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Corporate Governance and bank supervision

Category: Corporate Governance

One of the main reasons why government arranged corporate governance in a way that gives government agencies (e.g. Central Bank) greater authority over the operations of banks is — to prevent disruption in the country’s banking system.

Bank supervision cannot function well if sound corporate governance is not in place and, consequently, bank supervision has a strong interest in ensuring that there is effective corporate governance at every banking organization.

Sound corporate governance makes the work of bank supervision easier. Sound corporate governance should contribute to a collaborative working relationship between bank management and bank supervision.

A bank’s Supervisory Council and Management Board are ultimately responsible for the performance of the bank. As such, bank supervision typically check to ensure that a bank is being properly governed and bring to management’s attention any problems that they detect through their supervision efforts. When the bank takes risks that it cannot measure or control, bank supervision must hold the Supervisory Council accountable and require that corrective measures be taken in a timely manner.

Sound corporate governance considers the interests of all stakeholders, including depositors, whose interests may not always be recognized. Therefore, it is necessary for bank supervision to determine that individual banks are conducting their business in such a way as to protect depositors.

Bank supervision examiners usually deal with bank management during the examination to obtain information or to discuss issues. When the examination is complete, the examiners prepare a report of examination and should conduct a meeting with the bank’s Supervisory Council to discuss the results of the examination.

An environment in which examiners and Supervisory Council members openly and honestly communicate benefits a bank. The Central Bank examiners and office personnel have experience with a broad range of banking activities and can provide independent, objective advice on safe and sound banking principles and compliance with laws and regulations.

Supervisory Council members should be encouraged to meet with the Central Bank examiners to discuss the condition of the bank and the results of the examinations. They should ask questions and raise issues of concern. They also should create an environment in which examiners and supervisory council members openly and honestly assure themselves that the bank completes any specific follow-up actions in a timely manner.

The activities of the Central Bank examiners, however, do not diminish the Supervisory Council’s responsibilities to oversee the Management board and operation of the bank. Supervisory Council members are independently responsible for knowing the condition of the bank and should not rely on the bank supervision examiners as their sole source of information to identify or correct problems. Instead, the Supervisory Council should look to its Management board, its auditors, and other outside experts to identify and correct any problems.


This example illustrates the importance that the bank supervision in the US devotes to the corporate governance issues of commercial banks:

Every quarter Supervision and Regulation’s Risk Committee of the Federal Reserve Bank of Chicago meets to determine the top banking risks facing Seventh District banks in the upcoming months and develop appropriate supervisory responses. Here is the latest listing of the top risks, arranged alphabetically:


Chasing Yield

Corporate Governance

Home equity lending

Internal controls and fraud

Liberal Extensions on Loans Masking Delinquency

Loan Rating Systems

Overdraft-Protection Products

Risks of Rising Interest Rates (Community Banks

Trust Departments Investing in their Own Proprietary Mutual Funds

USA PATRIOT Act Compliance (Anti Money

In recent years, Corporate Governance has moved to the center of attention all over the world.

Ukraine is gradually making the considerable progress in recognition of issues and importance of corporate governance.

Key elements of corporate governance in bank are:

Establishment of strategic goals and corporate values;

Setting clear lines of responsibility and accountability;

Adequate independence and professional competence of Supervisory Council members;

Appropriate oversight functions;

Transparency in corporate governance matters; and

Support of outside environment of sound corporate governance.

Members of Supervisory Council are responsible for proper fulfillment of its the fiduciary duties: duty of care and duty of loyalty.

Bank supervision should have a strong interest in ensuring that there is effective corporate governance in every banking organization

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