Corporate Governance for Banks in Southeast Europe: Policy - IFC

Recommendation:Remedial action: Supervisors need to have the authority to compel remedial action when materialdeficiencies are found in bank governance. Where important aspects of governance are embedded involuntary codes, which are not being enforced by market pressures, greater authority may need to be givento regulators.D. Home-host supervisory cooperation 80Supervisors are expected to be in contact with, cooperate with, and share information with their counterpartsin other jurisdictions. Such cooperation is necessary for a number of reasons: 1) to permit oversight of banksthat operate in multiple jurisdictions; 2) to betterassess and control for the potential for internationalcontagion; 3) to enhance understanding of internationalbest practice in governance and supervision; and 4)to better understand the regulations and supervisoryapproaches of other countries and their potentialimpact on the host supervisor. The tools used for suchcooperation are usually memoranda of understandingand periodic meetings among supervisors.Cooperation between SEE and home-countrysupervisors needs substantial enhancement. There iswidespread disappointment with the memoranda ofunderstanding signed with home supervisors, whichproved to be of limited use during the recent crisis.Despite such understandings, the main sources ofinformation on home-country banks were the mediaand the Internet. Information provided by homesupervisors was often incomplete and out of date.Cooperation Between Supervisors“The recent crisis in the financial sectorhas shown that the monetary authoritiesand institutions and supervisory bodiesneed to co-operate more closely in order tomitigate the consequences of the crisis.”Kemal Kozarić, Bosnia and Herzegovina“The linkages between parent and subsidiarybanks and between different parent banksare more intertwined. At the same time,the regulatory system globally, not justin Europe, has not kept up with it.”Jon Lukomnik, United StatesInternational cooperation is of fundamental importance, because it is not possible to regulate global capitallocally in an increasingly globalized economy. Links between banks are more intertwined, and capital and riskcan move almost instantaneously, often propagated by increasingly complex financial instruments.Recommendation:Home- and host-country cooperation between supervisors: Cooperation needs to be greatly enhancedbetween home-country and SEE host-country supervisors. Supervisors have to try to establish a dialogueboth with home-country supervisors and the parent on all matters to do with liquidity, capital, risk, andgovernance. Resources need to be applied to help achieve the intent of memoranda of understanding. Newsystems and strategies may need to be devised to allow for better information sharing both on banks and onsupervisory policies.80 2010 BIS Principles, Section IV.5 on cooperation with relevant supervisors in other jurisdictions, p 32.Corporate Governance for Banks in Southeast Europe Policy Brief 55