Considering the fiduciary responsibility of the Boards towards their stakeholders, and in the interest of wider financial system stability, the Central Bank issued directions on corporate governance in December 2007, requiring the banks to streamline their governance practices commencing from 2008. 3.2 The implementation of the Basel II framework from January 2008 is another enhancement to the regulatory structure, which requires the financial industry to have a better risk management framework. Most of the leading banks have set up independent risk management and compliance divisions to monitor bank-wide risks. These institutions should now focus in moving forward to implement advanced approaches under Basel II framework by setting up data warehouses and sophisticated IT systems in order to have better risk management and compliance. Similarly, the adoption of International Accounting Standards such as IAS 32 & 39 and IFRS 7, which deal with disclosures, presentation, recognition and measurement of financial instruments, also highlight the need for an integrated risk management, disclosures and compliance. There is, however, reluctance by banks to build robust IT infrastructure and advanced IT frameworks due to the high cost of investment and the time it would take to reap the benefits. It is important that banks and financial institutions change this mindset to pave the way for a GRC management and also to avoid operational losses due to product failures and frauds. Risks arising in these areas could spread beyond the financial institution concerned and have the potential to affect the entire industry. 4.

The financial institutions have the responsibility to establish a compliance mindset throughout the organization as a foundation that places high regard on ethics, trust and values. Energies that are used by some banks and financial institutions to design ways and means of flouting instructions and defying directives should be diverted to observance of governance and compliance. 6.2 I have highlighted the challenges that financial institutions could encounter in implementing GRC amidst ongoing increasing globalization, continuously changing laws and regulations, various forms of financial stresses and continuous evolution of complex financial products. These challenges underscore the importance of compliance and best practice, which have already been set by the financial services industry regulators and supervisors as well as the international standard setters. 6.3 In the present financial industry environment, where the stakeholders and other interested parties put pressure for greater transparency and corporate responsibility, the Board of Directors and senior management have to set high standards in all aspects of GRC. The increase in investments to improve the IT infrastructure and human resources to integrate GRC management can improve risk management as well as compliance performance and its efficiencies. The financial institutions that have strong governance and  6  BIS Review 15/2008  compliance processes in an integrated GRC framework will be more capable of winning public confidence, attracting investors, improving corporate reputation and efficiency, as well as contributing to promote financial system stability.