The Basel Committee on Banking Supervision has issued a set of principles for enhancing sound corporate governance practices at banks.
The principles stress the importance of the board and senior management having a clear knowledge and understanding of the bank's operational structure and risks. This includes risks arising from special purpose entities or related structures.
According to the committee, the role of the board should include approving and overseeing the implementation of the bank's risk strategy, taking account of the bank's long-term financial interests and safety. The board should have an active oversight of the compensation system's design and operation, including careful alignment of employee compensation with prudent risk-taking, consistent with the Financial Stability Board's principles.
The board should also have adequate knowledge and experience relevant to each of the material financial activities the bank intends to pursue to enable effective governance and oversight of the bank.
The set of principles also stresses the importance of a risk management function (including a chief risk officer or equivalent for large banks and internationally active banks), a compliance function and an internal audit function, each with sufficient authority, stature, independence, resources and access to the board.
A sound corporate governance practice also identifies, monitors and manages risks on an ongoing firm-wide and individual entity basis, says the committee. This should be based on risk management systems and internal control infrastructures that are appropriate for the external risk landscape and the bank's risk profile.
Supervisors also have a critical role in ensuring that banks practice good corporate governance, says the committee. In line with the committee's principles, supervisors should establish guidance or rules requiring banks to have robust corporate governance strategies, policies and procedures. Commensurate with a bank's size, complexity, structure and risk profile, supervisors should regularly evaluate the bank's corporate governance policies and practices as well as its implementation of the committee's principles.
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