Daniel K Tarullo has authored a piece entitled "Corporate Governance and Bank Regulation" for the Corporate Board, November/December 2014. Tarullo is now a professor of banking and international business at Georgetown University and previously was a member of the Board of Governors of the US Federal Reserve Bank.
He notes there are atleast three key means in which financial activities and regulation affect the mechanisms of corporate governance:
- Given the influence of deposit insurance, the issue must be asked if traditional corporate law and governance is works sufficently in today's world,
- Market discipline, a key tenant of corporate law and governance, is directly impacted by regulation, and
- The set of risks associated with the important role of intermediation, including lending, leveraged capital structures, maturity transformation all pose a real challenge to governance.
Tarullo goes on the distinguish between microprudential regulation of an individual firm and a macroprudential approach to regulation focused on systemic risks. Key aims of this later form of regulation include the containment of systemic risks and the mitigation of the risk of disturbances of credit granting to individuals and corproates. He sees purdential regulation as a complementary tool to risk governance by the board. The compliance to good risk management by the board benefits shareholders and regulatory relations alike.
Tarullo sees decisions on risk appetite as being key for the firm. He posits that three types of measures could better align governance activities with regulatory objectives, including financial incentives to management, constraints upon the firm (i.e., such as stress testing, etc), and governance processes including board level risk oversight.
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