The Russia Banking Sector Corporate Governance Project aims to strengthen the Russian banking system by improving the corporate governance practices of banks. Stronger corporate governance will foster trust and credibility, thus making the banking sector more effective and eventually more appealing to investors and clients alike.
Banks are a critical component of any economy. They provide:
- financing for commercial enterprises
- basic financial services to a broad segment of the population
- access to payment systems
In addition, some banks are expected to make credit and liquidity available in difficult market conditions.
The importance of banks to national economies is underscored by the fact that banking is, almost universally, a regulated industry and that banks have access to government safety nets.
The Intrinsic Risks of the Banking Sector
The banking business has a number of intrinsic risks that may jeopardize the entire financial system of an economy, including:
- high debt to equity ratios which can make banks vulnerable to losses;
- possible mismatch in maturities between assets and liabilities;
- dependence on the confidence of depositors and the financial markets for securing necessary funds; and
- general opaqueness of the business of banking.
The Importance of Corporate Governance
Because of these risks, it is critical that banks have strong corporate governance. For the
Basel Committee on Banking Supervision, corporate governance involves the manner, in which the business and affairs of individual institutions are governed by their Supervisory Boards and senior management, including how banks:
- set corporate objectives to generate sustainable economic returns to shareholders;
- run the day-to-day operations of the business;
- protect the interests of depositors;
- consider the interests of other recognized stakeholders; and
- align corporate activities and behaviors with the expectation that they will operate in a sound manner and in compliance with applicable laws and regulations.
Common ways to achieve these aims include instituting:
- deposit insurance schemes;
- capital adequacy requirements;
- disclosure requirements (for product, services and financial statements);
- internal control systems; and
- prudential supervision.
The safety and soundness of the banking system cannot solely rely, however, on the efforts of the regulatory authorities. As Alan Greenspan, the Chairman of the US Federal Reserve Board, once said, “
We need to adopt policies that promote private counter-party supervision as the first line of defense for a safe and sound banking system.”
