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Banking Governance: A Key Element for Sound Management

In a move aimed at enhancing sound and prudent management practices, the Bank of Italy (BoI) has introduced new guidelines on banking governance. The provisions, which came into effect in August 2023, require banks to adopt robust corporate governance structures that ensure effective risk management and compliance with regulatory requirements.

Independent Supervisory Body

A key aspect of the new guidelines is the requirement for an independent supervisory body to be comprised of at least 25% independent members. This ensures that the bank’s strategic decisions are made with objectivity and integrity, free from conflicts of interest.

AML Compliance

The BoI has also introduced a specific rule requiring banks to appoint a member responsible for Anti-Money Laundering (AML) within their management body. This individual must possess adequate knowledge and experience in AML matters to ensure the bank’s compliance with relevant regulations.

Prohibition of Interlocking Directorates

Another important provision is the prohibition on interlocking directorates, which aims to prevent conflicts of interest and ensure that bank executives do not have overlapping roles in competing companies or groups. This rule applies if two or more companies operating in the banking, finance, or insurance sectors are subject to authorization and/or supervision by sectoral authorities.

Internal Committees

To facilitate decision-making, particularly in complex activities with high-risk conflict of interest situations, larger banks must establish specialized committees within their strategic supervisory body. These committees must be composed of a majority of independent directors and have investigation, advisory, and proposing functions.

Remuneration Policies

The new guidelines also set out specific requirements for remuneration policies to ensure that they are aligned with the bank’s long-term business values, strategies, and objectives. Remuneration systems must be designed to avoid incentives that could lead to regulatory violations or excessive risk-taking.

Internal Control Environment

Finally, the BoI has emphasized the importance of an effective internal control environment in ensuring the consistency of a bank’s activity with its strategies and policies. To this end, banks must establish permanent and independent internal control functions, including compliance, risk management, and internal audit functions.

By implementing these guidelines, Italian banks can enhance their corporate governance practices, improve risk management, and ensure compliance with regulatory requirements.