Corporate Governance for Banks in Southeast Europe: Policy - IFC

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.
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