Corporate Governance for Banks in Southeast Europe: Policy - IFC

On the SEE bank level, there is the need for a clear definition of the roles and responsibilities of subsidiary
boards. Best practice 38 recommends that the obligations of a parent bank board with regard to the
subsidiary are to establish governance structures adapted to the local conditions that meet all locally
applicable governance requirements, and to ensure that resources are available to meet both group and local
governance standards. It is important that the different decision-making powers of the parent and subsidiary
board are clearly understood. The parent board should also monitor subsidiary compliance with applicable
local requirements.
Best practice also suggests that the regulated subsidiary of a foreign bank adhere to the governance
requirements of the parent bank, taking into account the nature of the local business and local legal
requirements. The local bank subsidiary must ensure that group-level decisions do not put it into breach of
host-country legal provisions. Similar to the obligations of any board, the local subsidiary board has a duty
of care and loyalty that should ensure the sound management of the subsidiary and its financial health. In
addition, it has an obligation to protect the legal interests of its stakeholders.
However, the implementation of these general recommendations is a considerable challenge in practice. On
the one hand, parents do not wish to cede control over strategy, products, and risk to local subsidiary boards.
Many of these local operations may almost function more as branches than as independent banks. On the
other hand, substantive input by local boards should protect local stakeholders and encourage a better
understanding of local conditions and local risks. Local conditions do matter, and local boards cannot merely
be rubber stamps or conduits for executing central command. The middle ground is a substantive interaction
between the parent and the subsidiary that respects group strategy and ensures a full understanding of the
local conditions.
Another concern is that different governance rules from different jurisdictions can lead to situations in which
foreign and local requirements come into conflict. In principle, this should not occur in countries that are
adopting EU legislation and with a preponderance of foreign banks. However, in practice, banking groups
increasingly point to a bewildering complexity of rules and regulations that come from the group and from
the home and host countries. Background Box 3 provides an overview of foreign ownership of banks in SEE.
Background Box 3: Foreign Ownership of SEE Banks 39
Albania
The Albanian banking sector comprises 16 banks, of which only 2 are owned by Albanian shareholders. The
three major banks represent more than 56 percent of the Albanian market share. Only one of the three major
banks is domestically owned; the other two are subsidiaries of important banking groups.
Bosnia and Herzegovina
In Bosnia, the majority foreign-owned banks dominate the banking system. They account for over 90 percent
of the registered capital of banks. Domestic privately owned banks represent 7 percent of the registered capital
of banks. State-owned banks controlled 1.1 percent of total assets. The three major banks represent over 50
percent of the market share.
38 2010 BIS Principles BCBS (2010).
39 For detailed illustrations of ownership of SEE banks by country and individual owners, see Annex E.2.
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Policy Brief
Corporate Governance for Banks in Southeast Europe