This means the decision-making process within the bank, the respective responsibilities and accountabilities of the board and managers, the control functions that provide assurance to the monitoring processes and the structures that support all these functions. Good corporate governance and supervisory actions complement one another. The guidance, inspections and oversight activities of supervisors cannot guarantee, on their own, the prudent operation and financial soundness of a supervised bank. Banking supervisors must rely on the competence, skills and prudence of the board and management. Confidence in the corporate governance processes at the bank will enhance the supervisor’s overall confidence that the bank is being operated prudently. This may be reflected in the intensity of supervision applied. In addition, supervisors may expect a bank’s governance structure to be proportionate to its size and complexity regardless of the relevant general legal requirements. From the perspective of a prudential supervisor, the basic elements of a good corporate governance framework could include the following: -  The primary responsibility for the conduct of the bank’s business lies with its board and management. Indeed, it is difficult to conceive that a bank could carry out activities in the absence of strategic objectives or guiding corporate values. Therefore the responsibilities of the board and management would include, among other things, approving ethical standards, establishing and maintaining strategic objectives, policies and procedures as well as ensuring that the bank complies with the statutory and supervisory obligations.

At the very least, during the crisis, we have seen deleveraging proceeding at an accelerated pace, although interest rates have been brought down – and this is the reason why there has been a zero lower bound problem. I suspect that, symmetrically, interest rate hikes would have been powerless to stop the incredible build up in leverage prior to the crisis. This is the very reason why we need additional – macro prudential – tools to deal with financial instability. But this analysis also shows that macro prudential and monetary tools are not independent. So we have to give up the ideal vision of a world where two objectives – price and financial stability – would be pursued with two independent set of instruments. The  BIS central bankers’ speeches  1  reality is somehow messier and this has important consequences. Operating two different policies with two sets of interacting instruments is definitely a challenge. Once we move away from the pure “Tinbergen” world, preserving the operational independence of monetary policy may require particular attention. Add to this that mandates and accountability regimes are very different for price and financial stability. Central Banks are independent, but macro prudential authorities are not. In all major jurisdictions, Governments, and Parliaments, are deeply involved in the organization and management of macro prudential supervision. Likewise, while price stability mandates are precisely defined and often quantified, financial stability mandates are specified in very broad terms. There are good reasons for this situation.