Our recommendations include:
- Adding structural reform of TBTF banks to the list of measures for improving corporate governance: no corporate governance model can work when the principal actors either cannot understand risks because of the complexity and opacity of their organisation, or are subject to structural incentives that may run counter to corporate governance principles.
- Limiting the reliance on internal models or ensuring the consistency and soundness of risk weights calculated through internal models: good corporate governance requires banks to understand and maintain the right levels of risk. Since internal models are vulnerable to incorrect assumptions, there should be more emphasis on risk assessment by qualified, responsible individuals.
- Taking better account of externalities: corporate governance should support prudential regulatory measures that aim to internalise external costs, such as individual banks’ contribution to systemic risk.
- Establishing medium and long term strategies: some types of banks may try to boost short-term returns on equity by favouring short-term activities and fragile funding structures at the expense of longer term lending. Aligning corporate governance with certain regulatory measures could help to address this.
