Importance of CG in Bank

Sound corporate governance makes the work of supervisors relatively easier. This work is an
attempt to make banking institutions safe, sound and efficient and, therefore, increase
confidence in the banking system.
1. Governance weaknesses at banks that play a significant role in the financial system can
result in the transmission of problems across the banking sector and the economy as a
whole.
2. The primary objective of corporate governance should be safeguarding stakeholders’
interest in conformity with public interest on a sustainable basis. Among stakeholders,
particularly with respect to retail banks, shareholders’ interest would be secondary to
depositors' interest.
3. Corporate governance determines the allocation of authority and responsibilities by
which the business and affairs of a bank are carried out by its board and senior
management, including how they:
• set the bank’s strategy and objectives;
• select and oversee personnel;
• operate the bank’s business on a day-to-day basis;
• protect the interests of depositors, meet shareholder obligations, and take into
account the interests of other recognized stakeholders;
• align corporate culture, corporate activities and behavior with the expectation that the
bank will operate in a safe and sound manner, with integrity and in compliance with
applicable laws and regulations; and
• establish control functions.

Basel Recommendation
The Basel Accords are a series of three sequential banking regulation agreements (Basel I, II, and
III) set by the Basel Committee on Bank Supervision (BCBS).

The Committee provides recommendations on banking and financial regulations, specifically,

concerning capital risk, market risk, and operational risk. The accords ensure that financial
institutions have enough capital on account to absorb unexpected losses.
Basel 1
The first Basel Accord, known as Basel I, was issued in 1988 and focused on the capital adequacy
of financial institutions.
Under Basel I, banks that operate internationally must maintain capital (Tier 1 and Tier 2) equal
to at least 8% of their risk-weighted assets. This ensures banks hold a certain amount of capital
to meet obligations.
Basel 2
The second Basel Accord, called the Revised Capital Framework but better known as Basel II,
served as an update of the original accord. It focused on three main areas: minimum capital
requirements, supervisory review of an institution's capital adequacy and internal assessment
process, and the effective use of disclosure as a lever to strengthen market discipline and
encourage sound banking practices including supervisory review. Together, these areas of focus
are known as the three pillars.
Basel 3
Due to the impact of the 2008 Global Financial Crisis on banks, Basel III was introduced to
improve the banks’ ability to handle shocks from financial stress and to strengthen their
transparency and disclosure.
Basel III is a continuation of the three pillars along with additional requirements and safeguards.
Basel III requires banks to have a minimum amount of common equity and a minimum liquidity
ratio.

Models of CG
Corporate governance provisions may differ from corporation to corporation, many de facto and
de jure factors affect corporations in a similar way. Therefore, it is possible to outline a "model"
of corporate governance for a given country.

Anglo-American Model
Under the Anglo-American Model of corporate governance, the shareholder rights are
recognised and given importance. They have the right to elect all the members of the
Board and the Board directs the management of the company. Some of the features of
this model are:

 This is shareholder oriented model. It is also called Anglo-Saxon approach to

corporate governance being the basis of corporate governance in Britain,
Canada, America, Australia and Common Wealth Countries including India
 Directors are rarely independent of management
 Companies are run by professional managers who have negligible ownership
stake. There is clear separation of ownership and management.
 Institution investors like banks and mutual funds are portfolio investors. When
they are not satisfied with the company’s performance they simple sell their
shares in market and quit.
 The disclosure norms are comprehensive and rules against the insider trading are
tight
 The small investors are protected and large investors are discouraged to take
active role in corporate governance.
German Model
This is also called European Model. It is believed that workers are one of the key
stakeholders in the company and they should have the right to participate in the
management of the company. The corporate governance is carried out through two
boards, therefore it is also known as two-tier board model. These two boards are:

1. Supervisory Board: The shareholders elect the members of Supervisory Board.

Employees also elect their representative for Supervisory Board which are generally one-
third or half of the Board.
2. Board of Management or Management Board: The Supervisory Board appoints and
monitors the Management Board. The Supervisory Board has the right to dismiss the
Management Board and re-constitute the same.

Japanese Model
Japanese companies raise significant part of capital through banking and other financial
institutions. Since the banks and other institutions stakes are very high in businesses,
they also work closely with the management of the company. The shareholders and
main banks together appoint the Board of Directors and the President. In this model,
along with the shareholders, the interest of lenders is recognised.