Bank Governance Contracts: Establishing Goals and Accountability in Bank Restructuring (World Bank Discussion Papers ; 308)

The major obstacle to creating safe and sound banks in transitional economies is the absence of political will and of traditions and techniques for exercising governance and regulation of financial intermediaries. International lenders and donors have, in the past, financed recapitalization and institutional development programs for state-owned banks. More often than not, however, these banks have failed to improve their performance in line with the lenders and donors expectations. Increasingly, the international community recognizes that the legal infrastructure and the management traditions and credit cultures which are often taken for granted in developed countries are simply not present in the developing world. Consequently there is an effort to find new techniques which will compensate, during a transition stage, for the deficiencies in existing legal infrastructure and governance traditions. Techniques long used in contract law can be used to supplement existing financial legislation and to help policy-makers, regulators, owners and bank managers agree on their roles and responsibilities. As importantly, these same techniques can be used to establish accountability and to track compliance with agreed upon programs for strengthening state-owned commercial banks. This paper provides a comprehensive annotated model contract to assist policy makers and bank regulators, owners and managers in their efforts to impose discipline on troubled banks. The consequent improvements in these banks should improve the efficient allocation of scarce financial resources and contribute to economic development