International Finance Regulation: The Quest for Financial Stability

CHAPTER 13 Financial Institution Governance (or Lack Thereof)

“It seems clear that, if the CEO chooses, he or she can, by example and through oversight, induce corporate colleagues and outside auditors to behave ethically.”

—Alan Greenspan, Former Federal Reserve President

Had bank governance been perfect and the supervision by the regulatory authorities been impeccable, the financial crisis would not have happened. The failures of some governance mechanisms must be remedied, and while little has been done to improve governance regulation, some initiatives are gradually changing the way banks operate.

The Financial Stability Board (FSB) is the closest to a global regulator in matters of financial institutions. It issued several directives on some of the aspects of governance. The Organization for Economic Cooperation and Development (OECD) looked at the corporate governance lessons from the financial crisis and organized an in-depth initiative to look at various aspects of bank governance:

A number of weaknesses have been apparent. The risk management systems have failed in many cases due to corporate governance procedures rather than the inadequacy of computer models alone: information about exposures in a number of cases did not reach the board and even senior levels of management, while risk management was often activity rather than enterprise-based. These are board responsibilities. In other cases, boards had approved strategy but then did not establish suitable metrics ...