Corporate Governance and Financial Stability

Abstract

Good corporate governance is a key element in a satisfactory framework for financial supervision. The financial system is only likely to maintain stability if there is a reasonable balance between the interests of the various stakeholders in banks. Shareholders (owners), depositors, borrowers, creditors, managers and supervisors all have a stake. If we make a crude division of the relationships, consumer protection covers the framework for the relationship between individual depositors and borrowers and the bank, while rules relating to liquidation and the like cover the relationship with all depositors and creditors. Corporate governance on the other hand relates primarily to the relationship between investors in the company and its management (Shliefer and Vishny, 1995, p. 773). The way in which the final relationship with supervisors seeking to maintain systemic stability should be conducted is dependent upon the framework for all of the others.