Corporate Governance Failure: The Role of Internal and External Gatekeepers in UK Banks and Financial Institutions
Corporate Governance - International Journal for Enhanced Board Performance, Vol. 10, No. 1, p. 8, 2010
18 Pages Posted: 14 Aug 2010 Last revised: 24 Aug 2010
Date Written: August 13, 2010
Abstract
There is no doubt that both internal and external regulation of banks will need to be coordinated, but the main responsibility for effective regulation of banks and financial institutions lies within these institutions themselves. However, internal regulation needs to be backed up by effective external regulatory mechanisms which impose some sanction for failure. Prior to the financial crisis of 2007-2008, government regulators seemed to have the role of providing reassurance rather than sanction; thus, banks would turn to regulators for comforting reaffirmation that the bank’s risk management policies and practices were adequate. A key means of achieving effective corporate governance has been through the roles of “gatekeepers” both within and outside of the corporation. Those gatekeepers inside the banks included its board and CEO as well as the general meeting; in contrast, external gatekeepers included auditors, credit rating agencies, and government regulators. The failure of bank gatekeepers has set the scene for the subsequent financial crisis that we have seen. This failure was made all the more likely due to the complexity of financial instruments that bank gatekeepers were meant to scrutinise, but were poorly equipped to do this. This paper examines some of these issues in greater detail.
Keywords: Global Financial Crisis, Bank Regulation, Governance, Gatekeepers
JEL Classification: G21, K22, G15, G28, G30
Suggested Citation: Suggested Citation