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Prudential authorities control the quality of individuals that serve on bank boards through their "fit and proper" (F&P) assessment process. Despite these requirements, failures in bank governance were a root cause of the Great Financial Crisis, which subsequently led standard setters to tighten their governance requirements.
While all jurisdictions prescribe F&P criteria, some have no regulatory powers to approve board candidates, or they do not require prior approval of all bank directors. Where prior regulatory approval is required, regulatory decisions are driven by the fitness criterion, which comprises a range of different factors.
When it comes to board composition, nearly all authorities require the chair and the CEO roles to be separated, and many prescribe an appropriate mix of executive directors, non-executive directors (NEDs) and independent non-executive directors (INEDs) on the board. In this context, all jurisdictions provide guidance on what is not considered "independent", focusing on the relationship between a bank and a director. Several jurisdictions also impose tenure limits for INEDs and NEDs. As for board structure, most authorities require banks to establish risk, audit, and remuneration committees, while ethics and culture committees are rare.
Based on their stocktake, authors also identify areas where additional guidance on aspects of board governance can help to further strengthen the quality of bank boards which, in turn, may enhance confidence in the financial system.