The Deputy will appreciate that the primary responsibility for managing a bank and for preventing undesirable practices in that bank lies with the board of directors and management of each institution. Boards of directors have a key role as the principal decision-making body in an institution and are responsible for exercising effective control over senior management. In this regard appropriate corporate governance arrangements and internal controls are essential prerequisites for effective and prudently managed organisations.
The Deputy will also be aware of the conclusions of the two recent reports into the banking crisis by Messrs Regling and Watson and by the Governor of the Central Bank. Messrs. Regling and Watson concluded, inter alia, that it was clear that there were especially egregious failures in corporate governance and risk management at Anglo Irish Bank and Irish Nationwide Building Society. Following the publication of these reports, the Oireachtas approved the establishment of a statutory Commission of Investigation into the banking sector in Ireland. The Commission commenced its work on 21 September 2010 and is investigating, inter alia, the main causes of the serious failure within each of the covered institutions to implement and adhere to appropriate standards and controls in the context of corporate governance and prudent risk management policy and procedures. The Commission is expected to complete its report within six months.
It is also fair to say undesirable banking practices have not been exclusive to Ireland and the European Commission has prioritised the reform of corporate governance for financial institutions in light of the conclusions of the de Larosière report on the causes of the financial crisis. The Commission's Green Paper on Corporate Governance in the financial sector and remuneration policies, published in June 2010, highlights how the financial crisis clearly shows that financial institutions' boards of directors did not fulfil their key role as a principal decision-making body and consequently, boards of directors were unable to exercise effective control over senior management and to challenge the measures and strategic guidelines that were submitted to them for approval. The Commission also concludes that members of boards of directors, in particular non-executive directors, devoted neither sufficient resources nor time to the fulfilment of their duties. The Green Paper outlines a number of options to supplement existing legal provisions and those implemented or planned for the purpose of strengthening the financial system.
In recognition of the role of corporate governance, on 8 November the Central Bank of Ireland issued its Corporate Governance Code for credit institutions and insurance firms in Ireland which sets out new statutory rules to ensure that robust governance arrangements are in place so that appropriate oversight exists to avoid or minimise the risk of a future crisis. The Code sets out provisions on the membership of the Board of Directors, the role and responsibilities of the Chairman and other directors and the operation of various board committees. Where institutions fail to adhere to the Code's requirements, the Central Bank has the power to take sanctions against an institution, including the removal of directors.
Finally, the Government has also taken significant steps to reform the domestic regulatory system. The Central Bank Reform Act 2010, which commenced on 1 October 2010, is the first step in a substantial legislative reform programme and establishes a new fully-integrated structure for financial regulation and enhances the powers and functions of the Central Bank.
The Government is currently preparing a second Bill to provide for further enhancements to the regulatory powers and functions of the restructured Bank. Subsequent legislation will consolidate all legislation relating to the Central Bank and its supervision of the financial services sector. I am satisfied that these measures will ensure that there will be no repetition of the banking practices which have given rise to very substantial costs for the State and have contributed significantly to the deterioration of economic conditions in Ireland.