## 1uvkea2020001 ## Source details **Canonical URL:** [1uvkea2020001](https://www.imf.org/-/media/files/publications/cr/2020/english/1uvkea2020001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2020/english/1uvkea2020001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2020/english/1uvkea2020001.pdf.json) --- ### Preface — mission, scope, and purpose - Mission composition and timeline - MCM TA mission to Pristina, Kosovo, from April 24 to May 7, 2019, to undertake a Financial Sector Stability Review (FSSR). - Mission led by Ann-Margret Westin (MCM); team included Richard Stobo (MCM); Zhongxia Zhang (EUR); external experts Michael Deasy, Keith Hall, Paula Oliveira, and Sarah Simpson. Peter Windsor (MCM) participated from IMF HQ. - IMF Resident Representative to Kosovo Ruud Vermeulen and Rosmarie Schlup (SECO) joined part of the mission; James Morsink (Deputy Director, MCM) participated in closing meeting. - FSSR and three-year follow-up TA funded through the Financial Sector Stability Fund (FSSF). - Scope of work and contacts - Scope agreed January 2019: central bank governance, banking supervision, insurance supervision, securities markets, macroprudential policy, financial inclusion and deepening, and financial stability statistics (with STA support). - Meetings with CBK board and management; Governor’s Cabinet; multiple CBK departments; MoF; KCGF; DIFK; Financial Intelligence Unit; KFRC; KAS; banks, insurers, pension funds, MFIs, NBFIs, external auditors; donors (EU, SECO, U.S. Treasury, USAID, WB). - Findings and recommendations presented to the CBK Executive Board. - Purpose of the FSSR - Demand-led TA instrument providing baseline diagnostic review and prioritized TA roadmap to support development, financial stability, deepening and inclusion. - Stocktaking of 2012 FSAP and MCM TA implementation; assessment of financial sector statistics with STA input. ### Executive summary — key diagnostic findings - System structure and performance - CBK regulates entire financial system; banking system dominates and is stable. - Banks meet capital adequacy requirements, are reasonably profitable, and NPLs are the lowest in the region. - Commercial banks’ credit to the private sector experienced double-digit growth rates over the last three years. - Supervision and markets - Supervisory framework strengthened; enhanced cooperation with regional authorities and ECB. - New draft law on banks prepared; legislation on MFIs and other NBFIs before parliament. - NBFIs play a small role; financial markets underdeveloped; CBK working on regulation to allow creation of investment funds. - Governance and operational weaknesses at CBK - CBB operating with fewer non-executive members than required by the CBL. - Some CBK departments (including strategic areas) do not report to a deputy governor and are not represented at the Executive Board. - Neither CBB nor EB regularly receives direct presentations from CBK staff. - Sector vulnerabilities and gaps - Potential lack of preparedness for sharp tightening of liquidity conditions; banks’ liquid assets largely government securities with no active secondary market. - Insurance sector undeveloped (particularly life); CBK market-conduct powers and capacity need strengthening; recent insurer liquidation highlighted problems. - Macroprudential policy operational steps taken but institutional arrangements, monitoring, and data gaps remain; no macroprudential measures implemented yet. ### Main recommendations and priorities (selected) - Priority/timeframe legend - Priority: High (H); Medium High (MH); Medium (M) - Timeframe: Immediate (IM) <6 months; Short-Term (ST) <12 months; Medium-Term (MT) 12–24 months; Long-Term (LT) 24–48 months. - Enhance Central Bank Governance (selected) - Restart appointment of fourth non-executive member to CBB in accordance with the CBL. (¶26) — Priority: H; Timeframe: ST - Review effectiveness of the CBB and EB and enhance EB composition. (¶27, ¶29–30) — Priority: MH/H; Timeframe: MT/ST - Review and update CBK organizational structure, documented roles and responsibilities. (¶28) — Priority: H; Timeframe: ST - Embed risk management within CBK governance arrangements. (¶31) — Priority: MH; Timeframe: MT - Banking supervision and regulation (selected) - Undertake in-depth staffing analysis for supervision and policy. (¶36, 53) — Priority: H; Timeframe: IM - Remove doubt over indemnification of staff defending actions in good faith. (¶38, 54) — Priority: H; Timeframe: IM - Review regulatory list to cover country/transfer risk, cyber risk, market risk. (¶39, 54) — Priority: MH; Timeframe: ST - Require full business and professional history for license applicants (directors, senior management, principal shareholders). (¶41, 54) — Priority: MH; Timeframe: ST - Intensify efforts with ECB to participate in Raiffeisen supervisory college and resolution/recovery plans. (¶42, 54) — Priority: H; Timeframe: IM - Integrate stress testing with financial stability area and communicate results to banks. (¶54, 99, 107) — Priority: H; Timeframe: MT - Improve offsite liquidity monitoring and implement Basel III liquidity standards. (¶49, 50, 54) — Priority: H; Timeframe: ST/IM - Finalize repo facilities maturing over intraday lag. (¶52, 54) — Priority: H; Timeframe: IM - Insurance sector (selected) - Update MTPL premium pricing and establish regular review process. (¶59, 71) — Priority: H; Timeframe: ST - Assess viability of taxes/fees and obligations to pay for uninsured drivers’ claims. (¶70–71) — Priority: H; Timeframe: ST - Enhance market-conduct supervision powers and resources. (¶62, 64, 71) — Priority: MH; Timeframe: MT - Develop escalating supervisory actions and reconsider crisis management processes (avoid installing CBK employees as administrators/liquidators). (¶55, 61) — Priority: H/MH; Timeframe: ST/MT - Implement RBS manual and enhance onsite supervision. (¶68, 67, 71) — Priority: MH/H; Timeframe: ST - Develop program for Solvency II implementation considering Kosovo circumstances. (¶75) — Priority: M; Timeframe: LT - Macroprudential and financial stability (selected) - Review CBK institutional arrangements and governance for financial stability and MaPP. (¶95, 101) — Priority: H; Timeframe: ST - Amend the CBL to strengthen legal basis for CBK’s macroprudential powers. (¶93, 103) — Priority: MH; Timeframe: LT - Dedicate more resources to EAFSD and streamline deliverables including Financial Stability Report. (¶102) — Priority: H; Timeframe: IM - Complete macroprudential data gap review and strategy to close them; establish Interagency Real Estate Working Group. (¶98, 104) — Priority: H/MH; Timeframe: ST - Consider LTV and DSTI for consumer and mortgage lending. (¶109) — Priority: H; Timeframe: IM - Securities markets and financial inclusion (selected) - Establish cross-agency task force for capital markets development; assist MoF drafting capital markets legislation; increase CBK expertise on capital markets. (¶83–87, 84–85) — Priority: M; Timeframe: MT/LT - Establish a National Strategy on Financial Inclusion. (¶119, 126) — Priority: H; Timeframe: ST - Enhance CR data collection and use credit history for financial stability. (¶128) — Priority: MH; Timeframe: MT - Advance regulation and readiness for mobile payment and electronic signature. (¶122, 129) — Priority: MH; Timeframe: MT - Reconcile laws on MFIs’ legal status and address NGO MFIs’ conversion. (¶124, 131) — Priority: H; Timeframe: ST ### Annex IV — adequacy of financial statistics & macroeconomic context - Methodology and scope - Evaluations used: Basel Core Principles (BCP), IAIS Core Principles, IMF Staff Guidance Note on Macroprudential Policies, IMF stress-testing frameworks, Basel Committee guidance on financial inclusion, IMF Financial Soundness Indicators Compilation Guide. - Macroeconomic context and financial system structure - Real GDP growth: estimated 4 percent in 2018; forecast 4.2 percent in 2019. - GDP per capita about €3,600 in 2017; income gap: 26 percent of the EU average and 76 percent of Western Balkans average in PPP terms. - Inflation expected to double in 2019 to 2.2 percent from 1.1 percent in 2018 (reflecting 100 percent tariff introduced November 2018). - Current account and fiscal: trade deficit large; budget deficit in 2019 projected at about 1.9 percent of GDP; total public debt forecasted to rise to 19.7 percent of GDP. - Financial sector composition and key metrics - Banking sector accounts for 66 percent of total financial system assets. - Foreign-owned banks account for 87 percent of total banking assets in 2018. - NPLs at 2.6 percent. - Pension sector share rose from 13.6 percent in 2009 to 28 percent in 2017. - Insurance sector about 3 percent of total financial system assets; MFIs and NBFIs 4 percent. - No corporate bond or stock markets; firms rely on banks for funding. - Reserve and liquidity considerations - Under conservative definition excluding Privatization Agency of Kosovo and Kosovo Pensions Savings Trust (KPST) deposits, reserves fall below three months of prospective imports. - Gross international reserves declined in percent of GDP; level low regionally. - Banking sector liquid assets represented 38 percent of short-term liabilities in January 2019. - Liquidity ratios tightening as credit expansion outstrips deposit growth. - Liquid assets include domestic government securities with no haircut in liquidity ratio despite absence of active secondary market and no central bank repo facility in operation. - CBK’s ELA arrangement limited in size, constant, never tested, would meet needs of only a few smaller distressed banks. ### Macrofinancial vulnerabilities, stress testing, and early warning - Positive signals - Banks meet capital adequacy, have sufficient liquidity, low NPLs, profitability, and sustained credit growth rates in excess of 10 percent for three consecutive years. - Risks and data limitations - Authorities lack insight into nonfinancial private sector balance sheets and debt-servicing capacity. - Real estate markets opaque; no residential property price indices. - Trade deficit 26 percent of GDP in 2017. - Travel services 16 percent of GDP (2017); remittances 15 percent of GDP (2017); FDI 4 percent of GDP (2017). - Stress testing - EAFSD and BSD run separate stress tests (macro-focused vs micro-focused); largely static sensitivity analyses; limited network analysis and integration. - Recommendation: deepen stress-testing competency, integrate EAFSD and BSD exercises, and communicate results to banks. ### Banking sector — baseline diagnostics, metrics, and recommendations - Key metrics and trends - Aggregate capital adequacy ratio about 16 percent (level since 2016). - Almost all capital is Common Equity Tier 1 (CET1). - Return on equity about 5–6 percent since 2015. - NPL ratio 2.6 percent, down from 5.9 percent in 2016. - Banks maintain average CET1 level above 96 percent of total capital. - Regulation requires liquid assets against short-term liabilities minimum 20 percent by currency and 25 percent in total currencies; all banks are well above these limits. - Liquidity coverage ratio (LCR) - Except for two branches, Kosovo banks would not face difficulties complying with the LCR. - Scenario excluding GoK securities from HQLA: - one bank would breach the minimum LCR; - two other banks would experience a relevant reduction in their liquidity ratio levels. - Main banking recommendations (selected) - Prioritize review of staffing requirements in Banking Supervision; Licensing and Standardization; and AML departments — H IM. - Amend indemnification rule to provide unconditional support for staff defending actions in good faith. - Publicly disclose reasons for dismissal of CBK Board members. - Review and update regulations and permitted banking activities (including digital money and electronic signatures). - Require full career history for directors and senior management in license applications; limit directors’ tenure (suggested maximum 12 years). - Intensify cooperation with ECB for Raiffeisen supervisory college and participation in group resolution/recovery plans. - Introduce formal meetings with external auditors. - Approve and implement Offsite Supervision Procedures Manual for Banks. - Establish supervisory procedures for periods of stress and conduct periodic ELA operational tests. - Develop tools for granular credit risk assessment using Credit Registry data. - Improve offsite liquidity monitoring and finalize repo facility implementation. ### Insurance sector — structure, performance, and recommendations - Market structure and key statistics - 13 insurance companies in Kosovo at mission time (1 entered liquidation at end-April 2019); originally 14 (12 non-life, 2 life). - End-2018 gross non-life premiums: €89.1 million; 67 percent MTPL business. - Life insurance gross premiums: €3 million. - Insurance penetration: 1.37 percent of GDP (comparatives: Central and Eastern Europe 1.92 percent; Western Europe 7.28 percent). - Performance indicators and concerns - 2018 domestic business: loss ratios 46.6 percent; expense ratios 48.1 percent. - Non-resident MTPL loss ratio 32.8 percent; expense ratio 59.6 percent. - Low loss ratios and high expense ratios may indicate under-provisioning of claims and overstated financial position. - Industry paid approximately €4.5 million in taxes in 2018 under a 5 percent tax on premiums versus €230,000 under usual corporate taxation. - Industry required to pay a 1 percent premium contribution to the Red Cross (recently declared unconstitutional). - CBK requires at least 10 percent of insurer assets invested with the CBK; insurers predominantly invest in bank deposits, some government bonds and real property. - Market conduct and supervisory capacity - MTPL premiums set by CBK have not been adjusted since 2011 despite rising claim costs and regulatory changes. - Practice of appointing CBK employees as administrators/liquidators raises concerns for CBK independence. - CBK market-conduct surveillance tools limited (e.g., restrictions on “mystery shopping”); consumer surveys underused. - CBK has one qualified actuary (key person risk); recommended outsourcing interim actuarial expertise and sponsoring actuarial training long-term. - Insurance recommendations (selected) - Update MTPL premiums and institute regular pricing review. — Priority: H; Timeframe: ST - Assess viability of taxes/fees and obligations to pay uninsured drivers’ claims. — Priority: H; Timeframe: ST - Enhance market-conduct supervision powers and resources; implement RBS manual; enhance onsite supervision. — Priority: MH/H; Timeframe: MT/ST - Reconsider crisis management practices that involve appointing CBK employees as administrators/liquidators. — Priority: MH; Timeframe: MT - Consider proportionate Solvency II implementation in medium term with attention to proportionality and local circumstances. — Priority: M; Timeframe: LT ### Macroprudential policy, systemic risk monitoring, and crisis management - Institutional arrangements and governance - CBK published a macroprudential policy framework and established MPAC in 2016; no macroprudential measures implemented to date. - No explicit macroprudential mandate in primary legislation (CBL); recommendation to amend CBL to explicitly provide for MaPP powers; alternative to anchor in amended law on banks is less preferred. - Decision-making for MaPP resides with small Executive Board decoupled from monitoring functions; recommendation to establish a Financial Stability Committee or broaden EB composition. - Resource constraints: dedicate more resources to EAFSD; streamline Financial Stability Report. - Data gaps and early-warning - Priority data gap: property markets (construction, transactions, prices). - Recommended Interagency Real Estate Working Group: CBK, MoF, KAS, Ministry of Environment and Spatial Planning, Real Estate Industry Association. - Enhance use of Credit Registry (CR) data: compute default rates, loss-on-default, LTV, DTI, aggregate borrowing statistics by borrower type, region, purpose, maturity, currency. - Strengthen sectoral financial accounts and balance sheet statistics (STA TA). - Crisis preparedness and ELA - ELA limits due to euroization: CBL limits ELA to total CBK reserves (about €50 million) and Special Reserve Fund of €46 million — likely to cover only a few small banks. - Operational gaps: restrictive collateral requirements, lack of standard contracts, no established solvency/viability methodology for illiquid banks. - NFSC restructured and rebadged as Financial Stability and Crisis Management Committee (FSC); to meet semi-annually from late 2019; established by bilateral MoUs rather than legislation. - WB FinSAC providing TA on operationalizing ELA and crisis preparedness; FSSR not proposing IMF TA on crisis management given ongoing WB support. - Macroprudential operational recommendations (selected) - Deepen stress testing competencies, move beyond static sensitivity analysis, expand network analysis. — Priority: MH; Timeframe: MT - Consider LTV, DTI/DSTI limits for consumer and mortgage lending. — Priority: H; Timeframe: IM - Strengthen liquidity management: introduce LCR and net stable funding ratio as part of Basel III implementation; foster interbank repo market and CBK repo facility. ### Financial inclusion, payments, and MFIs - Financial inclusion and payments - Low financial intermediation; many households/firms not covered by formal institutions. - Cash transactions dominate; electronic payments limited; mobile payments virtually nonexistent. - Only 24 percent of adults use electronic payments; less than 2 percent use mobile phones to pay bills; less than 1 percent use mobile phones to transfer money. - Mobile payment and digital wallet services not available; electronic signature use not allowed. - Microfinance and KCGF - KCGF guarantees up to 50 percent for MSME loans; as of February 2019 KCGF capital €15.9 million; cumulative approved loan portfolio €93.8 million; 2,409 loans registered as of February 2019. - Most banks participate; only one NBFI joined KCGF due to legal uncertainty on MFIs. - Legal status of MFIs - 10 of 12 MFIs, and 3 of top 4 MFIs (90 percent market share), are NGOs. - Proposals to convert NGO MFIs to joint-stock companies not successful; provisions of 2012 LB ruled incompatible with constitution. - New draft law on MFIs and NBFIs not compatible with law on business organizations and law governing NGOs; legal uncertainty persists. - Financial inclusion recommendations (selected) - Establish a National Strategy on Financial Inclusion to monitor and evaluate financial deepening risks and enable multi-institutional coordination. (¶126) — Priority: H; Timeframe: ST - Enhance CR data (include utility bills, credit scoring) and publish financial inclusion data on a dedicated webpage. - Advance regulation and technical readiness for mobile payments and electronic signatures. — Priority: MH; Timeframe: MT - Pass draft law on MFIs/NBFIs and reconcile laws to address NGO MFI conversion and legal uncertainty. ### TA Roadmap — sequencing and selected priorities - Roadmap objectives - Prioritize TA to support governance reforms at CBK; banks’ crisis preparedness and liquidity monitoring; insurance market conduct and onsite supervision; CBK institutional arrangements for financial stability and MaPP; close data gaps; consider macroprudential tools; build blocks for investment funds; national financial inclusion strategy; develop sectoral financial accounts and balance sheet statistics. - Selected TA activities and priorities (examples) - Review structure of management and decision-making bodies at the CBK. — Responsible: MCM / CBK — Priority: H ST - Oversee CRDIV/Basel III implementation and provide training. — Responsible: MCM / CBK — Priority: H MT - Develop liquidity stress test model and staff training. — Responsible: MCM / CBK (BSD) — Priority: H IM - Develop tools for credit risk assessment using CR granular data and staff training. — Responsible: MCM / CBK (BSD and EAFSD) — Priority: MH MT - Develop regulatory and supervisory toolkit for insurance market conduct; staff training. — Responsible: MCM / CBK — Priority: MH MT - Establish cross-agency task force on capital markets; assist MoF drafting capital markets legislation. — Responsible: CBK, MoF, KPST — Priority: M MT / M LT - Conduct data gap analysis and TA on sectoral financial accounts and balance sheet statistics (STA). — Responsible: CBK, MoF, KAS — Priority: H ST ### Financial statistics, FSIs, and sectoral balance-sheet data (selected exact figures) - Selected Financial Soundness Indicators (Deposit Takers, in percent; consolidation basis: DC) - Regulatory Capital to Risk-Weighted Assets: 19.0, 17.9, 18.1, 18.1, 17.4, 16.1 - Regulatory Tier 1 Capital to Risk-Weighted Assets: 16.7, 15.9, 16.2, 16.2, 15.7, 14.6 - Non-performing Loans Net of Provisions to Capital: 3.0, 2.0, 1.1, 1.2, 1.4, 1.6 - Non-performing Loans to Total Gross Loans: 6.2, 4.9, 3.1, 2.9, 2.8, 2.8 - Sectoral Distribution of Total Loans: Nonfinancial corporations: 65.7, 63.8, 63.6, 63.5, 63.6, 63.3 - Sectoral Distribution of Total Loans: Other domestic sectors: 33.9, 35.8, 36.2, 36.3, 36.1, 36.4 - Return on Assets: 2.6, 2.5, 2.8, 2.4, 2.5, 67.2 - Return on Equity: 23.7, 20.5, 22.1, 18.6, 19.0, 48.0 - Interest Margin to Gross Income: 75.8, 75.3, 71.2, 74.5, 79.5, 78.8 - Non-interest Expenses to Gross Income: 51.6, 46.7, 46.5, 48.0, 49.4, 47.9 - Liquid Assets to Total Assets (Liquid Asset Ratio): 29.2, 31.7, 28.9, 27.2, 24.8, 36.3 - Liquid Assets to Short Term Liabilities: 37.3, 41.5, 38.2, 35.9, 33.2, 12.1 - Net Open Position in Foreign Exchange to Capital: 1.8, 4.4, 1.2, 1.7, 1.7, 1.0 - Capital to Assets (encouraged): 12.2, 12.1, 12.6, 13.1, 13.0, 12.1 - Large Exposures to Capital (encouraged): 63.5, 65.6, 81.7, 77.3, 77.3, 83.6 - Trading Income to Total Income (encouraged): 2.4, 2.3, 4.0, 1.4, 3.1, 3.0 - Personnel Expenses to Non-interest Expenses (encouraged): 40.9, 42.7, 43.0, 43.7, 44.3, 43.9 - Spread Between Reference Lending and Deposit Rates (encouraged): 7.7, 6.0, 5.5, 5.6, 5.3, 5.6 - Customer Deposits to Total (Non-interbank) Loans (encouraged): 130.3, 130.4, 124.4, 121.3, 113.8, 117.5 - Foreign-Currency-Denominated Loans to Total Loans (encouraged): 0.3, ---, ---, 0.2, 0.1 - Foreign-Currency-Denominated Liabilities to Total Liabilities (encouraged): 3.7, 3.6, 4.6, 4.8, 4.9, 4.7 - Annex I — Structure of the Financial Corporations Sector (As of June 2019; in Millions of euros) - Central Bank of Kosovo: Total Assets 1,691; Percent of Subsector 20.2 - Commercial Banks: Total Assets 4,303; Percent of Subsector 51.4 - Other Financial Corporations: Total Assets 2,378; Percent of Subsector 100.0; Percent of Financial System 28.4 - Microfinancial Institutions: Total Assets 285; Percent of Subsector 12.0; Percent of Financial System 3.4 - Insurance Companies: Total Assets 205; Percent of Subsector 8.6; Percent of Financial System 2.4 - Pension Funds: Total Assets 1,871; Percent of Subsector 78.7; Percent of Financial System 22.3 - Money Transfer Agencies: Total Assets 17; Percent of Subsector 0.7; Percent of Financial System 0.2 - Total: Total Assets 8,372 (In Millions of euros); Percent of Financial System 100.0 *Source: Preface and Executive Summary of the Financial Sector Stability Review mission report to Kosovo (FSSR mission, April 24–May 7, 2019); Annexes and statistical tables from content unit 1uvkea2020001.* ### Preface................................................................................................................. ### Preface ### Mission composition and timeline - A Monetary and Capital Markets Department (MCM) technical assistance (TA) mission visited Pristina, Kosovo, from April 24 to May 7, 2019, to undertake a Financial Sector Stability Review (FSSR). - The mission was led by Ann-Margret Westin (MCM) and included Richard Stobo (MCM); Zhongxia Zhang (EUR); and external experts Michael Deasy, Keith Hall, Paula Oliveira, and Sarah Simpson. Peter Windsor (MCM) participated from IMF HQ. - The IMF Resident Representative to Kosovo, Ruud Vermeulen, and Rosmarie Schlup from the Swiss State Secretariat for Economic Affairs (SECO) joined part of the mission. James Morsink, Deputy Director (MCM), participated in the closing meeting. - The FSSR and the three-year follow-up TA based on the TA Roadmap is financed through the Financial Sector Stability Fund (FSSF). ### Scope of work and contacts - Scope agreed during January 2019 scoping discussions and comprised central bank governance, banking supervision, insurance supervision, securities markets, macroprudential policy, and financial stability issues related to financial inclusion and deepening. - The mission met with: the Central Bank of Kosovo (CBK) board and management; Governor’s Cabinet; CBK departments including Banking and Insurance Supervision, Licensing and Standardization, Asset Management, Statistics, Financial Planning and Reporting, External Relations, Legal, Risk Management, Economic Analysis and Financial Stability (EAFSD), Internal Audit; stand-alone divisions of Anti-Money Laundering (AML), Appeals and Financial Services Users, and Credit Registry (CR); Ministry of Finance (MoF); Kosovo Credit Guarantee Fund (KCGF); Deposit Insurance Fund of Kosovo (DIFK); Financial Intelligence Unit; Kosovo Financial Reporting Council (KFRC); Kosovo Agency of Statistics (KAS); representatives from banks, insurance companies, pension funds, microfinance institutions (MFIs) and other nonbank financial institutions (NBFIs), external auditors; and donor community including EU, SECO, U.S. Treasury and USAID, and the World Bank (WB). - Findings and recommendations were presented to the Executive Board (EB) of the CBK. ### Purpose of the FSSR - The FSSR is a demand-led TA instrument for low- and lower-middle-income countries that provides a baseline diagnostic review of the financial sector and proposes a prioritized TA roadmap to deliver sound financial sector reform in support of development, financial stability, financial deepening and inclusion. - The mission also conducted a stocktaking of implementation of the 2012 FSAP and MCM TA and an assessment of financial sector statistics with support from the IMF Statistics Department (STA). ### Acknowledgements - The mission appreciated open and frank discussions with counterparts, the authorities’ support and hospitality, and logistical support from the IMF Resident Representative Office in Pristina. ### Key diagnostic findings (Executive Summary) - The CBK regulates the entire financial system, which is dominated by a stable banking system. - Banks meet capital adequacy requirements and are reasonably profitable, with nonperforming loans (NPLs) the lowest in the region. - Commercial banks’ credit to the private sector has experienced double-digit growth rates over the last three years. - The supervisory framework has been strengthened, including enhanced cooperation with regional authorities and the European Central Bank (ECB). A new draft law on banks has been prepared; legislation regulating and widening the range of activities of MFIs and other NBFIs are before parliament. - Credit penetration is low by regional standards but continues to increase, facilitated by low interest rates, an easing of credit standards, and credit guarantee fund-backed lending. - NBFIs play a small role in intermediation; financial markets remain underdeveloped though CBK is working on regulation to allow creation of investment funds. - Identified weaknesses in CBK organizational structure and culture that may impact decision-making effectiveness: the Central Bank Board (CBB) is operating with fewer non-executive members than required in the Law on the Central Bank of Kosovo (CBL); some CBK departments (including key strategic areas) do not report to a deputy governor and are not represented at the EB; neither the CBB nor the EB regularly receives direct presentations from CBK staff. - Banking sector vulnerabilities: potential lack of preparedness for sharp tightening of liquidity conditions; banks’ liquid assets largely consist of government securities for which there is currently no active secondary market in Kosovo. - Insurance sector weaknesses: undeveloped (particularly life insurance); CBK powers and capacity for market-conduct surveillance need strengthening; a recent liquidation of an insurance company highlighted sector problems. - Macroprudential framework: CBK has taken steps toward operationalizing it but institutional arrangements, monitoring of systemic risks, and differentiation between healthy financial deepening and excessive credit growth remain challenging given data limitations; no specific macroprudential policy measures have yet been implemented. - Preconditions for capital markets and the impact of financial deepening were assessed. - Stocktaking: Kosovo has received extensive MCM TA historically, including a resident advisor in 2011; nearly all 2012 FSAP recommendations have been implemented. Most progress on MCM TA recommendations was in risk-based banking supervision. ### Main recommendations and priorities (selected items from Table 1) - Enhance Central Bank Governance - Restart the process to appoint a fourth non-executive member to the CBB in accordance with the CBL. (¶26) — Priority: H; Timeframe: ST - Review the effectiveness of the operation of the CBB. (¶27) — Priority: MH; Timeframe: MT - Enhance the composition of the Executive Board and review its effectiveness. (¶29–30) — Priority: H; Timeframe: ST - Review and update the organizational structure of the CBK and refresh documented roles and responsibilities to ensure the structure is clear to all staff, at all levels. (¶28) — Priority: H; Timeframe: ST - Review the effectiveness of other decision-making structures and committees. (¶24) — Priority: MH; Timeframe: MT - Embed risk management within the CBK and its governance arrangements. (¶31) — Priority: MH; Timeframe: MT - Effective and Efficient Financial Supervision and Regulation — Banking sector (selected) - Undertake an in-depth analysis of the staffing requirements needed in day-to-day supervision and policy. (¶36, 53) — Priority: H; Timeframe: IM - Remove any remaining doubt concerning the protection of staff against the costs of defending their actions and/or omissions made while discharging their duties in good faith. (¶38, 54) — Priority: H; Timeframe: IM - As part of the ongoing review of the list of Regulations, ensure necessary risks (e.g., country and transfer risks, cyber risk, aspects of market risk) are addressed and re-examine existing ones. (¶39, 54) — Priority: MH; Timeframe: ST - In relation to banking license applications, require full details of the business and professional history of directors and senior management, and principal shareholders. (¶41, 54) — Priority: MH; Timeframe: ST - Intensify efforts with the ECB to participate in the Raiffeisen supervisory college and to be party to its resolution and recovery plans. (¶42, 54) — Priority: H; Timeframe: IM - Introduce a formal regime for regular meetings with banks’ external auditors. (¶44, 54) — Priority: MH; Timeframe: ST - Integrate stress test exercises with the financial stability area and communicate the results to the banks. (¶54, 99, 107) — Priority: H; Timeframe: MT - Establish supervisory procedures required during periods of stress and conduct periodic tests on operational procedures for granting of ELA. (¶47, 54) — Priority: H; Timeframe: ST - Develop tools for more thorough assessment of credit risk, based on granular data from the CR. (¶48, 54) — Priority: MH; Timeframe: MT - Require banks to define scenarios forecasting disturbances to payment and settlement systems for operational risk management. (¶46, 54) — Priority: H; Timeframe: IM - Improve offsite monitoring tools to better comprehend banks’ exposure to liquidity risk. (¶50, 54) — Priority: H; Timeframe: IM - Finalize implementation of repo facilities between the CBK and financial institutions, maturing over the intraday lag. (¶52, 54) — Priority: H; Timeframe: IM - Implement Basel III liquidity standards. (¶49, 54) — Priority: H; Timeframe: ST - Insurance sector (selected) - Update the premium rate pricing of the mandatory motor third-party liability (MTPL) product and develop a process to regularly review the pricing as risk factors evolve. (¶59, 71) — Priority: H; Timeframe: ST - Assess the viability for the insurance industry of continuing to apply the taxes and fees, and obligations to pay for claims related to uninsured drivers. (¶70–71) — Priority: H; Timeframe: ST - Enhance supervision of market conduct by ensuring the CBK has adequate powers and resources for effective market-conduct supervision. (¶62, 64, 71) — Priority: MH; Timeframe: MT - Develop a framework of escalating supervisory actions for the insurance sector from preventative and corrective measures to enforcement. (¶55) — Priority: H; Timeframe: ST - Reconsider crisis management processes for the insurance industry, particularly the practice of installing CBK employees as administrators and liquidators. (¶61, 71) — Priority: MH; Timeframe: MT - Implement the risk-based supervision (RBS) manual that has been developed. (¶68, 71) — Priority: MH; Timeframe: ST - Enhance onsite supervision practices for insurance. (¶67, 71) — Priority: H; Timeframe: ST - Develop a program for implementation of Solvency II that takes into account Kosovo circumstances and CBK resource needs. (¶75) — Priority: M; Timeframe: LT - Improved Monitoring of Systemic Risks and Financial Stability Governance (selected) - Review the CBK’s institutional arrangements and governance in support of financial stability and macroprudential policy. (¶95, 101) — Priority: H; Timeframe: ST - Amend the CBL to strengthen the legal basis for CBK’s macroprudential policy powers. (¶93, 103) — Priority: MH; Timeframe: LT - Dedicate more resources to EAFSD for financial stability analysis, and “streamline” deliverables including the Financial Stability Report. (¶102) — Priority: H; Timeframe: IM - Complete a full review of macroprudential data gaps and develop a strategy to close them. (¶98, 104) — Priority: H; Timeframe: ST - Establish an Interagency Real Estate Working Group to close information gaps around real estate in Kosovo. (¶104) — Priority: MH; Timeframe: ST - Explore ways to better harness Credit Registry (CR) data for macroprudential policy purposes. (¶105) — Priority: MH; Timeframe: ST - Deepen CBK’s stress testing competency and network analysis. (¶99, 107–108) — Priority: MH; Timeframe: MT - Consider the use of macroprudential policies, including LTV and DSTI for consumer and mortgage lending. (¶109) — Priority: H; Timeframe: IM - Develop Securities Markets (selected) - Ask the Government to establish a cross-agency task force on the development of capital markets in Kosovo. (¶83) — Priority: M; Timeframe: MT - Provide assistance to the MoF in drafting key pieces of capital markets legislation. (¶84) — Priority: M; Timeframe: LT - Increase expertise and knowledge on capital markets at CBK. (¶85) — Priority: M; Timeframe: MT - Ensure existence of pre-conditions for capital markets activity. (¶87) — Priority: M; Timeframe: LT - Financial Inclusion and Deepening (Impact on Financial Stability) - Establish a National Strategy on Financial Inclusion. (¶119, 126) — Priority: H; Timeframe: ST - Further enhance data collection by the CR and utilize credit history data for financial stability purpose. (¶128) — Priority: MH; Timeframe: MT - Advance regulation and technical readiness for mobile payment and electronic signature. (¶122, 129) — Priority: MH; Timeframe: MT - Reconcile laws regarding MFIs’ legal status and address NGO MFIs’ conversion. (¶124, 131) — Priority: H; Timeframe: ST - Enhanced Financial Statistics for Financial Stability Monitoring and Analysis - Harmonize reporting of FSIs and address remaining methodological issues. (Annex I) — Priority: MH; Timeframe: ST - Ensure methodological consistencies of monetary statistics with the international standards. (Annex I) — Priority: MH; Timeframe: MT - Priority and timeframe legend contained in Table 1: - Priority: High (H); Medium High (MH); Medium (M) - Timeframe: Immediate (IM) <6 months; Short-Term (ST) <12 months; Medium-Term (MT) 12–24 months; Long-Term (LT) 24–48 months. ### TA Roadmap and sequencing - Based on the diagnostic assessment, the mission delivered a preliminary TA Roadmap (Annex II) prioritizing key TA to support financial sector reforms, focusing on: governance and organizational reforms at the CBK; banks’ crisis preparedness and liquidity risk monitoring; market conduct and onsite supervision in insurance; CBK institutional arrangements for financial stability and macroprudential policy; closing data gaps; considering macroprudential tools; building blocks for investment funds; establishing a national strategy on financial inclusion; and developing sectoral financial accounts and balance sheet statistics. *Source: Preface and Executive Summary of the Financial Sector Stability Review mission report to Kosovo (FSSR mission, April 24–May 7, 2019).* ### Annex IV. The assessment of the adequacy of financial statistics for evaluating financial ### Annex IV. The assessment of the adequacy of financial statistics for evaluating financial stability risks and vulnerabilities ### Methodology and scope - The diagnostic review is based on existing standards and methodologies and targeted to specific issues based on country circumstances. - Evaluations used: - Basel Core Principles (BCP) for banks and IAIS Core Principles for Insurers (guided by self-assessments where available). - IMF’s Staff Guidance Note on Macroprudential Policies for financial stability and macroprudential policy frameworks. - IMF established analytical framework and toolkits to evaluate stress testing capacity. - Basel Committee Guidance on application of Core Principles for Effective Banking Supervision to review financial inclusion-related regulation and supervision. - IMF’s Financial Soundness Indicators Compilation Guide to evaluate compilation of FSIs. - Complementary inputs included targeted questionnaires and market sector overviews. - The output from the evaluation of financial statistics was utilized to inform the mission’s diagnostic review of financial risks and vulnerabilities. ### Macroeconomic context and financial system structure - Economic performance and outlook: - After three years of strong expansion, the economy grew at an estimated 4 percent in 2018. - Real GDP is forecasted to increase by 4.2 percent in 2019 due to a temporary increase in public investment. - GDP per capita about €3,600 in 2017; income gap remains large (26 percent of the EU average and 76 percent of Western Balkans average in PPP terms). - Inflation and fiscal/ external indicators: - Inflation expected to double in 2019 to 2.2 percent from 1.1 percent in 2018, reflecting a 100 percent tariff on imports from Serbia and Bosnia and Herzegovina introduced in November 2018. - Current account deficit expected to remain large due to a sizable negative trade balance. - Budget deficit in 2019 projected at about 1.9 percent of GDP (within the fiscal rule limit). - Total public debt forecasted to rise to 19.7 percent of GDP. - Structural challenges: - Low labor force participation, high unemployment, widespread informality, and weak external competitiveness. - Financial sector structure: - The CBK regulates the entire financial system; primary objective is to maintain financial stability in a euroized economy. - Banking sector accounts for 66 percent of total financial system assets. - Foreign-owned banks account for 87 percent of total banking assets in 2018. - NPLs at 2.6 percent (reported lowest in the region). - Commercial banks’ credit to the private sector experienced double-digit growth rates for the last three years. - Pension sector increased share of total financial system assets from 13.6 percent in 2009 to 28 percent in 2017. - Insurance sector represents about 3 percent of total financial system assets and mainly engages in MTPL insurance. - MFIs and NBFIs constitute 4 percent of the financial system. - Kosovo has no corporate bond or stock markets; firms depend on banks for funding. - Financial inclusion and payments: - Low degree of financial intermediation; many households and firms are not covered by formal financial institutions. - Cash transactions dominate; electronic payments limited; mobile payments virtually nonexistent. - Commercial banks have reduced involvement in the small-loan market and physical access points; MFIs and NBFIs have expanded to fill the gap. ### Macrofinancial vulnerabilities - Positive signals: - Banks meet capital adequacy requirements, have sufficient liquidity, low NPLs, are profitable, and sustained credit growth rates in excess of 10 percent for three consecutive years. - Credit expansion supports financial deepening; credit penetration remains low by regional standards but increasing. - Risks and data limitations: - Authorities have very limited insight into nonfinancial private sector balance sheets and debt-servicing capacity of households and companies. - Anecdotal evidence that consumption lending is benefiting real estate in absence of mortgage finance. - Real estate markets are opaque; no residential property price indices or readily available commercial real estate information. - External vulnerabilities: - Trade deficit high at 26 percent of GDP in 2017. - Trade financing largely supported by travel services (16 percent of GDP in 2017), remittances (15 percent of GDP in 2017), foreign direct investment (4 percent of GDP in 2017), and other non-recorded capital inflows. - Remittances mainly support consumption rather than investment; sensitivity to remittance shocks as diasporas integrate abroad. - Decision to impose 100 percent customs duties on goods from Serbia and Bosnia and Herzegovina in late 2018 adds concern to trade relations. - Reserve and liquidity considerations: - Kosovo’s unilateral euroization requires vigilance to capital movements and liquidity risk. - According to standard definitions, gross international reserves are adequate; under a conservative definition excluding Privatization Agency of Kosovo and Kosovo Pensions Savings Trust (KPST) deposits, reserves fall below three months of prospective imports. - Gross international reserves have declined in percent of GDP and the level is low regionally. - Banking sector liquid assets represented 38 percent of short-term liabilities in January 2019. - Reserve adequacy ratios expected to decline over the medium term and may be insufficient to cover balance of payments needs. - Banks’ liquidity ratios are gradually tightening as credit expansion outstrips deposit growth. - Liquid assets include domestic government securities with no haircut for sovereign debt in liquidity ratio calculations, despite no active secondary market and no central bank repo facility in operation. - CBK’s emergency liquidity assistance (ELA) arrangement is limited in size due to euroization, constant in size, has never been tested, and would meet needs of only a few smaller distressed banks. ### Technical assistance (TA) stocktaking and review - MCM TA since FY2011: - About 4.5 FTEs of MCM TA delivered since FY2011 (A Full Time Equivalent measures TA delivered in the field by one person for one year). - 76 percent of MCM TA focused on financial sector regulation and supervision since FY11. - Central bank operations accounted for 6 percent and crisis preparedness and management for 4 percent of MCM TA since FY11. - Macroprudential policy framework TA provided in 2017. - Other TA providers: - World Bank: property registration, law on MFIs, retail payment system, MTPL pricing. - U.S. Treasury: insurance supervision and debt management. - World Bank Financial Sector Advisory Center (FinSAC) currently providing TA on crisis preparedness and management. - Implementation status: - Stocktaking exercise on 2012 FSAP recommendations and MCM TA recommendations since 2012 showed nearly all 2012 FSAP recommendations have been implemented. - Most progress on MCM TA recommendations was in risk-based banking supervision, leading to a risk-based supervision manual. - CBK followed up on TA recommendations by approving a risk management function, creating a risk management department, and allowing financial institutions to review draft legislation. - Slower progress on contingency planning for crisis preparedness, macroprudential policy and early warning system, and insurance sector regulation and supervision—partly reflecting insufficient staff resources. - Authorities have taken steps to address capacity constraints and promote coordination; lessons learned informed a realistic FSSR TA Roadmap. ### Baseline diagnostic review and main recommendations: Enhance central bank governance - Rationale: - Good corporate governance is essential to ensure the central bank meets objectives through effective decision-making and to embed positive culture. - Governance standards should be reviewed regularly as central bank responsibilities or structure evolve. - Culture should foster questioning, positive challenge, communication, and feedback; an anonymous staff survey is one option to monitor culture over time. - Observations and recommendations: - CBK has a sound legal framework providing an excellent baseline for operations, but governance arrangements and organizational structure should be reviewed to ensure they are fit for purpose. - The report highlights changes to further strengthen controls, improve culture, and support CBK’s program of improvements and regulatory change. ### Baseline diagnostics: governance weaknesses and operational recommendations - Central Bank Board (CBB) composition and independence: - By Article 34 of the CBL, the CBB should contain four non-executive members plus the Governor. - The CBB has operated with only three non-executives for more than three years. - Current CBK law (Article 34(2)) states “The non-executive members of the Central Bank Board shall not be members of the Central Bank’s staff” but does not specify restrictions on former staff. - Recommendation: consider strengthening independence standards for non-executives (e.g., a former employee appointed should not have worked in a role of significant influence or proximity to senior management for at least the one year prior to appointment). - Consider reviewing the CBL in future to reflect up-to-date practices on non-executive independence. - CBB effectiveness: - No arrangements to provide introduction, ongoing training, or support to new non-executive members on their role or CBK operations—this reduces ability to perform effectively. - CBB meetings receive written reports and verbal explanations from Governor and Deputy Governors; CBB does not regularly receive direct presentations from CBK staff. - Recommendation: change agendas to have regular planned presentations of key items directly from relevant staff to enable constructive challenge and improve discussion quality. - Executive Board (EB) composition and decision-making: - CBK previously had three Deputy Governors; after a 2017 departure the vacancy was filled by a “General Coordinator” position not regulated in the CBL, transferring responsibilities without independent EB vote or CBB presence for those areas. - Concerns about clarity over roles, responsibilities, and appropriate staffing levels; budgeted vacancies not clearly communicated. - The EB composition (Governor plus two Deputy Governors) allows quorum of two-thirds; for a period in 2017 there were only two EB members, enabling decisions with two members and allowing the chair a casting vote. - Recommendation: consider setting a clear minimum number for Deputy Governors (suggested minimum of three) and possibly a cap; consider staggered terms for Deputy Governors in any future CBL review. - EB also does not regularly receive direct presentations from staff; recommendation mirrors that for CBB to improve transparency and linkage between staff inputs and EB decisions. - Organizational structure and transparency: - The creation of the General Coordinator position and transfer of key strategic responsibilities to report through the Governor has created a vacuum in EB composition and a lack of departmental independence at EB and CBB levels. - Recommendation: conduct a transparent review of the overall structure with input from management and staff to embed changes positively. - Staffing communication: - Where budgeted vacancies exist and recruitment is not allowed, communicate clearly whether replacements are necessary and remove budgeted vacancies if not, to avoid staff misconceptions. *IMF mission diagnostic review and Annex IV content.* ### 24. The CBK has a number of committees that operate below the level of the ### 1uvkea2020001 - 24. The CBK has a number of committees that operate below the level of the ### Governance, committees, and board effectiveness - CBK operates committees below the Executive Board (EB), including the Macroprudential Committee and the Investment Committee. - The operations (including membership) of the Macroprudential Committee should be reviewed as a priority alongside review of the CBB and EB. - Other committees’ effectiveness should be considered and subject to regular effectiveness reviews to: - allow committees to assess their performance; - ensure outcomes are escalated to the EB and CBB in a timely manner; and - ensure outcomes are cascaded to staff where relevant or appropriate. ### Risk management and organizational culture - Positive progress has been made introducing risk management processes, but focus should shift to ownership and mitigation of risks at all CBK levels. - The risk division draws on external support and has a plan for further development; embedding a culture of risk management is emphasized. - Recent risk reports to the EB have highlighted only the three most significant risks (those categorized as major residual risk), without challenging risks just below that threshold. - The risk department should consider strategic risks such as “effectiveness of governance arrangements.” - A prior IMF TA recommendation (2012) to establish a senior risk committee reporting to the CBB (akin to the Audit Committee or a joint Audit and Risk Committee) has not been implemented and is considered best practice to revisit. ### Main recommendations (summary of numbered recommendations) - Recommendation 26: - Reinstate process to appoint the fourth non-executive member to the CBB in accordance with the CBL. - CBL (Article 45) states any vacancy on the CBB should be filled within 60 calendar days. - CBK should restart the appointment process and submit names of candidates to Parliament for approval. - Recommendation 27: - The CBB should review its effectiveness, including meeting structure, planning, and inputs received. - Consider building relationships with experienced non-executive members from other central bank boards in Europe. - Review operation and independence of the Audit Committee and its interaction with the CBB. - Audit Committee should encourage Internal Audit to periodically review compliance with governance arrangements as part of its audit universe. - Over the medium term, the CBB Secretariat should develop the ability to review its own effectiveness on an annual basis. - Recommendation 28: - Review organizational structure and refresh documented roles and responsibilities to ensure clarity at all staff levels. - Clarify appropriate staffing levels in each division/department, identify key skills and skills gaps, and prioritize filling vacancies. - Address key-person risk via training and succession planning. - Improve communications at all levels to enhance transparency and support a positive culture. - Recommendation 29: - Supplement the Executive Board with an additional (fourth) voting member (a third Deputy Governor) to ensure balanced decision-making and representation of all CBK departments. - This change is permissible under CBL and would amend the quorum from two to three members. - Recommendation 30: - The Executive Board should review its effectiveness; initially this review could be internal. - Review to include meeting structure, planning, and inputs received. - Medium term: EB should develop the ability to review its own effectiveness periodically, in line with good corporate governance. - Recommendation 31: - Risk division should provide the Executive Board with a more detailed view of CBK’s top risks to enable regular EB discussion of strategic and operational risks and reporting to the CBB. - Previous MCM TA recommendation to introduce a separate risk committee remains best practice and should be introduced over the medium term. - In the short term, EB may continue to handle risk issues while CBK’s risk management capability develops. - Vital that EB takes ownership and actively challenges characterization and proposed mitigation of risks. ### Financial sector oversight — Banking sector baseline diagnostics and findings - Regulatory and supervisory progress since 2012 FSAP: - Several new regulations issued covering almost all aspects of supervision. - Risk-based, forward-looking supervisory approach introduced. - Basel III (except the liquidity standards) becomes effective in January 2020. - International Financial Reporting Standards (IFRS) 9 becomes effective in January 2020. - The Law on Banks, Microfinancial Institutions, and Nonbank Financial Institutions (LB) is being updated to include recovery and resolution, consumer protection, and amendments to existing provisions. - Problem supervising banks in Northern Kosovo for political and security reasons has been partially addressed. - Broad structural observations: - Regulatory structures largely coincide with international norms. - CBK carries out main supervisory functions (licensing, onsite/offsite supervision, AML/CFT surveillance). - Staff are dedicated and knowledgeable, but some expertise gaps exist. - Key banking sector metrics and trends: - Aggregate capital adequacy ratio is about 16 percent and has been at that level since 2016. - Almost all capital is composed of Common Equity Tier 1 (CET1). - Return on equity has been about 5–6 percent since 2015. - NPL ratio is currently 2.6 percent, down from 5.9 percent in 2016. - Currently, banks maintain an average CET1 level above 96 percent of total capital. - Note: banks are not allowed to use the conservation buffer in periods of stress, which may complicate CBK handling of breaches on capital requirements. - Favorable NPL figure attributed to effective collection systems, better underwriting, strengthened supervision, denominator effect (rapid credit growth), and write-offs. - Nature of banking business: - Banking business in Kosovo is traditional: acceptance of deposits and granting of loans. - Virtually all banking business conducted in euros. - No cross-border activity except placements from and with foreign banks and parent bank groups. - Placements from group banks restricted to 20 percent of total deposits. - Placements with group banks restricted to 10 percent of Tier l capital as such placements are regarded as related-party transactions. - Staffing and capacity concerns: - CBK should urgently review staff complement in number and expertise. - Supervisory staff appear overstretched and will be more so with increased technical requirements under Basel III and IFRS 9. - No current practice of seconding staff between the Banking Supervision Department (BSD) and the Licensing and Standardization Department (LSD); such secondments would be beneficial. - Legal and governance gaps: - No provision in law for public disclosure of reasons for dismissal of CBB members, contrary to BCP. - CBK should remove remaining doubts concerning protection of staff defending actions/omissions made in good faith. - CBL (Article 78) provides indemnification against costs of legal defense except where convicted of a crime arising out of the activities. - Internal CBK rule on indemnification is conditional and allows Governor to reject recommended payments; recommended to amend rule to reflect Essential Criteria 9 of BCP 2 regarding adequate protection for supervisors and staff. - Regulatory coverage and permitted activities: - Gaps exist in regulations: limits on use of capital conservation buffer, countercyclical buffer, country and transfer risks, cybercrime, and certain aspects of market risk. - CBK should review regulatory list for completeness and revisit regulations dating from 2012–2013. - Consider updating list of permitted banking activities (Article 44 of LB), which was devised in 2012 and may not reflect developments such as technology-driven services. - Concerns raised over absence of specific reference to digital money services and requirements that certain communications must be made via letter, potentially ruling out electronic signatures. - Proposed new law on banks elaborates existing activities and provides for new activities, including provision of insurance or reinsurance services, pension company services, and implementation of electronic money services. - Licensing and suitability assessments: - Application process for banking licenses sometimes lacks complete information; CBK requires professional and business history of directors and senior management only for the previous 10 years rather than entire careers. - CBK should limit period of tenure for bank directors; current law allows reappointment without limit. - Best practice (joint guidelines of September 2017 by EBA and ESMA (Article 91)) suggests a maximum period of 12 years. - Cross-border supervisory cooperation: - CBK has not been invited by the ECB to participate in the supervisory college of Raiffeisen and is not party to its resolution and recovery plans. - Raiffeisen is the largest bank in Kosovo with a market share of almost 25 percent and is a subsidiary of an Austrian bank. - CBK should seek to be party to group regulatory deliberations and continue efforts to sign an MoU with Austrian authorities. - External auditor engagement: - Although law provides for CBK to meet external auditors, such meetings rarely occur. - Good practice would see regular meetings with external auditors (planning stage and/or post-audit) and meetings with the external auditing profession as a group. - Supervisory processes and manuals: - CBK banking supervisory process is well documented, integrating offsite and onsite activities. - EB is decision-making body for corrective measures against banks. - RBS manual organizes guidance to bank examiners for consistent application of supervisory procedures. - Offsite supervision procedures manual for banks submitted to EB in October 2018 but still pending approval. - Supervision is conducted both on a solo and consolidated basis; onsite supervisors from banking and nonbanking areas may perform joint examinations when special expertise is needed. - Reporting and Analysis Division of BSD is responsible for offsite activities and produces micro- and macrofinancial analysis reports. - Payment systems and liquidity oversight: - Payment System Department (PSD) is responsible for oversight of banks’ intraday liquidity procedures. - Exchange of information on banks’ liquidity status between supervisors and PSD staff is adequate but informal. - PSD is not formally responsible for reporting to BSD in event of a bank not complying with intraday liquidity needs. - Neither PSD nor BSD requires banks to assess stress scenarios forecasting disturbances to payment and settlement systems. - Supervisory preparedness for stress: - Banking supervision in Kosovo has not experienced periods of financial stress; supervisors have limited practice supervising under stress. - BSD’s emergency decision-making processes and the role of supervision in events such as bank requests for ELA need formalization and periodic testing. - Credit registry and credit risk analysis: - CBK keeps and administers the Credit Registry (CR) to collect and distribute credit information. - All credit providers required to report to the CR all credit applications and credits extended; assessment of client information possible upon authorization. - BSD uses CR information to assess consistency of risk classification among credit providers. - A more thorough assessment of credit risk using CR granular data has not yet been developed. - Liquidity regulation and supervisory assessment: - Regulation requiring Basel III minimum standards for liquidity risk still in initial elaboration. - Current regulation on liquidity risk management requires banks to hold ratio of liquid assets against short-term liabilities at minimum level of 20 percent by currency, and of 25 percent in total currencies. - All banks are well above these limits. - Supervisors may underestimate liquidity risk by relying on current regulatory ratios: - Liquidity buffers may be overestimated if banks rely on assets not easily settled in Kosovo (e.g., Government of Kosovo securities) due to absence of active secondary markets. - Ratio metrics do not consider cash outflows in stressed situations, such as early withdrawal of term deposits. - Absence of legal impediments for customers to withdraw term deposits prior to maturity may bring unexpected outflows not considered by current ratios. - Recommendation: improve offsite supervision monitoring tools to better understand banks’ liquidity exposure and explore vulnerabilities and contingency buffer sufficiency while Basel III liquidity requirements are not yet in place. *IMF mission findings and recommendations as presented in the chapter excerpt provided.* ### 51. Except for two branches, Kosovo banks would not face difficulties complying ### 51. Except for two branches, Kosovo banks would not face difficulties complying with the liquidity coverage ratio (LCR) ### Liquidity coverage ratio (LCR) and banks' liquidity capacity - Except for two branches, Kosovo banks would not face difficulties complying with the liquidity coverage ratio (LCR). - The LCR is a minimum requirement and also a comprehensive liquidity stress test; it should be used for a more thorough assessment of banks’ liquidity capacity. - Estimations show that in a scenario where GoK securities are not included in the high-quality liquid assets (HQLA) buffer due to the absence of a liquid market for these securities: - one bank would breach the minimum LCR; - two other banks would experience a relevant reduction in their liquidity ratio levels. - Under the Basel III LCR standard, banks must hold a stock of unencumbered HQLA to cover total net cash outflows over a 30-day period under a prescribed stress scenario. ### Central Bank of Kosovo (CBK) repo operations and market development - The CBK provides intraday liquidity facilities to banks through repo operations collateralized by government securities; these operations cannot exceed the intraday lag. - The CBK is experiencing delays in the implementation of repo operations longer than the intraday lag with the market. - A regulation to regulate repo operations with market participants maturing beyond the intraday term has been drafted, but there is no provision for its implementation. - The stage of development for the facility’s framework, in terms of an IT solution, at the CBK is unclear. - Finalizing repo facilities maturing over the intraday lag is very relevant to: - improve the liquidity capacity of Kosovo’s government securities; - open the door for development of a secondary market for those securities. - The Regulation on Liquidity Risk Management already treats these assets as liquid for the computation of the required liquidity ratios. - The mission provided comments on the proposed Regulation on Emergency Liquidity Assistance. ### Main recommendations for banking supervision and liquidity - Prioritize a review of the staffing requirements within the three supervisory Departments: Banking Supervision; Licensing and Standardization; and AML. - Undertake an in-depth analysis of the staffing requirements currently needed and that will be needed for day-to-day supervision and policy, particularly due to upcoming implementation of new requirements such as Basel III and IFRS 9; these require highly specialist and expert staff and improved IT infrastructure and greater support for data analysis. - Provide for the secondment of staff between the BSD and the LSD. - Other areas to address: - Remove any remaining doubt concerning the protection of staff against the costs of defending their actions and/or omissions made while discharging their duties in good faith by amending the CBK's internal rule on the Indemnification of Staff Costs in Legal Proceedings to provide unconditional support for staff in these circumstances. - Provide for public disclosure reasons for the dismissal of CBK’s Board members. - Review list of regulations to ensure necessary risks and issues are dealt with (e.g., country and transfer risks, cyber risk, and certain aspects of market risk) and re-examine existing regulations to ensure they reflect the latest thinking. - Update list of activities and procedures that can be undertaken by banks to reflect, inter alia, technological developments in banking. - In applications for banking licenses, require full details of the business and professional history of directors and senior management, as well as for principal shareholders of the proposed bank (rather than only for the past 10 years). - Intensify efforts with the ECB to participate in the Raiffeisen supervisory college and to be party to its resolution and recovery plans. - Limit the maximum period for which directors can be elected to the Boards of banks to 12 years unless the bank can justify to the supervisor why members’ ability to exercise objective and balanced judgement and to take decisions independently are not affected. - Introduce a formal regime for regular meetings with the banks’ external auditors. - Integrate stress test exercises with the financial stability work of the CBK and communicate the results to the banks. - Approve and implement the Offsite Supervision Procedures Manual for Banks. - Establish supervisory procedures required during periods of stress. - Conduct periodic tests on the operational procedures for granting of ELA with participation of the banking industry. - Periodically review the procedures and integration of onsite and offsite supervisory functions. - Require banks to notify BSD in advance of any substantive changes in their activities, structures and overall condition, or as soon as they become aware of any material adverse developments. - Develop tools for a more thorough assessment of credit risk based on granular data from the CR. - Improve offsite assessment of trends in risk concentrations, risk mitigation strategies, and risk build-up across banking sectors. - Formalize responsibilities and procedure for information exchange between BSD and the PSD. - Require banks to define scenarios forecasting disturbances to payment and settlement systems for operational risk management. - Improve offsite monitoring tools to better comprehend banks’ exposure to liquidity risk; methodology should explore banks’ vulnerabilities and identify whether contingency buffers are sufficient to support liquidity needs derived from stressed scenarios. At a minimum, scenarios should take into account: - the absence of secondary markets in Kosovo for the estimation of the banks’ liquid assets buffer; - the absence of legal impediments for early withdrawal of term deposits for the estimation of liquidity needs. - Implement Basel III liquidity standards. - Finalize the implementation of repo facilities between the CBK and financial institutions, maturing over the intraday lag. --- ### Insurance Sector — Baseline diagnostics and recommendations ### Market structure and key statistics - Market composition and recent developments: - There are currently 13 insurance companies in Kosovo (1 entered liquidation during the mission, at end-April 2019). The original 14 companies consisted of 12 non-life and 2 life insurance companies. - The insurance market is undeveloped, particularly with respect to life insurance. - Premiums and penetration: - At end-2018, gross non-life premiums amounted to €89.1 million, of which 67 percent was mandatory third-party liability (MTPL) business. - Life insurance gross premiums amounted to €3 million. - Insurance penetration was 1.37 percent of GDP. - Comparative figures: Central and Eastern Europe average 1.92 percent; Western Europe 7.28 percent. - Solvency, provisioning, and supervisory developments: - Findings are broadly similar to the 2016 MCM TA mission: concerns regarding solvency and viability of the insurance industry, including under-provisioning. - CBK has employed one actuary since 2016; while positive, enhancing the actuarial function further is necessary. - The 2016 TA mission found the new insurance legislation and regulations to be in line with Solvency I EU directives, which were superseded by Solvency II. The CBK is beginning to look at how to move toward implementation of Solvency II over the medium term. - Investment environment and constraints: - Lack of a range of investment opportunities and liquid secondary markets for financial instruments is a significant concern. - CBK mandates limits on certain investments and requires that at least 10 percent of assets are invested with the CBK. - Insurance companies predominantly invest in bank deposits, with some investments in government bonds and real property. ### Performance metrics and market conduct concerns - Industry ratios and potential distortions: - Reported for 2018 (domestic business): loss ratios 46.6 percent and expense ratios 48.1 percent. - For non-resident MTPL: loss ratio 32.8 percent with an expense ratio of 59.6 percent. - Typical international ranges noted: loss ratios usually range between 60 and 75 percent, and expense ratios between 25 and 40 percent. - The low loss ratios and high expense ratios in Kosovo may indicate underestimating claims (particularly court-held claims), suggesting technical provisions are understated while financial position is overstated. - High expense ratios may result from incentives provided to agents and brokers or directly to clients given inability to compete on price because MTPL premiums are set by the CBK. - CBK has apparently issued a regulation limiting expenses to 35 percent of premiums, which is only adhered to by leading companies. - Uninsured drivers and compensation fund impact: - Claims from uninsured drivers are estimated by the Insurance Association of Kosovo at between €3.5 million and €5 million per year, corresponding to about 10 percent of claims. - MTPL premium setting and adjustments: - Premium rates for MTPL are set by the CBK but have not been adjusted since 2011. - Since 2011, premiums have not been adjusted for market developments (inflation in medical expenses, changing driver behavior, changing risk profiles due to court awards). - The insurance industry has twice requested increases in premiums since 2011; both applications were rejected. - In 2015, CBK regulations were changed, with some prescribed claims payment amounts increasing 10 times, yet there was no adjustment in premiums. - Supervisory and operational concerns: - Liquidation of an insurer during the mission and escalation of measures against other insurers are positive from a supervisory enforcement perspective but have negative consequences for public confidence and market development. - The practice of installing CBK employees as administrators and liquidators compromises the appearance of CBK independence and may create reputational concerns. - Market conduct: willingness to use the court system to delay claim payments is a concern; courts have awarded claims that exceed prescribed CBK amounts. CBK is proposing legislation to put CBK claim payment amounts in legislation rather than in regulation. - CBK supervisors may lack tools to adequately surveil market conduct (e.g., inability to conduct “mystery shopping” campaigns due to legal limitations and underuse of consumer surveys). - Onsite supervision appears adequately frequent but may not delve into risks with sufficient intensity; supervisors seem unaware of the basis of high expense ratios. - Capacity and resource constraints: - CBK has one qualified actuary, creating significant key person risk and concentration of expertise without adequate peer challenge. - Short-term mitigation: carefully constructed outsourcing arrangements with international professional services firms to access additional actuarial expertise. - Long-term mitigation: sponsor education and professional development of students and graduates to attain actuarial qualifications to work for the CBK. - Fiscal and regulatory burdens on insurers: - A 5 percent tax on premiums is applied rather than the usual corporate tax; the industry paid approximately €4.5 million in taxes in 2018, compared with €230,000 had the usual corporate taxation rate been applied. - The industry was required to pay a 1 percent of premium contribution to the Red Cross, a requirement recently declared unconstitutional by the Constitutional Court. - The industry is required to pay claims related to uninsured drivers. - CBK applies a fee of 1.35 percent of premium. - Restrictions on investments, marketing expenses, and on overall expenses, and restrictions on premiums for the major product, appear not fully conducive to attracting new entrants or ensuring viability of current participants. ### Main recommendations for the insurance sector - Update the pricing of the mandatory MTPL product and develop a process to regularly review the pricing of this product as risk factors evolve. - Assess the viability of continuing to apply the various taxes and fees, as well as obligations to pay for claims related to uninsured drivers. - Enhance the supervision of market conduct of insurers. - Reconsider crisis management processes for the insurance industry, particularly the practice of installing CBK employees as administrators and liquidators. - Implement the RBS manual for insurance that has been developed (U.S. Treasury Financial Service Technical Assistance helped develop the RBS manual; it is currently being reviewed within the CBK). - Enhance onsite supervision practices for insurance. *Source: 1uvkea2020001 - 51. Except for two branches, Kosovo banks would not face difficulties complying* ### 72. The IMF is best placed to provide TA on the last four of those priorities. With ### 1uvkea2020001 - 72. The IMF is best placed to provide TA on the last four of those priorities. With ### Insurance sector — TA, governance, and supervision - The IMF is best placed to provide TA on the last four of the identified priorities; for setting MTPL premiums the CBK may seek independent professional advice or assistance from the World Bank, which previously provided TA in this area. - Transformation of the industry, its regulation and CBK’s supervision is a medium- to long-term project requiring buy-in from CBK management, the insurance industry and the GoK. IMF TA can only be effective with that buy-in. - Observations made during the mission on CBK governance must be addressed as a precondition for the provision of IMF TA. - It is advisable to engage other TA providers such as the U.S. Treasury and the World Bank to create a coordinated program of TA within an overall plan over an achievable timeframe and with credible milestones. ### Consumer education, market conduct, and insurance sector development - CBK and other relevant government authorities need to develop consumer education and awareness of the benefits of insurance and counter negative public perceptions due to liquidations. - Increased market-conduct supervision will involve more outreach to consumers and policyholders. - An education campaign combined with improved conduct by insurers should increase insurance penetration. - A stable and viable insurance industry providing protection and investment products can enhance economic development and financial stability. ### Solvency II and proportional implementation - Solvency II implementation is important for potential integration into the EU system but should not be an immediate priority. - Solvency II was designed for a sophisticated EU insurance market with well-resourced supervisors; its implementation improved risk management and governance in the EU but has come at some cost. - As Kosovo looks toward EU integration, Solvency II is an important medium-term goal and can provide an excellent framework provided implementation sufficiently takes into account proportionality and local circumstances, including: - the relative development of the industry; - the resources of the CBK and the need to develop those resources; - the availability of adequate investment options; - the reliability of secondary markets to provide market prices of investments and other inputs to valuation. - Development of capital markets is important for successfully implementing a modern prudential regulatory framework such as Solvency II. ### Securities market — baseline diagnostics - Capital markets do not currently exist in Kosovo to any meaningful extent. There is no stock exchange. - The financial sector is dominated by banks focused on plain-vanilla banking activity. - The only securities in issuance are government bonds, for which there is no active secondary market. - Neither banks nor insurance companies offer investment products; corporates rely on bank loans. - Aggregate credit growth is high but households’ ability and willingness to consider capital markets as an alternative is questionable. - Auctions of government securities are typically held every two weeks by the CBK. The primary dealers consist of banks and the KPST, the state-run pillar II pension fund; insurance companies and a few large corporates also buy government bonds through their bank. - Auctions are often oversubscribed although two auctions failed in mid-2018 when the CBK signaled it would no longer buy GoK securities in the secondary market. - The maturity of issues is gradually being extended; the first 10-year bond was issued in 2018. The CBK believes the limits of the domestic investor base will soon be reached. - KPST is the main domestic institutional investor with current assets under management amounting to €1.8 billion as of end-April 2019: - €1.4 billion invested in a selection of investment funds managed by major global asset managers; - Kosovo government bonds: €255 million; - cash deposits at domestic banks: €130 million. - All Kosovo citizens are obliged to contribute 5 percent of their salaries to the KPST, and employers must match that contribution. Employees can choose to contribute more than 5 percent to a different pension fund. In practice, there is only one other scheme—the Slovenian-Kosovo Pension Fund—the assets of which are a mere 0.5 percent of total pension assets. - KPST is considering creating two separate portfolios: a default portfolio for all contributors with a balanced risk profile, and a more conservative portfolio for imminent retirees. ### Main recommendations for capital markets development - The CBK should consider development of capital markets as a medium-term goal while prioritizing more urgent recommendations from the FSSR and the TA Roadmap. - Establishing an investment fund sector should be subject to other key building blocks being in place first. Investment funds require: - a diversified pool of potential investments; - a sufficient number of investors; - presence of key service providers. - Four priority areas to address first: - Establish a cross-agency task force for the development of capital markets in Kosovo. - Draft key pieces of capital markets legislation. - Develop expertise on capital markets at CBK. - Ensure existence of pre-conditions for capital markets activity (financial reporting, corporate governance, disclosure, external audit). - Although creation of investment funds could be allowed in the short term by adopting the draft investment funds law, this should be viewed as a long-term goal because near-term funds would lack eligible local assets and might trigger capital outflows. - Specific recommended actions: - CBK should ask the government to establish a cross-agency task force on the development of capital markets. - A national task force should involve CBK, MoF, KPST, financial market participants, and representatives of retail investors; the task force should be put in place by the end of 2019 and deliver its report by mid-2020. The IMF can help guide the discussions (not formal TA). - CBK should provide assistance to the MoF in drafting draft laws on capital markets compatible with the EU acquis, covering primary issuance, secondary market trading, transparency, market abuse, prudential/conduct requirements for investment services providers, and completion of laws on investment funds and repos. Development of a comprehensive package of legislation is expected to take about three years. - Develop expertise at CBK on capital markets by leveraging the Asset Management Department and providing access to training in parallel with legislation development; other bodies may be better placed to provide this training. This is ongoing with no specific deadline. - Financial literacy initiatives should include a capital markets segment given limited current exposure: 48 percent of citizens do not have bank accounts (World Bank data). - Ensure preconditions for capital markets: improved financial reporting, corporate governance, disclosure, and external audit. The KFRC is making efforts to strengthen oversight of the audit industry. - Steps should be taken to develop the interbank money market and repo market and to deepen the secondary market for government bonds; IMF (MCM) has commented on a draft law on repo and other TA providers (U.S. Treasury, EBRD) have made recommendations. - Development of a healthier insurance sector (per FSSR recommendations) will benefit capital markets by enabling insurers to provide secondary market liquidity and offer investment products. ### Macroprudential policy and systemic risk monitoring — baseline diagnostics and institutional arrangements - CBK has taken important steps to operationalize a macroprudential policy framework following ESRB practice by identifying intermediate objectives, risk indicators, and policy instruments; the framework has been published on the central bank’s website. - A macroprudential advisory committee (MPAC) was established in 2016 to assess systemic risk outlook and provide recommendations to the CBK’s Executive Board. - Significant remaining work: - Institutional arrangements supporting macroprudential policy need strengthening. - CBK’s ability to identify appropriate macroprudential policies is impeded by information gaps and staffing constraints, risking delays in timely policy actions. - Institutional observations: - The CBL specifies the primary objective of the central bank is to “foster and to maintain a stable financial system including a safe, sound and efficient payments system.” Price stability is an additional, subordinate objective. - There is no reference to macroprudential policies in primary legislation; purpose, scope, and application of macroprudential policies were approved by the Executive Board under Article 36 of the CBL. CBK recognizes merit in making an explicit reference to macroprudential policy in primary legislation. - The LB provides CBK with a full array of policy instruments for microprudential purposes and CBK views LB as providing sufficient flexibility for macroprudential use. CBK proposes further legal foundation through amendments to the LB and associated regulations; however, since the amended law would apply only to banks, it would be preferable to derive enabling powers by amending the CBL to ensure system-wide application. - Governance strengthening is needed: decision-making rests with a small Executive Board (Governor and two Deputy Governors) neither of whom have executive responsibilities for macroprudential oversight; review of governance and resourcing of the financial stability function is recommended. - An effective financial stability framework benefits from collaboration between CBK and MoF; an inter-agency National Financial Stability Committee will meet semi-annually from late 2019 to formalize briefings to MoF. - Systemic risk monitoring: - To fulfil macroprudential responsibilities, CBK must be able to monitor systemic risks despite conceptual and measurement challenges. - The policy framework must function preemptively to address systemic risks before they crystallize into damaging events. *Italic: IMF Staff — content unit 1uvkea2020001.* ### 98. Developing an early warning system in Kosovo is a challenging task. Credit ### 98. Developing an early warning system in Kosovo is a challenging task. Credit ### Early-warning challenges and credit dynamics - Credit penetration remains low by regional standards and financial deepening is an important policy priority. - Evidence that credit is growing at an annual rate in excess of 10 percent facilitated by low interest rates, an easing of credit standards and the use of the KCGF to support lending to MSMEs is to be welcomed. - Differentiating between healthy financial deepening and potentially excessive credit growth is not easy. - The CBK lacks the type of information on nonfinancial sector balance sheets that would allow it to form a more-forward looking assessment of systemic risks. - The CBK is currently unable to assess whether the surge in credit is increasing the leverage of households and corporates and testing their debt-servicing capacities. - Particular concern: the opaqueness of property markets in Kosovo. ### Stress testing and current practices - Stress testing plays a key role in macroprudential analysis; the CBK undertakes regular stress tests to assess resilience in solvency and liquidity. - EAFSD and BSD undertake separate stress tests using separate scenarios: - BSD stress test: micro-focused, uses individual bank data. - EAFSD stress test: macro-focused. - Stress tests are largely static sensitivity analysis. - Information sharing takes place but exercises are independent. - BSD receives stress test results from commercial banks but does not specify scenarios nor validates banks’ stress testing methodologies. - Neither department undertakes detailed network analysis to identify potential for financial contagion in Kosovo. ### Operationalizing the Macroprudential Policy Framework (current status) - CBK has a macroprudential policy framework but has yet to implement any specific policy measures. - The MPAC is briefed quarterly on systemic risks and financial system outlook; so far it has not recommended macroprudential actions to the Executive Board. - Persistent credit growth and signs of tightening liquidity conditions suggest it might be timely to consider using instruments in the macroprudential policy toolkit. ### Main recommendations — Institutional arrangements - Current institutional arrangements are not well aligned with the CBK’s primary objective within the CBL of fostering and maintaining financial stability. - Decision-making (reserved to the Executive Board) is decoupled from monitoring and assessing systemic risks and formulating macroprudential responses. - Recommendation: establish a decision-making Financial Stability Committee, chaired by the Governor and composed of executives and non-executive members with relevant expertise; alternative is broadening the composition of the existing Executive Board. - More resources should be dedicated to financial stability analysis; ensure sufficient staff with the right training and expertise to support the financial stability mandate. - Review deliverables of the EAFSD to ensure they are targeted and precise; further streamline the Financial Stability Report. - Amend the CBL to explicitly provide for a macroprudential policy function; current intention to anchor macroprudential policies within the amended law on banks is less preferred than provision within the CBL. ### Main recommendations — Systemic risk monitoring and data - Complete a full review of macroprudential data gaps and develop a strategy to close them. - Most pressing gap: property—meaningful information on construction, transactions, and prices is not readily available. - Recommend formation of an Interagency Real Estate Working Group consisting of the CBK, the MoF, the KAS, and the Ministry of Environment and Spatial Planning, with representatives from the Real Estate Industry Association. - The Working Group should review available information, identify gaps, determine how best to address them, and determine specific IMF TA needs. - Explore ways to better harness information collected by the CR: - Use existing data for calculating default rates and loss-on-default. - Compute loan-to-value (LTV) and debt-to-income (DTI) ratios for macroprudential policy purposes. - Derive aggregate borrowing statistics (loan by type of legal entity, region, and purpose and activity type, average principal amount, average interest rate, currency composition, average maturity, etc.) and make them available to the public and financial institutions. - More closely monitor developments in nonfinancial sector balance sheets: - Excessive leverage in household and corporate sector balance sheets increases dangers of excessive credit growth. - Large informal sector limits information from national accounts; CBK should explore use of surveys in consultation with the KAS, including the current Household Budget Survey and the forthcoming Statistics on Income and Living Conditions in Households survey. - STA provides TA on developing sectoral financial accounts and balance sheet statistics, including for the nonfinancial sector. - Enhance stress testing competencies and collaboration: - Intensify collaboration between EAFSD and BSD. - EAFSD should take ownership of scenario design; BSD should contribute bank-specific knowledge. - EAFSD would benefit from assistance on macrofinancial modelling to generate and quantify adverse scenarios. - Both departments need guidance on effective use of stress testing models, moving beyond static, single period, sensitivity analysis. - Deepen network analysis: - Inter-linkages are currently limited but will increase as the nonbank sector, particularly pensions, grows. - Deepen analysis of flow of funds between financial sector and nonfinancial sector balance sheets, including government. ### Operational recommendations — macroprudential policy tools and liquidity - Use macroprudential policies to reinforce the quality of consumer lending: - Consumer credit has been growing strongly in recent years at an annual average rate of about 11 percent. - CBK has limited insight into household sector balance sheets to assess leverage and debt-servicing capacity. - Consider introducing LTV, DTI or debt-service-to-income (DSTI) limits to ensure banks’ credit management systems are conservatively aligned to the opaque nature of Kosovo’s credit environment. - Contain liquidity risks: - References to ample liquidity can be misleading given the lack of an active secondary market for domestic government securities. - Carefully monitor changes in liquidity conditions of the banking system. - Strengthen liquidity management of banks by introducing the LCR and the net stable funding ratio as part of planned Basel III implementation. - Foster development of an inter-bank repo market in Kosovo; planned introduction of a central bank repo facility is a useful step. - Domestic systemically important banks: - Having identified domestic systemically important banks, CBK should follow through with a capital surcharge. - For banks with capital well in excess of minimum requirements this may have no immediate effect, but aligns regulatory requirements with CBK’s assessment of systemic risk contribution. ### Financial crisis management — progress and gaps - 2012 FSAP noted significant progress: provision in the CBL for an ELA arrangement; amended law on banks includes improvements in bank resolution framework; narrow mandate (“paybox”) DIFK in place; National Financial Stability and Crisis Management Committee (NFSC) established. - Follow-up recommendations and TA (February 2014) focused on limits to ELA funding, need for improvements in bank resolution framework, and importance of detailed crisis preparedness and contingency planning. - Limits to ELA funding arise from euroization: - CBL limits ELA to total reserves of the CBK (currently about €50 million) and a Special Reserve Fund of €46 million established by the Treasury. - This would likely cover needs of only a few small banks. - IMF TA recommended CBK define a larger target size and consider use of bank premiums to raise funding. - Operationalization gaps: collateral requirements too restrictive, no pre-prepared standard contracts, no established methodology for identifying solvency and viability of illiquid banks. - CBK amended and tightened ELA regulations to incorporate IMF advice; WB FinSAC providing TA on operational procedures. - Problem bank resolution regime assessed as generally appropriate, but improvements suggested around purchase and assumption transactions and promoting recovery and resolution planning, particularly for systemically important banks; to be incorporated in amended law on banks. - Crisis preparedness and management needed more work; NFSC established in 2011 was never operationalized. - Authorities revisited NSFC and made changes: - Composition revamped: Governor will remain chair and Minister of Finance a member; no legislative representative. - Other members: CBK Chair of MPAC and MoF Director of Budget; in times of crisis joined by Managing Director of the DIFK. - Committee rebadged as Financial Stability and Crisis Management Committee (FSC). - FSC to meet semi-annually with first meeting scheduled for the fourth quarter 2019. - Supported by a Working Group of six senior executives from CBK, MoF, and DIFK meeting twice a year. - FSC established by bilateral MoUs rather than enabling legislation; a stronger legal foundation might be preferred. - FSSR not proposing IMF TA for crisis management because WB FinSAC is currently providing extensive TA focused on operationalizing ELA and activating the FSC, raising crisis preparedness, drafting a crisis binder, and working with DIFK on risk-based premiums and possibly MoU between CBK and DIFK. ### Financial stability impact of financial deepening — baseline diagnostics - Kosovo lacks a comprehensive national strategy on financial inclusion despite policy initiatives. - CBK has strategy for consumer protection and financial literacy; Complaints Division established within the central bank. - No comprehensive national financial inclusion strategy for monitoring and evaluation of initiatives and impact on financial stability. - Data non-availability hinders assessment of financial inclusion: - Authorities do not publish any financial inclusion statistics online. - Authorities lack data on financial access and needs of MSMEs, and on financial inclusion status of women and rural area inhabitants. - Kosovo is not included in the World Bank’s FinStats database. - Data on financial inclusion mainly found in IMF and WB databases. - Recent shifts in providers: - Banks have reduced involvement in financial inclusion; MFIs and NBFIs have grown rapidly to fill the gap. - Total new MFI and NBFI loans increased by 122 percent between 2015 and 2018; outstanding stock grew by 114 percent. - Use of electronic payments and cards limited; mobile payments virtually nonexistent: - All central government payments processed electronically. - Only 24 percent of adults use electronic payments in Kosovo. - Less than 2 percent use mobile phones to pay bills. - Less than 1 percent use mobile phones to transfer money. - Mobile payment and digital wallet services are not available; electronic signature use is not allowed. - KCGF and MSME financing: - KCGF issues portfolio loan guarantees covering up to 50 percent of risk for loans to MSMEs. - As of February 2019, KCGF’s capital reached €15.9 million; cumulative volume of loan portfolio approved by KCGF reached €93.8 million. - Most banks participate in KCGF scheme; 2,409 loans registered as of February 2019. - Only one NBFI has joined KCGF scheme so far due to legal uncertainty regarding MFIs. - Legal status of MFIs: - 10 out of 12 MFIs, and 3 out of the top 4 MFIs (comprising 90 percent of market share) are NGOs. - Proposals to convert NGO MFIs into joint-stock companies have not succeeded; provisions of the 2012 LB envisaging conversion ruled incompatible with the constitution by the Constitutional Court. - New draft law on MFIs and NBFIs does not address Constitutional Court issues and is not compatible with law on business organizations and law governing NGOs. - Unresolved legal status generates uncertainty and risks. - Microfinance sector and payday lending risks: - NPL ratio for microfinance sector was at a record low of 2.4 percent in 2018. - No claims submitted to KCGF so far. - Microfinance sector constitutes only 4 percent of total financial system assets in Kosovo, so systemic impact is small. - In the last year one new MFI and one new NBFI started offering short-term payday loans at high interest rates. - Onsite CBK examinations found two institutions charging significantly higher interest rates than in original business plans, leading to penalties and written warnings. - Total combined loan amount from the two institutions is small (less than €5 million), but rising NPLs could cause social unrest given the client base. - CBK needs to closely watch developments, promote financial literacy on payday loans, and strengthen consumer financial protection. *Source: 1uvkea2020001 - 98. Developing an early warning system in Kosovo is a challenging task. Credit* ### 126. Establish a National Strategy on Financial Inclusion that would allow for ### 126. Establish a National Strategy on Financial Inclusion that would allow for ### Purpose and institutional scope - Establish a Financial Inclusion Strategy to allow monitoring and evaluation of financial stability risks associated with financial deepening. - The strategy should comprise several institutions in addition to the CBK, including the Ministries of Finance, Trade, and Justice, as well as business associations. - The strategy would enable mechanisms to monitor progress and evaluate performance of financial inclusion policy initiatives. - The CBK’s current initiatives on financial literacy could be embedded in a national financial inclusion strategy. - Improvement in financial literacy could lay the foundation for developing securities markets in the future. ### Identified data gaps and transparency measures - Fill data gaps related to financial access and needs and provide all relevant financial inclusion data on a dedicated webpage. - Construct financial inclusion variables to provide a more comprehensive picture for design, monitoring, and evaluation of a national strategy. - Specific missing data: access to finance and financing needs of MSMEs, women, and rural area inhabitants. - Authorities could take stock of available financial inclusion data, including information from international institutions, and publish them on a one-stop webpage. ### Credit registry (CR) and credit history enhancements - Further enhance data collection by the CR in the CBK and utilize credit history data for financial stability purposes. - The public CR captures credit exposures of both legal entities and individuals. - Suggested additions: more inclusive credit history data such as utility bills, and credit scoring as a value-added service to help banks and other financial institutions assess borrowers’ creditworthiness. ### Digital payments, electronic signatures, and financial inclusion - Advance regulation and technical readiness for mobile payment and electronic signature. - Rationale: Mobile payment and digital wallet services promote financial inclusion, reduce cost of access to finance, and help the regulator monitor flow of funds and detect illicit activities. - Reliance on electronic signature would enhance efficiency and the security of contract enforcement. ### Microfinance institutions (MFIs) and non-bank financial institutions (NBFIs) - Pass the draft law on MFIs and NBFIs and clarify the services that MFIs can provide. - Passing the law will eliminate legal uncertainty and encourage MFIs and NBFIs to participate in the KCGF’s credit guarantee scheme. - Important to clarify whether MFIs can offer transfer services (similar to Western Union) and digital payment services to merchants. - Reconcile laws regarding MFIs’ legal status and promptly address NGO MFIs’ conversion by coordinating with all stakeholders. - Authorities need to harmonize relevant laws and address issues raised by the Constitutional Court to ensure conversion of NGO MFIs to private sector entities without delay. ### Technical Assistance (TA) Roadmap — purpose and structure - The TA Roadmap proposes TA to address risks and vulnerabilities in the financial system based on the baseline diagnostic review. - The Roadmap develops a prioritized set of actions and presents, in one integrated table, main strategic recommendations and supporting TA. - Elements included in the Roadmap table: - Topical Area - Key Risks and Vulnerabilities - Strategic Objectives - TA Activities (most foreseen to be provided by IMF—mainly MCM but also STA and LEG; sometimes other organizations such as the WB) - Responsible Agency - The Roadmap benefited from discussions with the CBK and comments from MCM functional divisions, EUR, LEG, STA, and the World Bank. - Timeframe legend used in Roadmap: IM: < 6 months; ST: < 12 months; MT: 12 to 24 months; LT: 24 months to 48 months. ### Selected TA priorities related to financial inclusion and governance (from summary table) - Identify priorities and establish cross-agency task force; provide ongoing guidance (Timeframe: MMT). - Establish national financial inclusion strategy to effectively monitor risks to financial stability due to financial deepening (Priority: HST). - Ensure methodological consistency with international standards (Priority: MHMT). - Develop sectoral financial accounts and balance sheet statistics (Priority: MHLT). - Provide CBK with explicit MaPP mandate; amend the CBL to include explicit mandate for the use of prudential instruments for MaPP purposes (Priority: MHLT). ### Assessment of Financial Sector Statistics — key points - Monetary and Financial Statistics (MFS) and Financial Soundness Indicators (FSI) are the two key sets of statistics collected and disseminated by the IMF STA for analysis of financial sector stability. - The STA note presents status of Kosovo’s MFS, FSIs, and underlying datasets for the Balance Sheet Approach (BSA) matrix. - The BSD of the CBK reports FSIs monthly to STA via the National Summary Data Page. - FSIs including all 12 core indicators and 8 encouraged indicators for deposit takers (DTs) are published through IMF’s FSI webpage. - FSI definitions are broadly in line with IMF guidelines, but shortcomings identified: - Liquidity measure (liquidity assets) currently includes government debt securities; STA recommends excluding government debt securities because secondary market does not exist and such securities are not considered liquid. This change would affect: - Liquid assets to total assets (Liquid Asset Ratio) - Liquid assets to short-term liabilities - Revision of historical data prior to September 2018 is recommended to ensure consistency after a change to supervisory-data-only compilation. - Other minor issues include measures of total gross loans (should include interbank loans) and net NPLs (net of only specific provisions, not general provisions). ### Financial Soundness Indicators — selected values (Deposit Takers, in percent; consolidation basis: DC) - Regulatory Capital to Risk-Weighted Assets: 19.0, 17.9, 18.1, 18.1, 17.4, 16.1 - Regulatory Tier 1 Capital to Risk-Weighted Assets: 16.7, 15.9, 16.2, 16.2, 15.7, 14.6 - Non-performing Loans Net of Provisions to Capital: 3.0, 2.0, 1.1, 1.2, 1.4, 1.6 - Non-performing Loans to Total Gross Loans: 6.2, 4.9, 3.1, 2.9, 2.8, 2.8 - Sectoral Distribution of Total Loans: Nonfinancial corporations: 65.7, 63.8, 63.6, 63.5, 63.6, 63.3 - Sectoral Distribution of Total Loans: Other domestic sectors: 33.9, 35.8, 36.2, 36.3, 36.1, 36.4 - Return on Assets: 2.6, 2.5, 2.8, 2.4, 2.5, 67.2 - Return on Equity: 23.7, 20.5, 22.1, 18.6, 19.0, 48.0 - Interest Margin to Gross Income: 75.8, 75.3, 71.2, 74.5, 79.5, 78.8 - Non-interest Expenses to Gross Income: 51.6, 46.7, 46.5, 48.0, 49.4, 47.9 - Liquid Assets to Total Assets (Liquid Asset Ratio): 29.2, 31.7, 28.9, 27.2, 24.8, 36.3 - Liquid Assets to Short Term Liabilities: 37.3, 41.5, 38.2, 35.9, 33.2, 12.1 - Net Open Position in Foreign Exchange to Capital: 1.8, 4.4, 1.2, 1.7, 1.7, 1.0 - Capital to Assets (encouraged): 12.2, 12.1, 12.6, 13.1, 13.0, 12.1 - Large Exposures to Capital (encouraged): 63.5, 65.6, 81.7, 77.3, 77.3, 83.6 - Trading Income to Total Income (encouraged): 2.4, 2.3, 4.0, 1.4, 3.1, 3.0 - Personnel Expenses to Non-interest Expenses (encouraged): 40.9, 42.7, 43.0, 43.7, 44.3, 43.9 - Spread Between Reference Lending and Deposit Rates (encouraged): 7.7, 6.0, 5.5, 5.6, 5.3, 5.6 - Customer Deposits to Total (Non-interbank) Loans (encouraged): 130.3, 130.4, 124.4, 121.3, 113.8, 117.5 - Foreign-Currency-Denominated Loans to Total Loans (encouraged): 0.3, ---, ---, 0.2, 0.1 - Foreign-Currency-Denominated Liabilities to Total Liabilities (encouraged): 3.7, 3.6, 4.6, 4.8, 4.9, 4.7 ### Monetary and Financial Statistics — coverage notes - CBK reports monetary data via standardized report forms monthly for the central bank (SRF 1SR) and other depository corporations (SRF 2SR), and quarterly for OFCs (SRF 4SR). - Institutional coverage of SRF 2SR currently includes commercial banks (the only other depository corporations). - Institutional coverage of SRF 4SR includes: - Microfinancial institutions: accounting for 12.0 percent of total assets in the sector as of June 2019 - Insurance companies: 8.6 percent - Pension funds: 78.7 percent - Money transfer agencies: 0.8 percent *Source: IMF staff report as provided in the content unit.* ### Annex I Table 2. The Structure of the Financial Corporations Sector ### Annex I Table 2. The Structure of the Financial Corporations Sector ### Sector structure and key statistics (As of June 2019) - Central Bank - Central Bank of Kosovo: Total Assets 1,691 (In Millions of euros); Percent of Subsector 20.2 - Other Depository Corporations - Commercial Banks: Total Assets 4,303 (In Millions of euros); Percent of Subsector 51.4 - Other Financial Corporations: Total Assets 2,378 (In Millions of euros); Percent of Subsector 100.0; Percent of Financial System 28.4 - Microfinancial Institutions: Total Assets 285; Percent of Subsector 12.0; Percent of Financial System 3.4 - Insurance Companies: Total Assets 205; Percent of Subsector 8.6; Percent of Financial System 2.4 - Pension Funds: Total Assets 1,871; Percent of Subsector 78.7; Percent of Financial System 22.3 - Money Transfer Agencies: Total Assets 17; Percent of Subsector 0.7; Percent of Financial System 0.2 - Total: Total Assets 8,372 (In Millions of euros); Percent of Financial System 100.0; Percent of Subsector n.a. ### Main data issues identified by the STA mission (August 2019) and recommendations - Correcting misclassification - Issues identified: - Misclassification between other accounts receivable/payable and nonfinancial assets. - Lack of breakdown of insurance technical reserves among insurance subsectors (life, non-life, and reinsurance). - Reclassification of foreign currency to national currency for some financial instruments. - Recommendation: Address classification shortcomings in terms of financial instruments, sectors, and currencies—mainly for 2SR and 4SR. - Increasing periodicity of 4SR to monthly - Current practice: CBK reports 4SR on a quarterly basis while SD already receives monthly source data for major subsectors (insurance corporations directly; pension funds indirectly from the BSD). - Recommendation: SD to make an institutional arrangement with BSD to share source data for pension funds for timely compilation and reporting of monthly 4SR. - Recording revaluation for 1SR - Current practice: CBK reports current year result (net profit/loss for the reporting period) as inclusive of valuation adjustment (revaluation). - Concern: Revaluation (net changes in the value of assets and liabilities) can widely fluctuate due to changes in foreign exchange rate or prices of debt securities and equities. - Recommendation: Separately record revaluation for better assessment of the central bank balance sheet. - Estimating and reporting euro currency in circulation - Context: CBK does not issue national currency; the euro is legal tender and unit of account in Kosovo. - Practice: CBK ceased compiling and reporting euro currency in circulation in 2006 due to difficulties obtaining adequate source data, under-reporting broad money. - Current internal method: CBK internally estimates currency in circulation using information based on nominal GDP growth rate with an initial stock level in 2002 adjusted for cashless transactions in the payment system; cross-checked with cash-deposit ratios for neighbor countries. - Recommendation: Investigate other estimation methods and assess adequacy of estimates with a view to start regularly reporting broad money, including euro currency in circulation to STA. - Developing financial statistics and database - CBK is developing a comprehensive database sourced from the financial sectors based on SRFs to compile financial statistics and assess intersectoral linkages for macroprudential policy analysis. - Next steps: Incorporate source data for other sectors including external, government, and nonfinancial corporations (NFCs). - Challenge: Obtaining data for NFCs poses significant time and resource challenges; mission suggested prioritizing tasks by assessing importance and magnitude of interlinkages between NFCs and households. - Interim priority: Use existing data to identify vulnerability and risks in sectoral interlinkages to guide policy analysis. ### Balance Sheet Approach (BSA) — purpose, components, and Kosovo implementation - Purpose and uses - BSA matrices complement FSIs for financial sector stability analysis. - Uses: analyze vulnerabilities from balance sheet positions and mismatches at a point in time and over time; run simulations of shock spillovers (e.g., deposit withdrawals, rollover problems). - Four main types of balance sheet mismatches considered in the BSA framework: 1. Currency mismatches 2. Remaining maturity mismatches between liabilities and assets (short-term liabilities vs longer-term assets) 3. Capital structure problems (excessive reliance on debt/high leverage) 4. Solvency or counterpart risk - BSA scope and data sources - Compiles balance sheets for: government; financial sector (central bank, ODCs, OFCs); nonfinancial private sector (corporations, households); external sector. - Main data sources: monetary statistics (SRFs), international investment position (IIP), government financial balance sheet information. - SRFs enable from-whom-to-whom tables for stocks for inclusion in the BSA. - Kosovo-specific implementation and data issues - A BSA matrix for Kosovo for end–2017 is produced using MFS and IIP (noting Government balance sheet data are not sufficiently disaggregated for use in the BSA). - The from-whom-to-whom framework presents total assets and liabilities for all sectors by counterpart sector and by currency. - For external sector: Kosovo reports quarterly IIP data by functional categories, instruments, sectors, and original maturity; assets/liabilities vis-à-vis the rest of the world are assumed to be all in foreign currency because currency breakdown is unavailable. Recommendation: develop currency breakdown data. - For government sector: Kosovo compiles and reports annual balance sheet data in line with GFSM 2014 on a cash basis; regular compilation is not fully established (data for 2017 not reported; data only for 2015 and 2016 available) and not all instruments covered. Ongoing TA on GFS continues to assist. - Remaining BSA data gaps can largely be filled with NFCs and households data; collecting positions between NFCs and households is challenging and requires close cooperation with statistical, supervisory, and regulatory agencies. ### Annex II. Technical Assistance (TA) Roadmap — selected strategic objectives, TA activities, responsibilities, and priority/timeframe - Enhance Central Bank Governance - Key vulnerability: Weaknesses in central bank governance. - Strategic objective: Strengthen structural arrangements for central bank governance and enhance effectiveness of decision-making. - TA activity: 1. Review the structure of management and responsibilities within the CBK. 2. Review the effectiveness of decision-making bodies at the CBK, including membership of key committees. - Responsible: (MCM) CBK - Priority / Timeframe: H ST - Strengthen Financial Supervision and Regulation — Banking - Key vulnerability: CRDIV/Basel lll complexity; underestimation of banks’ liquidity risk; less sophisticated credit risk tools. - Strategic objectives and TA activities: - Oversee implementation of CRDIV/Basel lll and provide training to CBK staff. - Responsible: (MCM) CBK - Priority / Timeframe: H MT - Development of more adequate liquidity indicators and a liquidity stress tests model; staff training on full model and use in offsite supervision. - Responsible: (MCM) CBK (BSD) - Priority / Timeframe: H IM - Development of tools and indicators for credit risk assessment based on granular data from the CR; staff training on credit risk monitoring and use of indicators in offsite supervision. - Responsible: (MCM) CBK (BSD and EAFSD) MH - Priority / Timeframe: MT - Insurance sector supervision and regulation - Key vulnerabilities: market-conduct issues, legalistic enforcement focus, crisis-management approach exposing CBK reputational risk, onsite inspections overlooking material risks, rapid/piecemeal Solvency II implementation. - Strategic objectives and TA activities (selected): - Develop regulatory framework and supervisory toolkit for market conduct; staff training. - Responsible: (MCM) CBK - Priority / Timeframe: MH MT - Develop escalating supervisory measures before enforcement; staff training on supervisory practices. - Responsible: (MCM) CBK - Priority / Timeframe: H ST - Develop crisis management approaches that do not involve CBK employees; staff training (possibly IMF LEG). - Responsible: CBK - Priority / Timeframe: MH MT - Improve onsite inspection techniques; staff training and possible on-the-job training by joining an onsite inspection. - Responsible: (MCM) CBK - Priority / Timeframe: H ST - Proportionate implementation of Solvency II; partner with EIOPA for assistance and training (WB may provide assistance under FSAP development module). - Responsible: CBK - Priority / Timeframe: M LT - Securities markets and capital markets development - Key vulnerabilities: Underdeveloped capital markets. - Strategic objectives and TA activities: - Establish a cross-agency task force on capital markets development (MCM ongoing guidance). - Responsible: CBK, MoF, KPST - Priority / Timeframe: M MT - Provide assistance to MoF in drafting key capital markets legislation (MCM, LEG review). - Responsible: CBK, MoF - Priority / Timeframe: M LT - Increase expertise and knowledge on capital markets at CBK; identify TA/training providers (World Bank, EBRD, ESMA). - Responsible: CBK - Priority / Timeframe: M MT - Systemic risk, financial stability, and macroprudential policy (selected) - Financial Stability Governance - Vulnerability: Lack of appropriate institutional arrangements for MaPP. - Objective: Undertake a strategic review of CBK’s institutional arrangements and practices in support of MaPP. - TA: Incorporated into broader TA on central bank governance (MCM). - Responsible: CBK - Priority / Timeframe: H ST - Vulnerability: Lack of reference in the CBL to use prudential instruments for MaPP. - Objective: Amend the CBL to provide explicit mandate for MaPP prudential instruments. - TA: Review and assist in drafting the CBL (MCM with LEG). - Responsible: CBK - Priority / Timeframe: MH LT - Systemic Risk Monitoring - Vulnerability: Insufficient skilled staff for MaPP analysis. - Objective: Develop HR strategy and train staff (stress testing, network analysis). - TA: Draw on IMF Institute for Capacity Development training courses. - Responsible: CBK - Priority / Timeframe: H IM - Vulnerability: Inadequate detection of key financial sector risks and vulnerabilities. - Objective: Conduct data gap analysis and TA on developing sectoral financial accounts and balance sheet statistics (STA). - Responsible: CBK, MoF, and KAS - Priority / Timeframe: H ST - Real estate data: Establish Interagency Real Estate Working Group to identify and close data gaps; possible STA support. - Responsible: CBK, MoF, KAS, Ministry of Environment and Spatial Planning - Priority / Timeframe: MH ST - Improve stress testing and network analysis competencies; enhance methodologies. - Responsible: CBK - Priority / Timeframe: MH MT - Financial inclusion and statistics - Financial Inclusion - Vulnerability: Lack of overview of financial inclusion initiatives hinders monitoring/evaluation of financial stability risks. - Objective: Establish national financial inclusion strategy to monitor risks from financial deepening. - TA: Could be provided by the WB. - Responsible: CBK, MoF, Ministries of Trade and Justice, and business associations - Priority / Timeframe: H ST - Financial Statistics (Nonbank sector) - Vulnerability: Inadequate financial statistics for assessing risk. - Objective: Strengthen Monetary and Financial Statistics; ensure methodological consistency with international standards; develop sectoral financial accounts and balance sheet statistics. - TA: STA - Responsible: CBK; for sectoral accounts also CBK, KAS - Priority / Timeframe: MH MT and MH LT (as specified) - Real Estate Statistics - Vulnerability: Missing information in real estate statistics. - Objective: Start closing information gaps; develop series on construction activity and real estate transactions (subject to data availability). - TA: STA - Responsible: CBK, KAS - Priority / Timeframe: MH LT - Timeframe legend (as provided) - IM: < 6 months - ST: < 12 months - MT: 12 to 24 months - LT: 24 months to 48 months - Priority legend (as provided) - H: High - MH: Medium High - M: Medium *Source: Central Bank of Kosovo; STA mission findings; IMF staff text as provided in the source content.* ### ANNEX III. IMPLEMENTATION OF PAST KEY MCM TA RECOMMENDATIONS ### ANNEX III. IMPLEMENTATION OF PAST KEY MCM TA RECOMMENDATIONS ### Banking Sector - Authors: Michel Deasy and Paula Cristina Seixas de Oliveira - Purpose: - Carry out a stability assessment of the banking regulatory system in Kosovo. - Develop an agenda for follow-up TA in areas where deficiencies are identified or where further analytical support may be required. ### Insurance Sector - Author: Peter Windsor - Content: - Provides an analysis of the insurance industry in Kosovo and of its regulatory framework and issues identified with respect to its supervision. - Adds further detail on the key recommendations covered in the Aide Memoire. - Provides additional recommendations, including regarding financial education and industry development. ### Securities Markets - Author: Richard Stobo - Content: - Discusses the development of capital markets in Kosovo, as a necessary precursor to the introduction of an investment funds regime. - Assesses the current regulatory and supervisory context. - Identifies the key steps to be taken to create a sound basis for capital markets activity. - Makes suggestions on how best to organize TA to support that objective. ### Macroprudential Policy - Authors: Keith Hall and Zhongxia Zhang - Content: - Reviews key elements of CBK’s macroprudential policy framework. - Covers institutional arrangements underpinning CBK’s role as a macroprudential authority. - Discusses the challenges of developing a systemic monitoring capacity in Kosovo where there are significant information gaps. - Describes the strategy adopted by CBK for operationalizing the use of macroprudential policies. ### Central Bank Governance - Author: Sarah Simpson - Content: - Contains a detailed explanation of observations, recommendations, and best practice relating to central bank governance, particularly on: - decision-making structures; - organizational structure and design; - risk management; and - internal audit. ### Financial Inclusion and Deepening (Impact on Financial Stability) - Authors: Ann-Margret Westin and Zhongxia Zhang - Content: - Documents the state of nature of financial inclusion in Kosovo and the different initiatives currently being undertaken to enhance financial deepening. - Proposes recommendations to mitigate any risks to financial stability from financial deepening. ### Statistical Annex — Financial Statistics - Author: Naoto Osawa - Content: - Examines Kosovo’s Financial Soundness Indicators and Monetary and Financial Statistics. - Presents the current reporting status of these two key data sets and identifies several potential methodological issues and data gaps. - Attempts to map the inter-sectoral linkages for Kosovo from a stock perspective using a balance sheet approach. *Source: ANNEX III. IMPLEMENTATION OF PAST KEY MCM TA RECOMMENDATIONS (excerpt).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1uvkea2020001.pdf_