Instructions to banks

Corporate governance is of great relevance to all types of corporations, but with banks and to the international financial system as a whole, it has an added meaning: it means financial stability.

The Basel Committee, the primary global standard setter for the prudential regulation of banks, has been issuing worldwide guidance to promote the adoption of sound corporate governance practices by banking organisations.

Jordanian banks, therefore, should welcome with open arms the instructions of the Central Bank of Jordan (CBJ) in this regard. However, several banks have been showing unjustified resistance to the instructions, which follow international best practice.

Basel III, the recent instructions of the Basel Committee, is a comprehensive set of reform measures on banking supervision to strengthen the regulation, supervision and risk management of the banking sector in countries and worldwide.

A quick review of the instructions of the CBJ to banks, which are based on Basel III, shows that they set out best practices for banking organisations, focusing on: the role of the board of directors of banks; the qualifications of the board members and their composition; the importance of a chief risk officer and the independence of the risk management function; the significance of monitoring risk on a continuous bank-wide and departmental basis; the board’s oversight of the bank compensation and reward systems; the board and senior management’s appreciation of the bank’s operational structure and risks; and the importance of regularly evaluating the bank’s corporate governance policies and practices, and the implementation of the committee’s principles by supervisors.

It is clear that such measures, if implemented, will improve the banking sector’s ability to absorb shocks arising from financial and economic stress, whatever the source — be it local or foreign — improve risk management and governance, and strengthen the banks’ transparency and disclosure mechanisms.

Moreover, with internal improvements, banks would require less macrosupervision by the CBJ, as they internalise more and more the function of their own supervision.

Visiting the website of the CBJ, one notices many requests by banks for extensions and comments regarding the instructions.

Clearly, the instructions would limit the ability of the chairman of the board to appoint his son as CEO, which is definitely contrary to the principles of governance even if the son is the most qualified in the world.

They would also prohibit selection of “like-minded” board members who are not qualified and whose only qualification is kowtowing to the chairman.

And they would entail disclosure and many fantastic, merit-enhancing practices that are badly needed in Jordan, especially in the banking sector.

The move by the CBJ, the banking sector promoter and regulator, is highly appreciated and should be implemented without delay by all banks.

It is time that this vital sector take the next step, and Jordan will come to thank all who help make such a transition a reality now.

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