Corporate Governance in the Banking Industry

By Stanley Epstein

Broadly speaking corporate governance can be best described as a system of rules, practices and processes by which a business enterprise is directed and controlled. In essence corporate governance involves balancing the interests of the many stakeholders in a firm. These stakeholders include its shareholders, management, customers, suppliers, financiers, government and the larger community.

Corporate governance has become firmly entrenched on the world business scene over the past three decades. Today it is a key component in the operation of all manner of firms around the globe. Even more important is the need for corporate governance to be effective, not only for business firms but for the economy as a whole.

Banking is an important component of the economy, be it national or global. Banks play a very important financial intermediation role in this space. Clearly any difficulties arising from corporate governance shortcomings at banks will also result in a very high degree of nervousness in both the public and the market.

Some very fundamental deficiencies in bank corporate governance became very apparent during the 2008 financial crisis adding to the general distress that the crisis itself generated.

So in 2010 the Basel Committee on Banking Supervision published a set of principles for enhancing sound corporate governance practices at banking organizations. These principles set out best practices in corporate governance for banks.

The Basel Committee has since revised its original set of principles. This revision was published in July 2015, after consultation with the international banking community.

The revised guidance stresses the vital importance of effective corporate governance and promotes the importance of risk governance as part of a bank's overall corporate governance structure.

There are in all thirteen principles, which range from the bank board’s responsibilities, composition, structure; senior management, governance, risk management, compliance, audit compensation, disclosure right through to the role of bank supervisors.

So what major changes have taken place over the past five years?

The following five broad themes are evident in the revision.

1. The guidance has been expanded as regards the role of the board in overseeing the implementation of effective risk management systems.
2. Additional stress is placed on the need for the board to be competent as a group and for individual board members to devote enough time to their role on the board and to keep up-to-date of current banking developments.
3. Reinforces the guidance on risk governance. This also covers the risk management roles played by bank business units, risk management teams and internal audit. The importance of a sound risk “culture” is also addressed.
4. Bank supervisors are provided with guidance on how to evaluate the processes that banks use to select not only their board members but their senior management as well.
5. The guidance also recognizes that compensation schemes are a key part of the governance and incentive structure by which the bank board and its senior management transmit acceptable risk-taking behavior and strengthen the bank's operating and risk culture.

The Basel Committee stresses that these principles are relevant irrespective of whether or not a jurisdiction chooses to adopt the Committee’s regulatory framework. The board and senior management at each bank still have an obligation to pursue good governance.

As regards Systematically Important Financial Institutions (SIFIs), these organizations are expected to have the corporate governance structure and practices appropriate with their role in and potential impact on national and global financial stability.

The full document covering the revised principles can be downloaded directly from the BIS at http://www.bis.org/bcbs/publ/d328.pdf

Towards a Global FATCA? OECD, G20 Unanimously Endorse Global Automatic Information Exchange

From Mondaq -

“On October 29, 2014, through the OECD “Global Forum on Transparency and Exchange of Information for Tax Purposes,” both the OECD and G20 countries endorsed a new Standard for Automatic Exchange of Financial Account Information in Tax Matter. 59 countries are so-called “early adopters” and are committed to undertaking their first exchanges by 2017. 35 other countries (including Canada) have committed to undertaking their first information exchanges by 2018. The U.S. has agreed to participate in automatic information exchanges through its Foreign Account Tax Compliance Act (FATCA), pursuant to its bi-lateral Intergovernmental Agreements.”

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Fighting Corruption

Bribery directly damages your business and your reputation. However your business is not the only victim. The big losers are the government and the larger society, both of whom are severely undermined by the weakened rule of law and damaged economic and social development. As such, Governments worldwide are making anti-corruption programs an integral part of regulation and compliance.

The OECD and its member countries see the core principle in fighting corruption as rooted the principle of free and fair competition. Each bribe offered or accepted reduces this – it steals from the larger society.

The key to successfully fighting corruption is education and training together with continual reinforcement of the basic concepts and principles.

To this end a new 2-day training program “Fighting Corruption”, which is focused on anti-corruption compliance, is now available. This program is the product of months of labor by our team of compliance and risk management specialists.

Into this two-day program we have woven an exciting agenda that enables participants to understand three extremely important laws and conventions aimed at combating corruption. We examine the OECD Anti-Bribery Convention, the United State’s “Foreign Corrupt Practices (FCPA) Act”, and the United Kingdom’s “Anti-Bribery Act”; and then we show you how you build their requirements into you anti-corruption program.

This two-day intensive training course is a practical look at corruption and current anti-corruption practices at a level that will provide both a clear definition and broad guidelines as to how this scourge can be fought as well as a set of detailed issues and checklists to help make setting up your own anti-corruption program easier.

Key issues covered include;

• What corruption is and how to recognize it,
• How to set up your own anti-corruption program,
• Red Flags and other warning signs that point to corrupt practices,
• How to implement a process that will allow you to continually improve your anti-corruption measures without overwhelming your organization,
• Steps you can take to better understand your global corruption risks,
• The need for ongoing risk assessments and review, and
• Why third-party due diligence can make or break your program.

This new program is available from Citadel Advantage as an In-House Training Program.

Speaking about in-house have you ever taken a minute to think about the efficiencies and cost benefits that running a training program In-House can give you?

Why not spend just 5 minutes reading our short article “Road Trip or Staying Put? Why training in-house makes sense”. This puts the whole cost aspect into perspective and boils everything down to dollars and cents. You will be amazed by what you can save.

FATCA costs spiral beyond expectations

From Treasury Insider

“Only a third of financial institutions now believe that their FATCA compliance efforts will now be completed within budget, according to a new survey by Thomson Reuters.

Undermining the costs involved appears to be a common problem, with 27% of organisations surveyed saying that they expect their FATCA compliance spend in 2015 to be between $100,000 and $1m, compared to just 16% of those asked the same question at the beginning of the year. Over half (55%) expect the costs of meeting the new rules to exceed their original budget.

Last month, the UK and 50 other countries from the Organisation for Economic Co-operation and Development (OECD) signed up as early adapters of the Common Reporting Standard (CRS), an international agreement to create a new standard for the automatic exchange of information.

“The whole problem of FATCA has just become bigger,” commented Laurence Kiddle, managing director of corporate market EMEA for the tax and accounting business of Thomson Reuters.

“CRS is a game-changer. It dramatically widens the reporting scope and this puts massive strain on budgets. A financial institution needs to be able to identify the tax residence of each of their customers – not just whether or not they meet the definition of ‘American Person’ – and have the ability to report this to the relevant authorities. This increase in the scope, depth and complexity of reporting is a very significant challenge.”

Financial organisations will be required to submit FATCA reporting from the end of March 2015.”

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