FINANCIAL SECTOR ADVISORY CENTER (FINSAC) ANNUAL REPORT 2015 EU in i t ia tRiO vWe T s H f o expertise inf nc ia l G consistency a s regulation n t SSM Fi a bility o n b ras al an cu h g t i cap k r tru EC w taredness d prac EBA ESFS it ach a tice u l V ie n n ec c t tre A o ou s g r ep a FinSA o u SS M r es g ERm EU su resolu i A ri t M C v t pDGS ion i o c a p ES RRD l ES T e ta r bank k r r er RY r olicy pi cP n c vi ca FS i N MA i B s r si CE e k n o w le dge g o r e yE SO ss p e ld sem t is o - n E ra St Wo r S ina EB rs p Austr U OVER A prECS h VI e T SF os pr AD dn A SRM BR t p banG re u d en SIGHT ghH RD cy R re li al c e 5 i v rit g rs WT po e n tio 201 ui li q TO a kin L S ia OA d it ti d e n EC ep tia n W RO ia tr s SRM RK Aus O EU k codnen EIOPA L S pr SH l t i al ring Advice OP DGS re uden capital S SRM w str s u u SSM uctuBA i t i e t pr i v e ring ac t c NKIN -pr Fin rld B AN an mac ro– m u EU G m icro Wo str CIA FIN rbaij workshops r ea anc prosperity e & Aze conferences BRR M D arkets i o n ina ank Group SRM rgia v CRIS bank r e g zego ulat US ing and Her Geo IES EBA r IT IS PREVE PROJECTS TIV e AC SRM c U SR ECA o A R a M ESFS Bo ni v ESF h L l ta E y S e Uk A banks e M a MO growt it pi acedon NTENEGRO r Ca rain lbani l EU B y i ia EBA a dov b l B t a bia ita U Mo l p s u a Kos no NTIO c SSM l tructure ECA SRM c i a S er l E ention gari N Fin a BRRD ARMENIA ESFS a A an EB kn b en y k 2016 ti re i v li t co frasv es led y ve EIOPA b ta t r r ol ge in nte ut al s ON se i Financial Sector Advisory Center (FinSAC) Annual Report 2015 Vienna, Austria TABLE OF CONTENTS List of Abbreviations 5 1. Introduction 7 2. The Financial Sector Advisory Center (FinSAC) 9 3. The Regional Environment in 2015 and Strategic Priorities in the Financial Sector 13 3.1 The European Union 13 3.2 EU candidates, potential candidate countries and neighboring countries 16 3.3 FinSAC: responding to developments and changing needs 17 4. FinSAC activities in 2015 19 4.1 FinSAC activities in 2015: Pillar 1: Financial stability, macro-prudential frameworks and crisis preparedness 20 4.2 FinSAC activities in 2015: Pillar 2: Strengthening micro-prudential supervision and regulation 23 4.3 FinSAC activities in 2015: Pillar 3: Addressing bank recovery and resolution including bank liquidation 28 5. Focus for 2016 35 6. Annexes 39 Annex I: Financial information 41 Annex II: Results Framework Table 45 FinSAC Annual Report 2015 List of Abbreviations AML Anti-Money Laundering BoA Bank of Albania BRRD Bank Recovery and Resolution Directive CFRR World Bank – Centre for Financial Reporting Reform CRD IV/CRR Capital Requirements Directive and Regulation CCSE Cyber Crisis Simulation Exercises CSE Crisis Simulation Exercise DGS Deposit Guarantee Schemes DIA Deposit Insurance Agency DIF Deposit Insurance Fund DIS Deposit Insurance system DPL Development Policy Loan EBA European Banking Authority EBRD European Bank for Reconstruction and Development ECA Europe and Central Asia ECB European Central Bank EU European Union FinSAC World Bank – Financial Sector Advisory Center FMA Financial Market Authority FSAP WB/IMF Financial Sector Assessment Program IFC International Finance Corporation IFI International Financial Institutions IFRS International Financial Reporting Standards IMF International Monetary Fund MREL Minimum Requirements for Own Funds and Eligible Liabilities NBRB National Bank of the Republic of Belarus NBS National Bank of Serbia NFSC National Financial Stability Council NPLs Non-Performing Loans NBU National Bank of Ukraine SRB Single Resolution Board SRM Single Resolution Mechanism SSM Single Supervisory Mechanism TTL Task Team Leader USD US Dollars WB/WBG World Bank Group 5 FinSAC Annual Report 2015 6 FinSAC Annual Report 2015 1. Introduction Economic growth is critical to ending ex- mentation assistance to client countries in treme poverty and boosting shared pros- the ECA region. It is part of the World Bank perity. Growing economies create jobs, Finance and Markets Global Practice and generate income, produce social benefits is supported financially by Austria’s Federal and attract investments. To function opti- Ministry of Finance. mally, economies and markets need strong and resilient banking systems that are well FinSAC is a regional “knowledge cen- regulated and well supervised. Such sys- ter” focused primarily on three broadly tems contribute to domestic and interna- defined thematic areas: first, macro-pru- tional financial stability, reducing the risk dential supervisory frameworks and crisis and severity of financial crisis and allowing management; second, micro-prudential capital and markets to develop and flour- supervision and regulation including the ish. Ensuring the stability of the financial resolution of non-performing loans; and sector is thus an important component of finally bank recovery and resolution. Advi- the World Bank’s regional strategy. sory and analytical services in these areas are provided mainly through client-specific Following the global financial crisis, a technical assistance assignments. Techni- broad financial sector reform agenda has cal workshops, conferences, and seminars been pursued by international and Euro- are organized regularly and FinSAC also pean Union (EU) institutions, with direct conducts relevant and applied research and indirect impact on most Europe and projects with corresponding outreach ac- Central Asia (ECA) countries, especially EU tivities. member states and candidate or potential candidate countries. One of the most vis- FinSAC committed USD 2,327,082 to its ible initiatives in the region is the Banking activities in 2015, providing technical as- Union. Under its aegis, a number of im- sistance and knowledge sharing to eligi- portant initiatives have been implemented, ble countries including EU candidate and for example strengthened capital regula- potential candidate countries, EU mem- tion, enhanced liquidity requirements and ber states as active non-graduated World measures to prepare for resolution. Client Bank clients, and some EU neighborhood countries seeking to join the EU are harmo- countries. 2015 was a challenging year nizing their national laws and regulations to in terms of financial stability for client meet EU requirements. Implementing new countries. These challenges included the regulations and practices poses challenges re-emergence of the Greek sovereign crisis for our client countries in the ECA region. bringing increased risk to countries whose banking systems have a substantial Greek The Financial Sector Advisory Centre presence; continued geopolitical tensions (FinSAC) was established in Vienna in 2011 in Ukraine; the sharp decline in the oil as a dedicated technical unit delivering price, the Russian ruble and Russian eco- financial sector reform advice and imple- nomic activity in general, putting pressure 7 FinSAC Annual Report 2015 Introduction on the financial systems of many ex-Soviet Union countries. Legacies from the global financial crisis continue to weigh on eco- nomic activity and credit growth in the re- gion. Against this background, there was a spe- cial focus this year on improving crisis pre- paredness and supervisory frameworks. FinSAC continued to work with clients in designing and testing the institutional set-up for national financial stability ar- rangements, with an increasing focus on cyber-preparedness. Another key driver of demand was for input on the implementa- tion and alignment of legal and regulatory frameworks with the EU Banking Recovery and Resolution Directive (BRRD) which has resulted in several important assignments in the area of recovery plans and resolu- tion legal frameworks. Despite significant progress on these, policy issues remain and much work on implementation will be required, particularly in candidate and po- tential candidate countries. FinSAC continues to make significant strides towards achieving meaningful re- sults for every dollar invested. Progress is tracked using a results framework, iden- tifying the positive changes made on the ground and listing clearly identified out- puts and outcomes. The results achieved in 2015 are detailed at Annex II. 8 FinSAC Annual Report 2015 2. The Financial Sector Advisory Center (FinSAC) The Vienna Initiative, a private-public plat- sues in the financial services sector at the form to resolve systemic problems in the regional level in support of financial sector central and southeastern European bank- development at the country level. ing sector, was launched in 2009. Initially it aimed to maintain the presence of western FinSAC provides independent, confiden- banks in the region and has subsequently tial and tailored expertise, technical advice worked to oversee an orderly process of and implementation support to eligible deleveraging and a balanced restructuring client countries. As a dedicated technical of the region’s banking sectors. The Initia- unit it delivers financial sector reform ad- tive brings together relevant public and vice and implementation assistance to cli- private sector stakeholders of EU-based ent countries in the ECA region as part of cross-border banks active in the region. the World Bank Finance and Markets Glob- al Practice. Assistance includes supporting The Financial Sector Advisory Centre the development of legislative and regula- (FinSAC) was established in Vienna in 2011 tory frameworks; encouraging institutional as a follow-up mechanism of the Vienna strengthening; and building the capacity Initiative to assist authorities in the region to local experts through targeted projects. deal with some of the legacy issues from It also helps implement the WB/IMF Fi- the crisis - particularly the resolution of nancial Sector Assessment Program (FSAP) non-performing loans (NPL) and fragment- recommendations and the policy respons- ed crisis management frameworks, and the es agreed in the Vienna Initiative. implementation of new regulatory and su- pervisory initiatives at the international and FinSAC offers global knowledge to help regional level. develop and disseminate good practices that can enrich regional policy debates FinSAC is supported financially by Austria’s and cross-fertilize reforms. It promotes the Federal Ministry of Finance through a Trust application of international benchmarks Fund Agreement signed in April 2011 and and standards with the support of glob- amended in December 2013. This financ- al and regional organizations such as the es the Center and the implementation of Basel Committee, the FSB, the Financial the program, managed and administered Stability Institute, the European Banking through FinSAC, to provide advisory and Authority, and the European Central Bank analytical services on policy, technical, ca- (ECB). FinSAC maintains momentum in cli- pacity building and institution building is- ent countries at the national level through 9 FinSAC Annual Report 2015 The Financial Sector Advisory Center (FinSAC) bilateral meetings, in-country engagement banking sectors. It convenes knowledge (often in partnership with WBG country dissemination events, such as conferences, programs or other IFIs), and provides tech- seminars and workshops, on relevant top- nical advice on specific issues at all levels of ics of regional interest and produces ana- government and industry to reinforce the lytical reports on banking regulatory and importance of financial stability and strong supervisory issues. Expertise on Basel and EU regulations and initiatives Detailed technical assistance in the implementation of regulatory agenda Source of advice on good FinSAC international practices Depth of understanding of country specific institutional development needs and constraints Trustworthy advisors who respect the privileged access to sensitive and confidential information Seasoned practitioners who build and maintain ongoing constructive relationships 10 The Financial Sector Advisory Center (FinSAC) FinSAC Annual Report 2015 FinSAC clients include: • EU candidate and potential candidate countries (Albania, Bosnia and Herzegovina, Kosovo, FYR Macedonia, Montenegro, and Serbia) • EU member states as active non-graduated World Bank clients (Bulgaria, Croatia, Poland, and Romania) • EU neighborhood countries (Belarus, Moldova, Ukraine, Armenia, Azerbaijan, and Georgia) with potential expansion to Central Asia. Belarus Ukraine Moldova Azerbaijan Georgia Armenia Poland Romania Croatia Serbia Bulgaria FYR Macedonia Kosovo Albania Montenegro Bosnia and Herzegovina 11 FinSAC Annual Report 2015 The Regional Environment in 2015 and Strategic Priorities in the Financial Sector 12 FinSAC Annual Report 2015 3. The Regional Environment in 2015 and Strategic Priorities in the Financial Sector 3.1 The European Union A banking system still facing steady progress in strengthening their bal- many challenges ance sheets and building up their resilience There are still lingering domestic challeng- to adverse shocks. Nevertheless, they still es in the euro area, which remain in many face challenges relating to weak economic ways a legacy of the post-2007 bank and growth prospects, legacy issues from the sovereign debt crisis. The euro area bank- financial crisis, and strengthened regulato- ing system continues to be challenged by ry and prudential requirements. low profitability amid a weak economic re- covery. This, combined with a large stock There were many weaknesses in superviso- of non-performing loans in a number of ry structures and institutional arrangements countries, constrains bank’s lending ca- for financial sector supervision and regula- pacity and their ability to build up stronger tion revealed during the crisis. In Europe, capital buffers. Banks will need to further the rapid financial integration of the past adjust their business models to cope with decades was not accompanied by integra- the persistently weak economic conditions, tion of the legal and regulatory framework. combined with an environment of histori- The regulatory response to this worsening cally low interest rates across the maturity situation was weakened by an inadequate spectrum. Beyond these financial vulner- crisis management infrastructure in the EU, abilities, real economy risks still prevail. both in terms of the cooperation between High sovereign and private sector debt in national supervisors and between public several euro countries remains a potential authorities. systemic risk. Debt sustainability challeng- es remain for euro area sovereigns, as well In the absence of a common framework for as for the private sector. crisis management, Member States were faced with a very difficult situation. The The economic recovery across Emerging larger financial institutions especially had Europe, particularly the non-euro areas to react quickly and pragmatically to avoid and EU countries in Central and Eastern a banking failure. These actions were not Europe, is under way with the recent in- coordinated and sometimes led to neg- crease in volatility in global financial mar- ative spillover effects on other Member kets having had only a limited impact on States. Each national supervisor was keen the region, given rather healthy macroeco- to protect its own banking system. When nomic fundamentals. Economic growth is a bank became weak bailouts were the predominantly being driven by robust do- preferred solution, allegedly to preserve mestic demand, as very low inflation sup- financial stability but generally motivated ports the purchasing power of consumers, by the desire to protect and bolster the while investment activity is benefiting from national banking system. The fragmented inflows of EU structural funds. structure of the bank supervision and res- olution function encouraged moral hazard Euro area banks have continued to make and excessive risk-taking by banks. 13 FinSAC Annual Report 2015 The Regional Environment in 2015 and Strategic Priorities in the Financial Sector Fragmentation of the legal and regulatory — the Deposit Guarantee Schemes Direc- framework also prevented an integrated tive which strengthens the protection of approach to systemic risk. These systemic deposits in case of bank failures - most de- weaknesses highlighted the need to cre- positors, including companies that are not ate a more integrated architecture to im- financial institutions, are eligible; and prove financial stability that could bring a uniform and high standard of enforcement, — the Capital Requirements Regulation remove national distortions, and mitigate and Directive (CRR/CRD IV) which sets the buildup of risk concentrations. out important prudential requirements of credit institutions and investment firms. EU-wide legislation now coming on stream Banking union for euro area EU legislation has now been introduced countries which must be applied by all EU Member The EU developed Banking Union to fur- States: ther address these issues - based on four interconnected building blocks: common — the Bank Recovery and Resolution Di- prudential supervision; common resolu- rective (BRRD) which sets out the crisis tion (decision and funding); common pru- management of banks and large invest- dential regulation (Single Rule Book); and ment firms; common deposit insurance. BANKING UNION 1. SINGLE 2. SINGLE 3. HARMONISED SUPERVISORY RESOLUTION DEPOSIT MECHANISM MECHANISM GUARANTEE (SSM) (SRM) SCHEMES (DGS) COMMON RULES (EBA SINGLE RULE BOOK) COMMON SUPERVISORY PRACTICES (SSM SUPERVISORY MANUAL) The Three Pillars of Banking Union 14 The European Union FinSAC Annual Report 2015 Banking union applies only to euro area tion only apply as from 1 January 2016. The members and non-euro area members Single Resolution Board (SRB) has been es- who opt to join. Significant progress has tablished and has started to work on the been made in setting it up. The first pillar elaboration of resolution plans and related of Banking Union, the Single Supervisory tasks. There are plans within the euro area Mechanism (SSM) became operational on for national Deposit Guarantee Schemes 4 November 2014. The second pillar, the (DGS) to move progressively to a co-in- Single Resolution Mechanism (SRM), start- surance scheme and later to a harmonized ed its operations on 1 January 2015, al- European Deposit Insurance Scheme, the though most provisions of the SRM regula- third pillar of Banking Union. SUPERVISION RESTRUCTURING FINANCING Europ n sup rvisor Europ n r structurin Europ n r structurin uthorit uthorit fund EUROPEAN LEVEL • microprud nti l sup rvision •r structurin nd r solution • fin ncin of b nk - issu nc of b nkin lic nc s if th st bilit of th Europ n r structurin nd r solution - on oin sup rvision fin nci l s st m is t risk - rl int rv ntion • fund d b Europ n • m croprud nti l sup rvision b nk l v - id ntific tion of s st m risks • fisc l b ckstop provid d b - sp cific tion of ddition l th ESM c pit l buff rs N tion l sup rvisor N tion l r structurin N tion l d posit uthoriti s uthorit insur nc NATIONAL LEVEL • on oin microprud nti l •r structurin nd r solution • comp ns tion of d positors sup rvision in th cont xt of b ord r of th Europ n in th cont xt Europ n sup rvision uthoriti s - of r solution b Europ n • early intervention in • r structurin nd r solution nd/or n tion l r structurin coordination with European if th st bilit of th n tion l uthoriti s supervisor fin nci l s st m is t risk: in - of n insolv nc proc dur coordin tion with Europ n • funded by by harmoniz d, uthorit risk-b s d insur nc pr mi Structure of the Banking Union Having finalized the Comprehensive As- on a single implementation of the options, sessment in 2014 and the Supervisory Re- and national discretions contained within view and Examination Process, SSM activi- the CRD IV in the euro area. Consultations ties in 2015 were focused on strengthening on a regulation for significant banks con- the capital position of euro area banks (and cerning the prudential treatment of gen- tackling the problem of NPLs). Other key eral options and discretions and guidance priorities include the harmonization of le- for supervisory teams on how to treat indi- gal and regulatory practice, by agreeing vidual cases ended in December 2015. 15 FinSAC Annual Report 2015 The Regional Environment in 2015 and Strategic Priorities in the Financial Sector 3.2 EU candidates, potential candidate countries and neighboring countries Another challenging year for allow early and prompt interventions in financial systems problem banks. This might include: the 2015 was a challenging year in terms of ability to facilitate recapitalization from pri- financial stability for EU candidates, po- vate shareholders when needed; effective tential candidates and neighboring coun- resolution mechanisms of failing institu- tries. In the Balkans, the re-emergence of tions; emergency liquidity assistance; and the Greek sovereign crisis in the first half appropriate depositor protection to main- of 2015 increased systemic risk in countries tain confidence in the financial system. Re- where the banking system has a substan- forms to address these issues, and to align tial Greek presence. The subsidiaries of them more closely with EU, are underway Greek banks operating in southeast Euro- in many countries with different levels of pean countries experienced some deposit progress. FinSAC is helping national gov- outflows in late June, but they remained in ernments understand the implications for the domestic banking system. That said, them of recent EU legislation, for example the central, eastern and southeastern Eu- liquidity arrangements for cross-border ropean financial markets have weathered banking groups contained in the BRRD, well the bouts of market volatility stem- and is advising on the extent to which EU ming from worries about Grexit and falling requirements can be adopted in local leg- commodity prices. Continued geopolitical islation, regulations and practices. tensions in Ukraine, the sharp decline in the oil price, the Russian ruble and Russian The ongoing revisions and reform within economic activity in general put pressure the EU also impact countries with banking on the financial systems of many ex-Soviet systems connected to the EU. EU candi- Union countries. date and potential candidate countries, and countries whose banking systems are Crisis legacies such as private sector closely tied to parent banks in EU countries debt overhangs and high NPLs continue in the ECA region need to address imple- to weigh on economic activity and credit mentation of the new framework which in- growth in the region, although private sec- volves a range of questions and challeng- tor credit growth showed some signs of es. picking up in some Western Balkan coun- tries, especially in the household sector. The advancing reform agenda of European The reduction of NPLs, including through institutions is especially relevant to EU can- loss recognition and the removal of legal, didate countries, which need to adapt their regulatory and tax impediments to debt legal framework to the increasing body of restructuring, remains a priority for FinSAC EU secondary regulation. During 2015, engagement with national authorities. the European Banking Authority (EBA) en- dorsed some 160 technical standards and guidelines developing the Single Rulebook Closer harmonization with the EU and will gradually focus on their implemen- Effective financial sector oversight and tation [and impact on financial markets]. crisis management requires systems that 16 The Regional Environment in 2015 and Strategic Priorities in the Financial Sector FinSAC Annual Report 2015 Improving regional cooperation confidentiality regimes are positively as- In October, the EBA signed a Memoran- sessed by the EBA. It would seem sensible dum of Cooperation with the supervisory for the EBA to take into consideration the authorities of Bosnia and Herzegovina, the special status of other FinSAC client coun- Republic of Srpska, FYR Macedonia, Mon- tries, in terms of the relevance of EU bank- tenegro, Serbia and Albania establishing a ing groups with operations in their jurisdic- framework for cooperation and information tions and their likelihood of accession to exchange, reflecting the systemic role of the EU, when prioritizing the assessment. EU banking groups in the financial systems FinSAC is supporting its client countries to of these countries. Other countries should establish a similar Memorandum of Coop- be able to join at a later stage, once their eration with the European Central Bank. 3.3 FinSAC: responding to developments and changing needs FinSAC’s strategic objective is to be a cen- of different stakeholders where the World ter of excellence for financial sector reform Bank’s convening power can prove to be advice and implementation assistance in an important advantage. ECA countries, recognized by client au- The operational objective is to achieve thorities, IFIs, EU authorities and the in- strengthened financial stability and sustain- ternational community. Its unique com- able deepening of financial intermediation bination of an implementation-oriented in Eastern Europe. Progress is assessed multi-pillar thematic focus and long-term using a strategic results framework which funding structure allows FinSAC to tack- considers FinSAC outputs and activities to- le complex (cross-pillar) issues and follow wards achieving national reforms in client them through to implementation. Many countries (see Annex). projects require the effective cooperation Client-specific technical assistance assignments FinSAC Technical workshops, conferences delivers and seminars Research projects with corresponding outreach activities 17 FinSAC Annual Report 2015 FinSAC activities in 2015 18 FinSAC Annual Report 2015 4. FinSAC activities in 2015 Timely and targeted interven- member states and client country author- tions ities will need to adjust their regulations Policy makers in client countries continue and practices as a consequence. to demonstrate their commitment in imple- menting change and improving regulatory There is ongoing interest in stress-testing, frameworks to help ensure sound financial quantitative impact assessments and pos- systems and allow for economic growth. In sible linkages to macro prudential triggers 2015, FinSAC continued to work with cli- related to credit growth and the resulting ent institutions, such as central banks, pru- activation and depletion of macro pruden- dential supervisors, resolution authorities, tial capital buffers as well as other prescrip- deposit insurers and Ministries of Finance, tions for macro-prudential policy response. to help them keep updated on the latest Regulators are keen to improve and bench- regulatory developments. Globally led ini- mark their practices and welcome FinSAC’s tiatives, as well as EU Directives transpos- advice. Mechanisms for effectively dealing ing these, cover capital requirements, bank with troubled bank assets and nonperform- recovery and resolution, and deposit insur- ing loans continue to be relevant for many ance. These are being implemented by EU client countries. FinSAC is focused on these thematic areas Financial stability, Micro-prudential Recovery and macro-prudential supervision and resolution supervisory regulation including bank frameworks; including non liquidation crisis prevention performing and preparedness loansbank 19 FinSAC Annual Report 2015 FinSAC activities in 2015 Led by client demand there has been some the team in April 2015. The NPL expert left redefinition of FinSAC areas of focus over in October 2015 and a replacement is be- the last year. This is driven by the desire ing recruited. A senior staff member from to target important areas in which FinSAC Headquarters specializing in cyber security is uniquely well placed to assist, or which crisis simulation exercises will join FinSAC are not well served by other providers of in 2016. The Vienna-based team are sup- technical assistance, to make maximum ported by WBG headquarters senior staff impact within FinSAC’s limited resourc- as well as international consultants, as es. The growing, global, importance of needed. cyber-security has, for example, been ac- knowledged in work on crisis prevention and preparedness and will continue to be Benefitting from collaboration developed as a major area of focus. Giv- within the World Bank Group, en the resource constraints and the activi- with the EU and with other IFIs ties of others in the area an earlier FinSAC FinSAC works closely with WBG colleagues focus on improving financial literacy and in Washington DC, Vienna and throughout consumer protection has been scaled back the ECA region. Headquarters based staff significantly, although this is still recog- join FinSAC staff on missions on a regular nized as being key to client countries long- basis, for example for the CSEs where IT term development and assistance can be expertise is required. FinSAC is also an offered on request. active participant and speaker during con- ferences organized by the Vienna based World Bank Centre for Financial Reporting A dedicated team with a wealth Reform (CFRR). Similarly, the CFRR is a reg- of appropriate expertise ular speaker and participant at workshops FinSAC had some staff turnover in 2015, organized by FinSAC. including a change of Coordinator. By De- FinSAC staff contribute to other relevant cember the core FinSAC team consisted of seminars, conferences and events, includ- six dedicated staff whose skills and exper- ing those organized by the Joint Vienna In- tise include economics, law, supervision stitute. FinSAC also has meetings with the and regulation, accountancy and risk man- SSM and regular communications with the agement. A senior bank supervisor joined EBA. 4.1 FinSAC activities in 2015: Pillar 1: Financial stability, macro-prudential frameworks and crisis preparedness Under this pillar FinSAC assists authorities stability arrangements. FinSAC techni- strengthen their financial stability frame- cal assistance related to macropruden- works in both crisis prevention (including tial frameworks included a focus on the macroprudential policy-making) and pre- role, remit and analytical capacity within paredness to actually manage a financial the Financial Stability Departments of cli- crisis. In 2015, FinSAC continued to work ent countries’ central banks. In crisis pre- with clients in designing and testing the paredness, the primary FinSAC technical institutional set-up for national financial assistance product is the financial Crisis 20 FinSAC activities in 2015 FinSAC Annual Report 2015 Simulation Exercise (CSE), including fol- low-up advice on how to reform crisis pre- paredness frameworks. Macro-prudential frameworks were strengthened to varying degrees in 2015, home-host relations im- proved and the level of crisis preparedness increased in many client countries. Crisis Simulation Exercises FinSAC offers CSEs to test information Crisis Simulation Exercises (CSEs): analysis and sharing, decision making, • allow client country authorities home-host cooperation, and communica- to test their crisis preparedness; tions within the central bank and between • identify gaps in their early crisis the other national financial sector author- response and regulatory and le- ities. These exercises bring together the gal frameworks; top level financial authorities of a country • assess decision-making and in- to manage complex scenario-based finan- formation sharing processes; and cial sector distress episodes, offering a unique entry point in designing technical • demonstrate a model for au- thorities to use in regular CSEs assistance interventions in both the macro- of their own. and micro-prudential areas as well as bank resolution. in 2015, it has to be noted that the ones CSEs allow participants to “learn by do- that took place in late 2014 in Macedonia ing”. Key financial-sector decision makers and Armenia proved to be especially well- practice applying existing or proposed timed, given the subsequent escalation of legal and operational arrangements in a contagion risk from Greece and Russia, crisis situation. The exercises are conduct- countries towards which the financial sys- ed in a virtual environment and can be tems of these two client countries are, re- tailored to the needs of the authorities as spectively, particularly exposed to. These the scope can be set up as intra-agency, CSEs and the institutional and procedural inter-agency or a combination. An analysis changes triggered by them allowed the is undertaken following the exercise and a national authorities to become better pre- comprehensive CSE Report, outlining the pared and focused by the time the real main lessons and policy recommendations, crises had reached them. are shared and discussed with the partici- pating authorities. The findings can lead to FinSAC has now completed CSEs in eight follow-up implementation assistance. client countries since its inception. A FinSAC working paper “Financial Crisis Two FinSAC CSEs were undertaken in Simulation Exercises in Europe and Cen- 2015, one in Kosovo in March and an- tral Asia: Lessons Learned” (available on- other in Albania in June (the latter in the line at www.worldbank.org/finsac) analyzes midst of the escalation of the Greek sov- the experience gained and the lessons ereign crisis). Besides the CSEs conducted learned which may be useful for financial 21 FinSAC Annual Report 2015 FinSAC activities in 2015 sector authorities in crisis management A self-assessment questionnaire devel- institution design as well as in shaping fu- oped by FinSAC was sent to 14 central ture simulation exercises. The paper con- banks in the ECA Region. It sought to un- firms that while recovery and resolution derstand current practices and a working planning is still at an early stage in some paper outlined the results and recommen- countries there is growing recognition of dations to prevent and quickly recover its importance. Key areas to be addressed from a potential cyber-attack. Building on by authorities included a need for clearer this, FinSAC organized a Cyber-Prepared- definition of the roles and responsibilities ness Seminar in May attended by 65 cen- for declaring a systemic crisis and effec- tral bankers and bank supervisors from the tively managing the response. The CSEs ECA region, consulting and IT companies, had made clear that no “one size fits all” commercial banks active in Eastern Europe, solution existed, different problems would and local government officials. Presenta- require different solutions. Comprehensive tions highlighted the risks and suggested planning and regular testing was an effec- measures to address them. Governance tive preparation, enabling teams to un- and cyber-preparedness - ensuring attacks derstand the complexities and to develop were quickly identified and appropriately flexibility, and identify weaknesses, in their dealt with to limit contagion and quickly potential responses. resume normal business - were key. Given the potential threat to financial stability, central banks and supervisors had an im- Increasing Cyber Preparedness portant role in ensuring that all stakehold- One important area of increased FinSAC ers were effectively addressing the risks at focus in 2015, which emerged from CSEs, an appropriately senior level. Cyber-pre- was that of cyber-preparedness. Cyber in- paredness would be achieved only by de- cidents (such as malware attacks) are very veloping greater awareness and planning; often contagious and thus, by construc- improving domestic and cross-border co- tion, potentially systemic. Sharing infor- operation and knowledge sharing; and in- mation about incidents is vital to enable vesting in IT systems and training and ed- preventive and mitigation measures to be ucating staff. quickly taken in unaffected institutions, but in practice this is not always a priority. FinSAC also presented the cyber security Cyber issues can too often be viewed as related findings from its crisis simulation the responsibility of IT departments rath- exercises at an annual forum of European er than another operational risk that needs central bank IT department heads in Bel- the attention of banks’ board members grade and at a cyber security workshop in and senior management. Montenegro, organized by the Internation- al Telecommunications Union of the UN. FinSAC has worked to raise awareness of the key coordination role for central banks and prudential supervisors to try and con- Macroprudential and crisis pre- tain and prevent further escalation of a cy- paredness frameworks ber-attack on the financial system. Cyber events have been introduced within CSE’s Ukraine: scenarios. FinSAC has been supporting the estab- 22 FinSAC activities in 2015 FinSAC Annual Report 2015 lishment of a National Financial Stability assistance to enhance its crisis prepared- Council (NFSC) in Ukraine. FinSAC mis- ness framework. Work commenced with an sions in January and February advised on inception mission identifying the legal/reg- the internal procedures and functioning ulatory, institutional and procedural gaps of multi-authority NFSCs and the newly that have to be addressed. Further tech- established body met for the first time in nical assistance is expected to take place April when it adopted internal regulations in 2016 in implementing the proposed in line with FinSAC’s recommendations. changes. FinSAC is also supporting the newly estab- lished Financial Stability Department with- WORLD BANK PUBLICATION in the NBU, to quickly build up its analytical The lessons from FinSAC’s experience capacity. In 2015 a project to implement a with macroprudential frameworks in its liquidity stress testing model in the NBU client countries, accumulated in the past was completed and assistance with further four years during various technical assis- analytical tools are agreed for 2016. tance activities, were summarized in a short policy note titled “Macroprudential Kosovo: Policy-making in ECA Countries”, which is Following the crisis simulation exercise to be published in a World Bank flagship conducted earlier in 2015, the Central Bank publication on Europe and Central Asia Fi- of Kosovo had asked FinSAC for technical nance. 4.2 FinSAC activities in 2015: Pillar 2: Strengthening micro-prudential supervision and regulation The objective of work under this pillar is of inspection reports; to strengthen the safety and soundness of • Helping implement forward looking risk individual supervised entities through for- based supervision; ward-looking supervision and sound regu- lations. FinSAC helps to build knowledge • Encouraging the use of remedial action of changes in international and EU pruden- and enforcement frameworks; tial regulations, and works with national • Developing, or assessing, supervisory authorities towards the establishment and guidance and tools for assessment of bank implementation of appropriate systems of business models or for risk assessments of supervision and sound prudential regula- individual banks. tions in line with international standards and good practice. This can include: Regulation Supervision • Gap analysis of compliance with CRD IV/ CRR requirements; • Assessing supervisory approval process- es, quality assurance and the governance • Quantitative impact assessments and ad- of supervision; vice on action and implementation plans; • Advising on inspection policies and pro- • Guidance on implementation of Pillar II cedures, and the preparation and content framework; 23 FinSAC Annual Report 2015 FinSAC activities in 2015 • Guidance on identifying domestic sys- explained by the interplay of many factors, temically important banks, as required by which generally fall under four categories: CRD IV and Basel III; • Recognition and provisioning of NPLs, • Assisting with the development and cal- resulting in two closely related issues, ibration of the various buffers included in which should be jointly addressed: improve CRD IV and Basel III. valuation of collateral to bring it closer to market value and better align prudential The banking systems of many client coun- and accounting provisions to improve in- tries are dominated by foreign, mostly centives to sell distressed assets, euro area, banks which can pose specific • Voluntary restructuring of loans to viable challenges and risks for host country su- companies, pervisors. FinSAC advises on cross-border banking supervision including: risk assess- • Judicial resolution, which could be hin- ments and supervisory strategies for specif- dered by inadequate insolvency regimes ic risk posed by foreign banks; addressing or lack of court effectiveness, and home-host issues and building safeguards • Secondary market for the sale of dis- to prevent contagion risk. FinSAC can also tressed assets. help assess and address the prudential impact of transitioning to International Fi- Every project and country is different but nancial Reporting Standards (IFRS). This the overall approach to NPLs resolution includes policy advice on timing and safe- projects generally involves a diagnos- guards when moving from deterministic tic stage followed by an implementation regulatory provisioning models to expect- stage. In the diagnostic stage, slicing and ed loss methodologies and an assessment dicing the exposures obtain a detailed of the preconditions for increased reliance analysis of the overall portfolio. This stage on IFRS. also includes a legal analysis of the use and hurdles to voluntary out-of-court re- Non-performing loans structuring, the efficiency of bankruptcy NPLs can be a serious drag on credit sup- and court systems, and an assessment of ply - driving up banks’ funding costs and the consistency of the NPLs definitions interest margins and draining bank profits and provisioning. FinSAC assistance can and capital. While there has been some include benchmarking the existing NPLs improvement in the quality of banks’ loan identification and classification practices portfolios, the share of NPLs in the total against international good practice while loan portfolio in client countries remains taking into account specific country cir- generally high. cumstances and products. FinSAC has several ongoing programs de- EBA technical standards on Non-Perform- signed to address the high NPLs and NPLs ing Exposures and Forbearance can pro- resolution. These programs have some vide common definitions and reporting overlap with micro prudential and recov- templates to allow supervisors to assess ery and resolution work. They have a long- the level of forbearance activities and term horizon and a complex configuration non-performing loans on a comparable ba- due to the multidimensional nature of NPLs sis with the EU. The implementation stage resolution. Indeed, high NPLs can often be includes assisting countries with voluntary 24 FinSAC activities in 2015 FinSAC Annual Report 2015 guidelines for out of court restructuring the ECB. Speakers explained the rele- and the review of legislation. vance and impact of the SSM for FinSAC client countries. Banking groups operating Knowledge sharing events in these countries are now supervised by FinSAC joined representatives from central the SSM, the seminar helped to facilitate banks and supervisory agencies from the understanding of the SSM’s supervisory region in Prague in May for the “Financial stance and improve communication with Stability Institute – Banking Supervisors of the ECB. Issues related to institutional set- Central and Eastern Europe Regional Sem- tings that were addressed included gover- inar on Basel III, the liquidity standards and nance, supervisory board decision making new standardized approach”. FinSAC’s and cooperation between SSM and non- presentation outlined its technical assis- SSM authorities. The EBA explained their tance work as well as the current practices role and functions. Assessment of equiva- and regulations in the area of NPLs. lence of confidentiality regimes, regulation and consolidated supervision were also Tackling the persistent regional econom- discussed. The seminar looked in detail at ic challenge of NPLs was also the overar- SSM requirements and impact in relation ching theme of a FinSAC-hosted Vienna to supervisory methodologies and practic- Initiative meeting on 26 June. The meet- es and horizontal functions including risk ing discussed national progress in imple- analysis, business model classification, via- menting action plans with high-level rep- bility assessment, profitability monitoring; resentatives from the region, including the on-site supervision; and quality assurance. Governor of the Bank of Albania (BoA); the Among many valuable insights gained Governor of the Central Bank of Macedo- from these discussions was the importance nia; the Deputy Governor of the Croatian of integrated supervisory teams as the cor- National Bank, and senior representatives nerstone for effective supervision of signifi- of the Central Bank of Hungary, the Na- cant institutions. There was also discussion tional Bank of Romania and of the Serbian of the role of the external auditor in bank Ministry of Finance and National Bank of supervision and a presentation on research Serbia. Workshops, including in Albania, into the relationship between banking su- Croatia, Hungary and Serbia, had allowed pervisors and external auditors. the IFIs to work with local authorities, banks and potential investors to analyze individ- FinSAC contributed to the discussion on ual problems and develop responses. The the development of effective superviso- representatives underlined the importance ry architecture for Belarus, in the light of of linking the emerging European NPL res- the Basel Core Principles and the financial olution efforts to those in the euro area, sector assessment program for Belarus. A given the strong regional presence of euro one day roundtable in Minsk on Integrated area-based parent banks. Financial Supervision was organized with the Central Bank of Belarus on June 26 to FinSAC organized a seminar on the EU discuss different models and review inter- SSM in Frankfurt on November 3-4, 2015 national experience, including the cases with senior representatives of central of the Dutch National Bank, the Central banks and regulatory agencies from thir- Bank of Armenia and the National Bank of teen countries in the ECA region, IFIs and Ukraine. 25 FinSAC Annual Report 2015 FinSAC activities in 2015 Technical assistance to national Kosovo: authorities in 2015 FinSAC agreed to the Central Bank of Kosovo’s request for a review of its NPL Albania: definitions and NPL trends, triggered by FinSAC continued to provide support to the observation that NPLs in Kosovo re- BoA on NPL resolution in 2015. main low compared to the rest of the re- gion and had recently started to decrease. FinSAC also participated in the Third Alba- A desk review of the relevant NPL and pro- nia Financial Forum in Tirana on 25 June visioning regulations, inspection reports 2015, sponsored by the Vienna Initiative, and bank data will be followed by a num- which focused on NPL resolution. FINSAC ber of onsite missions in 2016. An analyt- provided inputs on a best practice legal ical report on the regulation and practice framework for NPL resolution in Emerging in Kosovo vis-à-vis international standards Europe. The meeting endorsed the idea of concerning NPLs, including those issued regular public monitoring on progress in by the EBA and other institutions, will be NPL resolution. drafted and discussed with the Kosovo au- thorities. It will provide a sound basis for Croatia: the optimization of the recognition and At the request of the Ministry of Justice, provisioning frameworks for NPLs in Koso- FinSAC produced a joint report with the vo, thus contributing to a comprehensive European Bank for Reconstruction and De- approach to the NPL issue. velopment (EBRD) on proposed amend- ments to the Croatian “Personal Insolven- Serbia: cy Law”. Most key recommendations were FinSAC has continued to assist NBS with included in the draft law, and are expected the implementation of recommendations to be adopted in 2016. contained in the 2014 review of the effec- tiveness of onsite supervision practices. Following this successful cooperation, the Croatian authorities requested support FinSAC finalized technical assistance in and technical assistance in the area of NPL the area of Anti Money Laundering (AML) resolution. A diagnostic report, prepared supervision practices started in 2014. Pol- by a joint FinSAC-EBRD team, was deliv- icies, procedures and supervision manuals ered to the Croatian authorities. It identi- for AML examination and their implemen- fied key impediments to NPL resolution in tation were reviewed and discussed with Croatia, and proposes a series of concrete bank supervision staff, on-site examiners, measures to address the NPL coordination risk managers and other stakeholders. A problems. report addressed the procedures for de- termining the scope and frequency of in- Other ongoing initiatives include support spections, the planning of inspections, and capacity-building for judges and in- the preparation and content of Inspection solvency professionals; and further review Reports, and the onsite inspection proce- of the insolvency law, including the area of dures. Even though AML supervision is not personal insolvency. a core FinSAC area, this assignment was performed as the AML supervisory process had many similarities to the prudential su- 26 FinSAC activities in 2015 FinSAC Annual Report 2015 pervision process. drafting new reporting forms, establishing a separate related parties supervision unit, FinSAC and NBS organized a conference supporting a special related parties review on NPL Resolution in Belgrade in April exercise and analyzing the bank restructur- 2015, which was attended by over 200 ing plans to unwind above the limits relat- participants representing the Serbian au- ed party exposures. thorities, International Financial Institu- tions (WBG, International Monetary Fund FinSAC has been collaborating with the (IMF), EBRD, and the International Finance NBU and the EBRD on a draft financial re- Corporation (IFC)), local and internation- structuring law to provide a framework for al banks, private sector actors, and inter- greater cooperation between creditors and national investors. The conference was debtors in the out-of-court resolution and opened by the Governor of the NBS and restructuring of large, complex multi-cred- the Serbian Minister of Finance. itor NPLs on the voluntary basis. The draft law, which has the support of the NBU, the Following the conference, the World Bank Ministry of Finance, the Ministry of Justice, was asked by the Ministry of Finance to and the Bankers’ Association, has been provide support in drafting an inter-agency completed and submitted to parliament for NPL Resolution Action Plan bringing to- approval. The proposed framework aims to gether initiatives by the NBS and the Min- form a set of binding agreements between istries of Finance, Justice and Economy, to commercial banks defining their mode better coordinate efforts on NPL resolution of collaboration in cases of multi-creditor in Serbia. A matrix of priorities for NPL res- workouts. The Ukrainian authorities and olution was developed and an inter-agen- bankers’ association have indicated the cy working group created to monitor and need for additional technical assistance coordinate NPL resolution efforts. The ac- with the implementation of the law during tion plan was adopted by the Serbian gov- 2015-2016. ernment in September 2015 and its imple- mentation is being guided by the working To shape FinSAC’s long-term technical group. assistance engagement in the field of mi- cro-prudential supervision and to support Ukraine: the NBU in the process of adoption of A new regulatory and supervisory frame- comprehensive internal supervisory reform work adopted by the NBU governing the agenda, FinSAC launched an assessment transaction with bank related parties, re- of the current stance of regulatory and su- flected extensive advice and technical pervisory framework in 2015. This aims to support from FinSAC and the IMF. With identify the gaps with the Basel Core Prin- the help of the FinSAC team, relevant leg- ciples and good international practice and islative amendments in the banking legis- will also cover a gap analysis with the CRD lation were introduced and the National IV/CRR framework, which country authori- Bank were given new supervisory powers ties agreed to converge to after signing the to presume relations with the bank borrow- Association Agreement with the EU. The ers. This was followed with technical assis- results of the exercise will contribute to the tance to enhance the regulatory frame- design a comprehensive reform roadmap work, FinSAC continue to be involved in for the next few years, which will be sup- 27 FinSAC Annual Report 2015 FinSAC activities in 2015 ported by extensive technical assistance ensure the provision of harmonized techni- by FinSAC in 2016-2017. Other IFI donors cal assistance and avoid any overlaps. will be consulted about the roadmap to 4.3 FinSAC activities in 2015: Pillar 3: Addressing bank recovery and resolution including bank liquidation Defining how to deal with failing banks has FinSAC is working with authorities in cli- been one of the most important regulatory ent countries to strengthen their national areas emerging from the 2007/08 global bank recovery and resolution frameworks, financial crisis. The “Key Attributes of Ef- including Recovery and Resolution Plans fective Resolution Regimes for Financial (RRPs), and adopt modern resolution tools Institutions” issued by the Financial Stabil- to deal with struggling institutions in line ity Board in 2011 provide the international with international best practice. Regulato- standard for resolution regimes for finan- ry convergence and alignment with the ac- cial institutions and are key to addressing quis communautaire is of special relevance the moral hazard and systemic risks asso- for EU-accession countries. Under the har- ciated with institutions that are “too big to monized framework of the BRRD, banks are fail”. required to prepare recovery plans to over- come financial distress. Authorities have In Europe, the BRRD provides the new legal powers to intervene in the operations of basis for bank recovery and resolution and banks to avoid them failing. If they do face is one of the cornerstones, and a potential failure, authorities have comprehensive game changer, for creating a more stable powers and tools, including expropriation, and fairer banking system that serves the to restructure them and to resolve failed economy at large. Member States had to banks in a way that preserves their critical transpose it into national law by 1 January functions and avoids taxpayers having to 2015 (they were given discretion to post- bail them out. The Directive also sets out pone the implementation of bail-in until how home and host supervisory and reso- 1 January 2016). The fact that a number lution authorities of banking groups should of Member States were delayed in their cooperate in all stages of cross-border res- national transposition shows that, despite olution, from resolution planning to reso- the formal consensus reached, political lution itself, including the establishment of reluctance and/or technical uncertainties resolution colleges. remain. Meanwhile the first (pre-) BRRD resolution cases are being challenged in Providing comprehensive understandings the Courts. FinSAC has been responding and advice on the BRRD is proving chal- to demand from non EU Member States to lenging as many key technical details of understand how the new legislation will af- how the new system will work in practice fect them. are still open. Though already more than a year old, the BRRD introduces some Adopting and adapting EU recov- challenging new concepts likely to affect ery and resolution legislation shareholders’ and creditors’ fundamental 28 FinSAC activities in 2015 FinSAC Annual Report 2015 rights, and the adoption of recovery and of England guidance. resolution plans, the effects of which will largely depend on the implementation FinSAC is developing a methodology to phases. Also, EBA standards specifying facilitate the comprehensive assessment and giving “flesh” to the basic legal text of the completeness, quality and feasibility of the BRRD have only recently been ad- of recovery plans against international and opted. The SRB, dealing with resolution of EU standards. Intended originally for the banks within the euro zone, only becomes assessment of Albanian systemic banks’ re- operational in January 2016 and is still in covery plans, it could be applied—with the the drafting phase of resolution plans and necessary customization—in other coun- minimum requirements for own funds and tries of the region. eligible liabilities (MREL) for the banks un- der its competence. Regarding the import- Bail-in ant issue of valuation, deciding the amount The key challenge is to adapt internation- of losses and the concrete adoption of res- al good practice to the economic circum- olution tools, a common understanding on stances and the needs and possibilities the valuation methodology used for reso- available in emerging markets. The fairly lution purposes still has to be defined at complex process of defining loss absorb- international and European level. ing capacity (MREL) for each individual bank, on which the real value and strength Many client countries will need to adopt of bail-in will depend, is still under develop- or adapt legislation to take account of the ment at international level. For authorities requirements of the BRRD. FinSAC is not in emerging markets with less developed advising wholesale transposition of the financial markets and a system largely de- legislation as enacted in the EU. Instead pendent on foreign banks, similar albe- it suggests tailored adaptations which re- it different and additional issues have to flect national economic circumstances and be taken into account when defining loss local financial markets. FinSAC developed absorbing capacity including from a host a “BRRD gap analysis matrix” to better as- perspective. In small countries with less sist authorities to understand and possibly developed capital markets it will be diffi- adapt their national frameworks in light cult to issue debt and to diversify and limit of the BRRD provisions. This matrix also contagion risk. For subsidiaries of foreign includes a more technical “Recovery-res- banks, reliance on internal loss absorbing olution powers matrix: what powers are capacity coming from the parent might be available upon which triggering event” to a solution. Whatever option is chosen, in a be used as a basis for the design of a new banking system with balance sheets largely resolution framework. This allows gaps be- funded by retail depositors the challenge tween the BRRD and current national reso- is to evolve to balance sheets that make it lution system to be concretely defined and easier to impose losses. can help guide the key policy decisions on alignment and possible divergences from Another factor that authorities should con- the BRRD. FinSAC also provided a matrix sider when framing a new system for bail- as a template to assist supervisors in the in are consumer protection and financial assessment of banks’ recovery plans, tak- literacy policies. The minimum issuance of ing into account EBA standards and Bank junior debt forced by the BRRD’s 8% prior 29 FinSAC Annual Report 2015 FinSAC activities in 2015 burden sharing (MREL) requires informed FinSAC co-organized a session on “EU and investors and depositors. Otherwise retail US Bank Resolution Systems” at a World clients not fully aware of the risks associat- Bank learning event in October in Wash- ed with bond-ownership might cause unex- ington DC which aimed to explain and pected contagion risks. FinSAC is working compare the bank resolution systems set with client countries to understand these up in the United States and the EU in the requirements and their likely impact, both wake of the financial crisis. High level rep- within the EU and more widely. resentatives from the US Federal Deposit Insurance Corporation Office of Complex Knowledge sharing events Financial Institutions and the SRB’s Policy A two-day workshop “Recovery and Reso- Coordination and International Relations lution Planning: From Experts to Experts” Unit gave insights into their respective was held in April in Vienna. More than 40 resolution frameworks and discussed with senior experts from client countries were participants how to devise strategies to joined by colleagues from the Austrian au- tackle problem banks in smaller emerging thorities, the European Single Resolution market economies. Board, ECB, EBA, Bundesbank, Dutch Cen- tral bank, FMA, the Polish Bank Guarantee FinSAC joined a World Bank/Polish Bank Fund, E&Y and KPMG to discuss these key Guarantee Fund Seminar in February on themes. The workshop examined how to “Challenges for European Deposit Insur- assess and establish credible and feasible ance Systems: Funding, Investment Prac- recovery and resolution strategies for indi- tices and Reimbursement” in Warsaw, vidual financial institutions; gave insights Poland. Specialists from 16 countries, in- into the new EU resolution framework un- cluding the United Kingdom, Romania, der the BRRD/SRM; and answered ques- Croatia, Bulgaria, Finland, Hungary and tions about the implementation of recov- Poland, the European Commission and ery and resolution planning. the EBA shared their knowledge and ex- perience of deposit insurance systems, A panel on “Independent valuation under especially funding, investment and payout the BRRD resolution framework: practical procedures. questions and implementation difficulties” was organized for a World Bank Centre for BRRD Guide Financial Reporting Reform conference for FinSAC began preparing a publication leading practitioners in the area of banking for supervisory and resolution authori- supervision and the role of auditors hosted ties in the European and Central Asia re- at the Austrian National Bank in Septem- gion giving a comprehensive overview of ber. The panel chaired by FinSAC brought the BRRD tools and powers for resolving together discussants from the Single Reso- failing banks. This Guide, expected to be lution Board, EBA, the International Valu- published in the second half of 2016, will ation Standards Council, the International outline the Directive’s most important prin- Accounting Standards Board, as well as ciples, briefly analyze possible scenarios, bankers and auditors to discuss topical and explain how practical implementation challenges in identifying a methodology could work. for resolution purposes. 30 FinSAC activities in 2015 FinSAC Annual Report 2015 Technical assistance to national work was submitted to the BoA in early authorities in 2015 November. By the end of the year a first version of the draft resolution law, drawn Albania: up with the help of an external law firm, FinSAC supported the resolution authori- was discussed internally by a special work- ties to meet the conditions of the Develop- ing group set-up within the central bank. ment Policy Loan (DPL), identifying gaps in the current banking resolution framework Also as part of the DPL II, FinSAC worked and issues in need of amending legislation. closely during 2015 with the Albanian au- FinSAC submitted and discussed a gap thorities to assess recovery plans submitted analysis matrix on the BRRD with the BoA by Albanian systemic banks, as required by to form a comprehensive assessment of a Decision of the BoA - becoming the first the legal framework for dealing with trou- country in the region to apply the method- bled banks. A comparison between current ology for the assessment of recovery plans. resolution powers and those provided un- A FinSAC team delivered the methodology der the BRRD helped to identify necessary to the BoA, which was explained in great- changes. FinSAC has also assisted with the er detail during a hands-on seminar for drafting of legislative texts. bank supervisors. The final assessment of the recovery plans was completed by the Partly motivated by the lessons from the Supervision Department of the BoA, and financial crisis simulation exercise conduct- endorsed by the Board, then incorporated ed by FinSAC, the Albanian authorities in the supervisory dialogue with banks. were encouraged to take more decisive action on crisis preparedness in order to in- Bosnia Herzegovina: tervene sufficiently early and timely to con- Following the FSAP, a Technical Note for tain contagion in the event of distress in the Deposit insurance Agency (DIA) on the banking system, as well as addressing “The Use of Deposit Guarantee Schemes legal risks for the BoA when taking resolu- for Resolution Purposes in Bosnia and Her- tion actions on failing institutions. It was zegovina” was prepared by FinSAC and agreed that adoption of a new law on bank submitted to the client in October 2015. resolution will be a conditionality under the The Note analyses the use of DGS financ- DPL II. ing for resolution purposes as provided for under the BRRD and, taking into account In October 2015, a BRRD workshop was the current institutional and economic con- co-hosted by the BoA and FinSAC. The text in BiH, proposes possible divergences workshop began an open dialogue with and a more active involvement of the DIA. key stakeholders on preparation of a new The Note seeks to provide analytical and resolution law for banks for which simple conceptual policy guidance focusing on liquidation is not an option. Speakers from the institutional set up of the resolution the European Commission, the Single Res- fund under the management of the DIA olution Board and FinSAC explained the and the scope to draw on the deposit in- philosophy and rationale of the BRRD and surance fund (DIF) for resolution purposes. its application by third countries. A fol- Further engagement to improve the oper- low-up note on key policy decisions for the ation and compliance of the DIA with the establishment of a new resolution frame- International Association of Deposit Insur- 31 FinSAC Annual Report 2015 FinSAC activities in 2015 ers (IADI) Principles is ongoing. as specialist technical assistance on social welfare payments. Implementation of reform will depend on the outcome of negotiations on the estab- Serbia: lishment of a new resolution framework. Following the reforms supported by a WB Taking part in a WBG financial sector mis- funded DIA lending project, FinSAc pro- sion in early November, FinSAC submitted vided TA to the government on the effects technical comments on draft new banking of the newly introduced resolution frame- laws drawn up by the authorities. work on the DIA’s mandate and its role in the new process especially its involvement Georgia: in the least-cost test and required informa- FinSAC is supporting the Georgian authori- tion exchanges. FinSAC indicated its pre- ties’ efforts to establish a deposit insurance paredness to provide technical assistance system (DIS) to increase public confidence, in the form of case studies illustrating the protect small depositors and enhance the application of the least-cost test as well as overall safety net, in line with the EU Direc- on the triggering of the use of DIF money tives and other international standards as under resolution. agreed with the EC. Analytical and adviso- ry support to: (i) finalize and receive Gov- Ukraine: ernment approval of the DIS concept, and FinSAC continued supporting the NBU in (ii) develop and enact a modern DIS legal establishing an effective recovery and res- framework (Law on Deposit Insurance and olution planning framework. The draft reg- accompanying legislation) was provided. ulations on recovery planning were exten- sively discussed with NBU to adapt them As part of awareness building activities, to local circumstances. FinSAC will contin- FinSAC organized a three-day Deposit In- ue to provide technical assistance as the surance Workshop jointly with the Ministry NBU begins the analysis and assessment of of Finance in August 2015. The workshop recovery plans. included extensive discussions with partic- ipants on the role, elements and EU legal provisions for the DIS. Moldova: A World Bank financial sector mission, funded by FinSAC, visited Moldova in May to assess the authorities’ plans and prepa- rations to resolve three banks under spe- cial administration; and to follow up on the results of the Kroll forensic scoping report to identify further action and avenues of support to the Moldova authorities regard- ing the loss and recovery of approximate- ly USD 1 billion of deposits. The National Bank of Moldova is receiving further assis- tance on the transfer of deposits, as well 32 FinSAC activities in 2015 FinSAC Annual Report 2015 33 FinSAC Annual Report 2015 Focus for 2016 34 FinSAC Annual Report 2015 5. Focus for 2016 FinSAC is consolidating its position as a Client specific technical assis- niche player in technical assistance and a tance assignments “center of excellence” with a focused man- FinSAC has a growing pipeline of specific date to maximize impact within its limited technical assistance requests for 2016 and scale. The Center’s work continues to be more will be defined over the course of the well received by client authorities. Work year as part of on-going policy dialogue will continue in 2016 to help develop re- with client countries. silient financial systems. Implementation of financial sector reform internationally In Albania, the adoption of the new bank and by the EU will continue to offer op- resolution law is expected for June 2016 portunities for FinSAC to assist both EU and authorities have indicated their inter- and non-EU member countries incorporate est and need for FinSAC assistance in the new requirements into national legislation, implementing phase. Especially on the drafting secondary legislation and regula- adoption of by-laws e.g. for recovery and tions. resolution planning but also on more prac- tical implementing aspects such as legal Building on our CSE experience techniques for bail-in, the drawing up of to offer niche assistance resolution plans and valuation for resolu- The World Bank has been running crisis tion purposes. simulation exercises (CSEs) since 2008, in- cluding national exercises in the following FinSAC will support the management of the FinSAC countries: Albania, Armenia, Cro- National Bank of the Republic of Belarus atia, Macedonia, Moldova, Montenegro, (NBRB) to develop terms of reference for an and Romania which have provided valu- Asset Quality Review and conduct Forward able insights for client authorities. While Looking Scenario Analysis of banks’ bal- cyber incidents have been present in sev- ance sheets, to assess the impact of dete- eral of the corresponding scenarios as trig- rioration in the macro environment and the gers of banking problems, those exercises reduction of government directed lending have been oriented towards the typical on the banks’ capital position. The findings decisions that financial sector authorities will be used to guide further technical as- need to take. Given the mounting threat to sistance aimed at future regulatory reforms, financial stability derived from manmade strengthening bank supervisory practices or accidental cyber incidents, FinSAC is and capacity building. now developing new Cyber Crisis Simula- tion Exercises (CCSEs) to focus attention Support for the Georgian authorities’ intro- on this area and provide a safe environ- duction of a DIS, to increase public con- ment to practice management of this type fidence, protect small depositors and en- of threat. hance the overall safety net in line with the EU Directives and other international stan- dards as agreed with the EU, will continue 35 FinSAC Annual Report 2015 Focus for 2016 in 2016. The focus will be on the establish- framework. This will be followed by de- ment of a public deposit insurance author- tailed consultations, including with other ity (agency or a fund) and operationalizing IFI donors, on the design of a comprehen- the DIS. sive reform roadmap and the requirements for technical assistance. In Kosovo, FinSAC will continue to work with the central bank and the deposit in- In Bosnia and Herzegovina (BiH), the adop- surance agency to strengthen the crisis tion of the new Banking Laws is expected preparedness framework and work out a in mid-2016 and authorities have indicat- detailed financial crisis contingency plan. ed their interest and need for FinSAC as- sistance in the implementing phase of the Technical assistance will be given to the foreseen bank resolution framework in- National Bank of the Republic of Macedo- cluding on the establishment of resolution nia related to the architecture and control units under the Banking Agencies as well as framework of banking supervision and the the adoption of respective by-laws. More- assessment and development of supervi- over, in line with the respective strategies sory methodologies. for Basel II/III implementation and subse- quent operational work plans of the Bank- In Montenegro, assistance will be provided ing Agencies, authorities are interested in to strengthen the institutional capacity of FinSAC support in establishing common the Montenegrin Deposit Protection Fund procedures and systems for the superviso- towards meeting its deposit insurance and ry review and evaluation processes as well enhanced bank resolution obligations un- as adoption of respective instructions and der the bank resolution regime and serve guidelines. The authorities also confirmed as a core part of the financial sector safe- interest in a “bottom - up” crisis simulation ty-net. exercise for the whole financial safety-net in BiH. In Serbia, technical assistance to the De- posit insurance Agency in the form of case Research projects with corre- studies will illustrate the application of the sponding outreach activities least-cost test and the triggering of use of Three important research pieces are cur- DIF money under resolution. rently under development; a guide to the BRRD, a working paper on policy options In Ukraine, Technical assistance to the Fi- for small host supervisors, and stocktaking nancial Stability Department of the NBU on exercise on financial sector governance. macroprudential analytical tools will con- tinue in 2016, focusing on the construction BRRD Guide of a Financial Stress Index, an Early Warn- The FinSAC BRRD Guide will provide su- ing System and a Financial Conditions In- pervisory and resolution authorities in the dex. FinSAC will finalize the assessment of European and Central Asia region with a the current bank supervisory framework at comprehensive overview of the BRRD tools the NBU against Basel Core Principles of and powers for resolving failing banks. The effective banking supervision, and the gap guide aims to outline the most important analysis of the current bank supervisory principles, including flow charts illustrating framework with the European CRDIV/CRR complicated decision making processes, 36 Focus for 2016 FinSAC Annual Report 2015 and provide short analysis and comment, these functions. The findings will be used explaining how practical implementation to identify good practices and ECA-specif- works. The Guide will be published, and ic considerations relevant for the choice of launched at a seminar, planned for Fall the appropriate governance structure for 2016. financial sector policy frameworks to be published later in the year. Policy options for “small host” supervisors MID-TERM REVIEW FinSAC will publish a paper detailing pol- In accordance with the Trust Fund Agree- icy options for small host supervisors in ment a mid-term review of FinSAC will 2016. These authorities face specific risks, take place in the first quarter of 2016, to only some of which are addressed by safe- carry out an independent evaluation of the guards built into international standards FinSAC program between 2014 and early and EU legislation on supervisory coop- 2016. The evaluation is not an audit and eration. The paper will analyze the policy will focus on activities during that period options for these small hosts in regulation, and the strategic direction of the FinSAC supervision (including recovery) and reso- program. The effectiveness, efficiency, rel- lution encompassing EU and non-EU coun- evance, impact and the lessons learnt will tries, including supervisory and resolution be assessed by an independent evaluator. cooperation between European banks su- The outcome of the evaluation will allow pervised by the SSM and third countries. the donor and the World Bank to shape the future strategic direction of FinSAC. Stocktake of financial sector governance FinSAC receives frequent questions from client countries on how others organize the governance of their financial sector regula- tory and supervisory functions. A research project will survey the current governance and oversight structures of financial sector policies/practices in ECA countries and other benchmarking countries to investi- gate how authorities organize macro pru- dential and micro prudential supervision and regulation, bank recovery and reso- lution, crisis management and consumer protection functions, and policy issues rel- evant to the governance and oversight of 37 FinSAC Annual Report 2015 Annexes 38 FinSAC Annual Report 2015 6. Annexes Financial information (disbursement of trust fund expenditure/graphics) Detailed results framework 39 FinSAC Annual Report 2015 Annexes 40 FinSAC Annual Report 2015 Annex I: Financial information Disbursement of trust fund expenditure/graphics As of March 31, 2016 Contributions paid-in € 10,177,200 Contributions to be received € 3,000,000 Investment Income € 109,654 Administration Fee € 508,860 Disbursements € 7,494,255 Fund Balance € 2,283,739 (incl. commitments) Disbursements 2013 Disbursements 2014 Disbursements 2015 Q1 (Jan/Feb/March) € 503,295.81 € 295,835.78 € 638,483.07 Q2 (April/May/June) € 346,790.83 € 585,281.57 € 659,241.68 Q3 (July/Aug/Sept) € 343,022.86 € 301,967.77 € 323,288.19 Q4 (Oct/Nov/Dec) € 649,639.78 € 499,192.57 € 613,310.00 Total € 1,842,749 € 1,682,278 € 2,234,323 € 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) Disbursements 2013 Disbursements 2014 Disbursements 2015 41 FinSAC Annual Report 2015 Annexes Disbursement by categories (for the period of 1 January 2015 – 31 December 2015) EURO % Staff costs1 1,400,014 62.7 Consultant fees2 345,652 15.5 Travel expenses 3 283,895 12.7 Publications & Workshops 58,318 2.6 Associated overhead costs 4 21,443 1,0 TF Admin fee 125,000 5.6 Total 2,234,323 100.00 Publications Travel & workshop expenses 3% 13% TF Admin fee 5% Consultant fees 15% Associated overhead costs 1% Staff costs 63% 1 Incl. FinSAC Coordinator, five TTLs and one program assistant 2 Incl. Short Term consultants and consultant firms 3 Incl. travel expenses of both staff and consultants/visitors 4 Incl. office maintenance, utilities, cleaning services, office supplies, depreciation etc. 42 Annex I: Financial information FinSAC Annual Report 2015 Disbursement by activities (for the period of 1 January 2015 – 31 December 2015) EURO % Administrative cost 5 740,370 33.1 Bank Resolution 251,329 11.2 Macroprudential Framework 302,002 13.5 Microprudential Framework 356,529 16.0 Crisis Simulation 253,175 11.3 NPL 330,918 15.0 Total 2,234,323 100.00 NPL 15% Administrative cost 33% Macroprudential Framework 14% Crisis Simulation 11% Bank Resolution 11% Microprudential Framework 16% 5 Incl. cost of all types of categories not related to the particular TF activities and all general expenses: con- tracts of designer, corrector, staff cost of program assistant/back up, travel cost for staff for training, consul- tants’ travel, translations services, utilities, office maintenance, office supplies, depreciation, publications and other printing services, representation cost, coordination and some business development activities. 43 FinSAC Annual Report 2015 Annexes 44 FinSAC Annual Report 2015 Annex II: Results Framework Table 45 46 MacRO-PRUDENTIAL FRAMEWORK FinSAC ACTIVITIES / FinSAC OUTPUTS FINSAC OUTPUT EXPECTED CLIENT POTENTIAL CLIENT INPUTS INDICATORS OUTCOMES OUTCOME INDICATORS Ukraine: Advice to the Ukrainian Sharing best practice with Legislation (presidential Enhanced capacity Meeting frequency establishing authorities on governance the NBU regarding the decree) on NFSC for macro-prudential of NFSC. Substance/ a National arrangements for the internal procedures of policymaking and importance of items on FinSAC Annual Report 2015 Financial Stability NFSC. Assistance to the multi-authority FSCs Internal procedures for strengthened crisis agenda. NBU Financial Stability NFSC adopted preparedness due to Council Department on how to better coordination perform effectively the Regular meetings of the among stakeholder role of the Secretariat for NFSC commence authorities the NFSC. Ukraine Macro- Work together with Model description, Successful adaptation Enhanced analytical Usage of new analytical prudential staff from the newly presentation for NBU of analytical tools to the capacity of the macro- tools in internal reports Capacity Building: established Financial management client’s environment and prudential authority, and in Financial Stability Liquidity stress Stability Department needs; reflected in client via new regular internal Review. of the National Bank of Excel files. satisfaction. reports on systemic risk testing Ukraine (NBU) to build launched within the a liquidity stress-testing Training of NBU Financial central bank, based on model, completing the Stability Department staff the output of newly built NBU’s stress testing on operating the model. analytical models. framework. Annexes CRISIS SIMULATION EXERCISES (CSEs) FinSAC ACTIVITIES / FinSAC OUTPUTS FINSAC OUTPUT EXPECTED CLIENT POTENTIAL CLIENT INPUTS INDICATORS OUTCOMES OUTCOME INDICATORS Kosovo CSE Conduct CSE with senior Next-day presentation Turnout: 30+ participants, Strengthened crisis Better cooperation policymakers to participants about including CB Deputy preparedness, better between authorities in Exercise outcome/lessons Governor, senior coordination among the process of using representatives from the stakeholder authorities. public funds for bank CSE Report Ministry of Finance, Head liquidity assistance/bank Annex II: Results Framework Table of Deposit Insurance. resolution. Endorsement of CSE Report by main client (CB). Albania CSE Conduct CSE with senior Next-day presentation Turnout: 30+ participants, Strengthened crisis Client better prepared policymakers to participants about including CB Deputy preparedness, better to manage renewed Exercise outcome/lessons Governor, Deputy coordination among contagion from Greece. Minister of Finance, Head stakeholder authorities. CSE Report of Deposit Insurance, Deputy Head of securities regulator. Endorsement of CSE Report by main client (CB). 47 FinSAC Annual Report 2015 48 MICRO-PRUDENTIAL FRAMEWORK FinSAC ACTIVITIES / FinSAC OUTPUTS FINSAC OUTPUT EXPECTED CLIENT POTENTIAL CLIENT INPUTS INDICATORS OUTCOMES OUTCOME INDICATORS Ukraine: Review of current Draft package of Proposals discussed, Performing more Improved level of regulatory framework on proposed legislative agreed and adopted by effective, risk based compliance with Basel New supervisory bank related parties and changes, NBU board. and efficient banking Core Principles for FinSAC Annual Report 2015 benchmarking it to best supervision. Effective Banking framework Draft new regulation international practice. Supervision”. governing the defining the criteria for Better use of scarce transactions Support NBU in designing identifying the related supervisory resources. More precise and with related legislative amendments parties, comprehensive Improved governance, parties and NBU were given new assessment of risks across Proposals on how to accountability and risk supervisory powers to the banking system. structure the separate management in financial presume relations with the unit for the supervision of institutions. A lower incidence of bank borrowers. related parties, failure of supervised Better supervised and Support NBU in institutions due to earlier Draft ToR and reporting more resilient banking designing new regulatory and more effective formats for Related Party system. framework. detection of concentration review exercise, in the banks’ portfolios. Support in establishing a Participation as an advisor separate related parties in the NBU steering supervision unit at NBU, committee meetings supporting a special created to approve the related parties review results of the review. exercise and analyzing the bank restructuring plans to unwind above the limits related party exposures. Annexes MICRO-PRUDENTIAL FRAMEWORK FinSAC ACTIVITIES / FinSAC OUTPUTS FINSAC OUTPUT EXPECTED CLIENT POTENTIAL CLIENT INPUTS INDICATORS OUTCOMES OUTCOME INDICATORS Ukraine: Support NBU in the Coordination of technical Proposals discussed Performing more Improved level of process of design assistance with other IFIs. and agreed with NBU effective, risk based compliance with Basel Reform of of comprehensive management. and efficient banking Core Principles for The report with the Banking supervisory reform supervision. Effective Banking recommendation and agenda. Supervision”. Annex II: Results Framework Table Supervision supervisory reform Better use of scarce framework Initiate the assessment roadmap. supervisory resources. More precise and of the current stance of Improved governance, comprehensive regulatory and supervisory accountability and risk assessment of risks across framework to identify management in financial the banking system. the gaps with the Basel institutions. A lower incidence of Core Principles and good Better supervised and failure of supervised international practice. more resilient banking institutions due to earlier The assessment to be system. and more effective finalized in 2016 and detection of risks in the include a gap analysis banks. with the CRD IV/CRR framework. Serbia: Review and benchmarking Supplementary report on Proposals discussed and Performing more Improved level of of onsite examination AML/CFT supervision. endorsed by the Governor effective, risk based and compliance with Basel Assessment practices and Senior Management efficient onsite AML Core Principles for Proposals to improve the of onsite of NBS examinations Effective Banking -Scope of inspections, efficiency of onsite AML Supervision and FATF examination inspection planning, examination practices Client satisfied with Better use of scarce Principles assessed by practices for AML/ inspection reports, onsite proposed solutions supervisory resources World Bank IMF FSAP CFT examination procedures, and committed to More risk based teams focused on AML activities implementation supervision Improved compliance with Improved governance, international AML/CFT accountability and risk good practice, reflected management in financial in better scores in 49 FinSAC Annual Report 2015 institutions international assessments. Better supervised and more resilient system 50 Non-Performing Loan resolution FinSAC ACTIVITIES / FinSAC OUTPUTS FINSAC OUTPUT EXPECTED CLIENT POTENTIAL CLIENT INPUTS INDICATORS OUTCOMES OUTCOME INDICATORS Serbia NPL Organized first inter- Coordination and Over 100 participants, NPL Working Group Reduction in level of NPLs agency workshop on organization of the primarily from Serbia. formally established at NPL resolution, co- conference with the conference FinSAC Annual Report 2015 Very positive feedback. hosted by the Bank of Ministry of Finance and Working group has been Serbia, bringing together Central Bank Serbia NPL action plan meeting since April 2015 Government agencies, formally adopted and In collaboration with IMF, private sector actors and implemented EBRD and Government international agencies agencies, drafting of NPL (IMF, EBRD, EIB, IFC, etc.) action plan in April 2015 Croatia NPL Provided input and Technical report Three technical report New insolvency law Reduction in level of NPLs recommendations to the on amendments to produced and shared with adopted in 2015 Ministry of Justice on the insolvency law, plus the authorities In the wake of the NPL draft amendments to the presentation to insolvency report, a technical insolvency law law working group assistance mission is in Provided input and Technical report on development on the topic recommendations on personal insolvency law of Tax treatment of NPLs draft of new personal In collaboration with insolvency law EBRD, comprehensive Conducted diagnostic report on impediments to mission, along with NPL resolution in Croatia the EBRD, on key impediments to NPL resolution in Croatia (report shared with the Croat authorities in 2015). Annexes Non-Performing Loan resolution FinSAC ACTIVITIES / FinSAC OUTPUTS FINSAC OUTPUT EXPECTED CLIENT POTENTIAL CLIENT INPUTS INDICATORS OUTCOMES OUTCOME INDICATORS Albania NPL Supported the Bank Organized and supervised Over 30 cases of large NBA to continue to use Reduction in NPL of Albania (BOA) in third-party advisory complex NPLs reviewed supervisory tools to lead developing standards for services on out-of-court by inter-bank working commercial banks to voluntary out-of-court resolution group collaborate in the area of restructurings. NPL resolution for large, Annex II: Results Framework Table Helped National Bank of Over 13 cases resolved complex cases Organized hands on Albania organize inter- expert workshops with bank resolution of large, BOA and private sector complex NPLS, through banks to promote multi- a series of seminars, creditor workouts. workshops and meetings Provide expert input between commercial and third party banks consultant support for the operational and financial restructuring of large, complex defaulted Corporates. Ukraine: NPL Support NBU in designing Collaborate with other Average client satisfaction Increase in the number of Reduction in the overall a law on Financial Debt IFIs and private sector as measured by client viable Corporate obligors size of NPLs. Restructuring to provide stakeholders within the satisfaction surveys. successfully restructured. a framework for greater context of the Vienna cooperation between initiative to develop a regional approach for creditors and debtors in tackling high levels of the out-of-court resolution NPLs across Central and and restructuring of large, South Central Europe. complex multi-creditor NPLs. Organize and host workshops to improve cooperation, raise awareness and share knowledge amongst key 51 FinSAC Annual Report 2015 stakeholders. 52 BANK RECOVERY & RESOLUTION FinSAC ACTIVITIES / FinSAC OUTPUTS FINSAC OUTPUT EXPECTED CLIENT POTENTIAL CLIENT INPUTS INDICATORS OUTCOMES OUTCOME INDICATORS Albania Assessment of local BRRD gap analysis matrix Provided evidence and Presentation of a draft Enhanced recovery and law for resolving banks analysis of gaps in the law by the BoA to the resolution planning, more Co-organization of a against international current system to ensure MoF and final adoption in efficient tools, over time FinSAC Annual Report 2015 workshop in Tirana best practice esp. Key timely and successful Parliament establish MREL and use Attributes and the BRRD. Comments and legal intervention in problem –bail in. Minimizing effects Several missions Legal support for the drafting of banks. of banking on overall support and a new resolution law financial stability and Well informed authorities taxpayers’ support. and stakeholders Part compliance with the Financial Stability Board’s “Key Attributes of Effective Resolution Regimes for Financial Institutions”. Serbia Participation in a Mission Tailored country specific Enhanced understanding Conduction of a case Bank failures are managed to identify the effects “decision tree” on bank of the DIA on the practical study to demonstrate the in an orderly way, of the new resolution resolution stages. effects and implementing likelihood and amounts of avoiding systemic crisis; framework adopted in stages of the new system the use of DIF money for Assessment note of the Enhanced Deposit early 2015 on the Deposit established including the bank resolution purposes DiAs role and the use of Insurance Agency regime Insurances role and role of the least cost test. as well as the use of Deposit insurance Fund mandate. public support. Compliance with the for resolution purposes Financial Stability under the new legal (Planned for 2016) Board’s “Key Attributes framework. of Effective Resolution Regimes for Financial Institutions”. Alignment with the BRRD. Annexes BANK RECOVERY & RESOLUTION FinSAC ACTIVITIES / FinSAC OUTPUTS FINSAC OUTPUT EXPECTED CLIENT POTENTIAL CLIENT INPUTS INDICATORS OUTCOMES OUTCOME INDICATORS BiH FinSAC participation Technical Note for DIA Increased DIAs awareness Adoption of a MoU Enhanced resolution in two Financial sector on “The use of Deposit on its role and mandate between DIA and the framework and Deposit missions Guarantee Schemes for under the new resolution supervisory Agencies insurance system resolution purposes in system. Adoption of a new in line with FSAP Bosnia and Herzegovina” resolution law (in 2016). recommendations and the Support authorities to Annex II: Results Framework Table Technical comments sent EU standards. to the MoFs on the draft better understand the New Banking Laws with effects and possible Improved compliance a focus on the setting up alternatives in their of the DIA with the of resolution financing alignment processes International Association arrangements with the BRRD resolution of Deposit Insurers (IADI) framework. Principles Moldova World Bank staff and Analysis of bank Report on bank resolution Legal amendments Enhanced bank resolution consultant mission and resolution legal framework legislation; recommended to strengthen NBM’s legal framework as time assessing insolvent – production of a amendments supervisory powers: (i) measured against banks, resolution options, “decision tree” showing grant legal immunity international and EU legal framework for key decision points and Report on resolution to supervisors; and (ii) standards resolution, forensic audit powers options for BEM, Banca eliminate MOJ powers to RFP, and diagnostic audit Sociala, and Unibank with review NBM regulations Enhanced prompt TOR and draft Written advice to recommendations NBM withdrawal of remedial actions or government on resolution licenses of the three intervention in troubled (liquidation) of three Report on crisis banks as measured management framework insolvent banks and insolvent banks began liquidation (done) against international and with recommendations EU standards Written comments on RFP NBM RFP for forensic for forensic audits of three audits following TA’s More prompt insolvent banks recommendations (done) interventions as measured by time between Written comments on NBM instruction to next identification and TOR for diagnostic audits three banks to undergo intervention of the next three big diagnostic audits using banks TOR that incorporated More timely identification TA’s recommendations of risks in banking sector Review and comment on the one draft diagnostic (done) Recovery of stolen assets audit delivered in 2015 Diagnostic audits and/or accountability of completed (one done; perpetrators two more expected) 53 FinSAC Annual Report 2015 54 BANK RECOVERY & RESOLUTION FinSAC ACTIVITIES / FinSAC OUTPUTS FINSAC OUTPUT EXPECTED CLIENT POTENTIAL CLIENT INPUTS INDICATORS OUTCOMES OUTCOME INDICATORS Georgia Advisory work on Deposit Recommendations Increased awareness of Adoption of DIS strategy Enhanced financial safety Insurance System and technical notes authorities about financial (2016) net in Georgia Development in Georgia, on DIS creation in safety net importance and FinSAC Annual Report 2015 Adoption of DIS draft Increased financial market including analysis of Georgia, including the role of DIS in financial and its submission to resilience and readiness the local environment, recommendations on stability Parliament for approval to reduce the risk of review of the international DIS institutional set Increased awareness (2016) contagion from depositors practices and preparation up, convergence with of EU and BIS/IADI run in smaller banks of recommendations for EU Directive and IADI Agreement on DIS principles for effective DIS creation in Georgia principles, DIS coverage, creation timeline (2016) DIS created in line with deposit insurance, and along with the draft exposure forecast and phase-in period for EU directive and BIS/IADI the recent trends in DIS legislation, DIS reform and funding strategy DIS funding accumulation principles development around the strategy and action plan. calculations, technical (5 years) globe and EU countries in note on consideration of particular risk based premium Higher commitment to Draft DIS strategy and acceptance of the Draft DIS Law Georgian authorities to DIS creation in line with DIS creation timeline the international practices DIS 3-day training workshop Participation of Georgian DIS working group in Turin conference Annexes © 2016 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. 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