There are three key points that are closely related to good corporate governance and critical to any banking institution. The first is a rigorous internal control apparatus, which is essential to the sound and successful execution of banks’ strategic objectives. Second, each banking institution must have in place the technical systems and management processes necessary to identify the risks associated with its activities. Third, an effective risk management and control structure must be accompanied by the institutional management culture required to ensure that policies and procedures are translated into practice, with buy-in at all staff levels. Primary responsibility for ensuring that the bank has in place good corporate governance, rigorous internal controls and effective risk management lies with the board of directors and senior management. The task of the board of directors is to oversee the development of the overall strategy of the organization and the decisions made by senior management in pursuit of that strategy. The role of senior management, in turn, is to assure that day-to-day decisions made within the organization are consistent with the policies and long-term objectives of the board. With regard to the board of directors, I recognize that it can be difficult to elect members with the necessary skills and time to devote to overseeing the bank. While this can be a major challenge, it is obviously important that we get it right for the overall well-being of the bank.

It is imperative that we stay on track in our goal to release a new capital adequacy framework by early next year, with a comment period and industry implementation to follow shortly thereafter. BIS Review 50/2000  4  Corporate governance My remarks thus far have focused on the need for a more risk-reflective capital framework. Clearly, a strong capital position is crucial to the sound operation of any banking organization. It allows banks’ board of directors and senior management to focus on strategic objectives and growth opportunities, supports the business activities of the organization, and provides the financial strength necessary to sustain the occasional losses that are inevitable in a business of taking calculated risks. In this latter sense, capital represents the last line of defense against potential loss-creating problems. But, I want to briefly address the first line of defense - effective bank management, which increasingly is an important element of today’s supervisory framework as banks’ activities and their associated risks become ever more complex. There are several aspects to effective bank management. The importance of good corporate governance cannot be overemphasized. Broadly speaking, corporate governance refers to the organizational infrastructure necessary to achieve a workable corporate strategy, to effectively implement that strategy, and to continually evaluate its risks and benefits to the organization. These basic infrastructural elements include: –  independent and competent outside directors;  –  capable and experienced management;  –  a coherent corporate strategy and business plan; and,  –  clear lines of responsibility and accountability.