Internal Corporate Governance and the Financial Crisis: Lessons for Banks, Regulators and Supervisors

This paper aims to highlight the importance of banks’ Internal Corporate Governance (ICG),viewed as an operational mitigation instrument, in a context where banks enjoy a high degree oforganisational flexibility due to principle-based regulatory and risk-based supervisory approaches.The recent crisis has shown, on the one hand, that financial mitigations (i.e. capital requirements) are,per se, not sufficient to ensure the stability of the banks (which underpins the soundness of the entirefinancial system) and, on the other hand, the failure of the light-touch supervisory approach. The mainresearch question is whether the improvement of ICG, involving proper protection for stakeholdersand the switch to a more intrusive supervisory model, will be able to offset the failures of marketdiscipline revealed by the crisis and, together with Basel 3’s reinforced capital adequacy regime,strengthen the resilience of the financial system, without the reintroduction of structural reforms. In theEuropean Union, the new European Systemic Risk Board (ESRB) and, above all, the three newEuropean Supervisory Authorities (ESAs) will play a crucial role in this process.