National Bank of Serbia governor paints banking landscape – Q&A

Lucy Fitzgeorge-Parker
Published on:

In a wide-ranging question-and-answer session, governor Jorgovanka Tabaković reveals shifting sands in the Serbian banking system, efforts to boost domestic sources of finance, capital market reform, Basel III and Vienna initiatives.

How would you characterize the NBS’s overall approach to bank regulation? How has it evolved over the past five years? What are the key challenges facing the NBS in relation to bank regulation?

Faced with challenges that characterize our macroeconomic environment, primarily non-performing loans (NPLs) largely inherited from previous years and the pronounced FX credit risk in our banking sector, the National Bank of Serbia has over the past years striven to preserve and succeeded in preserving banking sector stability by pursuing a counter-cyclical regulatory policy.

This approach implies the adoption of restrictive regulatory measures in the period of expansion and their orderly relaxation in the period of crisis, with a view to easing the financial cycle effects on banks as the main intermediaries between capital, on the one hand, and citizens and the corporate sector, on the other.

In this regard, conservative pre-crisis policies regarding capital, regulatory provisions and liquidity played an important role in effective overcoming of negative effects of the global financial crisis which hit Serbia’s banking sector, and represent one of the key factors behind solid capitalization and liquidity of the banking sector, and the full loan loss provisioning.

NBS governor 
Jorgovanka Tabaković 

At the same time, over the past years, the NBS has taken big steps towards harmonizing its legal framework with universally accepted banking standards – Basel II, including EU regulations implementing these standards. In June 2011, the NBS adopted a set of six decisions implementing Basel II standards in Serbia.

In accordance with these regulations, since late 2011, Serbian banks have been implementing Basel standards in calculation of capital and capital requirements, and the management of risks they are exposed to.

Clearly, this change also altered the way in which the NBS supervises banks – the concept of risk-based supervision – and greater emphasis was placed on the assessment of risk of individual banks and timely preclusion or mitigation of those risks with the potential to jeopardize financial stability.

The rules on necessary reserves calculation and allocation, amended in late 2011, represent another significant improvement which boosted the stability of the entire financial system. Furthermore, amendments of December 2012 laid the blueprint for more effective resolution of NPLs, which are one of the key challenges in the banking sector.

The NBS is currently considering the manner and timeframe for the most adequate implementation of Basel III standards in Serbia and will draft a strategy for Basel III implementation by end-2013. The strategy will cover all areas of new standards and present the timeframes for the adoption of individual minimum capital and liquidity requirements, in addition to the already adopted measures.

In what respects has the NBS’s regulatory stance been influenced by the dominance of foreign-owned lenders in the Serbian banking system? How has it been affected by the problems suffered in their home market by the parent banks of several leading Serbian lenders? How has the NBS’s response compared with that of regulators elsewhere in SEE/CEE?

Within the context of the presence of foreign-owned banks and the effects of the financial crisis, it is important to mention the new rules of the Basel III accord and their implementation as of January 1, 2014, particularly bearing in mind that the change in business models of banking groups and their subsidiaries began with the publication of the first drafts of these documents.

Most conclusions regarding current and future changes are applicable to almost all banks in the local market, regardless of their size or the country of origin.

New Basel III measures did not have much impact on business models of Serbian banks, but we can certainly see more cautious behaviour of banks in capital management. It is important to note that regulatory capital in the Serbian market traditionally consists of only core capital – usually in the form of share capital and unallocated profits – and supplementary capital – usually made up of subordinated liabilities subject to strict conditions harmonized with EU directives.

In addition, Serbia traditionally has low and stable leverage values, which is one of the reasons why measures of the Basel III accord did not significantly and directly affect banks in Serbia.

In regard to Basel III measures introduced to promote the formation of capital reserves in good times, which can be used in the periods of stress, note that Serbian banks have been required, for quite a number of years already, to allocate necessary reserves which enable the coverage of potential losses on a pro-active basis.

In the period of crisis, by relaxing regulations in terms of calculation and allocation of necessary reserves, the NBS strove to act in a counter-cyclical way, which certainly produced a positive effect on the stability of the overall financial system. Partly owing to the above NBS measures, Serbia’s banking sector remains highly capitalized.