Banks and Corporate Merchant Banks Specialize in business

Banks and Corporate �Merchant Banks Specialize in business connected with bills of exchange �Acceptance of foreign bills �A merchant bank is a financial intermediary �Helps in transferring capital from those who possess it to those who need it

Banks and corporate �Investment banks require shares in limited companies on their own account �Not merely agents of their customers �Sometimes banks are established to handle specialized functions for particular industries i. e Industrial development bank of India, Export. Import Bank �Banks are critical component of economy

Why Corporate governance in Banks? ? �Banks exist because they are willing to take and manage risk �Protects the interests of depositors �This protection becomes a matter of paramount interest due to two reasons: 1. The depositors collectively entrust a very large sum of their hard-earned money to the care of banks 2. Depositors are very large in number and they are scattered and have little say in administration of banks

Why Corporate governance in Banks? ? �Banks deal in people’s funds and should, therefore act as trustees of depositors � in nutshell, the basic objective of governance in bank should first be protection of depositor’s interests and �Then be to optimize the shareholder’s interests � banking supervision cannot function effectively if sound corporate is not in place �Consequently, bank supervisors have a strong interest in supervisory experience underscores the necessity of having the appropriate levels of accountability and checks and balances within each other

Corporate Governance and the World Bank �The world bank report on corporate governance stress on principles on which it is based �These principles such as transparency, accountability, fairness, and responsibility which are universal in their application �Corporate governance is concerned with holding the balance between economic and social goals �Balance between individuals and community goals �The governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources

Corporate Governance and the World Bank �World bank reported points the way to the establishment of trust and encouragement of enterprise �It makes an important milestone in the development of corporate governance

Basel Committee on Corporate Governance �In 1988, the Bank for International settlements-based Basel Committee on banking supervision came out with regulations regarding the capital requirements for banks �The crux of Basel I requirements is the assignment of risk weights for different assets in bank’s book and aggregating the risk-weighted assets of which 8 percent was recommended as the capital of bank

Basel Committee on CG �From a banking industry perspective, corporate governance involves the manner in which the business and affairs of individual institutions are governed by their BODs, and senior management affecting how banks: �Set corporate objectives �Run day to day operations �Consider the interests of recognized stakeholders �Align corporate activities and behavior with applicable laws and regulations’ �Protect the interest of depositors

Basel Committee on CG �Published a paper on corporate governance in the banking industry �Supervisory experience underscored the need for having accountability and checks and balances within each bank to ensure sound corporate governance �In turn it will lead to more effective and meaningful supervision �Basel committee underscored the need for banks to set strategies for their operations

Basel Committee on CG �Basel committee also issued several papers on specific topics �These papers have highlighted the fact that the strategies and techniques that are basic to sound corporate governance include the following: �The corporate values, codes of conduct and standards of appropriate behavior �A well articulated corporate strategy to judge the success of overall enterprise and measuring the contribution of individuals �Clear assignment of resposibilities

Basel Committee on CG �Establishment of a mechanism for interaction and corporation among the board of directors, senior management and auditors �String internal control systems �Special monitoring of risk exposure �Financial and managerial incentives �Appropriate information flows internally to the public

Four important forms of oversight �Oversight by the board of directors or supervisory board �Oversight by individuals not involved in the day to day running of various business areas �Direct line supervision of different business areas �Independent risk management and audit functions

Sound Corporate Governance practices �Establishing strategic objectives and a set of corporate values that are communicated throughout the banking organization �Setting and enforcing clear lines of responsibility and accountability throughout the organization �Ensuring that board members are qualified for their positions’

Committees for banks �Risk assessment committee �Audit Committee �Compensation committee �Nomination committee

Sound Corporate Governance practices �Ensuring that there is appropriate oversight by senior management �Effectively utilizing the work conducted by internal and external auditors �Ensuring compensation approaches are consistent with bank’s ethical values, objectives, strategy and control environment �Conducting corporate governance in transparent manner

Ensuring sound corporate governance environment Can be ensured through �Government- through laws �Securities regulators, stock exchanges- through disclosure and listing requirements �Auditors- through audit standards on communication to board of directors, senior management and supervisors �Banking industry associations

The role of Supervisors �Should be aware of importance of corporate governance �Should expect bank to implement organizational structure that includes appropriate checks and balances �Ensure that senior management and board of directors are fulfilling their responsibilities �Ensure that bank is being properly governed �Must hold the board of directors accountable �Require that corrective measures be taken in a timely manner

The new Basel Capital Accord (Basel II) �Basel II rests on three pillars �Pillar I of the new capital framework revises the 1988 Accord’s guidelines by aligning the minimum capital requirements more closely to each bank’s actual risk of economic loss’ �Pillar II recognizes the necessity of exercising effective supervisory review of banks, internal assessment of their over all risk to ensure that bank management is exercising sound judgment and has set aside adequate capital for these risk

The new Basel Capital Accord (Basel II) �Pillar III leverages the ability of market discipline to motivate prudent management by enhancing the degree of transparency in bank’s public reporting �It sets out the public disclosures that banks must make that lend greater insight into the adequacy of their capitalization

Implementation of Basel II and its Impact �Survey by Federal Stability Institute showed that more than 100 countries would implement Basel II in next few years �It is also expected that Basel II will be fully implemented in Europe �The US has already announced that it would be made mandatory for the ten biggest banking groups

Implementation of Basel II and its Impact �Once implemented, Basel II has profound impact on the way banking is conducted worldwide �It could also lead to a shakeout in the industry �This could result in a spate of mergers worldwide, especially among international interactive banks in their struggle to remain competitive �Implementation of Basel II is imperative in context of emerging market economies

Implementation of Basel II and its Impact �Non implementation will result in �Adverse credit ratings �High borrowing costs �Consequents on the real economy �No country can afford to delay implementation of Basel II indefinitely

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