The Principles of Banking

Chapter 18

Principles of Corporate Governance¹

We conclude this book with a review of the principles of bank corporate governance. As any enlightened study of the economic crash of 2007–2009 would conclude, there were perhaps 10 to 12 significant causal factors, interacting over a number of years, that led to the crisis. However, if one had to identify just one factor specific to the banking industry, it would be that the failures of 2008 were a failure of corporate governance. Poor judgement, allied with not inconsiderable incompetence, led to the financial crash being much worse than it need have been.

In this final chapter we undertake a case study of selected bank failures from the viewpoint of corporate governance, and present recommendations on how best to organise bank governance going forward. These can be taken to be good practice, rather than business best-practice, because they are not universal beliefs and bank managements are free to conduct themselves in a variety of different ways. However, the principles outlined in this chapter have much to commend them and we present them as leading-edge good practice.

In this chapter we review the experience of a sample of failed banks in the period leading up to, and during, the crash. We observe the conduct of boards and senior management, as well as the governance infrastructure in place, to determine lessons for policy going forward. We highlight failures of governance, identify sources of risk as important determinants ...