Corporate Governance for Banks in Southeast Europe: Policy - IFC

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List of Acronyms ALCO BCBS BIS BSCEE CRD3 CRO EBRD IFRS OECD SEE Asset-liability committee Basel Committee on Banking Supervision Bank for International Settlements Banking Supervisors from Central and Eastern Europe Third Amendment to European Commission’s Capital Requirements Directive Chief Risk Officer European Bank for Reconstruction and Development International Financial Reporting Standards Organisation for Economic Co-operation and Development Southeast Europe 4 Policy Brief Corporate Governance for Banks in Southeast Europe
I. Introduction The stability of global financial markets came into the spotlight as a result of the financial crisis of 2007–2010. At the heart of the crisis were investments whose assets had been derived from bundled home loans. Exposure to such mortgage-backed securities, and to the credit derivatives that were used to insure them, caused the collapse or takeover of several large financial firms such as Lehman Brothers, AIG, and Merrill Lynch. 1 Global financial markets allowed the crisis, which originated in the United States, to spread to Europe and worldwide. Initially a crisis of the financial sector, the impact quickly spread. Financial institutions that were forced to deleverage and to pay back obligations created a solvency crisis that made its impact felt in real markets and eventually caused a decrease in international trade. The fundamental origins of the crisis have been ascribed to the following: 1) housing and monetary policy; 2) subprime lending; 3) easy credit conditions; and 4) the rapid deflation of a housing bubble. Corporate governance practices of the firms involved are not generally understood to be the origin, though they do appear to have played a role. An inquiry into the causes of the crisis in the United States took the view that corporate governance and, in particular, risk management practices at systemically important financial institutions were factors that allowed the crisis to develop. 2 Others have argued that governance was a major cause and that its role was greater than simply letting a bad situation get worse. 3 The Importance of Governance “It is not a question of whether we need corporate governance, but how to do it and survive.” Zoran Bohacek, Croatia “Here we have a once-in-a-lifetime opportunity after the financial crisis, which really stress-tested our governance systems, and we have to respond.” Peter Dey, Canada In any event, the crisis has been an opportunity to “We strongly believe that the improvement reexamine corporate governance practices in banks of corporate governance will contribute to and other financial institutions, to establish their role the creation of a better, stronger and more in the crisis, and to learn from past mistakes. Such an sustainable banking system in the region.” examination is without doubt salutary. It has become Kiyoshi Nishimura, Japan a global exercise, extending beyond those countries directly involved in the meltdown, to developing countries, emerging markets, and transition economies. Banks in Southeast Europe, whose governance is seen as an important aspect of their successful integration into the European Union and the global family of banks, have also come under scrutiny. This Policy Brief emanates from the reflections of a High Level Policy Group composed of banks and regulators from Southeast Europe (SEE) 4 and international experts who met in Belgrade in December 2009 and in London in June of 2011 to draw lessons from the financial crisis, discuss international best practice in bank governance, and develop recommendations and action plans for the different countries in the SEE 1 These firms were not traditional depository banks but, rather, part of the so-called shadow banking system that consists of nondepository banks and financial entities, which at the time of the crisis were roughly equivalent in size to the U.S. banking sector and which played a critical role in lending. 2 Conclusions of the U.S. Financial Crisis Inquiry Commission, 2010. 3 G. Kirkpatrick, “The Corporate Governance Lessons from the Financial Crisis,” Financial Market Trends 2009/1 (OECD 2009). 4 Albania, Bosnia and Herzegovina, Bulgaria, Croatia, the former Yugoslav Republic of Macedonia, Montenegro, Romania, and Serbia. Corporate Governance for Banks in Southeast Europe Policy Brief 5
Page 1 and 2: Corporate Governance for Banks in S
Page 3: Contents I. Introduction...........
Page 7 and 8: II. Overview of bank corporate gove
Page 9 and 10: framework for coordinating crisis m
Page 11 and 12: III. Sound corporate governance pri
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
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Recommendation: Remedial action: Su
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VI. Additional issues A. State owne
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VII. Annexes A. Southeast Europe Po
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INTERNATIONAL EXPERTS Peter Dey, Ch
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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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For information requests and genera
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Corporate Governance for Banks in Southeast Europe: Policy - IFC

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