However, the Basel Committee goes further and describes the role of supervisors in Corporate Governance by adding new parameters as well. These are: •  Supervisors should provide guidance to banks on sound Corporate Governance and the proactive practices that should be in place. •  Supervisors should consider Corporate Governance as one element of depositor protection. •  Supervisors should determine whether the bank has adopted and effectively implemented sound Corporate Governance policies and practices. •  Supervisors should assess the quality of banks’ audit and control functions. •  Supervisors should evaluate the effects of the bank’s group structure. •  Supervisors should bring to the board of directors’ and management’s attention, problems that they detect through their supervisory efforts. According to Basel recommendations, Corporate Governance should be promoted by other stakeholders as well.
Some of these risks, singularly or collectively, can lead to potential insolvency and financial instability. In more recent times, the regulators world over have introduced prudential norms on single borrower exposures, group exposures and concentration of credit risks. The underlying principles of such norms indicate some degree of compulsion on the observance of CG principles. To further augment such prudential norms, regulators may even consider introducing mandatory disclosures by banks and financial institutions. Where does good governance fit in this scenario? Obviously, Corporate Governance is now identified and acknowledged as a powerful tool to generate trust and confidence in an institution. In that context, good Corporate Governance is essentially important for banks, because such institutions (a) deal with funds raised from the public; (b) are likely to encounter greater risks including frauds and failure; and (c) if such frauds or failures occur in such institutions, it may pose issues relating to public confidence in the financial system stability itself. All these reasons have led to Banks tending to depend upon risk management practices based on principles of prudence rather than complying with only minimum requirements. It is also as a result of such realization that many stakeholders and regulators are now consciously looking towards good Corporate Governance, as one of the prime instruments in its overall effort to maintain financial system stability. In Sri Lanka, the CBSL has already issued a voluntary code of best practice on Corporate Governance to banks.