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Corporate and internal governance issues have received increased attention from various international bodies (FSB, Basel, IMF) and at EU level. Weak corporate governance, while not the direct trigger for the great financial crisis, contributed to its magnitude. Indeed, weaknesses in the governance of a number of institutions had contributed to excessive and imprudent risk-taking in the banking sector, which led to the failure of individual institutions and caused systemic issues in the EU and globally.
There was a need to correct credit institutions’ weak or superficial internal governance practices identified during the financial crisis. The management body might not have always understood the complexity of the business and the risks involved, consequently failing to identify and constrain excessive risk taking in an effective manner. In some cases, the absence of effective checks and balances within credit and other financial institutions resulted in a lack of effective oversight of management decision-making, which exacerbated short-term and excessively risky management strategies.
Internal governance frameworks, including internal control and risk management mechanisms, were often not sufficiently integrated within institutions or groups. Institutions’ risk appetite and strategy had not been well defined and risk methodologies lacked consistency, so that a holistic view on all risks did not exist. Internal control functions often lacked appropriate resources, status...