Professional Documents
Culture Documents
Session 12
Session 12
Session 12
Presentation Outline
1.
Why corporate governance matters in general and to banks in particular What is special about bank vs. corporate governance An introduction to the Basel Committees guidance on enhancing corporate governance for banking organizations
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Concluding remarks
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Build trust between banks and its stakeholders, including shareholder, investors, regulator, depositors, employees key in weak external environment
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In Particular Because of the Central Role Banks Play in the Economy Well-governed banks will play a positive role in the economy
Mobilizing and allocating societys savings Providing financing to firms (in particular in most developing countries w/i deep equity markets)
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Corporate Governance Also Matters to the Firms and Households Banks Lend to
Corporate governance affects
Corporate governance of banks thus affects the cost of capital of the firms and households they lend to
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Why Corporate Governance is Different for Banks Then for Firms (To a Degree)
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And so: Banks also have shareholders, directors and managers, with the same agency conflicts and costs Corporate governance issues relevant to companies are thus also relevant to banks, e.g.:
A vigilant and independent board, The protection of (minority) shareholder rights and Appropriate disclosure and transparency
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Macroeconomic
Global Market Trends: Globalization, consolidation, new technology Key economic role played by banks: Managing savings, providing financing Financial Structure: High debt/equity Transparency: Opaque, culture of secrecy Insider Role: Power role, conflict of Interests Risk Management: More complex that for firms; internal audit more difficult Employment & Incentives: Limited mobility Shareholders: More dispersed due to govt. restrictions Regulator and supervisor Depositor Creditor General public
Microeconomic
Conflicts of interests more prevalent; harder to assess performance & risk higher chance misuse (tunneling)
Additional Stakeholders
Less incentive to monitor directors and management govt. plays more active role
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Studies and Practice on Bank Corporate Governance Have a Simple, Yet Telling Story
Banks are more difficult to monitor
Moodys and S&P disagreed on only 15% of all firm bond issues, but disagreed on 34% of all financial bond issues
Recessions increases spreads on all bond issues, but increases spreads on riskier banks more than for firms Partly result of a flight to safety, but also greater vulnerability of banks compared to non-financial firms
In practice, banks with weak corporate governance have failed more often
Accrued deposit insurance, good summary measure of riskiness of banks, higher for weaker CG State-owned banks enjoy even larger public subsidy, that is often misused: poor allocation, large NPLs, e.g., Indonesia, South Korea, France, Thailand, Mexico, Russia Fiscal costs of government support up to 50% of GDP, large output losses from financial crises
Countries with weaker corporate governance and poorer institutions see more crises
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What Does This Imply for Bank Corporate Governance and Regulation?
Two approaches to corporate governance related laws & regulations
1. Monitor banks through laws and regulations, based on international best practices (Basel I & II) 2. Empower banks through information and best practices, e.g. through a code based on the OECD Principles and Basel Committee Guidelines
Approaches not mutually exclusive: But what is best mix of private market and government oversight of banks? Banks certainly can preempt regulatory (re)action by implementing good corporate governance
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An Introduction to the Basel Committees Guidance on Enhancing the Corporate Governance of Banks
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Applicable to diverse corporate and board structures Principles, not rules Not part of Basel II; applicable regardless Not intended to add new layer of regulation or to replace national codes Purpose: To assist banks to enhance their corporate governance frameworks and supervisors in assessing the quality of those frameworks
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Clearly define authorities and responsibilities between shareholders, the board & management Also important in group structures:
Board at group level responsible for overall strategy, oversight of subsidiaries, and risk/internal control structure of entire group Board at subsidiary level retains cg responsibilities for subsidiary itself Key issue: Open & transparent intra-group policies to deal with conflicts of interest among entities w/i group
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V. The Importance of Internal & External Controls and Audit to Sound Corporate Governance
The external audit
Importance of independent, external auditor is communicated throughout bank
Internal controls
Management letter issued Monitors compliance with corporate governance rules, regulations, codes and policies Direct reporting to the boards audit committee Independence must be real: no/limited non-audit services At minimum, rotation of external audit partner 19 of 26 Report to boards audit committee
VI. Ensuring that Compensation is In-Line with a Banks Values, Strategy & Control Environment
Link board and management remuneration to longterm business strategy of bank
E.g. LT performance targets vs. st-volume or profitability Options should only be granted under appropriate terms (time limits to hold/trade) and shareholder approval
Independent remuneration committee sets remuneration Board discusses and validate shareholders (ideally) approve final package
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Establishing off-shore SPVsalthough possibly serving legitimate business needspose real oversight and reputational risks
Require close attention by board Risks need to be carefully analyses Purpose, structure, volume of SPVs needs to be defined and disclosed Clear policies for such structures need to be developed Audit committee needs to pay close attention Internal and external audit and controls need to include these structures
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Auditors through an established and qualified audit profession, audit standards and communication to boards and supervisors
Banking industry associations initiatives re. best practices and training Professional risk advisory firms and consultancies assisting banks in implementing sound corporate governance practices Governments through laws, regulations, enforcement and an effective judicial framework Credit rating agencies through review and assessment of the impact of corporate governance practices on a banks risk profile Securities regulators, stock exchanges and other self-regulatory organizations through disclosure and listing requirements Employees through communication of concerns regarding illegal or unethical practices or other corporate governance weaknesses.
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