the corporate governance of banks

Chapter 1

INTRODUCTION

The Corporate Governance of Banks

The dominant model of corpora te governance in law

and economics i s tha t the corpora t ion i s a “complex se t of

expl ic i t and impl ic i t cont rac ts .” In o ther words , one

should v iew the corpora t ion as nothing more (or less) than

a se t of cont rac tua l a r rangements among the var ious

c la imants to the product and earnings genera ted by the

bus iness .

Every bus iness organiza t ion , inc luding the corpora t ion ,

represent nothing more than a par t icular ‘s tandard form’

cont rac t . The very jus t i f ica t ion for having d i f ferent type

of bus iness organiza t ions i s to permi t inves tors ,

ent repreneurs , and o ther par t ic ipants in the corpora te

enterpr ise to se lec t the organiza t ion des ign they prefer

f rom a menu of s tandard-form cont rac ts . The v i r tue of the

s tandard-form arrangement charac ter i s t ic of modem

corpora te enterpr ise to take advantage of an ar rangement

tha t su i t s the needs of inves tors and ent repreneurs in a

wide var ie ty of s i tua t ions . On a theore t ica l level , the

problems of corpora te governance resul t f rom the

exis tence of incomple te cont rac ts . The ru les of corpora te

governance are a imed a t resolving the gaps le f t in these

cont rac ts in ways consis tent wi th maximizing the va lue of

the f i rm. In the case of shareholders cont ingent cont rac ts

in the Uni ted Sta tes , these background ru les are ca l led

f iduciary dut ies . The economic jus t i f ica t ion for having

f iduciary dut ies i s s t ra ight forward: Fiduciary dut ies are

the mechanism invented by the legal sys tem for f i l l ing in

the unspeci f ied te rms of shareholders cont ingent

[cont rac ts ] . The presence of f iduciary dut ies a t tempts to

address these cont ingencies . In th is gap-f i l l ing ro le ,

f iduciary dut ies essent ia l ly ca l l on d i rec tors to work hard

and to promote the in teres ts of shareholders above the i r

The duty of care requi res tha t d i rec tors exerc ise

reasonable care , prudence , and d i l igence in the

management of the corpora t ion . Direc tor l iabi l i ty for a

breach of the duty of care may ar i se in two discre te

contexts . F i rs t , l iab i l i ty may f low f rom “ i l l advised or

negl igent” dec is ion –making. Second, l iabi l i ty may be the

resul t of fa i lure of the board to moni tor in “c i rcumstances

in which due a t tent ion would , a rguably , have prevented

the loss .” ‘Signi f icant ly , in both c lasses of cases ,

d i rec tors a re ent i t led to re ly on informat ion, repor ts ,

s ta tement , and opinions prepared by the company’s

of f icers and di rec tors as wel l as outs ide consul tants .

Separat ion of Ownership and Control

The problem of corpora te governance i s rooted in the

Ber le-Means (1932) paradigm of the separa t ion of

shareholders ‘ownership and management’s cont ro l in the

modern corpora t ion . Agency problems occur when the

pr inc ipa l (shareholders) lacks the necessary power or

informat ion to moni tor and cont ro l the agent (managers)

and when the compensat ion of the pr inc ipa l and the agent

i s not a l igned. Severa l fac tors work to reduce these

pr inc ipa l -agency cos ts , the “market for managers”

penal izes management teams tha t t ry to advance the i r own

in teres t a t shareholders’ expense .

On poss ib le so lu t ion to the agency cos t problem is to g ive

shareholders d i rec t cont ro l over management . This i s the

case when management and shareholders are the same

par ty and cont ro l r ight automat ica l ly res t in the hands of

shareholders .

Al though these are potent ia l ly powerful concerns about

the ef fec t iveness of shareholder cont ro l , recent research

sugges ts tha t the more fundamenta l t rade-offs may guide

the des i red involvement of shareholders in corpora te

cont ro l . Burkhar t Gromb, and Panunzi (1997) , for example

show tha t d i rec t shareholder cont ro l may discourage new

in i t ia t ives on the par t of managers .

These observat ions are consis tent wi th rea l -wor ld

corpora te governance ar rangements , which a lmost wi thout

except ion l imi t d i rec t shareholder involvement . In some

cases –par t icular ly in the Uni ted Sta te- th is i t fac i l i ta te by

re la t ive ly d ispersed ownership .

Banks are organized in a var ie ty of ways , f rom s tand-

a lone corpora te ent i t ies and s ingle bank holding

companies to mul t ip le bank holding companies and the

pos t -Gramm- Leach –Bl i ley Act (GLBA) divers i f ied

holding company.

This d ivers i f ied s t ruc ture permi ts such holding companies

to reduce or e l iminate the f i rm- speci f ic r i sks associa ted

wi th the banks they own. The GLBA s igni f icant ly

enhanced th is d ivers i f ica t ion abi l i ty by permi t t ing bank

holding companies and cer ta in o ther res t r ic ted f i rms to

become a new ent i ty : a f inancia l holding company (FHC)

This d ispers ion of ac t iv i ty throughout the holding

company s t ruc ture a lso g ives incent ives to bank holding

companies to put more r i sky behavior in the i r federa l ly

insured banks .

Special Problems of Banks

The discuss ion so far has focused on a genera l overview

of corpora te governance . We now know turn to speci f ic

problems of banks and a t tempt to address why the scope of

the dut ies and obl iga t ions of corpora te of f icers and

di rec tors should be expanded in the case of banks . Our

argument i s tha t the specia l corpora te governance

problems of banks weaken the case for making

shareholders the exclus ive benef ic iar ies of f iduciary

dut ies . Our focus here i s on es tabl i sh ing why banks are

not l ike o ther f i rms and thus should be t rea ted d i f ferent ly .

The Liquidi ty Product ion Role of Banks

Many di f ferent types of f i rms extend credi t . S imi lar ly , a

var ie ty of non-bank f i rms most notably money market

mutual funds and non-bank credi t card companies , of fer

the equivalent of a check t ransac t ion account . What

d is t inguished banks f rom other f i rms i s the i r capi ta l

s t ruc ture , which i s unique in to ways . F i rs t , banks tend to

have very l i t t le equi ty re la t ive to o ther f i rms. Second,

banks , l iabi l i t ies a re la rge ly in the f rom of deposi t s ,

which are avai lable to the i r c redi tors /deposi tors on

demand, whi le the i r asse ts of ten take the f rom of loans

tha t have longer matur i t ies (a l though increas ingly ref ined

secondary market have mi t iga ted to same extent mismatch

in the te rm s t ruc ture of banks’ asse ts and l iabi l i t ies) .

Thus , the pr inc ipa l a t t r ibute tha t makes banks as f inancia l

in termediar ies ‘specia l ’ i s the i r l iquidi ty product ion

funct ion . By holding i l l iquid asse ts and i ssuing l iquid

l iabi l i t ies , bank crea tes l iquidi ty for the economy.

The l iquidi ty product ion funct ion may cause a col lec t ive-

ac t ion problem among deposi tors because banks keep only

a f rac t ion of deposi t s on reserve a t any one t ime.

Deposi tors because banks keep only a f rac t ion of deposi t s

on reserve a t any one t ime. Deposi tors cannot obta in

repayment of the i r deposi t s s imul taneously because the

bank wi l l not have suff ic ient funds on hand to sa t i s fy a l l

deposi tors a t once .

The Deposi t Insurance Fund

In the wake of the mass fa i lure of deposi tory ins t i tu t ions ,

Congress passed the Banking Act of 1933 es tabl i sh ing the

Federa l Deposi t Insurance Corpora t ion (FDIC) and giv ing

the federa l government the power to insure deposi t s in

qual i f ied banks . The crea t ion of federa l deposi t insurance

has been t remendously ef fec t ive in prevent ing bank runs

and keeping the fa i lure of individual banks f rom affec t ing

the la rger economy. Deposi t insurance “has succeeded in

achieving what had been a major objec t ive of banking

reform for a t leas t a century , namely the prevent ion of

banking panics .”

Despi te the pos i t ive ef fec t of FDIC insurance on

prevent ing bank runs , the implementa t ion of deposi t

insurance poses a regula tory cos t of i t s own-i t g ives the

shareholder and manager of insured banks incent ives to

engage in excess ive r i sk- taking.

The problem of mora l hazard i s exacerbated in s i tua t ions

where a bank i s a t of near insolvency. In such a s i tua t ion ,

the shareholders have a s t rong incent ive to increase r i sk

because they can a l loca te the i r losses to th i rd-par t ies

whi le s t i l l rece iv ing any gains tha t might resul t f rom the

r i sky behavior .

Asset Structure and Loyalty Problems

The presence of federa l insurance fund a lso increased the

r i sk of f raud and se l f -deal ing in the banking indust ry by

reducing incent ives for moni tor ing . In the 1980, i t was

es t imated tha t f raud and se l f -deal ing t ransac t ion were

“apparent” in as many as one- th i rd of today’s bank

fa i lures . 28 A s imi lar s ta t i s t ic shows tha t be tween 12990

and 1991, ins ider lending cont r ibuted to 175 of 286bank

fa i lures ,29 Such behavior , of course , i s a poss ib i l i ty in

any large f i rm, s ince i t i s ineff ic ient for owners to

moni tor a l l employees a t a l l t imes . These sor ts of

problems are par t icular ly acute in f inancia l ins t i tu t ions ,

however , because of the la rge por t ion of the i r asse t he ld

in h ighly l iquid form.

The same regula tory s t ruc ture tha t c rea tes a problems i f

excess ive r i sk- taking by banks a lso leads to a reduct ion in

the normal levels of moni tor ing wi th in the f i rm, resul t ing

in a h igher inc idence of bank fa i lures due to f raud.

Shareholders have an incent ive to moni tor to prevent f raud

and se l f -deal ing in banks , but such moni tor ing i s

notor ious ly ineffec t ive in many cases because individual

shareholders rare ly have suff ic ient incent ives to engage in

moni tor ing because of col lec t ion-ac t ion problems.

One might a rgue tha t FDIC insurance s imply replaces one

se t of c redi tors : deposi tors , wi th another se t of c redi tors :

s ta te and federa l regula tors . These o ther c redi tors might

more f inancia l ly sophis t ica te than rank-and – f i le

deposi tors and thus appear in a be t te r pos i t ion to conduct

the moni tor ing necessary to prevent bank f raud.

Regula tors have f ive main enforcement tools : cease and

des is t powers , removal powers , c iv i l money penal ty

powers , wi thdrawal or suspension of federa l deposi t

insurance power and prompt correc t ive ac t ions powers .

Cease and des is t powers genera l ly address both unsafe and

unsound banking as wel l as v io la t ions of the law or

regula t ions governing deposi tory ins t i tu t ions .

Federa l banking agencies a lso have to impose c iv i l

monetary penal t ies agains t a banking ins t i tu t ion and i t s

a f f i l ia tes . Prompt correc t ive-ac t ion powers are a lso

t r iggered by capi ta l requi rements , and these a l low

regula tors to reach every s igni f icant opera t ional aspect of

a bank. Fina l ly , the FDIC has the author i ty to revoke a

bank’s deposi tor insurance i f necessary , Never the less ,

replac ing pr iva te- sec tor c redi tors wi th publ ic-sec tor

regula tors as the f i rs t l ine of defense agains t bank f raud

and se l f -deal ing presents two problems. Pr iva te-sec tor

c redi tors have s t ronger incent ives than publ ic-sec tor

regula tors to moni tor c lose ly for f raud and se l f -deal ing .

Chapter 2

IS CORPORATE GOVERNANCE DIFFERENT FOR

BANK HOLDING COMPANIES ?

The governance s t ruc ture in banks should a im a t

enhancing Accountabi l i ty and ef f ic iency. Corpora te

governance in Banks i s d i f ferent f rom tha t of

manufac tur ing companies on account of number of fac tors

Governance reforms requi red for banks should be indust ry

Composi t ion and compared to the board in manufac tur ing

companies . Fur ther research on corpora te Governance in

banks would de termine the opt imal board Size tha t

maximizes shareholder va lue subjec t to the Const ra in ts

imposed on these f i rms.

Shle i fer and Vishny def ine corpora te governance as

dea l ing “wi th the ways tha t suppl iers of f inance to

corpora t ions assure themselves of ge t t ing a re turn on the i r

inves tment” i f managers opera te independent ly , they may

make f inancing, inves tment , and payout dec is ions tha t a re

de t r imenta l to shareholders . The governance of banking

f i rms may be d i f ferent f rom tha t unregula ted , non-

f inancia l f i rm for severa l reasons . For one , the numbers of

par t ies wi th a s take in an ins t i tu t ion’s ac t iv i ty compl ica tes

the governance of f inancia l ins t i tu t ions . As a resul t , the

board of d i rec tors of a banking f i rm is p laced in a cruc ia l

ro le in i t s governance s t ruc ture . Al though the boards of

BHCs are ass igned the same legal responsib i l i t ies as o ther

boards , regula tors have p laced addi t ional expecta t ions on

bank, as opposed to BHC boards tha t de l inea te the i r

responsib i l i t ies even fur ther .

These and other d i f ferences in the opera t ion of f inancia l

and non-f inancia l ins t i tu t ions have led many to v iew

regula tory overs ight of the indust ry as a subs t i tu te for

corpora te governance as less c r i t ica l to the conduct and

opera t ion of banking f i rms. Other argue tha t e f fec t ive

supervis ion could lead to board overs ight becoming a

more cr i t ica l e lement of banking f i rm governance tha t i s ,

these could be complementary forces .

Thus , a l though in non-f inancia l f i rm s tock opt ions may be

appropr ia te ins t ruments to provide incent ive for managers

to crea te va lue , as wel l as to protec t the credi tors of

d is t ressed companies ; the opt ions may conf l ic t wi th pol icy

objec t ives tha t seek to protec t the non-shareholding,

s takeholders , such as deposi tors and taxpayers in f inancia l

f i rms.

Resolut ion of a f inancia l ly d is t ressed condi t ion or

out r ight insolvency in the banking indust ry can a lso have

an impor tant e f fec t on top manager’s incent ive s t ruc tures .

In an unregula ted envi ronment , f inancia l d is t ress

genera l ly leads to reorganiza t ion and in most cases ; the

incumbent top manager i s g iven the oppor tuni ty to turn

the corpora t ion around.

Board Size and Composi t ion

An average of e ighteen d i rec tors makes up each BHC

board , a l though there i s a wide d is t r ibut ion of board s ize

in the sample (a minimum of e ight d i rec tors and a

maximum of th i r ty-s ix) . Over the sample per iod, i t i s

apparent tha t banking f i rm boards are becoming smal ler .

An average board in1999had 17 d i rec tors (median: 18) ,

down f rom 20.3 in 1986 (median: 20) . The t rend i s

cons is tent wi th the f inding of Adams and Mehran (2002) ,

who examine BHC board s ize over the 1959-99 per iods .

As Table 3 indica tes , an average S&P manufactur ing f i rm

had s ix fewer d i rec tors than an average BHC did over the

sample per iod. Booth , Cornet t , and Tehranian (2002) a lso

provide evidence tha t banks have la rger boards , us ing a

sample of the 100 larges t BHCs and the 10-0 la rges t

manufac tur ing f i rms in 1999.

Since such regula tory res t r ic t ion genera l ly apply to board

s t ruc ture a t the bank level and not the holding level ,

which i s the focus of th is s tudy, the regula tory

envi ronment a lone does not expla in BHC board s ize and

composi t ion However , regula t ion may have an indi rec t on

the s t ruc ture of BHD board to the extent tha t i t i s

inf luenced by the s t ruc ture of the board of the BHC’S lead

bank and other subs id iary banks .

CEO Compensat ion

The increased use of s tock opt ion in execut ive

compensat ion packages in banking fo l lows the pa t te rn of

o ther indust r ies even though the growth and level of s tock

opt ion use are s igni f icant ly lower than in manufac tur ing

f i rms.

One potent ia l explanat ion for the lower re l iance on s tock

opt ion in the banking indust ry found in smi th and wat ts

(1992) , who show tha t -growth indust r ies re ly less on

s tock-based compensat ion (a lso see Mehram [1992]) .

Smith and Wat ts sugges t tha t board can observe , moni tor ,

and evaluate the ac t ion of CEOs of f i rms and indust r ies

wi th low-growth oppor tuni t ies much eas ier than they can

in f i rms or indust r ies wi th h igh-growth oppor tuni t ies .

Thus , board in such indust r ies should re ly more on f ixed

ra ther than on s tock-based compensat ion .

Final ly , g iven the low s tock-re turn vola t i l i ty in the

banking indust ry , a l l e l se equal , the va lue of s tock opt ion

in banks wi l l be lower . To compensate the CEO for a

g iven dol lar va lue of granted opt ions , the bank has to g ive

a la rger number of opt ion re la t ive to those g iven by an

average manufactur ing f i rm.

CEO Ownership

CEO ownership across BHCs and manufactur ing f i rms may

di f fer for severa l reasons . One can argue tha t the smal ler

f low of opt ions to bank holding company CEOs leads to

smal ler ownership . There may a lso be are a mechanica l

i ssue inf luencing the percentage of ownership . S ince

BHCs are s igni f icant ly more leveraged and have more

asse ts than manufactur ing f i rm, ownership levels across

the two types of f i rms may not be comparable .

An impor tant ins ight of Modigl iani and in a word wi th

corpora te taxes i s tha t the case f low c la ims of an

ownership s take in an a l l -equi ty f i rm di f fer f rom those

associa ted wi th the percentage of equi ty ownership of an

ident ica l f i rm wi th a pos i t ive debt level .

Block Ownership

To compi le our s ta t i s t ics on b lock ownership , we re ly on

the CDA/Spect rum Ins t i tu t ional Holding Database of

Thomson Financia l . Ins t i tu t ional shareholding i s our

proxy for moni tor ing by b lockholders . However , the

corpora te governance l i te ra ture a lso emphasizes the

impor tance of the ident i ty of the ident i ty of b lockholders

and individuals , as opposed to jus t the s ize of ins t i tu t ion

holdings .

Bank-aff i l ia ted ins t i tu t ions are unl ike ly to moni tor the

BHC over the course of these ac t iv i t ies ; therefore , to

const ruc t our summary s ta t i s t ics on ins t i tu t ion holders , we

dele ted a l l bank-aff i l ia ted ins t i tu t ion f rom the l i s t of

ins t i tu t ion holders of our BHCs in a l l year . We a lso

examined the ident i ty of ins t i tu t ional holding shares of

manufac tur ing f i rms; however , found very few cases of

b lockholders tha t were af f i l ia ted wi th manufactur ing

f i rms.

Chapter 3

BASEL II AND ROLE OF PILLAR 2: ENSURING

HIGH STANDARDS OF CORPORATRE GOVERNANCE

A. The Basel Committee

The Basel Commit tee on Banking Supervis ion i s a

commit tee , of banking supervisory author i t ies , es tabl i shed

by the Centra l Bank Governors of the G10 developed

countr ies in 1975. The commit tee in 1988 in t roduced the

concept of capi ta l Adequacy Framework, Known as Base l

Capi ta l Accord , wi th a minimum capi ta l adequacy of 8

percent . This accord has been gradual ly adopted not only

in member countr ies but a lso in more one hundred o ther

countr ies , inc luding India .

B. Basel II : The New Basel Capital Accord

The commit tee i ssued a consul ta t ive document t i t led “The

New Basel Capi ta l Accord” in Apr i l2003, to replace the

1988 Accord , Which re-enforce the need for capi ta l

adequacy requi rements under the current condi t ions . This

accord i s commonly known as Base l I I and i s current ly

under f ina l iza t ion . Base l I I wi l l be appl ied on a

consol ida tes bas is to in ternat ional ly ac t ive banks .

However , supervisors are requi red to tes t tha t individual

banks are adequate ly capi ta l ized on a s tand – a lone bas is

a lso . Base l I I i s based on three Pi l la rs .

P i l la r 1 – Minimum Capi ta l Requirements .

Pi l la r 2 – Supervisory Review Process .

Pi l la r 3 – Market Disc ip l ine .

Pi l la r 1 d iscusses the ca lcula t ion of the to ta l minimum

capi ta l requi rements for c redi t , market and opera t ional

r i sks and mainta ins the level of minimum capi ta l adequacy

a t 8 percent . P i l la r 2discussed the key pr inc ip les of

supervisory review, r i sk management guidance and

supervisory t ransparency and accountabi l i ty wi th respect

to banking r i sks . P i l la r 3 complements Pi l la r 1 and 2 by

encouraging market d isc ip l ine through enhanced

disc losures by banks to enable market par t ic ipant ’s asses

the capi ta l adequacy of banks .

D. Enhancing Corpora te Governance in Banks

The Basel commit tee had i ssued, in August 1999, a

guidance paper ent i t led “Enhancing Corpora te Governance

for Banking Organiza t ions” to supervisory author i t ies

Worldwide to ass is t them in promot ing the adopt ion of

sound corpora te governance prac t ices by banks in the i r

countr ies . The key fea tures of th is guidance are d iscussed

here .

Importance of Corporate Governance for Banks

Banks are a c r i t ica l component of any economy. They

provide f inancing for commercia l enterpr ises , bas ic

f inancia l services to a broad segment of the popula t ion

and access to payments sys tems. From a banking indust ry

perspect ive , corpora te governance involves the manner in

which the i r boards of d i rec tors and senior managements

govern the bus iness and af fa i rs of individual banks ,

a f fec t ing how banks .

Set the i r corpora te objec t ive ;

Run day- to-day opera t ions ;

Consider the in teres ts of var ious s takeholders ;

Align corpora te ac t ives wi th the expecta t ion tha t

bank wi l l opera te in a safe and sound manner and in

compl iance wi th appl icable law and regula t ions ; and

Protec t the in teres t of deposi tors .

II . Sound Corporate Governance Pract ices for Banks

The Prac t ices ment ioned below are cr i t ica l to any

corpora te governance process in banks:

Establ i sh ing s t ra tegic objec t ives and a se t of corpora te

va lues communica ted throughout the organiza t ion .

St rong r i sk management funct ions independent of bus iness

l ines , in ternal cont ro l sys tems, in ternal and external audi t

funct ions and other cheeks and balance .

Specia l moni tor ing of r i sk exposures where conf l ic ts

of in teres ts a re l ike ly to be par t icular ly grea t ,

inc luding bus iness re la t ionships wi th borrowers

af f i l ia ted wi th the banks .

Set t ing and enforc ing c lear l ines of responsib i l i ty

and accountabi l i ty .

Ensur ing tha t banks’ board members are qual i f ied for

the i r pos i t ions , have a c lear unders tanding of the i r

ro le in corpora te governance and are not subjec t to

under inf luence .

Ensur ing tha t there i s appropr ia te overs ight by senior

management .

Ensur ing tha t compensat ion sys tems are consis tent

wi th the banks , objec t ives and cont ro l envi ronment .

Conduct ing corpora te governance t ransparent ly .

Flow of appropr ia te informat ion in ternal ly and to the

publ ic .

III . The Role of Supervisory Authori t ies in Ensuring

Effect ive Corporate Governance in Banks

Supervisors should be aware of the impor tance of

corpora te governance and i t s impact on corpora te

performance . Supervisors should be a t tent ive to any

warning s igns of de ter iora t ion in the management of the

banks ac t iv i t ies . They should consider i ssuing guidance to

banks on sound corpora te governance and the proact ive

prac t ices tha t need to be in p lace .

F. Corporate Governance for the Internal Rat ings-

based (IRB) Approach to Credit Risk as per Pert 2

Pi l lar 1

I IRB Approach [ In ternal Rat ing –based]

Internal r i sk ra t ings are an impor tant tool in moni tor ing

credi t r i sk . In ternal r i sk ra t ings should be adequate to

suppor t the ident i f ica t ion and measurement of r i sk f rom

a l l c redi t r i sk and capi ta l adequacy Subjec t to cer ta in

minimum condi t ion and disc losure requi rements , banks

tha t qual i fy for the IRB approach may re ly on the i r own

in ternal es t imates of r i sk components inc lude measures of

the probabi l i ty of Defaul t (PD) Loss Give defaul t (LGD)

the Exposure a t Defaul t (EAD) and ef fec t ive matur i ty .

G. The second pi l lar “supervisory review process”: I ts

role in Ensuring High Standards of Corporate

Governance

Par t 3 of Base l l l dea ls wi th the i r impor tance of

supervisory review, i t s key pr inc ip les , speci f ic i ssues to

be addressed under the supervisory review process and

supervisory t ransparency and accountabi l i ty i t se l f in

ensur ing ef fec t ive corpora te governance .

Importance of Supervisory Review

The supervisory review process of Base l l l i s in tended not

only to ensure tha t banks have adequate capi ta l to suppor t

a l l the r i sk in the i r bus iness , but a lso to encourage banks

to develop and use be t te r r i sk .

This in terac t ion i s in tended to fos ter an ac t ive d ia logue

be tween banks and supervisors such tha t when

def ic iencies are ident i f ied , prompt and decis ive ac t ion can

be taken to reduce r i sk or res tore capi ta l .

II Four Key principles of supervisory Review

Principle 1

The f ive main fea tures of such a r igorous process are as

fo l lows:

1. Board & Senior Management overs ight

A sound r i sk management process i s foundat ion for an

ef fec t ive assessment of the adequacy of a bank’s

capi ta l pos i t ion . The analys is of bank’s current and

fu ture capi ta l requi rements in re la t ion to s t ra tegic

objec t ives i s a v i ta l e lement of the s t ra tegic p lanning

process .

The bank’s board should ensure tha t management

es tabl i shes a f ramework for assess ing the var ious r i sks , to

the bank’s capi ta l and moni tor ing compl iance wi th

in ternal pol ic ies . I t should suppor t s t rong in ternal

cont ro ls and wri t ten pol ic ies and ensure tha t a re

ef fec t ive ly communica ted throughout the bank.

2. Comprehensive Assessment of Risk

All mater ia l r i sks faced by banks should be

addressed in the capi ta l assessment process . Whi le

not a l l r i sk can measured prec ise ly , an adequate and

comple te model should be developed es t imate the

var ious r i sk , such as , c redi t r i sk , opera t ional r i sk ,

in teres t ra te r i sk , l iquidi ty r i sk and o ther r i sk l ike

reputa t ion and s t ra tegic r i sk .

3. Monitoring and Report ing

The bank should es tabl i sh an adequate sys tem for

moni tor ing and repor t ing r i sk exposures in order to :

Evaluate the level and t rends of mater ia l r i sks and

the i r a f fec t on capi ta l levels ;

Evaluate the reasonableness of key assumpt ions used

in the capi ta l assessment measurement sys tem;

Determine tha t the bank hold suff ic ient capi ta l

agains t the var ious r i sk in compl iance wi th

es tabl i shed capi ta l adequacy goals ; and

Assess the i r fu ture capi ta l requi rement based on the

r i sk prof i le and make necessary adjus tments to the

s t ra tegic p lan .

4. Internal Control Review

The banks should regular review the fo l lowing aspects of

the i r sys tem of in ternal cont ro l to ensure wel l -ordered

conduct of bus iness : appropr ia teness of the capi ta l

assessment process ; ident i f ica t ion of la rge exposures and

r i sk concent ra t ions ; accuracy and comple teness of da ta

inputs in to the assessment process ; va l id i ty of scenar ios

used in the assessment process ; and s t ress tes t ing and

analys is of assumpt ions and inputs .

Principle 2

Review of Adequacy of Risk Assessment

Supervisors should assess the degree to which in ternal

ta rge ts and processes incorpora te a l l mater ia l r i sks faced

by the banks . Supervisors should a lso review the adequacy

of r i sk measures used in assess ing in ternal capi ta l

adequacy and the extent to which these r i sk measures are

used opera t ional ly in se t t ing l imi ts . Supervisors should

consider the resul t s of sens i t iv i ty analyses and s t ress tes ts

conducted by the banks and how these resul t s re la te to

capi ta l p lans .

Assessment of Capital Adequacy

Supervisors should review the banks processes to

de termine tha t the ta rge t levels of capi ta l chosen are

comprehensive and re levant to the current opera t ion

envi ronment , a re proper ly moni tored by senior

management , the composi t ion of capi ta l i s appropr ia te for

the banks’ bus iness and the extent to which the banks have

provided for unexpected events in se t t ing the i r capi ta l

levels .

Assessment of the control Environment

Supervisors should consider the qual i ty of the banks’

management informat ion sys tems; the manner in which

bus iness r i sk and ac t iv i t ies a re aggregated and

management’s record in responding to emerging or

changing r i sks . They should a lso consider the external

fac tors l ike bus iness cycle ef fec ts and the macroeconomic

envi ronment in de termining the capi ta l levels .

Supervis ion Act ion

Having carr ied out the review process descr ibed above,

supervisors should take appropr ia te ac t ions , such as those

se t out under Pr inc ipa ls 3 and 4 be low, i f they are not

sa t i s f ied wi th The resul t of the bank’s own r i sk

assessment and capi ta l a l loca t ion .

Principle 3

Supervis ion should requi re banks to opera te wi th a buffer ,

over and above the Pi l la r1 capi ta l requi rement , for a

number of reasons .

A large number of banks prefer to be h ighly ra ted by

in ternat ional ly recognized ra t ing agencies .

In the normal course of bus iness the type and volume of

ac t iv i t ies keep on changing as wel l as the d i f ferent r i sk

requi rements caus ing f luc tua t ions in the overa l l capi ta l

ra t io .

I t may be cos t ly for banks to ra ise addi t ional capi ta l

dur ing emergency need.

I f i t so happens , to fa l l be low minimum regula tory capi ta l

requi rements i s a mat ter of ser ious concern for banks .

Among other methods , the supervisors may se t t r igger and

targe t capi ta l ra t ios or def ine ca tegor ies above minimum

ra t ios for ident i fy ing the capi ta l iza t ion level of the banks .

III Speci f ic Issues to be Addressed under the

Supervisory

Review Process

1 . Interest Rate Risk

I f supervisors de termine tha t banks are not holding

capi ta l commensura te wi th the level of in teres t ra te r i sk ,

they must requi re the banks to reduce the i r r i sk , to hold a

speci f ic addi t ional amount of capi ta l or a combinat ion of

the two.

2. Operat ional Risk

The Supervisors should examine whether the capi ta l

requi rement genera ted by the Pi l la r 1 ca lcula t ion g ives a

cons is tent p ic ture of the individual bank’s opera t ional r i sk

exposure , for example , in compar ison wi th o ther banks of

s imi lar s ize and opera t ions .

3. Credit Risk

Stress Tests under IRB : A bank should ensure tha t i t has

suff ic ient capi ta l to meet the Pi l la r 1 requi rements and the

resul t s , in case of a def ic iency, of the credi t r i sk s t ress

tes t performed as par t of the Pi l la r 1IRB minimum

requi rements . Supervisors may review how the s t ress tes t

has been carr ied out and in case of a shor t fa l l , reac t

appropr ia te ly .

Residual r isks : Supervisors should requi re banks to have

in p lace appropr ia te and ef fec t ive wri t ten CRM pol ic ies

and procedures in order to cont ro l the res idual r i sks , such

as . Inabi l i ty to se ize or rea l ize in t imely manner col la tera l

p ledged, refusa l or de lay by a guarantor to pay and

ineffec t iveness of untes ted documenta t ion .

Securi t izat ion: Fur ther to the Pi l la r 1 pr inc ip le tha t banks

should take account of the economic subs tance of

t ransac t ions in the i r capi ta l adequacy determinat ion ,

supervisors should moni tor whether banks have done so

adequate ly . As a resul t , regula tory capi ta l t rea tments for

speci f ic secur i t iza t ion exposures may exceed those

speci f ied in

Pi l la r 1 . The supervisors wi l l have to address the key

i ssues involving secur i t iza t ion t ransac t ions such as

s igni f icance of r i sk t ransfer , market innovat ions ,

provis ion of impl ic i t suppor t , f i r s t loss credi t

enhancements , ca l l provis ions and ear ly amort iza t ion .

Chapter 4

BANK PERFORMANCE AND CORPORATE

GOVERNANCE

Financial Condit ion of US Banks

Last year was except ional in many respects , wi th the

Uni ted Sta tes s l ipping in to a recess ion, the September

te r ror is t a t tacks , the s tock market dec l ines , and a l l of the

re la ted events . In response , the Federa l Reserve reduced

in teres t ra tes a t every meet ing of the Federa l Open Market

Commit tee in 2001 and an addi t ional three t imes be tween

meet ing , for a to ta l of e leven ra te cutes accumula t ing to

475 bas is points .

The d i rec t e f fec t of the pas t year’s s t ressful events was

pa inful enough. In addi t ion , abus ive account ing and

corpora te governance prac t ices made condi t ions worse , as

la rge corpora te bankruptc ies imposed subs tant ia l losses on

inves tors , lenders , and employees .

Throughout th is per iod the US banking sys tem remained

s t rong, repor t ing cont inuing record earnings and

prof i tabi l i ty , despi te a s l ip in asse t qual i ty . Dur ing the

f i rs t ha l f of th is year , US insured commercia l banks

earned more than $44.5 b i l l ion and an annual ized re turn

on asse ts of 1 .37 percent .

Net in teres t income was the pr imary dr iver of increased

revenue, despi te a notable dec l ine in commercia l loan

volume. Loans loss provis ions remained re la t ive ly h igh by

the s tandards of most of the pas t decade but d ipped

notably f rom the second hal f of 2001. Net charge –offs ,

which were concent ra ted among commercia l loans of la rge

banks and credi t card specia l ty lenders , a l so dropped.

As noted current weaknesses appear to be la rge ly wi th in

the commercia l loan por t fo l ios of la rge regional and

money center banks ra ther than those of smal ler

ins t i tu t ions . Even the problems of la rge banks could be

v iewed as mi ld , however , g iven the shocks fe l t by many in

the i r cus tomer base . I f smal ler banks , genera l ly , a re not

see ing the commercia l loan weakness tha t some large

ins t i tu t ions are fac ing, which areas may present them wi th

he ightened r i sks?

Most Reserve Banks are repor t ing genera l ly weak

commercia l rea l es ta te markets , as fa i l ing companies

vacate of f ice and re ta i l space and renters in to s ingle

fami ly homes commercia l rea l es ta te credi t s a re s t i l l

per forming re la t ive ly wel l for th is s tage of the cycle , and

my comments are not in tended to sugges t a mater ia l

concern .

The second areas of potent ia l r i sk re la tes to in teres t ra tes .

For the indust ry overa l l , the Federa l Reserve’s in teres t

ra te cuts las t year cer ta in ly appear to have he lped bank

earnings , but they present management wi th new

chal lenges , too . Lower ra tes undoubtedly eased payment

pressures on many borrowers , and prevented fur ther

de ter iora t ion in the qual i ty of bank loan por t fo l ios .

Indeed, many banks have responded to the low ra tes by

sharply reducing the i r inves tments in Treasur ies and

shi f t ing funds in to mortgage-backed secur i t ies in the

search for h igher y ie lds . That banking organiza t ions and

inves tors genera l ly , should recognize tha t domest ic

in teres t ra tes are h is tor ica l ly low and tha t the poss ib i l i ty

for r i s ing ra te envi ronments should not be over looked.

Even s table ra tes could present increased r i sks , i f saving

and money market deposi t accounts f low out of banks as

quickly as they came in when equi ty markets dec l ined. At

some point , even loyal cus tomers- those on f ixed income,

in par t icular -may bl ink and take s teps to improve the i r

own yie lds .

Managing Risks

The heal th of f inancia l ins t i tu t ions today i s a lso a resul t

of improvement in the r i sk management process tha t has

been ongoing a t banks for years , increas ingly; the ent i re

r i sk management process has become data a t lower cos t ,

but a lso improved techniques for measur ing and managing

r i sks . Bank regula tors a re working to develop a more

modern in ternat ional approach to bank capi ta l - ca l led

Basel I I . Al though those s tandards , in the f i s t ins tance ,

a re be ing des igned to address changing prac t ices a t la rge ,

in ternat ional ly ac t ive banks , we can expect the lessons

learned about r i sks management to have much border

ef fec ts . In quant i fy ing credi t r i sk , la rge banking

organiza t ions a re taking the lead , measur ing a borrower’s

probabi l i ty of defaul t , the bank’s loss g iven defaul t and

i t s l ike ly exposure to the borrower a t the t ime of defaul t ,

tak ing in to considera t ion fu ture draw downs.

The grea ter of c redi t scor ing in re ta i l t ransac t ions

provides a s t ronger f ramework to asses r i sk and ensure

tha t loan pr ic ing ref lec ts the credi t qual i ty . Such tools

should perform even bet te r as the ef fec ts of the most

recent economic s lowdown are incorpora ted in to bank

s ta t i s t ics .

The measurement and management of in teres t ra te r i sk has

a lso improved grea t ly in recent years , perhaps par t icular ly

a t communi ty banks . Asse t l iabi l i ty commit tees a t banks

throughout the country now rout ine ly consider the resul t s

of models developed e i ther in ternal ly or by vendors to

ident i fy the market sens i t iv i ty of loans , inves tments , and

deposi t s .

Recent abuses of corpora te account ing prac t ices and other

mat ters provide good lessons in r i sk management as

bankers t ry to increase earning by cross- se l l ing more

products , g iven the dominant ro le of c redi t r i sk a t banks ,

to chief c redi t of f icer should ensure tha t pressures to

increase fee income do not lead to unacceptable levels of

c redi t r i sks .

Corporate Governance

Sound corpora te governance i s an essent ia l of a s t rong

r i sk management process . As banker and bank and bank

di rec tors ,you have speci f ic responsib i l i t ies to manage the

r i sk a t your f inancia l ins t i tu t ions and ef fec t ive ly oversee

the sys tems of in ternal cont ro ls Not only are the ac t iv i t ies

of cent ra l to credi t in termedia t ion , but , in th is country ,

banks found the i r ac t iv i t ies in par t wi th federa l ly insured

deposi t s . Those deposi t s a re the lowest – cos t source of

found tha t banks have , speci f ica l ly because of the

government guarantee .

In teragency pol icy holds boards of d i rec tors

responsib le for ensur ing tha t the i r organiza t ions have

an e f fec t ive audi t process and in ternal cont ro ls tha t

a re adequate for the na ture and scope of the i r

bus inesses . In ternal audi t i s a key e lement of

management’s responsib i l i ty to va l ida te the s t rength of a

bank’s in ternal cont ro ls .

In ternal cont ro ls a re the responsib i l i ty of l ine

management . Line managers must de termine the level

of r i sk they need to accept to run bus inesses and

must assure themselves tha t the combinat ion of

earnings , capi ta l , and in ternal cont ro ls i s suff ic ient to

compensate for the r i sk exposures . The resul t s of

these independent reviews should be rout ine ly

repor ted to execut ive management and boards of

d i rec tors . The level of independence form execut ive

management tha t a board can demonst ra te has , of

course , become a fa r more v is ib le and more

impor tant fac tor in evalua t ing corpora te governance .

Other provis ions of the ac t se t for th potent ia l ly

broad ranging s tandards a f fec t ing the way publ ic

companies compensate the i r execut ives and d i rec tors

and d isc lose the i r opera t ing resul t s . To s t rengthen the

ro le of outs ide audi tors , the ac t a l so l imi ts the non-audi t

work such f i rms may perform for audi t cus tomers and

crea tes an overs ight board to regula te and oversee audi t

work. Indeed, beyond legal requi rements , boards of

d i rec tors and managers of a l l f i rms should

per iodica l ly tes t where they s tand on bus iness

prac t ices . Ul t imate ly , of course , market correc t the i r

excesses , and in th is context markets inc lude both the

publ ic and pr iva te sec tors . Obviously , dur ing the pas t

year we have seen reac t ions not only form inves tors

and c redi tors , but a l so f rom law- makers and

regula tors , to observed fa i lures wi th in corpora te

boardrooms. Al l of the ac t ion af fec ts market prac t ice .

That inc ludes mainta in ing sound e th ica l prac t ices in

protec t ing the reputa t ions of your banks . As we have

seen f rom recent events , the market ’s response can

be harsh .

Qual i ty of Accounting Pract ices

Uncer ta in ty regarding the qual i ty of corpora te

account ing s tandards s t r ikes a t the hear t of our

capi ta l i s t sys tem and threa tens the e f f ic iency of

markets . Inves tors and lenders must be conf ident

tha t unders tand the r i sk they accept and tha t the i r

counterpar t ies a re p laying fa i r .

Informed and objec t ive profess ionals can legi t imate ly

d isagree on the bes t account ing s tandard to apply to new

types of t ransac t ions .That i s par t of the chal lenge of

keeping account ing s tandards current . The rapid pace of

business innovat ions makes i t impract ica l to have ru les in

p lace to ant ic ipa te every bus iness t ransac t ion .

At the core of such account ing pr inc ip les should be

profess ional s tandards tha t every corpora te accountants

and every outs ide audi tor must fo l lows. In par t , audi tors

should be requi red to ask themselves whether a

par t icular account ing method adequate ly represents the

economics of t ransac t ion and whether i t provides readers

wi th suff ic ient informat ion to evaluate the r i sks .

Rules a lone , however , do not ensure good f inancia l

repor t ing . At Enron and other companies , weak corpora te

governance’s prac t ices apparent ly permi t ted sham

t ransact ions and mis leading f inancia l repor t ing . Outs ide

audi tors e r red in t ry ing too hard to p lease an impor tant

c l ient .

In another example , the banking regula tors have jo in t ly

i ssued for comment new guidance re la ted to credi t s cards .

This guidance not only deals wi th unacceptable prac t ices ,

but a lso c lar i f ies tha t revenue recogni t ion of fees b i l led to

cus tomers should the expected abi l i ty to col lec t those

fees .

Chapter 5

THE ROLE OF THE CENTRAL BANK IN

PROMOTING CORPORATE GOVERNANCE

The growing compet i t iveness and in terdependence

be tween Banks and f inancia l ins t i tu t ions in loca l and

fore ign markets have increased the impor tance of

corpora te governance and i t s appl ica t ion in the banking

sec tor . Corpora te governance in Bank can be achieved

through a se t of legal , account ing Financia l and economic

and in tegr i ty in banking sec tor i s Mainta ined, the need

for uni form s tandards of the concept of governance in

pr iva te and publ ic sec tor banks in emphasized.

The g lobal iza t ion process and the l ibera l iza t ion of money

markets have changed the ideas and vis ions of f inancia l

ins t i tu t ions a l l over the wor ld . Banks and f inancia l

ins t i tu t ions in loca l and fore ign markets have acqui red a

new spi r i t of compet i t iveness .

Governance in the banking sec tor i s achieved through a

se t of legal , account ing, F inancia l and economic ru les and

regula t ions . These ru les and regula t ions d i rec t the

Management , govern performance , and ass is t in car ry ing

out the responsib i l i t ies of the Sector .

Corpora te governance i s impor tant because i t prohibi t s

corrupt ion , ensures in tegr i ty and a lso ensures . Corpora te

governance i s impor tant as wel l to benef i t and learn f rom

the f inding of the audi tors and f inancia l cont ro l le rs and to

unders tand the i r overs ight ro le .

Role of central Bank

Over the las t years , the cent ra l bank of Egypt has adopted

a number of measures tha t a re consis tent wi th pr inc ip les

se t by the Basel commit tee on banking supervis ion . these

measures are wi th in the legal and regula tory f ramework

of the ro le of the cent ra l bank In the area of prudent ia l

regula t ion and ef fec t ive survei l lance of the da i ly

opera t ions of banks .

Set t ing a percentage of l iquidi ty and reserves for banks i s

cons idered a prudent ia l mechanism and not a requi rement

tha t h inders banking ac t iv i ty . Over the las t years , some

were compla in ing tha t banks are h indered by an e levated

percentage of legal reserves , and tha t i s the reason for the

l iquidi ty cr i s i s . Bankers know very wel l how to manage

the i r banks; the cent ra l banks i s here to ass is t the bankers ,

a t the same t ime t r igger the warning Bel l should such a

s i tua t ion ar i se .

The cent ra l bank of Egypt a lso emphasizes the measure of

loan concent ra t ion a t the level of each bank. Loan

concent ra t ion i s not re la ted to the loan provided to one

c l ient . Current ly the law se ts the exposure l imi t to each

c l ient a t 30 percent . We a lso have loan concent ra t ion

l imi ts for fore ign banks . The res t r ic t ion i s tha t a l l

Egypt ian money or a l l Egypt ian money or a l l Egypt ian

or ig ina ted money should not be deposi ted a t fore ign

representa t ion banks .

However connect ions re la ted to more than one ac t iv i ty

wi l l lead a bank to be exposed to problems tha t have

been avoided to connected lending las t November 2002

There wi l l be a conf l ic t of in teres t . You cannot be a

borrower and a shareholder in the same t ime. Cer ta in ly ,

there wi l l be conf l ic ts of in teres t be tween your pos i t ion as

a shareholder who wants to pursue the maximum prof i t

and a borrower The same to the member of the boards of

d i rec tors . We emphasize tha t the member of the board of

d i rec tors . We emphasize tha t the member of board of

d i rec tors should not be a borrower f rom the same bank;

o therwise th ings wi l l be mixed up and there wi l l be

conf l ic t of in teres ts .

Direc t conf l ic t of in teres t , each non-execut ive board

member should s ign a cer t i f ica t ion and submit i t to the

board of the bank sa t ing tha t he has no conf l ic ts of

in teres t and tha t he wi l l re f ra in f rom mixing h is pr iva te

work or bus iness and his work as a board member .

I t i s advisable tha t audi t commit tees have three non-

execut ive board members . Commit tee members should be

g iven power and author i ty to review the bank’s

performance , works , d isc ip le , and manuals , and the extent

of the i r compl iance to the manuals .

The repor t of the audi t ing commit tee should be avai lable

for the whole board for revis ion and the f inding should be

presented by the head of the audi t ing commit tee .

I f the bank’s audi t ing commit tees fo l low in ternat ional ly

recognized s tandards and prac t ice , I th ink tha t there wi l l

be some sor t of adherence to the d isc ip l ine .

The es tabl i shment of inspect ion commit tee or depar tment

i s not the i ssue; the i ssue i s these depar tment of

inspect ion commit tees or depar tments i s not the ef fec t ive .

I f inspect ion commit tees submit the i r repor t to the

chai rman of the board of d i rec tors , we should say tha t th is

i s wrong. These commit tees need to submit repor ts and

make i t s informat ion avai lable to the ent i re board of

d i rec tors , and not to the chai rman or execut ive d i rec tor .

I th ink there i s no cont radic t ion be tween the in ternal

inspect ion depar tments and in ternal audi t ing commit tees .

Infec t ion depar tments have a da i ly responsib i l i ty to check

compl iance wi th manuals .

Shareholders Rights

I t i s very impor tant tha t the shareholders have the

convic t ion to take and to g ive . In many cases , we f ind tha t

shareholders in companies not to speak of banks are

in teres ted only to no about the i r d iv idends . I f we assume

tha t th is i s the r ight th ink to do than, there cont ro l l ing

ro le i s absent . Some shareholders want only to rece ive

decedents has inves tors but a re not aware tha t they have

cont ro l l ing and supervisory ro le

Shareholders need to under take the i r supervisory ro le

wi th in a l l ins t i tu t ions . We as a supervisory ins t i tu t ion for

the banking sec tor should perform our ro le so , i f there i s

in ternal cont ro l a t the banking via corpora te governance

and external cont ro ls f rom the cent ra l bank, th is would be

very benef ic ia l to the country .

I f we look a t the cont ro l fac tor ins ide the banks boards

and make a l ink be tween members of the banks boards of

d i rec tors and the i r ownership we might d iscover tha t a

speci f ic shareholder might cont ro l the banks management

and cont ro l i t s dec is ions . Ownership might be 49 percent

in a speci f ic ins t i tu t ions and other ownership might be 20

or 21 percent and be consider i t a s i s te r company and not

an af f i l ia ted company. In the coming per iod, we are

concerned wi th new bank laws and we wi l l make sure tha t

the concept of cont ro l leads to qual i ty and not to

monopoly . Monopoly of thought and monopoly of

leadership in the bank in a wrong di rec t ion or leading the

board in a wrong di rec t ion wi l l be g iven enough

considera t ion .

Corpora te governance cr i te r ia can not be ef fec t ive i f i t i s

only on paper . Proper , sound, and ef fec t ive corpora te

governance cr i te r ia a re those tha t incorpora te a

punishment and reward sys tem. The cent ra l bank’s abi l i ty

to implement i t s pol ic ies and decis ions wi th in the banking

sec tor serve as a correc t ive and disc ip l inary mechanism.

The bank’s board of d i rec tor and i t s genera l assembl ies

a lso need to be commit ted to under taking correc t ive

measures when necessary .

Chapter 6

PUBLIC SECTOR BANKS AND GOVERNANCE

CHALLENGEGS

Historical Concept

India had a fa i r ly wel l developed commercia l banking

sys tem in exis tence a t the t ime of independence in

1947.The Reserve Bank of India (RBI) was es tabl i shed in

1935.Whi le the RBI became a s ta te-owned ins t i tu t ion f rom

January 1 , 1949, the Banking Regula t ion Act was enacted

in 1949 providing a f ramework of regula t ion and

supervis ion of commercia l banking ac t iv i ty . The f i rs t s tep

towards the na t ional iza t ion of commercia l banks was the

resul t s of a repor t (under the aegis of RBI) by` the

Commit tee of Direc t ion of Al l India Rura l Credi t Survey

(1951) which t i l l today i s the locus c lass ics on the subjec t

.Thus the Imper ia l Bank was taken over by the

Government and renamed as the Sta te Bank of India (SBI)

the July 1 , 1955 wi th the RBI acqui r ing overr id ing

subs tant ia l holding of shares . A number of e rs twhi le banks

owned by pr ince ly s ta tes were subs id iar ies of SBI in

To meet theses concerns , in 1967, the Government

in t roduced the concept of soc ia l cont ro l in the

banking indust ry . The scheme of soc ia l cont ro l was

a imed a t br inging some changes in the management

and d is t r ibut ion of c redi t by the commercia l banks .

Pol i t ica l compuls ion then par t ia l ly a t t r ibuted to

inadequacies of the soc ia l cont ro l , led to the

Government of India na t ional iz ing, in 1969, 14

major scheduled commercia l banks the needs which

had deposi t s above a cut -off s ize . The objec t ive was to

serve be t te r the needs of development of the economy in

conformi ty wi th na t ional pr ior i t ies and objec t ives .

From the f i f t ies a number of exclus ive ly s ta te-owned

development f inancia l ins t i tu t ion (DFIs) were a lso se t up

both a t the na t ional and s ta te level , wi th a lone except ion

of Indust r ia l Credi t and Inves tment Corpora t ion of India

( ICICI) which had minor i ty pr iva te share holding.

Reform Measures

The major chal lenge of the reform has been to in t roduce

e lements of market incent ive as a dominant fac tor

gradual ly replac ing the adminis t ra t ive ly coordinated

p lanned ac t ions for development . Such a paradigm shi f t

has severa l d imensions , the corpora te governance be ing

one of the impor tant e lements . The evolut ion of corpora te

governance in banks , par t icular ly in PSBs, thus ref lec ts

changes in monetary pol icy , regula tory envi ronment , and

s t ruc tura l t ransformat ions and to some extent , on the

charac ter of the se l f - regula tory organiza t ions funct ioning

in the f inancia l sec tor .

Pol icy Environment

During the reform per iod, the pol icy envi ronment

enhanced compet i t ion and provided grea ter oppor tuni ty for

exerc ise of what may be ca l led genuine corpora te e lement

in each bank to replace the e lements of coordinated

ac t ions of a l l ent i t ies as a “ jo in t fami ly” to fu l f i l l

predetermined Plan pr ior i t ies . The measures taken so far

can be summarized as fo l lows.

Fi rs t , grea ter compet i t ion has been infused in the banking

sys tem by permi t t ing ent ry of pr iva te sec tor banks

(9 l icences s ince 1993) , and l ibera l l icens ing of more

branches by fore ign banks and the ent ry of new fore ign

banks . With the development of a mul t i - ins t i tu t ional

s t ruc ture in the f inancia l sec tor non-bank in termedia t ion

has increased, banks have had to improve ef f ic iency to

ensure surviva l .

Second, the reforms accorded grea ter f lexib i l i ty to the

banking sys tem to manage both the pr ic ing and quant i ty of

resources . There has been a reduct ion in s ta tu tory

preempt ions to less than a th i rd of commercia l banks

resources . Valuat ion of banks’ inves tments i s a l so a t tuned

to in ternat ional bes t prac t ices so as to appropr ia te ly

capture market r i sks .

Thi rd , the RBI has moved away f rom micro-regula t ion to

macro-management . RBI has replaced de ta i led individual

guidel ines wi th genera l guidel ines and now leaves i t to

individual banks’ boards to se t the i r guidel ines on credi t

dec is ions .

Four th , to s t rengthen the banking sys tem to cope up wi th

the changing envi ronment , prudent ia l s tandards have been

imposed in a progress ive manner .

F i f th , an appropr ia te legal , ins t i tu t ional , technologica l

and regula tory f ramework has been put in p lace for the

development of f inancia l markets . There i s now increased

volumes and t ransparency in the pr imary and secondary

market opera t ions . Development of the Government

Secur i t ies , money and forex markets In teres t ra te channel

of monetary pol icy t ransmiss ion i s acqui r ing grea ter

impor tance as Compared wi th the credi t channel .

Regulatory Environment

Prudent ia l regula t ion and supervis ion have formed a

cr i t ica l component of the f inancia l sec tor reform

programme s ince i t s incept ion , and India has endeavored

to in ternat ional prudent ia l norms and prac t ices .

The Banking Regula t ion Act 1949 prevents connected

lending ( i .e . lending by banks to d i rec tors or companies in

which Direc tors a re in teres ted . )

Per iodica l inspect ion of banks has been the main

ins t rument of supervis ion , though recent ly there has been

a move toward supplementary ‘on-s i te inspect ions’ wi th

‘off -s i tes survei l lance’ . The sys tem of ‘Annual Financia l

Inspect ion’ was in t roduced in1992, in p lace of the ear l ie r

sys tem of Annual Financia l Review/Financia l Inspect ions .

A high powered Board for Financia l Supervis ion (BFS) ,

compris ing the Governor of RBI as Chai rman, one of the

Deputy Governors as Vice-chai rman and four Direc tors of

the cent ra l board of RBI as members was const i tu ted in

1994, wi th the mandate to exerc ise the Power of

supervis ion and inspect ion in re la t ion to the banking

companies , f inancia l ins t i tu t ion and non-banking

companies .

A supervisory s t ra tegy compris ing on- s i te inspect ion ,

of f–s i te moni tor ing and cont ro l sys tems in ternal to the

banks , based on the camels (capi ta l adequacy, asse t

qual i ty , management , earnings , l iquidi ty and sys tems and

cont ro ls ) methodology for banks have been ins t i tu ted . The

RBI has ins t i tu ted a mechanism for c r i t ica l analys is of the

ba lance sheet by the banks themselves and the

presenta t ion of such analys is before the i r boards to

provide an in ternal assessment of the heal th of the bank.

Keeping in l ine wi th the merging regula tory and

supervisory s tandards a t in ternat ional level , the RBI has

in i t ia ted cer ta in macro level moni tor ing techniques to

assess the t rue heal th of the supervised ins t i tu t ions . The

format of ba lance sheets of commercia l banks have now

been prescr ibed by the RBI wi th d isc losure s tandards

on v i ta l performance and growth indica tors , provis ions ,

ne t NPAs, s ta f f product iv i ty , e tc . appended as ‘notes of

accounts’ . These proposed addi t ional d isc losure norms

would br ing the d isc losure s tandards a lmost on par wi th

the in ternat ional bes t prac t ice .

Structural Environment of Banking

The nat ional ized banks are enabled to d i lu te the i r equi ty

of Government of India to 51 percent fo l lowing the

amendment to the Banking Companies (Acquis i t ion &

Transfer of Under takings) Acts in 1994, br inging down the

minimum Government’s shareholder to 51 percent in

PSBs. RBI’s shareholding in SBI i s subjec t to a minimum

of 55 percent .

The divers i f ica t ion of ownership of PSBs has made a

qual i ta t ive d i f ference to the funct ioning of PSBs s ince

there i s induct ion of pr iva te shareholding and a t tendant

i ssues of shareholder’s va lue , as ref lec ted by the market

cap , representa t ion on board , and in teres ts of minor i ty

shareholders . There i s representa t ion of pr iva te

shareholder when the banks ra ise capi ta l f rom the market .

The governance of banks res ts wi th the board of d i rec tors .

In the l ight of deregula t ion in in teres t ra tes and the

grea ter autonomy given to banks in the i r opera t ion , the

ro le of the board of d i rec tors has become more

s igni f ica t ions .

Dur ing the years , Board has been requi red to lay down

pol ic ies in cr i t ica l a reas such as inves tments , loans , asse t -

l iabi l i ty management , and management and recovery of

NPAs. As par t of th is process , severa l Board level

commit tees inc luding the Management Commit tee are

requi red to be appointed by banks .

Government in t roduced a Bi l l in Par l iament to omi t the

mandatory provis ions regarding appointment of RBI

nominees on the Boards of publ ic sec tor banks and ins tead

to add a c lause to enable RBI to appoint i t s nominee on

the boards of publ ic sec tor banks i f the RBI i s of the

opinion tha t in the in teres t of the banking pol icy or in the

publ ic in teres t or in the in teres t of the bank or deposi tors ,

i t i s necessary so to do.

Appointment of Chai rman and Managing Direc tors and

Execut ive Direc tors of a l l PSBs i s done by Government .

The Naras imham Commit tee I I had recommended tha t the

appointment of Chai rman and Managing Direc tor should

be le f t to the Boards of banks and the Boards themselves

should be e lec ted by shareholders

Appointment as wel l as removal of audi tors in PSBs

requi res pr ior approval of the RBI. There i s an e labora te

procedure by which banks se lec t audi tors f rom an

approved panel c i rcula ted by the RBI. In respect of

pr iva te sec tor banks , the s ta tu tory audi tors a re appointed

in the Annual Genera l Meet ing wi th the pr ior approval by

the RBI.

Self Regulatory Organizat ions

India has had the d is t inc t ion of exper iment ing wi th Sel f

Regula tory Organisa t ion (SROs) in the f inancia l sys tem

s ince the pre- independence days . At present , there are

four SROs in the f inancia l sys tem- Indian Banks

Associa t ion ( IBA), Fore ign Exchange Dealers Associa t ion

of India (FEDAI) , Pr imary Dealers Associa t ion of India

(PDAI) and Fixed Income Money Market Dealers

Associa t ion of India (FIMMDAI) .

The IBA es tabl i shed in 1946 as a voluntary associa t ion of

banks , s t rove towards s t rengthening the banking indust ry

through consensus and co-ordinat ion . S ince

na t ional iza t ion of banks , PSBs tended to dominate IBA

and developed c lose l inks wi th Government and RBI.

Of ten , the reac t ive and consensus and coordinated

approach border on car te l i sa t ion . To i l lus t ra te , IBA had

worked out a schedule of benchmark service charges for

the services rendered by member banks , which were not

mandatory in na ture , but were be ing adopted by a l l banks .

Responding to the impera t ives caused by the changing

scenar io in the reform era , the IBA has , over the years ,

re focused i t s v is ion , redef ined i t s ro le , and modif ied i t s

opera t ional modal i t ies .

Tentat ive Issues and Lessons

Corpora te governance in PSBs i s impor tant , not only

because PS Bs happen to dominate the banking

indust ry , but a l so because , they a re unl ike ly to exi t

f rom banking bus iness though they may ge t

t ransformed. To the extent there i s publ ic ownership

of PS Bs , the mul t ip le objec t ives of the government

as owner and the complex pr inc ipa l - agent

re la t ionships cannot be wished away. PS Bs cannot be

expected to b l indly mimic pr iva te corpora te banks in

governance though genera l pr inc ip les a re equal ly

va l id . Compl ica t ions a r i se when there i s a widespread

fee l ing of uncer ta in ty of ownership and publ ic

ownership i s t rea ted as t rans i t ional phenomenon. The

ant ic ipa t ion or threa t of change in ownership has

a lso some impact on governance , s ince expected

change i s not mere ly of owner but the very na ture of

owner . Mixed ownership where government has

cont ro l l ing in teres t i s an ins t i tu t ional s t ruc ture tha t

poses i ssues of s igni f icant d i f ference be tween one se t

of owners who look for commercia l re turn and

another who seeks something more and di f ferent , to

jus t i fy ownership .

The most impor tant chal lenge faced in enhancing

corpora te governance and in respect of which there

has been s igni f icant though par t ia l success re la tes to

redef in ing the in ter re la t ionships be tween ins t i tu t ion

wi th in the broadly def ined publ ic sec tor i e . ,

government ,RBI and PSBs and PSBs to move away f rom a

model of p lanned development . )

The cent ra l bank a lso had to move away f rom shar ing the

n i t ty gr i t ty of developmenta l schemes wi th government

involving micro regula t ion , to a more equi table t rea tment

of a l l banks as regula tor and s tandards .

Another noteworthy aspect of enhancing corpora te

governance i s narrowing of gap be tween PSBs and

other banks in te rms of the pol icy , regula tory and

opera t ing envi ronment , apar t f rom some changes in

ownership s t ruc tures wi th a t tendant consequences . The

PSBs as hundred percent owned ent i t ies wi th no

share va lue quoted in s tock exchanges accounted for

over three quar ters of banking bus iness seven years

ago, whi le they now account for less than a

quar ter .

Random Thoughts

The Indian exper ience provokes some thoughts on a few

fundamenta l i ssues in regard to PSBs and corpora te

governance . F i rs t , i s publ ic ownership compat ib le wi th

sound corpora te governance as genera l ly unders tood?

Since var ious corpora te governance s t ruc tures exi t s in

d i f ferent countr ies . Government ownership of a bank,

unless government happens to have such a s take pure ly as

a f inancia l inves tment for re turn , necessar i ly has to have

the ef fec t of a l te r ing the s t ra tegies and objec t ives as wel l

as s t ruc ture of government . Government as an owner i s

accountable to pol i t ica l ins t i tu t ions which may not

necessar i ly be compat ib le wi th pure ly economic

incent ives .

The mixed ownership br ings in to sharper focus the

d ivergent objec t ives of shareholding and the i ssues of

reconci l ing them, especia l ly when one of the owners i s

government . In such a s i tua t ion , one can argue tha t as

long as the pr iva te shareholder i s aware of the specia l

na ture of shareholding, there should be no conf l ic t . I t

o ther words , The idea of mainta in ing publ ic sec tor

charac ter of a bank whi le government holds a minor i ty

shareholding i s an in tens i f ied and modif ied vers ion of

“golden share” exper iment of UK. The ques t ion could s t i l l

be as to whether such a mixed ownership of organiza t ion ,

par t icular ly for banks which are in case genera l ly under

in tense regula t ion and supervis ion .

Chapter 7

BEST PRACTICES OF CORPORATE GOVERNANCE

IN BANKS

Financia l fa i lures l ike Enron. WorldCom have eroded fa i th

in the corpora te sec tor genera t ing unprecedented shocks in

the s tock markers a l l over the wor ld . Many individual and

Corpora te inves tors have become conservat ive in the i r

Inves tment dec is ions they demand higher degree of

scrut iny Of a corpora te’s f inancia l d isc losure and

s t r ingent Disc losure norms to avoid such i r revers ib le and

I r recoverable scandals in the fu ture . Consequent ly , the

board Rooms are compel led to pay grea ter a t tent ion to

the i r Rela t ionship wi th the s takeholders and the

t ransparency of the i r f inancia l s ta tements . Legis la t ive and

regula tory i ssues have a lso been made more s t r ingent to

boost inves tor Conf idence . The audi t process has a lso

been reviewed thoroughly wi th c lear guidel ines the focus

on corpora te Dut ies and responsib i l i t ies .

Importance of Corporate Governance in Banks

Corpora te Governance i s par t icular ly impor tant for banks

because Banks p lay a dominant ro le in f inancia l sys tems

and economic growth. Banks are the main source of

f inance for a major i ty of f i rms as access of f inancia l

markets i s subjec t to compl iance wi th cumbersome

regula tory requi rements . They are the main deposi tor ies

for the economy’s saving. They ac t as the cus todian of the

country’s l iquid reserves . Thus the banking sys tem

deserves much a t tent ion to bui ld a s t rong, re l iable and

s table f inancia l sys tem in a country .

Good governance can be bui l t based on the bus iness

prac t ices adopted by the board of d i rec tors and

management . Many bank fa i lures in the pas t have been

a t t r ibuted to inadequate and ineff ic ient management which

enabled banks to accept low qual i ty asse ts and assume

addi t ional r i sks tha t extended beyond the level appropr ia te

for the banks’ capaci ty .

Some of the key e lement tha t i s ident i f ied to be a par t of

a good governance sys tem a t the individual bank level :

Management wi th h igh in tegr i ty , adequate and exper ience;

A comprehensive in ternal informat ion cont ro l sys tem to

ensure the decis ions i f the bank are col lec t ive decis ion;

Prudent c redi t appra isa l mechanism thereby l imi t ing the

r i sk exposure ; and Effec t ive external and in ternal audi t

procedures to es tabl i sh adherence to the pol ic ies and

regula t ions and no specia l t rea tment i s a l lowed on any

par t icular dec is ion .

Ten Commandments of Corporate Governance

We can enumerate the commandments for ensur ing bank

corpora te governance .

I . Banks shal l real ize the t imes are changing

The issue of corpora te governance had not been g iven the

requis i te a t tent ion in the pas t unt i l the advent of some

economic and f inancia l c r i ses in the la te ‘90s . Times are

changing now, and even smal les t banks need to focus on

corpora te governance res t ruc tur ing. This i s because of the

apparent lack of in tegr i ty and values in the opera t ion

some large corpora t ions l ike World Com and Enron.

II . Banks shal l establ ish an ef fect ive capable and

re l iable board of directors

Establ i sh ing an ef fec t ive , capable and re l iable board of

d i rec tors requi res involving wel l qual i f ied and successful

individuals wi th in tegr i ty . This impl ies tha t a major i ty of

banks of board of d i rec tors should be t ru ly outs ide

independent d i rec tors . Here , “ independence” refers to the

individual not working for the bank and he/she not having

mater ia l re la t ionship wi th the bank. The board should se t

a long- term s t ra tegy, pol icy and values for the

organiza t ion . Never the less , the bank should not

micromanage the ins t i tu t ion .

III . Banks shal l establ ish a corporate code of e thics

for themselves

Corpora te e th ics and values should be es tabl i shed a t the

top and should be used to govern the opera t ions of the

company both f rom a long- term and a shor t - te rm view

point . Unless th is exerc ise i s accompl ished, execut ive

management cannot ant ic ipa te tha t the rank and f i le

employees wi l l fo l low such a code on the i r own.

IV. Banks shal l consider establ ishing an Off ice of

the Chairman of the Board

Many banks are a l ready examining th is idea of

es tabl i sh ing Off ice of the Chai rman of the Board . Such an

Off ice wi l l be made to repor t to the board and wi l l ac t as

the board’s eyes and ears on a da i ly bas is in connect ion

wi th the funct ions of the bank.

V. Banks shal l have an ef fect ive and operat ing

audit committee , compensat ion committee and

nominat ing/corporate governance committee

The audi t commit tee , compensat ion commit tee and

nominat ing commit tee should be composed of a l l

independent , outs ide d i rec tors of the bank who opera te

independent ly . These commit tees should have access to

a t torneys and consul tants pa id for by the bank other than

the bank’s cus tomary counsel and consul tants . This

independence of the commit tees wi l l ensure any bias in

the in ternal audi t commit tee’s dec is ions .

VI. Banks shal l consider the ef fect ive board

compensat ion

Fair compensat ion should be pa id to the d i rec tors . Thei r

remunera t ion should be commensura te wi th the r i sks they

take . The bank should a im to appoint a h ighly qual i f ied

d i rec tor and take appropr ia te measures to re ta in them

wi th the organiza t ion as i t normal ly does wi th o ther

employees .

VII. Banks shal l require cont inuing educat ion for

directors

The f inancia l services indust ry i s now fac ing a number or

chal lenges due to many technology innovat ions .

Therefore , i t becomes impera t ive for the banks to educate

the i r d i rec tors to meet the growing needs of the indust ry .

Cont inuing educat ion should be g iven equal impor tance

a long wi th o ther parameters out l ined above.

VIII . Banks shal l establ ish procedures for board

success ion

The presence of qual i f ied members on the board i s a very

crucia l i ssue . So a bank should have a c lear ly speci f ied

se t of ru les regarding i ssues of success ion to the board .

The bank should pose a ques t ion are as fo l lows:

a ) Does the bank have a mandatory re t i rement age tha t i s

ac tua l ly enforced?

b) Does a se l f appra isa l process exis t to f ree the board of

the non-product ive d i rec tors?

c) Does the bank have a p lan to mainta in a fu l ly s ta f fed

board of d i rec tors wi th capable people , no mat ter what

the age i s as i t moves forward?

IX. Banks shal l d isc lose , d isc lose and disc lose the

information

Banks wi l l f ind tha t d isc losure wi l l be quicker and more

burdensome than i t was in the pas t . This may be through

quar ter ly le t te rs to the shareholders or o ther types of

communica t ion .

X. Banks shal l recognize tha t duty i s to es tabl i shed

corpora te governance procedures tha t wi l l serve to

enhance shareholder va lue

The pr imary objec t of the board of d i rec tory i s to

maximize the shareholder’s weal th . The s t ra tegy adopted

to achieve th is objec t ive should now encompass corpora te

governance procedures and should be des igned wi th long-

term value for the shareholder in focus .

Key Elements of Best Pract ices in Corporate

Governance

The Key e lements ident i f ied are :

1 . A s t rong independent board of d i rec tors ,

2 . Independent Commit tees ,

3 . Char ter -based Commit tees than ru le-based,

4 . Code of conduct or e th ics ,

5 . Transparent account ing prac t ices ,

6 . Direc tor or ienta t ion program and an ongoing

t ra in ing.

Steps taken in India to Improve Corporate Governance

in Indian Banks.

A consul ta t ive group of Direc tors of banks and f inancia l

ins t i tu t ions was se t up by the Reserve Bank of India to

review the supervisory ro le of the Boards of banks and

f inancia l ins t i tu t ions and to obta in feedback on the

funct ioning of the Boards v is -à-vis compl iance ,

t ransparency, d isc losures , audi t commit tees , e tc .

These recommendat ions were based on in ternat ional bes t

prac t ice as enuncia ted by the Basel Commit tee on banking

supervis ion , o ther commit tee and advisory bodies . But

sui table amendments were made in these in ternat ional

s tandards to su i t the Indian scenar io .

Recommendations of the Advisory Group

Direc tors of a l l banks both publ ic and pr iva te sec tor banks

should exerc ise due d i l igence wi th respect to the i r

su i tabi l i ty to the pos t they hold by way of qual i f ica t ions

and technica l exper t i se .

The Government shout be guide by cer ta in broad “f i t

and proper norms for the nominat ion of the

Direc tors . The cr i te r ia sugges ted by Bank of

In ternat ional Set t lements can be adopted as a

guidel ine to ar r ive a t an appropr ia te se t of norms.

For assess ing in tegr i ty and sui tabi l i ty fac tors such as

cr iminal records , f inancia l pos i t ion , c iv i l ac t ion

under taken to pursue personal debts , re fusa l of

admiss ion to or expuls ion f rom profess ion bodies ,

sanct ion appl ied by regula t ion to s imi lar bodies and

previous ques t ionable bus iness prac t ices , e tc , should

be considered.

The appointment / nominat ion of independent / non-

execut ive d i rec tors to the Boards of banks should

be taken f rom a pool of profess ional and ta lented

people to be prepared and mainta ined by the

country’s Centra l Bank, Reserve Bank of India .

Any vio la t ion of the norm should be not i f ied to the

In the current context of banking becoming more

complex and knowledge – based , there i s an

urgent need for making the boards of banks

more contemporar i ly profess ional by induct ing

technica l ly and specia l ly qual i f ied individual .

While the exis t ing regula t ion of appoint ing

exper ts f rom d i f ferent sec tors such as

agr icul ture , SSI , e tc can be cont inued , e f for ts

should be a imed a t combining i t wi th the need

based representa t ion of sk i l l s such as market ing ,

technology and sys tems, r i sk management , s t ra tegic

p lanning , t reasury opera t ions , c redi t recovery , e tc .

The independent and non- execut ive d i rec tors

should ra ise c r i t ica l ques t ions re la t ing to bus iness

s t ra tegy , house keeping and in ternal cont ro l

sys tems and o ther impor tant aspects of the

funct ioning of the bank and inves tor re la t ions

in the meet ing of the board .

In the pr iva te sec tor banks where promoter

d i rec tors may ac t in concer t , the independent /

non- execut ive d i rec tors should provide e f fec t ive

checks and ba lances to ensure tha t the bank

does not bui ld up exposures to ent i t ies

connected wi th the promoters or the i r

associa tes .

The remunera t ion of the d i rec tors should be

increased to the comparable levels of

in ternat ional s tandards to encourage them towards

mainta in ing in tegr i ty in the i r per forming the

dut ies .

The of f ice of the cha i rman and the d i rec tor

should be separa ted in respect of la rge s ized

publ ic sec tor to br ing in more focus in

render ing the i r dut ies .

The informat ion furnished to the board should

be adequate and comple te to enable the

members of the Board to take meaningful

dec is ions .

Uniform code and procedure should be adopted

for recording the proceedings of the Board

meet ings in banks and f inancia l ins t i tu t ions .

The board should be informed per iodica l ly of

the exposures of a bank to s tockbrokers and

market - makers and o ther sens i t ive sec tors such

as rea l es ta te e tc .

All banks should g ive impor tance to appoint ing

a qual i f ied Company Secre tary as the Secre tary

to the Board and a l so appoint a Compl iance

Off icer for moni tor ing and repor t ing

compl iance wi th regula tory and account ing

requi rements .

The Audi t commit tee should comprise

independent / non-execut ive d i rec tors and the

Execut ive Direc tors should only be a permanent

invi tee .

CONCLUSION

Corpora te governance thus has become a topic in teres t to

Many audiences inc luding the corpora te d i rec tors , the

cent ra l banks and other regula tory author i t ies . Like many

issues , even CG has become an in teres t ing i ssue tha t

a t t rac ted publ ic a t tent ion in the wake of corpora te

scandals l ike Enron. Governance i ssue genera l ly centers

a round accountabi l i ty of the par t ies involved in dec is ion-

making in a bank or any organiza t ion . Libera l iza t ion and

deregula t ion , and vola t i l i ty in the f inancia l markets a re

the major fac tors tha t have t r iggered an in teres t in the

i ssue of corpora te governance . I have made an a t tempt to

in t roduce the reader the concept , i ssues and perspect ives

of corpora te governance in the f inancia l sec tor in genera l

and banks in par t icular . I have t r ied to g ive br ief

in t roduct ion on the corpora te governance prac t ices in

some of the Asian banks and Indian banks .

BIBLIOGRAPHY

CORPORATE GOVERNANCE IN BANKSAN INTRODUCTION

EDITED BY: V. SUBBULAKSHMI

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