Q&A with Dimitar Bogov, governor of the National Bank of the Republic of Macedonia

Lucy Fitzgeorge-Parker
Published on:

In an interview with Euromoney, Bogov discusses credit growth, bank regulation, foreign dominance of the country’s lenders, and the Vienna initiatives.

How would you characterize the National Bank of the Republic of Macedonia’s (NBRM) overall approach to bank regulation? How has it evolved over the past five years? What are the key challenges facing the NBRM in relation to bank regulation?

The NBRM keeps pace with the international standards in banking regulation. Having in mind the recommendations of the Basel Committee on Banking Supervision pertaining to the harmonization of the implementation of Basel standards with the characteristics and the capacity of the banking system, the NBRM opted for gradual transition to the Basel II standards.

Their introduction started in 2007; currently the regulation encompasses all three pillars of Basel II, except advanced approaches from the first pillar which are medium-term priority for the NBRM.

Preparations regarding Basel III adoption are on track. Some of the banks increased their capital levels, and we do not expect difficulties in achieving strengthened capital standards. The main challenge is to comply with the liquidity standards, regarding the treatment of the domestic CB and T-bills and the possible effects on the fiscal and monetary policy effectiveness and implementation.

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

Like in the most CEE countries, Macedonian banks are dominantly foreign owned. The benefits from the foreign presence in the region, and in Macedonia as well, are quite evident. It has contributed to better capacity of the banking sector for absorption of local shocks, enabled import of the know-how from the more developed financial markets, increased the competition among institutions, and provided wider spectrum of financial and banking services for the public.

Overall, the foreign presence contributed to the stability and safety of the banking systems in the region.

But recently the Macedonian banking sector felt the other side of the medal of the foreign presence on the market. Concerns with respect to eurozone banks’ deleveraging, due to additional capital requirements, have materialized. Even though the banking sector is in overall sound shape, the deleveraging by the eurozone parent banks have affected the credit developments, creating even bigger concerns due to the current asset-quality review and stress test of the eurozone banks.

A set of monetary and macro-prudential measures were undertaken in the last several years. Immediately, as the first signals of the crisis had appeared, we tightened some of the prudential requirements, regarding limits of exposure to banks, liquidity requirements, etc.

The new decision on credit risk management (effective from December 1, 2013), introduced several reliefs in the credit risk regulation, like materiality threshold for determining the non-performing status, inclusion of defined collateral in DCF and NPV calculation, reduction of the thresholds of impairment/special reserve percentages.

The possible release of impairments, i.e. higher profit for banks at the end of the year due to these changes, could be used only to cover losses from previous years or to increase the banks’ reserves or retained earnings (tier 1 capital).

Striving to support the banks’ credit activity and consequently the economic growth without compromising the objectives of maintaining price stability, the stability of the exchange rate, and the financial stability of the country, NBRM introduced diverse policies to tackle credit-market bottlenecks.

Besides the interest rate cuts that have brought the policy rate to its historical low of 3.25%, over the past two years we have introduced several changes in the reserve requirements instrument.

Furthermore, we have eased liquidity requirements for banks and have fundamentally redesigned monetary policy operational framework with the goal of further strengthening monetary policy effectiveness, easing credit conditions and supporting the development of domestic money market.

In addition, the NBRM has undertook non-standard measures in the reserve requirements instrument targeted towards the corporate sector as to facilitate the credit terms for the net-exporters and domestic electricity producers.

How effective have the Vienna initiatives been in addressing conflicts between home and host regulators? Does the NBRM support multilateral efforts to limit deleveraging in the Balkan region?

Republic of Macedonia was not included in the Vienna Initiative framework (1.0 and 2.0). During the first wave of the global financial crisis in 2008/2009, the domestic banks were not significantly influenced by the deleveraging of their parent banks and were able to sustain their stability. As a result, it was not essential to include the Republic of Macedonia in the Vienna Initiative 1.0 framework

However, the experience of the participating countries and their supervisory bodies suggests that the Vienna initiatives have helped in avoiding potential banking systemic crisis in the CESEE countries, by appropriately addressing the deleveraging processes in these countries and enhancing the coordination between all relevant public and private stakeholders.