The Complementarity of regulatory and internal governance mechanisms in banks

In February 2006, the Basel Committee stressed the need to strengthen good governance practices in banks. The Committee recommended that managerial discipline roles should be shared between the board of directors and the controlling authorities. The board of directors, to consist of a larger number of independent directors, should be responsible for approving the bank's strategies and values, ensuring respect of the hierarchy and transparency of management, and motivating and supervising management, with particular focus on its audit role as part of a coherent overall approach. In complement, the controlling authorities should be responsible for issuing the guidelines needed to ensure banks meet one of the Committee's major objectives: depositor protection. The primary role of the authorities was to be the "supervisor of supervision". They were mainly in charge of developing board and management empowerment, together with verifi cation of good governance practices and control of audit. It is clear from the "Core Principles for Effective Banking Supervision" report published by the Basel Committee in 2006 that the internal control exercised by the board of directors and the external control exercised by the controlling authorities complement each other.