Elgar Financial Law and Practice series
Chapter 6: CORPORATE GOVERNANCE AND RISK MANAGEMENT IN BANKS AND FINANCIAL INSTITUTIONS
The global financial crisis in 2008–9 led to serious scrutiny of banking and financial institutions in respect of risk mismanagement. The crisis has highlighted poor risk management at banks to be a key factor in the failure of a number of financial institutions, and so regulators have stepped up regulation in this area as part of micro-prudential regulation. This chapter will discuss risk management in banks and financial institutions as a corporate governance issue but, it should be noted that this area is now largely governed by a post-crisis regulatory framework. The pre-crisis regulatory framework at banks and financial institutions was skeletal in nature and it is arguably natural that ramping up its regulation would be perceived as an apt response to the crisis. International standards for managing banking risk have been developed in the Basel I Capital Accord (which dealt with credit risk) since 1988, followed by a more comprehensive consideration of banking risks in the Basel II Capital Accord of 2006. However, as the Basel II Capital Accord has recognised, the management of banking risk specific to the profiles of bank assets and trading books cannot be micro-managed by regulatory prescription and significant responsibility lies in banks having robust risk-management systems themselves, subject to supervision and capital markets accountability.
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