Corporate Governance for Banks in Southeast Europe: Policy - IFC

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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
examinations permit a systematic evaluation of a bank’sMeetings with Bank Boardsgovernance is uncertain. It is common that supervisorsonly meet with boards when there is a problem.“We have found…that the supervisor…doesFurthermore, local supervisors rarely have a clear view not have interaction with the board; theyof the structure of responsibility and authority within have a lot of interaction with management.group structures, which makes it difficult for them It is surprising…how many supervisors doto form a global picture as to where the weaknesses not meet with the board on a regular basis.”might lie in the group. At present, there is no clearEsad Zaimovic, Montenegroconcept of what criteria are to be used and howto monitor the process of implementation of goodgovernance. Supervisors’ ability to make meaningfulcomparisons of governance between banks is alsolimited by the lack of a standardized supervisory reporting process.Finally, some concern has been expressed over the tendency of regulators to rely on checklists and box-tickingexercises for their monitoring responsibilities. Checklists and box ticking are often criticized, though they havethe merit of ensuring that all issues of relevance are at least considered. Their weakness is that the issues maynot be examined in sufficient detail to reveal deficiencies or risks. Nor is it clear how individual componentson a checklist may interrelate or how they affect the risk of the bank. Ultimately, checklists can work ifapplied intelligently by individuals who understand the substance. Getting at the substance requires time andmay call for additional training for supervisory staff.Recommendations:Monitoring bank governance: The monitoring of bank governance should be formalized and strengthened.The basis of any monitoring should be an agreed standard of governance. Standardized frameworks for theanalysis of banks will make evaluations more rigorous and allow for interbank comparison. Supervisors shouldthemselves be held accountable and report on their own progress in enhancing governance in the bankingsystem.Meetings with bank boards: Supervisors should meet regularly with boards and chief risk officers, orequivalent, during visits and inspections. This includes subsidiary boards. Supervisors should require the fullboard to meet locally at least once a year. The supervisor should meet annually with the board to discusscurrent issues, even when the bank is in satisfactory condition. These meetings should be conducted locally.Understanding home-subsidiary relations: To varying extents, supervisors place confidence in the abilityof head offices to oversee their local subsidiaries. This trust should not turn into blind confidence. Supervisorsneed to develop the capacity to look through to the parent’s control systems. Supervisors should be awareof and understand the scope of reporting and oversight provided by head offices, in part by reviewing thenature and configuration of key reports. If obvious gaps exist, it may require dialogue between the supervisor,the parent and the subsidiary and understanding of the issue or risk by all parties.Corporate Governance for Banks in Southeast Europe Policy Brief 53
Page 2: © Copyright 2012. All rights reser
Page 7 and 8: II. Overview of bank corporate gove
Page 12 and 13: A1. Responsibilities of the board 1
Page 14 and 15: A2. Qualifications 19Bank boards sh
Page 17: Tests for integrity are needed. How
Page 20: RomaniaIn Romania, Regulation No. 1
Page 23: A5. Role of the chair 29The chair o
Page 29 and 30: Briefing of the board: Audit commit
Page 34 and 35: B. Risk management and internal con
Page 38 and 39: Chart 4: CRO (or Equivalent) Presen
Page 40 and 41: C. Compensation 58Compensation poli
Page 42 and 43: The disclosure of compensation, whi
Page 44 and 45: Skepticism regarding disclosureBeyo
Page 46: decision concerning the appointment
Page 49 and 50: Recommendations:Disclosure and tran
Page 51: These limitations are due to the ve
Page 55 and 56: Recommendation:Remedial action: Sup
Page 57 and 58: VI. Additional issuesA. State owner
Page 59 and 60: VII. AnnexesA. Southeast Europe Pol
Page 61 and 62: INTERNATIONAL EXPERTSPeter Dey, Cha
Page 63 and 64: B. Important sources of guidance on
Page 65 and 66: C. Synopsis: BCBS Enhancing corpora
Page 67 and 68: Complex or opaque corporate structu
Page 69 and 70: oard. The supervisory board is resp
Page 71 and 72: Bulgaria19.1% Others16.3% Unicredit
Page 73 and 74: Romania19% BCR (Erste)13.1% BRD (So
Page 75: For information requests and genera

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