BASEL COMMITTEE RECOMENDATIONS :

The Basel Committee guidance provides a foundation for sound corporate governance practices for various banking system across countries. The guidance is divided into four major sections (i) overview of corporate governance in banks (ii) sound corporate governance principles (iii) role of supervisors and (iv) promotion of an environment to support sound corporate governance.

(i) Overview of Corporate Governance in Banks: The guidance stressed the importance of sound corporate governance practices as vital in gaining and maintaining public trust and confidence in the banking system and economy as a whole. The guidance suggested that the supervisors should take steps to ensure that the ownership structure does not affect the sound corporate governance practices in banks.

(ii) Sound corporate governance principles: The committee proposed eight principles which are considered important for an effective corporate governance process.

Principle 1: Board members should be qualified for their role in corporate governance and be able to exercise sound judgment in handling the affairs of the bank

Principle 2: The board of directors should approve and oversee the bank’s strategic objective and corporate values that are communicated throughout the organization

Principle 3: The board of directors should set and enforce clear lines of responsibility and accountability throughout the organization

Principle 4: The board should ensure that there is appropriate oversight by senior management consistent with board’s policy

Principle 5: The board and senior management should effectively utilize the work conducted by the internal auditors, external auditors and internal control systems

Principle 6: The board should ensure that compensation policies and practices are in consistent with the bank’s corporate culture, long tern objectives and strategy

Principle 7: The bank should be covered in a transparent manner Principle 8: The board and senior management should understand the bank’s operational structure and the jurisdiction

(iii) The Role of Supervisors: Supervisors play a key role to encourage and support strong corporate governance by analyzing and assessing a bank’s implementation skills of the sound principles. Supervisors should

– Provide guidance to banks on sound corporate governance

– Consider corporate governance as one factor for depositor protection

– Assess the quality of banks’ audit and control systems

– Evaluate the bank’s performance in respect of effective implementation of corporate governance

(iv) Promotion of an environment to support sound corporate governance: As per the report the primary responsibility for good governance rests with board of directors and senior management of banks. Banks supervisors also play a key role in developing and assessing bank corporate governance practices. The guidance report also lists out role of others who can promote good corporate governance like shareholders, customers, depositors, auditors, Banking Industry associations, Governments, Credit rating agencies, Employees, stock exchanges etc;

According to the Basel guidance banks’ good corporate governance practices would entail banks for better operational efficiency, greater opportunities to get low cost funds, and a good reputation and increased market value.