All in all, as of today, Codes of Best Practice on Corporate Governance set out principles within which values and governance rules should be set by the management of the institution, and in the final analysis, good Corporate Governance is looked to as being a key tool to be used in the overall risk management of institutions, irrespective of the nature of the business carried out by the institution. Why is good governance in the banking and financial system more important than any other sector? The Banking and financial sector is easily distinguishable from the others. A few distinguishing features stand out: •  Unlike normal business entities which are funded mainly through shareholders’ funds, banks’ business involves funds raised mainly through deposits. The business of raising public deposits places greater fiduciary responsibilities on the institution and its managers, since depositors’ funds need to be safeguarded in a special way. 2  BIS Review 24/2007  •  Banks perform as financial intermediaries by lending and investing the funds mobilized and funding economic activities of others. •  Banks are the agents of the payments system where they facilitate payments domestically and internationally, through various instruments such as bank accounts, fund transfers, credit cards, etc. •  Banks are able to undertake all such business operations as a result of public trust and faith in the stability and soundness of the banks in particular and the system in general.
The history on bank failures in many countries indicates that loss of public confidence in banks could be contagious and could easily lead to systemic banking crisis situations. Overall, the banking business is the key for monetary conditions in a country. Bank deposit and lending business determines the supply, cost and availability of money. Money is created by the banking system through the legal tender issued by the Central Banks and/or Monetary Authorities. Since sight money created is payable by banks at any time through legal tender and technically, the banking system does not have funds adequate for meeting all such created money at any particular point of time. Banking business thus casts a huge responsibility on the monetary authorities to facilitate, regulate, and protect the banking and payments system. Weak Corporate Governance (CG) can contribute to financial instability and that would increase the risk profile of companies in the corporate sector and expose the banks and financial institutions to a greater risk. In a more direct sense, weaknesses in CG arrangements in banks and financial institutions reduce their capacity to identify, monitor and manage their business risk and that can result in poor quality lending and excessive risk-taking by the financial institutions. Depending on the resilience of the financial institutions and markets, these risks have the potential to spread across the wider financial system. Needless to say that inadequate CG can also lead to a poor credit culture, excessive exposure concentration, poor management of interest risk/exchange risk and inadequacies in the management of connected exposures.