management to shareholders and other stakeholders
(the accountability aspect).114
The feedback effects of corporate governance into
the liquidity and systemic risk mechanisms are illus-
trated thus:
iiPoor corporate governance may contribute to
bank failures, which could pose significant public
costs and consequences due to their potential
impact on any applicable deposit insurance sys-
tems and the possibility of broader macro eco-
nomic implications, such as contagion risk and
impact on payments systems. Furthermore, poor
corporate governance could result in markets los-
ing confidence in the ability of a bank to properly
manage its assets and liabilities, including deposits,
which could in turn, trigger a bank run or liquid-
ity crisis.”115
As well as a robust system of internal controls (which
incorporates internal and external audit functions), the
implementation ofi) corporate values, codes of conduct,
standards of appropriate behaviour and the system used
in ensuring compliance with these, ii) a clear allocation
of responsibilities and decision making authorities, iii)
the establishment of a system which would guarantee
efficient interaction and collaboration between the
board of directors, senior management and auditors, and
iv) special monitoring of risk exposures where conflicts
of interest are likely to be high, are considered to be
crucial to ensuring that sound corporate governance
operates within an organisation.116
Furthermore, sound corporate governance practices
are considered to require “ appropriate and effective
legal, regulatory and institutional foundations.”117 Even
though factors such as the system of business laws and
accounting standards which prevail in respective juris-
dictions are considered to be factors which operate
beyond the scope of banking supervision, the inclusion
of fɔur important forms of oversight are considered suf-
ficient not only in ensuring that appropriate checks and
balances exist, but that an effective system of corporate
governance can be achieved.118 The types of oversight
include:
ii(l) oversight by the board of directors or super-
visory board; (2) oversight by individuals not
involved in the day-to-day running of the vari-
ous business areas; (3) direct line supervision of
different business areas; and (4) independent risk
management, compliance and audit functions. In
addition, it is important that key personnel are fit
and proper for their jobs.”119
The contribution and the role assumed by senior
management in ensuring that internal control sys-
tems are effectively managed, is reflected through
the Principles for the .Assessment of Internal Control
Systems.120 The importance of monitoring and the
rectification of deficiencies within internal control svs-
/
terns is reflected under principles 10-12.121 Principle 10
highlights the importance of monitoring on a frequent
and ongoing basis whilst principles 11 and 12 draw
attention to the importance of effective collaboration
and communication between highly trained competent
stafl', the board of directors, audit committees and senior
management.122
According to paragraph 84 of the BCBS Principles
for Sound Liqtiidify Risk Management and Supervision of
September 2008, internal coordination across business
lines is vital towards ensuring that effective controls
over liquidity outflows are achieved.123 In relation to
examples of actions which supervisors could adopt ,
as means of responding to banks with liquidity risk
management weaknesses or excessive liquidity risk, that
which “requires actions by the bank to strengthen its
management of liquidity risk through improvements in
internal policies, controls or reporting to senior manage-
ment and the board” is considered to have the greatest
potential to address deficiencies in a banks liquidity risk
management process or liquidity position.124
As observed by the Basel Committee,125 “most
banks that have experienced losses from internal con-
trol problems did nc∙t effectively monitor their internal
control systems, OFen the systems did not have the
necessary built-in ongoing monitoring processes and
the separate evaluations performed were either not
adequate or were not acted upon appropriately by
management.”126 Furthermore it highlights that such
failures to monitor adequately commence with a “fail-
ure to consider and react to day-to-day information
provided to line management and other personnel
indicating unusual activity—such as exceeded expo-
sure limits, customer accounts in proprietary business
38 ∙ Banking & Financial Services Policy Report
Volume 30 ∙ Number 9 ∙ SeptemberlOII