The European Banking Authority (EBA) has published today its Guidelines on Internal Governance aiming at enhancing and consolidating supervisory expectations and to ultimately improving the sound implementation of internal governance arrangements. Effective internal governance is fundamental if individual institutions and the banking system as a whole are to operate well.
Article 22 of Directive 2006/48/EC requires that every credit institution shall have robust governance arrangements, which include a clear organisational structure with well defined, transparent and consistent lines of responsibility, effective processes to identify, manage, monitor and report the risks it is or might be exposed to, adequate internal control mechanisms, including sound administrative and accounting procedures, and remuneration policies and practices that are consistent with and promote sound and effective risk management. Furthermore, Article 73 (3) of the same Directive requires that Article 22 is also applied to parent undertakings and subsidiaries on a consolidated or sub-consolidated basis.
A survey on the implementation of internal governance arrangements, conducted under CEBS in 2008, revealed a number of weaknesses in terms of oversight of the supervisory function, risk management and internal control frameworks. The complexity of individual institutions coupled with the riskiness of the products and services offered were often not sufficiently offset by appropriate internal governance arrangements.
Taking into account the results of the survey and the recent work done by other European and international bodies on corporate governance, the EBA has consolidated and updated its former guidelines on internal governance into the present Guidelines on Internal Governance. Beside other enhancements, new chapters have been added on the transparency of the corporate structure, the role, tasks and responsibilities of the supervisory function and on IT-systems and business continuity management.
The EBA Internal Governance Guidelines repeal the 2010 High Level Principles for Risk Management, the 2009 High Level Principles for Remuneration Policies and Section 2.1 of the 2006 Guidelines on the Application of the Supervisory Review Process under Pillar 2.
The EBA reviewed these Guidelines following a public consultation and the input provided by the EBA’s Banking Stakeholder Group. Overall, respondents were supportive of the proposed Guidelines and appreciated the EBA’s initiative to develop a comprehensive set of internal governance guidelines in line with international standards.
The EBA expects competent authorities to implement the Guidelines on Internal Governance and to incorporate them within their supervisory procedures by 31 March 2012. As of that date, competent authorities should ensure that institutions effectively comply with the new Guidelines.