Abstract
The analysis of the financial crisis has revealed not only major market and regulatory failures, but also shortcomings in supervisory approaches and in banks systems of internal and external controls. These failures and shortcomings played a significant role in the origin and evolution of the crisis. In some important cases, the crisis revealed that banks internal governance, and their internal control functions in particular, were ineffective or even unsuitable when faced with the demands of overseeing the growing levels of risk undertaken by intermediaries, and especially the interrelations between these exposures. So what are the implications of the crisis, the regulatory innovations now being implemented, and the changes in supervisory policies and practices, for banks internal control systems? Given the role of internal control functions in risk-based supervision, what is the exact relationship between supervisor and supervised as defined by Basel 3, Pillar 2, with regard to ICAAP and SREP? One important lesson to emerge from recent experience is the need to encourage a new culture amongst banks, ensuring that they appreciate the key role of internal controls as a tool for managing and monitoring risk.
Highlights
The aim of this paper is to provide a detailed investigation of banks’ internal control functions in the light of the crisis and the subsequent regulatory and supervisory measures, first and foremost Basel 3
This process, intended to intensify the dialogue between supervisors and supervised and strengthen the accountability of the supervisory body, is extremely problematical, especially with regard to the method adopted for the cost-benefit analysis (CBA), but the appropriate procedures have been more or less identified and considerable progress has been made during the last few years
It will be useful to take a closer look at the objectives of the European System of Financial Supervisors (ESFS), which consists of three agencies established under EU law, the European Supervisory Authorities (ESAs) created by transforming the sectorial supervisory committees from level 3 of the Lamfalussy process, the duties and responsibilities of which they have taken over
Summary
The aim of this paper is to provide a detailed investigation of banks’ internal control functions in the light of the crisis and the subsequent regulatory and supervisory measures, first and foremost Basel 3. The first step will be to survey internal governance and control functions within the regulatory and supervisory context at the international level. This will be followed by an investigation of the main regulatory failings and supervisory. The next topic to be examined will be the changes being made at the international level to both regulation and the supervisory function, with specific reference to Europe. These changes are the outcome of the failures and shortcomings that emerged during the crisis. Attention will be focused in particular on the role of internal control functions in overseeing banks’ risk exposure, since it was these functions’ inability to monitor the ever-increasing risks undertaken, and their failure to consider or even understand the interrelations between them and their combined weight in a firm-wide perspective, that prevented them from providing effective protection against excessive levels of risk
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