Moldovas Foreign Policy statewatch

Angela Secrieru

Institute for Development and Social Initiatives Viitorul

Issue 64, February 2013

Corporate goVernanCe In the bankS In the republIC of MolDoVa unDer the IMpaCt of the baSel CoMMIttee regulatIonS
I think corporate governance for banks is not just dedicated to protecting the interests of minority shareholders. However, there is this interest of depositors as stakeholders, which must be guaranteed by the law, by regulators, but also within the board. Gian Piero Cigna, Italy

Cornel Ciurea Cristian Ghinea Witold Rodkiewicz Hans Martin Sieg

BoaRd:

ollowing the financial crisis started in 2007, in developed countries and at the level of international institutions, consistent efforts are being made to improve corporate governance in banks. Corporate governance (CG) in banks involves the allocation of authority and responsibility, i.e. the way the bank activities and operations are governed by its board and management. The recent adverse events in the banking sector in the Republic of Moldova regarding attempts to change the shareholding structure of banks including hostile takeovers may be partly explained by imperfect mechanisms of CG of the banks in the Republic of Moldova. In this context, is required the development of a consistent concept by the NBM regarding corporate governance in the banks in the Republic of Moldova aligned to BCBS recommendations and bringing banking regulations in compliance with this concept.
Following the financial crisis started in 2007, in developed countries and within the international institutions, there nave been elaborated and published a number of studies, reports and guidelines for improving corporate governance in banks.

Moldovas Foreign Policy Statewatch represents a series of brief analyses, written by local and foreign experts, dedicated to the most topical subjects related to the foreign policy of Moldova, major developments in the Black Sea Region, cooperation with international organizations and peace building activities in the region. It aims to create a common platform for discussion and to bring together experts, commentators, officials and diplomats who are concerned with the perspectives of European Integration of Moldova. It is also pertaining to offer to Moldovas diplomats and analysts a valuable tribune for debating the most interesting and controversial points of view that could help Moldova to find its path to EU.

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Among them we mention several with a strong impact - Walker Report[6], the report of the Senior Supervisors Group1 [5], guidelines of the Basel Committee on Banking Supervision[4], Organization for Economic Cooperation and Development[3] and the EU[2] on corporate governance in banks. The mentioned reports differ in the primary objective the corporate governance in banks should pursue: some of them[6] plead for the need to apply the shareholder-based approach, the rest of them[2, 3, 4] advocate the stakeholder-based approach in the corporate governance. The first point of view promotes the idea that corporate governance must serve shareholders - owners of the company. The second one lays the emphasis on both the interests of shareholders and those of stakeholders, including depositors, employees, customers, taxpayers and society. Therefore, the Western banking practice shows that several mechanisms of corporate governance may be operational. Bank board may be composed solely of representatives elected by the shareholders. In Germany, the board may include representatives of employees. In cooperative type structures (credit cooperatives) this one may include customer representatives: debtors and depositors. In some countries, savings banks board members are locally elected politicians.

What is corporate governance and which is its specificity for banking institutions?
Corporate governance (CG) is one of the main factors in improving efficiency, economic growth and strengthening investor confidence. In this context, the OECD defines corporate governance as follows CG refers to the relationship between the companys management, its board, shareholders and other parties interested in its activity. Corporate governance also provides the structure through which are set out the company objectives and the means to achieve them and ensure supervision and monitoring of performance achieved. Good corporate governance should provide proper incentives for the board and management team to pursue goals that are in the interest of the company and its shareholders and facilitate effective monitoring of results. Promoting best CG practices in banks is a long-term commitment for the Basel Committee on Banking Supervision. According to its Statute, the Basel Committee on Banking Supervision (BCBS) is the primary author and promoter of global standards in the prudential regulation of banks, providing a forum for cooperation on banking supervision [1]. Basel Committee mandate is to strengthen the regulation, supervision and practices of banks worldwide in order to enhance financial stability. The BCBS does not possess any formal supranational authority. Its decisions do not have legal force. Rather, the BCBS relies on its members commitments to achieve its mandate. The BCBS Secretariat is located at the Bank for International Settlements in Basel, Switzerland, and is staffed mainly by professional staff, mostly on temporary secondment from BCBS members. BCBS members are the following countries: Argentina, Australia, Belgium, Brazil, Canada, China, France, Germany, Hong Kong, India, Indonesia, Italy, Japan, Korea, Luxembourg, Mexico, Netherlands, Russia, South Arabia, Singapore, South Africa, Spain, Sweden, Switzerland, Turkey, United Kingdom, and USA. The Republic of Moldova although not a member of BCBS participates in the activities of its working groups and through the national supreme authority of banking supervision, the NBM, promotes the principles of BCBS in the banking legislation and practice in the country. Currently, the NBM is at the stage of implementation of Basel I provisions and initiation of Basel II provisions implementation.
1

Senior Supervisors Group Senior financial supervisors from seven countries: Canada, France, Switzerland, Germany, Japan, United Kingdom, USA.

str. iacob hncu 10/1, chiinu

Md-2005 republic of Moldova

373 / 22 221844 phone

373 / 22 245714 fax

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The Basel Committee published its initial guidelines on CG in 1999, revising its principles in 2006. The Committee guidelines assist the banking supervisory authorities and provide a reference for promoting the adoption of sound corporate governance practices by banks in their countries. The principles also serve as a benchmark for banks own efforts in the field of corporate governance. The 2006 guidelines of BCBS were based on corporate governance principles published by the OECD in 2004. Since publication of the 2006 BCBS Guidelines, there have been a number of failures and errors in corporate governance, many of which were manifested in full during the financial crisis triggered in mid 2007. These included, for example, insufficient supervision by the board of senior management, inadequate risk management and organizational structures and banking activities unduly complex or opaque. In this context, the BCBS updated in 2010 its principles on CG in the banks[4]. The 14 principles of sustainable CG cover the following areas: A. Board practices B. Senior management C. Risk management and internal controls D. Compensation E. Complex or opaque corporate structures F. Disclosure and transparency. The BCBS believes that from the perspective of banking industry, corporative governance involves the allocation of authority and responsibility that is the way in which the activity and operations of the bank are governed by the board and management, including the way they: set the bank strategy and objectives; determine the bank tolerance / appetite towards risk; carry out the daily activity of the bank; protect the interests of depositors, meet their obligations to the shareholders and take into account the interests of other recognized stakeholders; align corporate activities and behavior with the hope that the bank will operate in a safe and sustainable manner, with integrity and in compliance with applicable laws and regulations. In the pages of this publication we will highlight aspects of the first three principles of CG on the Board of Directors and the way in which Moldovan banks correspond to their contents. Principle 1: The bank Board has overall responsibility for the bank, including approval and supervision of the implementation of the banks strategic objectives, risk strategy, corporate governance and corporate values. The Board is also responsible for supervision of senior management of the bank. Principle 2: Board members of the bank should be and remain qualified including through training for the position they hold. They should have a clear understanding of their role in corporate governance and be able to exercise a fair and objective view on the bank affairs. Principle 3: The Board should define appropriate governance practices for its own activity and possess the means required to ensure that such practices are followed and periodically reviewed for their continuous improvement.

The recent adverse events in the banking sector of the Republic of Moldova regarding attempts to change the ownership structure of banks including through hostile takeovers, in the case of BC Universalbank S. A., BC Victoriabank S. A., BC Moldova-Agroindbanc S. A., BC Banca de Economii S. A. may be partly explained by imperfect mechanisms of CG of banks in the Republic of Moldova.

str. iacob hncu 10/1, chiinu

Md-2005 republic of Moldova

373 / 22 221844 phone

373 / 22 245714 fax

office@viitorul.org

www.viitorul.org

Moldovas Foreign Policy statewatch

Supreme banking supervision bodies in developing economies, the Republic of Moldova economy belonging to this category, do not usually have political independence, this shortcoming can undermine their ability to compel banks to meet prudential requirements and impose appropriate sanctions. In these countries, the problem of CG in banks is complicated by the extensive political interference in the functioning of the banking system. On the other hand, in the developing economies, introduction of sustainable principles of corporate governance in banks is partly hampered by poor legal protection. Under these circumstances, we may consider good political governance as a prerequisite for good corporate governance. The NBM defines corporate governance as follows: Corporate Governance is a set of relationships between the bank management, its shareholders and others. Corporate governance also includes the structures through which the bank goals are set and determined the means of achieving them and monitoring performance. Source: [8, p. 2]. In the context of the BCBS provisions emphasizing promoting the interests and role of stakeholders in CG (stakeholder-based approach), the NBM should formulate explicitly its position specifying the term others and recommend banks to comply with this approach. According to the NBM regulations, banks must draw up corporate governance codes[8]. In this regard, all banks in the Republic of Moldova have developed and published their respective codes. The analysis of these codes demonstrates, however, that most frequently, there is not a clear understanding of CG content in banks. Although some CG codes state the need of considering interests of other interested stakeholders in the bank activity apart from the shareholders interests, however, when the bank Board competences are described it is indicated that it exclusively protects the rights of shareholders. Regarding the Board of Directors2 which has to play a key role not only in the bank activities, but also in promoting sustainable corporate governance principles, the NBM, among other things, makes the following provisions: The Board is the administrative body of the bank exercising functions of supervision, developing and ensuring the bank policy. The banks board consists of an odd number of members, but not less than three. Source: [7]. At the same time, in terms of the level of professional training of members of the bank are stipulated the following requirements: The members of the Board shall: - have higher education; - have at least 3 years, in the last 5 years, of work experience in positions of administrator (board member, executive body) in economics or finance. Source: [9]. Based on these requirements, in the table below, we tried to make a synthesis of information provided by banks regarding the bank board members:

In the Republic of Moldova, the banks have the following managing bodies: the General Assembly of shareholders, the board, the executive authority and audit committee.

str. iacob hncu 10/1, chiinu

Md-2005 republic of Moldova

373 / 22 221844 phone

373 / 22 245714 fax

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Table 1. The quality of banks boards in the Republic of Moldova

BC Mobiasbanc Groupe Societe Generale S. A

BC EXIMBANK - Gruppo Veneto Banca S.A.

BC Banca de Finane i Comer S. A.

BC Moldova - Agroindbank S. A.

BC Banca de Economii S. A.

BC Moldindconbank S. A.

BC COMERBANK S. A

BC Banca Social S. A. 5 5 2

BC ENERGBANK S. A:

The number of members in the Board of them: without the bankingfinancial training senior managers in other economic entities government representatives

Source: elaborated based on information provided by the banks on the management structure of banks

The data presented show that in the case of one bank the NBM requirement on the number of at least 3 members required in order to make up the Board is not respected. In the other two banks, the board consists of an even number of members (6), both cases with adverse consequences on the quality of decision-making within the boards of the bank. The best practices in CG show that the board should possess both in terms of individual members and collectively experience, appropriate skills and personal qualities, including professionalism and personal integrity. In this context, BCBS believes that collectively the Board should have adequate knowledge and relevant experience for each of the financial activities the bank intends to pursue, in order to enable effective governance and supervision. The areas in which the banks board should ensure adequate experience are, according to BCBS recommendations, the following: finance, accounting, credit, banking and payment systems, strategic planning, communications, governance, risk management, internal control, banking regulation and audit.

str. iacob hncu 10/1, chiinu

Md-2005 republic of Moldova

373 / 22 221844 phone

373 / 22 245714 fax

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BC Victoriabank S. A. 6 4 5

BC UNIBANK S. A.

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From the above table we see that in three banks and namely - BC Moldindconbank S. A., BC BANCA SOCIAL S. A. i BC UNIBANK S. A., no board member has financial - banking training. In the case of BC Moldova - Agroindbank S. A., 4 out of 5 members do not have financial - banking training. An adverse situation, in this regard, is seen in other banks as well, in whose boards more than half of members do not have training/studies in the financial-banking field. Under these conditions, is threatened the efficient exercising of the boards competences, especially of those related to elaboration and implementation of the bank strategy and managers activity supervision. Finally, the banks performance and stability are threatened. At the same time, BCBS suggests that bank board members should be able to dedicate enough time to perform efficiently their tasks (not limited to attendance of the Board and its committees meetings). In this context, the practice shows that there are frequent cases where board members of the bank are, at the same time, executives, directors, senior managers of other economic entities, positions which by definition are time sinks. In some banks (BC UNIBANK S. A., BC Moldindconbank S. A., BC Moldova - Agroindbank S. A., BC Victoriabank S. A.) all or almost all board members are general managers. The conclusion is that in these banks, the Board of Directors is rather a formal, dysfunctional structure, while corporate governance mechanisms are not only inexistent but are not well understood in banks in the Republic of Moldova. Foreign-owned banks have a relatively successful board structure (especially BC Mobiasbanc Groupe Societe Generale S. A.), although in the case of BC EXIMBANK - Gruppo Veneto Banca S.A. arouses some bewilderment the fact that of the 5 board members there is not any citizen of the Republic of Moldova, at least to remind the foreign investors that they are operating in another country, characterized by certain particularities and to provide formal minimum guarantees of honest behavior and intentions in their capacity as shareholders. International practice shows that for the local banks boards of the developing countries, proper understanding of the role and responsibilities of the bank board is, probably, the most serious challenge for an efficient CG of the bank. In this context, is required the development by the National Bank of Moldova of a consistent concept on corporate governance in banks in the Republic of Moldova in line with the BCBS recommendations and adjustment of banking regulations to this concept. With reference to the Board of Directors, Western banking experience suggests the need for regular rigorous assessments of bank board and its members activities, the assessment report being available to the interested public. This is important to ensure that the board and its individual members discharge their duties properly, that the board includes people characterized by professionalism, meeting also other specific requirements put forward by the supreme institution of banking supervision. The boards of banks should improve their level of qualification and skills. The competences that are needed in the board are well defined in the context of the best international practices. The international banking practice shows that presently the board seeks to strengthen its position by developing specific expertise in the areas of banking, particularly focusing on the presence within the board of specialists in bank risk. The boards should definitely have members with banking experience and objective people as well. The training opportunities must be enhanced at the same time. Banks should develop functional plans for training / professional growth and to make them compulsory. These trainings should guide the board members in terms of the banking activities and processes, forms and content of reports, etc. The board itself should seize training opportunities offered by various institutions of governance, international financial institutions, academia and others. The boards of banks should not be electoral or client councils made up of persons representing the interests of a group of shareholders or a clientele group. The bank board must be a professional board.

str. iacob hncu 10/1, chiinu

Md-2005 republic of Moldova

373 / 22 221844 phone

373 / 22 245714 fax

office@viitorul.org

www.viitorul.org

Moldovas Foreign Policy statewatch

bibliography:
1. Basel Committee on Banking Supervision, Charter, BIS, January 2013. 2. Green Paper on Corporate Governance in Financial Institutions and Remuneration Policies, European Union, 2010; Commission Staff Working Document on Corporate Governance in Financial Institutions: Lessons to be drawn from the Current Financial Crisis, Best Practices, European Union, 2010. 3. OECD Principles of Corporate Governance, OECD, Paris, 1999; OECD Principles of Corporate Governance, OECD, Paris, 2004; Corporate Governance and the Financial Crisis, OECD Steering Group on Corporate Governance, OECD, Paris, 2010. 4. Principles for enhancing corporate governance, Basel Committee on Banking Supervision, Bank for International Settlements, October 2010. 5. Risc Management Lessons from the Global Banking Crisis of 2008, Senior Supervisors Group, 2009. 6. Walker, S. D., i alii, A Review of Corporate Governance in UK Banks and other Financial Industry Entities, London: HM Treasury, 2009. 7. Legea instituiilor financiare nr. 550-XIII din 21.07.95. Republicat: Monitorul Oficial al R.Moldova nr.7881/199 din 13.05.2011, art. 18-19. 8. Regulament cu privire la sistemele de control intern n bnci, Hotarrea Consiliului de Administratie al BNM nr. 96 din 30.04.2010, Monitorul Oficial al Republicii Moldova nr. 98-99/368 din 15.06.2010. 9. Regulamentul cu privire la exigenele fa de administratorii bncii, Hotrrea Consiliului de Administraie al BNM nr. 134 din 01. 07. 2010, Monitorul Oficial al Republicii Moldova nr. 91-94 din 03.06.2011, art. 619.

This publication was produced by IDIS Viitorul with the financial support of Soros Foundation Moldova. The opinions expressed in this publication reflect the authors/authors position and dont necessary represent the views of the donors.
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