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Corporate governance and banking regulation


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Alexander, Kern 


The globalisation of banking markets has raised important issues regarding corporate governance regulation for banking institutions. This research paper addresses some of the major issues of corporate governance as it relates to banking regulation. The traditional principal-agent framework will be used to analyse some of the major issues involving corporate governance and banking institutions. It begins by analysing the emerging international regime of bank corporate governance. This has been set forth in Pillar II of the amended Basel Capital Accord. Pillar II provides a detailed framework for how bank supervisors and bank management should interact with respect to the management of banking institutions and the impact this may have on financial stability. The paper will then analyse corporate governance and banking regulation in the United Kingdom and United States. Although UK corporate governance regulation has traditionally not focused on the special role of banks and financial institutions, the Financial Services and Markets Act 2000 has sought to fill this gap by authorizing the FSA to devise rules and regulations to enhance corporate governance for financial firms. In the US, corporate governance for banking institutions is regulated by federal and state statute and regulation. Federal regulation provides a prescriptive framework for directors and senior management in exercising their management responsibilities. US banking regulation also addresses governance problems in bank and financial holding companies. For reasons of financial stability, the paper argues that national banking law and regulation should permit the bank regulator to play the primary role in establishing governance standards for banks, financial institutions and bank/financial holding companies. The regulator is best positioned to represent and to balance the various stakeholder interests. The UK regulatory regime succeeds in this area, while the US regulatory approach has been limited by US court decisions that restrict the role that the regulator can play in imposing prudential directives on banks and bank holding companies. FSA regulatory rules have enhanced accountability in the financial sector by creating objective standards of conduct for senior management and directors of financial companies. The paper suggests that efficient banking regulation requires regulators to be entrusted with discretion to represent broader stakeholder interests in order to ensure that banks operate under good governance standards, and that judicial intervention can lead to suboptimal regulatory results.



government policy and regulation, corporation and securities law, regulated industries and administrative law, economics of regulation, firm organization and market

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CFAP, Cambridge Judge Business School, University of Cambridge

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