a) Critically discuss the key factors which would determine whether or not a bank is well governed. [23 marks] b) Critically assess the role of Regulators in ensuring the safe, fair and effective operation of financial markets.

Answer:

Overview: Key Factors that Determine Bank Governance

Bank governance is an umbrella term that encompasses a variety of systems and processes that ensure a financial institution is run in a healthy, responsible and compliant manner. The key factors that determine whether a bank is well-governed include the organization’s internal corporate governance structure, as well as external regulations and oversight. Internal factors that influence bank governance include the composition of the board of directors, the risk management systems of the bank, executive compensation structures, and internal audit and control systems. External factors include government regulations, regulations from international organizations such as the Basel Accord, and oversight and monitoring by regulatory authorities.

Composition of Board of Directors

The board of directors is responsible for setting the strategy and direction of the bank, and ensuring that it is compliant with applicable laws and regulations. It is therefore essential that the board is composed of experienced individuals with the appropriate skills and knowledge. The board should include a mix of executive and non-executive directors, who bring different perspectives and skills to the table. The board should also be of sufficient size to handle the workload, and there should be an emphasis on diversity and inclusion.

Risk Management Systems

Risk management is an integral part of bank governance, as it is essential to ensure that the bank is operating in a safe and sound manner. The risk management systems of the bank should be comprehensive and cover all areas of risk. This includes credit risk, market risk, operational risk, liquidity risk, and compliance risk. The risk management systems should be regularly reviewed and updated to ensure that they are up-to-date and effective.

Executive Compensation Structures

Executive compensation structures should be designed in such a way as to incentivize executives to act in the best interests of the bank, and to ensure that they are properly rewarded for good performance. Executive compensation should be based on performance, and should not be overly generous or excessive. The compensation structure should also ensure that incentive-based compensation does not lead to excessive risk-taking.

Internal Audit and Control Systems

Internal audit and control systems are essential for ensuring that the bank is operating in accordance with applicable laws and regulations, and that any risks are identified and mitigated. The internal audit and control systems should be comprehensive and regularly reviewed to ensure that they are up-to-date and effective.

Government Regulations

Government regulations are an important factor in determining bank governance. Banks must comply with applicable laws and regulations, and failure to do so can result in significant penalties. Governments also have the power to impose additional regulations, such as capital requirements, that must be complied with.

Regulations from International Organizations

International organizations such as the Basel Accord have a significant role to play in bank governance. The Basel Accord sets out a number of regulations that banks must comply with, such as capital adequacy requirements and liquidity risk management requirements. Banks must comply with these regulations in order to ensure that they are operating in a safe and sound manner.

Oversight and Monitoring by Regulatory Authorities

Regulatory authorities such as the Central Bank are responsible for overseeing and monitoring banks, and ensuring that they are operating in a safe and sound manner. Regulatory authorities have the power to impose fines and other penalties on banks that are not compliant with applicable laws and regulations.