Challenges in Group Governance: The Governance of Cross-Border Bank Subsidiaries

by W. Richard Frederick for the International Finance Corporation (IFC)

This publication focuses on the governance of the subsidiaries of banking groups, with particular emphasis on cross-border bank subsidiaries. Thought on the issue originated during a series of high-level meetings organized by IFC on the governance of banks in Southeast Europe (SEE) in 2010—a time when the effects of the 2007–2008 financial crisis still lingered, giving the meetings a sense of urgency. Participants reflected on the role that governance may have played in the crisis and what could be done to prevent a recurrence.
One of the key observations made in developing this publication was that many banks view governance of subsidiaries as a “tick the box” exercise with marginal value to their operation — particularly when regulatory requirements do not take into account business exigencies. On the other hand, banks take governance seriously and appreciate its value when rules are balanced, measured, and practical, helping them achieve results. Another observation is that many banks do not fully appreciate the role governance plays in controlling risk in increasingly complex international banking groups.
The governance of bank subsidiaries has received insufficient study, and empirical evidence is scant—though there is burgeoning interest among banks. Given the scarcity of information and lack of a clear consensus, this publication stops short of making detailed recommendations. It encourages supervisors to adapt their approaches to fit market realities and to be more aware of the incentives for good governance. It also emphasizes the importance of proportionate and risk-driven approaches to supervision. At the same time, it encourages banks to look beyond the achievement of business goals and consider the issues of risk and stability that are ultimately a concern to us all. Download Publication Here.

Guidance for the Directors of Banks (by Richard Westlake – Foreword by Leo Goldschmidt)

Focus 11

The need for sound governance of banks worldwide has never been stronger. After the global financial crisis of 2007–2009, spectacular bank failures – whether caused by greed, incompetence, or indifference – are still occurring. This Guidance for Directors of Banks is intended mainly for three groups of readers: (i) New directors with experience in banking; (ii) Directors who understand governance, but have no experience in banking; and (iii) New directors who have no experience of either banking or being a director.

It is mainly an introduction for the directors of non-complex banks – whose main business is to take deposits and provide loans – and is not designed for the directors of large, complex banks or investment banks operating in global capital markets and dealing with complex corporate structures. We hope, however, that even relatively experienced directors of banks, and those who work with them, may find the book a useful refresher.

Main topics discussed in the Guidance are:

• Where Banks Fit in the Corporate Governance Framework
• The Unique Role of Banks
• Governing Risk
• Board Structures and Directors’ Duties
• Effective Board Decision Making

Since the late Jonathan Charkham CBE wrote the first edition of this Guidance book in 2003, the world has changed dramatically. During the crisis, many household-name banks merged or disappeared. Now there is stronger supervision of banks and greater expectations of boards, so directors need to be knowledgeable about and engaged with their bank to provide direction and hold bank management to account. Download document here!

How Can Financial Supervisors Improve the Effectiveness of Corporate Governance? Private Sector Opinion #18

Posted by Alexey Volynets & Santiago Chaher (Corporate Governance Leaders) for the Global Corporate Governance Forum. PSO by by John Palmer and Chang Su Hoong

New initiatives are under way to improve governance, including guidelines from supervisory standard-setting bodies such as the Basel Committee on Banking Supervision. These initiatives should help, but more is needed to change board culture and behavior. Financial supervisors have an important stake in ensuring sound corporate governance as a strong underpinning for effective supervision. This paper suggests measures that financial supervisors can take to improve governance in regulated financial institutions. (continue reading… )

Consultative proposals to strengthen the resilience of the banking sector announced by the Basel Committee

by the Bank for International Settlements, December 17, 2009.

At its 8-9 December meeting, the Basel Committee on Banking Supervision approved for consultation a package of proposals to strengthen global capital and liquidity regulations with the goal of promoting a more resilient banking sector. Along with the measures taken by the Committee in July 2009 to strengthen the Basel II Framework, the proposals announced today are part of the Committee’s comprehensive response to address the lessons of the crisis related to the regulation, supervision and risk management of global banks.

These reforms carry forward the 7 September 2009 mandate of the Governors and Heads of Supervision, the oversight body of the Basel Committee. The reform programme has also been endorsed by the Financial Stability Board and by the G20 leaders at their Pittsburgh Summit.

Mr Nout Wellink, Chairman of the Basel Committee and President of the Netherlands Bank, stated that “the capital and liquidity proposals will result in more resilient banks and a sounder banking and financial system. They will promote a better balance between financial innovation and sustainable growth”…(continue reading)

Canada cannot be complacent about corporate governance

by Michael Hlinka, for  Money Talks, November 17, 2009.

Industry must be regulated. There’s no question about that. The only legitimate question is the type of regulation.

The reason that the United States banking system suffered through a devastating crisis and ours did not is because in 1999 U.S. President Bill Clinton, a Democrat, and a Republican-controlled Congress passed the Financial Services Modernization Act. Among other things, it connected the health of the banking system to the vagaries of the stock market. The legislation also reduced the capital requirements demanded of banks – that is, the money they needed to hold to cover bad loans. We’ve seen the result.

The Canadian system avoided these excesses, and while the rest of the developed world has been bedridden with a devastating economic flu, comparatively we’ve suffered a case of the sniffles…(continue reading)

UK Walker Review Likes SWFs’ Influence

by Ashby Monk, for Oxford SWF Project at University of Oxford, November 3, 2009.

As you may know, Sir David Walker is leading an independent review of corporate governance in the UK banking industry. One component of this review focuses on the role of institutional investors in engaging effectively with companies and monitoring corporate boards.

Apparently, Walker loves the influence of long-term SWFs on increasingly short-term financial institutions:

“They will help vis-a-vis UK institutions which have often taken short-term views.”

He makes a good point; SWFs are the longest-term investors out there. Therefore, giving them a bit more influence over corporate management would tend to move these firms’ time-horizons out a bit…(continue reading)

Ipreo Hires Top Industry Player to Head Up Asia-Pacific, Announces Launch of Corporate Governance Services in the Region

by Business Wire, October 12, 2009.

Ipreo, leading global provider of market intelligence and productivity software to investment banks and corporations, announced its hire of Justin Reynolds – a veteran advisor to both the corporate and capital markets communities in Europe, Asia, and Africa – to head up its entire Asia-Pacific operations. In addition to running and expanding Ipreo’s existing capital markets and corporate business lines throughout the region, Reynolds will also be focusing on providing corporate governance and investor outreach services to Ipreo’s corporate and investment banking clients throughout the region.

Reynolds has worked in the fields of Corporate Governance, Director Remuneration and Shareholder Voting throughout EUMESA and APAC for over 13 years. He comes to Ipreo from Sodali Ltd, a consulting firm in Corporate Governance and Shareholder Transactions in Europe, Asia, Middle East and Africa, where he led Business Development, Strategic Partnerships and Governance Consulting. Prior to Sodali, Reynolds was a Director at RiskMetrics Group, ISS Governance Services Corporate business, advising corporate issuers on environmental, social and governance related equity and debt risk. His extensive experience also includes stints at Mourant (in equity compensation), and Georgeson (in proxy solicitation), where he was instrumental in the founding of the Sydney and Johannesburg offices.

“Justin’s combination of industry expertise and regional operations management experience make him an ideal leader for our Asia-Pacific operations,” said Paul Lucas, EVP & MD of International Operations for Ipreo. “I’m confident that he will be a driving force in our continued efforts to provide industry-leading services to this region.”…(continue reading)

The Real Lesson from Lehman – Breakdown in Corporate Governance

by The Ops Guru, September 21, 2009.

There are a bunch of lessons learned article related to the anniversary of the Lehman bankruptcy.  Bloomberg dedicated a section to this on their home page (you will have to search now, the feature is gone).  Some focus on the interconnections within the banking system and how pieces began to fall, undermining confidence.  Others have focused on the inability of regulators to diagnose issues with particular investment instruments ahead of the crisis.  Amazingly few have focused on one of the central elements of capitalism, corporate governance.  This is the area that I think deserves more attention.

In my opinion, fundamental issues with corporate governance have been uncovered.  While these lessons are most critical for financial services companies, I believe that other non-financial companies have similar weaknesses which need to be addressed.  These governance issues also relate in many ways to economic points raised by Paul Krugman in his outstanding article in the New York Times.  Link is here.

While lots of breakdowns occurred, much of this must ultimately lie at the feet of boards and the shareholders who merely rubber stamped nominated members…(contin ue reading)

Wall Street May Not Change Much Despite Reform Effort

by The Associated Press, for CNBC, September 18, 2009.

The rule book for Wall Street may not change that much after all.

Tougher financial rules that seemed inevitable after last year’s crisis have been stymied by industry lobbying, government turf battles and a stabilizing banking system. If efforts to tighten oversight of the industry fail, some financial analysts fear a future crisis is inevitable.

Each of the crises of the past 25 years—the collapse of the savings and loan industry, the Internet-stock bust a decade later and last year’s credit-market meltdown—were the result of inadequate regulation, says former Comptroller of the Currency Eugene Ludwig.

“The failure has been government’s inability to restrain bubble growth, and then often reacting with the wrong medicine,” he says.

The administration’s financial plans focus on the right issues, but some don’t go far enough, he says. Financial experts who are more critical of the plan say it largely consists of half-measures that aren’t likely to rein in excessive risk-taking by banks.

Among other things, the administration’s plan would do away with one bank regulator, but leave multiple agencies in charge of bank supervision. It calls for collaboration between the Securities and Exchange Commission and the Commodity Futures Trading Commission, but stops short of combining the agencies–even though their missions are increasingly similar. And the administration would impose more controls on the largest banks’ risk-taking, but would still view them as “too big to fail.”…(continue reading)

Never again? Risk management in banking beyond the credit crisis

by KPMG, January 6, 2009.

The credit crisis has forced banks to take a critical look at how they manage risk and has exposed some significant weaknesses in risk management across the financial services industry. The collapse of several high profile banks, the emergency bail out of others, departures of CEOs and CFOs, the hundreds of billions of dollars of write-downs, efforts by banks to raise fresh capital were all signs that something had gone very badly wrong…

To download this survey click here.

Partner and Global Head of Financial

Risk Management, KPMG Germany

Nigel Harman

Partner and Head of Financial Risk Management, KPMG UK

Michael ConoverPartner, New York Leader of Financial Risk Management