. the unique nature of banks provides the rationale for prudential regulation. but it is unrealistic to expect that bank regulation alone can guarantee the efficient and safe operations of the banking system. good corporate governance is as equally important for sound and efficient bank management bis central bankers ’ speeches as bank regulation. corporate governance must start with the board of directors, setting the overall strategic policies of the bank and providing independent oversight of bank management. in particular, the directors must understand clearly their fiduciary responsibilities. they must ensure that the bank ’ s risk management is adequate to ensure its safe operation, so that depositors funds are protected and that the financial statements provided by the bank to the regulator and the public are accurate. bis central bankers ’ speeches

bank failures was poor corporate governance. in many of the failed banks, a dominant shareholder or group of shareholders was able to exert undue influence over the management of the bank which resulted in abuses such as pervasive insider lending. the losses incurred on insider loans were the single most important contributor to the collapse of these banks. the kenyan banking industry was also afflicted by multiple bank failures in the 1990s, with poor corporate governance playing a major role in these failures as it did in uganda. poor and abusive management was allowed to flourish in banks because their boards of directors were usually weak, lacking the professional expertise and often the independence and incentives to provide any effective oversight of bank management. the bank failures of the 1990s prompted the bou and the government to strengthen banking regulation. parliament enacted new legislation in 2004 – the financial institutions act – which, inter alia, raised minimum bank capital requirements, tightened restrictions on insider lending and mandated the bou to intervene promptly in failing banks before their bis central bankers ’ speeches capital is completely eroded and their depositors suffer losses. the fia also imposes a ceiling of 49 percent on the share of a bank ’ s equity which a single shareholder, or a group of related shareholders, can hold, in order to limit the influence of dominant shareholders, although this ceiling does not apply to shareholdings by reputable parent banks domiciled in other jurisdictions with good home country bank regulation. but we also recognised that statutory bank regulation and supervision by a public agency cannot be expected, on its own, to guarantee the sound management of banks. moreover, excessively heavy handed regulation, although it might protect depositors, can also stifle innovation and risk taking in banks, which would be detrimental to economic development. in a market economy, the onus for sound management, including the proper management of risks, must lie with the banks themselves. bank regulators cannot be a substitute for bad bank managers. as such good corporate governance is an essential complement to good bank regulation and supervision. this principle was made explicit in the financial institutions act, section vii of which was devoted specifically to providing a regulatory framework for good corporate governance in financial institutions. the provisions in section vii of the fia were supplemented by a set of corporate governance regulations which were issued by the bou in 2005. uganda ’ s corporate governance regulations were influenced by the guidelines published by the basel committee on banking supervision, based at the bank for international settlements, which is responsible for formulating global standards for bank