1. 1 M O N T E N E G R O Negotiating Team for the Accession of Montenegro to the European Union Working Group for Chapter 9 – Financial S ervices Bilateral screening: Chapter 9 PRESENTATION OF MONTENEGRO Brussels, 10 June 2013

2. Financial Services CENTRAL BANK OF MONTENEGRO - INSTITUTIONAL AND ADMINISTRATIVE CAPACITIES 2 M O N T E N E G R O Negotiating Team for the Accession of Montenegro to the European Union Chapter 9: Financial Services Veselin Vukovi ć Central Bank of Montenegro veselin.vukovic@cbcg.me

3. Financial Services 3 OUTLINE OF THE PRESENTATION Central Bank independence: – Institutional independence; – Personal independence; – Inancial independence; Central Bank supervisory function; – The role of the Supervision Department in performing supervisory function; – Supervisory practice; – Imposing the measures against the banks; – Co-operation with domestic and foreign supervisory bodies; The main features of banking system in the period 2007-2012 M O N T E N E G R O Negotiating Team for the Accession of Montenegro to the European Union Chapter 9: Financial Services

4. 4 CENTRAL BANK INDEPENDENCE Central Bank’s institutional independence The Central Bank of Montenegro is an independent organization, responsible for monetary and financial stability and banking system operations. The independence of the Central Bank of Montenegro is based on the Central Bank of Montenegro Law in functional, institutional, personal and financial aspect. The main tasks and duties of the Central Bank (Article 14, the CBCG Law) Overseeing the maintenance of stability of the financial system as a whole Definition and use of monetary policy instruments (reserve requirements, liquidity loans for banks and financial assistance as the lender of last resort) Managing the international reserves Prudential supervision of banks Maintaining and promoting safe and sound operation of payment systems. Central Bank performs other activities in accordance with the Central Bank of Montenegro Law and other law. M O N T E N E G R O Negotiating Team for the Accession of Montenegro to the European Union Chapter 9: Financial Services

5. 5 CENTRAL BANK INDEPENDENCE The Central Bank’s institutional independence (Article 7, the Central Bank of Montenegro Law) The Central Bank shall be independent in pursuing objectives and exercising functions under this law. The Central Bank, members of its bodies and employees in the Central Bank shall be independent in the performance of their functions and their activities established under this and other laws and they may not receive or seek any instruction from the government and other bodies and organisations or any other entities. The state and other bodies and organizations and other persons may not exert any influence on the performance and decision-making of members of the Central Bank’s bodies. M O N T E N E G R O Negotiating Team for the Accession of Montenegro to the European Union Chapter 9: Financial Services

6. CENTRAL BANK INDEPENDENCE 6 M O N T E N E G R O Negotiating Team for the Accession of Montenegro to the European Union The Central Bank’s financially independence (Articles 66 and 67 The CBCG Law ). The Central Bank of Montenegro is financially independent institution. The Central Bank has its own income that it independently plans and allocates in accordance with the financial plan, which it passes independently. The Central Bank shall make income on the basis of the following: - Fees for issuing licenses and granting approvals in accordance with the law; - Fees to be collected based on its supervisory function in accordance with the law; - Interest and other income on funds deposited abroad; - FX revaluation gains; - Interest on loans granted; - Fees for rendered services; - Purchase and sale of securities; - Other fees for performing other activities within its authority. Chapter 9: Financial Services

7. CENTRAL BANK INDEPENDENCE The Central Bank’s personal independence The Central Bank is governed by the Council of the Central Bank and it is managed by the Governor of the Central Bank. The Council of the Central Bank consists of seven members: the Governor, the Vice-Governor for the banking system supervision, the Vice-Governor for financial stability and payment system and four members. (Article 44-46, the CBCG Law) Members of the Council are appointed by the Parliament. The Governor is appointed by the Parliament, upon the proposal of the President of Montenegro. The Vice-Governors are appointed by the Parliament, upon the proposal of the Governor. Four members of the Council are appointed by the Parliament, upon the proposal of the working body of the Parliament responsible for financial affairs. (Article 50, the CBCG Law) Members of the Council are appointed for the period of six years and may not serve more than two terms, in accordance with this law. A member of the Council whose term of office has expired continues to perform his/her function until the appointment of a new member. Financial Services 7 M O N T E N E G R O Negotiating Team for the Accession of Montenegro to the European Union Chapter 9: Financial Services

8. CENTRAL BANK INDEPENDENCE The Central Bank personal independence Relieving of duty of the member of the Council of the Central Bank and/or the Governor is made by the Parliament on the proposal of the Council of the Central Bank. If the Parliament fails to relieve of duty the Council member within 30 days following the receipt of the proposal thereof, the Council may pass a decision to suspend his/her participation in the work of the Council and/or performance of other activities within the Central Bank’s competence until the passing of such a decision A member of the Council may be relieved of duty at personal request by submitting his/her resignation from the office of the member of the Council. A member of the Council seeking to be relieved of duty must previously notify the Council thereof in writing, at least 60 days before submitting his/her resignation to the Parliament. (The CBCG Law, art. 54) A decision on the removal from office of a Council member shall be final, and the discontented party may seek protection before the competent court within 30 days following the receipt of the decision on the relieving of duty. (The CBCG Law, art. 56) Financial Services 8 M O N T E N E G R O Negotiating Team for the Accession of Montenegro to the European Union Chapter 9: Financial Services

9. 9 M O N T E N E G R O Negotiating Team for the Accession of Montenegro to the European Union Chapter 9: Financial Services ORGANISATIONAL CHART

10. CENTRAL BANK SUPERVISORY FUNCTION The Central Bank of Montenegro is the supervisory authority responsible for overseeing the credit institutions, including the granting of authorisation and the monitoring of prudential requirements The Central Bank is solely authorised to issue licenses and approvals to banks and financial institutions and supervise banks and financial institutions. In pursuing its supervisory function, the Central Bank, independently from any other body or institution, decides on bank’s licensing, supervises the operations of banks and imposes measures against banks. In attaining its regulatory function, the Central Bank is solely authorised to adopt secondary legislation which passing is prescribed by the Central Bank of Montenegro Law and Banking Law. The Central Bank has the right to prepare draft laws related to the pursuing of the Central Bank’s objectives and exercising of its functions (Article 40, the CBCG Law). Financial Services 10 M O N T E N E G R O Negotiating Team for the Accession of Montenegro to the European Union Chapter 9: Financial Services

11. CENTRAL BANK SUPERVISORY FUNCTION Financial Services 11 M O N T E N E G R O Negotiating Team for the Accession of Montenegro to the European Union Chapter 9: Financial Services

12. CENTRAL BANK SUPERVISION FUNCTION Responsibility for supervising operations of banks and micro-credit financial institutions; On-site and off-site inspections; Risc Based Supervision concept; There is no clear division between on-site and off-site duties and responsibilities; Annual plan of on-site inspections based on a bank size, its risk profile, measures imposed against the bank and the number and result of previously performed on-site inspections in the previous year; Banks submit reports to the Central Bank on daily and ten-day basis (liquidity indicators ), monthly and quarterly basis, which are used for analytical and statistics purposes as well as for supervisory purposes (off- site inspections). Financial Services 12 M O N T E N E G R O Negotiating Team for the Accession of Montenegro to the European Union Chapter 9: Financial Services

13. CENTRAL BANK SUPERVISION FUNCTION Supervisory Practice On-site inspections performed in 2011 and 2012 20112012 Regular inspections1213 Extraordinary inspections113 Total1326 Financial ServicesA 13 M O N T E N E G R O Negotiating Team for the Accession of Montenegro to the European Union Chapter 9: Financial Services All banks had been supervised at least once in 2011, while ten banks were supervised at least once in 2012; Some of the banks were inspected for several times through targeted inspections of individual risk areas; Inspections in the last year particularly focused on the supervision of credit risk, liquidity risk and capital adequacy;

14. CENTRAL BANK SUPERVISION FUNCTION Imposing the measures against the banks If the Central Bank establishes irregularities in the bank’s operations, it may take one of the following measures (Article 116, the Banking Law): warn the bank in writing about the irregularities found and request the bank to undertake one or more activities to remove the irregularities; conclude a written agreement with the bank making the bank bound to remove the irregularities found within a specified time; issue an order pass a decision ordering the bank to prepare a plan to improve the condition of the bank, which must contain detailed measures and activities taken by the bank to provide adequate management of risks the bank is exposed to in its operations and/or to remove the identified irregularities, as well as timeframes for their implementation; institute interim administration in the bank in accordance with Article 120 of The Banking Law; revoke the bank’s license The administrative proceedings may be carried out against the order and other measures imposed by Central bank. Administrative Court of Montenegro controls the legality of the measures in a form of decision/resolution. Financial ServicesA 14 M O N T E N E G R O Negotiating Team for the Accession of Montenegro to the European Union Chapter 9: Financial Services

15. CENTRAL BANK SUPERVISORY FUNCTION Imposing the measures against the banks The Central Bank did not suspended or withdrawn any issued license over the past two years; The Central Bank has issued 8 decisions as a form of a measure against banks in period 2011–2012; Each of these decisions ordered the banks to pay the exact amount of funds to the Deposit Protection Fund, where such amount, in each case, made up 0.1% of bank’s own funds; Commonly imposed measures: –order the bank to remove the irregularities found in its operations and/or undertake other activities to improve the condition in the bank; –order the bank to establish stricter limits in operations than prescribed by the Central Bank or the bank’s policies; –order a bank classification of assets based on the exposure to credit risk in riskier group –order the bank to increase the amount of own funds, ensure higher solvency ratio and/or other capital adequacy indicators than those prescribed; –order the bank to prepare capital restoration plan acceptable to the Central Bank, within 60 days –order the bank to reduce overhead expenses Financial Services 15 M O N T E N E G R O Negotiating Team for the Accession of Montenegro to the European Union Chapter 9: Financial Services

16. CO-OPERATION WITH DOMESTIC AND FOREIGN SUPERVISORY BODIES Central Bank co-operation with domestic and foreign supervisory authorities (The Banking Law, article 107) In performing its supervisory function, the Central Bank shall cooperate with representatives of foreign institutions responsible for bank supervision and with domestic authorities and institutions responsible for the supervision of financial operations, with which it has concluded appropriate cooperation and confidentiality agreements regarding the exchange of information. The exchange of information shall not be considered as revealing a secret. Financial ServicesA 16 M O N T E N E G R O Negotiating Team for the Accession of Montenegro to the European Union Chapter 9: Financial Services

17. CO-OPERATION WITH DOMESTIC AND FOREIGN SUPERVISORY BODIES The cooperation between supervisory bodies is made within the Financial Stability Council, as well as based on the concluded MoUs. Established in 2010. The Council is chaired by the Governor of the CBCG. The Council’s objective is to monitor, identify, prevent and mitigate potential systemic risks in the financial system of Montenegro as a whole. The Council passes the National Contingency Plan based on individual plans for financial crisis management defined by the competent authorities (CBCG, MF, ISA and SEC). Financial Services 17 M O N T E N E G R O Negotiating Team for the Accession of Montenegro to the European Union Chapter 9: Financial Services

18. CO-OPERATION WITH DOMESTIC AND FOREIGN SUPERVISORY BODIES determine, collect and analyse data and information of importance for the financial system stability and a potential financial crisis management; ensure coordination and exchange of data and information among the competent authorities; assess and identify threats to the financial system and/or the financial system vulnerabilities; identify risks in the financial system and determine their impact on the financial system stability; determine the contingency plan for financial crisis management at the financial system level and organize stress testing and financial crisis simulation exercises; Besides the Financial Stability Council, the Central Bank concluded cooperation arrangements with other supervisory bodies in Montenegro, based on the Memorandum on Cooperation (the most important is the Memorandum on Cooperation in the area of anti-money laundering and terrorist financing) Financial Stability Council shall: Financial ServicesA 18 M O N T E N E G R O Negotiating Team for the Accession of Montenegro to the European Union Chapter 9: Financial Services

19. CO-OPERATION WITH DOMESTIC AND FOREIGN SUPERVISORY BODIES The Central Bank of Montenegro signed the memoranda of understanding with the following supervisory bodies: National Bank of Serbia (23 April 2003), Bank of Slovenia (14 October 2003), Bank of Albania (27 April 2005), National Bank of the Republic of Macedonia (30 January 2007), Hungarian Financial Supervisory Authority (6 March 2007), Central Bank of Bosnia and Herzegovina, the Banking Agency of the Republic of Srpska, and the Banking Agency of the Federation of Bosnia and Herzegovina (5 March 2007), Central Bank of the Russian Federation (28 September 2007), Supervisors of Southeast Europe (Bank of Greece, Bank of Albania, Bulgarian National Bank, Central Bank of Bosnia and Herzegovina, Central Bank of Cyprus, National Bank of the Republic of Macedonia, National Bank of Romania, National Bank of Serbia, Banking Agency of the Federation of Bosnia and Herzegovina, Banking Agency of the Republic of Srpska) (8 February 2008), Banque de France (8 August 2008), Croatian National Bank (29 September 2009), National Bank of the Republic of Belarus (27 October 2009). Financial Services 19 M O N T E N E G R O Negotiating Team for the Accession of Montenegro to the European Union Chapter 9: Financial Services

20. BANKING SECTOR OF MONTENEGRO IN PERIOD 2007-2012 Eleven banks operated in Montenegro as at 31 December 2012 with a widespread network of 193 organisational units and 2.325 employees Key banks balance sheet positions, 2007-2012 (EUR thousand) General indicators 200720082009201020112012 Number of banks10 11 Employees1,9792,2642,2932,2902,3542,325 Organizational units160196206188191193 Total assets2,975,4323,309,6643,025,2332,943,6552,809,7202,808,283 Total capital236,937279,377331,734310,905305,229288,686 Total loans2,245,6832,797,5352,397,7552,199,9741,955,7671,862,539 Total deposits2,091,0751,990,5901,824,6881,789,8521,817,0601,980,716 Financial Services 20 M O N T E N E G R O Negotiating Team for the Accession of Montenegro to the European Union Chapter 9: Financial Services

21. BANKING SECTOR OF MONTENEGRO IN PERIOD 2007-2012 Assets, loans and deposits level Financial Services 21 M O N T E N E G R O Negotiating Team for the Accession of Montenegro to the European Union Chapter 9: Financial Services

22. BANKING SECTOR OF MONTENEGRO IN PERIOD 2007-2012 Non-performing loans to total loans ratio (in %) and loan loss provisions (EUR thousand), 2007-2012 Financial Services 22 M O N T E N E G R O Negotiating Team for the Accession of Montenegro to the European Union Chapter 9: Financial Services

23. BANKING SECTOR OF MONTENEGRO IN PERIOD 2007-2012 Key liquidity indicators (%), 2007-2012 Financial Services 23 M O N T E N E G R O Negotiating Team for the Accession of Montenegro to the European Union Chapter 9: Financial Services

24. BANKING SECTOR OF MONTENEGRO IN PERIOD 2007-2012 Total capital Solvency ratio was constantly above the legally prescribed minimum of 10% in period 2007 - 2012. Financial Services 24 M O N T E N E G R O Negotiating Team for the Accession of Montenegro to the European Union Chapter 9: Financial Services Total capital and solvency ratio, 2007-2012

25. Financial Services 25 M O N T E N E G R O Negotiating Team for the Accession of Montenegro to the European Union Chapter 9: Financial Services Ownership structure of banks capital (%), 2007-2012 BANKING SECTOR OF MONTENEGRO IN PERIOD 2007-2012

26. FINANCIAL RESULT Banks operated with negative result at aggregate level in period from Q4 2008 to end of 2012, which was due to global financial crisis and its spill over through transmission channels to the banking system. Financial Services 26 M O N T E N E G R O Negotiating Team for the Accession of Montenegro to the European Union Chapter 9: Financial Services

27. MICRO-CREDIT FINANCIAL INSTITUTIONS (2007 – 2012) Six micro-credit financial institutions operate in Montenegro; Micro-credit financial institutions recorded an increase in total assets and/or loans until the beginning of the financial crisis. In the period 2008 - 2012, these indicators constantly declined; Due to the increase in non-performing assets, reported losses in operations and increase in risk levels in the system, MFIs had to increase their capital in the observed period; Financial Services 27 M O N T E N E G R O Negotiating Team for the Accession of Montenegro to the European Union Chapter 9: Financial Services

28. 28 Thank you for your attention! QUESTIONS