Corporate governance of banking group: international recommendations, european policies and national practices

The new institutional framework put on the agenda a review of established models and introducing new perspectives in economics. The role of banking groups for economic growth and competitiveness place corporate governance practices of critical analysis. The development of banking in the twentieth century brought to the fore the advantages of conducting activities cross-border. The global economic recession determines the corporate governance of international banking groups as a source of the financial crisis and as a means of reducing its effects. The present stage of development of society is characterized by actions to improve practices in corporate governance at the international, regional and national level. The monograph examines the dynamics of the corporate governance of international banking groups. The analysis of changes in corporate governance encompasses recommendations of international organizations, policies in the EU and practices in Bulgaria. The beginning of conglomerisation in the second half of the twentieth century it was laid by national policies on competitiveness. The deregulation and the related movement of capital identified cross-border activities of banks as a driving force for economic growth. The differences in the laws of individual countries led to organizational units, which began to offer financial services with increased risk. Owing to the new services, the competent authorities have taken several measures to address the transfer of risk across national borders. The international activities of banking groups highlighted the need for international recommendations for coordination of actions at the regional level to improve practices in corporate governance. Banking groups play a key role for development and function of the economy. Their practices of corporate governance have an effect on rest players in market economy. National legislations in some countries have allowed the creation of complex banking structures and financial services that lead to emergent and distribution of financial crisis. To decrease the negative effects by crisis, international organizations initiate a series of measures for improvement of corporate governance practices and prevention of future crises. The changes in corporate governance of transnational banking groups are in following order: recommendation by international organizations -> policies of parent banks in European Union -> practices in subsidiary banks in Eastern Europe. The dynamics of good practices in corporate governance is depended on the role of players. Shareholders have interest to increase their wealth by company deals. Parallel with property rights, shareholders have non-property rights that must exercise advisable. Strict attendances and exercise rights at general meeting of shareholders will contribute to control over managers. Main contribution for bank stability plays the institutional investors which role was decreased because of missing information for their voting policy. Managers have financial incentives to increase shareholders’ wealth by risk undertaking. The board must reconsider the remuneration policy for managers. This recommendation will bring to control over the risk management. Auditors have a double status – to decrease information asymmetry between principal and agent, and to confirm to stakeholders, incl. regulators, for correct preparation of reports. The changes regard audit as a part of regulation policy at national and international levels. Auditors are in charge of assessment of remuneration policy which target is decrease of practices for taking of excessive risk. Regulators of some countries allow the creation of complex organization structures and financial services that are difficult for control and assessment. Decisive factor for stability of economy is concluding and keeping of memorandums among national regulators. The institutional framework has not a target to create a memorandums by „one-size-fits-all“ approach. The modern regulation of banking groups is based on „comply-or-explain“ approach. Tools in corporate governance of banking groups include traditional and non-traditional techniques. Using of rating agencies by institutional investors is put on control by national regulators. The requirement for information disclosure is realize at quality new stage: the information user pays for preparation of an investment plan. A part of attempts for convergence of policies in corporate governance is separation of risk businesses in particular entities and decrease of complexity for corporate structures. The consequences for corporate governance of banking groups in Bulgaria are indirect. The presence of subsidiaries from EU banking groups and their big market share define the subordination of corporate governance practices. The process of cash privatization and sale of profit banks define the majority and privately-owned ownership of Bulgarian banks therefore their practices are not covered by the new EU policies for corporate governance. In contrast to public status of parent banks in Western Europe, most of Bulgarian subsidiaries have not obligations to comply international principles for corporate governance.