## 1. Priority Recommendations ## Source details **Canonical URL:** [1. Priority Recommendations](https://www.imf.org/-/media/files/publications/cr/2019/1mneea2019001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2019/1mneea2019001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2019/1mneea2019001.pdf.json) --- ### Summary of mission outcomes and key findings - A Financial Soundness Indicators (FSIs) TA mission from the IMF’s Statistics Department (STA) visited Podgorica, Montenegro, during November 29–December 5, 2017, to develop a framework for compiling FSIs based on the IMF’s FSIs Compilation Guide (FSI Guide). - The mission was conducted with financial support from the government of the Netherlands. - The Central Bank of Montenegro (CBM) is keen to regularly compile and disseminate FSIs based on the FSI Guide; releasing FSIs on the CBM website would support a possible subscription to the Special Data Dissemination Standard (SDDS). - Prior to the mission: - The CBM compiles and reports some FSIs to IMF’s European Department (EUR) for Article IV consultations and FSAP, but no FSIs were reported to STA for posting on the IMF’s FSI website nor disseminated by the CBM on its website. - This was the first STA mission on financial sector statistics with the CBM to develop FSIs based on the FSI Guide. - The mission focused on deposit takers (DTs), covering 15 commercial banks, using chart of accounts (COAs) and supervisory series as source data. - Commercial banks dominate Montenegro’s financial system, accounting for more than 90 percent of total financial system assets. - Regulatory and accounting practices of DTs are broadly in line with the FSI Guide; all commercial banks follow Basel II and apply IASs. ### Priority recommendations (action plan) - Target Date: August 2018 - Officially designate a specific unit within the CBM to work on FSIs. - Responsible Institutions: CBM Management - Target Date: August 2018 - Finalize and report to STA the sectoral income statement (FSI template Annex 2), the sectoral balance sheet (FSI template Annex 3), and memorandum series (FSI template Annex 4) for DTs using the compilation spreadsheets developed during the mission, including data beginning from 2013 with a quarterly periodicity as a minimum. - Responsible Institutions: CBM [FSD] - Target Date: October 2018 - Start regular reporting to STA, for posting on the IMF’s FSI website, the sectoral income statement (FSI template Annex 2), the sectoral balance sheet (FSI template Annex 3) and memorandum series (FSI template Annex 4) for DTs including data beginning with the first quarter of 2013 at a quarterly frequency, the institutional coverage (FSI template FS1) for 2017 at an annual frequency, and FSI metadata (FSM template). - Responsible Institutions: CBM [FSD] ### Background and context - This was STA’s first financial sector statistics mission to the CBM; STA has fielded multiple missions to Montenegro in real sector, government finance, and external sector statistics over the last ten years. - The October 2017 IMF Report “Montenegro: Technical Assistance Report—Macroprudential Policy Framework” emphasized closing data gaps for financial stability analysis and noted the CBM’s reliance on core banking FSIs. - The CBM’s Department for Financial Stability, Statistics and Research Department (FSD) carries out the financial stability mandate. - Legislative amendments (expected to be implemented by April 2018) will extend the regulatory perimeter to capture activities of all credit institutions (nonbank factoring and leasing companies, microcredit finance institutions, purchase of receivables, credit-guarantee operations). - Insurance companies and investment and pension funds are supervised by the insurance supervisory agency and securities exchange commission, respectively. ### Financial system structure and key statistics - Fifteen banks operate in Montenegro. - Foreign-controlled banks: 9 out of 15 banks hold around 74 percent of the banking sector’s assets. - Banking sector assets represent about 96 percent of GDP. - Banking share of total financial sector assets: around 90 percent. - Lending to the household sector accounts for almost 50 percent of total loans. - Microcredit finance institutions (6 institutions) constitute 1.3 percent of financial sector assets and are not allowed to perform deposit taking operations. - Insurance sector is small in market share but has been growing. - Table extract (end-2016, thousand Euros, end-2016) — selected figures preserved as presented: - Domestically controlled commercial banks: Asset Size 980,918; Share in Total Assets of Sub-Sector 625.9%; Share in Total Financial Sector Assets 23.5% - Foreign controlled commercial banks: Asset Size 2,809,337; Share in Total Assets of Sub-Sector 974.1%; Share in Total Financial Sector Assets 67.2% - Total ODCs: Asset Size 3,790,255; Share in Total Assets of Sub-Sector 15100.0%; Share in Total Financial Sector Assets 90.6% - Insurance Companies: Asset Size 196,681; Share in Total Assets of Sub-Sector 1150.1%; Share in Total Financial Sector Assets 4.7% - Pension Funds: Asset Size 566; Share in Total Assets of Sub-Sector 20.1%; Share in Total Financial Sector Assets 0.0% - Other Financial Intermediaries total: Asset Size 194,981; Share in Total Assets of Sub-Sector 1949.7%; Share in Total Financial Sector Assets 4.7% - Leasing Companies: Asset Size 45,209; Share in Total Assets of Sub-Sector 411.5%; Share in Total Financial Sector Assets 1.1% - Micro-credit Finance Institutions: Asset Size 55,576; Share in Total Assets of Sub-Sector 614.2%; Share in Total Financial Sector Assets 1.3% - Investment Funds: Asset Size 94,196; Share in Total Assets of Sub-Sector 924.0%; Share in Total Financial Sector Assets 2.3% - Total OFCs: Asset Size 392,228; Share in Total Assets of Sub-Sector 32100.0%; Share in Total Financial Sector Assets 9.4% - Total Financial Sector: Asset Size 4,182,483; Share in Total Assets of Sub-Sector 47100.0% ### Detailed technical assessment and recommendations A. Source data - Source data for DTs (COAs and supervisory series) are broadly adequate for compiling FSIs per the FSI Guide. - COAs provide breakdowns by type of financial instrument and by counterpart sector, and include income/expense detail required for FSIs. - Some COA account descriptions (e.g., "non-amortized discount Dr/Cr", "receivables purchased (factoring) Dr", "accruals: loans Dr") are insufficiently clear for statistical counterpart-sector and instrument classification; clarification from CBM accounting experts is recommended. - Building blocks of source data align with international regulatory, accounting, and statistical standards (residents vs nonresidents distinction, accrual accounting, sectoring, instrument classification, supervisory series). - Recommended Action: - Address the data issues identified during the mission and update the compilation spreadsheets as needed. B. Regulatory and accounting framework - All banks in Montenegro follow Basel II since 2009; calculation of supervisory series (Tier 1 capital, Tier 2 capital, risk-weighted assets) aligns with the FSI Guide. - Montenegro is working towards implementation of the EU Capital Requirements Regulation and Directive (CRR/CRD IV); CBM applies a conservative approach (higher minimum capital ratio of 10 percent and additional capital requirements as relevant). - Commercial banks have been implementing IAS39 since 2013 and are expected to start implementing IFRS9 in 2018; COA amendments related to IFRS9 are not expected to substantially affect mapping and FSI compilation. C. Consolidation basis - FSIs are compiled using a “domestic consolidation” (DC) basis, appropriate because banks in Montenegro do not have subsidiaries abroad. - The FSI Guide’s CBCSDI and DCCBS bases are alternatives, but DC is acceptable when resident DTs have no nonresident subsidiaries and few or no domestically controlled non-DT subsidiaries. D. Compilation and reporting framework - The mission mapped COAs to IMF FSI templates for sectoral balance sheet and income statement and developed a tool to automatically calculate FSIs from source data, reducing manual work and supporting sustainability. - Using available source data: - All 12 core FSIs were compiled. - 10 of the 13 additional FSIs for DTs were compiled. - Two FSIs for real estate markets were compiled. - Available source data allow quarterly compilation of most FSIs for DTs and monthly compilation of indicators derived only from COAs. - The mission assisted in developing institutional coverage templates (FS1) and FSI metadata (FSM template). - FSD officials confirmed ability to compile FSIs using the framework and report them to STA on a regular basis. - Minor deviations were found between mission-calculated FSIs and those used for national analysis; reasons are understood and data improvements are planned. *Source: IMF STA mission report to the Central Bank of Montenegro (November 29–December 5, 2017) — Priority Recommendations and Detailed Technical Assessment as presented in the source PDF.* ### 1. Priority Recommendations _____________________________________________________________________6 ### 1. Priority Recommendations ### Summary of mission outcomes and key findings - A Financial Soundness Indicators (FSIs) TA mission from the IMF’s Statistics Department (STA) visited Podgorica, Montenegro, during November 29–December 5, 2017, to develop a framework for compiling FSIs based on the IMF’s FSIs Compilation Guide (FSI Guide). - The mission was conducted with financial support from the government of the Netherlands. - The Central Bank of Montenegro (CBM) is keen to regularly compile and disseminate FSIs based on the FSI Guide; releasing FSIs on the CBM website would support a possible subscription to the Special Data Dissemination Standard (SDDS). - Prior to the mission: - The CBM compiles and reports some FSIs to IMF’s European Department (EUR) for Article IV consultations and FSAP, but no FSIs were reported to STA for posting on the IMF’s FSI website nor disseminated by the CBM on its website. - This was the first STA mission on financial sector statistics with the CBM to develop FSIs based on the FSI Guide. - The mission focused on deposit takers (DTs), covering 15 commercial banks, using chart of accounts (COAs) and supervisory series as source data. - Commercial banks dominate Montenegro’s financial system, accounting for more than 90 percent of total financial system assets. - Regulatory and accounting practices of DTs are broadly in line with the FSI Guide; all commercial banks follow Basel II and apply IASs. ### Priority recommendations (action plan) - Target Date: August 2018 - Officially designate a specific unit within the CBM to work on FSIs. - Responsible Institutions: CBM Management - Target Date: August 2018 - Finalize and report to STA the sectoral income statement (FSI template Annex 2), the sectoral balance sheet (FSI template Annex 3), and memorandum series (FSI template Annex 4) for DTs using the compilation spreadsheets developed during the mission, including data beginning from 2013 with a quarterly periodicity as a minimum. - Responsible Institutions: CBM [FSD] - Target Date: October 2018 - Start regular reporting to STA, for posting on the IMF’s FSI website, the sectoral income statement (FSI template Annex 2), the sectoral balance sheet (FSI template Annex 3) and memorandum series (FSI template Annex 4) for DTs including data beginning with the first quarter of 2013 at a quarterly frequency, the institutional coverage (FSI template FS1) for 2017 at an annual frequency, and FSI metadata (FSM template). - Responsible Institutions: CBM [FSD] ### Background and context - This was STA’s first financial sector statistics mission to the CBM; STA has fielded multiple missions to Montenegro in real sector, government finance, and external sector statistics over the last ten years. - The October 2017 IMF Report “Montenegro: Technical Assistance Report—Macroprudential Policy Framework” emphasized closing data gaps for financial stability analysis and noted the CBM’s reliance on core banking FSIs. - The CBM’s Department for Financial Stability, Statistics and Research Department (FSD) carries out the financial stability mandate. - Legislative amendments (expected to be implemented by April 2018) will extend the regulatory perimeter to capture activities of all credit institutions (nonbank factoring and leasing companies, microcredit finance institutions, purchase of receivables, credit-guarantee operations). - Insurance companies and investment and pension funds are supervised by the insurance supervisory agency and securities exchange commission, respectively. ### Financial system structure and key statistics - Fifteen banks operate in Montenegro. - Foreign-controlled banks: 9 out of 15 banks hold around 74 percent of the banking sector’s assets. - Banking sector assets represent about 96 percent of GDP. - Banking share of total financial sector assets: around 90 percent. - Lending to the household sector accounts for almost 50 percent of total loans. - Microcredit finance institutions (6 institutions) constitute 1.3 percent of financial sector assets and are not allowed to perform deposit taking operations. - Insurance sector is small in market share but has been growing. Table extract (end-2016, thousand Euros, end-2016) — selected figures preserved as presented: - Domestically controlled commercial banks: Asset Size 980,918; Share in Total Assets of Sub-Sector 625.9%; Share in Total Financial Sector Assets 23.5% - Foreign controlled commercial banks: Asset Size 2,809,337; Share in Total Assets of Sub-Sector 974.1%; Share in Total Financial Sector Assets 67.2% - Total ODCs: Asset Size 3,790,255; Share in Total Assets of Sub-Sector 15100.0%; Share in Total Financial Sector Assets 90.6% - Insurance Companies: Asset Size 196,681; Share in Total Assets of Sub-Sector 1150.1%; Share in Total Financial Sector Assets 4.7% - Pension Funds: Asset Size 566; Share in Total Assets of Sub-Sector 20.1%; Share in Total Financial Sector Assets 0.0% - Other Financial Intermediaries total: Asset Size 194,981; Share in Total Assets of Sub-Sector 1949.7%; Share in Total Financial Sector Assets 4.7% - Leasing Companies: Asset Size 45,209; Share in Total Assets of Sub-Sector 411.5%; Share in Total Financial Sector Assets 1.1% - Micro-credit Finance Institutions: Asset Size 55,576; Share in Total Assets of Sub-Sector 614.2%; Share in Total Financial Sector Assets 1.3% - Investment Funds: Asset Size 94,196; Share in Total Assets of Sub-Sector 924.0%; Share in Total Financial Sector Assets 2.3% - Total OFCs: Asset Size 392,228; Share in Total Assets of Sub-Sector 32100.0%; Share in Total Financial Sector Assets 9.4% - Total Financial Sector: Asset Size 4,182,483; Share in Total Assets of Sub-Sector 47100.0% (Note: table figures are presented as in the source.) ### Detailed technical assessment and recommendations A. Source data - Source data for DTs (COAs and supervisory series) are broadly adequate for compiling FSIs per the FSI Guide. - COAs provide breakdowns by type of financial instrument and by counterpart sector, and include income/expense detail required for FSIs. - Some COA account descriptions (e.g., "non-amortized discount Dr/Cr", "receivables purchased (factoring) Dr", "accruals: loans Dr") are insufficiently clear for statistical counterpart-sector and instrument classification; clarification from CBM accounting experts is recommended. - Building blocks of source data align with international regulatory, accounting, and statistical standards (residents vs nonresidents distinction, accrual accounting, sectoring, instrument classification, supervisory series). - Recommended Action: - Address the data issues identified during the mission and update the compilation spreadsheets as needed. B. Regulatory and accounting framework - All banks in Montenegro follow Basel II since 2009; calculation of supervisory series (Tier 1 capital, Tier 2 capital, risk-weighted assets) aligns with the FSI Guide. - Montenegro is working towards implementation of the EU Capital Requirements Regulation and Directive (CRR/CRD IV); CBM applies a conservative approach (higher minimum capital ratio of 10 percent and additional capital requirements as relevant). - Commercial banks have been implementing IAS39 since 2013 and are expected to start implementing IFRS9 in 2018; COA amendments related to IFRS9 are not expected to substantially affect mapping and FSI compilation. C. Consolidation basis - FSIs are compiled using a “domestic consolidation” (DC) basis, appropriate because banks in Montenegro do not have subsidiaries abroad. - The FSI Guide’s CBCSDI and DCCBS bases are alternatives, but DC is acceptable when resident DTs have no nonresident subsidiaries and few or no domestically controlled non-DT subsidiaries. D. Compilation and reporting framework - The mission mapped COAs to IMF FSI templates for sectoral balance sheet and income statement and developed a tool to automatically calculate FSIs from source data, reducing manual work and supporting sustainability. - Using available source data: - All 12 core FSIs were compiled. - 10 of the 13 additional FSIs for DTs were compiled. - Two FSIs for real estate markets were compiled. - Available source data allow quarterly compilation of most FSIs for DTs and monthly compilation of indicators derived only from COAs. - The mission assisted in developing institutional coverage templates (FS1) and FSI metadata (FSM template). - FSD officials confirmed ability to compile FSIs using the framework and report them to STA on a regular basis. - Minor deviations were found between mission-calculated FSIs and those used for national analysis; reasons are understood and data improvements are planned. *Source: IMF STA mission report to the Central Bank of Montenegro (November 29–December 5, 2017) — Priority Recommendations and Detailed Technical Assessment as presented in the source PDF.* ### 28. The CBM aims to regularly provide FSIs to STA at a minimum of quarterly frequency, ### 1mneea2019001 - 28. The CBM aims to regularly provide FSIs to STA at a minimum of quarterly frequency, ### FSI reporting objective and coverage - The CBM aims to regularly provide FSIs to STA at a minimum of quarterly frequency, with data going back to 2013. - The underlying methodology of the source data for DTs was amended in January 2013, particularly due to the adoption of the International Accounting Standards; providing consistent data prior to 2013 will be challenging. - Only commercial banks meet the definition of DTs in Montenegro; FSIs for DTs are compiled on a domestic consolidation basis and include resident DTs and their resident branches. - Resident DTs consist of only 15 commercial banks; the mission focused on compiling FSIs for these commercial banks on a minimum of quarterly basis. - Some FSIs are also compiled monthly for internal use as monthly source data are available. ### Key methodological points and data definitions - All banks have adopted Basel II to compile and report supervisory data, including Tier 1 capital, Tier 2 capital, and risk-weighted assets (RWAs); RWAs reported by banks cover credit risk, market risk, and operational risk. - Accounting principles are based on the International Accounting Standards (IASs); as of the beginning of 2018, all commercial banks in Montenegro are expected to implement IFRS9. - Loans: nonperforming defined using the 90-days past due criterion or if high probability of loss; CBM loan classification A, B, C, D, E with C, D and E treated as nonperforming loans. - Specific loan loss provisions are calculated by summing “the value adjustments for loans” from the COA and “provisions for estimated losses under regulatory requirement.” - Large exposures: exposures equal to or larger than 10 percent of bank’s own funds (total regulatory capital); Banking Law caps exposure to one party/group at 25 percent of bank’s own funds and sum of all large exposures must not exceed 800 percent of bank’s own funds. For FSIs, national figures include exposures to central government and account for credit risk mitigants. - Short-term liabilities for FSI calculation include all liabilities with a remaining maturity of three-months or less. - Liquid assets per Banking Law include cash; funds on settlement account at the Central Bank; checks and other cash receivables; funds on accounts at domestic banks (demand deposits); funds at payment system agents; funds on accounts at foreign banks (demand deposits); part of reserve requirement funds usable for daily liquidity. Only 50 percent of required reserves are treated as liquid assets. - Government securities are classified as “securities” for FSI purposes even when an active secondary market may not exist. - Net income before extraordinary items and tax is used to calculate return on assets and return on equity; income and expense data are reported on an accumulative basis. - Data on accrued interest are separately identified in source data but not split by counterpart sector; the mission estimated breakdowns based on shares in total loans. - Some COA accounts require clarification for precise classification by counterpart sector and financial instrument. ### Metadata expectations - Metadata are essential to interpret FSIs and allow cross-country comparisons; any deviations from the FSI Guide should be explained in the metadata and updated when necessary. - Metadata should contain information on content and coverage of FSIs, accounting conventions, and other national guidelines; update metadata when changes occur (for example, adoption of Basel III). - Recommended action: Finalize the FSI metadata developed during the mission and submit it to STA. ### Recommended actions (selected) - Finalize and report to STA the sectoral income statement (FSI template Annex 2), the sectoral balance sheet (FSI template Annex 3), memorandum series (FSI template Annex 4), and FSIs with underlying series (FSD template) for DTs using the compilation spreadsheets developed during the mission including data beginning from 2013. - Start regular reporting to STA, for posting on the IMF’s FSI website, the sectoral income statement (FSI template Annex 2), the sectoral balance sheet (FSI template Annex 3), memorandum series (FSI template Annex 4), and FSIs with underlying series (FSD template) for DTs including data from the first quarter of 2013, and the institutional coverage (FS1 template) for 2017. - Finalize the FSI metadata developed during the mission and submit it to STA. - Coordinate with regulators of other financial institutions not under CBM supervision to draw a work program to collect data for compiling FSIs for other financial corporations. - Coordinate with other relevant statistical agencies to explore collecting data for compiling FSIs for nonfinancial corporations and households. - Officially designate a specific unit within the CBM to work on FSIs. - Support FSD officials for their participation in the IMF’s FSI courses to improve methodological knowledge and skills. - Address compilation and data issues identified during the mission and update compilation spreadsheets as needed. ### Institutional, resources, and training notes - The FSD worked with the mission to develop the FSI compilation framework, but an official designation of a unit responsible for regular compilation, reporting, and dissemination of FSIs has not yet been made. - As of December 2017, the FSD has three officials, including the FSD director; one CBM official participated in an FSI course at the Joint-Vienna Institute. - The mission and CBM officials agreed that further TA on FSIs for DTs was not needed at this stage; pending issues could be addressed by STA staff from IMF headquarters via e-mail. ### Timetable and verifiable milestones (selected from Table 3) - August 2018: Officially designate a specific unit within the CBM to work on FSIs. Benchmark. - August 2018: Finalize and report to STA for review the sectoral income statement (FSI template Annex 2), sectoral balance sheet (FSI template Annex 3), memorandum series (FSI template Annex 4), and FSIs with underlying series (FSD template) for DTs using compilation spreadsheets including data beginning from 2013. Benchmark. - October 2018: Start regular reporting to STA for posting on the IMF’s FSI website, including quarterly FSIs for DTs with data from 2013 and institutional coverage (FS1 template) from 2017 at annual frequency. Benchmark. - October 2018: Finalize the FSI metadata developed during the mission and submit it to STA. Benchmark. - October 2018: Address compilation and data issues identified during the mission and update compilation spreadsheets as needed. - December 2018: Coordinate with regulators of other financial institutions (not under CBM supervision) to agree a work program for compiling FSIs for other financial corporations. Target completion date: December 2018. - December 2018: Coordinate with other relevant statistical agencies to explore collecting data for compiling FSIs for nonfinancial corporations and households. Target completion date: December 2018. *Excerpt from the IMF mission report on Financial Soundness Indicators for Montenegro (provided content).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2019/1mneea2019001.pdf_