ANNUAL REPORT 2014 97666 THE WORLD BANK – FinSAC FINANCIAL SECTOR ADVISORY CENTER – VIENNA May 2015 Table of Contents I. Foreword 5 II. Overall Economic and Financial Regulatory Context: The EU and the Region 9 a. The EU 9 b. EU client countries 13 c. EU candidate and potential candidate countries 15 d. Ukraine and Moldova 16 e. The Caucasus 17 III. FinSAC Activities in 2014 19 a. Staff 19 b. Public profile and budget discipline 19 c. Seminars, Conferences and Working Papers 19 d. Client specific activities 20 e. Collaboration within the WB Group, the EU and and IFIs 25 IV. Looking forward to 2015 27 a. Micro-Prudential Pillar 27 b. Bank Recovery and Bank Resolution Pillar 29 c. Streamlined Financial Stability and Macro-Prudential Pillar 30 d. Other FinSAC Activities 31 e. FinSAC work program for 2015 31 f. Disbursement of Trust Fund by FinSAC 32 Attachment: Results Framework Table 35 Report prepared by Fernando Montes-Negret, FinSAC Coordinator, and Katia D’Hulster, Sr. Bank Supervisor, with contributions from FinSAC Staff. We thank Aurora Ferrari, F&M Practice Manager at the World Bank, Elisabeth Gruber, from the Austrian Federal Ministry of Finance, for their useful comments, and Susan Schroeder for competent editing of the Report. List of Abbreviations AML Anti-Money Laundering AQR Asset Quality Reviews BCBS Basel Committee of Banking Supervision BEM Moldova Banca de Economii BGF Poland’s Bank Guarantee Fund BNB Bulgarian National Bank BoA Bank of Albania BRRD Bank Recovery and Resolution Directive BS Moldova Banca Sociala CBCG Central Bank of Montenegro CET Common Equity Tier CRD IV/CRR Capital Requirements Directive and Regulation CSE Crisis Simulation Exercise DIF Bulgarian Deposit Insurance Fund DPL Development Policy Loan D-SIBs Domestic Systemically Important Banks EBA European Banking Authority EBRD European Bank for Reconstruction and Development ECB European Central Bank EIB European Investment Bank ESM European Stability Mechanism EU European Union FinSAC World Bank Vienna Financial Sector Advisory Center FSAP Financial Sector Assessment Program FSB Financial Stability Board FPM Financial Projection Model FSC Financial Stability Council ICAAP Internal Capital Adequacy Assessment Process IFC International Finance Corporation IFI International Financial Institutions IFRS International Financial Reporting Standards IMF International Monetary Fund JRC EC Joint Research Centre KTB Bulgarian Corporate Commercial Bank NBM National Bank of Moldova NBS National Bank of Serbia NPE Non-Performing Exposure NPLs Non-Performing Loans RRPs Recovery and Resolution Plans SRB Single Resolution Board SREP Supervisory Review and Examination Process SRF Single Resolution Fund SRM Single Resolution Mechanism SSM Single Supervisory Mechanism NBU National Bank of Ukraine TA Technical Assistance WBG World Bank Group 3 Financial Sector Advisory Center | Annual Report 2014 I. Foreword Significant progress has been made in addressing the “fault lines” that led to the global financial crisis. The EU is gradually implementing a new financial architecture - aiming to achieve more integrated, competitive, and, hopefully, better supervised financial institutions - while addressing the resolvability of systemic banking institutions without recourse to fiscal support, and implementing international agreements directed at enhancing the resilience of banking institutions such as Basel III and the Financial Stability Board (FSB) recommendations. Despite progress on the new EU financial architecture, the return to “normality” still has not been completed. 2014 was a disappointing year in terms of further postponement of the long-awaited resumption of faster credit and economic growth, the reduction of non-performing loans, and better financial results for banking institutions. New threats emerged, including the continuous deleveraging of banks and borrowers, the reduction of cross-border capital flows, the threat of rising public debt levels and potential sovereign defaults, and the dangers posed by lowflation or even deflation in several EU countries. There are rising geo-political risks, enhanced market and foreign exchange volatility, precipitous declines in commodity prices (particularly oil and metals), concerns about the decoupling of the US and UK economies from the EU and the possibly temporary strengthening of the US dollar, and other factors which risk sending financial integration into reverse. While some of these developments can be viewed positively as they represent healthy corrections from the excesses which led to the “Great Recession”, others could have negative repercussions for the financial system and further delay the EU recovery. Deflationary pressures make it more difficult for governments (as well as the private sector) to service debts and resume consumption and investment growth. These EU issues, together with countries’ own idiosyncratic factors, had major repercussions in FinSAC client countries. Countries already in the EU experienced slowing economies or the inability to recover from deep recessions, particularly Croatia. The economy of South East Europe (six Balkan countries) stagnated in 2014. Increasing business cycle synchronization transmitted the slow growth from its main trading partner, the EU. A major natural disaster resulted in a flood-induced GDP contraction in Serbia (estimated to have contracted by 2 percent) and a sharp slowdown in Bosnia and Herzegovina and Montenegro. Only Albania and the former Yugoslav Republic of Macedonia, among the countries in the Balkans1, showed signs of a more sustained recovery on the back of rising exports. Further East, geopolitical factors and deepening banking crises (Ukraine and Moldova) affected the year’s outcome. The crisis in Russia has also severely affected neighboring countries like Armenia and Georgia, which are struggling to contain the Ruble fallout. FinSAC stepped up its activities in 2014. It provided targetted technical assistance (TA) to tackle some of the most pressing banking problems - particularly the high levels of non-performing loans (NPLs) and the resolution of non-viable banks - while addressing the medium-term institutional development needs of incorporating EU legislation and best practices into the national legal frameworks and supervisory systems. Activities focused on strengthening supervisory practices from the bottom up; decisively addressing the high levels of NPLs; crisis simulation exercises (CSEs) preparing policy-makers to confront potential distress in their financial sectors; and providing crisis assistance. FinSAC has now matured into a regional center of excellence, increasingly focused in micro-prudential supervision, NPL resolution and banking recovery and resolution. Based on its growing experience and understanding of demand, FinSAC is moving away from the previous general four-pillar approach, to become increasingly a “niche” player. As a results-based advisory program, and to make the most effective use of resources, assistance is being focused on more selective interventions. That said, specific requests in the area of financial stability, macroprudential supervision or consumer protection will be addressed when resources permit. 1 World Bank Group, “Coping with Floods, Strengthening Growth”, South East Europe, Regular Economic Report, January, 2015. 5 Financial Sector Advisory Center | Annual Report 2014 Financial Sector Advisory Center (FinSAC) The World Bank Vienna Financial Sector Advisory banking sectors, as well as through regional Center (FinSAC) was established in 2011 in response seminars to disseminate good practices and foster to the global financial crisis, to assist in identifying peer learning. issues and problems in national banking sectors, in new EU member states and emerging European Since its establishment, FinSAC has followed an client countries, and, at the request of the national ambitious inception strategy of casting a very authorities, recommend tailored solutions. A core wide “net” of potential TA products to its client FinSAC team of specialized staff with key relevant countries. Activities have centered on four pillars2: skills and expertise is based in Vienna, funded by 1) financial stability, crisis prevention and macro- the Austrian Federal Ministry of Finance, working prudential frameworks; 2) micro-prudential closely with staff from the World Bank’s (WB) regulatory and supervisory frameworks; 3) bank headquarters and other IFIs, as well as with Sr. recovery and resolution frameworks; and 4) international experts offering technical assistance, consumer protection and financial literacy. This including implementation advice. approach allowed FinSAC to effectively identify actual demand, providing valuable information EU and other international policy makers about the concerns and requirements for advisory coordinated their response to the global financial services and knowledge products from its target crisis has resulted in the introduction of a flurry client countries. of policy reforms, particularly in the area of cross border crisis management, bank recovery and Productive FinSAC engagements have included resolution, NPL resolution, and bank capital and addressing the enormous implementation liquidity. FinSAC has responded to the need for challenges arising from the numerous Basel and help in implementing these reforms by deepening EU complex regulations and initiatives. Most its expertise to offer specialized TA, in areas other client countries are committed to adopting EU TA providers do not reach or are unable to deliver. regulations, but have only limited access to EU FinSAC provides independent, confidential and institutions or other EU supervisors for guidance. tailored technical expert and technical advice and Most of these regulations are also principles based, implementation support to eligible client countries. and thus pose specific implementation questions This includes supporting the development of and challenges for non EU counties. FinSAC legislative and regulatory frameworks; encouraging offers technical assistance in the implementation institutional strengthening; and building the of this vast and complex regulatory agenda. We capacity of local experts through our targeted work to help implement these proposals, aligning TA projects. It also helps implement the WB/ them with good international practices as well as IMF Financial Sector Assessment Program (FSAP) country specific institutional development needs recommendations and participates in the Vienna and constraints. Initiative. It offers global knowledge such as analytical reports on important banking regulatory Central banks and supervisory agencies are often and supervisory issues and helps develop and reluctant to give access to sensitive confidential disseminate knowledge and good practices that information in the area of banking supervision, can enrich regional policy debates and cross- such as banks’ inspection reports, internal fertilize reforms. It promotes the application of supervisory decisions and practices, individual international benchmarks and standards with the banks’ risk assessments, to external consulting support of global and regional organizations such firms. Similarly, authorities are often disinclined as the Basel Committee, the FSB, the Financial to give access to their own contingency plans and Stability Institute, the European Banking Authority, crisis arrangements and bank specific resolution and the European Central Bank (ECB). In building plans. They do, however, feel comfortable strong regulatory and supervisory environments, working with FinSAC in these areas under strict FinSAC maintains momentum in client countries confidentiality. Moreover, the analyses and at the national level through bilateral meetings, recommendations offered by FinSAC as part of the in country engagements (often in partnership micro-prudential pillar require multiple missions with the WB country programs or other IFIs), and staffed by seasoned practitioners, something out of provides technical advice on specific issues at all reach for the FSAP missions and other International levels of government and industry to reinforce Financial Institutions (IFI) engagements. the importance of financial stability and strong 2 The four pillars supporting FinSAC’s activity were defined in 2012. The first pillar consists of financial stability, crisis prevention and macro-prudential frameworks. The second pillar includes micro-prudential regulatory and supervisory frameworks. The third pillar is bank recovery and resolution frameworks. The fourth pillar covers consumer protection and financial literacy. 7 Financial Sector Advisory Center | Annual Report 2014 II. Overall Economic and Financial Regulatory Context: The EU & the Region For the EU countries and candidate countries, 2014 can be characterized as a “transition year”, both in terms of the expected recovery of economic activity, as well as in terms of the new euro area financial sector institutional framework being phased-in. From the geopolitical point of view, 2014 turned out to be a watershed year, in view of the deepening crisis in Ukraine; the imposition of sanctions on Russia by the EU and the US; and the Greek crisis enterering into a new, unchartered, phase. a. The EU of potentially higher household disposable income and consumer spending, and better There seems to be increasing heterogeneity among export competitiveness, this also brought more EU countries. Some of the crisis countries started to deflationary pressures and potential turmoil in oil/ recover from a low base (Spain, Ireland, Portugal, energy dependent exporters, particularly Russia, and Greece), while Germany and France sharply especially if low oil prices persist over 2015-17. slowed down, and Italy fell back into recession. These developments in the core EU countries have a major impact in all FinSAC client countries, both EU countries continued struggling with legacy in the EU, as well as outside of the EU. issues from the global financial crisis. These included high unemployment; high public and According to the European Central Bank’s (ECB) private debt levels; sluggish output growth; financial stability review, a confluence of cyclical “lowflation”; and very low interest rates, and structural factors has led to a low profitability practically at the zero lower bound. There was or loss-making environment for many euro area low bank profitability; bank deleveraging; and low banks. Clearly, the emergence from crisis and or negative credit growth, with signs of increasing recession in the euro area has had a significant bank disintermediation as companies started more impact – with one-fifth of euro area significant actively to tap the shadow banking system and the banking groups reporting losses in the first half of incipient capital market. Addressing key policy 2014, albeit down considerably from more than issues has been made even more difficult in an half of the banks reporting losses in the second environment of fiscal austerity and low (public half of 2013. Persistent weak bank profitability and private) investment, low or declining output could become a systemic concern if it limits growth, low or falling inflation rates, and rather banks’ ability to improve their shock-absorbing generalized pessimism and political uneasiness. capacity via retained earnings and provisioning. The year ended with a welcome boost, with the For many banks their return on equity has fallen unexpected stimulus for all EU oil importing below their cost of equity – shareholders’ expected countries as international oil prices fell sharply, as rate of return – also pointing to a structural need well as from increased competitiveness resulting for further balance sheet adjustment in parts of from the rather steep depreciation of the Euro the banking system, as well as possible further against the US Dollar. While welcomed in terms consolidation to eliminate excess capacity. Pre- and post-provision return on equity of euro area and Return on equity and leverage of euro area significant banking global large and complex banking groups (LCBGs) groups H1 2007 – H1 2014; percentages; medians; two-period moving average Q1 2004 – 2015; medians 35 35 24 21 30 30 20 20 25 25 20 20 16 19 15 15 12 18 10 10 5 5 8 17 0 0 2007 2009 2011 2013 2007 2009 2011 2013 4 16 Pre-provision return on equity Return on equity 0 15 2004 2006 2008 2010 2012 2014 euro area LCBGs leverage (ratio; right-hand scale) non-euro area European LCBG’s return on equity (percentage; left-hand scale) US LCBG’s return on equity, analyst forecast for 2015 (percentage; left-hand scale) Charts from the ECB Financial Stability Review, November 2014 9 Financial Sector Advisory Center | Annual Report 2014 The risk of a disorderly and broad-based unwinding (ESM) for direct recapitalization of individual of global search for-yield flows as a result of a banks, if needed. faster than expected exit from unconventional monetary policies by the US FED remains a cause for concern. Building Blocks of the Banking Union Things can get worse in view of: (i) Supervisors’ imposition of large fines for manipulation of LIBOR The “Banking Union” consists of four interconnected rates and FX markets; (ii) legacy issues including building blocks: common prudential supervision; potential claims from private agents on the losing common resolution (decision and funding); side of the LIBOR/ FX trades; and (iii) banks faced common prudential regulation (Single Rule with possible overcapacity, high costs, or limited Book); and common deposit insurance. Significant diversification of their income sources. There is progress has been achieved in all these areas, still some way to go in addressing these issues. but only the SSM has been fully adopted, as of Banks are still heavily exposed to sovereign risks November 2014. The transfer of authority from in many EU countries in the form of government the national level to the supra-national SSM was bonds in their investment portfolios. Uncertainties preceded by a financial health-check of systemic relating to sovereign debt sustainability are likely Eurozone banks to identify any legacy issues and to remain over the medium term, as government restore market confidence. This “Comprehensive debt-to-GDP ratios are projected to stay at levels Assessment” included an AQR and a forward well above 100% in several euro area countries. looking stress test, to identify and address legacy This highlights the need for further adjustment issues before the ECB assumed its new regional of fiscal and economic fundamentals relevant for supervisory role. debt sustainability. The AQR was undertaken by the ECB and national Bank lending flows to the non-financial private competent authorities and covered the 130 largest sector have remained muted, partly reflecting the EU banks, representing 82% of banking assets of ongoing balance sheet repair in both the financial Eurozone countries. Findings from the AQR were and non-financial sectors. On average, bank lending incorporated with the stress test’s baseline and to euro area households has remained subdued, adverse scenarios. Banks were required to maintain mirroring sluggish dynamics of household income, a minimum Common Equity Tier 1 (CET1) ratio of high levels of unemployment and housing market 8% after AQR adjustments and for the stress-test weakness in some countries, while lending to the baseline scenario, and a minimum CET1 ratio of corporate sector has in general declined. 5.5% under the adverse scenario. 2014 was a year of remarkable institutional The AQR revealed that banks had to revise changes in the EU’s financial regulatory and down their assets by €48 billion, mostly due to supervisory framework, with the completion of the underestimation of specific provisions related asset quality reviews (AQRs) by the ECB, as a prior to non-retail exposures. Additionally, non- action to the adoption of the Single Supervisory performing exposure (NPE) stocks were increased Mechanism (SSM), and as a component of the by €135.9 billion across the in-scope institutions, Banking Union; the adoption of the Bank Recovery as NPE definitions were moved onto a harmonized and Resolution Directive (BRRD); and the initial and comparable basis, including the examination phase of implementation of the Single Resolution of forbearance as a trigger of NPE status. The Mechanism (SRM) and the Single Resolution Fund assessment identified 25 banks as having an overall (SRF). capital shortfall. When all of the capital that has been raised between the assessment date and the reporting on the Comprehensive Assessment is Banking Union offset against the shortfalls, €9.5 billion of equity remains to be filled, distributed across 13 banks. The European sovereign debt and banking crises underlined the flaws of monetary and currency With regards to the second building block, the union with national banking supervision. The EU has adopted the BRRD which provides for a Banking Union began with the Eurozone summit minimum harmonized set of early intervention statement of mid 2012, when EU leaders committed and recovery and resolution tools and powers, to “break the vicious circle between banks and including the obligatory introduction of ex-ante sovereigns”. They planned to do this by centralizing financing arrangements and the nomination of banking supervision at the ECB for major banking a public administrative body as the resolution groups and use the European Stability Mechanism authority. Member States are required to transpose 10 Overall Economic and Financial Regulatory Context: The EU and the Region the BRRD by 31 December 2014. For the euro area becomes effective as of 1 January 2015 and the countries, an agreement on a SRM and a (SRF) was SRF will gradually replace national financing also reached. This should make the resolution of arrangements as of January 2016, while reaching insolvent institutions possible at a European level about €55bn in common funding by 2024. and would minimize nationalizations or public support. For the SRM countries a complex web of The SRM is a necessary complement to the SSM rules and authorities has been set up with the Single in order to achieve a well-functioning banking Resolution Board (SRB), as a centralized decision union and to sever the link between banks and making body, and the SRF, as a common financing their sovereigns. Thus, the SRM will apply to all arrangement, at its heart. In reality, however, banks supervised within the scope of the SSM. the SRM is a coordination mechanism that still Any Member State outside the euro area which partly preserves national interests and relies opts to join the SSM will automatically also fall on the implementation of the SRBs decisions by under the SRM. The SRM will be better placed to autonomous national resolution authorities. Even take due account of contagion and spillovers when though the Commission and Council have veto making resolution decisions. It will also ensure a powers in the adoption of a resolution decision by consistent application of resolution principles and the SRB, the rare execution of these powers could tools throughout the banking union, including endanger effective and timely decision making. banks with no cross-border activity. The uniform institutional framework (SRM) Institutions under the SSM & SRM NSA/NRA Non EUR area excuding opt. ins 120 significant CIs = ~85% of total banking assets CRB: ECB: Resolution Supervision + all cross Significant border banks banks NRAs: National Banks, NSA: LSI save use of SRF NSA: National Supervisory Authority / NRA: National Resolution Authority SRB: Single Resolution Board for the Euro 18+ / LSI: Less Significant Institutions 11 Financial Sector Advisory Center | Annual Report 2014 The adoption of the fourth Capital Requirements of the banks’ balance sheets, including risk-weigted Directive and Regulation (CRD IV/CRR) in 2013 assets, leverage, liquidity, NPLs definitions and was an important step towards the implementation provisioning, etc. For this to succeed the European of the third building block: common prudential Banking Authority’s (EBA) role in standardizing regulation or the Single Rule Book. For the first definitions, as well as the full implementation time, a set of harmonized prudential rules has been of the Single Rule Book, is vital. Developing a created which banks and regulators throughout common “supervisory culture” will be clearly a the EU must respect. CRD IV/CRR will ensure longer-term challenge. uniform application of Basel III across all Member States. The CRR is a directly applicable minimum Since November 4, 2014 supervision is directed by harmonization regulation; Member States are only the ECB, and supported by the national supervisory allowed to apply stricter requirements where these authorities of participating Member States. The are justified by national circumstances, needed success of the SSM is predicated on close and on financial stability grounds, or because of a effective cooperation with a rather large number bank’s specific risk profile. The latter require a of EU players, including the EBA, the European strict reporting regime to the European Systemic Parliament, the Euro-group, the European Risk Board (ESRB). Until the establishment of a Commission, and the European Systemic Risk Single Rule Book, EU banking legislation was Board (ESRB), within their respective mandates, as based on Directives which left room for significant well as the international standard setters and other divergences and discretion in interpretation bodies, including the Basel Committee of Banking and national rules. This created a regulatory Supervision (BCBS), the Financial Stability Board patchwork, leading to legal uncertainty and higher (FSB) and the G-20. The SSM’s “growing pains” costs, while enabling banks to exploit regulatory will likely be significant, and the objective of loopholes. consistent supervision across all the EU countries will not be achieved immediately. The fourth building block, common deposit insurance, has received significantly less atttention. The Deposit Insurance Directive harmonizes, as The Missing Pieces a prior action to the adoption of the SSM, the Adoption of the SSM and progress on the BRRD/ €100,000 threshold for the individual deposits SRM are important steps, but they do not yet add covered and sets a target of a 7 day payout period. up to complete integrated “Banking Union”. The There is however no agreement on introducing a BRRD does not offer a final solution regarding common European deposit insurance scheme for cross border burden sharing, but still relies on cross border banks. National deposit guarantee cooperation and coordination of autonomous schemes will be much better financed to back up national authorities. Within the SRM the vicious their guarantees, notably through a significant feedback loop between European countries’ level of ex-ante funding: 0.8% of covered deposits creditworthiness and that of banks headquartered will be collected from banks over a 10-year period. in them still exists because: i) the SRF is limited If the ex-ante funds prove insufficient, the Deposit by the relatively small €55 billion fund; ii) real Guarantee Scheme will collect immediate ex-post mutualization of losses among Member States will contributions from the banking sector, and, as a not occur until 2024, and then only up to the fund’s last resort, the deposit guarantee scheme will €55 bn. limit (plus €60 bn. ESM financing after have access to alternative funding arrangements, requiring national support); and iii) the absence such as loans from public or private third parties. for the foreseable future of a fiscal union that A voluntary mechanism of mutual borrowing could credibly back stop a cross border resolution between deposit guarantee schemes from different and/or a common deposit insurance. EU countries is also foreseen. The few discretions and options available to Member States under the BRRD could have a big Implementation Challenges effect, for example the exclusion of creditors from It seems clear that the implementation challenges bail-in might lead to regulatory arbitrage and does of the SSM are very significant. The ECB must not ensure equal treatment of creditors across undertake a wholly new supervisory role and jurisdictions. Within the SRM the disretionary set up a cadre of experienced supervisors to power of the SRB appears especially problematic, oversee the largest and most complex banks in with stronger voting rights for Member States the EU. It must also work towards achieving fully representing larger banks where the plenary harmonized treatment of the various components session is invoked by individual Member States. 12 Overall Economic and Financial Regulatory Context: The EU and the Region The absence of any plans for a common bank The decisions taken in the last two years have insolvency framework in the EU could become been important positive steps towards eliminating a future stumbling block in the event of a cross the vicious circle between banks and sovereigns. border bank liquidation, as the default option Meaningful progress has been made and has had of bank resolution through liquidation remains stabilizing effects, but implementation of a fully under national legal frameworks. There is also fledged Banking Union remains some way off. a need to strengthen institutional frameworks and governance for the newer EU member states, particularly in the area of deposit insurance. European Banking Union SSM SRM EDGS Single Single European Supervisory Resolution Deposit Mechanism Mechanism Guarantee (ECB + NCAs) (SRB + NRAs) Mechanism Voluntary borrowing Euro 18+ Euro 18+ between National DGS Single Rulebook – EU 28 CRD/CRR DDGS BRRD/SRM National fiscal National insolvency law National deposit policy national ownership guarantee systems instruments b. EU client countries priority to address the gaps in the resolution and crisis management systems, as well as the The state of affairs in FinSAC’s EU client countries recapitalization of the DIF to allow for a timelier is described in more detail below. pay-out of insured deposits. A planned AQR in 2015 also seems important to restore confidence Bulgaria in the banking system. Bulgaria’s banking system has shown remarkable High corporate debt and high and rising resilience to any damage to confidence resulting non-performing loans (NPLs) and associated from the failure of its fourth largest bank, Corporate encumbered collateral need to be addressed Commercial Bank (KTB), in June of 2014. Liquidity promptly, including setting up an effective measures taken by the Bulgarian National Bank voluntary out-of-court debt workout system and (BNB) and the Government successfully avoided other measures to address judicial shortcomings further contagion to the rest of the system. The to timely and predictable insolvency proceedings. injection of €1 billion in state resources into the Deposit Insurance Fund (DIF) allowed for the payment of insured KTB deposits, albeit with a Croatia six-month delay. KTB’s failure, however, points Croatia has been underperforming in terms of to the need to address weaknesses in Bulgaria’s economic growth, fiscal consolidation, and business supervisory and bank resolution systems to restore environment. Croatia remains in a protracted BNB’s credibility. recession for the sixth year in a row with weak prospects of recovery in 2014-15. The recession KTB’s crisis demonstrated that Bulgaria’s legal has put pressures on public finances, resulting in framework did not give the authorities adequate entry into the EU’s Excessive Deficit Procedure. resolution tools. A timely transposition of Although accession to the EU is expected to the BRRD into the national law has become a translate into higher investment through EU funds, 13 Financial Sector Advisory Center | Annual Report 2014 there are significant challenges in their efficient rely on relatively cheap labor, with a large share utilization and implementation. At the same time, of exports to Germany as part of their export- Croatian firms are less competitive, partly due to led supply chains. The new macroeconomic unsupportive legal and regulatory environments framework is therefore designed to help Poland for businesses. cope with future shocks, while strengthening labor markets (in terms of both flexibility and raising Banks, especially the smaller ones, are challenged participation rates), the business environment by a shrinking sector size and lower profitability, and promoting innovation. Continuing to bolster although average capital adequacy is high. In this financial sector oversight (including macro recessionary context, the banking sector has been prudential supervision) will also support a more shrinking in recent years. Although the banking sustainable recovery in credit and investment sector is dominated by large, foreign-owned and further reduce risks from such factors as the banks, it also includes numerous smaller banks. divergent monetary policy in the EU and US or Sector profitability has been decreasing, driven by from regional geopolitical instability. increasing provisions, declining loan quality (high and rising NPLs), and slow lending growth. The In the financial sector the authorities are committed sector is liquid and well capitalized on average, to enacting the Law on Macro-Prudential but these averages may mask differences at the Oversight, adopting amendments to the Banking individual bank-level. The “overcrowded” market Law to incorporate the EU Capital Requirement and declining profitability point to pressures for Directive (IV), passing a new Bankruptcy Law bank consolidation and/or exits. and amending the 1997 Law on Covered Bonds and Mortgage Banks. Due to difficult legal issues, NPLs have been rising and their resolution has particularly possible constitutional impediments, been slow and ineffective. The quality of the the BRR Law included in a new Law for the aggregate bank loan portfolio has continued to Bank Guarantee Fund (BGF), drafted with World deteriorate and this trend is expected to continue. Bank (WB) assistance, is still under discussion The resolution of NPLs has been slow to date, and is likely to be delayed for another year to be partly due to an illiquid real estate market and considered by the new Parliament following the weaknesses in the legal and judicial framework. An October 2015 elections. out-of-court pre-bankruptcy settlement process has recently been introduced, but has had little success Romania in restructuring firms. FinSAC and the European Prior to the 2008 global financial crisis, Romania Bank for Reconstruction and Development (EBRD) achieved high rates of real GDP growth averaging have prepared a NPLs resolution strategy and more than 6 percent per year. Romania suffered action plan to be implemented in 2015. a deep, V-shaped, GDP contraction in 2009, with a slow recovery in the following years. Under Poland the 2009 IMF Stand-By Arrangement, Romania’s Sound macroeconomic policies have helped Poland economy stabilized, external and structural fiscal sustain economic growth throughout the global imbalances were substantially reduced, and initial downturn. During the two recent periods of weak signs of growth emerged. Structural reforms euro area growth, in 2008-10 and in 2013, Poland are starting to bear fruit, although they remain adopted counter-cyclical fiscal and monetary incomplete. In 2013 the economy recovered policies to help cushion the impact on the domestic reaching a real rate of growth of 3.5 percent. By economy. Despite a decline in domestic demand, regional standards, Romania has had a remarkable particularly investment, Poland is the only EU recovery, although it still has one of the lowest country that has grown continuously over the last levels of per capita income in the region and a six years. In 2014, economic growth strengthened notably slow pace of convergence to the EU mean in Poland and the authorities resumed their fiscal compared to its peers. In 2014 domestic demand is consolidation efforts in an effort to start rebuilding expected to gradually overtake net exports as the prudential fiscal buffers, reducing the fiscal deficit main driver of growth. Investment is projected to to around 3.2 percent of GDP. regain momentum, supported by better absorption of EU funds, as major infrastructure projects move To sustain the recovery the authorities have ahead, although the consensus forecast is that prioritized reforms to strengthen public finances GDP growth will be under 2 percent for 2014 as and financial sector oversight, while structural a whole. reforms aim to bolster the economy’s long term competitiveness. Challenges remain to achieve The financial sector of Romania is mostly bank- sustainable growth: future growth is less likely to based and foreign owned, and therefore exposed 14 Overall Economic and Financial Regulatory Context: The EU and the Region to deleveraging pressures. Banks have lost external levels are generally sound and most banks have set funding equivalent to 11 percent of GDP since aside significant provisions, the potential losses on the first quarter of 2009, which has not been these loans could reduce bank capital and profits. fully compensated by greater mobilization of Additionally, banks remain cautious to lend, which domestic funding. Although the funding structure hampers economic growth in the region. Some of banks has continued to improve, deposits are countries attribute the slowdown in subsidiaries of predominantly short-term, posing challenges in EU banks granting credit domestically to tighter terms of maturity mismatches with lending. policies from the parent bank. There is scope in a number of countries to further strengthen Bank credit growth continued its negative trend the legal frameworks, crisis management tools in 2014, reflecting persistent bank deleveraging and procedures, and institutional governance to as well as demand factors. On the supply side, increase the authorities’ capacity to effectively parent banks adjusted their balance sheets due manage a banking crisis, particularly if it were to new capital requirements, while subsidiaries systemic. The weak economic recovery in Western tightened their credit underwriting standards, and Europe and the economic conditions in other cut lending due to the lack of medium and longer- regions would complicate and delay the potential term Leu funding. Demand factors included slow takeover or orderly exit of weaker banks in the output growth, increased weighting of debt service region. of households and balance sheet weaknesses of individual borrowers and SMEs. The prevailing The share of Greek banks in total bank assets political and policy uncertainty has not helped. remains elevated in Albania (17 percent), FYR Macedonia (22 percent) and Serbia (15 NPLs in Romania have reached a historical high, percent), although the local subsidiaries are well but banks are gradually selling at a significant capitalized. The ongoing problems in Greece have loss their portfolios of bad loans. The NPLs ratio spurred banking supervisors in these countries to in February 2014 reached 22.52 percent. Banks implement increased supervisory monitoring, as have taken steps to sell significant portions of their well as regular stress tests, assessing the potential NPLs, after the authorities allowed them to write negative impact. The above average NPLs of Greek off fully provisioned non-performing loans. subsidiaries and the risk of contagion can be an additional source of vulnerability. c. EU candidate and potential High levels of NPLs pose significant challenges candidate countries for the authorities. While the causes are unique to each country, the following common factors can The South East European economies have be identified: stagnated in 2014 on the back of increasing business cycle synchronization with the EU, • Enforcement of collateral tends to be a and flood-induced contraction in Serbia and long, uncertain and costly process and sharp slowdowns in Bosnia and Herzegovina relies heavily on rather unpredictable and and Montenegro. This weak regional economic slow court decisions. This legal process performance masks notable differences among the is slow due to, for example, the need to Southern European countries. In 2014, the Serbian organize auctions with bidding, difficulties economy is estimated to have contracted by 2 per in identifying the ownership of the cent – for a third time since the global financial collateral; crisis – and Bosnia and Herzegovina is stagnating. Economic growth rates in Kosovo3 and Montenegro • Lack of fair frameworks for voluntary are estimated to have moderated in 2014. Only out of court restructurings for viable Albania and the FYR Macedonia showed signs of a exposures, such as mediation services and more sustained recovery on the back of increasing dispute resolution; exports, particularly in the second half of the year. The floods in May 2014 were the main immediate • Prudential supervisors tend not to be culprit behind the weak domestic demand and the proactive and intrusive enough, overall sluggish economic performance. particularly when the exposures are fully provided for. They should be more The financial sectors of the Western Balkan countries hands-on, requiring banks to set minimum remain fragile. Many countries are confronted target ratios for NPL resolution, with levels of NPLs that have been rising over the discouraging the commonly adopted “wait past years and are now very high by international and see” attitude of some banks; standards. Even though on paper bank capital 3 This designation is without prejudice to positions on status, and is in line with UNSCR 1244 and the ICJ Opinion on the Kosovo Declaration of Independence. 15 Financial Sector Advisory Center | Annual Report 2014 • Underdeveloped markets for distressed banks are building-up capital buffers assets in the region tend to further limit to comply with stricter Basel III the scope for NPLs resolution; and requirements, can require close cooperation with the relevant authorities • Lack of financial capacity in the bank or other donors to resolve the bank. to absorb the losses, particularly when WESTERN BALKANS: Non-performing Loans, percent of total loans 30.00 25.00 20.00 15.00 10.00 5.00 0.00 ALB BIH KOS MKD MNE SRB June 2013 June 2014 Peak since 2008 Pre crisis level (end of 2007) There is an urgent need to restore credit growth and and the sovereign in general, and in the Balkan clean up balance sheets. In the NPLs area, FinSAC region in particular, the financing of resolution works closely together with other EU institutions tools will be a key element for their successful and IFIs (the IMF, the European Investment application. The setting up of separate funding and Bank (EIB) and the EBRD) as part of the Vienna / or the extent and conditions of the use of deposit Initiative, which aims to improve banking systems insurance under resolution requires a tailored and coordination among banking supervisors in approach. Also the potential reimbursement of the EU and non EU countries. During the 2014 creditors invoking the “No Creditor Worse Off” WB/IMF Annual Meetings in Washington DC, it than under liquidation principle is to be carefully was agreed that there will be closer coordination considered, in those cases where no separate ex among the IFIs in the area of NPL resolution at the ante financing of resolution funds is opted for, as country level to avoid duplication and providing in Serbia’s case. conflicting advice. The first test case was the joint mission to Croatia (see Section IV, c of this report) and Serbia. d.Ukraine and Moldova FinSAC has been particularly active in Albania in NPL resolution, where it has engaged two Ukraine consulting firms to coordinate, train and prepare Ukraine faces enormous geopolitical and economic financial restructuring plans with the Bank of challenges, including a systemic banking crisis. Albania (BoA) and the commercial banks leading Devaluation and political uncertainty have caused to the actual resolution/restructuring of the thirty significant deposit outflows and deterioration of largest corporations/conglomerates with a high the bank credit portfolio in 2014. 33 banks were concentration of NPLs (over one-fourth of total sent to resolution, including some medium sized NPLs) - See below. and big banks, and given the accelerated negative developments in the market other banks may In view of the strong financial links between banks become insolvent in 2015. The Deposit Guarantee 16 Overall Economic and Financial Regulatory Context: The EU and the Region Fund is facing significant operational and funding retail deposit accounts4), and the largest branch problems in the present crisis environment which network. At the same date, BS held 7.1% and UB the government has been addressing. One of the 3.2% of the system’s deposits. Neither SB nor UB major weaknesses in the banking sector resulted is considered to be systemic, but these three banks from poor corporate governance and shortcomings jointly represent about one quarter of total bank in the supervisory regime which led to a very high deposits, posing a major stability risk. level of related-party lending and increased other risks in the system. The work of the WB and the The National Bank of Moldova (NBM) has imposed IMF has concentrated on stabilizing the situation, a Special Administration regime on the three dealing with clearly insolvent and unviable banks, banks, and it has received TA from the WB and while putting in place a new financial stability and FinSAC to conduct a crisis simulation exercise regulatory framework. This should address the (CSE), undertake a financial diagnostic of these major deficiencies observed in the past, including banks, and lay out a bank resolution strategy. The poor coordination among the government agencies NBM has also requested bids from international National Bank of Ukraine (NBU) and the Ministry auditing firms for a forensic audit of three banks in of Finance, which will now formally coordinate order to identify the culprits, expose domestic and policies and cooperate in the Financial Stability cross-border irregular transactions, and eventually Committee), as well as tackling the critical issues of file criminal charges against the responsible bank related parties’ lending, increased responsibility of controlling shareholder and senior bank managers. bank owners and managers, and special regulatory framework for systemically important banks. To ensure the financial stability of the banking system e. The Caucasus the NBU plans to run another round of bank diagnostics and related parties’ mapping exercise in large banks, to assess recent deterioration of Armenia banks’ portfolios and come up with reliable bank Armenia’s economic environment became more restructuring and recapitalization plans. difficult in 2014, particularly due to adverse external developments affecting exports and Another stream of work deals with the resolution remittances. GDP growth is expected to slow of the very high level of NPLs, adopting legal and to 2.6 percent. Head winds include geopolitical regulatory reforms and a set of more effective developments in the region (Russia, Ukraine, mechanisms to deal with corporate bankruptcies Nagorno-Karabakh), the continuation of the (adoption of the “Istanbul Approach” in cooperation standstill with Turkey, and stagnation in the EU. with the EBRD). FinSAC has a dedicated, Russian- Currency pressures reemerged in November, in speaking, staff working on Ukraine, preparing a the context of sharp depreciation of the Russian series of Development Policy Loans (DPLs), as well ruble, and lower remittances and exports to as coordinating our TA efforts. Russia, leading again to CBA intervention, as well as depreciation of the Dram. Moldova The IMF reports that the Armenian banks have A financial pyramid scheme carried out by three excess liquidity and they remain well capitalized, Moldovan banks is coming to a conclusion that although a recent increase in NPLs warrants may cost the government’s budget as much as monitoring. The banking sector remains profitable, 15% of GDP or more. The three banks involved, but performance has weakened. Slower economic Banca de Economii (BEM), Banca Sociala (BS), and growth has been accompanied by an increase in Unibank (UB), are believed to be controlled by a NPLs, which reached 6.5 percent in September, Moldovan business tycoon and his associates, with a reduction of profitability, slower credit and senior political patronage. Moldovan authorities deposits growth, and a small reduction in the are seeking to untangle a complex web of financial capital adequacy ratio. In addition, competition relationships among the three banks, their offshore among banks for clients in a weaker economic correspondent banks, shell companies domiciled environment has reduced lending-deposit abroad (including the UK), and their borrowers. spreads, putting additional downward pressure on BEM is considered by some to be a systemic bank profitability. because of its large role in the payment system (e.g. it is a key channel for Government social payments and pensions and the sole clearing bank Georgia for the Moldova Visa and MasterCard payments) Georgia’s economy has been hit by a combination and as of September 30, 2014, held 14.4% of the of severe external shocks: the Russia-Ukraine crisis, system’s deposits (with about 1 million active the deepening recession in Russia and currency 4 BEM has a further 1 million inactive retail accounts. These accounts consist of Soviet era deposits, generally in tiny nominal amounts per account, the true value of which is determined by an annual Government decision on an index. This scheme effectively makes these legacy “deposits” nothing more than another Government budgetary transfer, which could be done with payments through the Post Office or other banks. 17 Financial Sector Advisory Center | Annual Report 2014 devaluations in trading partner countries. Because US dollar since January 2014,increasing the cost of these shocks, Georgia’s exports are 30 percent for those who have borrowed in foreign currency, lower than one year ago, and remittances from slowing down economic growth further. Georgian workers abroad are down 25 percent. Georgian banks are well capitalized and liquid. The economy is slowing as a result. GDP growth The system is quite concentrated with a few in 2015 could reach 2 percent, however, the locally-owned banks, particularly Bank of Georgia, economies of many of Georgia’s main trading controlling a large share of total bank assets. partners are slowing by even more, and the depreciation of their exchange rates is hurting Georgia had a FSAP Update in 2014, in which a Georgia’s competitiveness. Lower exports, number of recommendations were made. FinSAC remittances, and tourism receipts, have increased is willing to assist the NBG in implementing them, the current account deficit in 2014 to around as well as collaborating in setting up a Deposit 9.5 percent of GDP. As a result, the Lari has Insurance Fund, as agreed between the Georgian depreciated by more than 20 percent against the Government and the EU. 18 III. FinSAC Activities in 2014 a. Staff adopted. This standardizes project preparation, appraisal and quality control processes, providing In December 2014, the core FinSAC team a template for Project Concept Notes, facilitating consisted of seven staff based in Vienna, including the preparation of the Results Framework. This the Coordinator. FinSAC had some turnover in approach is mandatory for all FinSAC activities 2014. FinSAC’s coordinator retired in June and and will help maintain project focus and discipline, one staff resigned. The Coordinator was swiftly enhance the quality of tasks at entry/inception, replaced and the search was a new Sr. Supervisor and maintain accountability regarding within- was started. Three additional staff were hired, budget deliveries. one focusing on NPL resolution, another mainly dealing with the response to crisis countries, FinSAC continues to work closely with relevant particularly Ukraine, and a lawyer with expertise international organizations and agencies. For in BRR was hired. FinSAC staff skills and expertise example, following a visit to the Joint Research include economics, finance, law, supervision and Centre (JRC) of the EU Commission in ISPRA regulation, accountancy, and risk management. potential areas for cooperation, like stress testing The staff are supported by WB headquarter senior and financial modelling, are being discussed. staff as well as Sr. international consultants, as needed. The hiring of one senior bank supervisor is foreseen for Q1/2015. c. Seminars, Conferences and Working Papers b. Public profile and budget 1) FinSAC International Conference on discipline Financil Consumer Protection and Financial Literacy – June, Sofia, Bulgaria To increase its visibility and public profile, FinSAC has developed and populated a website From 11 to 14 June, 2014, FinSAC organized www.worldbank.org/finsac and developed a conference in Sofia, Bulgaria, on Consumer a range of dissemination (printed) and business Protection and Financial Literacy for regional line brochures for its clients. The website contains senior supervisors and regulators. It sought to a summary of services offered, as well as the enhance their knowledge and encourage debate presentations of seminars and working papers. with academics, practitioners and policymakers on the effectiveness of various initiatives being Two marketing brochures were developed and implemented in their respective countries. Six posted on FinSAC’s website. The first, which is also broad topics were addressed: available in printed form, is a general introduction to FinSAC, outlining its mission, product range, - Compliance and Supervision; geographic reach and client feedback. The second - Responsible Lending and Debt focuses on FinSAC’s best known product, the CSE, Counseling: A European Perspective; explaining the process, outcomes, results and expectations. It has been used in an actual CSE to - Financial Innovation and Technology; give participants an understanding of the overall - Approaches to Alternative Dispute purpose of the exercise and inform them about the Resolution in Developed and Developing process to be followed. EU Economies; Two other product specific brochures, on micro - Deposit Insurance and Financial prudential supervision and addressing recovery Consumer Protection, and and resolution, are being developed. - Strengthening the Population’s Financial Capability. Increased standardization and project discipline is being applied to all FinSAC’s activities. As Participants acknowledged that recovery of operations expanded, a simplified internal consumer confidence in the financial sector is operational procedure has been developed and crucial for the viability of new bank funding 19 Financial Sector Advisory Center | Annual Report 2014 models which will be less reliant on cross-border in an IFRS Environment on October 21-22, 2014 and wholesale financing and more dependent at the Austrian Federal Ministry of Finance in on a local retail deposit base. There is a need to Vienna. More than forty-five senior participants collectively redefine consumer relationships with from central banks and regulatory agencies from the financial system in Europe to address the ten countries in the ECA region, international challenges of the recent crisis, and better prepare financial institutions (IFIs) and the Austrian for the next. Ministry of Finance attended this event. The conference promoted international co- The seminar gave an overview of current operation to support the strengthening of financial regulatory practices for defining and provisioning consumer protection in line with, and building NPLs in the Europe and Central Asia region and upon, the G20 approved principles. There was considered commercial banks’ current IFRS support for increased legal recognition of financial provisioning practices. There was discussion of consumer protection by oversight bodies, and the pre-requisites and strategies for better aligning achieving fair treatment of financial service regulatory and IFRS provisioning incentives and users, proper disclosure, prevention of fraud and practices and for the strategies being followed to abuse, adequate complaints handling and redress accommodate traditional regulatory provisioning mechanisms and, more broadly, the adoption systems and IFRS provisioning in view of the of policies by financial service providers of new IFRS 9 standard. The importance of having responsible business conduct. common definitions and the early recognition of credit losses was recognized using the experience More information is available at: and supervisory lessons from some crisis countries www.worldbank.org/finsac with asset quality review programs, in particular Spain and Ireland, and their loan loss provisioning 2) Working Paper on Loan Classification practices. Other topics included home-host and Provisioning: Current Practices in 26 cooperation and consolidation of financial European and Central Asian Countries and regulatory reports; the implementation considerations of the new IFRS 9 standard; the FinSAC issued its first working paper, explaining the modelling of credit losses from the perspective of regulations and practices in the area of identifying commercial banks, regulators and IFIs; the main and provisioning for loans losses in 26 countries in policy alternatives and strategies for implementing EU countries and Emerging Europe. The analysis reforms in accounting, disclosure, prudential is based on the WB Survey 2011-2012. Banking supervision and reporting. supervision responses were validated through a desk review of publicly available regulations. Regulators, international financial institutions (International Monetary Fund and the WB), This working paper had three objectives. First, the EBA, central and commercial bankers, analyzing some important considerations that make consultancy firms and rating agencies, provided the comparison of NPLs ratios and provisions across their perspectives on IFRS provisioning, NPLs jurisdictions so challenging. Second, explaining identification and regulatory provisioning. the interactions between provisioning frameworks based on prudential regulations and accounting standards. Finally, concluding by sharing some d. Client specific activities good practices for NPLs definitions useful for prudential supervisors who are considering PILLAR 1: FINANCIAL aligning their prudential frameworks more closely STABILITY; CRISIS PREVENTION with International Financial Reporting Standards AND MACRO-PRUDENTIAL (IFRS) and proposing steps for further regional FRAMEWORKS work, knowledge sharing and harmonization. One of FinSAC’s most popular products under this 3) FinSAC Conference on Credit Risk Pillar is the financial CSE. These exercises provide Management and Regulatory Provisioning the opportunity for client country authorities to in an International Financial Reporting test their crisis preparedness, to identify gaps in Standards (IFRS) Environment, October, their early crisis response and bank resolution Vienna, Austria frameworks, and to assess how well different Following publication of the working paper, authorities can cooperate in a stressed or crisis FinSAC hosted a successful conference on Credit situation. FinSAC conducted three CSEs, in Risk Management and Regulatory Provisioning Moldova, FYR Macedonia and Armenia, during 20 FinSAC Activities in 2014 2014. They offer a good illustration of how valuable with help from the WB, and felt it timely to test this product can be for our clients, especially if they their new arrangements, asking for a CSE with are facing an impending crisis situation. With the FinSAC’s assistance in September. The experience benefit of hindsight, one can say that the timing of and the lessons learned are helping them to deal all three CSEs in 2014 proved to be exceptionally with the new wave of possible contagion from fortunate. Greece that re-emerged at the end of 2014 and at the beginning of 2015. Armenia The CSE took place in September 2014 in Skopje, Armenia’s financial system has shown no signs with the participation of about 40 staff from the of serious stability problems in the past couple of NBRM, the Ministry of Finance and the Deposit years. Given the very strong trade and remittance Guarantee Fund. The exercise included a very links with Russia however, where a sinking oil productive de-briefing to discuss preliminary price, Western sanctions and other factors resulted observations and potential gaps in terms of policy in a sharp fall of the Russian Ruble in addition to tools and reaction times for the different bank other economic problems, it made sense for the cases examined during the exercise. A full CSE authorities to practice how to cope with a sudden Report was shared with the NBRM for their review. escalation of these adverse trends. The CSE took The report benefited from comments by the WB’s place in late October at the CBA’s Research Centre internal peer reviewers, the NBRM, the Ministry in Dilijan, with the participation of about 40 staff of Finance of the Republic of Macedonia and the from the CBA, the Armenian Ministry of Finance and Deposit Insurance Fund. the Deposit Guarantee Fund. This experience was to prove useful when the Russian Ruble tumbled Moldova in December with contagion reaching Armenia, Following FSAP findings and at the urgent request requiring the Central Bank and other authorities to of the NBM a financial CSE was carried out in implement a set of extraordinary measures in order Chisinau in April 2014 with the participation of to manage the crisis. The de-briefing two days later around 30 staff from the authorities including the allowed a valuable exchange on the preliminary NBM Governor, Deputy Governor, the Minister observations and potential gaps identified during of Finance and the Director of the Deposit the CSE. The full Report will be shared with the Guarantee Fund. Subsequently, the information CBA for their review and comments. flow and the actions taken during the CSE were carefully analyzed and a comprehensive CSE Bosnia-Herzegovina Report, outlining the main lessons and policy A credit risk model to strengthen the stress recommendations, was sent to the authorities for testing framework at the Central Bank of Bosnia- their review and comments. Herzegovina (CBBH) was delivered to the client in early 2014. Staff at the CBBH was trained Ukraine how to make regular use of the model and how FinSAC participated in joint WB – IMF missions to interpret its results for decision-making. The to Ukraine as part of the crisis response program. delivery of this TA module was a joint effort of FinSAC provided TA on NPL resolution, enhancing FinSAC and the Joint Vienna Institute (JVI) with bank capital requirements, a special regulatory one JVI staff participating in the model building regime for domestic systemically important banks process. FinSAC also built and delivered an early (D-SIBs), as well as a recovery planning framework warning model for the Bosnian financial system. for D-SIBs. Also, in 2014 an update of the credit growth The country authorities requested FinSAC’s forecasting model suite took place, making use of assistance to help the NBU in their efforts to new data available at the Financial Stability Unit. establish a high level Financial Stability Council The results of the update were delivered to the (FSC) as a platform for regular discussions of client and were instructed on how to incorporate financial stability issues, with the participation the new models in their everyday practice. of the Ministry of Finance, the Deposit Guarantee Fund, and two other financial regulators. The FYR Macedonia authorities were specifically interested in the mandate and functions of the Committee and FYR Macedonia is one of the countries in the how best to institutionalize the work of the FSC Western Balkans where Greek banks have a Secretariat which is to be established in the NBU. strong presence. The Macedonian authorities have FinSAC provided extensive comments on a draft been intensively updating the country’s crisis Presidential Decree setting up the FSC. Additional preparedness framework for the past two years, TA topics have been discussed with the NBU, 21 Financial Sector Advisory Center | Annual Report 2014 both under FinSAC’s macro and micro-prudential By the end of 2014, a first sample of 13 defaulted activities. corporate obligors, representing approximately 15% of total NPLs in the system, had been reviewed through the pilot program. Approximately one PILLAR 2: MICRO-PRUDENTIAL third coming out with restructuring plans were REGULATORY AND deemed to have a high chance of success, one third were deemed “worth restructuring” but SUPERVISORY FRAMEWORKS there was some uncertainty about their prospects, and approximately one third were deemed unfit Albania for restructuring and sent to liquidation. A further FinSAC has been collaborating with the Bank sample of 25 corporates will be reviewed by the of Albania (BoA) since 2013 to identify and BoA, FinSAC and the external consultants in March implement measures that will facilitate the – April 2015, representing another 10 percent of reduction of the NPLs stock in the Albanian the stock of NPLs. After this the participating banking sector, and encourage the resumption banks are expected to continue managing the of lending to viable companies and households. process without external support to reach a The priority has been the effective enforcement coverage of about 50 companies or conglomerates, of creditors’ rights, while promoting the return over one quarter of the NPLs in Albania. Factors of operationally viable borrowers to sustainable exogenous to the project led to some delays in debt servicing capabilities, and hence to new 2014, but the project, overall, has demonstrated sustainable borrowing. the importance of overcoming collective action and lack of information problems. With these aims in mind, the BoA and FinSAC have promoted the appropriate restructuring of FinSAC presented on the NPLs Reduction Program large, economically viable corporate debtors. This at the Bank of Albania-IMF Country Forum in required the BoA to adopt a more intrusive role in March 2014. tackling coordination failures between the major creditors, while also helping banks develop their Bulgaria skills and expertise in operational and financial At the request of BNB a FinSAC mission visited the restructuring. This was achieved through a Banking Supervision department of the BNB on framework for the voluntary, out-of-court (VOOC) June 15, 2014 to advise on: (i) migrating BNB’s restructuring of large, complex, multi-creditor loan classification and provisioning standards defaults, in line with the INSOL principles on to IFRS provisioning; and (ii) transferring the multi-creditor workout, as well as the London and WB’s Financial Projection Model (FPM) - by the Istanbul experience, adapted to the specificities of author of the model- to assist supervisors analyze the Albanian context. and simulate banks’ performance for regulatory analysis and stress-testing purposes. This work was complemented by an innovative pilot program to evaluate the restructuring The development objective of this dual TA activity potential of the largest, most complex corporate was: (i) to strengthen the practices followed by defaults. This program, which brings together the the BNB in supervising loan quality, once the largest Albanian banks, is hosted and managed by regulatory loan-loss provisions was abolished the BoA, with support from FinSAC through the and additional capital buffers were introduced, engagement of two restructuring specialist firms while the system transitions to IFRS provisioning with extensive experience both in Western and in which great discretion is given to commercial Central & South Eastern Europe. Under the program, banks to set their loan-loss provisions; and (ii) banks with shared exposures cooperate in creditor to transfer the FPM, a key tool for assessing the committees, exchange information and analysis, condition and viability of Bulgarian banks. and jointly negotiate with the debtor to ensure transparency and fairness in recovery. Defaulted The recent intervention and nationalization of companies in the pilot sample are evaluated based KTB, the fourth largest commercial bank, coincided on their current financial statements and future with the mission’s visit to Sofia, but was not part business prospects to determine their commercial of its assistance. It is likely the BNB will request viability, as well as the level of debt that can further support from FinSAC. reasonably be supported by future earnings. This is then used to decide whether the enterprise value of the company is greater than its liquidation Croatia value, in which case a restructuring is pursued. A joint WB - FinSAC and EBRD NPLs diagnostic mission visited Zagreb from 1 to 5 December, 22 FinSAC Activities in 2014 2014 to conduct a diagnostic of impediments to implementation were discussed and reviewed. The NPLs resolution in Croatia and identify priority assistance covered the procedures for determining areas for intervention, which will eventually be the scope and frequency of inspections, the used to define technical assistance (TA) and other planning of inspections, the preparation and support that can be provided by the WB and content of Inspection Reports, and the review other IFIs. The diagnostic visit was conducted in of loan portfolios by sampling during on-site collaboration with the EBRD and the International inspections. Recommendations for improved Finance Corporation (IFC), in the context of the oversight of external auditors and the use of other Vienna Initiative. The team conducted interviews experts were also made. with a wide range of stakeholders including the Croatian National Bank, government ministries, The confidential FinSAC report was discussed state institutions; the judiciary, leading banks in a closing meeting with the Governor and the (representing ca. 2/3 of all Croatian bank assets), Senior Management of the NBS, with participation law firms, accounting and audit firms, and private from the FinSAC team and Coordinator. The NBS investment firms. confirmed its commitment to implement proposed changes to onsite examination procedures. A FinSAC and the EBRD have been asked to support supplementary report covering specific AML issues the insolvency law amendment process, with a will be prepared, as the AML supervisory process follow-up visit scheduled for January 2015. has many similarities with prudential supervision. Georgia FinSAC provided TA to the NBS in reviewing the Internal Capital Adequacy Assessment Process The National Bank of Georgia (NBG) requested TA (ICAAP) and improving the efficiency of the with the prudential implications of transition to Supervisory Review and Examination Process IFRS. FinSAC reviewed the gap analysis prepared (SREP) dialogue – Pillar 2. The work covered by the NBG and provided recommendations on six areas: (i) using ICAAP/SREP as a supervisory the pace and timing of transition to IFRS in the tool, (ii) risks to be considered, (iii) calculation banking system, taking into account the state of capital requirements, (iii) stress testing, (iv) of preparedness of the smaller banks. FinSAC available capital, (v) capital adequacy, and (vi) also proposed an action plan for IFRS transition other issues. Specific proposals on each topic were including the definition and implementation of made for NBS consideration. prudential adjustments, filters and reclassifications to the IFRS financial statements of Georgian banks, It should be noted that the NBS gave full access based on the position of other prudential standard- to confidential information to FinSAC’s team of setters and regulatory bodies, such as the EU and experts, making it possible to go in-depth in the the Basel Committee on Banking Supervision. review of the operations, organization, outputs and effectiveness of the Supervision Department Montenegro in discharging its responsibilities. At every step the FinSAC assisted the Central Bank of Montenegro Team and FinSAC’s Coordinator interacted directly (CBCG) to organize an international conference and extensively with the NBS Governor to report launching the “Podgorica Approach” - a on the findings and recommendations, as well as to framework for voluntary NPLs resolution. The get “buy-in” for the reforms proposed at the highest conference was attended by 122 participants, level of the central bank. FinSAC encouraged including representatives of the CBCG, the the Governor to undertake some of the reforms Ministry of Finance and various other Montenegrin proposed and, under her leadership, working government bodies, the WB and the EBRD, as well groups are being set at the NBS to focus on the as commercial banks, international restructuring implementation of some of the recommendations experts and investors. during 2015. We made clear that further support in this area would focus on achieving positive results Serbia in the form of implementation of the proposed reforms. New areas of assistance emerged during FinSAC provided significant TA to the National the discussions, including a bank governance Bank of Serbia (NBS) to improve the efficiency and review, and information has been sent to the NBS effectiveness of onsite prudential and Anti Money as to what this review entails. Laundering (AML) supervision practices. The team interviewed bank supervision staff, on-site In many respects, given the right set of conditions examiners, risk experts and other stakeholders. - particularly unrestricted access to confidential Current policies, procedures and supervision information and supervision Staff and trust in the manuals for on-site examination and their collaboration and soundness of the advice offered 23 Financial Sector Advisory Center | Annual Report 2014 by FinSAC - the approach followed in Serbia is a in the last quarter of 2014 due to exacerbating very good model and prototype for the “niche” problems in three Moldovan Banks – BEM and Banca in which FinSAC can contribute most, reaching Sociala were put under “Special Administration” beyond the regulatory framework, while focusing at the end of November and another commercial on the effectiveness of how supervision is actually bank, “Unibank” in December. This put about 30% being discharged, an area where the FSAPs cannot of its banking sector by assets under central bank reach, but it is absolutely critical. administration. Ukraine The missions concluded by recommending a number of detailed immediate next steps to be FinSAC gave a presentation to the NBU on taken by the authorities. Further immediate TA approaches to the voluntary restructuring in (i.e. on operational aspects of bank resolution) the context of multi-creditor NPL work-outs. was requested by the NBM and the government. The presentation targeted the regulation and In the medium term, an overhaul reform of the supervision team, with the aim of starting a NBU- banking sector will be required with a special led coordination effort amongst Ukrainian banks focus on its governance structure, and revising to resolve their portfolio of NPLs. A follow up and strengthening application of supervisory and activity has been financed by the EBRD to explain resolution tools. The authorities are conducting the content and possible advantages of the so investigations involving potential violation of laws called “Istanbul approach”. and regulations by the managers and controlling shareholders of the three banks in distress. NBU requested further TA to help streamline bank capital requirements, to build the foundation to move towards new liquidity requirements and Serbia to help in designing a special regulatory regime FinSAC collaborated with the IMF on regulatory for D-SIBs. This request was made in response to reform in the area of banking resolution and FinSAC’s report on the topic prepared in 2013 on deposit insurance. The final legislation was “Regulatory consistency assessment between NBU adopted by the Serbian Parliament by the end of prudential requirements regulation and the EU’s January, 2015. Future work providing assistance CRD IV/CRR framework”. FinSAC has provided in ensuring proper implementation, including the extensive comments on changes to the special drafting of by-laws, has already been defined with regulatory regime for D-SIBs and discussed next the NBS. steps for streamlining the capital requirements. Ukraine The NBU requested assistance with the design of a PILLAR 3: BANK RECOVERY AND Recovery and Resolution Planning framework. In RESOLUTION the first stage, FinSAC will assist with the design of a methodology for the preparation of Recovery Albania Plans for systemically important banks. FinSAC supported the implementation of Bank Recovery Plans featured as prior DPL action and developed a Framework for the drafting of these PILLAR 4: FINANCIAL plans. FinSAC also supported the authorities in the CONSUMER PROTECTION development of a policy for the identification of Domestic Systemically Important Banks and the Kosovo development of a diagnostic tool. FinSAC finalized complaints handling procedures, FinSAC staff initiated the development of a regulation and complaint forms, and developed a strategy for the consolidation and resolution of financial consumer disclosure framework. FinSAC “Savings and Credit Associations” aligned with also drafted a financial literacy article on effective international best practices. Although a very small interest rates and the responsibilities of guarantors subsector they merit attention due to the social for this framework. A consumer guide to mortgages cost and potential contagion effect of eventual was also developed. FinSAC provided comments to failures among the savings associations. the Central Bank of Kosovo’s mortgage regulation and default interest rate regulation and assisted the authorities with the introduction of market conduct supervision introduced into the insurance Moldova on-site supervisory process. A number of WB – IMF missions visited Moldova 24 FinSAC Activities in 2014 • Support to the financial sector through e. Collaboration within IFC investments in banks (e.g. Serbia) the WB Group, the EU and and IFIs • Acquisition of non-performing loans through the IFC’s Debt & Asset Recovery program FinSAC works closely with WB senior staff located (e.g. Romania). in Washington D.C. and Vienna. WB Headquarters- based staff join FinSAC staff on missions regularly, The recent reorganization of the WB Group under particularly for the CSEs where IT expertise is the Global Practices (GPs) has greatly encouraged required. A joint mission to Georgia with the WB that process, by bringing together, under the Center for Financial Reporting Reform (CFRR), Finance & Markets GP, NPL-related experts and based in Vienna, also took place. The CFRR was products from across the WB Group on areas also an active participant and speaker during such as secured transactions, credit information FinSAC’s Conference on Credit Risk Management and insolvency systems. The close collaboration and Regulatory Provisioning in an International between FinSAC and the Finance & Markets Financial Reporting Standards (IFRS) Environment GP (e.g. Croatia, Serbia, Ukraine) ensures that in October in Vienna. FinSAC’s client countries benefit from the best knowledge solutions available in the WB Group. FinSAC also had meetings with the EU Commission and has regular communications with the Outside of the WB, FinSAC has promoted greater European Banking Authority (EBA). As part of cooperation between IFIs active in the area of NPL the Vienna Initiative, FinSAC and EBRD met with resolution. The Vienna Initiative, where FinSAC the EBA to advocate an urgent assessment of the participates, has provided a forum to initiate these confidentiality provisions of the Banking Laws discussions, which are now being replicated and our client countries. Once these provisions are expanded at the country level. assessed as equivalent to the EU by EBA, it is very likely that FinSAC client countries will be invited • In Croatia, FinSAC invited the EBRD to to participate in supervisory colleges. Results of join a diagnostic mission to identify impediments the assessment are expected early 2015. Where to NPL resolution, which has already resulted in relevant, EBA representatives also participate as joint recommendations on the draft amendments speakers in FinSAC’s conferences, workshops and to the insolvency law that were presented to the seminars. FinSAC will strive to further expand its Croat authorities in February 2015. This will be cooperation with EU institutions and other IFIs, followed by a joint report on NPL issues in Croatia, particularly the Joint Research Center (ISPRA), the leading to closely coordinated initiatives from the Joint Vienna Institute and the Financial Stability EBRD and WBG. Institute. • In Serbia, FINSAC played an active FinSAC has been collaborating closely with the role, in collaboration with the IMF and EBRD, in International Finance Corporation (IFC) and devising a matrix of priorities for NPL resolution, other IFIs in the area of NPL resolution. When which will be used as a framework to bring working on NPL resolution, the WB seeks to together key stakeholders working on NPL (public propose a holistic package, bringing together a sector entities, such as the National Bank of Serbia, range of products and expertise from across the Ministries of Finance, Economy and Justice; lead organization. Interventions were FinSAC closely IFIs such as the IMF, WBG and EBRD; and private cooperated with other IFIs include: sector actors). • TA to the central bank or supervisory • In Ukraine, the World Bank and EBRD agency to convene bank creditors to overcome the are closely collaborating in helping the central collective action problem, through a combination bank promote a framework for voluntary out-of- of FinSAC and the IFC interventions (e.g. court restructuring of distressed assets. Montenegro, Albania and more recently, Serbia and Croatia) • Financial support to the public sector, for example through a DPL with specific NPL-related prior actions endorsed by FinSAC (e.g. Albania, Ukraine, etc.) 25 Financial Sector Advisory Center | Annual Report 2014 IV. Looking forward to 2015 1. Economic Outlook 2. Financial Regulatory & Supervisory Outlook The ECA region is still struggling to return to robust growth following a short lived rebound after The implementation of the ambitious EU reform the global economic crisis of 2009. A slowdown agenda will continue to offer opportunities for in the pace of structural reforms, accompanied FinSAC to assist both EU and non-EU member by tepid growth in the global economy and countries in adopting the new Directives into uncertainty arising from the conflict in Ukraine, national legislation, drafting secondary legislation continue to cloud the outlook. The weak external and regulations. Moreover, FinSAC’s work at the environment, especially slow growth in Western micro-prudential level has been very well received Europe, has dampened growth prospects in 2014 by national central banks and, as we gain more and it might persist in 2015. Western Europe experience, it will be extended to other countries, continues to face sluggish demand and structural focusing on the effectiveness of supervision. The challenges, which are contributing to below target adoption of reforms and the resulting efficiency inflation. The quantitative monetary easing policy gains in this area are really important as recognized in the Eurozone and the resulting weakening of by recipient countries. the Euro may help lift demand in the short term, including in several client countries for which the euro area is an important export destination. However, the external environment for the region 3. FinSAC’s Strategic is not expected to become particularly favorable in Positioning Going Forward: the coming years. Narrower Scope, More Depth Remaining debt overhang and lost competitiveness in several new EU member states and Balkan FinSAC will consolidate its position as a niche countries are other factors that will continue to player and “Center of Excellence in Banking constrain the recovery. High levels of external debt Supervision and Resolution” with a more focused and needs for large-scale external financing make mandate to maximize impact within FinSAC’s some countries particularly vulnerable to changing limited scale. The “niche” is in itself a broad area conditions in international financial markets, in and one where FinSAC can expand its range of TA particular an expected rise in US interest rates. The products offered. high levels of NPLs in the region, together with the ongoing restructuring of the banking sector, To most effectively leverage Fin SAC expertise in are likely to continue to constrain investment and response to the growing demand for its products, consumer demand in 2015. but given finite resources, the focus will be on providing targeted, specialized consulting services. At the same time, fiscal positions are slowly FinSAC is in process of hiring at least one more improving and many countries in the region are senior supervisor able to support client countries gradually regaining competiveness after wage in the implementation of legal, regulatory and adjustments. Projected stability in oil prices, down supervisory solutions. from the high levels in previous years, should also mitigate uncertainty among energy importers in While FinSAC will continue to offer the region. That all makes it likely that the recovery macroprudential and financial stability products in the western part of the ECA region continues, at the specific request of a client country, its four albeit not at a fast pace. The geopolitical tensions pillar strategy will gradually transform to a largely Ukraine-Russia are likely to persist, making the three pillar-centric strategy focused on: economic recovery more difficult. FinSAC’s efforts to assist client countries in a. Micro-Prudential Pillar addressing the drag of high NPLs will continue to a critical focal point in 2015, as well as dealing with Work under this pillar is divided into two the deep banking crisis in Ukraine and Moldova. subthemes: 27 Financial Sector Advisory Center | Annual Report 2014 1. Micro prudential • compliance with CRD IV/CRR requirements by performing or reviewing supervision and regulation: gap analyses of the existing regulations A menu of different modules in the supervisory compared to the CRD IV/CRR; and regulatory area is offered. • assisting with quantitative impact The first supervisory module addresses the assessments and providing proactive policies and procedures for determining the advice on action and implementation scope and frequency of inspections, the planning plans; of inspections, the preparation and content of inspection reports, and the review of loan • developing country specific tailored portfolios by sampling during on-site inspections. criteria for identifying domestic This module was successfully undertaken in Serbia systemically important banks, as required (see section IV, c) assessing the efficiency and by CRD IV and Basel III; efficacy of onsite supervision practices. • assisting countries with the development Other available modules include a review of and calibration of the various buffers the architecture and control framework within included in CRD IV and Basel III; and banking supervision departments, for example: • selectively targeting some of the Basel • enhancing onsite/offsite cooperation or Core Principles to enhance both the exploring the implementation challenges, regulatory and supervisory aspects, in benefits and drawbacks of integration of particular bank governance, consolidation, onsite and offsite; related parties and large exposures. • assessing supervisory approval For each of these modules, clients must give the processes, quality assurance and the FinSAC team full access to confidential inspection governance of supervision; reports, inspection planning, risk assessments and outcomes. This access can be anonymous, as long • developing, or assessing, supervisory as the nature of the individual bank is shared guidance and tools for preparing risk (state owned bank, systemically important bank, assessments of individual banks; small bank, …). A relationship of trust with the client is essential and FinSAC treat all information • developing supervisory plans; including as strictly confidential. the tailoring of supervisory procedures and expert teams to the individual • Cross border banking supervision – institution; home host issues Almost all of FinSAC’s client countries have • assistance with the assessment of bank’s banking systems that are dominated by foreign business models; banks, mostly Eurozone banks. While global banks come with benefits for host countries, they also • assisting with the implementation of pose specific risks and challenges to host country forward looking risk based supervision; supervisors. • assisting with the development of a FinSAC can work with client countries in the area remedial action and enforcement of cross border banking supervision including; risk framework; assessments and supervisory strategies for specific risk posed by foreign banks; and addressing home • assistance in developing quantitative host issues and building safeguards to prevent tools for the crisis management and contagion risk. resolution process: and models for quick checks of viability and cost assessment of different resolution options 2. Non-Performing Loans FinSAC has several ongoing programs designed to address the high NPLs and NPLs resolution. On the regulatory side, tailored assistance in the These programs overlap with micro prudential and area of implementation of Basel III/CRDIV/CRR is recovery and resolution work. They have a long- offered. In some countries, FinSAC’s TA program term horizon and a complex configuration due to focusses on: the multidimensional nature of NPLs resolution. 28 Looking forward to 2015 Indeed, high NPLs can often be explained by the introduction of single resolution tools such as a interplay of many factors, including legal obstacles bridge bank). Still, in most countries the resolution in collateral realization, specific requirements in of distressed banks is largely based on “early tax legislation and accounting, as well as consumer intervention” via simple conservatorship, without protection issues and difficulties with the Court the power to override shareholder rights, and a system. Even though every project and country liquidation system under “traditional” insolvency is different, the overall approach to dealing laws. In some countries shareholders’ rights can with NPLs resolution projects generally involves become a major impediment for prompt decision two stages: a diagnostic and an implementation making in the event of a crisis in failing systemic stage. In the diagnostic stage, a detailed analysis institutions without endangering financial stability of the overall portfolio by slicing and dicing the and critical functions interruption (e.g., Albania). exposures is performed. Generally speaking, this Comprehensive reform of current resolution stage also includes a legal analysis of the use and frameworks should therefore be considered for hurdles to voluntary out of court restructuring most countries in the region. So far only Serbia and the efficiency of bankruptcy and court has overhauled, with IMF and FinSAC assistance, systems and an assessment of the consistency of its bank resolution system in January 2015, the NPLs definitions and provisioning. During introducing a bank resolution system aligned to the implementation stage, the program can assist the BRRD. countries with voluntary guidelines for out of court restructuring and the review of legislation. Authorities in the region have started preliminary work on recovery and resolution plans (RRPs). Comparability of NPLs definitions, reporting So far only a few have developed binding standards and provisions across countries has been requirements for systemically important banks and a long standing concern, particularly the scope of established internal best practices and tools for the the definitions of restructuring or forbearance with assessment of recovery plans. There is, however, a different classifications in many countries. The general lack of powers to execute resolution plans EBA has recently developed technical standards on and tools. A first key step will be to support the supervisory reporting on forbearance and NPE to development of mandatory guidelines requiring perform harmonized overall data collection on asset (systemic) banks to adopt and submit recovery quality and lower costs for international banks by plans. Thereafter the preparation of bank-specific gradually decreasing divergent definitions. FinSAC resolution plans and internal guidelines for early can provide assistance with: intervention and resolution are to be established. • benchmarking the existing NPLs The effective execution of a resolution regime and identification and classification practices the powers to apply resolution tools require not against international good practice while only coherent legal frameworks, but also a stable taking into account specific country institutional architecture and strong governance. circumstances and products; The immediate and full application of the complex BRRD might not be the best tailored solution for • assessing and addressing the prudential many of the Balkan countries at this stage interactions of IFRS implementation for banks when transitioning to IFRS. This Often, the optimal solution of establishing an includes policy advice on timing and independent administrative resolution authority safeguards when moving from may not be advisable on resource and efficiency deterministic regulatory provisioning grounds. Many smaller countries, even in the EU, models to expected loss methodologies have therefore decided to set up a “resolution unit” and an assessment of the preconditions for within the supervisory authority or the central increased reliance on IFRS5. bank. In those cases ensuring organizational and functional separation, while at same time establishing information sharing and coordination b. Bank Recovery and Bank mechanisms will be a difficult balancing act. In Resolution Pillar this respect, it is good practice for the resolution unit to receive periodic information and to be empowered to trigger resolution independently of Overview the supervisor. The region’s banking supervision and resolution system is, in some respects, based on modern Similarly, the application of the bail-in tool principles and recent reforms have strengthened may require special consideration in transition legal frameworks (for example, through the countries. It will be challenging to ensure that those 5 FinSAC has cooperated with the Centre for Financial Reporting Reform in this area. 29 Financial Sector Advisory Center | Annual Report 2014 who profit from risky investments also potentially specific local market circumstances. take the loss in case of failure (bail-in). The lack of a developed bond market comes with the risk • Resolution of specific institutions that unsecured creditors such as depositors will Home supervisors and resolution authorities are be subject to bail-in which can increase contagion responsible for the development of recovery and risks. resolution plans, and this has raised new challenges to cross border supervision and resolution. FinSAC The application of the “No Creditor Worse Off can help client countries address these home principle” can also become problematic in an host issues by providing advice on preparing for environment where fair values are difficult to and implementing the resolution of individual assess. institutions, thereby ensuring independent support and advice in line with international developments The recovery and resolution pillar comprises three for dealing with financial sector distress. subthemes: Some authorities in the region have started work • Bank Recovery and resolution regulation on recovery plans but few have developed binding in EU countries: requirements for the adoption of resolution plans FinSAC assists authorities in the region to for systemically important banks. As highlighted strengthen their bank resolution frameworks to by international standards adopted in the wake of preserve financial stability, protect depositors, the financial crisis, RRPs are essential instruments and save tax-payer resources. The EU BRRD was for effective crisis preparedness and management. adopted to avoid disorderly bankruptcy and costly A recovery plan contains information on how a bail outs. It introduced a number of bank resolution bank would try to recover from severely adverse instruments, such as sale of business, bridge bank, conditions that could cause its failure by setting asset separation, and bail-ins, that EU authorities out in advance its “menu of options” for dealing must comply with as a minimum. FinSAC is with a range of stress events. Resolution plans are committed to support resolution authorities in drawn up by the authorities and set out options for developing strong tools and strategies to fulfill resolving the bank and ensuring the continuity of their role as part of the financial sector safety- critical functions. net in application of the BRRD including covering critical home/host issues. Recovery plans are likely to increase the resilience of the banking system and should allow better use FinSAC also provides assistance in the development and targeting of supervisory resources and powers. of coordination and information sharing systems, FinSAC can provide TA in drawing up and defining especially where the resolution authority is set legal requirements of RRPs, and in the development up as a separate but still integral part of the of supervisory guidance for the assessment of supervisory authority. FinSAC can help define recovery plans (for example, as regards the respective responsibilities to achieve smooth adequacy of qualitative and quantitative recovery and efficient decision making and successful indicators). cooperation while maintaining operational and functional independence. c. Streamlined Financial • Resolution framework for non EU Stability and Macro- countries Prudential Pillar While advising authorities on the development of appropriate resolution frameworks, FinSAC is • Crisis prevention and preparedness mindful of the lessons learnt elsewhere and aligns In the area of crisis preparedness, FinSAC assists its TA with international good practice (e.g., Key countries in contingency planning and tests crisis attributes and IADI Principles for Effective Deposit management plans using CSEs. The objective is Insurance) and local market circumstances. threefold: first, to identify gaps and weaknesses in regulatory and legal frameworks; second, to assess The overall aim for systemic banks is to make the the decision making and information sharing by resolution feasible without taxpayers’ support and the authorities to the “crisis event” and; finally, to without systemic interruption, while ensuring the train the authorities so they can organize regular critical functions of an institution remain intact. CSEs on their own. A CSE tests information Attention is also given to ensuring an efficient analysis and sharing, decision making, home- least cost resolution for non-systemic banks and host cooperation, and communications within developing related safety nets, taking into account the Central Bank and between the other national 30 Looking forward to 2015 financial sector authorities. The exercises are (I) CSE: completing the CSE in two additional conducted in a virtual environment and can be countries (Kosovo and Albania), to finalize these tailored to the needs of the authorities as the scope exercises in all our client countries; can be set up as intra-agency, inter-agency or a combination. CSEs have now been conducted in (ii) BRRD: FinSAC’s work will expand many countries. significantly in addressing the complex issues of bank recovery and resolution and the adoption With initial CSEs (funded by FinSAC or from into national legislation of the BRRD. A Regional another source) now completed in many of its Workshop on recovery and resolution plans will client countries some are asking FinSAC to repeat take place in April; the exercise. A decision needs to be made about whether and how this should be undertaken. (iii) Micro-Prudential Supervision: FinSAC Options range from providing IT only support to will continue its innovative work in micro- the delivery of the CSE (with expenses covered prudential supervision, completing the ambitious by the client country), to a full repeat CSE work being done in Serbia and extending this pilot depending on specific country circumstances (e.g., to other countries in the region; recent amendments of the resolution framework, considerable and imminent vulnerabilities of the (iv) NPL Resolution: FinSAC will complete in country financial sector). There is scope to take 2015 its work in Albania addressing the this product line further, focusing on the cross- restructuring of up to 30 companies with large border aspect of crisis management, organizing NPLs and assisting the Bank of Albania with the multi-jurisdiction CSEs, or with the participation of off-site review and resolution of 20-25 additional multiple home- and host authorities and possibly companies, dealing with up to one quarter of the international observers (such as the ECB and EBA). country’s NPLs. It will expand the NPL resolution work to Serbia and Croatia in partnership with In the macroprudential area, FinSAC will continue other IFIs. Finally, the work in this critical are in to selectively agree to requests from clients to assist Ukraine will continue in 2015-16; in building quantitative tools for systemic risk assessment and in designing the institutional set- (v) Crisis Countries: FinSAC will continue its up for national financial stability arrangements. assistance to countries faced with systemic banking crises (Ukraine and Moldova) in cooperation with the World Bank and IMF teams preparing d. Other FinSAC Activities assistance packages; FinSAC will continue with a flexible program of (vi) Seminars and Working Papers: FinSAC knowledge creation and dissemination activities, will deliver two additional regional seminars on such as working papers and seminars, in response deposit insurance funds investment regime (jointly to the diverse and changing needs of its client with the Deposit Insurance Fund of Poland) and countries. In 2015, a working paper assessing a seminar on cyber preparedness for which a 15 key lessons learnt from CSEs will be developed. country survey was conducted and a working A working paper analyzing the supervisory and paper is being drafted; regulatory issues encountered by prudential supervisors of host countries that have a systemic (vii) Deposit Insurance: FinSAC will provide presence of foreign banks will also be produced. assistance in Bosnia Herzegovina and Georgia A conference on cyber security and an expert-to- in their reform efforts to adopt modern deposit expert workshop on recovery and resolution plans insurance system compatible with EU legislation; are planned. A deposit insurance conference with the BFG from Poland is also scheduled. FinSAC (viii) Broadening Partnerships: FinSAC expect to reengage with the Georgian authorities will strive to expand its cooperation with EU on IFRS for the banking system and assist in setting institutions, particularly the Joint Research Center up a Deposit Insurance Scheme, as agreed between (ISPRA) and other IFIs; Georgia and the EU and included in the on-going Development Policy Loan with the WB. (ix) Broadening FinSAC’s donor base: FinSAC is exploring its transformation into a multi-donor trust fund, inviting other EU countries e. FinSAC work program for to support the efforts from the Austrian Federal 2015 Ministry of Finance, to expand its resource base to address longer-term serious problems in the During 2015 FinSAC’s TA work will focus on: banking sector, particularly in Ukraine, where 31 Financial Sector Advisory Center | Annual Report 2014 FinSAC has approach the National Bank of Poland demand for its services, responding flexibly, to to consider becoming a FinSAC donor. As indicated request from our client countries. in this Annual Report, FinSAC will follow the f. Disbursement of Trust Fund by FinSAC Total budget disbursed: 6,964,182/US$ (as of March 31, 2015). Current Fund available balance: 1,317,865/US$ (as of March 31, 2015). Disbursements 2013 Disbursements 2014 Disbursements 2015 Q1 (Jan/Feb/March) $664,492 $404,734 $654,170 Q2 (April/May/June) $449,979 $630,224 Q3 (July/Aug/Sept) $459,140 $392,733 Q4 (Oct/Nov/Dec) $887,714 $622,844 Total $2,461,325 $2,050,535 Disbursements 2013 Disbursements 2014 Disbursements 2015 $1,000,000 $900,000 $800,000 $700,000 $600,000 $500,000 $400,000 $300,000 $200,000 $100,000 $0 Q1 Q2 Q3 Q4 (Jan/Feb/March) (April/May/June) (July/Aug/Sept) (Oct/Nov/Dec) Disbursement by categories: a. For the period of 1 June 2011 – 31 December 2014 US$ % staff costs 6 4,471,196.82 68.11 airfare rebate -27,259.35 -0.42 consultant fees 7 992,090.07 15.11 associated overhead costs 8 80,353.94 1.22 travel expenses9 935,754.63 14.25 publications & workshops 112,478.97 1.71 Total 6,564,615.08 100.00 6 Incl. FinSAC Coordinator, five TTLs and one program assistant 7 Incl. consultant firms and consultants 8 Incl. office maintenance, utilities, cleaning services, office supplies, depreciation etc. 9 Incl. travel expenses of both staff and consultants/visitors 32 Looking forward to 2015 b. For the period of 1 January 2014 – 31 December 2014 US$ % staff costs 1,593,970.81 75.21 consultant fees 194,326.55 9.17 associated overhead costs 29,183.06 1.38 travel expenses 255,220.76 12.04 publications & workshops 46,508.32 2.27 Total 2,050,535.40 100.00 Disbursement by activities: c. For the period of 1 June 2011 – 31 December 2014 US$ % TF010025 - general for all activities (June 2011- Febr 2013) 10 2,710,151.77 41.28 Administrative cost 11 741,724.70 11.30 NPL 1,076,534.18 16.40 CPFL 475,402.79 7.24 Bank Recovery & Resolution 231,470.78 3.53 Crisis Simulation 649,465.17 9.89 Microprudential Framework 423,287.12 6.45 Macroprudential Framework 256,578.57 3.91 Total 6,564,615.08 100.00 f. For the period of 1 January 2014 – 31 December 2014 US$ % Administrative cost 550,997.84 26.87 NPL 358,514.08 17.48 CPFL 212,686.77 10.37 Bank Recovery & Resolution 235,079.11 11.46 Crisis Simulation 364,577.69 17.78 Microprudential Framework 289,555.69 14.12 Macroprudential Framework 39,124.22 1.91 Total 2,050,535.40 100.00 10 Between June 2001 and February 2013, the Trust Fund had no separate windows. The window labelled “TF010025 - general for all activities” was used for all types of categories and activities allowed under the TF. Starting from February 2013, the following windows were created: Administrative & Monitoring, NPL, BRR, CPFL, Micro & Macroprudential. 11 Incl. cost of all types of categories not related to the particular topical activities namely: management, webdesigner, program assistant cost, translations services, utilities, office maintenance, office supplies, depreciation, publications and representation cost. 33 Financial Sector Advisory Center | Annual Report 2014 Attachment: Results Framework Table MICRO-PRUDENTIAL FRAMEWORK FinSAC ACTIVITIES / FinSAC OUTPUTS FINSAC OUTPUT EXPECTED CLIENT POTENTIAL CLIENT INPUTS INDICATORS OUTCOMES OUTCOME INDICATORS Serbia: Assessment Review and benchmarking Proposals to improve Proposals discussed and Performing more Improved level of of on-site of onsite examination the efficiency and endorsed by the Governor effective, risk based and compliance with practices: scope of effectiveness of onsite & Senior Management efficient onsite bank Basel Core Principles examination inspections, planning of examination practices of the NBS. Working examinations. for Effective Banking practices inspections, inspection (report to the NBS Groups established to Supervision” assessed by reports, sampling of Sr. management and foster implementation of Better use of scarce IMF-World Bank FSAP the loan portfolio, Governor) recommendations. supervisory resources. teams. examination preparation More risk based and tools to decrease the Client satisfied with supervision. More precise and workload of the onsite proposed solutions and comprehensive assessment inspection division, decision matrix. Improved governance, of risks across the banking coordination on & off site. accountability and risk system. management in financial institutions. A lower incidence of failure of supervised Better supervised and institutions due to earlier more resilient banking and more effective system. intervention. Serbia: Review and benchmarking Proposals to improve Proposals discussed and Improved skills and better Improved level of Structuring the of SREP/Pillar 2 practices: the efficiency of the endorsed by Governor & understanding of ICAAP compliance with supervisory review and Senior Management of the and SREP. Basel Core Principles Pillar 2 dialogue ICAAP/SREP as a examination process NBS. for Effective Banking supervisory tool, risks to (SREP dialogue – Pillar 2) Better use of scarce Supervision” assessed by be included in the ICAAP, Client satisfied with supervisory resources. IMF-World Bank FSAP calculation of capital proposed solutions teams. requirements, stress tests, and committed to More risk based available capital, capital implementation. supervision. More precise and adequacy and other comprehensive assessment issues. Improved governance, of risks across the banking accountability and risk system. management in financial institutions. A lower incidence of failure of supervised Better supervised and institutions due to earlier more resilient banking and more effective system. intervention. 35 Results Framework Table 36 MICRO-PRUDENTIAL FRAMEWORK FinSAC ACTIVITIES / FinSAC OUTPUTS FINSAC OUTPUT EXPECTED CLIENT POTENTIAL CLIENT INPUTS INDICATORS OUTCOMES OUTCOME INDICATORS Serbia: Assessment Review and benchmarking Supplementary report on Proposals discussed and Performing more Improved level of of onsite of the onsite examination AML/CFT supervision. endorsed by the Governor effective, risk based and compliance with Proposals to improve the & Senior Management of efficient onsite AML Basel Core Principles examination Practices : scope of efficiency of onsite AML the NBS. examinations. for Effective Banking practices for inspections, inspection examination practices. Supervision” and FATF Better use of scarce Financial Sector Advisory Center AML/CFT planning, inspection Client satisfied with Principles assessed by supervisory resources | reports, onsite proposed solutions IMF-World Bank FSAP examination procedures, and committed to More risk based teams. focused on AML activities. implementation. supervision Improved compliance Improved governance, with international AML/ accountability and risk CFT good practice, management in financial reflected in better institutions. scores in international Better supervised and assessments. Annual Report 2014 more resilient banking system. Georgia: Make assessment of Report making Proposals discussed and More resilient and stable Improved level of Prudential impact of IFRS transition recommendations on endorsed by the Senior banking system. compliance with on the prudential ways to address the Management of the NBG. Prudent solutions to Basel Core Principles interactions regulation and supervision implications, the pace and address the impact of IFRS for Effective Banking of IFRS of the banking system. timing of IFRS transition Client satisfied with on bank regulatory capital Supervision” assessed by implementation for the banking system. proposed solutions. and supervision. IMF-World Bank FSAP teams. Improvement in the preconditions for effective banking supervision. Ukraine: Prepare a gap analysis Report identifying Proposals discussed and Compliance with Improved level of Compliance with comparing the current major gaps, making endorsed by the Senior internationally agreed compliance with capital and liquidity recommendations for Management of the NBU. capital and liquidity rules. Basel Core Principles CRDIV/CRR regulations with the addressing them. Client satisfied with Better capitalized and for Effective Banking requirements of CRDIV/ proposed solutions more liquid banking Supervision” assessed by CRR. and committed to system. IMF-World Bank FSAP implementation. teams. NON-PERFORMING LOAN RESOLUTION FinSAC ACTIVITIES / FinSAC OUTPUTS FINSAC OUTPUT EXPECTED CLIENT POTENTIAL CLIENT INPUTS INDICATORS OUTCOMES OUTCOME INDICATORS Montenegro NPL Supported the drafting General of the “Framework for resolving non-performing Provide technical loans on a voluntary ba- assistance for the sis” (Podgorica Approach) resolution of non- Number of deliverables Improvement in Improved legal performing loans. produced. recognition and environment for NPL Organized two-day provisioning of non- resolution and more workshop introducing the Conduct diagnostic on performing loans. broadly for “doing Podgorica approach. NPL situation in countries business”. across the Balkans. Croatia NPL Provided input and Identify key impediments Average client satisfaction recommendations to the (legal, regulatory, as measured by client Ministry of Justice on the structural, economic, etc.) satisfaction surveys. Increase in write-offs of Reduction in the overall draft amendments to the to the resolution of NPLs “stale” NPLs with low size of NPLs. insolvency law. and prepare and prioritize prospects of recovery. key recommendations Conducted diagnostic for policy and regulatory mission, along with the changes. Average client satisfaction EBRD, on key impedi- as measured by client Increase in the number of Increase in new lending ments to NPL resolution Assess local insolvency satisfaction surveys. viable Corporate obligors to the Corporate sector. in Croatia (report to be legislation and regulatory successfully restructured. shared with the Croat framework against authorities in 2015). EU directives and international best practice Albania NPL Supported the Bank Work with public and Adopted amendments of Albania (BOA) in private sector partners to the insolvency legal developing standards for to improve cooperation regime. voluntary out-of-court and collaboration in the Reduction in the overall restructurings. area of NPL resolution, in Average client satisfaction size of NPLs. Organized hands on particular for large, multi- as measured by client Increase in the number of expert workshops with creditor default situations. satisfaction surveys. viable Corporate obligors BOA and private sector successfully restructured. banks to promote multi- Develop and deliver hands creditor workouts. on expert workshops for Provide expert input and banking sector supervisors third-party consultant and private sector support for operational insolvency practitioners and financial restructuring to improve skills and of large, complex expertise in restructuring 37 defaulted Corporates. NPLs. Results Framework Table 38 NON-PERFORMING LOAN RESOLUTION FinSAC ACTIVITIES / FinSAC OUTPUTS FINSAC OUTPUT EXPECTED CLIENT POTENTIAL CLIENT INPUTS INDICATORS OUTCOMES OUTCOME INDICATORS Serbia NPL In collaboration with Collaborate with other Average client satisfaction Increase in the number of Reduction in the overall other IFIs, developed IFIs and private sector as measured by client viable Corporate obligors size of NPLs. inter-agency matrix stakeholders within the satisfaction surveys. successfully restructured of priorities for NPL context of the Vienna resolution, and agreed on initiative to develop a Financial Sector Advisory Center area of responsibilities regional approach for | between IFIs and relevant tackling high levels of public sector authorities. NPLs across Central and South Central Europe. Ukraine NPL Provided input to the Organize and host Average client satisfaction National Bank of Ukraine workshops to improve as measured by client on improving cooperation cooperation, raise satisfaction surveys. between banks in NPL awareness and share resolution; project knowledge amongst key Annual Report 2014 continuing in 2015, stakeholders. expected to result in draft Law on Financial Debt Restructuring. Draft law on private bailiffs. MACRO-PRUDENTIAL FRAMEWORK FinSAC ACTIVITIES / FinSAC OUTPUTS FINSAC OUTPUT EXPECTED CLIENT POTENTIAL CLIENT INPUTS INDICATORS OUTCOMES OUTCOME INDICATORS Bosnia- Work together with CBBH Background Note on Successful adaptation of Enhanced analytical Usage of new analytical Herzegovina staff to build a credit risk Modeling Credit Risk for analytical tools to the capacity of the macro- tools in internal reports model for their stress- Stress Testing in Bosnia- client’s environment and prudential authority, and in FSR. Macro-prudential testing framework (with a Herzegovina. needs; reflected in client via new regular internal Capacity Building: consultant from the JVI). satisfaction. reports on systemic risk Credit risk Excel and EViews files. launched within the modeling central bank, based on Training for CBBH staff on the output of newly built operating the model. analytical models. Bosnia- Work together with Background Note on Successful adaptation of Enhanced analytical Usage of new analytical Herzegovina CBBH staff to build a Banking Sector EWS for analytical tools to the capacity of the macro- tools in internal reports simple, quantitative Early Bosnia-Herzegovina. client’s environment and prudential authority, and in FSR. Macro-prudential Warning System for the needs; reflected in client via new regular internal Capacity Building: Bosnian banking sector. Excel and EViews files. satisfaction reports on systemic risk Early Warning launched within the System Training for CBBH staff on central bank, based on operating the model. the output of newly built analytical models. Bosnia- Update the credit growth- Short note on the model Successful adaptation of Enhanced analytical Usage of new analytical Herzegovina forecasting model of the update. analytical tools to the capacity of the macro- tools in internal reports CBBH (with a consultant client’s environment and prudential authority, and in FSR. Macro-prudential from the University of Excel and EViews files. needs; reflected in client via new regular internal Capacity Building: Amsterdam). satisfaction. reports on systemic risk Credit growth Consultations (over the launched within the forecasting phone) with CBBH staff central bank, based on update on the update. the output of newly built analytical models. 39 Results Framework Table 40 CRISIS SIMULATION FinSAC ACTIVITIES / FinSAC OUTPUTS FINSAC OUTPUT EXPECTED CLIENT POTENTIAL CLIENT INPUTS INDICATORS OUTCOMES OUTCOME INDICATORS Moldova CSE Conduct CSE with senior CSE Report Turnout: 30+ Strengthened crisis Better cooperation policymakers participants, including preparedness, better between authorities in the CB Governor, Minister of coordination among process of using public Finance, Head of Deposit stakeholder authorities funds for bank resolution Insurance. Financial Sector Advisory Center | Endorsement of CSE Report by main client (CB) Macedonia CSE Conduct CSE with senior CSE Report Turnout: 30+ Strengthened crisis Client better prepared policymakers participants, including preparedness, better to manage renewed CB Governor, MoF Senior coordination among contagion from Greece Advisor, Head of Deposit stakeholder authorities Insurance. Annual Report 2014 Endorsement of CSE Report by main client (CB) Armenia CSE Conduct CSE with senior CSE Report Turnout: 30+ Strengthened crisis Client better able to policymakers participants, including CB preparedness, better handle contagion from Deputy Governor, MoF coordination among Russian Rouble crisis at Senior Official (former stakeholder authorities. end-2014. Minister), Head of Deposit Insurance. Endorsement of CSE Report by main client (CB). BANK RECOVERY & RESOLUTION FinSAC ACTIVITIES / FinSAC OUTPUTS FINSAC OUTPUT EXPECTED CLIENT POTENTIAL CLIENT INPUTS INDICATORS OUTCOMES OUTCOME INDICATORS Albania Assessment of local Guidelines for recovery Analysis on Savings and Adoption of mandatory Consolidation and law for resolving banks plans Cooperation Association recovery plan guidance. inclusion of the Savings against international consolidation and transfer and Cooperation best practice (esp. Key List of systemically to Deposit Insurance Submission of recovery Association sector under Attributes and the BRRD. important banks Agency. plans by 7 banks. Deposit Insurance Agency. Enhanced recovery and Analysis of existing New law on Savings and possible future resolution triggers and powers for Cooperative Association?. planning. early, timely and firm Increased co-ordination intervention in failing New Memorandum of with cross-border parent institutions without Understanding (MoU) banks home supervisor, requiring public support;. with ECB under SSM. avoiding insular national responses. Identification of Part compliance with systemically important the Financial Stability banks. Board’s “Key Attributes of Effective Resolution Regimes for Financial Institutions”. Serbia Assessment of local law Mission in cooperation Assessment on R&R Adoption of overhaul new Bank failures are managed on resolving banks against with IMF (sept. 2014). reform in Serbia (focus on legislative framework in an orderly, avoiding international best practice use of Deposit Insurance by national parliament systemic crisis; (esp. Key Attributes and Support the preparation Agency). in January 2015 (R&R Enhanced Deposit the BRRD) including the of agreement to and plus Deposit Insurance Insurance Agency regime role of Deposit Insurance implementation of MoUs Guidance note on Agency). (funding, pay-out, etc.. Agencys. between the principal separation of powers in line with new EU authorities - Guidance between resolution and Directive). Support in drafting legal note on the structural and supervision Unit in Serbia Domestic banks covered requirements for revised organizational separation (NBS). by recovery & resolution Banking Recovery and between resolution and plan. Resolution Law including supervisory tasks within effects on deposit Increased co-ordination one institution (NBS). with cross-border parent insurance, company law etc. banks home supervisor avoiding insular national responses.; Compliance with the Financial Stability Board’s “Key Attributes of Effec- 41 tive Resolution Regimes Results Framework Table for Financial Institutions”. Alignment with the BRRD. 42 BANK RECOVERY & RESOLUTION FinSAC ACTIVITIES / FinSAC OUTPUTS FINSAC OUTPUT EXPECTED CLIENT POTENTIAL CLIENT INPUTS INDICATORS OUTCOMES OUTCOME INDICATORS Moldova Assessment of local law Tailored country specific Mission in December 3 banks were put under Minimizing effects of on resolving banks against “decision tree” on 2014. special administration by banking crisis (fraudulent international best practice resolution stages and the Central Bank in Q4 scheme) on financial (esp. KA and the BRRD) powers. Note on Banking Sector 2014. stability and taxpayers’ including the role of DIA. Developments. support. Financial Sector Advisory Center Gap analysis of local laws In early stage of internal | Assistance in the (ongoing). Decision tree. planning in overall reform preparation of the closing of the recovery and of 3 banks in Moldova. resolution regime. Annual Report 2014 BANK RECOVERY & RESOLUTION FinSAC ACTIVITIES / FinSAC OUTPUTS FINSAC OUTPUT EXPECTED CLIENT POTENTIAL CLIENT INPUTS INDICATORS OUTCOMES OUTCOME INDICATORS CPFL TA To assess the existing TA to support CBK satisfied with the TA - MOU signed between Number of newly enacted Implementation financial consumer amendments to the support provided. CBK to Ministry of Trade and financial consumer protection framework legal and regulatory approve and implement Industry and CBK protection laws, Program Kosovo by reviewing laws, framework as well as the framework regulations, guidelines regulations and practices institutional strengthening - Enactment of CBK and procedures: 3 in Kosovo compared of the financial consumer Regulation on Disclosure to international good protection regime in Requirements Coordination mechanisms practices. Kosovo, including established with public • Conducting a - Enactment of sector authorities /private To provide diagnostic review for Complaints Regulation sector/civil society: MOU recommendations on ways consumer protection and signed between Ministry to strengthen the level Financial literacy - Enactment of CBK of Trade and Industry and of financial consumer • Preparation of Internal Procedure on CBK on coordination and protection in Kosovo. strategy for CPFL in Complaints Handling cooperation Kosovo The objective of this • Preparation of Ac- Strengthening of phase is to ensure that tion Plan for Implementa- regulatory units for financial consumers are tion of CPFL Strategy consumer protection able to reap benefits from supervision, • Preparation of an expedited execution of Technical Note on organizational the proposed measures. measures to strengthen reforms to enhance the legal and regulatory capacity for financial framework for financial consumer protection: consumer protection Strengthened regulatory • Drafting of MOU and supervisory role between Ministry of Trade and capacity of CBK and Industry and CBK in financial consumer protection in particular • Provision of tech- related to disclosure nical advise on Market requirements and Conduct Reporting Form complaints handling. • Drafting of provisions of Consumer protection for the Draft Mortgage Regulation, Draft Law on Micro Finance, Draft Regulation on Default Interest rates. 43 Results Framework Table 1818 H Street, NW Washington, DC 20433 FINANCIAL SECTOR ADVISORY CENTER (Finsac) Praterstrasse 31-19th Floor 1020 Vienna, Austria www.worldbank.org/finsac