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 services Bilateral screening: Chapter 9 PRESENTATION OF MONTENEGRO Brussels, 10 June 2013

2. Chapter 9: Financial Services Banking Legislation in Montenegro Dejan Vujačić Chief of Portfolio Management Division The Central Bank of Montenegro dejan.vujacic@cbcg.me 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 2

3. Chapter 9: Financial Services M O N T E N E G R O Negotiating Team for the Accession of Montenegro to the European Union Content  Relevant Acquis  National legislation  Institutional Framework  Level of transposition (key rules)  Level of transposition (summary)  Future activities  Financial conglomerates Chapter 9: FINANCIAL SERVICES 3

4. 4 Chapter 9: Financial services M O N T E N E G R O Negotiating Team for the Accession of Montenegro to the European Union Relevant Acquis DIRECTIVE 2006/48/EC OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 14 June 2006 DIRECTIVE 2006/49/EC OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 14 June 2006 DIRECTIVE 2009/111/C OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 16 September 2009 - CRD 2 DIRECTIVE 2010/76/EC OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 24 November 2010 – CRD 3 Chapter 9: FINANCIAL SERVICES 4 CRD1

5. 5 Chapter 9: Financial services M O N T E N E G R O Negotiating Team for the Accession of Montenegro to the European Union National Legislation The Banking law (OGM, 17/08, 44/10) Central Bank of Montenegro Law (OGM, 40/10, 46/10, 6/13) Deposit Protection Law (OGM, 44/10) Decision on Capital Adequacy of Banks (OGM, 38/11, 55/12) Decision on the Charts of Accounts for Banks (OGM, 55/12) Decision on Reports to be Submitted to the Central Bank of Montenegro (OGM, 64/12) Decision on the Manner of Calculating Bank Exposures (OGM, 02/12) Decision on public disclosure of data by banks (OGM, 17/12) Decision on the submission of documents supporting the request for obtaining approvals set out in the Law on Banks (OGM, 57/08, 80/10) Decision on minimum standards for liquidity risk management in banks (OGM, 60/08) Chapter 9: FINANCIAL SERVICES 5

6. 6 Chapter 9: Financial services M O N T E N E G R O Negotiating Team for the Accession of Montenegro to the European Union National Legislation (cont.) Decision on minimum standards for interest rate risk management not originating from bank's trading activities (OGM, 60/08) Decision on Minimum Standards for Credit Risk Management in Banks (OGM, 22/12, 55/12) Decision on methods for preparation of the consolidated financial reports of the banking group (OGM, 24/09) Decision on minimum standards for operational risk management in banks (OGM, no. 24/9) Chapter 9: FINANCIAL SERVICES 6

7. 7 Chapter 9: Financial services M O N T E N E G R O Negotiating Team for the Accession of Montenegro to the European Union Institutional Framework The competent authority in Montenegro is the Central Bank of Montenegro Independent organization; Overseeing the maintenance of stability of the financial system as a whole; Issue licenses and approvals to banks and financial institutions and supervise banks and financial institutions; Carry out bankruptcy and liquidation proceedings against banks and financial institutions; Pass regulations and measures pursuant to its authority. Central Bank performs other activities in accordance with the Central Bank of Montenegro Law and other laws. Chapter 9: FINANCIAL SERVICES 7

8. 8 Chapter 9: Financial Services M O N T E N E G R O Negotiating Team for the Accession of Montenegro to the European Union Level of Transposition (Key Rules) Requirements for access to the taking up and pursuit of the business of credit institutions: Banking Law governs foundation, management, operations and supervision of banks and micro-credit financial institutions and credit unions and it governs the conditions and supervision of operations of parties involved in credit and guarantee operations. A bank may not be founded and operate in Montenegro without license issued by the Central Bank. A foreign bank may operate in Montenegro through its branch with prior issuance of the approval of the Central Bank for branch operations. The financial amount of founding capital may not be less than EUR 5,000,000. Chapter 9: FINANCIAL SERVICES 8

9. 9 Chapter 9: Financial Services M O N T E N E G R O Negotiating Team for the Accession of Montenegro to the European Union Level of Transposition (Cont.) Qualified participation is participation in capital or voting rights of a legal person of at least 5%, or possibility of making significant influence on management i.e. policy of a legal person, regardless of the amount of participation in capital or voting rights in a bank. No legal or natural person may acquire or further increase qualified participation in a bank without prior approval of the Central Bank. The Central Bank shall keep the register of the banks, micro-credit financial institutions and credit unions, branches of the foreign banks and representative offices of the foreign banks. Information from the register shall be public and shall be disclosed at web site of the Central Bank. Chapter 9: FINANCIAL SERVICES 9

10. 10 Chapter 9: Financial services M O N T E N E G R O Negotiating Team for the Accession of Montenegro to the European Union Level of Transposition (Cont.) Corporate governance The Board of Directors shall govern a bank and oversee its business activities. Foreign citizens may be elected members of the Board of Directors. The Board of Directors shall have at least five members, provided that at least two members of the Board of Directors must be persons independent from the Bank. A member of the Board of Directors may not be elected without prior approval of the Central Bank. Banking Law prescribes a bank shall have at least two executive directors, of which one shall be the Chief Executive Officer. Executive directors must meet eligibility criteria and have adequate skills and professional experience. Foreign citizens may be elected executive directors, and at least one executive director must speak the language that is in official use in Montenegro. Chapter 9: FINANCIAL SERVICES 10

11. 11 Chapter 9: Financial services M O N T E N E G R O Negotiating Team for the Accession of Montenegro to the European Union Level of Transposition (Cont.) Technical instruments of prudential supervision. CBCG implementing prudential requirements for minimum level of own funds, solvency ratio, credit risk management, liquidity risk management, exposure limitation, including large exposures, share in nonfinancial institutions and fixed assets :  Bank own funds must always be at the level equal to or higher than: – minimum financial portion of the founding capital specified in this Law; and – Total amount of capital required for all risks.  The solvency ratio maintained by a bank on a solo or consolidated basis shall not be less than 10%. Chapter 9: FINANCIAL SERVICES 11

12. 12 Chapter 9: Financial Services M O N T E N E G R O Negotiating Team for the Accession of Montenegro to the European Union Level of Transposition (Cont.)  Total exposure of a bank to one party or group of related parties may not exceed 25% of bank’s own funds.  The exposure of a bank to one party or group of related parties shall be considered as large if it is equal to or larger than 10% of bank’s own funds. The sum of all large exposures of a bank must not exceed 800% of bank’s own funds.  The bank shall establish, maintain and enhance effective internal controls system and shall organize the internal audit as an independent function in the bank.  Central Bank performs consolidated supervision. Chapter 9: FINANCIAL SERVICES 12

13. 13 Chapter 9: Financial Services M O N T E N E G R O Negotiating Team for the Accession of Montenegro to the European Union Level of Transposition (Cont.) The banks, foreign bank branches and micro credit financial institutions and credit unions and other parties licensed by the Central Bank shall prepare and submit to the Central Bank, in a timely manner, correct reports and other data on their financial condition and operations. CBCG employees have the obligation to non disclose the banking secret. Eligible CBCG employees shall not be held liable for damage that might incur during the performance of duties in accordance with the law and regulations enacted on the basis of the Banking Law. Chapter 9: FINANCIAL SERVICES 13

14. 14 Chapter 9: Financial Services M O N T E N E G R O Negotiating Team for the Accession of Montenegro to the European Union Level of Transposition (Cont.) Sanctions The Central Bank may impose measures against the bank for the removal of the found irregularities : -Require bank to apply a specific policy of assets in terms of own funds; -Limit bank’s activities; -Require bank to use the gains achieved to strengthen their financial basis; -Other measures listed in the Banking Law. Formal measures against the bank may take one of the following forms: - Warn the bank in writing; - Conclude a written agreement with the bank; Chapter 9: FINANCIAL SERVICES 14

15. 15 Chapter 9: Financial Services M O N T E N E G R O Negotiating Team for the Accession of Montenegro to the European Union Level of Transposition (Cont.) Issue an order imposing one or more of the measures, Pass a decision ordering the bank to prepare a plan to improve the condition of the bank, Institute interim administration in the bank Revoke the bank’s license. Banks are obliged to implement imposed measures and submit reports to the Central Bank15 regarding measure implementation results. Chapter 9: FINANCIAL SERVICES 15

16. 16 Chapter 9: Financial Services M O N T E N E G R O Negotiating Team for the Accession of Montenegro to the European Union Level of Transposition (Cont.) Capital adequacy Capital adequacy requirements are prescribed by Banking Law and Capital Adequacy Decision. Banking Law prescribes that a bank shall determine capital adequacy on the basis of own funds as absolute, and solvency ratio as relative indicators of bank’s capital adequacy. Own funds of a bank shall represent the sum of paid in share capital and other core and supplementary elements of own funds reduced by deductible items. The solvency ratio shall be the percentage ratio of own funds to the sum of total amount of risk weighted assets for all risk, while the solvency ratio maintained by a bank on a solo or consolidated basis shall not be less than 10%. Chapter 9: FINANCIAL SERVICES 16

17. 17 Chapter 9: Financial Services M O N T E N E G R O Negotiating Team for the Accession of Montenegro to the European Union Level of Transposition (Cont.) Bank shall calculate capital requirement for credit risk in accordance with the standardized approach prescribed by Decision on capital adequacy. Bank shall, subject to the settlement techniques, calculate the capital requirement for settlement/delivery risk in accordance. For calculating capital requirement for operational risk, the bank may use: - Basic Indicator Approach, or - Standardized Approach Bank is obliged to calculate the capital requirement for market risks, while capital requirement for market risks represents the sum of capital required for: - Position risk, which includes price risk and interest rate risk; - FX risk, and - Commodity risk. Chapter 9: FINANCIAL SERVICES 17

18. 18 Chapter 9: Financial Services M O N T E N E G R O Negotiating Team for the Accession of Montenegro to the European Union Level of Transposition (Cont.) Liquidity risk management Decision on minimal standards for liquidity risk management shall establish the minimum standards for liquidity risk management that the banks shall follow in their operations. The Decision prescribes that Bank shall establish effective measurement and management of liquidity risk on daily, ten-day, quarterly and longer period basis. Bank’s liquidity level is shown by its liquidity indicator (ratio of a sum of liquid assets to a sum of due liabilities). Bank shall maintain the liquidity level so that the minimum value of liquidity shall amount to: - 0.9 – when calculated for one working day; - 1.0 – when calculated as an average of liquidity indicators for all working days in a ten-day period. Chapter 9: FINANCIAL SERVICES 18

19. 19 Chapter 9: Financial Services M O N T E N E G R O Negotiating Team for the Accession of Montenegro to the European Union Level of Transposition (Cont.) Bank is obliged to perform tests of liquidity in different situations using several types of stress test scenarios in order to estimate the impact of these situations on bank’s cash flows or liquidity. Bank is obliged to adopt the contingency plan for liquidity risk management in emergency situation. Chapter 9: FINANCIAL SERVICES 19

20. 20 Chapter 9: Financial Services M O N T E N E G R O Negotiating Team for the Accession of Montenegro to the European Union Level of Transposition (Summary) CRD 1: - The provisions related to the advanced capital measurement requirement approaches (IRB, IMM, AMA) are not transposed; - The provisions to be applied only after the accession of Montenegro to the EU (branch operations in other member states, consolidated supervision in the EU); - High compliance with the rest of CRD 1 CRD 2: - The regulation is fully complied in the area concerning large exposures regime - Non-compliance with the rest of CRD 2 CRD 3 and CRD 4: non compliance Chapter 9: FINANCIAL SERVICES 20

21. 21 Chapter 9: Financial Services M O N T E N E G R O Negotiating Team for the Accession of Montenegro to the European Union Future activities New Law on Credit Institutions should be adopted by the end of 2015 and shall enter into force on January 1 st 2017 The new Law would include provisions that would have delayed implementation to take effect with the accession of Montenegro to the EU New Capital Adequacy Decision should be adopted by the end of the first quarter of 2016 and shall enter into force on January 1 st 2017 Chapter 9: FINANCIAL SERVICES 21

22. 22 Chapter 9: Financial Services M O N T E N E G R O Negotiating Team for the Accession of Montenegro to the European Union Financial conglomerates Relevant Acquis: Directive 2002/87/EC of the European Parliament and of the Council of 16 December 2002 on the supplementary supervision of credit institutions, insurance undertakings and investment firms in a financial conglomerate – CELEX 32002L0087. National Legislation and level of transposition : Directive 2002/87/EC is not transposed in national legislation. Future activities: Passing a new Law on the supplementary supervision of financial conglomerates. Time table: General timeframe in the beginning of 2018, after achievement of full compliance of Montenegrin supervisory authorities and their relevant domestic legislation with relevant acquis. Chapter 9: FINANCIAL SERVICES 22

23. Thank you for your attention. QUESTIONS