Banco Bilbao Vizcaya Argentaria : José Manuel González-Páramo says, “Corporate governance is necessary to ensure proper risk management”

This morning in a forum at the Spanish General Council of Economists, BBVA executive director José Manuel González-Páramo discussed the new model for European banking supervision and its impact on the corporate governance of financial institutions. He said, "Good corporate governance should ensure a lower level of risk, a lower cost of capital, and a better implementation of the corporate strategy."

Corporate governance is one of the fundamental considerations for the new supervisor (the European Central Bank) as well as analysis of the business model, evaluation of capital and assessment of liquidity. Mr. González-Páramo went on to explain that governance and internal control systems, which are part of the risk categories, play a relevant role in managing financial institutions. "Corporate governance complements capital. High levels of capital alone do not guarantee a suitable risk profile. Therefore capital is a necessary attribute but -by itself- insufficient to ensure appropriate management and control of risk," he pointed out.

He believes that some aspects of corporate governance are fundamentally important. They include a clear definition of directors' roles and responsibilities, suitable guidelines that facilitate a correct election of board members and a remuneration policy that removes incentives to incur unnecessary risk. Summarizing, Mr. González-Páramo (who is head of regulation at BBVA) added that "appropriate governance ensures proper management of risk and businesses."

The Spanish General Council of Economists chairman Valentín Pich said, "The European supervisory model and the regulatory environment should lead to uniformity and coherence, and improve the quality of information provided by banks."

Implementation of the Single Supervisory Mechanism on November 4th triggered the search for a single supervisory culture. "This process does not imply adoption of the supervisory practices of a particular state but rather importing the best practices of all participants. This is the only way we can ensure the highest levels of supervision," added Mr. González-Páramo, who was a member of the ECB's executive committee and board of governors from 2004 to 2012.

The European Basel rules establish some clear and extensive principles regarding corporate governance. They define the responsibilities of the board and the different committees when developing suitable corporate governance. The whole concept of corporate governance is very broad and it includes implementation of appropriate processes and procedures for making decisions correctly and ensuring maximum transparency. At the same time it defines concepts such as risk appetite and the role of governance in risk management. Last of all it underlines the importance of dialog between the supervisor and the board of directors. In this regard Mr. González-Páramo insisted that "a clear framework is necessary to regulate the interaction between banks' boards of directors and the supervisors, and to ensure effective communication."