Introduction
Currently the cases of financial crisis especially in banks have continued to increase hence raising attention of many people as well as governments and business organizations. It is because of the increased financial crisis that there is need for more attention and focus on the proper corporate governance of the financial institutions and especially which currently have been faced by increased cases of financial banking crisis. As it is known it is the responsibility of the board of directors of the corporate governance to assess the different risks that financial institutions especially banking institutions. Because of the increased financial risks that the banking institutions are facing board of governors should be highly concerned on the different situations that are causing high risks in the banking sector.
The case of Northern Rock
As it is the case of northern rock it is clear that from its transactions certain financial risks can be predicted. Also it is clear that in most cases financial risks arise as a result of poor corporate governance as well as lack of proper management. Northern rock was preparing to lend 25 percent more of the value properties which had impact of increasing automatically the risk for bad debts. From such a decision it is evident that the corporate governance did not take into consideration the kind of risk that would emanate from making such a decision. This shows lack of understanding of the impact some of the decisions corporate governance make have on the banking sector.
Since it is the responsibility of the board of directors to access the weight of the financial risk that may occur after making certain decisions, for this case the board of directors did not take into account the level of risk that would occur hence such risk for bad debts which is one of the major financial risks that are taking place in the banking sector and other organizations dealing with finances. Based on such a case the board of governors should have knowledge on risk management hence being in a position of accessing the risk that may come up based on knowledge that value property can go down and value security can call down hence great risks occurring.
Since banking crises did not start yesterday they started back in United States and United Kingdom it means that they are there and the only thing that can be done is to implement strategies that will help minimize higher risks. For instance in the case of Northern Rock it had to be nationalized to help minimize some of the mistakes that were done that in turn resulted to high financial risks.
Corporate governance issues emerging
Several corporate governance issues have continued to rise in terms of financial crisis in financial institutions especially banking sector. These corporate issues rise global concerns and need to be addressed to have enough security for the financial institutions in regards to financial crisis that are rising rapidly.
The major corporate governance issues that need to be addressed to minimize the financial risks that are highly taking place in the banking sector. The issues that need to be addressed include the following:
The regulatory and supervisory powers of central banks should be extended to investment banking and related non-bank financial intermediation. This is because it is lack of sufficient regulatory and supervisory powers of the corporate governance that there are increased financial risks in the banking sector. Intervention of the central banks in governance of the banking sector would play a great role in the minimization of the financial risks that are taking place in the banking sector. For instance some of the risks come up through lending loans to many people and institutions that at one point fail to repay the loans. Intervention of the central bank would help regulate and minimize the risks that are faced by the banking institutions worldwide.
Also the corporate governance should be careful to ensure that the risk management frameworks, processes and implementation practices should be reformed to restore the shortcomings revealed by the disorder caused by the risks that the banking sector face. Risk management frameworks are very essential and for that reason the corporate board of governors within the banking institutions should ensure that there are efficient risk management frameworks and processes that are set up to check on the different areas that may bring in financial risks in the banking sector.
Also due to increased risks that are as a result of the credits and loans that are offered to other institutions and individuals the corporate governance should be keen on the role and the form of regulation that is being practiced on the credit rating agencies. This is because in most cases the role and the regulations of the credit ratings are not monitored keenly and because of this many crises arise as a result of bad debts that need to be catered for. The role and regulation of credit ratings if followed up keenly can help much in minimizing some of the risks that can arise like high levels of bad debts that need to be written off.
To have good governance and to minimize most of the financial crisis taking place in the banking sector the corporate governance practices should be highly strengthened. This should be done in specific areas to increase the board of governors’ competence and responsibility in their areas of duties and responsibility. Secondly they should have up to date information and knowledge on various financial areas and issues which in most cases result to the increase in financial risks that are being faced by the banking sector. Also the board members should be well equipped and trained on the various areas of risk management to help in avoiding some of the risks that take place as a result of minor mistakes that take place.
On the point of minimizing financial risks taking place in banking sector governance and accountability of the people and the regulators responsible should be taken seriously. This is the mode of governance determines the probability of risks taking place and if the people responsible are held accountable it will mean that they will be extra careful to ensure that some of the mistakes that may result of financial risks are avoided hence minimization of the number of risks that take place.
Conclusion
Financial crisis has been experienced for many years and it is a major issue that is being faced globally by many institutions apart from financial institutions. Since they take place and however much institutions try to avoid them they still occur the best thing is to try by all means to implement corporate governance policies like the one discussed earlier to minimize the high rate of occurrence and to minimize the one involving huge amounts of finances.
List of references
Doha declaration, 2008, Corporate governance reforms to address financial crisis risks in the Mena region, Web.