Bank governance is at the same time deceptively simple and one of the hardest areas of supervision. Capital ratios, liquidity metrics and prudential returns can be measured with relative precision. Governance cannot. A bank may have a board, committees, policies, minutes, risk appetite statements and control functions, yet still suffer from weak challenge, poor accountability, dominant management, ineffective independent directors or a culture that discourages escalation. This is why the recent BIS/FSI speech by Fernando Restoy, Overseeing banks’ governance: Can we do it better?, is important: it reminds supervisors that governance is not only a regulatory design problem; it is a supervisory judgment problem.
Restoy, F. (2026, May 25). Overseeing banks’ governance: Can we do it better? Financial Stability Institute, Bank for International Settlements.https://www.bis.org/speeches/sp260526.htm
The Corporate Governance Code of Jurisdaictions along with Basel Committee’s corporate governance principles provide the necessary architecture. They emphasise board responsibility, risk governance, senior management accountability, control functions, compensation, disclosure and supervisory oversight. But principles alone cannot determine whether a board genuinely understood a transaction, whether independent directors challenged management, whether conflicts were properly mitigated, or whether a risk appetite statement actually influenced decisions. The Basel framework sets the minimum expectations; supervision must test whether those expectations are alive in practice.
This is where the distinction between formal governance and effective governance matters. Formal governance asks: Was there a policy? Was there a committee? Was approval recorded? Effective governance asks: Was the right information available before the decision? Were alternatives considered? Was dissent encouraged? Were conflicts of interest identified and managed? Did the board understand the risk? Was the decision consistent with strategy, capital, liquidity, conduct obligations and the bank’s risk appetite?
The challenge for supervisors is that these questions require judgment. But judgment should not mean subjectivity. Restoy’s argument points toward a more disciplined form of qualitative supervision: one that is evidence-based, consistently documented and linked to escalation. The supervisor should not become a passive rule-checker, but neither should supervisory intervention depend on intuition alone. Governance supervision needs structured judgment.
A useful development is the FSI’s work on supervisory risk appetite frameworks. Balan and Zamil argue that supervisors themselves need clarity on how much risk they are willing to tolerate, when to intervene, and how to act under uncertainty. This is especially relevant for governance. Supervisors must decide when weak board challenge, poor risk culture, delayed remediation or unreliable evidence crosses the line from “area for improvement” to “supervisory concern” to “enforcement trigger.”
For supervisors, a practical governance review should therefore test five core areas. First, information quality: did the board receive complete, timely and decision-useful material? Second, challenge: did directors question assumptions, valuations, related-party implications and downside risks? Third, conflict management: were conflicts identified, disclosed, mitigated and independently reviewed? Fourth, risk alignment: was the decision consistent with capital, liquidity, strategy and risk appetite? Fifth, evidence integrity: were approvals, minutes and supporting documents contemporaneous and reliable?
This has particular relevance in concentrated ownership structures, smaller markets and group-linked banking systems. In such environments, formal independence may not guarantee real independence. Related-party transactions, group influence, management dominance and post-facto approvals can weaken the substance of governance even where documentation appears complete. Supervisors must therefore look beyond board composition and examine actual influence, decision timing, information flows and patterns of challenge.
The central message is simple: rules build the governance architecture; supervision tests whether the architecture works. The next stage of risk-based supervision should therefore treat governance as a leading indicator, not a lagging compliance category. Bank failures often begin before ratios deteriorate. They begin with weak decisions, ignored warnings, poor incentives, ineffective challenge and delayed intervention. Accordingly, better governance supervision does not require arbitrary discretion. It requires a disciplined framework for qualitative judgment: clear expectations, documented evidence, peer review, escalation thresholds and accountability within the supervisory authority itself. The future of effective banking supervision will depend not only on stronger rules, but on the consistent, structured response to visible governance weakness but financial damage has not yet fully appeared.
Supervisory outcomes will vary significantly when arbitrariness overrules structured judgement. In the presence of arbitrary uneven and disproportionate supervisory interventions, markets may get stifled, strategies may turn defensive instead of optimising returns within a risk appetite framework.
In this context, Restoy’s words are highly relevant : ” When it comes to governance and culture, there should be little doubt that supervision is the most effective policy tool, and that supervisory effectiveness requires a fair amount of judgment. Yet how judgment is applied merits attention at the highest level within supervisory authorities to avoid arbitrariness and to ensure sufficient transparency regarding the rationale behind supervisory assessments of banks’ corporate governance practices. To achieve this, supervisory judgment should be anchored within a well-established framework of supervisory objectives, priorities, tools and measures that need to be consistently applied to all supervised institutions. ” ( Speech on May 25, 2025)
References
Balan, M., & Zamil, R. (2026). Acting under uncertainty: The case for supervisory risk appetite frameworks. Financial Stability Institute, Bank for International Settlements.
Basel Committee on Banking Supervision. (2015). Corporate governance principles for banks. Bank for International Settlements.
Basel Committee on Banking Supervision. (2024). Core principles for effective banking supervision. Bank for International Settlements.
European Central Bank Banking Supervision. (2024). Draft guide on governance and risk culture. European Central Bank.
European Central Bank Banking Supervision. (2024). Supervisory priorities 2025–27. European Central Bank.
Restoy, F. (2026, May 25). Overseeing banks’ governance: Can we do it better? Financial Stability Institute, Bank for International Settlements.
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