Beyond this, also banks’ management bodies – both in their managerial and supervisory function – have an impact on banks’ governance, performance and sustainability. I will now first focus on this  other dimension of governance: the role and composition of banks’ boards. Role and composition of banks’ boards Banks’ management bodies have an array of important responsibilities. They set the bank’s risk appetite and ensure that it is adhered to at every level of the institution. They ensure that any material risks to which the bank is, or could be, exposed are identified, monitored and mitigated. And they are responsible for communicating the bank’s strategic objectives, risk appetite and values, not only to external stakeholders through transparent disclosures, but also internally within the bank. In particular, management bodies play a key role in steering the strategic course of a bank and setting it on the path towards sustainable long-term objectives. Especially in times of crisis, a well-governed bank, with a clear understanding of its main risks and core revenue sources, is likely to adapt more quickly and perform better. First with the pandemic and now with the war in Ukraine, but also in the face of the climate and environmental crises, it is important that banks and their boards have an active strategy to tackle the challenges arising from events that can have a significant economic impact. As for the composition of banks’ boards, and given their importance, the ECB pays particular attention to assessing their collective suitability, diversity and effective functioning.

Banks’ internal governance First, let me start with internal governance. Internal governance concerns the way in which a bank is organised and the efficacy of its management bodies in conducting business and managing risk. Setting the bank’s business objectives, its appetite for risk, its internal controls, as well as allocating roles and responsibilities and setting up adequate reporting lines, are all aspects which fall under the scope of internal governance. Banks’ governance came under close scrutiny during the global financial crisis, when weaknesses in governance, such as excessive risk-taking and misconduct by board members, were identified as some of the root causes of the crisis. [1] Since then, internal governance arrangements have been strengthened to improve banks’ sound and prudent management. This also ensures that their strategies serve more than merely the short-term interests of their shareholders. Now – what does good internal governance look like? First, it provides for the necessary checks and balances. It counters excessive risk-taking and ensures that decisions are taken in a sustainable manner. In addition, a strong governance framework is one which gives board members access to good data in good time. This is a pre-condition for wellinformed decision-making. [2] Unfortunately, too many banks in the banking union still do not possess sufficiently agile IT systems to adequately aggregate data on risk appetite, risk limits and risk profiles. Weaknesses in this area are one of the main factors hindering the effectiveness of governance frameworks of these banks.