Overview of Bank Corporate Governance

OVERVIEW OF BANK CORPORATE GOVERNANCE
Corporate governance for banking organizations is arguably of greater importance

than for other companies, given the crucial financial intermediation role of banks
in an economy, the need to safeguard depositors’ funds and their high degree of
sensitivity to potential difficulties arising from ineffective corporate governance.
Effective corporate governance practices, on both a system-wide and individual
bank basis, are essential to achieving and maintaining public trust and confidence
in the banking system, which are critical to the proper functioning of the banking
sector and economy as a whole. Bank failures can pose significant public costs and
consequences due to their potential impact on deposit insurance mechanisms and
the possibility of broader macroeconomic implications, such as contagion risk and
impact on payment systems. Indeed, banks and other financial companies may lose
large amounts of money in a short period in the case of events such as fraud. In
addition, poor corporate governance can lead markets to lose confidence in the
ability of a bank to properly manage its assets and liabilities, including deposits,
which could in turn trigger a liquidity crisis or a run on deposits. Banks also
typically have access to confidential customer information, which can potentially
be misused by employees for personal gains.
Moreover, review and analysis of the investments, activities, risk exposures and
financial statements of banks may in some cases be more complex than such
reviews of other companies for several reasons, including the unrated, borrower-
specific nature of a bank’s loan portfolio, as well as valuation challenges. In light
of these sensitivities, minimum standards of corporate governance for banks should
therefore be more ambitious than for non-financial firms.
The OECD principles define corporate governance as involving “a set of
relationships between a company’s management, its board, its shareholders, and
other stakeholders. Corporate governance also provides the structure through
which the objectives of the company are set, and the means of attaining those
objectives and monitoring performance are determined. Good corporate
governance should provide proper incentives for the board and management to
pursue objectives that are in the interests of the company and its shareholders and
should facilitate effective monitoring. The presence of an effective corporate
governance system, within an individual company and across an economy as a
whole, helps to provide a degree of confidence that is necessary for the proper
functioning of a market economy.”
From a banking industry perspective, corporate governance involves the manner

in which the business and affairs of individual institutions are governed by their
boards of directors and senior management, which affects how banks:
• Set corporate objectives (including generating economic returns to owners);
• Run the day-to-day operations of the business;
• Meet the obligation of accountability to their shareholders and take into account
the interests of other recognised stakeholders
• 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.

If we examine the need for improving corporate governance in banks, two reasons
stand out:
1) Bank exist because the are willing o take on and manage risk. Besides,
with the rapid pace of financial innovation and globalization, the face of
banking business is going a sea change. Banking business is becoming
more complex and diversified. Risk taking and management is less
regulated competitive market will have to be done in such a way that
investors confidence is not enforced.
2) Even in a regulated setup, 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(NBFC’S) had adversely impacted investors confidence.
3) Moreover, protecting the interest of the depositors become a 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 the banks. It is found that in India, the
depositors contribution was well over 15. % times the shareholder’s stake
in banks as early as in March 2001. this is bound to be much more now.
The depositors are very large in number and are scattered and have a little
say in the administration of the banks. In other corporates, big lenders do
exercise the right to direct the management in any case; the lender’s stake
in them might not exceed 2 or 3 times the owners stakes.
4) Bank’s deal in peoples fund and should therefore act as trustees of the
deposit. Regulators t world over has recognized the vulnerability of
depositors to the whims of the managerial misadventures in banks and
therefore, has been regulating banks more tightly than other corporates.
To sum the objective of governance in banks should be protection of depositors

interest and then be to optimize the shareholder’s interest. All other considerations
would fall in place once these two are achieved.
Banking supervision cannot work 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 organization.
Supervisory experience underscores the necessary of having the appropriate level
of accountability and checks the balances within each banks. 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.

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OVERVIEW OF BANK CORPORATE GOVERNANCE

Corporate governance for banking organizations is arguably of greater importance

From a banking industry perspective, corporate governance involves the manner

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

• Run the day-to-day operations of the business;

• Protect the interests of depositors.

3) Moreover, protecting the interest of the depositors become a paramount

To sum the objective of governance in banks should be protection of depositors

Banking supervision cannot work effectively if sound corporate governance is not

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