Chapter 7 - Governance Flashcards
(163 cards)
1
Q
What is corporate governance?
A
A framework of rules and practices that guide how a company is directed and managed, focusing on accountability, transparency, fairness, and managing risk.
2
Q
What is the role of the Board of Directors in a bank?
A
Sets the overall direction and strategy, oversees senior management, delegates duties, and retains ultimate accountability.
3
Q
What is the importance of clear roles and responsibilities in corporate governance?
A
Ensures a clear division of duties between the board, management, and internal control functions, avoiding conflicts of interest.
4
Q
What is the focus of risk management in banks?
A
To identify, assess, and manage risks effectively within the governance framework.
5
Q
Why is compliance essential in banking operations?
A
Ensures the bank adheres to laws, regulations, and internal policies to protect depositors and the financial system.
6
Q
What does transparency mean in the context of banking?
A
Banks need to be transparent with stakeholders, involving clear financial reporting and disclosure of material risks or issues.
7
Q
What are the Basel III requirements?
A
Require banks to hold more capital of higher quality and have sufficient liquid assets to cover outflow of funds.
8
Q
What is the King Code on Corporate Governance?
A
A set of recommendations for corporate governance in South Africa, which includes various versions since 1994.
9
Q
What is the difference between ‘comply or explain’ and ‘comply or else’ governance codes?
A
‘Comply or explain’ allows for flexibility in governance practices, while ‘comply or else’ enforces strict compliance.
10
Q
What are the three key elements espoused by the King IV Code?
A
- Leadership
- Sustainability
- Good corporate citizenship
11
Q
What is the primary moral and economic imperative of the 21st century?
A
Sustainability.
12
Q
Fill in the blank: An integrated report explains how a business creates value to its external environment in the context of its _______.
A
[strategy, governance, performance and other prospects]
13
Q
What is the significance of trust in the banking system?
A
Trust is essential for the efficient mobilisation and allocation of funds; when it fails, the system collapses.
14
Q
What is the impact of effective corporate governance on the cost of capital?
A
Reduces the cost of capital for all market participants, increasing capital formation and productivity growth.
15
Q
What does the UK Corporate Governance Code emphasize?
A
- Effective board leadership
- Accountability with transparent risk management
- Effective remuneration policies
- Open relationships with shareholders
16
Q
What are the key governance objectives for banks?
A
- Setting the bank’s objectives
- Protecting customer deposits
- Overseeing daily operations
- Setting strategy for all stakeholders
17
Q
True or False: Corporate governance is only an issue for banks.
A
False.
18
Q
What were some significant bank failures in South Africa in the last 25 years?
A
- Trust Bank (1991)
- Saambou (2002)
- BOE (2003)
- African Bank (2014)
- VBS (2018)
19
Q
What is the implication of having a robust corporate governance regime in banks?
A
It lowers the cost of capital, increases capital formation, and enhances national prosperity.
20
Q
What is the relationship between corporate governance and societal development?
A
Banks are recognized for their importance in providing financing and facilitating the transmission of funds, integral to societal development.
21
Q
Fill in the blank: Good governance is viewed as effective, _______ leadership.
A
[ethical]
22
Q
What is the purpose of integrated reporting according to King III?
A
To enable stakeholders to make a more informed assessment of the economic value of a company.
23
Q
What does corporate governance in banking aim to manage?
A
Risk throughout the economic cycle and under volatile market conditions
24
Q
Is there a universal bank corporate governance model?
A
No, differences exist by regulatory jurisdiction and institution type
25
What are the key elements of a robust corporate governance framework according to the World Bank?
* Well-articulated corporate strategy
* Clear assignment of responsibilities
* Strong financial risk-management function
* Adequate corporate values and codes of conduct
* Financial and managerial incentives
* Transparent information flows
26
What is the role of the board in corporate governance?
To engage with management and oversee the implementation of strategic objectives
27
What principle emphasizes board qualifications and composition?
Board members should be qualified and able to exercise sound judgment
28
What does Principle 4 state about senior management?
They should manage the bank’s activities consistent with approved policies
29
What is the responsibility of the board regarding risk management?
To ensure an effective independent risk management function exists
30
True or False: The board of directors is responsible for overseeing compliance risk.
True
31
What is the purpose of the internal audit function in banking?
To provide independent assurance on risk governance and controls
32
What is the focus of Principle 12 regarding governance?
Disclosure and transparency to shareholders and stakeholders
33
What key theme did the Walker Committee identify regarding bank boards?
Board-level engagement in risk supervision should be increased
34
What is the first line of defence in a bank's risk management framework?
Line management staff in the business units
35
Fill in the blank: The second line of defence involves the _______ and the risk management team.
[Chief risk officer (CRO)]
36
What is the primary responsibility of the board in the third line of defence?
To set the tone at the top and determine risk culture
37
What does the Companies Act (2008) require for most entities in South Africa?
An audit committee and a social and ethics committee
38
What is the significance of King IV in South Africa?
It builds on King III with a focus on transparency and inclusive capitalism
39
What does the UK Corporate Governance Code emphasize?
Relationships between companies, shareholders, and stakeholders
40
What is the purpose of the UK Stewardship Code?
To set high standards for institutions managing money on behalf of UK citizens
41
What is the role of the compliance function in banks?
To ensure adherence to all relevant laws and regulations
42
What role does the audit function play in relation to financial statements?
To provide assurance that the statements are free of material misstatement
43
True or False: The first line of defence is responsible for risk ownership in banking.
True
44
What is the primary aim of the Companies Act 2006 in the UK?
To modernize and simplify corporate law and improve shareholders’ rights
45
What is the main focus of the risk management function in a bank?
To provide independent oversight of risk management activities
46
What are the three lines of defence in banking operations?
* First line: Line management staff
* Second line: CRO and risk management team
* Third line: Board and audit function
47
What is the primary responsibility of auditors regarding financial statements?
To provide reasonable assurance that the financial statements are free of material misstatement, whether caused by error or fraud.
## Footnote
Auditors issue a report that includes their opinion on the financial statements.
48
Why do banks listed on UK and SA stock exchanges rotate audit firms?
To ensure independence and mitigate reputational risk.
## Footnote
There are strict rules limiting the type of consulting work audit firms may do for their audit clients.
49
What is the role of the board in a banking operation?
To supervise management, agree on strategic objectives, and monitor performance.
## Footnote
The board does not manage the business directly; that is the role of management.
50
List key responsibilities of a bank's board.
* Agree on vision, values, and strategic objectives
* Appoint leadership team
* Ensure management development and succession
* Oversee remuneration of management and employees
* Establish governance structures
* Monitor execution of strategy
* Engage with external stakeholders
51
What are the three common forms of board structure in banking?
* Unitary Board
* Two-Tier Board
* Mixed System
52
True or False: The structure of a bank's board has a direct impact on its ability to survive a crisis.
False.
## Footnote
The effectiveness of the board is more critical than its structure.
53
What is a key feature of the unitary board structure in the UK and South Africa?
Separation of duties between the Chairman of the Board and the CEO.
## Footnote
An independent non-executive typically fills the Chair role.
54
What is the average number of board members at European banks?
11.8 members.
## Footnote
Countries with larger or smaller boards experienced similar banking crises.
55
What does the effectiveness of a board depend on?
The board's ability to address necessary activities while being small enough to react to emerging issues.
## Footnote
Larger boards may offer diverse representation but can be unwieldy.
56
What is the purpose of the audit committee in a bank?
To provide oversight of independent assurance and compliance.
## Footnote
All members must be independent non-executive directors.
57
What is the role of the risk committee in a bank?
To oversee risk management and risk appetite, including capital management.
## Footnote
This committee may also handle compliance.
58
Fill in the blank: The _______ committee is responsible for executive remuneration and HR matters.
Remuneration
59
What is the function of the governance committee in a bank?
To review governance processes and ensure effective functioning of the board.
## Footnote
This includes recruitment and performance reviews of board members.
60
What is the purpose of the social and ethics committee?
To ensure the bank acts as a good corporate citizen and addresses HR, environmental, and diversity issues.
## Footnote
This committee is required by the South African Companies Act.
61
What is the executive committee (Exco) in a bank?
An executive committee that delegates operational responsibility and accountability.
## Footnote
Led by the CEO, it typically does not include non-executive directors.
62
What is the importance of the IT committee in a bank?
To ensure oversight of the stability and robustness of the bank's IT operations.
## Footnote
Highlighted as critical by the King III report.
63
What are ad hoc committees in banking governance?
Committees established to address specific issues quickly as they arise.
## Footnote
Examples include committees formed for regulatory issues post-2008 and during the Covid pandemic.
64
What does a board charter ensure in a banking governance structure?
That the responsibilities and accountabilities of the board are clear.
## Footnote
It is guided by a written mandate reviewed by an oversight body.
65
What are key principles of corporate governance outlined by the King Committee?
* Board composition and mandate
* Appointments and maximum term for executives
* Executive and non-executive compensation disclosure
* Frequency of board meetings
* Balanced annual reporting
* Effective auditing
* Affirmative action and codes of ethics
66
What is the role of non-executive directors in the board of directors?
Non-executive directors challenge, question, and monitor the CEO and senior management.
## Footnote
They are not involved in day-to-day management and should act independently.
67
What are the key principles covered in the King II report?
* Board composition and mandate
* Appointments to the board
* Executive and non-executive compensation
* Frequency of board meetings
* Balanced annual reporting
* Effective auditing
* Affirmative action and codes of ethics.
## Footnote
Revisions in King II (2002) included responsibilities of directors, risk management, internal audit, integrated sustainability reporting, and accounting.
68
What major changes were introduced in King III (2009)?
* Integrated governance, strategy, and sustainability
* Alternative dispute resolution
* Risk-based internal audit
* Shareholder approval of non-executive directors’ compensation
* Evaluation of board and director performance
* IT governance
* Business rescue
* Transactions affecting director responsibilities during mergers.
## Footnote
King III has been applicable since March 2010.
69
How many principles does King IV contain compared to King III?
King IV has 17 principles, reduced from 75 in King III.
## Footnote
King IV emphasizes inclusive capitalism and transparency in corporate governance.
70
True or False: The King IV code is enforced through legislation.
False.
## Footnote
Many King II principles are included in the Companies Act of South Africa of 2008.
71
What is the board's responsibility regarding risk management according to the King Committee?
* Annual review of key risk indicators
* Dedicated committee for risk management process
* Disclosure of risk management in the annual report
* Independent assurance from internal audit on controls
* Compliance with applicable regulations.
## Footnote
These responsibilities support effective governance.
72
Fill in the blank: The board should comprise a balance of knowledge, skills, experience, and _______.
[diversity].
## Footnote
This is emphasized in Principle 7 from King IV.
73
What is a primary difference between executive and non-executive directors?
* Executive directors are involved in day-to-day management.
* Non-executive directors are not involved in management and need to act independently.
## Footnote
This distinction affects the governance structure.
74
What criteria can disqualify a non-executive director from being classified as independent?
* Significant provider of financial capital
* Participates in share-based incentives
* Owns material securities in the company
* Employed as an executive manager in the last three years
* External auditor in the last three years.
## Footnote
Additional criteria include being a significant adviser or executive of a significant customer or supplier.
75
What skills are essential for non-executive directors on a bank's board?
* Understanding the financial structure and performance drivers
* Knowledge of operational structures and risks
* Marketing and business development strategy
* Legal and regulatory framework comprehension
* Guiding remuneration policy development.
## Footnote
Financial literacy is particularly important.
76
What is the purpose of a risk appetite statement?
To define the bank's tolerance for various risk exposures in qualitative and quantitative terms.
## Footnote
It should be owned by the board and guide the bank's risk culture.
77
What does the executive committee of a large bank typically include?
* Group CEO
* COO
* CFO
* CRO
* Chief compliance officer
* Chief IT officer
* Audit executive
* Other executives.
## Footnote
The structure supports the execution of the bank's strategy.
78
What is a key role of senior management in corporate governance?
Execution of strategy within the governance structure agreed with the board.
## Footnote
Senior management must also ensure accountability, transparency, and timely reporting.
79
True or False: A strong and dominant CEO is an indicator of good corporate governance.
False.
## Footnote
Effective governance relies on a firm culture that encourages challenge and openness.
80
What is the relationship between the executive committee and the board?
The executive committee manages operations and acts on behalf of the board.
## Footnote
They are responsible for executing the board's policies.
81
What is the primary function of the ALCO?
To manage the inherent mismatch between assets and liabilities on the bank’s balance sheet
## Footnote
The ALCO is crucial for liquidity risk management.
82
List the responsibilities of the executive committee (Exco).
* Managing the operations of the company
* Acting on behalf of the board
* Conducting research into new trends
* Managing workplace culture and change management
* Making decisions quickly
* Developing and implementing strategy, operational plans, policies, and procedures
* Driving and monitoring operating and financial performance
* Assessing and controlling risk
* Prioritising and allocating resources
## Footnote
The Exco meets more often than the board to ensure effective management.
83
What are the board's responsibilities?
* Acting on behalf of stakeholders
* Appointing and monitoring the chief executive
* Being knowledgeable of the company and industry
* Delegating to management
* Establishing the organisation’s vision, mission, and purpose
* Providing financial oversight
* Creating and monitoring the execution of the strategy
* Ensuring legal and regulatory compliance
* Enhancing public trust
* Endorsing programmes
## Footnote
The board's role is distinct from that of management.
84
True or False: Control functions like finance, risk, and compliance are independent of business executive teams.
True
## Footnote
Their independence is crucial for effective governance.
85
What does the internal audit function typically report to?
The board audit committee
## Footnote
Its key function is to assess the effectiveness of internal control systems.
86
What is the role of the risk committee?
To provide oversight on all risk and control issues
## Footnote
It also interfaces with regulators on risk matters.
87
Fill in the blank: The _____ committee is responsible for monitoring compliance with legislative and regulatory requirements.
[compliance]
## Footnote
This includes issues like anti-money laundering and consumer protection.
88
What is the purpose of the audit committee?
To oversee the internal and external audit processes and ensure adequacy of internal controls
## Footnote
It must be chaired by an independent non-executive director.
89
List the main management risk committees typically found in a bank.
* Asset-liability committee (ALCO)
* Credit risk committee
* Market risk committee
* Operational risk committee
## Footnote
Each committee addresses specific risk types.
90
What is the main responsibility of the credit risk committee?
To monitor credit risk exposures, expected asset impairments, and associated provisions
## Footnote
It ensures compliance with the approved risk appetite.
91
What does the Model Risk and Validation committee do?
Oversees model risk management and independent validation of regulatory capital models
## Footnote
It includes reviewing model risk tolerance statements and monitoring model issues.
92
What is a key focus of the remuneration committee?
To ensure a balance between short- to medium-term profit growth and long-term sustainability of earnings
## Footnote
This includes scrutiny of C-suite remuneration.
93
True or False: The board of directors has overall responsibility for all risks of the bank.
True
## Footnote
This includes setting strategy, policy, and limits.
94
What is the function of the IT committee?
To address IT-related issues like cybercrime and system upgrades
## Footnote
IT issues have become increasingly important for banks.
95
What is the significance of effective governance in banks?
It is critical for the proper functioning and stability of the bank and the banking system
## Footnote
Governance structures may differ based on the size of the bank.
96
What role does the audit committee play in relation to the external auditor?
Recommending the appointment of the external auditor and overseeing the external audit process
## Footnote
This is part of ensuring adequate internal controls.
97
Fill in the blank: The _____ committee is responsible for overseeing all aspects of balance sheet structure.
[ALCO]
## Footnote
This includes capital and asset/liability management.
98
What should the credit risk management department (CRMD) be responsible for?
* Measuring risk and enforcing limits
* Constant oversight of the credit portfolio
* Credit performance monitoring and reporting
## Footnote
The CRMD must be adequately staffed and resourced.
99
What is the role of the executive members in the model risk management committee?
To understand the impact of model risk and model failures and provide effective technical and business challenge of model validation outcomes
## Footnote
The committee includes the CRO, Head of Model Risk Management, and representatives from areas that use models.
100
Who does the IT committee report to?
The board
## Footnote
The IT committee focuses on IT-related issues, which have become increasingly important in recent years.
101
What are the key responsibilities of the IT committee?
To assist the board with information technology projects, focusing on cybersecurity and strategic planning
## Footnote
Responsibilities may also include data governance, IT system controls, and overseeing third parties.
102
What is a significant risk that the IT committee must address?
Increased competition from fintech start-ups
## Footnote
Fintech start-ups are gaining market share in core banking services.
103
Fill in the blank: The IT committee assists the board with establishing strategic plans, principles, and _______.
[policies relevant to information technology]
104
True or False: The IT committee is solely focused on cybersecurity.
False
## Footnote
While cybersecurity is a key focus, the committee also addresses other IT-related responsibilities.
105
What does the IT committee do in relation to disaster and recovery planning?
They implement and monitor IT related projects
## Footnote
This includes ensuring the bank is prepared for IT disruptions.
106
What kind of knowledge is required from members of the IT committee?
Sufficient software and market knowledge
## Footnote
This knowledge helps articulate risks and defend against competition.
107
What has prompted the need for upgrades in legacy systems?
Exposure to cybercrime and the need for improved efficiencies
## Footnote
Automation is also a factor in freeing up resources.
108
List three areas of responsibility for the IT committee.
* Data governance
* Protection of personal information
* Monitoring IT resources
109
What are the three key roles of shareholders in a banking operation?
* Ensuring that the elected board is both competent and engaged
* Holding the board and management accountable for outcomes
* Demanding appropriate levels of transparency in reporting of activities
## Footnote
The roles of shareholders have been emphasized in recent governance reviews such as the Walker Committee Report.
110
What challenges do shareholders face in exercising control and influence in banks?
Shareholders are diverse and dispersed, often preferring to leave governance to paid agents.
## Footnote
This has led to the rise of activist shareholders.
111
What is the Twin Peaks regulatory structure in South Africa?
* Prudential Authority for prudential supervision
* Financial Sector Conduct Authority for market conduct regulation
## Footnote
This structure is similar to that in the UK.
112
Define model risk in a banking context.
Model risk is the potential loss a bank may incur due to errors in the development, implementation, and use of models.
113
What are some areas where models are used in banks?
* Provisioning calculations
* Pricing loans and other assets
* Budgeting
* Stress testing
* Capital calculations
* Investment decisions
## Footnote
Model failures can cause significant financial and reputational damage.
114
What regulatory changes have occurred regarding model risk management since the global financial crisis?
Regulators have increased model risk management requirements, and banks have improved their model risk management functions, policies, and frameworks.
115
List the key roles defined in model risk management.
* Model owner
* Model developer
* Model validator
* Model approver
## Footnote
Roles may differ across organizations but are essential for model lifecycle management.
116
What does model materiality measure?
Model materiality measures the extent of use of a model or the potential financial loss or reputational damage from its failure.
117
Fill in the blank: A model life cycle typically includes _______.
* Initiation
* Development
* Validation
* Deployment
* Monitoring
* Adjustment
* Decommissioning
## Footnote
Each step requires proper documentation for governance.
118
What is the purpose of a model inventory?
A model inventory serves as a central depository of a bank's models, including information on model usage and status.
119
What is model risk appetite?
Model risk appetite refers to the amount of model risk a bank is prepared to accept to meet its strategic objectives.
120
What new risks arise from AI/ML models in banking?
* Explainability risk
* Resilience risk
* Fairness risk
## Footnote
These risks require banks to enhance their governance frameworks.
121
What steps can be taken to ensure governance for AI/ML models?
* Develop an enterprise-wide AI/ML definition
* Enhance existing risk management frameworks
* Implement an operating model for responsible AI/ML adoption
* Invest in capabilities supporting AI/ML adoption
## Footnote
These steps help manage risks associated with AI/ML.
122
What is a black box model?
A black box model is one where access to its internal workings is restricted, often because it is proprietary.
123
What reasons might a bank have for purchasing a black box model?
* Time constraints
* Cost-effectiveness
* Lack of required specialist skills
## Footnote
Purchased models may also include periodic updates managed by the vendor.
124
True or False: All models used in a bank should be well documented online.
True
## Footnote
Undocumented models are often considered a red flag.
125
What is a 'black box' model?
A model where the internal workings are not accessible or understandable
126
What should be specified before purchasing a model?
The objective of the model
127
Why is understanding the model's scope important?
To ensure appropriate application and avoid misalignment with portfolio characteristics
128
True or False: Ethics are usually a primary consideration in model building.
False
129
What can result from unethically built models?
Legal and regulatory action, reputational risk
130
What historical example illustrates the impact of bias in AI models?
Amazon's AI model for sorting CVs
131
What are IFRS 9 ECL models used for?
To determine expected credit losses for banks' financial reporting
132
What is a significant consequence of year-on-year increase in provisions under IFRS 9?
Reduction in net profits and retained earnings
133
Fill in the blank: IFRS 9 models need to be developed for each _______.
[credit portfolio]
134
What role does the model challenge committee play?
To robustly challenge proposed changes to models before approval
135
What is a key consideration in provisioning governance?
Overlay adjustments for model risk and event risk
***
Definitions of model risk and event risk***
136
What do forward-looking adjustments in IFRS 9 models rely on?
Statistically-driven macro-economic models
137
What was a major issue during the COVID-19 period affecting ECL estimates?
Historical data did not account for COVID-19 impacts
138
How often should management information be provided to the executive committee?
Monthly
139
What is the purpose of management information?
To assist in day-to-day decision making and assess performance against strategic objectives
140
What principle did BIS publish in 2013 regarding risk data aggregation?
BCBS 239
141
What is a critical component of effective corporate governance?
Transparency
142
What did the banking crisis of 2007-2008 reveal about boards of banks?
Failures in oversight and risk management
143
True or False: All banks that failed during the crisis had similar cultures and strategies.
False
144
What does the term 'tail risk' refer to?
The irrational confidence in mathematical models estimating risk in extreme events
145
What should be avoided when providing information to management?
Clutter and irrelevant information
146
Fill in the blank: The final provisions, including modelled results and adjustments, are discussed with the _______.
[credit risk management committee]
147
What is the role of the provisioning committee?
To govern the approval and release of model risk overlays
148
What should be documented to support the external audit of provisioning processes?
Data, models, macro-economic scenarios, model outputs, committee meeting minutes
149
What was a major factor behind the banking crisis of 2007–2008 according to Muradoglu?
The opacity of balance sheets reflecting the extent of assets such as securitisations and complex transactions.
## Footnote
This lack of transparency led to incorrect risk assessments by bank management.
150
What is the governance principle highlighted in the text regarding senior management's assessment of risk?
An incorrect (usually optimistic) assessment of risk by senior management is a behavioural issue.
## Footnote
This emphasizes the need for better regulations to account for human nature.
151
What do De Bondt et al. (2010) suggest about current regulations and governance culture in banks?
They were not sufficient to prevent bank management from bending financial reports in their favour.
## Footnote
This indicates a need for stronger governance and controls.
152
What is accountability's role in bank governance?
The more accountability is placed on the board, the more engaged it becomes, leading to a better governance framework.
## Footnote
This suggests that more detailed regulation may not be the solution.
153
What paradox is identified regarding the price behavior of financial assets?
Rising prices lead to rising demand for financial assets, contrary to other assets where rising prices lead to falling demand.
## Footnote
This behavior contributes to short-term decision-making in financial markets.
154
Why is 'market share' considered an inappropriate measure for banks?
Chasing market share without considering price/margin and risk can lead to higher losses during market corrections.
## Footnote
This is particularly evident in the failures of banks such as HBOS and Bradford & Bingley.
155
What was a key issue with boards during the 2008 financial crisis?
Boards congratulated themselves on appointing dynamic CEOs, losing sight of their role to challenge management.
## Footnote
This led to a breakdown of governance structures.
156
What should banks recognize as their fundamental role?
Banks are custodians of other people's funds and should act consistently with this responsibility.
## Footnote
Putting these funds at risk is considered immoral.
157
What is the importance of communication for actuaries in banking?
Actuaries must explain technical concepts in an understandable manner to stakeholders, especially the executive committee and board.
## Footnote
This ensures that the impact of actuarial work on business is understood.
158
What must actuaries do when conflicts of interest arise?
They must disclose the conflicts to relevant stakeholders and should not continue with professional services.
## Footnote
This ensures objectivity and protects the profession's reputation.
159
What is meant by 'constructive challenge' in the workplace for actuaries?
Actuaries may need to challenge the workings of others, ensuring they remain objective and respectful.
## Footnote
This is important for fostering a collaborative environment.
160
What is required of actuaries when they notice violations of the code of conduct?
They must blow the whistle and notify relevant bodies to address the issues.
## Footnote
This is crucial for maintaining professional integrity.
161
What are the eight key principles of effective corporate governance according to the Basel Committee?
* Board members should be qualified and exercise sound judgement.
* The board should approve and oversee strategic objectives.
* Clear lines of responsibility and accountability should be set.
* Appropriate supervision by senior management should be ensured.
* The board should utilise internal and external audit functions effectively.
* Compensation policies should align with corporate culture and objectives.
* Governance should be transparent.
* The board should understand the bank's operational structure.
CHECK PAGE 241
## Footnote
These principles are essential for the effective governance of banks.
162
What are the three lines of defense typically used in banking?
* First line: Line-management staff own the risk in business activities.
* Second line: The CRO and risk management team oversee risk aspects.
* Third line: The board and audit function provide independent assurance.
## Footnote
Each line has a distinct role in managing risk within the bank.
163
Why do other banks not necessarily benefit from a bank's bankruptcy?
Banks have contracts with each other, and one bank's bankruptcy can lead to liquidity issues for others and reduce public confidence in the banking system.
## Footnote
This highlights the interconnectedness of banks in the financial system.
