The board needs to harness the work of the auditors as an independent check on the information received from management. I believe that this emphasis on the role of the board and senior management in developing and implementing an effective risk control environment will, with the help of independent audit and other control functions, result in better-managed banks. Culture The second “C” is culture. I believe that the increased responsibilities of the board of directors and senior management under Basel II will foster a culture of improved risk management. This notion underlies the second pillar of the new framework, which takes as its starting point that the board and senior management have an obligation to understand the bank’s risk profile and ensure that the bank holds sufficient capital against its risks. Supervisors, in turn, are responsible for reviewing the bank’s assessment to evaluate and determine whether that assessment seems reasonable. The key, in my view, is that risk awareness starts at the top of the organisation. The board and senior management cannot abdicate their responsibility to understand and manage the risks arising from the bank’s activities. I believe that this focus on sound risk management at the very top will help to set the tone throughout the bank that effective risk management is everyone’s job. Of course, this may also represent a cultural shift for supervisors. Basel II places a firm emphasis on taking a risk-based approach to supervision.
This does not mean that we can rest; banks are not immune from any of the factors that I have just described. Indeed, if we were to look closely at bank failures large and small over the years, I believe we would find that poor corporate governance lay at the heart of many of these failures. Why should we have higher expectations for the governance of banks than we have for other firms? Fundamentally, because banks must act in a way that promotes “confidence” to the public and the markets in general and, more specifically, to their primary stakeholders. Banks play a crucial role in the flow of capital within an economy and are charged with a special public trust to safeguard customers’ wealth. A stable and healthy banking system is critical to the long-term growth of an economy. Banking supervisors have long recognised the importance of good governance; supervision can not function properly if sound corporate governance is not in place. Experience underscores the need to have appropriate levels of accountability as well as sufficient checks and balances. For banking supervisors, although the range of topics that corporate governance may encompass is quite wide, the focus is mainly on those elements that relate to the manner in which the business and affairs of an organization are governed by its board and managers.