New Guidelines Ask Banks To Rethink Internal Governance

The financial crisis was a wakeup call for the whole financial industry. Among other things, it highlighted weaknesses in banks' internal governance frameworks that hugely affected their abilities to face adverse situations. In reaction, international supervisory authorities have increasingly been emphasising internal governance.

And this emphasis is still strengthening with the development of the supervisory review and evaluation process (SREP), central to which is the assessment of internal governance and institution-wide controls. In this area, the European Central Bank looks at how well a bank's internal governance framework suits its business model, risk profile, complexity, and size. It also evaluates the degree to which institutions adhere to the requirements and standards of good internal governance and risk control.

New EBA guidelines on internal governance

In order to improve and further harmonise practices, processes, and mechanisms on internal governance within the EU, and in accordance with CRD IV,1 the EBA has revised its Guidelines on Internal Governance. The new version entered into force on 30 June 2018.

The new guidelines enhance the roles and responsibilities of the management body in its supervisory function as well as those of the risk management function. They strengthen the information flow between risk management and the management body and give more emphasis to the "know your structure" principle (transparency of complex structures), the establishment of a sound risk culture and code of conduct, and managing conflicts of interest.

The adherence of the institutions' internal governance framework to the new guidelines will be subject to the assessment of the ECB as part of the SREP.

ESMA and EBA's joint guidelines on suitability

In the same context, and as required by MiFID II2 and CRD IV,3 ESMA and the EBA have jointly published guidelines on how to assess the suitability of the management body and of key function holders. These guidelines also went into force on 30 June 2018.

The criteria include consideration of, in both individual and collective terms, knowledge, skills, experience, repute, honesty, integrity, independence of mind, diversity, and time commitment.

Special attention is given to the behavioural skills of the management body members, both collectively and individually. Collectively, the management body in its supervisory function should be able to challenge...