Internal Governance

abstract

EBA Guidelines on Internal Governance (GL 44)
II. Background and rationale

3. Concepts used in the Guidelines

28. Corporate governance is a broad concept that can be described as the set of relationships between an institution, its management, its shareholders and other stakeholders. Internal governance is a limited but crucial component of corporate governance, focusing on the internal structure and organisation of an institution.

29. Internal governance for institutions9 in the European Community is covered by Article 22 of Directive 2006/48/EC, which requires, that every credit institution has robust governance arrangements, which include a clear organisational structure with well defined, transparent and consistent lines of responsibility, effective processes to identify, manage, monitor and report the risks it is or might be exposed to, adequate internal control mechanisms, including sound administrative and accounting procedures, and remuneration policies and practices that are consistent with and promote sound and effective risk management‟. Article 73(3) of Directive 2006/48/EC requires that Article 22 also applies to parent undertakings and subsidiaries on a consolidated or sub-consolidated basis.

30. Internal governance includes all standards and principles concerned with setting an institution‟s objectives, strategies, and risk tolerance/appetite; how its business is organised; how responsibilities and authority are allocated; how reporting lines are set up and what information they convey; and how internal control is organised. Internal governance also encompasses sound IT systems, outsourcing arrangements and business continuity management.

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