Global regulators to review bank governance

Global regulators are preparing to turn their attention to raising bank corporate governance standards in the wake of recent accounting scandals to strengthen the core principles in the Basel II accord.

Central bankers and regulators for the G10 industrial nations approved the accord at the weekend, which adjusts the rules governing the amount of money banks must set aside to absorb a potential collapse in their loan book.

It has taken more than five years to agree the new rules, which will reduce the amount of capital financial institutions will have to assign against their loan books.

The adjustment could free up some additional funds for Irish and other financial institutions, which they can use to invest in other parts of their businesses.

Domestic central banks, though, could impose other capital requirements that may limit the amount of funds that could potentially be released, particularly where there are concerns about the risks associated with lending in various economies.

Irish analysts said the introduction of a new accounting standard, IAS 39, which will be effective from the beginning of 2005, is a more significant development for the sector in the short-term.

Some have suggested that the new standard could reduce the bottom-line profits reported by some Irish financial institutions.

The reforms are part of the regulators' efforts to improve the integrity in corporate governance following billion-dollar accounting scandals at Enron, Worldcom and Parmalat.

In an interview with Reuters yesterday, Mr Jaime Caruana, who chairs the Basel Committee on Banking Supervision, said the committee must now press on with tackling corporate governance issues.

"Everything that happens needs to be taken account of," he said. "Good risk management should be anchored or based on good corporate governance."

The Basel accord is expected to evolve to keep up with advances in risk management, and Mr Caruana said he also wanted to incorporate guidelines on corporate governance drawn up by the OECD into its core principles.

"We have to be very conscious of everything that has happened in the past few years in terms of accounting... in different countries, which showed problems in controls and corporate governance," he said.