independent review by the internal audit. management should respect the independence of the compliance function and not interfere with their fulfilment. nevertheless, even at the cost of repetition, i would like to stress that compliance is a shared responsibility of each and every staff of the bank. importance of corporate governance while feedback mechanisms are important in a bank to permeate a strong compliance culture, enabling environment in a bank that fosters such culture embedded with strong internal control has to emanate from the directions of the board. aspects with benefits to the bank not apparent has to be enforced through a top down approach. corporate governance determines the allocation of authority and responsibilities by which the business and affairs of a bank are carried out by its board and senior management, including how they : align corporate culture, corporate activities and behaviour with the expectation that the bank will operate in a safe and sound manner, with integrity and in compliance with applicable laws and regulations. in this context, it may be noted that board should adopt policies in accordance to each bank ’ s size, complexity, risk appetites, business model and philosophy. board approved policies should factor in entity specific vagaries. also, mere adoption of policies does not solve anything. an effective implementation of board approved policies is essential to percolate down the philosophy embedded in policy throughout the firm. a strong compliance culture has a significant role to play in this context. conclusion lot of improvement is needed in compliance culture across banks. as a supervisor of banks, the reserve bank has keen interest in sound corporate governance and compliance culture, as it is an essential element in the safe and sound functioning of a bank and if not followed effectively may adversely affect the bank ’ s risk profile. well governed banks contribute to an efficient and cost - effective supervisory process, as there is less need for supervisory intervention. such sound culture would help in building organisations that are strong, resilient, disciplined and enjoy the benefits of sustained growth and customer confidence. it will also pre - empt several supervisory actions, and attendant reputational risk, that would follow in case transgressions are detected. role of compliance has been gaining wider attention across the globe and it has been acknowledged by the central banks and bankers alike that compliance warrants considerable attention. regulators, supervisors and international standard setters have become increasingly cognizant of the fact that merely enacting rules and regulations is a futile exercise unless these are complied with, both in letter and spirit, by the regulated entities.

current situation. there are three channels where this is particularly relevant. first, one cause of financial fragmentation is the high public debt levels in some euro area countries, which, as domestic banks are heavily exposed to their own governments, harms banks ’ asset quality. in italy, for instance, 65 % of bonds were held domestically in early 2012, and in spain 70 %. clearly, governments have a central role in dealing with this problem by ensuring that their debt is safe and sustainable. this requires credible fiscal consolidation. bis central bankers ’ speeches second, another cause of fragmentation is low growth, which deters banks from taking risk, especially lending to smes. interest rate spreads on sme loans compared with those for large non - financial companies have widened by an average of 40 basis points since 2010. a key part of the solution here has to be structural reforms that improve the medium - term growth outlook and hence support risk appetite. only governments can introduce them. third, fragmentation is also caused by weak bank balance sheets. lack of capital, weak profitability or rising non - performing loans lead to lower credit provision or higher interest rates being charged on new loans to offset losses elsewhere. but it is governments that have to deal with this problem through recapitalisation and restructuring. in other words, without actions from governments, we will not be able to reintegrate financial markets. fortunately, positive progress is being made. the commission projects the euro area fiscal deficit to fall below 3 % of gdp this year – less than half the peak reached in 2009. under pressure from supervisors, euro area large and complex banking groups have continued to improve their capital positions, with the median core tier 1 ratio reaching 11. 1 % in the first quarter of 2013, up from 9. 6 % at the end of 2011. but there is still a long way to go before the “ singleness ” of the euro area financial market is restored. this means that there is no room for complacency for governments. most of all, they should not expect the ecb to substitute for actions that they must take themselves. 2. dealing with financial fragmentation : the role of the ecb what is then the role of the ecb in addressing financial fragmentation? the ecb necessarily operates within certain constraints. we are the european central bank, and so our focus is the euro area as a whole, not the concerns of any particular country. and we can only address issues that fall within our mandate to maintain price stability