Trends in Federal Reserve and Basel II A‐IRB Bank governance

Purpose - The purpose of this paper is to apply theoretical concepts of corporate and bank boards to the Boards of Directors at Federal Reserve Banks and at US Basel II A‐IRB adopters. The Basel II Accord set to take effect in the USA in 2009 provides direction as to board oversight in Pillar 2. Since the Federal Reserve is one agency responsible for this document, the paper proposes to investigate the governance structure at US banks, presumably adopting (or opting in) the Basel II A‐IRB framework. Design/methodology/approach - The board structure at Federal Reserve District Banks as of 2006 is examined. Also analyzed are the board structure, executive compensation, and ownership structure at the 22 banks identified as Basel II A‐IRB adopters. These results are then compared with current views and standards of “good governance” in the literature. Findings - It was found that there is a fairly diverse representation on the board (in terms of female directors), a large proportion of directors are CEOs (generally of other banks), and that boards comprised a majority of outside directors. Several governance characteristics are contrary to “good governance” characteristics described in the literature. Further, banks adopting A‐IRB procedures in Basel II may need to improve governance structures to be in compliance with Pillar 2 of Basel II. Practical implications - The Federal Reserve System, in an effort to increase board oversight as part of a risk management framework, should also consider its own board structure in light of current research on private‐sector boards. Both Federal Reserve District Boards and Basel II Boards should work towards exemplary corporate governance in light of their place in the US banking system. Originality/value - The paper investigates the governance structures of banks.