Corporate Governance for Banks in Southeast Europe: Policy - IFC

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egion. 5 The main challenge that the group faced was understanding the differences between local andforeign banking markets and making recommendations that were specific to the circumstances and needs ofSEE.SEE is clearly not Wall Street. SEE has very high foreign ownership of the banking system, the equitiesmarkets are small and emergent, 6 and almost all banks are closely held. The corporate governance guidancepromulgated by the OECD, the Bank for International Settlements (BIS), the International CorporateGovernance Network, and others responds more directly to the needs of more developed countries. Eventhough their principles are globally sound, their application in the local context poses considerable challenges.The Policy Brief aims to help apply international best practice in the SEE context. Its recommendations buildto a large extent upon the BIS Basel Committee on Banking Supervision (BCBS) Principles for EnhancingCorporate Governance (2010) and also upon the BIS Enhancing Corporate Governance for BankingOrganizations (2006). These documents provide authoritative international guidance on corporate governancethat is tailored to the circumstances of the banking sector. 7The Policy Brief is not intended in any way to substitute for such guidance. Rather it is intended tocomplement it and serve as a tool for highlighting those issues that are seen to be most germane to theregion. It should also be understood that the Policy Brief makes recommendations that are on the policy level.It is not intended to be a detailed “toolkit” or set of instructions for supervisors or banks on how to achievebetter governance. In many cases detailed guidance exists and should be consulted when implementing thesepolicy recommendations. In other cases more detailed guidance may need to be developed.The larger chapter headings of the 2010 BIS Principles have been used to structure the Policy Brief. Followingthis introduction, Chapter II provides an overview of bank corporate governance in SEE. Chapter III looks atsound corporate governance principles for banks. Chapter IV discusses the role of supervisors, and ChapterV looks at how to promote a supportive environment for better governance. Some issues that are notdeveloped in the BIS Principles, such as state ownership of banks and the role of banks in client governance,are treated in Chapter VI, “Additional issues.” The annexes contain additional information, including sourcesof guidance on bank governance, synopses of key Basel Committee statements on bank governance, and theresults of a significant 2010–2011 European Bank for Reconstruction and Development (EBRD) study on banksin the SEE region.5 Participants in the High Level Policy Meeting and in the ensuing discussions are listed in Annex A.6 Morningstar, “Diverging Opportunities in Emerging Europe” (2011). http://www.morningstar.co.uk/uk/markets/articles/96403/Diverging-Opportunities-in-Emerging-Europe.aspx. Between 2008 and 2010, markets in SEE lost considerable value. The main index on the Sofia stock exchangecollapsed from a peak of 1,950 points in March 2007 to a low of 260 points in February 2009, a fall of 87 percent. The performance of the larger andmore liquid Romanian market saw an 80 percent drop in its main index.7 Synopses of both BIS documents are provided in Annexes C and D. For readers interested in a fuller understanding of international best practice inbank governance, a complete reading of the BIS document is recommended. In addition, the OECD Principles for Corporate Governance and the OECDGuidelines for the Governance of State-owned Enterprises provide a broader, more comprehensive, but non-industry-specific view on governancepractices. Also, the OECD-EBRD Policy Brief on Corporate Governance of Banks in Eurasia provides insight into the governance issues faced by banksin transition economies. Further important sources of guidance on corporate governance and the governance of banks are listed in Annex B.6Policy BriefCorporate Governance for Banks in Southeast Europe
II. Overview of bank corporate governance in SEEThe structure of the banking sector in SEEThe banking sector in SEE differs dramatically from those of the United States and Western Europe. All of thecountries in the region have stock exchanges, but the liquidity on these exchanges is, with some exceptions,very limited. Thus, businesses in most SEE countries are crucially reliant on banks to provide financing. Thebanking sector provides the single most important form of financial intermediation.Most of the local banks in the SEE region are classic deposit-taking and loan-making businesses. Mostare quite small, and few are listed on local exchanges. They make little use of the sophisticated financialinstruments that contributed to the financial crisis in more developed markets, and most risks are generatedin the area of credits.Ownership structures are also different. SEE countries are all living with the consequences of their recenttransition from central-control to market-driven economies, including a profound restructuring of the bankingsector. In Serbia, for example, as recently as 2001, two-thirds of the banking sector was state-owned, withforeign ownership representing approximately 13 percent of banks. By the end of 2009, state ownership haddeclined to about 17 percent of total assets, with foreign ownership rising to 74 percent and approximately 9percent in the hands of other private owners. 8The reform process occurred differently in each SEE country, but each had its own experience withprivatization, a massive restructuring of the banking sector, and the rapid emergence of new bankinginstitutions. State ownership is now low in most countries in the region (see Table 1).Table 1: State Ownership of Banks: Percent of Registered CapitalJurisdiction/Country 2007 2008 2009 2010Albania 0.3 0.2 – –Bosnia and Herzegovina (Federation) 2.7 1.3 1.1 1.1Bosnia and Herzegovina (Republika Srpska) – – – –Bulgaria* 0.4 0.6 1.3 1.9Croatia 4.6 4.4 4.1 4.3FYR Macedonia 1.4 1.2 1.4 2.3Montenegro – – – –Romania 5.4 5.2 7.3 7.4Serbia na 16.0 17.5 17.9Source: Data from Banking Supervisors from Central and Eastern Europe, BSCEE Review 2010. http://www.bscee.org.*Percentage on the basis of total assets.Without doubt, the most striking feature of the banking sector in the SEE region is the level of foreignownership. By 2009, an average of 87 percent of bank assets in the region was in banks with majority foreignownership. These figures range from a low of 74 percent in Serbia to a high of 94 percent in the Federationof Bosnia Herzegovina (see Table 2).8 R. Jelašic, “European Integration Challenges,” Speech at Belgrade Conference 2009.Corporate Governance for Banks in Southeast Europe Policy Brief 7
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Recommendation:Remedial action: Sup
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VI. Additional issuesA. State owner
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VII. AnnexesA. Southeast Europe Pol
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INTERNATIONAL EXPERTSPeter Dey, Cha
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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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Bulgaria19.1% Others16.3% Unicredit
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Romania19% BCR (Erste)13.1% BRD (So
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Corporate Governance for Banks in Southeast Europe: Policy - IFC

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