3.3 The impact of the financial crisis

For banks and some other financial institutions, fit and proper requirements have been in place since long before the financial crisis, but have now become broader in scope and more detailed.1 This should not come as a surprise. After all, it has been suggested in the literature that deficiencies in the profile and practice of members of the management body and senior management, particularly at banks, contributed to the crisis. It has been argued that many members of the management body were simply not sufficiently qualified to know, understand and deal with the complexities and risks of modern banking. A dramatic example is the failure of state-owned banks, such as the banks of the German states (Landesbanken). During the crisis their losses greatly exceeded those of the non-public banks. According to the literature, the management and financial experience of non-public banks in Germany was systematically superior to that of their public counterparts. Other examples are the failures of the Royal Bank of Scotland, Northern Rock and, in The Netherlands, DSB Bank.

Of course, other corporate governance aspects also contributed to the financial crisis, including (i) risk management and internal control failures; (ii) complex and opaque corporate and bank structures; (iii) perverse incentives; and (iv) failures in disclosure and transparency.2 Of course, other factors also contributed to the crisis. This is why regulatory and supervisory reforms extend far beyond corporate governance issues and cover (i) stricter capital and liquidity requirements; (ii) regulation of systemic risk; (iii) more power for financial supervisors; (iv) restrictions on certain transactions and products (product governance and product intervention rules); (v) stricter rules for credit rating agencies; (vi) stricter regulation of the OTC derivatives market; and (vii) the creation of the European Banking Union (EBU), including the Single Supervisory Mechanism (SSM) and the Single Resolution Mechanism (SRM). Nonetheless, corporate governance failures including shortcomings in the suitability of the management body represented an important piece of the puzzle (see Chapter 1, paragraph 1.2).