UK finance minister Alistair Darling has ordered a review to recommend measures to improve the corporate governance of UK banks, particularly with regard to risk management.

The review is to be chaired by senior Morgan Stanley advisor Sir David Walker. It will examine board management of risk (including the effectiveness of risk and audit committees), incentives to manage risk in bank remuneration policies, the competences needed on bank boards, board practices and structures, and the role played by institutional shareholders.

"As part of our review of supervision of financial institutions it is clear that corporate governance should have been far more effective in holding bank executives to account. I have therefore asked Sir David to carry out a thorough review and to make recommendations for improving what should be the first line of defence,” the chancellor said.

Preliminary conclusions will be drawn by the autumn and final recommendations made by the end of the year.

The move comes as UK regulator, the Financial Services Authority, publishes its Financial Risk Outlook outlining the main risks facing firms, consumers and the regulatory system in the economic downturn, in particular the challenges created by banking sector and real economy deleveraging.

These challenges include banks adjusting their business models to operate successfully in difficult conditions in financial markets and in the real economy.  Firms are also reminded of the importance of treating customers facing difficulties with fairness. 

The report is divided into three sections: Financial and economic crisis sets out an integrated view of the macroeconomic, financial and regulatory developments which lie behind the crisis.  It outlines issues relating to the regulation of banks and bank-like institutions.

The economic outlook of the report describes a central economic scenario drawn from various forecasts focusing in particular on how deleveraging is likely to affect firms, markets, consumers and the FSA. 

An outlook for financial sectors and consumers identifies the risks and implications of the financial and economic environment for firms, market participants and consumers.

By publishing this document, the FSA seeks to raise awareness of the key issues facing it and the regulated industry, and to place the actions and decisions the FSA makes in context.