Corporate Governance for Banks in Southeast Europe: Policy - IFC

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Implications The crisis in SEE was not a crisis of governance. The crisis came from outside. Helping SEE weather its impact were the absence of easy credit, the nature of the banking business, the limited use of financial instruments, and foreign ownership. However, the lesser severity of the crisis in SEE, compared with certain more developed markets, should not lead to complacency; improved corporate governance remains an important objective for the growth and development of the financial sector and the real economy. The Need for Tailored Responses “In our small countries it is very difficult to implement sophisticated and technologically demanding best practice. In the area of corporate governance we face the issue of high costs, very complicated management structures, a shortage of human resources….We need to look for a specific solution for small countries such as ours. We need to create a less costly and less complicated regulatory framework.” Ljubiša Krgovic, Montenegro “It is very important that we bring changes that are in line with the stage of development of the market. It is good for these banks and these markets to start learning the examples of the more developed countries. The problem is how to adjust those rules that are, in terms of the legal environment, rather different.” Belgrade Conference 2009 Since SEE markets are dominated by subsidiaries of foreign banks, the focus of attention needs to be on the governance of cross-border groups. This is a complex issue, involving group law, supervisory concerns, crisis resolution, and burden sharing, to name a few. For locally owned banks, there is a need to focus on the basics of good governance, the breadand-butter topics of boards, related-party transactions, related lending, and protection of stakeholders. Tailored responses are needed. In SEE it may be difficult, and in certain cases even counterproductive, to implement sophisticated and technologically demanding best practice. On the other hand, postponing the implementation of sophisticated and technologically demanding best practices could potentially deepen the gap between SEE and more advanced banking countries. The best approach may be a gradual but determined implementation of best practice. Regarding regulation, it is important that it be in line with the corresponding stage of development of the market. In the area of corporate governance, SEE regulators face the challenges of high costs, limited capacity, complicated oversight structures, and the need to integrate with international practice. SEE regulators need a less costly and less complicated regulatory framework. Future efforts to improve governance should help SEE banks come into line with international practice while, at the same time, not slavishly mimicking the practices of other financial markets for the sake of compliance. 10 Policy Brief Corporate Governance for Banks in Southeast Europe
III. Sound corporate governance principles 11 A. Board practices 12 A well-trained, professional, and dedicated board is the most effective means to ensure sound bank governance. It is also broadly accepted that a professional board can be a key contributor to bank performance. As a consequence, most countries in the region view the improvement of board practices as a key policy goal. Most countries in the region have two-tier board structures (a supervisory board and a management board), with two countries allowing banks to choose and one country (Montenegro) requiring one-tier boards (see Table 3). In this Policy Brief, references to “board” under the two-tier structure are to the supervisory board. 13 Table 3: Board Structures of SEE Banks 13 Albania Bosnia and Herzegovina (Federation) Bosnia and Herzegovina (Republika Srpska) Bulgaria Croatia FYR Macedonia Montenegro Romania Two-tier Two-tier Two-tier Option to choose one-tier or two-tier Two-tier Two-tier One-tier Option to choose one-tier or two-tier Serbia Two-tier 14 Source: Data from EBRD, Corporate Governance Assessment of Banks (2010–2011). Among domestically owned banks, there may be some confusion about the different roles of supervisory boards versus management boards, and supervisory board committees versus operational committees. In some cases, bank boards appear to be more directly involved in operational management than best practice would suggest. In other cases, executives view their operational committees as fulfilling the same function as (and substituting for) a committee of the supervisory board. Banks need to be aware of the differences between operational and board committees, and there may be a need for some clarification in law, regulation, and practice. 14 Substance Over Form “For most countries boards still exist here purely as a necessary legal requirement and not as a competitive advantage for a company.” Leonardo Peklar, Slovenia “Very seldom is the substance discussed over the form. At the level of the subsidiary in unlisted companies, it is only hard law.” London Conference 2011 11 BCBS, Principles for Enhancing Corporate Governance (Bank for International Settlements, 2010) (hereafter cited as 2010 BIS Principles), Section III, p. 7. 12 2010 BIS Principles, Section III A, p. 7. 13 EBRD, Corporate Governance Assessment of Banks (2010–2011). A more detailed description of the laws determining board structures can be found in Annex E.1. 14 The Law on Business Entities allows joint-stock companies to choose between one-tier and two-tier structures. Banks are regulated by the Law on Banks, which provides for a two-tier governance system. Corporate Governance for Banks in Southeast Europe Policy Brief 11
Page 1 and 2: Corporate Governance for Banks in S
Page 3 and 4: Contents I. Introduction...........
Page 5 and 6: I. Introduction The stability of gl
Page 7 and 8: II. Overview of bank corporate gove
Page 9: framework for coordinating crisis m
Page 13 and 14: The duty of care requires that boar
Page 15 and 16: A3. Training 20 Finding board talen
Page 17 and 18: Tests for integrity are needed. How
Page 19 and 20: Background Box 1: Legal Requirement
Page 21 and 22: Capacity issues Finally, competent
Page 23 and 24: A5. Role of the chair 29 The chair
Page 25 and 26: Among committees, the audit committ
Page 27 and 28: Background Box 2: Board Committees
Page 29 and 30: Briefing of the board: Audit commit
Page 31 and 32: Bulgaria The Bulgarian banking sect
Page 33 and 34: Recommendation: Evaluations: Banks
Page 35 and 36: Effective systems of risk managemen
Page 37 and 38: strategy. When the executive body o
Page 39 and 40: circumstances, these findings shoul
Page 41 and 42: A significant concern is the large
Page 43 and 44: D. Disclosure and transparency 60 D
Page 45 and 46: Supervisors also expressed skeptici
Page 47 and 48: Background Box 5: Disclosure Requir
Page 49 and 50: Recommendations: Disclosure and tra
Page 51 and 52: These limitations are due to the ve
Page 53 and 54: examinations permit a systematic ev
Page 55 and 56: Recommendation: Remedial action: Su
Page 57 and 58: VI. Additional issues A. State owne
Page 59 and 60: VII. Annexes A. Southeast Europe Po
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INTERNATIONAL EXPERTS Peter Dey, Ch
Page 63 and 64:
B. Important sources of guidance on
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C. Synopsis: BCBS Enhancing corpora
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Complex or opaque corporate structu
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oard. The supervisory board is resp
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Bulgaria 19.1% Others 16.3% Unicred
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Romania 19% BCR (Erste) 13.1% BRD (
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