New Governance Standards in the EU

The new European Banking Authority (EBA) guidelines outlining who is suitable to run a financial institution (FI) and the general oversight procedures that should be in place are now clear. The processes, criteria and minimum requirements FIs will use when assessing whether a candidate is suitable to join the boardroom or not have also now come into force under the EBA ‘Guidelines on Internal Governance‘ rules. 

Up until now the rules covering the oversight of senior FI managers and how credit institutions – accessed by treasurers and others – should be run, have largely been laid out via Europe’s Capital Requirements Directive amendment IV (CRDIV) and, internationally, via the Basel Committee on Banking Supervision (BCBS) paper entitled ‘Core Principles for Effective Banking Supervision’. This paper contained 29 principles that the 27 jurisdictions that are part of the Basel Committee are expected to enforce to ensure effective banking supervisory processes. Prominent amongst these was principle 14, covering corporate governance.  

The EBA paper is the first standalone harmonised European action and makes for interesting reading. Up until now governance guidelines have largely been the focus of national regulators. For example, the UK had its ‘Walker Review’ and has since implemented new criteria concerning the approval of controlled functions. There are also new laws pertaining to the conduct of senior FI managers in Germany. The collective EBA rules should hopefully introduce some commonality.  

The new post-crash corporate governance rules, both internationally and in Europe, are all designed to prevent a repeat of the 2008 financial crisis and improve oversight at the boardroom level, particularly of the risk function, which has too easily been ignored in the past with whistleblowers often sidelined in the dash for banking profits. If the new rules create a more, stable and long-term focused banking industry then this may assist treasurers seeking funding and long-term stable banking partners, or at the very least re-prioritise the corporate banking arena versus the investment banking segment. Firms will publicly have to disclose their corporate governance arrangements in future, for instance, and offer better protection for whistleblowers and be more mindful of risk indictors.   

The introduction of new governance guidelines has been the focus of national regulators up to now. For example, the UK has implemented new criteria of the approval of controlled functions, and new laws pertaining to the conduct of senior management in Germany. Governance has also been a key issue in the international arena. The September 2012 paper from the Basel Committee on Banking Supervision entitled “Core Principles for Effective Banking Supervision” which contained 29 principles that the 27 jurisdictions that make up the Basel Committee would expect to see in an effective banking supervisory process. Prominent amongst these was Principle 14 of the BCBS paper on ‘Core Principles for Effective Banking Supervision’, for instance, which covers corporate governance, insists that in future firms must:   

  • Establishing a legal framework to clearly set out the responsibilities of a bank’s board and senior management.  
  • Implement regular assessment of FI governance policies.  
  • Ensure board members are effectively exercising their duty of care.  
  • Confirm that governance structures and processes for nominating board members are appropriate and commensurate with an FI’s risk profile.  

The EBA guidelines are for members of both the management body and the supervisory body of a credit institution. The guidelines also pertain to key function holders who are not members of the management or supervisory bodies. The comments below apply to both management supervisory and key function holders.  

Credit institutions and competent assessment of the suitability of a member of the management body processes are triggered when: 

  • A credit institution is applying to be authorised;  
  • When new members of the management body have to be notified to the competent authorities, or ‘whenever is appropriate’.  

The assessment should identify key function holders and their suitability. It is primarily the credit institution’s responsibility to perform the initial and on-going assessments.  

Credit institutions’ assessment methodology for the management body and key functions must take the scale, nature and complexity of the business into account. It must also include the level of experience and expertise the role will require. Credit institutions may also include tailored training programs to take any gaps in knowledge into account. 

The management body should have an up-to-date understanding of the business of the institution, commensurate with their responsibilities, including appropriate area for which they are not directly responsible.  

The management body will need to regularly assess individual and collective efficiency and effectiveness of its activities, governance practices and procedures. Firms should consider the creation of specialised committees such as audit, risk, remuneration and other specialist committees, where appropriate. The management body will also promote high corporate, ethical and professional standards.  

The results of such assessments need to be recorded, and should be available for review by the appropriate external authorities. Credit institutions are required under the guidelines to have written policies on suitability and should include items such as individual responsible for assessment, information to be provided to the assessing body, ensuring all relevant parties involved in the assessment are adequately informed in a timely manner. 


The EBA has focused on improving FIs governance structures, which should ultimately aid treasurers seeking to understand how and why banks are taking the loan decisions they are and the risk assessments they are using. It is true that many FIs already feel that they have much of what is required in place. However, looking at this and related requirements the number of criteria that European banks have to satisfy means this is not a task to be taken lightly. Firms not only have to take on the requirement to correctly assess, but also to periodically review and to keep the required knowledge updated. 

The board, management and key function holders at FIs are all required to have correct up-to-date information relating to the business performance of a credit institution. All these informational and training requirements are unlikely to be addressed fully without proper consideration of what information is needed, when, and by whom throughout the firm. Once this has been done the firm then needs to ensure that their internal reporting process delivers the required information.  

The significance of this paper is throughout all of Europe there is now a common standard measurement for corporate governance, mandating the appropriateness of existing processes. Everyone now has a minimum requirement to reach.  




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Dominic Mac