Corporate Governance and Financial Risks in UK Banks: A Report

This report provides an in-depth analysis of corporate governance mechanisms within the banking sector, with a specific focus on HSBC and Standard Chartered banks in the United Kingdom. It begins with an introduction to corporate governance, highlighting its importance in ensuring the effective functioning of banks, protecting stakeholder interests, and complying with regulations. The report then delves into the corporate governance mechanisms, differentiating between internal and external components. Internal mechanisms encompass bank management and ownership structures, while external mechanisms include market discipline and regulatory systems. Furthermore, the report assesses various financial risks inherent in banking, such as credit, capital, and liquidity risks. Through a comparative analysis of HSBC and Standard Chartered, the report illustrates how these banks implement corporate governance principles and manage associated risks. The report concludes by emphasizing the significance of robust corporate governance in maintaining the stability and integrity of the banking industry.

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System04116
3/15/2019

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Contents
Introduction......................................................................................................................................2
Corporate governance mechanism...................................................................................................2
Corporate governance mechanism in bank:.................................................................................3
Corporate governance mechanism of HSBC bank:.....................................................................7
Corporate governance mechanism of standard chartered bank:..................................................9
Conclusion.....................................................................................................................................13
References......................................................................................................................................14

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Introduction
Corporate governance is the important factor for well-being functioning of the banks. In order to
improve the bank’s performance, protect the stakeholder’s interests and improve compliances
with laws and regulations and code of conduct that are applied to banking industry, banks need
to conduct its operations which are based on the principles of virtuous company governance.
In the report, the corporate governance mechanism in banks is highlighted. Along with this,
financial risks that evolved from internal and external corporate governance mechanisms are
evaluated. For better knowing of corporate governance mechanism in banks the HSBC and
Standard chartered banks from United Kingdom is selected.
Corporate governance mechanism
Corporate governance is the set of frameworks, standards and procedures by which an
organization is represented. They set the rules about how the organization can be controlled or
coordinated to such a point that it can satisfy its destinations and goals in a way that increases the
value of the organization (Fernando, 2010).
Corporate governance depends on principles, for example, leading the business with all
reasonableness and uprightness, being open about all exchanges, making all important decisions
and disclosures, following each one of the law that must be adhered to, obligation and
responsibility towards the stakeholders and promise to leading company in a moral way
(Thomson, 2009). One more point, which is featured in the UK report of corporate governance,
is the necessary for those in control to be able to differentiate between what are private and
company funds while controlling and managing the company (De Haan and Vlahu, 2015).
Effective corporate governance mechanism helps to eradicate the banking scandals, which
weakens the corporate governance. There is an example of Barclay in UK who does banking
scandal that discloses weak corporate governance (Hagendorff, 2015).
The Barclays’s employees battered their positions of trust for the sake of company, indirect
personal advantage was corrupts ethical behavior, and permits free investigation. Barclays paid
charge of £290 million to resolve investigations by supervisors of United Kingdom into

CORPORATE GOVERNANCE MECHANISM 3
endeavored influence of the London interbank existing offered rate. This was a dreadful
disappointment by a larger financial organization of UK to conduct its businesses by following
the ethical standards. Its management and leadership widely committed to maintain in that year.
The senior management and board of the company were held responsible. It also disturbed
another banks in United Kingdom and undermined confidence of public in the bank’s
transparency and integrity. This case depicts weaknesses in corporate governance and the
necessity to reorganize that will increase transparency, accountability and lessen the incentives
for corrupt behavior.
For restoring confidence, Barclays commissioned a free investigation into what comes wrong,
why it comes wrong, what process company adopt, who was accountable to develop their
corporate governance.
Figures that highlights scandal story:
Major lenders Complaints received
(per month)
Complaints raised to
FOS (per month)
Percentage of
complaints supported
by FOS
Barclays 46,700 3,300 93%
HSBC 17,100 800 66%
This is how Barclays manipulate Libor to its advantage.

CORPORATE GOVERNANCE MECHANISM 4
(Source: Bloomberg, 2012)
The graph demonstrates the difference between the Barclay’s submission rate and Libor rate for
a crucial period in 2012. Lehman brothers collapsed, the Libor rate flew an anxiety about the
banks grew. Before, Barclays more or less shadowed the Libor rate. It was charged higher than
the other banks, as it was not trust worthy anymore. Therefore, at the peak of the financial crisis,
it was file artificially low figures.
From the above example, it is compulsory that every bank should have worthy corporate
governance mechanism to maintain or improve their image for investors attracting funds from
middle ease.
Corporate governance mechanism in bank:

CORPORATE GOVERNANCE MECHANISM 5
(Source: Davoren, 2019).
The corporate governance mechanism joins strategies, controls and rules that initiate the bank
towards its purposes while also fulfilling the requirements of the investors. It is a relationship
between stakeholders used to decide and control the key course and execution of banks. It is
utilized to set up request between a bank's proprietors and its best dimension administrators
whose premium may struggle (Monks and Minow, 2011).
A corporate governance mechanism in banks is separated into inside and outside component in
banks. Interior corporate component depicts the bank's management and ownership structure
then again external corporate mechanism portrays the bank's marketed discipline and system
regulations (Davoren, 2019).
Internal corporate governance mechanism in bank:
Banks management structure: It usually engages all the activity titles from best dimension to
base dimension as per their significance, commitment and encounters. It assumes a noteworthy
job in the powerful working of the bank by guaranteeing a superior channel for correspondence
between the different dimensions of the experts (Berghe, et al, 2015).

CORPORATE GOVERNANCE MECHANISM 6
(Source: Berghe, Salah and Sterckx 2015)
Bank ownership structure: The ownership structure of bank determines the rights and obligation
conveyance among different members in the bank, for example, the board, investors, directors
and partners. They spell out the guidelines and strategies for basic leadership on bank
undertakings.
External corporate governance mechanism:
Market discipline: It is the obligation on banks to direct business while thinking about the
dangers to their investors. It works with administrative frameworks to increase the security and
reliability of the market. In the non-nearness of intercession of government in a permitted market
economy, the market discipline provides both internal and external governance system (Chen,
2019).

CORPORATE GOVERNANCE MECHANISM 7
System regulation: It is type of government guideline, which subjects banks to specific
necessities, rules, and confinements. These are intended to make straightforwardness of market
between banking establishments and the organizations and people with whom banks direct
business, between different things.
Financial risks in banking:
The financial risks is engaged with the banking, for example,
(Source: Gangreddiwar, 2015)
Credit risks: According to the bank, credit risks is alluded to as the possible that an acquirer of
bank or counter party will not able to meet its responsibilities as per agreed terms. Credit risk
doubtlessly taken about by advances outside trade exchanges, interbank exchanges,
acknowledgments, exchange financing, money related prospects, swaps, values, securities, and in
increase of duties and ensures, and the settlement of transactions (Gangreddiwar, 2015).
The rate of interest will be higher for borrowers to limit the risks of credit on the closures of
banks in the event that they are related with the higher risks of credit. The variables that
influence such circumstance are insecure salary, work type, guarantee resources low FICO
financial
risks
credit
risks
capital
risks
liquidity
risks

CORPORATE GOVERNANCE MECHANISM 8
rating, and other decide the associated risks related to a borrowers. Credit risks can be related
with interbank dealings foreign exchanges and different forms of exchange happening outside
the bank.
Capital risks: The output an organization will have lesser than forecasted benefits or that it will
meet a misfortune as opposed to advantages. Concerning a bank, capital risk is the risk
associated with the dissatisfaction of the extensive haul system of bank, which evaluated gauges
of income and number of diverse things identified with gainfulness. To be retained a strategic
distance from, the capital risk demands flexibility and versatility to market situations. Long
terms strategies are useful for bank however, they should be liable to change. The complete
financial business is erratic. Extensive haul techniques must have reinforcement plans to stay
away from capital dangers.
Liquidity risks: A liquidity risk in banks is the threat coming from the lack of attractiveness of a
speculation that cannot be sold or bought quickly enough to evade or lessen a misfortune. This
risks handicaps a bank from doing everyday money exchanges. For instance if an individual
going to a bank to withdraw money and the bank said that incidentally they does not have
money. This is the circumstance of liquidity risk where banks require sparing from it.
The management of liquidity risk is the significant movement of banks subsequently they
endeavors to give and keep up an unequivocal dimension of liquidity all the time. The risk of
liquidity itself is not intelligible however; it is conceivable through a dynamic liquidity risk in
organization plan to direct its negative effects.
Banks are presented to liquidity risk as they change fluid stores to illiquid resources or advances.
These are the key tasks of the banks and the job of liquidity risk the board is to guarantee their
congruity. However there is no bank that is not inclined to liquidity hazard and it has been seen
that it is one of the greatest contributory components to disappointment of banks these days
(Urlacher, 2008).
To comprehend this idea, the accompanying banks from United kingdoms are chosen to know
the corporate administration instrument in banks:
1. HSBC Bank

CORPORATE GOVERNANCE MECHANISM 9
2. Standard Chartered Bank
Corporate governance mechanism of HSBC bank:
HSBC is focused on elevated requirements of corporate governance. It complied with the
relevant requirements of the UK corporate governance code, and the provisions of the Hong
Kong corporate governance code. The review panel is in charge of the omission of all risks the
board and internal control mechanism (HSBC, 2019b).
The board has systematized commitments for exchanges in securities of HSBC aggregate as per
the prerequisites of the market misuse guideline and standards administering the posting of
securities on the Hong Kong’s stock trade restricted.
Under the New York securities trade's corporate administration rules for recorded organizations
and the appropriate principles of the US securities and trade commission as a New York stock
exchange recorded isolated private backer, HSBC holding uncover critical manners by which its
corporate administration rehearses vary from those pursued by US organizations question to
NYSE posting measures. HSBC possessions trusts the accompanying to be the critical contrasts
between its corporate administration practice and NYSE corporate governance guidelines
pertinent to US organizations (Thomsen and Conyon 2012).
US organizations recorded on the NYSE are essential to receive and uncover corporate
administration rules. The posting standards of the money related lead specialist require each
recorded organization consolidated in the UK to incorporate into its yearly report and records an
announcement of how it has connected standards of the UK corporate administration code all
through the bookkeeping time frame secured by yearly report and records (HSBC Group, 2019a).
The gathering administrator meets with the free no official chiefs without the official executives
in participation after each executive gathering and generally as essential. HSBC possessions
practice in such manner consents to the UK corporate governance code. As per the prerequisites
of the UK corporate governance code, HSBC possessions reveals in its yearly reports how the
board, executives and its councils are assessed and gives broad data in regards to chiefs pay in
chiefs compensation report. NYSE posting measures requires US organizations to receive a code
of business lead and morals for chiefs, workers and officers and instantly unveil any
renunciations of the code for official officers or chiefs. The esteem articulations and business

CORPORATE GOVERNANCE MECHANISM 10
rules that apply to the representatives of HSBC, in accordance with the necessities of the
Sarbanes-Oxley act the board HSBC property has received a code of morals relevant to the
gathering administrator and the gathering CEO as the main officers and to the gathering fund
executive and gathering head bookkeeping office. More than seventy-five percent of HSBC
holding's executives are autonomous (HSBC, 2019b).
Under the corporate governance code of UK the HSBC possessions board decides if a chief is
self-governing in character and decision and whether there are associates or situations that are
possibly going to have impact or could seem to influence the judgment of executive.
Lastly, HSBC holding group topmost executive is not required to furnish the NYSE with this
yearly consistence affirmation. They required submitting yearly and interval composed
confirmations of consistence with material NYSE corporate administration measures.
Corporate governance mechanism of standard chartered bank:
Standard chartered is a British worldwide banking and financial service company headquartered
in London, England. It works a system of in excess of 1200 branches and outlets crosswise over
in excess of seventy nations and employs around 87000 individuals (Standard chartered 2013a).
They trust that great governance adds to the long haul achievement of an organization which
making trust and commitment between the organization and its stakeholders. Model
administration guidelines and morals are center to their vital plan and they have clear, surely
knew administration rehearses all through the gathering. From supporting their customers and
clients to putting resources into nearby networks, they can be groundbreaking power for good.
As per standard chartered bank, just perceiving solid government structure alone is not sufficient
to accomplish their long haul desire. They likewise offer significance to values, culture of the
workers. Notwithstanding their esteem, key components of standard chartered way of life
incorporate a soul of straightforwardness, receptiveness, request, joint effort and useful test
(Deniz, et al, 2018).

CORPORATE GOVERNANCE MECHANISM 11
They try to convey excellent corporate governance over the gathering. Their point is to give
knowledge into how we meet the soul of corporate governance through embracing a verbose way
to deal with their revelations. They apply the arrangements of the UK financial reporting
gathering's corporate governance code. They likewise consent to the arrangements of the Hong
Kong corporate governance code and its provisions. They have a unitary board that enables
investors to have direct viewable pathway to these officials and that there is more prominent
responsibility for these people as chiefs particular from their obligations (Hong. 2012).
Their board of directors:
Director’s name Membership Appointment dates
Ms. Anna Marrs Non-independent director and
chairman
20-03-2017
Mr. Alan Nisbet Independent non-executive
director
30-09-2013
Mr. Alex Chan Independent non-executive
director
30-09-2013
Mr. Viswanathan
Ramachandran
Non-executive director 20-01-2015
Ms. Judy Hsu Executive director and chief
executive officer
1-10-2015
Mr. Daniel Koh Non-executive director 17-11-2017
The board is in charge of inside and outer undertakings of the bank for long haul
accomplishment of the association and work intimately with the executives to accomplish the
objectives (Andres and Vallelado, 2008). The accompanying issues are held for the board:
 Analysis and affirm long haul system and targets of banks;
 Approve the bank's yearly working arrangement and capital consumption spending plan;
 Oversee the administration and issues with nearby administrative or supervisory bodies;
 Review the execution in the light of its targets, methodology, strategies and spending
plans;

CORPORATE GOVERNANCE MECHANISM 12
 Oversee risk profile, risk resilience and risk technique;
 Accept yearly-examined records;
 Analysis and endorse matters that sway the liquidity and capital positions;
 Review progression arranging of the board and build up a persistent preparing and
improvement plan for chiefs;
 Set organization's esteem and norms to guarantee an abnormal state of expert for internal
and external managing;
 Review and favor the organization's compensation system;
 Approve appointed specialists for consumption loaning and other risks exposures;
The bank's structure is intended to use off the advantages of a worldwide system while
augmenting the esteem. It delivers local focus on the customers and clients and budgetary
execution, while catching the items, mastery and scale preferences of the gathering's worldwide
business and capacities (Goodley, 2014).
The board survey and favors the arrangement of the chief, CEO, CIO, CRO, CFO, and the head
of treasury. They likewise survey the enrollment and evacuation of these key arrangement
holders.
Standard chartered governance framework:
Board  Board
 Audit committee
Management committees  Executive committee
 Asset and liability committee
 Executive risk committee
 Fair dealing governance committee
Composition  6 directors - 2 independent non-
executive , 1 executive, 3 non-
executive,
 3 directors – 1 non-executive, 2

CORPORATE GOVERNANCE MECHANISM 13
independent non-executive
Key objectives  Company’s Long term success for
ensuring management within a
effective control framework;
 Overseen the company’s management
of the inner controls and business
reporting;
 Daily basis management, control and
operation of the company;
 Manage the strategic and
organizational reliability of the
balance sheet, in line with business
tactics, the bank’s policies and
monitoring requirements;
 Ensure the effective controlling of
risk in provision of business strategy.
 Delivery of impartial business
outcomes.
Risk management framework of standard chartered bank:

CORPORATE GOVERNANCE MECHANISM 14
(Source: Standard chartered 2019b).
The bank has set up the risk management structure that sets out its way to deal with risks the
board and the control structure in which chances or risks are overseen and return on risk
adjustments are made. By way of a feature of this system, an organization utilizes many rules
that depict the risks the culture of board it desires to support:
• Harmonizing risk and return: The bank oversees dangers to assemble a reasonable
establishment, in light of a legitimate concern for every one of its partners. The bank just goes
for broke inside its risk resilience and risk hunger, and where predictable with its endorsed
technique. The bank deals with its risk profile to keep up a low likelihood of an unforeseen
misfortune.
• Conduct of banking operations: it tries to accomplish great results for customers, financial
specialists and the market in which it works while submitting to the soul and letter of law and
guidelines.
• Responsibility and accountability: the bank ensures risks taking are straightforward, controlled
and announced in accordance with the risk the board structure internal risk hunger and risk
resilience limits and just where there is proper foundation and assets.
Balancing risk and return
conduct of banking operations
responsibility and acountability
anticipation
competitive advantage

CORPORATE GOVERNANCE MECHANISM 15
• Anticipation: Bank looks to foresee material future chances take in lessons after occasions that
have delivered unfriendly results and guarantee consciousness of every known hazard.
• Competitive favorable position: the bank looks to accomplish upper hand through productive
and successful risk the board and control (Peni, 2012).

CORPORATE GOVERNANCE MECHANISM 16
Conclusion
It is reasoned that corporate administration component is important at each association for
controlling and working exercises. It is required where the likelihood of irreconcilable
circumstances between stakeholders, among investors and upper administration or among
investors. A corporate administration system joins controls, approaches and rules that drive
association towards its objectives. The report was about the corporate administration component
in banks. It is comprehended by utilizing inner and outside corporate administration that
incorporates the administration and proprietorship structure and market order and framework
guidelines. For better comprehension of corporate administration instrument in banks, standard
sanctioned bank and HSBC bank is chosen for instance to realize the corporate administration in
banks. HSBC is top positioned bank in contrast with standard sanctioned bank. The structure of
HSBC is set by the open needs and desires from bank. Standard contracted bank additionally
pursue tenets and guidelines encircled by legislature of law for banking segments yet as indicated
by the payout proportions HSBC is at abnormal state and have great corporate administration

CORPORATE GOVERNANCE MECHANISM 17
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