The Basel Committee on Banking Supervision has issued a new set of principles that aim to enhance corporate governance practices at banks.

Released on Tuesday, the proposed principles cover: the role of the board; directors’ qualifications; the importance of an independent risk management function; the need to manage risks on an ongoing firm-wide and individual entity basis; and, board oversight of banks’ compensation systems.

The committee says that the principles are designed to address fundamental deficiencies in corporate governance that became apparent during the financial crisis.

The principles stress the importance of directors and senior management having a clear knowledge and understanding of the bank’s operational structure and risks, including risks arising from the use of special purpose entities or similar off-balance sheet structures.

The committee also notes that banking regulators have a critical role in ensuring that banks practice good corporate governance, and recommends that they establish guidance or rules requiring banks to have robust corporate governance strategies, policies and procedures.

Nout Wellink, chairman of the Basel Committee and president of the Netherlands Bank, stated that, “the crisis has highlighted the critical importance of sound corporate governance for banking organisations. Careful implementation of these principles by banks, along with rigorous supervisory review and follow-up, will enhance bank safety and soundness as well as the stability of the financial system.”

The committee said that its work developing the principles – which are out for comment until June 15 – was coordinated with the International Association of Insurance Supervisors, which is currently reviewing its principles for the insurance industry. The Basel Committee and the IAIS will also collaborate on monitoring the sound implementation of their respective principles.

IE