Basel III, Pillar 2: The Role of Banks’ Internal Control Systems

Abstract

Analysis of the financial crisis has revealed not only major market and regulatory failures, but also shortcomings in supervisory approaches and in banks’ systems of internal and external controls. These failures and shortcomings played a significant role in the origin and evolution of the crisis. In some important cases, the crisis revealed that banks’ internal governance, and their internal control functions in particular, were ineffective or even unsuitable when faced with the demands of overseeing the growing levels of risk undertaken by intermediaries, and especially the interrelations between these exposures.