system as those who were present at the highest levels when the crisis arose remained in their positions for some time after and many are still there today. This applies equally to the Department of Finance.
The need for strong corporate governance has been highlighted through major failures and lapses in corporations and banks over the last number of years. The failures invariably arose due to a lack of awareness among the boards of credit, market, operational or liquidity risks being taken by institutions. In considering reforms in this area, one might also include the issue of tackling conflicts of interest in financial institutions, so that raising a loan from your own bank, as people like Sean FitzPatrick have done, would be impossible, as it should be.
Drawing on lessons learned from the current financial crisis, the Basel Committee on Banking Supervision laid out âPrinciples for enhancing corporate governanceâ to set standards for best practice in banking organisations. 20 The key areas addressed by the principles include the role of a board; the qualifications of board members and the composition of a board; the importance of an independent risk management function including a chief risk officer; the importance of monitoring risk on an ongoing firm-wide and individual entity basis; a boardâs oversight of the compensation systems; and, finally, a board and senior managementâs understanding of the bankâs operational structure and risks.
The two major banks in Ireland, AIB and Bank of Ireland, have, over time, drawn up frameworks as to the policies and procedures for the operation of their respective institutions. A great deal of thought has been put into this area, and over the years these policies became better articulated and more suitable and applicable to their customers, employees, shareholders and the community at large. However, such documents are only as useful as they are put into daily practice. Somewhere along the line, smaller banks that were under the control of the Financial Regulator and that were independently audited failed to follow or comply with accepted good practice in relation to conflicts of interest and the moral hazard that exists in a community where a large majority of professional people were not only doing their day jobs, sometimes carelessly, but were actively moonlighting and had outside interests. For example, many members of the legal and accounting professions, in their own right or on behalf of their own firms, borrowed large sums for investment purposes. Over the past decade these investments were likely to have been in property. Whether such investments were part of a partnershipâs capital expenditure programme or part of a pension portfolio, they put the investor in an unenviable position when the downturn occurred. When the Government prepared a list of solicitors who would be deemed eligible for NAMA advisory work, many on the list presented conflict of interest issues as they owed banks substantial amounts on property loans on the one hand and, on the other hand, were being asked to representNAMA to prosecute people who were in a similar position to themselves.
Banks are traditionally cautious in the context of the borrowings of directors and executives. Normally, to avoid potential conflicts of interest, if members of one bank have a need to borrow they will do so from a competitor bank, and often reciprocal arrangements may exist to accommodate the directors and executives of the other bank. These borrowings would be used for mortgages, personal loans, car loans and shares. Frequently, an accommodation would be put in place to allow the executives to execute share options and subsequently share purchases. The purpose of these loans was always made clear and the size of outstanding personal borrowings was monitored closely. Directors and executives were encouraged to have a shareholding in their bank but the quantity of shares was limited to a
The need for strong corporate governance has been highlighted through major failures and lapses in corporations and banks over the last number of years. The failures invariably arose due to a lack of awareness among the boards of credit, market, operational or liquidity risks being taken by institutions. In considering reforms in this area, one might also include the issue of tackling conflicts of interest in financial institutions, so that raising a loan from your own bank, as people like Sean FitzPatrick have done, would be impossible, as it should be.
Drawing on lessons learned from the current financial crisis, the Basel Committee on Banking Supervision laid out âPrinciples for enhancing corporate governanceâ to set standards for best practice in banking organisations. 20 The key areas addressed by the principles include the role of a board; the qualifications of board members and the composition of a board; the importance of an independent risk management function including a chief risk officer; the importance of monitoring risk on an ongoing firm-wide and individual entity basis; a boardâs oversight of the compensation systems; and, finally, a board and senior managementâs understanding of the bankâs operational structure and risks.
The two major banks in Ireland, AIB and Bank of Ireland, have, over time, drawn up frameworks as to the policies and procedures for the operation of their respective institutions. A great deal of thought has been put into this area, and over the years these policies became better articulated and more suitable and applicable to their customers, employees, shareholders and the community at large. However, such documents are only as useful as they are put into daily practice. Somewhere along the line, smaller banks that were under the control of the Financial Regulator and that were independently audited failed to follow or comply with accepted good practice in relation to conflicts of interest and the moral hazard that exists in a community where a large majority of professional people were not only doing their day jobs, sometimes carelessly, but were actively moonlighting and had outside interests. For example, many members of the legal and accounting professions, in their own right or on behalf of their own firms, borrowed large sums for investment purposes. Over the past decade these investments were likely to have been in property. Whether such investments were part of a partnershipâs capital expenditure programme or part of a pension portfolio, they put the investor in an unenviable position when the downturn occurred. When the Government prepared a list of solicitors who would be deemed eligible for NAMA advisory work, many on the list presented conflict of interest issues as they owed banks substantial amounts on property loans on the one hand and, on the other hand, were being asked to representNAMA to prosecute people who were in a similar position to themselves.
Banks are traditionally cautious in the context of the borrowings of directors and executives. Normally, to avoid potential conflicts of interest, if members of one bank have a need to borrow they will do so from a competitor bank, and often reciprocal arrangements may exist to accommodate the directors and executives of the other bank. These borrowings would be used for mortgages, personal loans, car loans and shares. Frequently, an accommodation would be put in place to allow the executives to execute share options and subsequently share purchases. The purpose of these loans was always made clear and the size of outstanding personal borrowings was monitored closely. Directors and executives were encouraged to have a shareholding in their bank but the quantity of shares was limited to a
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