Risk and Governance
A Framework for Banking Organisations 
2nd Edition 









 Risk and Governance
A Framework for Banking Organisations

 

 


The central problem addressed by this book is how to structure a corporate governance framework for financial institutions that responds to the threats highlighted by the financial crisis: excessive risk taking, conflicts of interest, biased incentives and compensation, ineffective supervision. Likewise, the aims of this new edition (which includes five new chapters, with all other chapters updated) are, on the one hand to provide a reference for governance theories and practices on banks’ governance, and on the other, to articulate a detailed proposal for a new governance framework including: composition and role of the board, mission and organization of risk management, executive compensation structure and external governance (supervisors, auditors, rating agencies) and related disclosures.

























Shareholders may get the profits, but everybody bears the risks.
 
Of all the different stakeholders bank has (shareholders, depositors, bondholders, the government and even the general public), only shareholders are entitled to a part of its profits, but all are, in various ways, exposed to the risks that the bank takes while producing those profits. That is why the distribution of risks to stakeholders is as important a governance issue as the distribution of profits to shareholders.
 
The book is about the confluence of risk management activities and corporate governance mechanisms in modern banking into one integrated practice. It argues that the two processes, so far confined the former to the boardroom and the latter to the back office, are inextricably linked, that their goals are complementary and that one cannot function without the other. It calls for the Board of Directors to focus on all the risks faced or generated by the bank, not just its credit or market exposure, and to be accountable to all stakeholders, not just to its shareholders. In this context the Board’s primary tool is the risk management function, which should report directly to the Board and focus on maintaining the bank a going concern and on preventing financial distress.
 
The book reviews the current thinking on governance in banking, the key approaches, the related risks as well as the key point that there are intrinsic limitations in the governance of institutions. It examines the mission and scope of risk management, its fundamental role in banking governance and the evolution of this role during and after the financial crisis. Finally, it concretely discusses a set of practices that can form the basis for an effective approach to risk-based governance.
 
Those of us who, as CROs, are charged with developing frameworks across all risk types, will find this book an excellent addition to the current literature on the subject, mixing compelling theoretical argument with a number of really useful practical tips and suggestions. I can thoroughly recommend it.
Peter Harlow, Head of Risk, European Stability Mechanism