INTEGRATED SAFEGUARDS DATA SHEET CONCEPT STAGE Public Disclosure Copy Report No.: ISDSC6273 Date ISDS Prepared/Updated: 23-Dec-2013 Date ISDS Approved/Disclosed: 26-Dec-2013 I. BASIC INFORMATION A. Basic Project Data Country: Serbia Project ID: P146248 Project Name: Deposit Insurance Strengthening Project (P146248) Task Team Rinku Chandra Leader: Estimated 13-Jan-2014 Estimated 27-Feb-2014 Appraisal Date: Board Date: Managing Unit: ECSPF Lending Investment Project Financing Instrument: Sector(s): Banking (50%), Public administration- Financial Sector (50%) Theme(s): International financial standards and systems (100%) Financing (In USD Million) Total Project Cost: 200.00 Total Bank Financing: 200.00 Financing Gap: 0.00 Public Disclosure Copy Financing Source Amount Borrower 0.00 International Bank for Reconstruction and Development 200.00 Total 200.00 Environmental C - Not Required Category: Is this a No Repeater project? B. Project Objectives The Project Development Objective is to strengthen the financial capacity of the DIA so as to meet its legal deposit insurance and bank resolution obligations. C. Project Description The proposed project is a Results Based IPF to the Republic of Serbia for an amount of US$200m to support the strengthening of the Deposit Insurance Agency (DIA). The recent failure of two small banks resulted in the depletion of a key part of the financial safety net, the Deposit Insurance Fund (DIF). The Deposit Insurance Fund of Serbia is managed by the Serbian Deposit Insurance Agency (DIA), which utilizes the financial resources available to protect depositors up to a specified level (in this case EUR 50,000) and to facilitate the resolution of banks that fail in a cost effective manner. Public Disclosure Copy Considering the importance of an effective Deposit Insurance Scheme to maintaining confidence in the banking system, this operation aims to provide the Deposit Insurance Fund with the financial resources required to perform its legally mandated deposit insurance and bank resolution functions. The proposed project has two components: 1) A results based component of US$199 million that capitalizes the Deposit Insurance Fund based on satisfactorily achieving DLIs that improve the ability of the DIA to meet its legally mandated deposit insurance and bank resolution obligations. 2) A technical assistance component of US$1 million that aims to strengthen the ability of the DIA to meet its legal deposit insurance and bank resolution obligations. Component 1: Results Based Component This component includes US$199m that will be utilized to capitalize the Deposit Insurance Fund based on meeting Disbursement Linked Indicators (DLIs). The DLIs will be developed during the course of the project preparation, but examples of DLIs include the following: • Increasing premiums from banks • Putting in place a stand-by facility for the DIA • Improving information sharing between the NBS and DIA • Improving the independence of the Board of the DIA • Improving the recoveries process • Improving oversight of the State Owned Banking sector DLI 1: Premiums Considering that premiums are the primary source of income or the DIF, they will need to be increased to achieve the target size. The DLIs in this category will aim to increase the amount of Public Disclosure Copy premiums from the banks operating in Serbia in line with international best practices for a Deposit Insurance Scheme. These DLIs will increase the premiums (either through an extraordinary premium increase or an increase in the regular premium) from the current level of 0.4% in 2014 and 2015 as Deposit Insurance Schemes should primarily be paid for by the banks themselves. DLI 2: Stand-by facility In addition to funding, it is critical for the DIA to have a guarantee or stand-by facility that it can readily access in case it runs out of funds. Best practice for Deposit Insurance Schemes includes having a back-up facility that ensures that funds can be accessed without Government approval during a time of banking instability. Thus the second DLI will ensure that the Government puts in place a guarantee or stand-by. DLI 3: Improved information sharing between financial safety net providers In order to strengthen the coordination between the three financial safety net providers, DLIs will target the sharing of key data between the NBS to the DIA. The sharing of information between the financial safety net providers is critical to allowing the DIA to meet its legally mandated function. International best practices require that a framework should be in place for the close coordination and information sharing. This should be done on a routine basis, as well as in relation to particular banks, among the deposit insurer and other financial system safety-net participants DLI 4: Increasing the independence of Board of Directors of the Agency Governance principles for deposit insurers highlight that it should be operationally independent, transparent, accountable and insulated from undue political and industry influence. The DLIs in this Public Disclosure Copy category will aim to increase the independence of the Board of Directors of the Agency. The current governing body of the Deposit Insurance Agency is its Managing Board. The Deposit Insurance Law indicates that the Managing Board is to be comprised of six members: a Chairman appointed by the Government; the Minister of Finance and Economy; the Vice-Governor of the NBS responsible for bank supervision; the Deputy Director of banking supervision at the NBS; a member from the Association of Banks; and a member proposed and appointed by the Government. DLI 5: Strengthen the results from the recovery process. The Deposit Insurance Agency’s mandate also includes collecting receivables from bank bankruptcies and liquidations. Collections from these efforts totaled only EUR 40 million in 2011 and 2012, as there are issues related to both the institutional and legal structure for conducting these transactions that minimize the likelihood of success. Thus, the DLIs in this category will focus on implementing a strategy (exact targets to be defined during project preparation) DLI 6: Improving oversight of State Owned Banks There is a need to improve the information flow from the state owned banks to the owner – which in this case is the Government – in order to minimize the possibility of future problems similar to Agrobanka and RBV that resulted in the depletion of the DIF. The Government currently has an ownership stake in a small number of state banks, two of which have equity investments by EBRD and the IFC. DLIs will aim to improve the information that the Government has on the State Owned Banks in order to better manage the assets in which it has an ownership stake. Component 2: Technical Assistance to improve the ability of the DIA to meet its legally mandated deposit insurance and bank resolution functions. This component will finance technical assistance in critical areas that are needed to achieve the DLIs. Public Disclosure Copy The exact nature of the TA can only be determined after finalizing the DLIS, but possible areas of TA include: • Information sharing between safety net providers: Consulting services could be provided to ensure that the DIA has adequate capacity to utilize the information that it is provided from the NBS. • Governance: Consulting services could be provided on developing an operational manual for the Board of the DIA and ensuring that it has the capacity to meet its legally mandated requirements. • Recoveries: Consulting services could be provided to develop a time-bound strategy and implement it over the course of two years. • Oversight of State Owned Banks: Consulting services could be provided to increase the capacity of the Ministry of Finance to oversee the enterprises that it manages and improve the corporate governance framework. D. Project location and salient physical characteristics relevant to the safeguard analysis (if known) Not applicable E. Borrowers Institutional Capacity for Safeguard Policies Not applicable F. Environmental and Social Safeguards Specialists on the Team II. SAFEGUARD POLICIES THAT MIGHT APPLY Public Disclosure Copy Safeguard Policies Triggered? Explanation (Optional) Environmental Assessment OP/ No BP 4.01 Natural Habitats OP/BP 4.04 No Forests OP/BP 4.36 No Pest Management OP 4.09 No Physical Cultural Resources OP/ No BP 4.11 Indigenous Peoples OP/BP 4.10 No Involuntary Resettlement OP/BP No 4.12 Safety of Dams OP/BP 4.37 No Projects on International No Waterways OP/BP 7.50 Projects in Disputed Areas OP/BP No 7.60 III. SAFEGUARD PREPARATION PLAN A. Tentative target date for preparing the PAD Stage ISDS: 19-Dec-2013 B. Time frame for launching and completing the safeguard-related studies that may be needed. Public Disclosure Copy The specific studies and their timing1 should be specified in the PAD-stage ISDS: None IV. APPROVALS Task Team Leader: Name: Rinku Chandra Approved By: Regional Safeguards Name: Agnes I. Kiss (RSA) Date: 26-Dec-2013 Coordinator: Sector Manager: Name: Aurora Ferrari (SM) Date: 26-Dec-2013 1 Reminder: The Bank's Disclosure Policy requires that safeguard-related documents be disclosed before appraisal (i) at the InfoShop and (ii) in country, at publicly accessible locations and in a form and language that are accessible to potentially affected persons.