Corporate Governance for Banks in Southeast Europe: Policy - IFC

depend on the presence of active institutional investors. Differences in levels of acceptance and perceivedutility may also relate to whether the country comes from a common law or civil law tradition.The SEE countries thus face a sort of regulatory conundrum: the commonly used developed-market approachof relying on the board and voluntary codes as a nuanced, soft, outsourced form of regulation may notsuit the local culture; on the other hand, the imposition of hard rules has been criticized as a superficialcompliance exercise that adds little value to the bank.A possible intermediate approach for better embedding good governance in banks might be to set up taskforces, with prominent bankers and business people, that develop best practices that would in turn becomeobligatory for all banks. This approach of using private sector input for the development of governancepractices, which then becomes mandatory, is not uncommon in countries with more normative regulatorycultures.The institutional aspects of voluntary codes also need to be considered. Voluntary codes tend to be enforcedby securities regulators or stock exchanges and ultimately the markets. Given the relative size of securitiesmarkets in SEE, guidance on corporate governance would likely need to emanate from central banks.Voluntary codes in other countries have been developed by private groups and then published as central bankcirculars.Recommendation:Guidance on corporate governance: Regulators should provide guidance on sound governance practices.Such guidance must be adapted to the local environment and go beyond the mere transposition ofinternational rules and codes. 77 The implementation of the guidance must also be in accord with the localbusiness and legal culture. Voluntary corporate governance codes should be developed with the participationof the private sector; however, the correct balance between hard and soft law needs to be found. SEEcountries may require more formal means of implementing codes than other countries require.B. Monitoring 78Supervisors need to have processes for evaluating the quality of bank governance and the implementation oflegal requirements. Regulators are increasingly expected to take corporate governance into account as part oftheir risk assessment for banks. This monitoring can take different forms, such as the following: the collectionof internal and prudential reports, including statements of external auditors; the use of formal evaluations orscorecards; and onsite inspections. Such monitoring should focus on the bank’s risk profile and those aspectsof governance that have an impact on the bank’s overall safety and soundness.This approach implies looking closely at the bank’s control environment and risk management functions aswell as the capacity of the board to monitor the effectiveness of such systems. Further items that can beexamined at board level are fit-and-proper tests, and whether the board has the necessary combinationof skills to ensure safe and sound operations. Bank evaluations can involve regular meetings with boards,executives, and people responsible for key aspects of the control environment.Within SEE, supervisors conduct full-scope examinations of banks and may develop recommendations forexecutives and boards. Such examinations can cover any number of issues. However, the extent to which77 Nevertheless, the guidance of international bodies should not be ignored. In particular, the 2006 and 2010 BIS Principles (see Annexes C and D)should receive broad consideration.78 2010 BIS Principles, Sections IV.2 and IV.3. pp. 31–32.52Policy BriefCorporate Governance for Banks in Southeast Europe