Key Questions and Core Failures in Bank Governance

In Chapter 6 of the Key Code and Advanced Handbook we postulate the key questions for the governance and supervision of major banks in the GFC and beyond to the Australian Banking Royal Commission Inquiry into banking misconduct. In the GFC, Sahlman found five related systems which had failed – incentives, control and information technology, accounting, human capital and culture. We then identify the ‘core’ areas of corporate governance failures from the GFC and beyond including the securitisation of mortgage-backed securities. There follows an overview of multiple governance failures in banks – incentives, corporate/bank and risk culture, technology, boards, risk identification, assessment, control/management and reporting, (again) securitised mortgage products, the system of bank regulation and shareholders. We then examine failures identified in commentator studies and governmental and market participant reports – primarily incentives, board structure/composition and processes and risk management. We find that these failures were exacerbated by complex and opaque bank structures, independence being emphasised at the expense of expertise and weaknesses leading to excessive risk-taking where risk management and compensation structures encouraged high risk. We identify excessive reliance on rating agencies and self-regulatory regulation, opaque corporate reporting, complexity, risk and valuation of new derivatives products.