a f fec t ing the way publ ic
companies compensate the i r execut ives and d i rec tors
and d isc lose the i r opera t ing resul t s . To s t rengthen the
28
ro le of outs ide audi tors , the ac t a l so l imi ts the non-audi t
work such f i rms may perform for audi t cus tomers and
crea tes an overs ight board to regula te and oversee audi t
work. Indeed, beyond legal requi rements , boards of
d i rec tors and managers of a l l f i rms should
per iodica l ly tes t where they s tand on bus iness
prac t ices . Ul t imate ly , of course , market correc t the i r
excesses , and in th is context markets inc lude both the
publ ic and pr iva te sec tors . Obviously , dur ing the pas t
year we have seen reac t ions not only form inves tors
and c redi tors , but a l so f rom law- makers and
regula tors , to observed fa i lures wi th in corpora te
boardrooms. Al l of the ac t ion af fec ts market prac t ice .
That inc ludes mainta in ing sound e th ica l prac t ices in
protec t ing the reputa t ions of your banks . As we have
seen f rom recent events , the market ’s response can
be harsh .
Qual i ty of Accounting Pract ices
Uncer ta in ty regarding the qual i ty of corpora te
account ing s tandards s t r ikes a t the hear t of our
capi ta l i s t sys tem and threa tens the e f f ic iency of
markets . Inves tors and lenders must be conf ident
tha t unders tand the r i sk they accept and tha t the i r
counterpar t ies a re p laying fa i r .
Informed and objec t ive profess ionals can legi t imate ly
d isagree on the bes t account ing s tandard to apply to new
types of t ransac t ions .That i s par t of the chal lenge of
keeping account ing s tandards current . The rapid pace of
29
business innovat ions makes i t impract ica l to have ru les in
p lace to ant ic ipa te every bus iness t ransac t ion .
At the core of such account ing pr inc ip les should be
profess ional s tandards tha t every corpora te accountants
and every outs ide audi tor must fo l lows. In par t , audi tors
should be requi red to ask themselves whether a
par t icular account ing method adequate ly represents the
economics of t ransac t ion and whether i t provides readers
wi th suff ic ient informat ion to evaluate the r i sks .
Rules a lone , however , do not ensure good f inancia l
repor t ing . At Enron and other companies , weak corpora te
governance’s prac t ices apparent ly permi t ted sham
t ransact ions and mis leading f inancia l repor t ing . Outs ide
audi tors e r red in t ry ing too hard to p lease an impor tant
c l ient .
In another example , the banking regula tors have jo in t ly
i ssued for comment new guidance re la ted to credi t s cards .
This guidance not only deals wi th unacceptable prac t ices ,
but a lso c lar i f ies tha t revenue recogni t ion of fees b i l led to
cus tomers should the expected abi l i ty to col lec t those
fees .
Chapter 5
30
THE ROLE OF THE CENTRAL BANK IN
PROMOTING CORPORATE GOVERNANCE
The growing compet i t iveness and in terdependence
be tween Banks and f inancia l ins t i tu t ions in loca l and
fore ign markets have increased the impor tance of
corpora te governance and i t s appl ica t ion in the banking
sec tor . Corpora te governance in Bank can be achieved
through a se t of legal , account ing Financia l and economic
and in tegr i ty in banking sec tor i s Mainta ined, the need
for uni form s tandards of the concept of governance in
pr iva te and publ ic sec tor banks in emphasized.
The g lobal iza t ion process and the l ibera l iza t ion of money
markets have changed the ideas and vis ions of f inancia l
ins t i tu t ions a l l over the wor ld . Banks and f inancia l
ins t i tu t ions in loca l and fore ign markets have acqui red a
new spi r i t of compet i t iveness .
Governance in the banking sec tor i s achieved through a
se t of legal , account ing, F inancia l and economic ru les and
regula t ions . These ru les and regula t ions d i rec t the
Management , govern performance , and ass is t in car ry ing
out the responsib i l i t ies of the Sector .
Corpora te governance i s impor tant because i t prohibi t s
corrupt ion , ensures in tegr i ty and a lso ensures . Corpora te
governance i s impor tant as wel l to benef i t and learn f rom
the f inding of the audi tors and f inancia l cont ro l le rs and to
unders tand the i r overs ight ro le .
31
Role of central Bank
Over the las t years , the cent ra l bank of Egypt has adopted
a number of measures tha t a re consis tent wi th pr inc ip les
se t by the Basel commit tee on banking supervis ion . these
measures are wi th in the legal and regula tory f ramework
of the ro le of the cent ra l bank In the area of prudent ia l
regula t ion and ef fec t ive survei l lance of the da i ly
opera t ions of banks .
Set t ing a percentage of l iquidi ty and reserves for banks i s
cons idered a prudent ia l mechanism and not a requi rement
tha t h inders banking ac t iv i ty . Over the las t years , some
were compla in ing tha t banks are h indered by an e levated
percentage of legal reserves , and tha t i s the reason for the
l iquidi ty cr i s i s . Bankers know very wel l how to manage
the i r banks; the cent ra l banks i s here to ass is t the bankers ,
a t the same t ime t r igger the warning Bel l should such a
s i tua t ion ar i se .
The cent ra l bank of Egypt a lso emphasizes the measure of
loan concent ra t ion a t the level of each bank. Loan
concent ra t ion i s not re la ted to the loan provided to one
c l ient . Current ly the law se ts the exposure l imi t to each
c l ient a t 30 percent . We a lso have loan concent ra t ion
l imi ts for fore ign banks . The res t r ic t ion i s tha t a l l
Egypt ian money or a l l Egypt ian money or a l l Egypt ian
or ig ina ted money should not be deposi ted a t fore ign
representa t ion banks .
However connect ions re la ted to more than one ac t iv i ty
wi l l lead a bank to be exposed to problems tha t have
32
been avoided to connected lending las t November 2002
There wi l l be a conf l ic t of in teres t . You cannot be a
borrower and a shareholder in the same t ime. Cer ta in ly ,
there wi l l be conf l ic ts of in teres t be tween your pos i t ion as
a shareholder who wants to pursue the maximum prof i t
and a borrower The same to the member of the boards of
d i rec tors . We emphasize tha t the member of the board of
d i rec tors . We emphasize tha t the member of board of
d i rec tors should not be a borrower f rom the same bank;
o therwise th ings wi l l be mixed up and there wi l l be
conf l ic t of in teres ts .
Direc t conf l ic t of in teres t , each non-execut ive board
member should s ign a cer t i f ica t ion and submit i t to the
board of the bank sa t ing tha t he has no conf l ic ts of
in teres t and tha t he wi l l re f ra in f rom mixing h is pr iva te
work or bus iness and his work as a board member .
I t i s advisable tha t audi t commit tees have three non-
execut ive board members . Commit tee members should be
g iven power and author i ty to review the bank’s
performance , works , d isc ip le , and manuals , and the extent
of the i r compl iance to the manuals .
The repor t of the audi t ing commit tee should be avai lable
for the whole board for revis ion and the f inding should be
presented by the head of the audi t ing commit tee .
I f the bank’s audi t ing commit tees fo l low in ternat ional ly
recognized s tandards and prac t ice , I th ink tha t there wi l l
be some sor t of adherence to the d isc ip l ine .
33
The es tabl i shment of inspect ion commit tee or depar tment
i s not the i ssue; the i ssue i s these depar tment of
inspect ion commit tees or depar tments i s not the ef fec t ive .
I f inspect ion commit tees submit the i r repor t to the
chai rman of the board of d i rec tors , we should say tha t th is
i s wrong. These commit tees need to submit repor ts and
make i t s informat ion avai lable to the ent i re board of
d i rec tors , and not to the chai rman or execut ive d i rec tor .
I th ink there i s no cont radic t ion be tween the in ternal
inspect ion depar tments and in ternal audi t ing commit tees .
Infec t ion depar tments have a da i ly responsib i l i ty to check
compl iance wi th manuals .
Shareholders Rights
I t i s very impor tant tha t the shareholders have the
convic t ion to take and to g ive . In many cases , we f ind tha t
shareholders in companies not to speak of banks are
in teres ted only to no about the i r d iv idends . I f we assume
tha t th is i s the r ight th ink to do than, there cont ro l l ing
ro le i s absent . Some shareholders want only to rece ive
decedents has inves tors but a re not aware tha t they have
cont ro l l ing and supervisory ro le
Shareholders need to under take the i r supervisory ro le
wi th in a l l ins t i tu t ions . We as a supervisory ins t i tu t ion for
the banking sec tor should perform our ro le so , i f there i s
in ternal cont ro l a t the banking via corpora te governance
and external cont ro ls f rom the cent ra l bank, th is would be
very benef ic ia l to the country .
34
I f we look a t the cont ro l fac tor ins ide the banks boards
and make a l ink be tween members of the banks boards of
d i rec tors and the i r ownership we might d iscover tha t a
speci f ic shareholder might cont ro l the banks management
and cont ro l i t s dec is ions . Ownership might be 49 percent
in a speci f ic ins t i tu t ions and other ownership might be 20
or 21 percent and be consider i t a s i s te r company and not
an af f i l ia ted company. In the coming per iod, we are
concerned wi th new bank laws and we wi l l make sure tha t
the concept of cont ro l leads to qual i ty and not to
monopoly . Monopoly of thought and monopoly of
leadership in the bank in a wrong di rec t ion or leading the
board in a wrong di rec t ion wi l l be g iven enough
considera t ion .
Corpora te governance cr i te r ia can not be ef fec t ive i f i t i s
only on paper . Proper , sound, and ef fec t ive corpora te
governance cr i te r ia a re those tha t incorpora te a
punishment and reward sys tem. The cent ra l bank’s abi l i ty
to implement i t s pol ic ies and decis ions wi th in the banking
sec tor serve as a correc t ive and disc ip l inary mechanism.
The bank’s board of d i rec tor and i t s genera l assembl ies
a lso need to be commit ted to under taking correc t ive
measures when necessary .
Chapter 6
35
PUBLIC SECTOR BANKS AND GOVERNANCE
CHALLENGEGS
Historical Concept
India had a fa i r ly wel l developed commercia l banking
sys tem in exis tence a t the t ime of independence in
1947.The Reserve Bank of India (RBI) was es tabl i shed in
1935.Whi le the RBI became a s ta te-owned ins t i tu t ion f rom
January 1 , 1949, the Banking Regula t ion Act was enacted
in 1949 providing a f ramework of regula t ion and
supervis ion of commercia l banking ac t iv i ty . The f i rs t s tep
towards the na t ional iza t ion of commercia l banks was the
resul t s of a repor t (under the aegis of RBI) by` the
Commit tee of Direc t ion of Al l India Rura l Credi t Survey
(1951) which t i l l today i s the locus c lass ics on the subjec t
.Thus the Imper ia l Bank was taken over by the
Government and renamed as the Sta te Bank of India (SBI)
the July 1 , 1955 wi th the RBI acqui r ing overr id ing
subs tant ia l holding of shares . A number of e rs twhi le banks
owned by pr ince ly s ta tes were subs id iar ies of SBI in
1959.
To meet theses concerns , in 1967, the Government
in t roduced the concept of soc ia l cont ro l in the
banking indust ry . The scheme of soc ia l cont ro l was
a imed a t br inging some changes in the management
and d is t r ibut ion of c redi t by the commercia l banks .
Pol i t ica l compuls ion then par t ia l ly a t t r ibuted to
inadequacies of the soc ia l cont ro l , led to the
36
Government of India na t ional iz ing, in 1969, 14
major scheduled commercia l banks the needs which
had deposi t s above a cut -off s ize . The objec t ive was to
serve be t te r the needs of development of the economy in
conformi ty wi th na t ional pr ior i t ies and objec t ives .
From the f i f t ies a number of exclus ive ly s ta te-owned
development f inancia l ins t i tu t ion (DFIs) were a lso se t up
both a t the na t ional and s ta te level , wi th a lone except ion
of Indust r ia l Credi t and Inves tment Corpora t ion of India
( ICICI) which had minor i ty pr iva te share holding.
Reform Measures
The major chal lenge of the reform has been to in t roduce
e lements of market incent ive as a dominant fac tor
gradual ly replac ing the adminis t ra t ive ly coordinated
p lanned ac t ions for development . Such a paradigm shi f t
has severa l d imensions , the corpora te governance be ing
one of the impor tant e lements . The evolut ion of corpora te
governance in banks , par t icular ly in PSBs, thus ref lec ts
changes in monetary pol icy , regula tory envi ronment , and
s t ruc tura l t ransformat ions and to some extent , on the
charac ter of the se l f - regula tory organiza t ions funct ioning
in the f inancia l sec tor .
Pol icy Environment
During the reform per iod, the pol icy envi ronment
enhanced compet i t ion and provided grea ter oppor tuni ty for
exerc ise of what may be ca l led genuine corpora te e lement
in each bank to replace the e lements of coordinated
ac t ions of a l l ent i t ies as a “ jo in t fami ly” to fu l f i l l
37
predetermined Plan pr ior i t ies . The measures taken so far
can be summarized as fo l lows.
Fi rs t , grea ter compet i t ion has been infused in the banking
sys tem by permi t t ing ent ry of pr iva te sec tor banks
(9 l icences s ince 1993) , and l ibera l l icens ing of more
branches by fore ign banks and the ent ry of new fore ign
banks . With the development of a mul t i - ins t i tu t ional
s t ruc ture in the f inancia l sec tor non-bank in termedia t ion
has increased, banks have had to improve ef f ic iency to
ensure surviva l .
Second, the reforms accorded grea ter f lexib i l i ty to the
banking sys tem to manage both the pr ic ing and quant i ty of
resources . There has been a reduct ion in s ta tu tory
preempt ions to less than a th i rd of commercia l banks
resources . Valuat ion of banks’ inves tments i s a l so a t tuned
to in ternat ional bes t prac t ices so as to appropr ia te ly
capture market r i sks .
Thi rd , the RBI has moved away f rom micro-regula t ion to
macro-management . RBI has replaced de ta i led individual
guidel ines wi th genera l guidel ines and now leaves i t to
individual banks’ boards to se t the i r guidel ines on credi t
dec is ions .
Four th , to s t rengthen the banking sys tem to cope up wi th
the changing envi ronment , prudent ia l s tandards have been
imposed in a progress ive manner .
F i f th , an appropr ia te legal , ins t i tu t ional , technologica l
and regula tory f ramework has been put in p lace for the
development of f inancia l markets . There i s now increased
38
volumes and t ransparency in the pr imary and secondary
market opera t ions . Development of the Government
Secur i t ies , money and forex markets In teres t ra te channel
of monetary pol icy t ransmiss ion i s acqui r ing grea ter
impor tance as Compared wi th the credi t channel .
Regulatory Environment
Prudent ia l regula t ion and supervis ion have formed a
cr i t ica l component of the f inancia l sec tor reform
programme s ince i t s incept ion , and India has endeavored
to in ternat ional prudent ia l norms and prac t ices .
The Banking Regula t ion Act 1949 prevents connected
lending ( i .e . lending by banks to d i rec tors or companies in
which Direc tors a re in teres ted . )
Per iodica l inspect ion of banks has been the main
ins t rument of supervis ion , though recent ly there has been
a move toward supplementary ‘on-s i te inspect ions’ wi th
‘off -s i tes survei l lance’ . The sys tem of ‘Annual Financia l
Inspect ion’ was in t roduced in1992, in p lace of the ear l ie r
sys tem of Annual Financia l Review/Financia l Inspect ions .
A high powered Board for Financia l Supervis ion (BFS) ,
compris ing the Governor of RBI as Chai rman, one of the
Deputy Governors as Vice-chai rman and four Direc tors of
the cent ra l board of RBI as members was const i tu ted in
1994, wi th the mandate to exerc ise the Power of
supervis ion and inspect ion in re la t ion to the banking
companies , f inancia l ins t i tu t ion and non-banking
companies .
39
A supervisory s t ra tegy compris ing on- s i te inspect ion ,
of f–s i te moni tor ing and cont ro l sys tems in ternal to the
banks , based on the camels (capi ta l adequacy, asse t
qual i ty , management , earnings , l iquidi ty and sys tems and
cont ro ls ) methodology for banks have been ins t i tu ted . The
RBI has ins t i tu ted a mechanism for c r i t ica l analys is of the
ba lance sheet by the banks themselves and the
presenta t ion of such analys is before the i r boards to
provide an in ternal assessment of the heal th of the bank.
Keeping in l ine wi th the merging regula tory and
supervisory s tandards a t in ternat ional level , the RBI has
in i t ia ted cer ta in macro level moni tor ing techniques to
assess the t rue heal th of the supervised ins t i tu t ions . The
format of ba lance sheets of commercia l banks have now
been prescr ibed by the RBI wi th d isc losure s tandards
on v i ta l performance and growth indica tors , provis ions ,
ne t NPAs, s ta f f product iv i ty , e tc . appended as ‘notes of
accounts’ . These proposed addi t ional d isc losure norms
would br ing the d isc losure s tandards a lmost on par wi th
the in ternat ional bes t prac t ice .
Structural Environment of Banking
The nat ional ized banks are enabled to d i lu te the i r equi ty
of Government of India to 51 percent fo l lowing the
amendment to the Banking Companies (Acquis i t ion &
Transfer of Under takings) Acts in 1994, br inging down the
minimum Government’s shareholder to 51 percent in
PSBs. RBI’s shareholding in SBI i s subjec t to a minimum
of 55 percent .
40
The divers i f ica t ion of ownership of PSBs has made a
qual i ta t ive d i f ference to the funct ioning of PSBs s ince
there i s induct ion of pr iva te shareholding and a t tendant
i ssues of shareholder’s va lue , as ref lec ted by the market
cap , representa t ion on board , and in teres ts of minor i ty
shareholders . There i s representa t ion of pr iva te
shareholder when the banks ra ise capi ta l f rom the market .
The governance of banks res ts wi th the board of d i rec tors .
In the l ight of deregula t ion in in teres t ra tes and the
grea ter autonomy given to banks in the i r opera t ion , the
ro le of the board of d i rec tors has become more
s igni f ica t ions .
Dur ing the years , Board has been requi red to lay down
pol ic ies in cr i t ica l a reas such as inves tments , loans , asse t -
l iabi l i ty management , and management and recovery of
NPAs. As par t of th is process , severa l Board level
commit tees inc luding the Management Commit tee are
requi red to be appointed by banks .
Government in t roduced a Bi l l in Par l iament to omi t the
mandatory provis ions regarding appointment of RBI
nominees on the Boards of publ ic sec tor banks and ins tead
to add a c lause to enable RBI to appoint i t s nominee on
the boards of publ ic sec tor banks i f the RBI i s of the
opinion tha t in the in teres t of the banking pol icy or in the
publ ic in teres t or in the in teres t of the bank or deposi tors ,
i t i s necessary so to do.
Appointment of Chai rman and Managing Direc tors and
Execut ive Direc tors of a l l PSBs i s done by Government .
41
The Naras imham Commit tee I I had recommended tha t the
appointment of Chai rman and Managing Direc tor should
be le f t to the Boards of banks and the Boards themselves
should be e lec ted by shareholders
Appointment as wel l as removal of audi tors in PSBs
requi res pr ior approval of the RBI. There i s an e labora te
procedure by which banks se lec t audi tors f rom an
approved panel c i rcula ted by the RBI. In respect of
pr iva te sec tor banks , the s ta tu tory audi tors a re appointed
in the Annual Genera l Meet ing wi th the pr ior approval by
the RBI.
Self Regulatory Organizat ions
India has had the d is t inc t ion of exper iment ing wi th Sel f
Regula tory Organisa t ion (SROs) in the f inancia l sys tem
s ince the pre- independence days . At present , there are
four SROs in the f inancia l sys tem- Indian Banks
Associa t ion ( IBA), Fore ign Exchange Dealers Associa t ion
of India (FEDAI) , Pr imary Dealers Associa t ion of India
(PDAI) and Fixed Income Money Market Dealers
Associa t ion of India (FIMMDAI) .
The IBA es tabl i shed in 1946 as a voluntary associa t ion of
banks , s t rove towards s t rengthening the banking indust ry
through consensus and co-ordinat ion . S ince
na t ional iza t ion of banks , PSBs tended to dominate IBA
and developed c lose l inks wi th Government and RBI.
Of ten , the reac t ive and consensus and coordinated
approach border on car te l i sa t ion . To i l lus t ra te , IBA had
42
worked out a schedule of benchmark service charges for
the services rendered by member banks , which were not
mandatory in na ture , but were be ing adopted by a l l banks .
Responding to the impera t ives caused by the changing
scenar io in the reform era , the IBA has , over the years ,
re focused i t s v is ion , redef ined i t s ro le , and modif ied i t s
opera t ional modal i t ies .
Tentat ive Issues and Lessons
Corpora te governance in PSBs i s impor tant , not only
because PS Bs happen to dominate the banking
indust ry , but a l so because , they a re unl ike ly to exi t
f rom banking bus iness though they may ge t
t ransformed. To the extent there i s publ ic ownership
of PS Bs , the mul t ip le objec t ives of the government
as owner and the complex pr inc ipa l - agent
re la t ionships cannot be wished away. PS Bs cannot be
expected to b l indly mimic pr iva te corpora te banks in
governance though genera l pr inc ip les a re equal ly
va l id . Compl ica t ions a r i se when there i s a widespread
fee l ing of uncer ta in ty of ownership and publ ic
ownership i s t rea ted as t rans i t ional phenomenon. The
ant ic ipa t ion or threa t of change in ownership has
a lso some impact on governance , s ince expected
change i s not mere ly of owner but the very na ture of
owner . Mixed ownership where government has
cont ro l l ing in teres t i s an ins t i tu t ional s t ruc ture tha t
poses i ssues of s igni f icant d i f ference be tween one se t
of owners who look for commercia l re turn and
43
another who seeks something more and di f ferent , to
jus t i fy ownership .
The most impor tant chal lenge faced in enhancing
corpora te governance and in respect of which there
has been s igni f icant though par t ia l success re la tes to
redef in ing the in ter re la t ionships be tween ins t i tu t ion
wi th in the broadly def ined publ ic sec tor i e . ,
government ,RBI and PSBs and PSBs to move away f rom a
model of p lanned development . )
The cent ra l bank a lso had to move away f rom shar ing the
n i t ty gr i t ty of developmenta l schemes wi th government
involving micro regula t ion , to a more equi table t rea tment
of a l l banks as regula tor and s tandards .
Another noteworthy aspect of enhancing corpora te
governance i s narrowing of gap be tween PSBs and
other banks in te rms of the pol icy , regula tory and
opera t ing envi ronment , apar t f rom some changes in
ownership s t ruc tures wi th a t tendant consequences . The
PSBs as hundred percent owned ent i t ies wi th no
share va lue quoted in s tock exchanges accounted for
over three quar ters of banking bus iness seven years
ago, whi le they now account for less than a
quar ter .
Random Thoughts
44
The Indian exper ience provokes some thoughts on a few
fundamenta l i ssues in regard to PSBs and corpora te
governance . F i rs t , i s publ ic ownership compat ib le wi th
sound corpora te governance as genera l ly unders tood?
Since var ious corpora te governance s t ruc tures exi t s in
d i f ferent countr ies . Government ownership of a bank,
unless government happens to have such a s take pure ly as
a f inancia l inves tment for re turn , necessar i ly has to have
the ef fec t of a l te r ing the s t ra tegies and objec t ives as wel l
as s t ruc ture of government . Government as an owner i s
accountable to pol i t ica l ins t i tu t ions which may not
necessar i ly be compat ib le wi th pure ly economic
incent ives .
The mixed ownership br ings in to sharper focus the
d ivergent objec t ives of shareholding and the i ssues of
reconci l ing them, especia l ly when one of the owners i s
government . In such a s i tua t ion , one can argue tha t as
long as the pr iva te shareholder i s aware of the specia l
na ture of shareholding, there should be no conf l ic t . I t
o ther words , The idea of mainta in ing publ ic sec tor
charac ter of a bank whi le government holds a minor i ty
shareholding i s an in tens i f ied and modif ied vers ion of
“golden share” exper iment of UK. The ques t ion could s t i l l
be as to whether such a mixed ownership of organiza t ion ,
par t icular ly for banks which are in case genera l ly under
in tense regula t ion and supervis ion .
45
Chapter 7
BEST PRACTICES OF CORPORATE GOVERNANCE
IN BANKS
Financia l fa i lures l ike Enron. WorldCom have eroded fa i th
in the corpora te sec tor genera t ing unprecedented shocks in
the s tock markers a l l over the wor ld . Many individual and
Corpora te inves tors have become conservat ive in the i r
Inves tment dec is ions they demand higher degree of
scrut iny Of a corpora te’s f inancia l d isc losure and
s t r ingent Disc losure norms to avoid such i r revers ib le and
I r recoverable scandals in the fu ture . Consequent ly , the
board Rooms are compel led to pay grea ter a t tent ion to
the i r Rela t ionship wi th the s takeholders and the
t ransparency of the i r f inancia l s ta tements . Legis la t ive and
regula tory i ssues have a lso been made more s t r ingent to
boost inves tor Conf idence . The audi t process has a lso
been reviewed thoroughly wi th c lear guidel ines the focus
on corpora te Dut ies and responsib i l i t ies .
Importance of Corporate Governance in Banks
Corpora te Governance i s par t icular ly impor tant for banks
because Banks p lay a dominant ro le in f inancia l sys tems
and economic growth. Banks are the main source of
f inance for a major i ty of f i rms as access of f inancia l
markets i s subjec t to compl iance wi th cumbersome
regula tory requi rements . They are the main deposi tor ies
for the economy’s saving. They ac t as the cus todian of the
country’s l iquid reserves . Thus the banking sys tem
46
deserves much a t tent ion to bui ld a s t rong, re l iable and
s table f inancia l sys tem in a country .
Good governance can be bui l t based on the bus iness
prac t ices adopted by the board of d i rec tors and
management . Many bank fa i lures in the pas t have been
a t t r ibuted to inadequate and ineff ic ient management which
enabled banks to accept low qual i ty asse ts and assume
addi t ional r i sks tha t extended beyond the level appropr ia te
for the banks’ capaci ty .
Some of the key e lement tha t i s ident i f ied to be a par t of
a good governance sys tem a t the individual bank level :
Management wi th h igh in tegr i ty , adequate and exper ience;
A comprehensive in ternal informat ion cont ro l sys tem to
ensure the decis ions i f the bank are col lec t ive decis ion;
Prudent c redi t appra isa l mechanism thereby l imi t ing the
r i sk exposure ; and Effec t ive external and in ternal audi t
procedures to es tabl i sh adherence to the pol ic ies and
regula t ions and no specia l t rea tment i s a l lowed on any
par t icular dec is ion .
Ten Commandments of Corporate Governance
We can enumerate the commandments for ensur ing bank
corpora te governance .
I . Banks shal l real ize the t imes are changing
The issue of corpora te governance had not been g iven the
requis i te a t tent ion in the pas t unt i l the advent of some
economic and f inancia l c r i ses in the la te ‘90s . Times are
changing now, and even smal les t banks need to focus on
corpora te governance res t ruc tur ing. This i s because of the
47
apparent lack of in tegr i ty and values in the opera t ion
some large corpora t ions l ike World Com and Enron.
II . Banks shal l establ ish an ef fect ive capable and
re l iable board of directors
Establ i sh ing an ef fec t ive , capable and re l iable board of
d i rec tors requi res involving wel l qual i f ied and successful
individuals wi th in tegr i ty . This impl ies tha t a major i ty of
banks of board of d i rec tors should be t ru ly outs ide
independent d i rec tors . Here , “ independence” refers to the
individual not working for the bank and he/she not having
mater ia l re la t ionship wi th the bank. The board should se t
a long- term s t ra tegy, pol icy and values for the
organiza t ion . Never the less , the bank should not
micromanage the ins t i tu t ion .
III . Banks shal l establ ish a corporate code of e thics
for themselves
Corpora te e th ics and values should be es tabl i shed a t the
top and should be used to govern the opera t ions of the
company both f rom a long- term and a shor t - te rm view
point . Unless th is exerc ise i s accompl ished, execut ive
management cannot ant ic ipa te tha t the rank and f i le
employees wi l l fo l low such a code on the i r own.
IV. Banks shal l consider establ ishing an Off ice of
the Chairman of the Board
Many banks are a l ready examining th is idea of
es tabl i sh ing Off ice of the Chai rman of the Board . Such an
Off ice wi l l be made to repor t to the board and wi l l ac t as
48
the board’s eyes and ears on a da i ly bas is in connect ion
wi th the funct ions of the bank.
V. Banks shal l have an ef fect ive and operat ing
audit committee , compensat ion committee and
nominat ing/corporate governance committee
The audi t commit tee , compensat ion commit tee and
nominat ing commit tee should be composed of a l l
independent , outs ide d i rec tors of the bank who opera te
independent ly . These commit tees should have access to
a t torneys and consul tants pa id for by the bank other than
the bank’s cus tomary counsel and consul tants . This
independence of the commit tees wi l l ensure any bias in
the in ternal audi t commit tee’s dec is ions .
VI. Banks shal l consider the ef fect ive board
compensat ion
Fair compensat ion should be pa id to the d i rec tors . Thei r
remunera t ion should be commensura te wi th the r i sks they
take . The bank should a im to appoint a h ighly qual i f ied
d i rec tor and take appropr ia te measures to re ta in them
wi th the organiza t ion as i t normal ly does wi th o ther
employees .
VII. Banks shal l require cont inuing educat ion for
directors
The f inancia l services indust ry i s now fac ing a number or
chal lenges due to many technology innovat ions .
Therefore , i t becomes impera t ive for the banks to educate
the i r d i rec tors to meet the growing needs of the indust ry .
49
Cont inuing educat ion should be g iven equal impor tance
a long wi th o ther parameters out l ined above.
VIII . Banks shal l establ ish procedures for board
success ion
The presence of qual i f ied members on the board i s a very
crucia l i ssue . So a bank should have a c lear ly speci f ied
se t of ru les regarding i ssues of success ion to the board .
The bank should pose a ques t ion are as fo l lows:
a ) Does the bank have a mandatory re t i rement age tha t i s
ac tua l ly enforced?
b) Does a se l f appra isa l process exis t to f ree the board of
the non-product ive d i rec tors?
c) Does the bank have a p lan to mainta in a fu l ly s ta f fed
board of d i rec tors wi th capable people , no mat ter what
the age i s as i t moves forward?
IX. Banks shal l d isc lose , d isc lose and disc lose the
information
Banks wi l l f ind tha t d isc losure wi l l be quicker and more
burdensome than i t was in the pas t . This may be through
quar ter ly le t te rs to the shareholders or o ther types of
communica t ion .
X. Banks shal l recognize tha t duty i s to es tabl i shed
corpora te governance procedures tha t wi l l serve to
enhance shareholder va lue
50
The pr imary objec t of the board of d i rec tory i s to
maximize the shareholder’s weal th . The s t ra tegy adopted
to achieve th is objec t ive should now encompass corpora te
governance procedures and should be des igned wi th long-
term value for the shareholder in focus .
Key Elements of Best Pract ices in Corporate
Governance
The Key e lements ident i f ied are :
1 . A s t rong independent board of d i rec tors ,
2 . Independent Commit tees ,
3 . Char ter -based Commit tees than ru le-based,
4 . Code of conduct or e th ics ,
5 . Transparent account ing prac t ices ,
6 . Direc tor or ienta t ion program and an ongoing
t ra in ing.
Steps taken in India to Improve Corporate Governance
in Indian Banks.
A consul ta t ive group of Direc tors of banks and f inancia l
ins t i tu t ions was se t up by the Reserve Bank of India to
review the supervisory ro le of the Boards of banks and
f inancia l ins t i tu t ions and to obta in feedback on the
funct ioning of the Boards v is -à-vis compl iance ,
t ransparency, d isc losures , audi t commit tees , e tc .
These recommendat ions were based on in ternat ional bes t
prac t ice as enuncia ted by the Basel Commit tee on banking
supervis ion , o ther commit tee and advisory bodies . But
51
sui table amendments were made in these in ternat ional
s tandards to su i t the Indian scenar io .
Recommendations of the Advisory Group
Direc tors of a l l banks both publ ic and pr iva te sec tor banks
should exerc ise due d i l igence wi th respect to the i r
su i tabi l i ty to the pos t they hold by way of qual i f ica t ions
and technica l exper t i se .
The Government shout be guide by cer ta in broad “f i t
and proper norms for the nominat ion of the
Direc tors . The cr i te r ia sugges ted by Bank of
In ternat ional Set t lements can be adopted as a
guidel ine to ar r ive a t an appropr ia te se t of norms.
For assess ing in tegr i ty and sui tabi l i ty fac tors such as
cr iminal records , f inancia l pos i t ion , c iv i l ac t ion
under taken to pursue personal debts , re fusa l of
admiss ion to or expuls ion f rom profess ion bodies ,
sanct ion appl ied by regula t ion to s imi lar bodies and
previous ques t ionable bus iness prac t ices , e tc , should
be considered.
The appointment / nominat ion of independent / non-
execut ive d i rec tors to the Boards of banks should
be taken f rom a pool of profess ional and ta lented
people to be prepared and mainta ined by the
country’s Centra l Bank, Reserve Bank of India .
Any vio la t ion of the norm should be not i f ied to the
RBI.
In the current context of banking becoming more
complex and knowledge – based , there i s an
52
urgent need for making the boards of banks
more contemporar i ly profess ional by induct ing
technica l ly and specia l ly qual i f ied individual .
While the exis t ing regula t ion of appoint ing
exper ts f rom d i f ferent sec tors such as
agr icul ture , SSI , e tc can be cont inued , e f for ts
should be a imed a t combining i t wi th the need
based representa t ion of sk i l l s such as market ing ,
technology and sys tems, r i sk management , s t ra tegic
p lanning , t reasury opera t ions , c redi t recovery , e tc .
The independent and non- execut ive d i rec tors
should ra ise c r i t ica l ques t ions re la t ing to bus iness
s t ra tegy , house keeping and in ternal cont ro l
sys tems and o ther impor tant aspects of the
funct ioning of the bank and inves tor re la t ions
in the meet ing of the board .
In the pr iva te sec tor banks where promoter
d i rec tors may ac t in concer t , the independent /
non- execut ive d i rec tors should provide e f fec t ive
checks and ba lances to ensure tha t the bank
does not bui ld up exposures to ent i t ies
connected wi th the promoters or the i r
associa tes .
The remunera t ion of the d i rec tors should be
increased to the comparable levels of
in ternat ional s tandards to encourage them towards
mainta in ing in tegr i ty in the i r per forming the
dut ies .
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The of f ice of the cha i rman and the d i rec tor
should be separa ted in respect of la rge s ized
publ ic sec tor to br ing in more focus in
render ing the i r dut ies .
The informat ion furnished to the board should
be adequate and comple te to enable the
members of the Board to take meaningful
dec is ions .
Uniform code and procedure should be adopted
for recording the proceedings of the Board
meet ings in banks and f inancia l ins t i tu t ions .
The board should be informed per iodica l ly of
the exposures of a bank to s tockbrokers and
market - makers and o ther sens i t ive sec tors such
as rea l es ta te e tc .
All banks should g ive impor tance to appoint ing
a qual i f ied Company Secre tary as the Secre tary
to the Board and a l so appoint a Compl iance
Off icer for moni tor ing and repor t ing
compl iance wi th regula tory and account ing
requi rements .
The Audi t commit tee should comprise
independent / non-execut ive d i rec tors and the
Execut ive Direc tors should only be a permanent
invi tee .
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CONCLUSION
Corpora te governance thus has become a topic in teres t to
Many audiences inc luding the corpora te d i rec tors , the
cent ra l banks and other regula tory author i t ies . Like many
issues , even CG has become an in teres t ing i ssue tha t
a t t rac ted publ ic a t tent ion in the wake of corpora te
scandals l ike Enron. Governance i ssue genera l ly centers
a round accountabi l i ty of the par t ies involved in dec is ion-
making in a bank or any organiza t ion . Libera l iza t ion and
deregula t ion , and vola t i l i ty in the f inancia l markets a re
the major fac tors tha t have t r iggered an in teres t in the
i ssue of corpora te governance . I have made an a t tempt to
in t roduce the reader the concept , i ssues and perspect ives
of corpora te governance in the f inancia l sec tor in genera l
and banks in par t icular . I have t r ied to g ive br ief
in t roduct ion on the corpora te governance prac t ices in
some of the Asian banks and Indian banks .
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BIBLIOGRAPHY
CORPORATE GOVERNANCE IN BANKSAN INTRODUCTION
EDITED BY: V. SUBBULAKSHMI
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