Banking Soundness and Monetary Policy
Chapter

20 Governance Issues and Banking System Soundness

Editor(s):
Charles Enoch, and J. Green
Published Date:
September 1997
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Author(s)
RICHARD P. ROULIER

Many of the papers in this volume have identified those factors that contribute to a lack of soundness in financial systems, as well as the actions that can be taken to strengthen these systems. This paper will build on that foundation by putting forward three propositions: first, with the possible exception of massive macroeconomic instability, no one single factor contributes more to institutional problems than the lack of effective governance; second, although “governance” is a broad concept referring to external and internal forces, its core is “ownership”—the concept and identity of an owner, the relationship of the owner to an institution, and the mechanisms through which an owner affects an institution’s behavior; and third, improvements in governance should precede any state-funded recapitalization or any regulatory forbearance for an institution whose condition could place depositors at risk.

This paper focuses on the difficulties of translating and applying governance concepts where there is no strong tradition of private ownership. Specifically, how can a country establish effective internal governance of banks that are or were until recently state owned? As Manuel Guitián’s comments make clear (see Chapter 3), however, the concepts of governance are key not only in developing and transitional economies but also in the most highly developed markets.

Banking authorities have been struggling for years to improve the quality of financial institutions in developing and transitional economies. Bank restructuring projects have drawn heavily on foreign technical assistance and have often tasked the advisors with delivering improved credit analysis skills. Unfortunately, newly trained credit analysts soon realize that their local environments do not provide the tools necessary to recover debts and their managers and owners do not necessarily endorse the philosophy of making loans only to creditworthy borrowers. Finally, the analysts quickly discover that their careers are not likely to advance if they continue to recommend credit actions that are inconsistent with their owners’ preferences. A basic problem with these restructuring efforts is that project designers and technical advisors act pursuant to assumptions based on conditions in their home countries. Increasingly, it has become obvious that these assumptions are out of line with reality in transitional environments. Marko Škreb has pointed out the danger inherent in assuming the adequacy or accuracy of data available to analyze a bank’s condition or in assuming that the same standards can be applied in widely varying circumstances. Carl-Johan Lindgren drew further attention to the quality of data in his discussion on keeping banking systems sound (see Chapter 12).

This discussion therefore begins by identifying a number of closely interwoven “risky assumptions” that impede efforts to create sound systems or institutions and explores how attitudes toward evaluating risk in institutions and relying on governance to assure system soundness have changed. Next, the paper focuses on governance—first broadly, then more narrowly in the sense of “ownership governance”—and then concludes by addressing techniques to create governance.

Among the most serious “risky assumptions” that have impeded restructuring efforts are the following:

  • Legal infrastructure exists. Often in transitional economies, the laws and institutions do not exist to identify the owner of specific assets, enforce contractual obligations, perfect collateral, and convert assets into cash through foreclosure or bankruptcy to repay unsatisfied debts.

  • Agreement exists on the role of the market and the desirability of debt recovery. Beyond an absence of the legal tools for debt recovery, there is often a continuing controversy on whether the social good is served best by debt recovery, debt renewal, or debt forgiveness. There has been an extreme reluctance in many economies to accept the short-term pain associated with taking assets away from inefficient users. As a result, these economies have not yet been able to move toward the longer-term benefits associated with placing these assets in the hands of new (perhaps more efficient) investors who are able to use the assets to generate cash with which to repay loans, engage additional employees, and provide investors with a return on their capital.

  • Incentives exist to allocate resources efficiently, enforce debt recovery, and preserve bank capital. In the absence of agreement on the benefits of reducing “bad loans,” bank managers still function under incentives that encourage rolling over rather than collecting bad debts.

  • An understanding of “ownership” exists complete with (a) clear distinctions between public and private ownership and (b) government and owners’ attitudes consistent with sound institutional development. Although it is easy to endorse the benefits associated with an increasingly market-oriented economy, it is not as easy to accept the loss of control that this change in orientation and ownership implies to public sector officials. In many transitional environments, public sector officials are sincerely struggling with the trade-offs and risks inherent in letting the market decide. Similarly, they struggle to understand the extent to which regulation is a precondition for sound market development and at what point the regulation becomes so intrusive that the market is unable to develop.

High margins are explained by a lack of competition. Clearly a lack of competition can lead to monopolistic profits. The existence of wide margins, however, is not always explained by the level of competition. Economists have been too ready to conclude that margins will come down if competition is introduced. High margins, however, may simply reflect the cost of doing business in an environment in which systemic risk is high, debt recovery is expensive, and prudential regulations are absent or ignored. In such an environment, a more liberal entry policy is likely to have minimal effect on margins or to exacerbate the potential for bank failures.

Unsound banks will precipitate a near-term crisis. In a market economy, depositors, creditors, even investors will deny an unsound bank the resources it needs to survive. In transitional economies, the linkage is often not as clear. Many argue that, in a transitional economy, an insolvent state-owned bank can exist for an extended period of time without “failing” and without creating a run on the bank. To say, however, that no direct and near-term linkage exists between insolvency and a crisis is not necessarily good news. A near-term crisis may not be precipitated, but the costs (in terms of lost economic development and ultimate claims on fiscal resources) continue to grow as long as a bank’s insolvency is not recognized and as long as fundamental defects are not eliminated.

Audited statements in accordance with international standards provide an accurate reflection of reality. As Lindgren’s paper shows (see Chapter 12), it is difficult to capture a true picture of a bank in its balance sheet. Even in the most developed markets with good disclosure standards and well-trained accountants and auditors, financial statements often fail to reflect financial reality—just as English words and correct grammar may not accurately reflect the writer’s thoughts. Similarly, numerous enterprise and bank failures, following publication of unqualified financial statements demonstrate that such statements may not reflect the entity’s actual financial condition.

Risk-based capital adequacy of 8 percent implies solvency and viability. Although clear and transparent rules are always preferable, it may be that banking authorities have been too ready to endorse 8 percent as an adequate capital level. First, 8 percent may be achieved based on flawed accounting and provisioning methodologies; second, the static concept of capital fails to reflect the dynamic flows that determine an institution’s viability; and finally, 8 percent may be too low to provide a realistic cushion in changing market conditions. It is interesting to note that in the United States the average capital adequacy for banks with CAMEL ratings1 of 1–3 is between 16 and 20 percent. This implies that in a fairly stable market with relatively good disclosure private sector owners (concerned with minimizing their investments and maximizing their returns) voluntarily “require” a higher capital adequacy than that suggested by the BIS standard.

Management failure and deficient technical skills “explain” credit losses. Poor management will produce poor credit decisions. In transitional economies, however, poor credit decisions are not always explained by poor management or by lack of credit skills. When incentive systems and owners’ expectations preclude management decisions based on bank profitability and the creditworthiness of borrowers, then management cannot be held accountable for credit quality or capital levels. Many bank managers still operate in environments where they are theoretically given authority and expected to make sound credit decisions; in reality, they are required to implement policy decisions dictated openly or privately by the bank owners. If owners have not confirmed that their goals are profitability, efficient resource allocation, credit quality, and debt recovery, then improving credit skills will not result in improved bank performance.

The “foundation” for a sound bank (or banking system) is the legal and regulatory infrastructure. The “first floor” is the role of (and governance imposed by) the owner. The “second floor” comprises management and credit skills. To start construction (or bank restructuring) on the second floor can lead to structural problems and waste of both time and money. This principle is only now being recognized in the evolving attitudes of bankers in both the developed and developing worlds.

Evolving Attitudes

The countries represented at this seminar form a continuum in financial sector and regulatory attitudes. Transitional economies, for their part, have shifted from a reliance on policy lending to an increased recognition that market forces may more effectively promote economic development. With this shift, there was an organizational migration from monobanking to a dual banking system, separating central and commercial bank functions. These organizational changes, in turn, created a need for prudential regulation to govern the activities of the newly created commercial banks. In the early stages of this transition, and in the absence of experienced financial sector professionals, it was appropriate to introduce relatively rigid rules—for example, a loan past due by more than ninety days is classified as “substandard” and must be provisioned at a 20 percent level. Many of the transitional economies today stand at a critical threshold trying to move from rigid rules, mechanistically applied, to a philosophy of increased reliance on sound judgment in the application of prudential regulation.

Frederick Musch of the Bank for International Settlements emphasized the need to develop judgment and enumerated the risks associated with relying too heavily on black and white rules to be applied in all circumstances (see Chapter 7). Essentially the philosophy of increased reliance on sound judgment implies far greater use of governance systems internal to commercial banks. Regulators must not allow bankers to view risk-management as placing loans in the “correct” regulatory pigeon hole and then multiplying by the correct provisioning factor. Rather it is the banker’s job to prove to the regulator (1) that the bank has a sound governance structure, (2) that the bank has created and implemented a classification system and provisioning methodology that results in an accurate statement of profits and capital; and (3) that the bank’s resulting capital levels provide sufficient cushion for market volatility under reasonable economic scenarios.

Given the increased need to rely on the internal governance systems of banks, it is appropriate to turn our attention to the meaning of governance and ways in which it can be created and improved. “Governance” broadly defined includes the discipline imposed and incentives provided by a very broad “complex of institutions, laws and regulations, customs and practices that control and influence bank behavior.”2 Governance is imposed internally and externally by various parties with different perspectives, each of whom may exert pressure to move an institution in a slightly different direction. Table 1 provides a broad (but not all-inclusive list) of key sources of governance. Although the motivations of the various players are different, they can and should be mutually supportive. If common values are shared within a culture, governance can be far more effective than if the values and goals are so divergent that managers are paralyzed by requirements to move in mutually inconsistent directions.

Table 1.Sources of Governance
Key Sources of GovernancePrimary Motivation
OwnersDividend stream, stock appreciation, and limited downsides with infinite upside.
Capital marketsCompetition for equity funds.
Monetary authoritiesPrice stability.
Prudential regulatorsSafety and soundness of the financial system.
Debt providers (including depositors)Rates, convenience, and safety.
Legal systemAdherence to legal standards, sanctions for fraud.
Business practicesEthical standards.
Public opinionCorporate citizenship and implied civic responsibilities.
EmployeesCompensation and security.
CompetitionGood: narrow margins, high efficiency; bad: lax lending terms, conditions, and underwriting criteria.

Ownership as the Cornerstone

Although governance comes from both external and internal sources, ownership (and the resulting system of internal governance) is the cornerstone of a financial institution. The importance of ownership and internal governance cannot be overemphasized. A good bank can exist even under an inadequate regulator; a good bank cannot exist under a bad system of ownership governance. Regulators are constantly trying to chase the horse after it has escaped from the barn, but it is the owner who really controls the barn and holds the key to its door. Musch underscores this concept well when he writes that “there is something very wrong in a market in which the supervisors know more than the bankers” (see Chapter 7). It is not the supervisor’s job to make lending decisions or to impose target markets or strategies on financial institutions. It is their job to hold banks responsible for the banks’ decisions, to force the banks to understand and explain their risk profile, to assure that they have themselves instituted good governance and risk management systems, and ultimately to impose if necessary on banks, managers, and owners liability for failure to adhere to prudent standards of operation.

It is not the purpose of this volume or this paper to debate the relative merits of public versus private ownership. For those ideologically committed to private ownership, however, I would argue (a) that privatization is a means to an end and not an end in and of itself and (b) that there are significant prerequisites to privatization (such as accounting and disclosure standards, supervision and regulation, and other legislative infrastructure).

On the other hand, for those still tempted to allow state-owned banks to allocate resources rather than private owners and market forces, there are numerous problems associated with state ownership. Indeed, value has been lost by not moving more rapidly to privatize banks, and resources have been wasted trying to recapitalize and restructure banks as an intended prelude to privatization. Furthermore, conflicts of interest for the state as owner are difficult if not impossible to avoid: when making decisions, should the state owner act as owner, regulator, depositor, largest borrower, monetary authority, tax authority, dispute resolver, employer to insolvent and inviable bank borrowers, or election candidate? Beyond such conflicts of interest, a state-owned bank is also often plagued by a culture and decision process that precludes timely responses to rapidly changing market forces. Also, the skill sets and compensation mechanisms in state-owned banks do not encourage good management, the goal of which is to maximize the return on invested funds. Finally, partly because of the state’s conflicting goals as owner, the aims (and the incentives) for state-owned banks are often not clear—for example, is the goal to support the most creditworthy borrowers or to sustain existing employment levels?

To sum up the controversy between state and private ownership, private ownership (that seeks commercial profits) lends itself more easily to good governance than does state ownership. From a regulatory perspective, private ownership also offers a separate potential source of future capital without tapping fiscal resources. By contrast, state ownership contains significant risks. The central issue, however, is not necessarily whether a bank is owned by the state or by private shareholders, but is the ownership transparent and accountable, what are the owner’s goals and have they been explicitly stated, how do the owners exercise influence, what is the quality of governance, and how can the governance be improved?

Whether state or privately owned, good governance starts with the owner, then extends down through the governance body, the managers, and the employees.3 Even if the owner is the state, it is necessary to make the owner “transparent and accountable.” Although “ownership by the people” may be an ideologically attractive concept, it is difficult for a bank manager to know who the “people” are, who the “state” is, and therefore who the “boss” is? Is it a specific minister who is requesting preferences for a given sector? Is it the minister of trade when he or she asks for more favorable import and export terms? Is it the prime minister who wants to intervene on behalf of a large employer in his or her home district? Such issues are better debated in parliament than in credit departments. To ensure transparency, it is necessary to vest the state’s ownership in a specific entity; an asset management company, the department of banking within the Ministry of Finance, or some other.

The owner has certain rights—the right to choose which stock to own, to select members of a governance body, to decide strategic issues (merger, for example), to confirm the external auditor, and to receive any residual value in liquidation. Beyond its rights, an owner can also hope for dividends and stock appreciation. Whether state or privately owned, however, if an institution is to collect deposits from the public, the owner cannot be given preferential access to bank products (such as loans) or to preferential terms (rates) on bank products. If the state wishes to finance public works and long-term development goals, appropriate funding mechanisms are available—issuing bonds and collecting taxes. Governments are still tempted, however, to bypass the fiscal budgeting process and market-oriented credit discipline by using depositors funds to finance public needs. To do so confuses fiscal processes and prudent market-oriented commercial banking.

The separation of ownership and management, which has been found to be most effective in large corporations, implies the imposition of a “governance body” between the owner and the management. Such a body has long been recognized as critical for economic entities when the ownership is widely disbursed. In state-owned enterprises and banks, however, the value and role of the governance body have largely been overlooked. Not only is it the mechanism through which governance and control can be brought to a bank, it is often the only effective way that bank managers can be buffered from political interference in lending decisions.

In transitional and developing economies and in state-owned banks, a tradition of well-articulated rules to define the responsibilities, structure, composition, and incentives facing directors often does not exist. Improving this is the first step in creating governance.

Responsibilities

The basic responsibilities of the board are three-fold. First, they should supervise themselves; in other words, they must clarify their own governance responsibilities, ensure that as a group they have the necessary skills required to perform the board’s governance role, and ensure that as a group and individually they will not be handicapped by a conflict between their fiduciary role of protecting the bank’s best interest and their own personal interests. Second, the board must supervise management—set the agenda and make clear that management reports to the board and not the reverse; establish performance criteria; and select, retain, compensate, and dismiss senior management based on criteria established and monitored by the board. The board is also often given the responsibility of selecting its own chair from among the elected directors. Finally, and most important, the board must ensure the bank’s basic financial soundness by approving plans, policies, and procedures and by monitoring compliance with laws, regulations, and the bank’s own policies and procedures.

The plans, policies, and procedures for which the board has responsibility can be grouped into four categories: (1) the “basic building blocks” (strategy, decision processes, structure, distribution systems, budgeting and planning systems); (2) the “back office” (operations strategy, information technology, and management information systems); (3) “safeguarding assets and liabilities” (credit, treasury, and audit); and (4) human resource development (recruitment, retention, rotation, performance management, compensation, and training).

Structure

To perform the above responsibilities, boards often have different structures. Large and successful banks’ boards however, often have subcommittees, which can include: (1) an executive committee; (2) a loan review (or risk management) committee responsible for reviewing and approving credit policies and procedures, loan classification and monitoring systems, provisioning methodologies, underwriting criteria, loans recently approved, loans past due, loans restructured, accounts overdrawn, documentation exceptions, loans to insiders, loan concentrations, classified loans, and action plans for classified borrowers; (3) an audit committee responsible for supervising the internal auditor, approving the terms of reference and engagement letter under which the external auditor will perform, and receiving the audit report and management letter; (4) an asset/liability committee; and (5) a compensation committee.

Composition

To provide an effective link between owners and managers, a board will often include directors from outside and inside the bank. Ideally, the boards membership should have business, financial, and legal skills. The members themselves must be leaders, managers, and strategic thinkers with inquisitive and analytical minds. Their backgrounds should not be limited to academic preparation (as students, professors, and researchers) but should include past practical experience as managers of enterprises and banks. Basically, the board must have sufficient practical experience to know what questions to ask of management and to know when the answers are responsive.

Incentives

Board membership is not simply a reward for or reflection of community status and prestige. It is not a “carrot” for having loyally implemented government policies, a reward or compensation for a past job well done. Rather, the carrots set before valuable directors should be a combination of short- and longer-term compensation and psychological satisfaction and civic recognition for contributing to the efficient allocation of resources, which should result in better communities and stronger economic growth. One cannot, however, look at board incentives focusing only on the “carrots”—the “sticks” are equally important. Directors should be held accountable for their activities and should be held liable for their neglect, self-enrichment, malfeasance, and failure to assure that an institution follows safe and sound lending practices.

Creating Governance

Creating governance is a matter of agreeing on goals and then providing the necessary incentives and monitoring systems to ensure that the parties strive to achieve those goals. One typical goal is to be an efficient financial institution: one that enhances profitability, mobilizes deposits, allocates credit in a way that strengthens asset quality, ensures prompt and full repayment, and preserves and builds its own capital base. Yet, governmental authorities may not always rank “efficiency” in the financial sector as a high priority; differing development philosophies may make other goals more appropriate. This can be a difficult conflict to resolve—one cannot have one’s cake and eat it too. In fact, by attempting to juggle mutually incompatible goals, neither goal may be achieved.

One of the greatest problems observed in bank restructuring is that the various players do not agree on the goals each is to pursue. In the end, the bank may need to serve multiple bosses and achieve mutually incompatible goals: maximize recoveries and improve loan quality; provide financing for large (often loss-making) state-owned companies on which the government depends for political support; maintain employment (in the bank and in the borrowing enterprises) even when the cash-flow of the borrowers cannot sustain the employment; function as the “owner” in the restructuring of enterprises for long-term viability.

If the goals are agreed upon and are explicit and consistent, then incentives can be structured and performance can be monitored. Many problem banks, however, are given the impossible task of achieving incompatible goals. The managers are then blamed for failure, when, in fact, the impossible tasks and incompatible goals made failure inevitable.

The first step in creating governance is to analyze the players and define explicitly their respective roles. How can the government contribute to the development of good governance? What should the government do and what should the market do? Wang Jun (see Chapter 13) posed the problem that if the market is well developed then the government can take a less intrusive role, but if the market is not well developed, then it may be necessary to place continued reliance on the government. Essentially, this is a variation on the age-old problem of which comes first, the chicken or the egg. This is the core problem for the government. How can it contribute to, and not impede, market development and ownership governance? It would be nice to find one solution that fits all countries, but it is unlikely. Each country must struggle with this dilemma and, in many ways, create its own unique solutions. There are, however, certain core concepts. The government should lead infrastructure reform, catalyze clarification of roles, require judgment and accountability; and shift to “arm’s-length” relationships with the banks. Perhaps most important, the government must recognize that its intervention is transitional. The government needs to plan for how its intervention will diminish over time as it successfully encourages the growth of the market.

Once the government is prepared to operate at arm’s length and to exercise legitimate ownership governance aimed at preserving and enhancing the value of its invested capital, then a number of techniques are available for improving internal governance: using strategic investors, management contracts, twinning arrangements, training, and “governance contracts,” With each of these techniques, there is a wealth of opportunities for accelerating institutional development—for example, by allowing twinning partners or others to earn equity participation by virtue of their own success in helping an institution achieve quantifiable goals. Training too often connotes sessions for tellers and credit analysts. In fact, training dollars can be most effectively leveraged by focusing them on the owners and on members of the governance body. By starting at the top, new attitudes and techniques can be introduced and passed down through an organization.

Governance Contracts

“Governance contracts” are a way to ensure that banks are given “doable,” and not impossible, goals to achieve.4 These contracts can be extremely difficult to draft but once agreed upon they can provide an effective management roadmap. In this way, inconsistent goals are not targeted, and all players agree to actions that will foster an efficient financial system and an environment in which strong bank management can succeed.

What is a governance contract? Essentially, it is a formal document that details (1) the respective roles of the government, regulators, owners, directors, and managers; (2) the purpose for which a bank exists and the goals it will pursue; (3) a system of governance and accountability that clarifies how and by whom bank performance will be monitored; (4) quantitative and time-bound targets by which the bank and its management will be measured; and (5) consequences of failure to achieve targets or to comply with established standards.

The concept of a governance contract is extremely flexible as are the “contracts” themselves. A regulator can use contract law to agree upon and then enforce actions that might not be fully envisioned in a regulatory framework. An owner and a bank may use the document to agree on conditions for the infusion of additional equity. The most important point is that it is not the document itself that is of primary importance but rather the process by which it is drafted. There is no one template that can be distributed and used in different institutions and different countries. Rather there is a set of issues that are relevant and that the owners, regulators, and banks must discuss and on which they must agree. They must decide on what is important and what are the primary goals. In the drafting process, the various parties flesh out their assumptions and responsibilities to ensure agreement, thereby avoiding costly and time-consuming misunderstandings. These discussions are invaluable in setting the framework for substantive dialogue among the parties to carry out complex reforms.

It is often argued that this tool is not effective in transitional economies since it is difficult (perhaps impossible) to reach agreement on the basic issues. Even if agreement cannot be reached, however, the unsuccessful attempt to negotiate a document can provide tremendous value. Discussions allow the parties to determine if inconsistent goals are likely to impair the value of newly invested capital or diminish the benefits of funding institutional development programs. Another potential argument against such contracts is that they may not fully be enforceable given the legal infrastructure in transitional economies. Enforceability, however, is less relevant than the fact that the parties have debated the issues and have reached common accords.

In drafting a governance contract, there are a number of threshold issues—the resolution of which will then impact dozens of individual paragraphs. For example, what is the nature of the document, is it “voluntarily” negotiated between multiple parties or unilaterally imposed by a supervising agency, does it provide for recapitalization, who are the parties, and how can the inherent conflicts of interest in the state’s various roles be eliminated or mitigated? The contract itself can take various forms and impose constraints of varying severity. Such contracts even take different names (each implying a somewhat different focus or different level of severity): a conditional license agreement, a commitment letter, a memorandum of understanding, a formal regulatory agreement, a cease and desist order, a rehabilitation regime, and a recapitalization contract.

Although there is no boilerplate contract that can be adopted without major adjustments in light of a country’s or institution’s unique circumstances, several elements are essential to a well-drafted contract: a recitation of the circumstances motivating the document; the purpose for which the document is prepared; the “consideration” that each party is receiving for the obligations it is assuming; the duties of each party (including the state owner, the members of the board, and so on); qualitative and quantitative goals; restrictions and prohibitions imposed, and on whom; reporting requirements; potential sanctions to be imposed, and on whom; and the process and responsibilities for monitoring and enforcement.

Conclusion

In many transitional economies, the expression “bank supervision” was virtually unknown five to ten years ago. Although much progress has been made in recent years in establishing basic bank supervision, these countries are still at a very rudimentary stage in understanding “bank governance.” Eddie George’s analysis of the continuing “special role” of banks (see Chapter 11) implies a greater need for effective governance in banks than in other enterprises. The challenge for a regulator (especially of a state-owned institution) is how to distinguish “governance” from “micro-management” and how to ensure effective governance. Hopefully, this volume and this paper will contribute to an increased understanding both of the importance of governance and of specific techniques to create it.

A CAMEL rating measures the relative soundness of a bank on a scale of 1 to 5; 1 being the strongest rating. The term stands for capital, asset, management, earnings, and liquidity.

Matthew I. Saal, “Governance and Incentives,” paper prepared for the MAE Workshop on Systemic Bank Restructuring in Central and Eastern Europe (unpublished; Washington: International Monetary Fund, August 1995).

Throughout this paper, the term “governance body” and “board” are used interchangeably. Neither term is meant to imply a preference for a particular legal form, such as use of a “Board of Directors” pursuant to the U.S. practice or use of a “Supervisory Board” which is more common in Germany and a number of other countries. Whichever model is followed, it is important to recognize which entity is the primary “governance body” and to articulate quite clearly its responsibilities.

See Richard P. Roulier, “Bank Governance Contracts: Establishing Goals and Accountability in Bank Restructuring” (Washington; World Bank, 1995). In addition to introductory comments on “governance contracts,” this paper includes an annotated sample contract.

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