Importance of Corporate Governance on Bank Risk Management - Assignment Example

Importance of corporate governance on bank risk management Introduction Corporate governance entails a variety of systems, principles plus procedures which direct a company. These principles and procedures provide a basis through which a company runs in an organized manner in order to fulfill goals plus objectives. Adherence to these principles is for the purpose of improving the company’s performance in terms of value additions and risk management. The increase in value of a company means the well-being of the entire company since all its beneficiaries for example; company officials, shareholders and all the stakeholders will have a share of the benefits. This paper concentrates on the application of these principles in banks and their importance in bank risk management. Corporate governance is important in banking institutions because it ensures that procedures are in adherence. Banks faces various risks which require proper planning on risk management in order to deal with them amicably (Gup 281). Corporate governance ensures equal treatment of shareholders by giving them a chance to participate in critical matters. This is possible in participation of meetings where important matters concerning a bank are in discussion. Here, the bank exposes the shareholders to decision making thus they exercise their rights (Matutes & Vives 5). They contribute by giving their opinions on certain vital issues hence helping the bank management on risks that it is likely to face (Matutes & Vives 5). The shareholders of banks via the participation in meetings feel respected because of involvement in decision making. This way, the bank exercises openness which is an important aspect in corporate governance (Tang & Changyun 52). The application of corporate governance ensures risks such as credit risks, liquidity risks, and market risks are in good management. This is possible through analyses of the risks expected in banks and using corporate governance principles to implement important decisions (Tang & Changyun 54). A banking institution is likely to face severe financial crises if exposed to credit risks. Corporate governance is able to reduce the level of credit risks plus increase the rates of return of bank by conforming to acceptable levels of risk exposures. Corporate governance provides procedure through which banks follow in order to deal with credit risks (Parlour & Plantin 1295). For example, there is a need of evaluation of the risk thus, measurement of the risk is vital. The process of quantification is present in the corporate governance principles. This is possible through proper estimates on the amount of loses to be incurred on loans. Performing adequate controls on loans by following important procedures is vital in the process of credit management (Mehran & Thakor 1032). Corporate governance offers the best tools for dealing with credit risk by providing exposure ceilings on capital funds. This ensures that the funds do not go beyond a certain percentage provided by the bank. Credit risk management will entail application of models for rating that vividly defines the frequencies of risks plus perform reviews at various occasions (Parlour & Plantin 1299). There is an association of risk pricing and the losses that the bank is likely to incur in terms of credit risks. The solution is possible via the provision of historical data to original losses. The provision of capital is able to incorporate the losses that are possible (Greuning et al 76). Corporate governance ensures that the bank management reduces credit risks by applying portfolios management techniques such as portfolio reviews, proper borrower division plus recognition of credit weaknesses which are fundamental in decision making procedures (Parlour & Plantin 1303). Corporate governance principles plus procedures provides banks with a basis for conducting credit operations such as auditing on loans for the purpose of solving risk problems. Auditing ensures tracking of various mistakes in balance sheets and other documents hence implementing the corporate governance requirements (Greuning et al 77). This is important because the bank is able to know the origin of any losses. Corporate governance provides a system for credit organization that depicts the quantities that banks are likely to lose plus the capital to retain. An independent board that directs banking institution forms part of good corporate governance which forms part of decision making. The board is able to hold meetings to discuss matters that affect the institution (Tang & Changyun 56). They are responsible for respecting all beneficiaries including customers and investors. The nature of corporate governance of a banking institution is likely to attract investors. The board influences existing performance on management in order to improve the working of an institution. This requires persons with dedication and qualification for that purpose (Bodla & Richa 67). Corporate governance consists of code of conducts provided by proper ethics in the institution. The code of conduct is important in risk management because they are a requirement to solving various financial problems. Transparency in an organization is vital because it discloses various issues affecting it. For example, in banks the board provides important information to shareholders and other beneficiaries (Bodla & Richa 69). The information involves financial reports disclosed to beneficiaries. Sometime banks announce their yearly profits on media to respect the stakeholders. This is a requirement of corporate governance principles. Financial reporting offers information offers information so that it is possible to manage risks accordingly. Corporate governance is able to cope with liquidity risks in a bank. Liquidity risks are the potentialities of a bank to officials that ensures incorporation deposits in an efficient manner (Bodla & Richa 76). This entails improving on liabilities reduction plus loans and balance sheets that fail to balance. The liquidity risks falls under the market risks and includes funding plus time and call risks. The marketing risk results from losses originating from changes in various marketing variables. The influence of the risks originates from the interests rates market prices and others. Corporate governance ensures all these factors are in control through conformance to criteria as provided by the corporate governance principles plus procedures (Matutes & Vives 7). Corporate governance offers the best tools for performing measurements plus monitoring of interests and rates concerning foreign exchange. Corporate governance is responsible for the provision of systems that performs the entire risk management in banking institutions. The asset liability management is one system that offers the best management of risks. The system scrutinizes the assets plus liabilities on a suitable manner to ensure the funds present in the bank are in balance (Matutes & Vives 11). Corporate governance offers procedures required to eliminate the susceptibility of banks interest rates to an extent of influencing the earnings, assets plus the cash flows. It helps in maintaining these parameters to profit the banking organization. The bank management ensures proper risk management through power balancing within the organization (Matutes & Vives 26). This division ensures that every group of persons has defined responsibilities. Through this method, banks are capable of improving efficiency plus risk management because each person specializes in a specific area. Increasing remuneration on performance bases is a form of incentives that can eliminate certain risks such losing employees to other companies or competitors. Banks cope with competition by incorporating proper corporate governances in their plans. This is vital for maintenance of bank’s liquidity status (Shin 310). The principles contained in corporate governance entails important aspects that ensure management of risks at various levels. Corporate governance allows persons with greater shares the ability to perform different controls in the institution. This is fundamental because the company cannot risk losing a major stakeholder (Barth et al. 205). A bank is susceptible to forex risk if there is an exchange rate condition. Here, there may be mismatches resulting from the foreign currency imbalance while transactions are in progress. Banks have a responsibility of deciding on which decision to take on such critical matters. Without corporate governance codes of conducts it is impossible for the bank to make sound decisions (Mehran & Thakor 1022). Corporate governance creates various strategies for risk management. Risk management procedures ensure strategy implementation as provided by corporate governance principles. The management of financial institutions requires proper adherence of corporate governance procedures to contain risks. Operation risks are evident in banks hence familiarization of corporate governance processes is vital (Greuning et al. 49). The use of insurance policies is fundamental in dealing with such a case. Conclusion Corporate governance forms a basis through which financial institutions can plan and implement their objectives. Their objectives concerns resolving various financial issues that affect stakeholders. Banking institutions have a responsibility of adhering to corporate governance issues both from the bank boards and those imposed by the government. The performance of a bank is measurable via achievements made through proper planning and implementation of objectives. Therefore, banks incorporate corporate governance processes in order to deal with various risks such as credit risks, market risks and operational risks. A bank is prone to closure if its manager is not able to manage liquidity risks. Works cited Gup, Benton E. Corporate Governance in Banking: A Global Perspective. Cheltenham [u.a.: Elgar, 2007. Print. Greuning, Hennie , and Bratanovic S. Brajovic. Analyzing Banking Risk: A Framework for Assessing Corporate Governance and Risk Management. Washington, D.C: World Bank, 2009. Print. 71 Greuning, Hennie , Hennie . Greuning, Bratanovic S. Brajovic, and Jennifer Johnson-Calari. Analyzing and Managing Banking Risk: A Framework for Assessing Corporate Governance and Financial Risk. Washington, D.C: The World Bank, 2003. Print. Corporate Governance: Principles, Policies and Practices. Prentice Hall, 2009. Print. 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