A rule-setting committee of the Bank for International Settlements published a set of draft principles Tuesday to ensure that banks are better managed, using lessons from the financial crisis that showed many executives did not understand the risks they had taken.
The Basel Committee on Banking Supervision issued principles meant to ensure that bank boards oversee risk policies, that senior executives are qualified to handle complex topics, that risk management becomes a more important function within banks and that staff pay is controlled to stop excessive risk-taking.
"The financial crisis has underscored how insufficient attention to fundamental corporate governance concepts can have devastating effects on an institution and its continued viability," said Danièle Nouy, the head of the BIS corporate governance task force. "It is clear that many banks did not fully implement these fundamental concepts."
The committee said regulators must adopt rules forcing banks to develop robust corporate governance structures and to regularly analyze their compliance.
The principles state that a bank's board must approve and oversee the bank's risk strategy to ensure that long-term financial interests are accounted for. Board members also must have adequate knowledge and experience of the activities the bank wants to get involved in so they can be better supervised.
The Basel committee also said banks should have chief risk officers of stature within the bank, with access to the board and commanding adequate resources to direct risk management policies.
Bank boards should also ensure that bank pay policies foster "prudent risk-taking," the committee said.
It said consistent corporate governance standards across different financial market sectors are important and, consequently, it drafted the principles in coordination with the International Association of Insurance Supervisors, which is reviewing its "core principles" to cover corporate governance more fully.
The BIS said comments from banks on the principles must be submitted by June 15.