nout wellink : basel committee initiatives in response to the financial crisis remarks by dr nout wellink, president of the netherlands bank and chairman of the basel committee on banking supervision, before the committee on economic and monetary affairs of the european parliament ( econ ), brussels, 30 march 2009. * * * thank you, madame chairwoman and members of the econ committee, for this opportunity to share with you the basel committee ’ s strategy and initiatives to respond to the present financial crisis as it relates to the regulation, supervision and risk management of the banking sector. the work of the basel committee is consistent with and supports the initiatives of the financial stability forum and the leaders of the g20. in formulating responses to the financial crisis, it is necessary to address both the near term challenges related to the weakening economic and financial situation and the long term regulatory structure issues. the two are linked and we need to manage carefully the transition from current measures to a more sustainable long term framework. with regard to the near term situation, it is clear that the banking sector has been at the heart of the adverse feedback loop between the financial and real side. we have moved from what i would call the mark - to - market and illiquidity phase of the crisis related to legacy assets to the fundamental credit cycle part of the crisis. this is associated with large write downs from corporate and retail lending books, and i believe this phase will continue to play out over the medium term. it is critical that supervisors have a comprehensive strategy to deal with both phases of the crisis and their associated impact on banks. that is essential if we are to restore stability to our financial systems and economies. when it comes to the long term, we need to establish a clear target for the future regulatory system which substantially reduces both the probability and severity of a crisis like the one we currently are working though. by providing clarity about the future regulatory framework, we will help re - establish near term confidence, reduce the risk of competitive distortions and limit the degrees of uncertainty for the public and private sector. also, by emphasising that these reforms will be phased in over an appropriate horizon, we reduce the risk that our own actions contribute to procyclicality in the system. in this regard our plans are closely aligned with the views expressed in the de larosiere group ’ s report. this group ’ s report has been strongly appreciated by the basel committee. let me now say a few words about the steps the

for achieving the best possible performance of the company. this means maximizing profits, increasing growth and market share, expanding business lines, and doing all that it takes to maximize the company ’ s share value. on the other hand, the board of directors has to oversee the operations of management, ensuring that they operate well within the bounds of acceptable risks in order to ensure business continuity. the board of directors, thus, needs to act as a check - and - balance against the management with a view to ensuring the safety and soundness of the enterprise. meanwhile, shareholders also expect the board to perform its role as a watchdog or guarantor that the corporation would not incur losses or go into bankruptcy. they also expect the board to check management against excessive risk taking. therefore, it goes without saying that if the roles of chief of management and the chairman of the board are performed simultaneously by the same individual, then other board members cannot fully perform their duties of providing the check - and - balance required by good governance. worse yet, shrewd ceo will tempt other board members with stock options so that they would go along with his policy direction. this would especially be the case when the ceo aims for high growth or business expansion, which usually implies a quick rise in the company ’ s equities. though, these policies are often prone to higher risks, board members may become less inquisitive and more optimistic in their judgment as a result of the personal interests in potential profits from stock options. at the end of the day, their own personal interests would overtake their sense of conservatism and responsibilities. one can think of an even worse scenario when the ceo would like to cover up any wrongdoings or poor performances. since this ceo is also chairman of the board, he can easily influence the agenda of the meeting. thus, board members may never be aware of the company ’ s problems. if and when they have been informed of the problems, it may already be too late, as evidenced in the case of enron. it is for the above reasons that the authorities here in asia, are pushing for the separation of chairman and ceo positions so that they cannot be occupied by the same person in order to properly balance the powers and functions of the two roles. it is also fortunate for us that the practice of issuing stock options to directors of financial institutions is not yet widespread among banks in asia. ladies and gentlemen, what i have highlighted is only one face