## Preface ## Source details **Canonical URL:** [Preface](https://www.imf.org/-/media/files/publications/cr/2022/english/1mdaea2022002.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2022/english/1mdaea2022002.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2022/english/1mdaea2022002.pdf.json) --- ### Mission timing, modality, and leadership - IMF Financial Sector Stability Review (FSSR) mission held virtual meetings with the National Bank of Moldova (NBM) during June 1-22, 2021. - Mission led by Mr. Torsten Wezel (Monetary and Capital Markets Department, MCM). - Team members included Mr. Joseph Crowley (Statistics Department, STA); Ms. Cristina Pailhé; Messrs. Adam Gersl, Joao Marques, Ian Tower and Greg Tanzer (all MCM short-term experts). - Mr. Dong He, Deputy Director (MCM), and Mr. Vassili Prokopenko (MCM TA Country Manager) joined for the closing meeting. - Meetings conducted remotely due to COVID-19 travel restrictions. - Scope agreed in January 2021: financial sector oversight; financial stability (macroprudential framework, systemic risk assessment, and stress testing); financial crisis management; financial inclusion; capital markets development; financial sector statistics. ### Engagement and acknowledgements - Meetings with: Mr. Octavian Armaşu (Governor, NBM); Mr. Valeriu Chitan (Chairman, NCFM); Ms. Tatiana Ivanicichina (State Secretary, MoF) and technical staff from NBM, NCFM, MoF, MoE&I, MoE, DGF, CPA, MSE, CSD; senior executives and World Bank liaison. - Mission thanks NBM and NCFM staff for collaboration and flexibility for virtual meetings. ### Diagnostic modules and outputs - Two modules: - Financial stability: oversight; macroprudential framework; systemic risk assessment; stress testing; crisis management; financial inclusion; capital markets development. - Financial sector statistics: identify key data gaps hampering financial stability analysis and statistical reporting to IMF STA. - Diagnostic supports a Technical Assistance Roadmap (TARM); key recommendations summarized in Table 1 and TARM provided in Section III. ### Key cross-cutting findings (high-level) - Financial oversight: - Banking sector prudential regulatory and supervisory framework is close to completion based on EU standards. - Insurance regulation progress depends on enactment of outstanding legislation, effective implementation and enforcement, and increased resourcing. - Regulation of SCAs and NBCOs developed but requires more resources and emphasis on business conduct. - Preparations for transfer of regulatory responsibilities to the NBM in mid-2023 need acceleration and close NBM–NCFM cooperation. - Macroprudential framework and stress testing: - Institutional arrangements broadly appropriate. - Gaps: amend Law on NBM for explicit financial stability/macroprudential mandate; increase resources and visibility for financial stability surveillance; implement calibrated borrower-based tools, especially DSTI cap covering bank and non-bank credit for households. - Need stronger micro-level data at non-bank credit providers and revision of solvency and liquidity stress tests to align with best practices. - Crisis management and safety net: - Framework substantially improved; capacity increased since 2014-15. - Remaining gaps in bank resolution and safety net: crisis preparedness, inter-agency cooperation; review legal framework for bank liquidation and institutional arrangements; amend resolution law/secondary legislation for MREL and Resolution Fund access conditions. - Financial inclusion: - Initiatives on financial literacy and payments exist but no overarching NFIS or inter-agency coordination mechanism. - Digital/electronic finance underdeveloped; many transactions still in cash. - Potential to leverage remittances. - Need inclusive products (basic deposit accounts, microinsurance), comprehensive consumer protection reform, internal complaint-handling procedures, and an independent ADR scheme. - Capital markets development: - Underdeveloped; not sufficiently contributing to financing, risk management, investment needs. - Recommend capital markets development strategy by NCFM with priorities: legal framework for facultative pension funds, IOSCO MMoU signatory capacity, stronger supervision of intermediaries and pension administrators, encourage trading of government/municipal bonds and CIS. - Financial sector statistics: - MFS coverage includes all depository corporations, compiled in line with latest IMF methodology. - BSA matrices for 2015-20 scheduled for release in 2022. - IIP statistics based on BPM6. - Remaining data gaps: FSIs for non-financial corporations, households, market liquidity; many missing statistics available but require coordinated collection and quality/methodology checks under resource constraints. --- ### Overview of the financial system (As of end-December 2020 / notes) - At end-2020, commercial banks represented 90 percent of total financial system assets (excluding the central bank). - Deposit-taking institutions include Category B SCAs with total assets equal to less than one percent of total bank assets. - Non-depository sector: NBCOs and Category A non-deposit taking SCAs have assets equal to about 10 percent of total bank assets. - Insurance sector by total assets is about 2 percent of total financial system assets. - Small number of licensed non-bank investment companies. Key structural facts (As presented in Table 2, As of end-December 2020): - TOTAL FINANCIAL SECTOR: 419 institutions; Asset Size 198,893 (millions of lei); Percent of Total 100. - National Bank of Moldova: 1 institution; Asset Size 80,585 (millions of lei); Percent of Total 41. - Other deposit taking institutions: 75; Asset Size 104,781 (millions of lei); Percent of Total 53; Percent of Total Excluding Central Bank 89. - Commercial Banks: 11; Asset Size 103,795 (millions of lei); Percent of Total 52; Percent of Total Excluding Central Bank 88. - Domestic banks: 3; Asset Size 37,046 (millions of lei); Percent of Total 19; Percent of Total Excluding Central Bank 31. - Foreign-owned banks: 8; Asset Size 66,749 (millions of lei); Percent of Total 34; Percent of Total Excluding Central Bank 56. - Category B SCAs: 64; Asset Size 986 (millions of lei); Percent of Total 0.5; Percent of Total Excluding Central Bank 0.8. - Non-deposit taking institutions: 344; Asset Size 13,527 (millions of lei); Percent of Total 7; Percent of Total Excluding Central Bank 11. - Insurance (1/11): Asset Size 3,219 (millions of lei); Percent of Total 2. - Investment companies (end-June 2021) (1/15): Asset Size n/a; Percent of Total n/a. - Category A SCAs: 164; Asset Size 129 (millions of lei); Percent of Total <0.1; Percent of Total Excluding Central Bank <0.1. - NBCOs: 154; Asset Size 10,179 (millions of lei); Percent of Total 5; Percent of Total Excluding Central Bank 9. - Note: 1/ Assets are as of end-March 2021. Additional structural observations: - Banking sector concentration: HHI of 0.183; largest two of 11 banks hold over half of assets and deposits; bottom four hold less than one tenth in either category. - Foreign ownership of banks rose from just over one quarter in 2009 to almost 90 percent at end-2020. - Category B SCAs’ assets about one percent of total credit institutions’ assets at end-December 2020, up from about 0.4 percent a decade earlier. - Category A SCAs doubled share over past decade to 5 percent. - NBCOs (microfinance and leasing) largest element of OFCs; largest 15 NBCOs account for some 80 percent of total NBCO assets; largest NBCO has assets exceeding those of two smallest banks. - Insurance: most companies domestic; two part of Austrian groups; life insurance represented 7 percent of market in 2020 (only one life insurer). --- ### Macrofinancial vulnerabilities - Exposures via real-financial, fiscal-financial, external-financial, and intra-financial linkages raise credit and solvency risk despite generally strong capitalization. - Real-financial: - High loan concentration to a few large borrowers (name concentration risk). - NBCO/SCA sector saw strong pre-pandemic credit growth raising concerns on origination standards and borrower leverage. - Fiscal-financial: - Banks hold significant government bonds; bond holdings to total assets grew by 5½ percentage points between end-2019 and May 2021; loan-to-assets ratio fell by 1¼ percentage point over same period. - External risks: - Largest banks recently acquired by international investors, exposing sector to origin-country developments. - Remittances accounted for 13 percent of GDP in 2020, creating borrower and fee-income risks. - NBCO-specific: - NBCO funding in foreign currency: debt with non-residents accounts for two-thirds of NBCO funding while loans mostly to clients with cash flow in Lei. - NBCOs hedge partially but also grant Lei loans indexed to foreign currency, transferring currency mismatch risk to borrowers. - Intra-financial: - Post-2014-15 fraud crisis, non-bank lenders expanded lending more than doubling credit volume; NBCOs financed by non-residents and commercial banks create wholesale funding reliance and bank exposure (one bank’s loans to NBCOs reportedly account for 15 percent of its equity). - Resilience during COVID-19: - Sector resilient; NBM discouraged dividends/share buybacks and allowed temporary use of capital conservation buffer. - NCFM recommended voluntary rate reductions and payment deferrals by NBCOs; reporting deadlines extended for insurers and capital market issuers. - Banking NPL ratio rose slightly early in pandemic then resumed a declining trend; insurers benefited from reduced vehicle usage. --- ### Sector diagnostics and recommendations ### Banking sector — baseline diagnostics - Regulatory transition and foreign ownership: - NBM close to completing prudential framework based on EU standards. - Foreign owners (including five EU banks) account for nearly 90 percent of share capital. - Capitalization and liquidity: - Capital ratios exceed minimums with substantial (average 4 percent) buffers imposed after supervisory review. - NPLs continued downward trend. - Banks highly liquid including LCR; footnote: Banks have to meet only 70 percent of the requirement in 2021, rising to 100 percent from the start of 2023. - Remaining vulnerabilities: - Interventions on shareholder transparency outstanding at two banks; one non-systemic bank under temporary administration for over two years. - Five of 11 banks under (non‑statutory) intensive supervision. - Supervisory decisions sometimes challenged in courts. - Planned enhancements and unresolved policy choices: - Transposition of EU legislation will be complete though IRB approach not expected to be implemented in practice. - NBM undecided on aligning regulatory provisioning with IFRS 9. - Supervision resourcing and processes: - Off-site supervision centers on extensive reporting to NBM central risk register; supervisory review follows EU SREP but not fully risk-based. - Planned reorganization to increase supervision resources by close to 20 percent. ### Banking sector — targeted recommendations (selected) - Increase specialist supervisory resources, including governance expertise. - Strengthen governance evaluation, including "independence of mind" tests with TA as needed. - Expand cross-border cooperation agreements and participation in supervisory colleges; develop approach to assess/mitigate risks from foreign owners and apply consolidated supervision to banking groups. - Coordinate BSD dialogue with FSD on IFRS 9 alignment; intensify dialogue with banks and auditors on expected credit loss methods. ### NBCOs and SCAs — diagnostics and recommendations - Diagnostics: - 2018 legislation and 2020 amendments led to consolidation; minimum capital MDL 1 million and bar on deposit-taking. - NBCOs required to make provisions, participate in credit bureau, and report to NCFM. - Off-site supervision system appropriate; on-site development delayed by pandemic. - SCAs: assets concentrated in 64 deposit‑taking associations; one central organization provides liquidity facilities. - Legal detail: For credit contracts from April 20, 2020 with maturity < two years and/or principal < MDL 50,000, law prohibits fees/penalties/interest exceeding principal. - Recommendations: - NCFM to prioritize business conduct supervision, enforcement, and on-site attention on conduct controls and governance at larger NBCOs. - Use complaints data to identify sectoral failings. - Reconsider balance between prudential and business conduct regimes; monitor funding and liquidity and FX exposure of large NBCOs. - Consider additional resources or different skill sets. ### Insurance — diagnostics and recommendations - Diagnostics: - NCFM progressed on weak insurers; several exited or had licenses removed. - Industry-funded evaluation of insurers issuing "Green Cards" at end-2020 initiated. - New legislation planned to implement parts of Solvency II, IFRS 17, and ORSA; pending parliamentary approval. - Market: several insurers in run-off; only one life insurer representing 7 percent of market in 2020; brokers extract high commissions; MTPL dominates. - Responsibility for insurance regulation transfers to NBM July 2023. - Recommendations: - Enact new legislation and expect multi-year implementation requiring extensive TA. - Link reforms to broader financial sector development to expand product range and investment availability. - NCFM to establish implementation workstreams: (a) governance and on-site work; (b) overhaul supervision for IFRS 17/ORSA/tariff liberalization; (c) stronger enforcement and resolution approaches; (d) intermediary and business conduct supervision per IAIS. - Develop supervisory manuals; increase insurance supervision resources; cooperate with Austrian authorities for group risk assessment. ### Payment systems and CSD supervision - Diagnostics: - Extensive regulatory framework; payments market bank‑centric with seven non-banks. - 2012 law aligned with EU standards; PSD2 update planned. - NBM powers limited to enforce customer treatment; NBM legally responsible for CSD supervision but scope of NCFM involvement unresolved. - Need PFMI-aligned regulations and internal procedures. - Recommendations: - Settle CSD supervision roles and responsibilities with TA; align scope of CSD functions and NCFM role; arrange information exchange and joint monitoring. - Focus TA on PFMI Responsibility E (cooperation with other authorities); develop NBM internal processes for CSD supervision (EU TA). ### Transfer of NCFM responsibilities to NBM (July 1, 2023) — diagnostics and recommendations - Diagnostics: - Law No. 178 of 2020 transfers responsibilities for insurance, SCAs/NBCOs and credit bureaus on July 1, 2023; NCFM remains for capital markets and pensions. - Transfer presents opportunity for integrated regulator but entails resourcing, capability and conflict-of-interest risks. - Recommendations: - Agree and communicate full transfer plan soon; involve NCFM staff in preparation; establish joint working groups and apex-level Governor/Chairman meetings. - Seek advice from regional agencies with integrated regulator experience. - Establish internal structure, leadership and staffing for new functions early; identify initiatives to defer or reformulate to avoid jeopardizing core supervision. - Develop vision and principles for NBM as integrated regulator, including scope for common regulatory standards and processes; seek TA as needed. --- ### Macroprudential framework, systemic risk assessment, and stress testing - Institutional arrangements: - NBM is main macroprudential authority but lacks explicit legal mandate. - NCFS chaired by NBM issues recommendations but has no implementation powers. - FSD understaffed: about six regular staff members (currently only four); recommended increase to at least 10 FTE. - External visibility weak; financial stability content placed under Supervision on NBM website with limited publication of policy notes or studies. - Macroprudential toolkit: - Law No. 202/2017 aligned with CRR/CRD IV allows calibration of capital buffers: - capital conservation buffer (existence noted); - CCyB currently set at 0 percent for Moldovan exposures; - systemic risk buffer currently at 1 percent for all banks and an add-on of 2 percentage points for certain banks; - buffer for systemically important banks: 0.5 to 1.5 percent for four SIBs. - Discussions on borrower-based tools (DSTI and LTV caps) for banks and NBCOs underway. - Data gaps: - Loan-level data from banks in Credit Risk Register since 2011 (improved since 2016). - Lack of granular borrower-level data on NBCO and SCA loans to households; NCFM shares only institution-specific/sectoral data. - Household income data available from March 2021 but not shared with NBM/NCFM. - Stress testing: - Current solvency stress testing uses "what if" sensitivity approach without specific time horizon; adverse scenarios calibrated simply; transmission uses pre-defined Basel II QIS elasticities not estimated for Moldova. - Liquidity stress tests use a 30 days horizon and lack contractual cash-flow focus; LCR granularity limited. - No macro stress tests for non-bank institutions; bottom-up tests every two years not fully used in supervision. - NBCOs and SCAs have capital-to-assets ratios over 30 percent compared to required minimums of 5 percent (or 10 percent if borrowing from banks). - Micro stress tests of households and corporations not yet performed despite loan-level data availability. Main recommendations (selected): - Legal/organizational: - Amend Law on NBM to explicitly include financial stability and macroprudential mandate. - Increase FSD staffing to at least 10 FTE; make internal Working Group functional; strengthen external communications. - Toolkit & data: - Expand toolkit to include borrower-based tools (LTV/DSTI) for banks and NBCOs/SCAs; introduce overall DSTI cap jointly by NBM and NCFM and ensure enforcement. - Explore options to receive borrower-level data on NBCO/SCA loans via ad-hoc collections, regular reporting to NCFM, exchange with private credit bureaus, or inclusion in Credit Risk Register post-transfer. - Stress testing: - Build state-of-the-art solvency framework with alternative macro scenarios, credit risk satellite models, and 2-3 year balance sheet/P&L projections. - Involve MPD in scenario calibration and use MPD official forecast for baseline. - Replace liquidity stress tests with cash-flow based approach using LCR data and extend horizon beyond 30 days. - Use stress-test results in BSD supervisory processes and require banks to report both prudential and IFRS 9 ECL provisions and IFRS 9 parameters. - Develop capacity to stress test non-bank financial institutions and perform micro stress tests using borrower-level data. --- ### Financial crisis management and safety net Deposit Guarantee Fund (DGF) — diagnostics: - DGL in place since 2004; ex-ante funded "paybox plus" scheme. - 2018 amendments: extend protection to deposits of private legal persons; increase coverage to MDL 50,000 effective January 2020; introduce risk-based contributions; allow DGF to take loans (with no cap) also from MoF. - As at end-March 2021, DGF had 728 million MDL of available resources, corresponding to 4.8 percent of total guaranteed deposits. - DGF understaffed and focused on contributions; currently has only 6 staff members (excluding the executive director). IADI 2020 survey: average of 43 staff for "paybox plus" members (median 17). DGF — main recommendations: - Conduct crisis simulations to test DGF capacity to perform functions and banks' ability to provide needed information. - Operationalize and test DGL provisions allowing DGF to take loans from MoF. - Revise DGL to clarify reimbursement procedures/timelines; provide DGF access to depositors' records at all times in prescribed formats (Single Costumer View files); empower DGF to assess and request quality improvements in bank information systems. - Promote engagement with SCAs and increase DGF staffing. Bank recovery and resolution — diagnostics: - 2016 BRRL based on EU law created comprehensive tools; ex-ante Resolution Fund (RF) set up in 2020 managed by DGF targeting 3 percent of guaranteed deposits (around MDL 475 million) by end-2024. - Resolution planning undertaken; gaps remain in operational plans, Bridge Bank and Bail-In preparations, and no resolution simulation exercises performed. - MREL requirement needs reform due to deposit-funded banks and limited capital markets. - BRRL access conditions to RF may be too restrictive: mandatory minimum bail-in of 8 percent of total liabilities and own funds; total RF support limited to 5 percent of total liabilities and own funds — potential to bail in depositors and create unintended consequences. - Use of DGF resources to finance resolution not expressly provided in law; BRRL more restrictive than EU Directive. - Lack of clear "failing or likely to fail" criteria in law. Bank recovery and resolution — main recommendations: - Prioritize resolvability assessments for four largest SIBs and remove impediments; engage banks on resolvability outcomes. - Develop medium-term strategy for MREL that provides flexibility and transition arrangements. - Strengthen operational plans for all resolution tools and human resources; prioritize Bridge Bank and Bail-In as ancillary tools. - Conduct resolution simulation exercises to test preparedness and inter-agency cooperation; test MoUs with foreign group resolution authorities. - Revise BRRL to adapt MREL framework, amend RF access conditions (e.g., lower minimum bail-in or financial stability exception), and permit use of DGF funds in resolution with safeguards. - Adopt regulatory instrument/guidelines to clarify determination of "failing or likely to fail." Bank liquidation — diagnostics and recommendations: - Forced liquidation is administrative with NBM withdrawing license and appointing liquidator; framework used for three banks since 2014. - Recent legal change allows DGF to finance shortfall up to amount of covered deposits. - NBM perceives flaws and proposed reform options; preferred approach: hybrid court-based procedure with administrative pre-judicial phase where NBM retains substantial control, including ability to execute sale of assets/liabilities financed by DGF; strengthen legal protection for NBM staff. Emergency Liquidity Assistance (ELA) — findings and recommendations: - NBM established transparent ELA framework and mobilized credit claims as collateral post-2014; remaining gaps include need for forward-looking solvency assessment, finalize collateral framework, digitalize mobilization, accounting treatment and ELA communication strategy; improve staff preparedness. - Recommendations: - Strengthen analytical tools for advance monitoring and estimation of potential ELA needs and accounting consequences. - Implement, back test and evaluate Early Warning System (EWS) for ELA; develop liquidity stress testing for potential ELA needs at weekly or daily frequency; estimate PD and LGD of domestic banks and potential ELA loans for IFRS 9 ECL provisioning. - Tools to be developed jointly by FMD, FSD and BSD; FSD to extend liquidity stress tests; FMD risk management to lead PD/LGD estimation. --- ### Financial inclusion, consumer protection, and financial education - Institutional framework: - No National Financial Inclusion Strategy (NFIS) exists and no high-level inter-agency FI committee. - Recommendation: Develop NFIS and set up high-level coordination mechanism (NBM, NCFM, MoF, MoE, MoEd); TA recommended. - Services, digital finance, remittances and statistics: - SCAs and NBCOs serve over 600,000 clients (nearly one fourth of population). - Mobile connections equal 101 percent of population. - Remittances accounted for 13 percent of GDP in 2020; 80 percent paid through banks. - Average cost of sending remittances to Moldova is 5.6 percent (Q3 2020); comparable: Romania 4 .3 percent, Uzbekistan 1.8 percent, Georgia 1.1 percent. - Many SCAs/NBCOs lack digital products; account opening requires in-person ID for AML/CFT regardless of risk profile. - Insurance limited to mandatory products; life and agricultural insurance incipient; no micro-insurance or retail investor initiatives in capital markets. - Recommendations (selected): - Develop inclusive products: standard “basic deposit account”, digital accounts/e-wallets, simplified CDD/digital ID for predefined “low risk” groups per FATF standards, micro-insurance, retail investment opportunities and SME access to markets. - Make digital finance strategy a core NFIS element to reduce remittance costs and provide ancillary products. - Boost cashless infrastructure: ATMs, POS, mobile access; consider direct deposit of government subsidies to bank accounts. - Maintain proportionate regulation to avoid pushing clients to informal channels. - Financial consumer protection (FCP) diagnostics: - Framework fragmented across Ministry of Economy, CPA, NBM and NCFM causing gaps and overlaps. - Disclosure/transparency fragmented; SCAs/NBCOs may not disclose effective total cost of credit. - Abusive clauses and debt collection practices observed; 2020 amendments limited third-party collection amounts but no comprehensive prohibitions on abusive practices. - Complaints handling and redress deficient; no out-of-court ADR; courts remain main route. - Recommendations: - Comprehensive reform to implement effective FCP: harmonize mandates, establish overarching legal framework, harmonize internal complaint-handling procedures across sectors, implement independent out-of-court ADR mechanism. - ADR proposed as independent unit within NBM with firewalls and direct Board reporting; TA recommended. - Develop Strategy for Financial Education as a workstream within NFIS with NBM, NCFM, MoF, MoE and Ministry of Education participation. --- ### Capital markets development — diagnostics and recommendations - Overview: - Capital market underdeveloped; needs institutional strengthening, regulatory capacity improvement, and expanded instrument range/depth. - NCFM responsible for capital markets; transition of other responsibilities to NBM in 2023 will leave NCFM focused on capital markets and facultative pension funds. - Institutional and market diagnostics: - MSE operational for over 20 years with same trading system; single CSD established recently. - Around 40 listed companies on MSE but trading is thin. - Investment companies hold <1 percent of total financial sector assets; 15 licensed investment companies: 7 stand‑alone non-bank, 8 part of bank groups. - Bond market dominated by government securities; at end-2019 Government securities MDL 23,168 million with banks holding MDL 6,290 million or 27 percent. - FDI increased from US$290 million in 2010 to US$502 million in 2019 (~4 percent of GDP in 2019). - All instruments trade in MDL; no derivatives to manage currency risk. - Recommendations: - Develop and publish whole-of-government capital markets development strategy aligned with NFIS; amend NCFM statutory goals to include capital market development mandate. - Safeguard sustainability of capital markets supervision given NCFM may be smaller post-2023; Capital Markets Department: 15 of NCFM’s 59 staff in 2020; revenue from capital market as % of NCFM income: 43.5 percent (2018), 53.7 percent (2019), 20.4 percent (2020). - Upgrade NCFM powers to meet IOSCO MMoU standards and obtain/share information with foreign counterparts; amend laws as needed. - Prioritize normative rules for facultative pension funds under new law; develop supervisory frameworks and supervisory manual; obtain external expertise. - Encourage development of tradeable instruments: secondary trading of government securities > one year and municipal bonds on MSE; consider regulatory/fiscal measures to promote corporate bond issuance, CIS development, crowdfunding and alternative finance for SMEs; accompany listing with investor education. --- ### Financial sector statistics — diagnostics and TA - FSIs: - NBM reports 11 of 12 core and 7 of encouraged FSIs for DTs quarterly on domestic consolidation basis. - Missing indicator: sectoral distribution of loans reported in FS2 but not in FSD form. - No FSIs for NFCs, households, or market liquidity currently; NBM plans to address gaps. - NBM moving FSI methodology to 2019 Guide and implemented Basel III in 2018. - MFS: - Monthly MFS compiled for NBM and ODCs per 2016 Manual. - Coverage includes all banks and SCAs; Category A SCAs excluded from ODC survey; Category B SCAs not included due to reporting lag but planned inclusion once interpolation/estimation processes agreed. - BSA and IIP: - NBM preparing BSA matrices for 2015-2020 for publication in June 2022 using STA BSA tool. - Moldova compiles quarterly IIP based on BPM6. - Country-specific assumptions for 2019 used in mission analysis noted in Annex I. - FAS: - NBM produces Financial Access Survey covering banks, credit cooperatives and insurers; little coverage of MFI or mobile money sectors. - TA assessment (Annex II): - No immediate financial sector TA needs for statistics; potential medium- to long-term TA as NBM generates source data for NFCs and HHs and after transfer of non-bank oversight. - NBM received TA on FSIs in 2019; addressing recommendations to fully report loans by sector and deposit-lending spread. - No TA envisioned for MFS coverage improvements. --- ### Technical Assistance Roadmap (TARM) — selected priorities and timeframes - Financial sector oversight: - Complete implementation of remaining EU/Basel prudential standards; enhance supervision of SIBs; review IFRS 9 alignment. Responsible: NBM. Priority: High. Completion timeframe: MT. - Implement insurance reform workstreams; increase NCFM resources. Responsible: NCFM. Priority: High. Completion timeframe: LT. - Prepare for transfer of NCFM responsibilities to NBM (readiness for July 2023): agree transfer plan, communicate to staff/industry, establish internal structure. Responsible: NBM/NCFM. Priority: High. Completion timeframe: ST. - Macroprudential, systemic risk and stress testing: - Amend law for explicit macroprudential mandate; increase FSD staffing to at least 10 FTE. Responsible: NBM. Priority: High (staffing ST) / Medium (mandate MT). - Extend toolkit to borrower-based tools (LTV/DSTI) for bank and NBCO/SCA loans and obtain borrower-level data. Responsible: NBM/NCFM. Priority: High. Completion timeframe: MT/ST. - Build state-of-the-art solvency and liquidity stress testing frameworks and use results in supervision. Responsible: NBM. Priority: High. Completion timeframe: MT. - Crisis management and safety net: - Amend DGL for clarity and DGF access to records; increase DGF staffing; conduct DGF crisis simulations. Responsible: DGF/MoF. Priority: Medium. Completion timeframe: MT/LT. - Review BRRL and/or secondary legislation to adapt MREL and RF access conditions; conduct resolution simulation exercises; strengthen BRD staffing. Responsible: NBM/DGF/MoF. Priority: High/Medium. Completion timeframe: MT/LT. - Assess forced liquidation framework and adopt revised law with hybrid court-based procedure. Responsible: NBM. Priority: High. Completion timeframe: MT. - Financial inclusion and FCP: - Develop NFIS and high-level FI committee; adopt digital finance strategy and inclusive products (basic deposit account, micro-insurance); comprehensive FCP reform including ADR. Responsible: NBM/NCFM/MoF. Priority: High. Completion timeframe: LT/MT. - Financial education strategy with NBM, NCFM, MoF, MoE, Ministry of Education; TA in progress (OECD‑INFE for NBM). - Capital markets: - Develop capital markets strategy and enabling legal/regulatory changes; upgrade NCFM IOSCO MMoU capabilities; normative rules for facultative pension funds; risk-based supervision framework and supervisory manual. Responsible: NBM/NCFM. Priority: High. Completion timeframe: MT/LT. Timeframe definitions: - ST, short-term, less than six months; - MT, medium-term, with results around 18 months; - LT, long-term, with results around 30 months. *IMF | Republic of Moldova — Preface (content unit: 1mdaea2022002).* ### Preface ................................................................................................................ ### Preface ### Mission timing and leadership - An IMF Financial Sector Stability Review (FSSR) mission held meetings with the National Bank of Moldova (NBM) during June 1-22, 2021. - The mission was led by Mr. Torsten Wezel (Monetary and Capital Markets Department, MCM). - Team members included Mr. Joseph Crowley (Statistics Department, STA); Ms. Cristina Pailhé; Messrs. Adam Gersl, Joao Marques, Ian Tower and Greg Tanzer (all MCM short-term experts). - Mr. Dong He, Deputy Director (MCM), and Mr. Vassili Prokopenko (MCM TA Country Manager) joined the mission for the closing meeting. ### Modality and scope - Meetings were conducted remotely, via videoconferencing, due to COVID-19 travel restrictions. - The scope agreed with the NBM in January 2021 comprised: - financial sector oversight, - financial stability (macroprudential framework, systemic risk assessment, and stress testing), - financial crisis management, - financial inclusion, - capital markets development, - and financial sector statistics. ### Engagement and counterparts - The mission met with: - Mr. Octavian Armaşu (Governor of the NBM), - Mr. Valeriu Chitan (Chairman of the National Commission on Financial Markets (NCFM)), - Ms. Tatiana Ivanicichina (State Secretary, Ministry of Finance (MoF)). - Meetings also included NBM and NCFM technical staff and government officials from the Ministries of Finance, of Economy and Infrastructure, and of Education; the Deposit Guarantee Fund (DGF); the Consumer Protection and Market Supervision Agency (CPA); the Moldova Stock Exchange (MSE); the Central Securities Depository (CSD); senior executives from public and private sector financial institutions; and liaison with the World Bank. ### Acknowledgement - The mission thanks NBM and NCFM staff for excellent collaboration, productive discussions, and flexibility for virtual meetings despite large time zone differences. ### Diagnostic focus and modules - Two modules were undertaken during the FSSR mission: - Financial stability module: financial sector oversight; financial stability (macroprudential framework, systemic risk assessment, and stress testing); financial crisis management; financial inclusion; capital markets development. - Financial sector statistics module: key data gaps hampering financial stability analysis and statistical reporting to the IMF’s Statistics Department. ### Key cross-cutting findings (high-level) - Financial oversight: - Banking sector prudential regulatory and supervisory framework is close to completion based on EU standards. - Insurance regulation progress depends on enactment of outstanding legislation, effective implementation and enforcement, and increased resourcing. - Regulation of Savings and Credit Associations (SCAs) and Non-Bank Credit Organizations (NBCOs) has been developed but requires more resources and emphasis on business conduct. - Preparations for transfer of regulatory responsibilities to the NBM in mid-2023 need acceleration and close NBM–NCFM cooperation. - Macroprudential framework and stress testing: - Institutional arrangements for financial stability and systemic risk monitoring are broadly appropriate. - Gaps remain: amend Law on NBM to provide explicit legal mandate for financial stability and macroprudential policy; increase resources and visibility for financial stability surveillance; implement calibrated borrower-based macroprudential tools, especially debt-service-to-income (DSTI) cap covering bank and non-bank credit for households. - Need stronger micro-level data, particularly at non-bank credit providers, and revision of solvency and liquidity stress tests to align with best practices. - Crisis management and safety net: - General framework substantially improved over last five years; capacity increased. - Remaining gaps in bank resolution and safety net: increase crisis preparedness and inter-agency cooperation; review parts of legal framework for bank liquidation and its institutional arrangements. - Amendments to resolution law and/or secondary legislation needed for MREL requirement and Resolution Fund access conditions. - Financial inclusion: - Authorities have pursued initiatives (financial literacy, payments) but no overarching national strategy or inter-agency coordination mechanism exists. - Digital and electronic finance underdeveloped; many transactions still settled in cash. - Potential to leverage remittances given Moldova’s remittance reliance. - Need for inclusive financial products (basic deposit accounts, microinsurance), comprehensive financial consumer protection reform, internal complaint-handling procedures, and an independent alternative dispute resolution scheme. - Capital markets development: - Capital market is underdeveloped and not contributing sufficiently to financing, risk management, and investment needs. - Recommendation for a capital markets development strategy implemented by the NCFM, with priorities including establishing legal framework for facultative pension funds, empowering NCFM to sign IOSCO MMoU, strengthening off-site and on-site supervision of market intermediaries and facultative pension fund administrators, and encouraging trading of government and municipal bonds and collective investment schemes (CIS). - Financial sector statistics: - Monetary and financial statistics (MFS) coverage includes all depository corporations, compiled in line with latest IMF methodology. - Published Balance Sheet Approach (BSA) matrices for 2015-20 scheduled for release in 2022. - International Investment Position (IIP) statistics based on BPM6. - Remaining data gaps: Financial Soundness Indicators (FSIs) for non-financial corporations, households, and market liquidity; many missing statistics are available but require coordinated collection and quality/methodology checks under resource constraints. ### Diagnostic outcome and next steps - The mission’s diagnostic review supports a Technical Assistance Roadmap (TARM). - Key recommendations are summarized in Table 1 (Table of Main Recommendations) and the comprehensive TARM is provided in Section III. *IMF | Republic of Moldova — Preface (content unit: 1mdaea2022002).* ### 1. This report was prepared as part of the FSSR mission which held virtual meetings ### This report was prepared as part of the FSSR mission which held virtual meetings ### Mission scope, methodology, and standards - The FSSR mission held virtual meetings with the Moldovan authorities during June 1-22, 2021; scoping discussions with the NBM and NCFM were held remotely in January 2021. - The mission conducted a broad diagnostic of key segments of the financial system and proposed a TARM to address key gaps and vulnerabilities. - Topics covered: financial sector oversight; financial stability issues (macroprudential policy, systemic risk assessment, and stress testing); financial crisis management; financial inclusion; capital markets development; financial sector statistics (see Annex I). - Evaluation frameworks and standards used: - Banking supervision: Basel Core Principles (BCP) for banks. - Insurance: Insurance Core Principles (ICPs) (IAIS). - Stress testing: Basel Stress Testing Principles and best international practices. - Resolution and deposit insurance: Key Attributes of Effective Resolution Regimes and the Revised Core Principles for Effective Deposit Insurance. - Securities regulator information sharing: IOSCO Multilateral Memorandum of Understanding (MMoU). - Financial inclusion: Basel Committee Guidance on application of BCP to institutions relevant to financial inclusion; G20 Principles for Innovative Financial Inclusion; OECD-G20 High-Level Principles on Financial Consumer Protection; OECD High-Level Principles on National Strategies for Financial Education. ### Overview of the financial system - At end-2020, commercial banks represented 90 percent of total financial system assets (excluding the central bank). - Deposit-taking institutions include Category B savings and credit associations (SCAs) with total assets equal to less than one percent of total bank assets. - In the non-depository financial sector, non-bank credit organizations (NBCOs) and Category A non-deposit taking SCAs have assets equal to about 10 percent of total bank assets. - Insurance sector by total assets is about 2 percent of total financial system assets. - There are a small number of licensed non-bank investment companies. Key structural facts (as presented in Table 2, As of end-December 2020): - TOTAL FINANCIAL SECTOR: 419 institutions; Asset Size 198,893 (millions of lei); Percent of Total 100. - National Bank of Moldova: 1 institution; Asset Size 80,585 (millions of lei); Percent of Total 41. - Other deposit taking institutions: 75; Asset Size 104,781 (millions of lei); Percent of Total 53; Percent of Total Excluding Central Bank 89. - Commercial Banks: 11; Asset Size 103,795 (millions of lei); Percent of Total 52; Percent of Total Excluding Central Bank 88. - Domestic banks: 3; Asset Size 37,046 (millions of lei); Percent of Total 19; Percent of Total Excluding Central Bank 31. - Foreign-owned banks: 8; Asset Size 66,749 (millions of lei); Percent of Total 34; Percent of Total Excluding Central Bank 56. - Category B SCAs: 64; Asset Size 986 (millions of lei); Percent of Total 0.5; Percent of Total Excluding Central Bank 0.8. - Non-deposit taking institutions: 344; Asset Size 13,527 (millions of lei); Percent of Total 7; Percent of Total Excluding Central Bank 11. - Insurance (1/11): Asset Size 3,219 (millions of lei); Percent of Total 2. - Investment companies (end-June 2021) (1/15): Asset Size n/a; Percent of Total n/a. - Category A SCAs: 164; Asset Size 129 (millions of lei); Percent of Total <0.1; Percent of Total Excluding Central Bank <0.1. - NBCOs: 154; Asset Size 10,179 (millions of lei); Percent of Total 5; Percent of Total Excluding Central Bank 9. - Note: 1/ Assets are as of end-March 2021. Additional structural observations: - Banking sector concentration: Herfindahl-Hirschman Index (HHI) of 0.183; the largest two of the 11 banks hold over half of assets and of deposits; the bottom four hold less than one tenth in either category. - Foreign ownership of banks rose from just over one quarter in 2009 to almost 90 percent at end-2020. - Category B SCAs’ assets were about one percent of total credit institutions’ assets (including the NBM) at end-December 2020, up from about 0.4 percent a decade earlier. - Category A SCAs doubled their share over the past decade to 5 percent. - NBCOs (microfinance and leasing companies) were the largest element of other financial corporations (OFCs); largest 15 NBCOs account for some 80 percent of total NBCO assets; the largest NBCO has assets exceeding those of the two smallest banks. - Insurance: most companies are domestic; two are parts of Austrian groups, including the largest which is the only life insurance provider; product range and penetration rates are low by European standards. - Investment business activity is limited, reflecting underdevelopment of capital markets and investment services. ### Macrofinancial vulnerabilities - The financial sector is exposed to macrofinancial vulnerabilities through real-financial, fiscal-financial, external-financial, and intra-financial linkages, raising credit and solvency risk despite generally strong capitalization. Real-financial linkages: - High loan concentration in commercial banks’ lending to only a few relatively large borrowers (albeit within prudential limits) exposing banks to name concentration risk. - NBCO/SCA sector experienced strong credit growth before the pandemic, raising questions about loan origination standards and rising credit risk from overleveraged borrowers. Fiscal-financial linkages: - Commercial banks hold significant amounts of government bonds, creating a strong sovereign-bank nexus. - Between end-2019 and May 2021, bond holdings to total assets grew by 5½ percentage points, while the loan-to-assets ratio fell by 1¼ percentage point. - High take-up of government paper may create undue reliance on such investment, imply crowding out of commercial lending, and squeeze bank profits due to low returns. External risks: - Largest Moldovan banks were recently acquired by international bank and non-bank investors, largely from the region, exposing the sector to adverse developments in countries of origin. - Moldova is strongly dependent on remittances, implying credit risk for borrowers reliant on such flows and potential lower fee income if remittances falter. NBCO-specific risk: - NBCO funding in foreign currency is a potential risk: debt with non-residents accounts for two-thirds of NBCO funding, whereas loans to clients with cash flow in Lei dominate. - NBCOs hedge part of FX risk but also grant loans denominated in Moldovan Lei indexed to foreign currency, transferring currency mismatch risk to borrowers. - Foreign exchange risk is not eliminated in practice. Intra-financial sector linkages: - After the 2014-15 fraud-related banking crisis, non-bank lenders expanded lending, more than doubling credit volume since. - NBCOs are financed by non-residents and commercial banks, creating reliance on wholesale funding and exposure of banks to credit risk from NBCOs; loans to NBCOs of one bank reportedly account for 15 percent of its equity capital. Resilience during COVID-19: - The financial sector has proven resilient to COVID-19 pressures. - Authorities’ measures included NBM discouraging dividend payments and share buybacks and allowing banks temporarily to use capital held for the capital conservation buffer requirement. - NCFM recommended voluntary reductions in interest rates and payment deferrals by NBCOs; reporting deadlines extended for insurance companies and capital markets issuers. - At the time of the main FSSR mission some requirements were lifted, including NBM’s dividend restriction (a limit of 25 percent of annual profits is still recommended). - Impacts mitigated by effective risk management and high capital levels for banks and NBCOs. - Banking system NPL ratio rose slightly early in the pandemic but resumed a declining trend (against growing loans); insurers benefited in 2020 from reduced vehicle usage (motor insurance predominant). - Increased reliance on online business environment observed among financial institutions and customers. ### Stocktaking of past Technical Assistance (TA) - IMF (notably MCM) provided considerable TA following the 2014-15 banking crisis focusing on strengthening the bank resolution framework, bank governance (including ownership structure), deposit insurance, and emergency liquidity assistance (ELA). - Recent TA focus shifted towards monetary policy (inflation targeting framework and monetary policy operations), foreign exchange matters, and central bank capital adequacy. - Table 3 (IMF MCM Technical Assistance Since 2016) lists missions including: - Emergency Liquidity Assistance (11/23/2020–12/04/2020) - Monetary Policy Implementation & Operations (2/1/2020–2/12/2020) - Central Bank Capital Adequacy (4/24/2019–5/7/2019) - Enhancing the Inflation Targeting Framework (7/9/2018–2/7/2019) (2 missions) - Foreign Exchange (8/6/2018–8/17/2018) - Emergency Liquidity Assistance (9/5/2017–9/19/2017) - Related Party Diagnostic and Review (6/28/2017–11/20/2017) (3 missions) - Strengthening the Forecast and Policy Analysis System (6/19/2017–6/30/2017) - Deposit Insurance (4/3/2017–4/14/2017) - Ultimate Beneficial Owner and Related Party Identification (2/13/2017–2/24/2017) - Bank Resolution (10/3/2016–2/16/2017) (3 missions) - Resolution Framework (8/8/2016–8/19/2016) Self-assessment of past TA implementation: - Authorities consider they have fully implemented most TA recommendations. - Implemented areas prominent: bank regulation and resolution — measures since 2015 to suspend rights of illicit shareholders, identify and unwind unlawful related-party exposures, resolve non-compliant banks, upgrade resolution framework, and improve organizational arrangements for crisis management and financial stability. - Main exceptions with incomplete implementation: 2018-19 TA on inflation targeting (several workstreams still in progress) and the second mission on ELA carried out only in late 2020. - Other TA providers active: World Bank (deposit insurance, resolution planning, insurance oversight, banking supervision, transfer of non-bank supervisory responsibilities from NCFM to NBM, national payment systems infrastructure), national central banks under EU twinning projects, USAID, and private sector consultancies. FSSR role: - The FSSR reflects experience implementing past TA and assesses future needs, covering outstanding issues from previous IMF TA (e.g., ELA) and the challenges of effective implementation of measures taken in response to TA. - Recommendations identify priority areas for further development across financial regulation, financial inclusion, and capital markets development. ### Diagnostic review — banking sector baseline diagnostics and supervisory capacity - Regulatory transition and foreign ownership: - Extensive regulatory reforms and transition to foreign ownership have underpinned banking sector soundness. - NBM is close to completing a prudential regulatory and supervisory framework based on EU standards, addressing local vulnerabilities. - Foreign owners, including five EU banks, account for nearly 90 percent of share capital and contributed to stronger governance (significant numbers of independent board members) and risk management. - Capitalization and liquidity: - Capital ratios exceed the minimum, including substantial (average 4 percent) buffers imposed after supervisory review. - Non-performing loans (NPLs) have continued a downward trend. - Banks are highly liquid on all measures, including the newly effective Liquidity Coverage Ratio (LCR). - Footnote: Banks have to meet only 70 percent of the requirement in 2021, rising to 100 percent from the start of 2023. - Remaining vulnerabilities and supervisory challenges: - Interventions on shareholder transparency are outstanding at two banks; one non-systemic bank has been under temporary administration for over two years. - Five of the 11 banks are subject to (non-statutory) intensive supervision, reflecting risks including litigation. - All banks remain vulnerable to uncertainties due to the political and judicial system; NBM decisions continue to be challenged in the courts. - Foreign ownership brings exposure to financial, operational and reputational risks in case of problems at foreign bank or non-bank parent. - Planned enhancements and unresolved policy choices: - Remaining measures from the EU framework will enhance regulation and supervision of capital and liquidity adequacy, aligning with Basel requirements (though not the latest Basel III standards taking effect in 2023). - Planned additions include an internal ratings-based (IRB) approach to credit risk; transposition of EU legislation will be complete but IRB will not be implemented in practice because of lack of demand from banks and perceived capacity constraints at both the banks and the NBM. - NBM has yet to decide whether to move from conservative regulatory provisioning requirements to reliance on IFRS 9 impairment numbers. - Footnote: The NBM requirements will not reflect the December 2017 final Basel III requirements which materially amended key aspects of the IRB approach, although the revised Basel requirements have yet to be implemented in the EU. - Supervision resourcing and processes: - Off-site supervision centers on extensive reporting by banks to an NBM central risk register, being extended with shareholder and AML/CFT information. - Supervisory review follows EU SREP but is not yet fully risk-based (including allocation of additional resources for the four systemically important banks). - On-site inspection appears focused on key risk areas and carried out thoroughly; supervisory judgment is applied and intervention actions are taken in line with SREP. - A planned reorganization of the supervision unit will increase resources there by close to 20 percent and enable enhanced SREP and other processes. *Source: IMF FSSR mission report (virtual meetings June 1-22, 2021).* ### 23. In addition to completing planned measures, it is recommended that the NBM focus ### 23. In addition to completing planned measures, it is recommended that the NBM focus on: ### Enhancement of supervisory practices - Findings: - Progress has been made on the regulatory framework; supervision requires continued focus on risk assessment, supervisory planning/supervisory stance and allocation of resources, including to systemically important banks. - Evaluation of governance should include the “independence of mind” test where TA is required. - Specialist supervisory resources, including on governance issues, are currently insufficient to support development of risk-based supervision. - Recommendations: - Increase specialist supervisory resources (including on governance) to support further development of risk-based supervision. - Strengthen evaluation of governance and risk management frameworks across banks. ### Development of cross-border supervision and readiness for consolidated supervision - Findings: - Supervisors cooperate with home authorities on shareholder suitability, etc., but the network of cooperation agreements is incomplete. - The NBM participates in only one supervisory college. - An approach to assessment and mitigation of risk in foreign (including non-bank) owners is not yet developed or reflected in recovery planning and governance assessment. - The NBM has requirements on consolidated supervision but needs to apply them, including supervisory review, to the one banking group and ensure readiness for application to other groups. - Recommendations: - Expand cooperation agreements and participation in supervisory colleges. - Develop and embed an approach to assess and mitigate risks from foreign owners in recovery planning and governance assessments. - Apply consolidated supervision requirements and supervisory review to existing banking groups and ensure readiness for future groups. ### Alignment of regulatory provisioning with accounting treatment (IFRS 9) - Findings: - The NBM should consider alignment with IFRS 9 while recognizing the need for increased capacity to assess banks’ methods for determining expected credit losses. - Supervisors have had training but lack experience assessing banks’ approaches. - Recommendations: - BSD should intensify dialogue with banks and auditors on differing approaches to expected credit losses. - Coordinate BSD dialogue with the Financial Stability Department (FSD) as it develops risk monitoring. - Objective: ensure accounting provisions are reasonable, appropriately capture loan risk profiles, and that banks’ processes and internal controls are adequate. ### Non-Bank Credit Organizations (NBCOs) and Savings and Credit Associations (SCAs) — Baseline diagnostics - Findings: - The 2018 legislation, with 2020 amendments, led to exit/consolidation of many NBCOs as minimum (MDL 1 million) capital requirements and a bar on deposit-taking took effect alongside supervisory response to unsuitable/untransparent shareholders. - NBCOs are required to make provisions for loan losses, participate in a credit bureau, and make extensive reports to the NCFM; compliance of all or most NBCOs is expected soon. - Enforcement of minimum capital to asset requirements may still be necessary for some smaller NBCOs. - A system of off-site supervision appropriate to the large number of NBCOs has been developed, with enhancements planned; on-site supervision development delayed by the pandemic. - Tighter regulation appears to have contributed to ending formerly rapid sector growth. - SCAs: regulation long-established; numbers have fallen with assets concentrated in the 64 deposit-taking associations. - One strengthened central organization (the Central National Association of SCAs) now exists and provides liquidity facilities. - SCAs appear financially stable under proportionate regulation and supervision aligned with World Council of Credit Union standards. - Legal/technical detail: - For credit contracts entered from April 20, 2020 with a maturity less than two years and/or with the principal less than MDL 50,000, the law prohibits application of any fees, penalties, interest rates and any other costs that would exceed the value of the principal. ### NBCOs and SCAs — Main recommendations - Recommendations: - NCFM should prioritize strengthening business conduct supervision: enhanced risk assessment using appropriate data (numbers and types of customers), further enforcement, and on-site supervisory attention on conduct-related controls and governance, especially at larger NBCOs. - Use complaints to identify wider failings at NBCOs or across the sector. - Reconsider balance between prudential regulation and business conduct; some prudential requirements (e.g., lower capital requirements for NBCOs not taking bank loans) could be reconsidered in due course. - Supervision of larger NBCOs should include closer monitoring of funding sources and liquidity positions and address foreign exchange risk exposure. - Consider need for additional resources or different skill sets. ### Insurance — Baseline diagnostics - Findings: - NCFM has made significant progress addressing weak insurers and developing regulatory reforms; many insurers have withdrawn or had licenses removed for unsuitable/untransparent shareholders and financial weakness. - An industry-funded evaluation of financial condition of all insurers issuing “Green Cards” at end-2020 was initiated. - NCFM has been raising standards in line with IAIS principles, strengthening oversight of reserves adequacy, but gaps remain in governance and risk management. - Transformative new legislation is being prepared to implement parts of the EU Solvency II framework, including risk management requirements, and to reform MTPL insurance (pending post-election parliamentary approval). - Market structure: seven insurers have exited or are about to (run-off); of the remaining 10, three will struggle to meet planned higher solvency requirements and will require intensive supervision. - Foreign capital is not currently entering the market, though two companies, including the largest, are part of Austrian groups. - Product range limited; compulsory motor insurance dominates; only one company provides life insurance, which accounted for 7 percent of the market in 2020. - Brokers extract high commissions; prospect of MTPL tariff liberalization creates uncertainty. - Institutional change: - Responsibility for insurance regulation will transfer to the NBM in July 2023. ### Insurance — Main recommendations - Recommendations: - Build on recent progress and enact new legislation to further strengthen the sector and attract foreign interest; expect the process to take several years and require extensive TA. - Link reforms to wider financial sector development initiatives addressing product range and availability of investments to reduce dependence on real estate. - NCFM should establish workstreams for implementing the new legislation comprising: - (a) implementation of governance, risk management, including associated on-site work; - (b) overhaul of financial supervision to reflect new regulatory and accounting standards (IFRS 17, ORSA) and impact of tariff liberalization; - (c) stronger enforcement and revised approaches to weak companies, resolution/liquidation/guarantee fund; - (d) intermediary supervision and remaining business conduct supervision aspects covered by IAIS principles. - Develop and document revised supervisory processes in manuals. - Increase resources in insurance supervision, taking into account planned transfer of responsibilities to the NBM. - Develop cooperation with Austrian authorities to assess and mitigate group-related risks at relevant insurers. ### Payment Systems — Baseline diagnostics - Findings: - Extensive regulatory framework for payment services with supervision of bank and non-bank providers; payments market focused on banks with only seven non-banks (postal service accounts for most non-bank activity). - Entry requirements, especially on shareholders, are high. - 2012 law sets requirements based on EU standards and will be updated for PSD2. - A significant gap: NBM’s powers to enforce requirements on customer treatment are limited. - A dedicated NBM unit carries out supervision in line with an annual plan and cooperates with bank supervisors. - NBM is legally responsible for CSD supervision, but the scope of NCFM’s involvement is not agreed; mechanisms for NBM/NCFM cooperation are not currently operative. - NBM needs to develop enhanced regulations and internal procedures for CSD supervision in line with CPSS/IOSCO Principles for Financial Market Infrastructures (PFMI). - Recommendations: - Settle CSD supervision roles and responsibilities with TA support; align scope of the CSD’s functions and NCFM’s role and arrange for information exchange and joint monitoring as provided in law. - Focus TA on Responsibility E of the PFMI (cooperation with other authorities). - Further develop NBM framework for CSD supervision with regulations and internal processes compliant with the PFMI; TA to be provided by the EU. ### Transfer of certain NCFM responsibilities to the NBM — Baseline diagnostics - Findings: - A September 2020 law (Law amending certain normative acts No 178 of 2020) provides transfer of responsibilities for insurance, SCAs/NBCOs and credit bureaus on July 1, 2023; NCFM will remain responsible only for capital markets and pension fund regulation. - Staff transfers to be made in conformity with labor laws and Art. VIII (4) of Law No. 178 of 2020. - The transfer presents opportunities to strengthen regulation via an integrated financial services regulator but entails risks and industry/NCFM concerns. - The transfer will widen NBM’s supervisory responsibilities and transform it into an integrated authority with significant responsibilities for business conduct. - Challenges include developing expertise in insurance, balancing supervision demands across sectors, potential conflicts between prudential and conduct supervision, and concerns from industry about being regulated like banks. - Recommendations and preparatory actions: - The transfer requires detailed planning and careful execution; a plan for transfer preparations has been developed by the NBM and is expected to be revised to reflect IMF/World Bank comments. - NBM should agree a full plan and communicate key elements soon, especially to affected staff and the industry. - Involve NCFM staff in preparing and executing the transfer; establish joint working groups with Governor/Chairman meetings at the apex. - Seek advice from supervisory agencies in the region with experience of creating an integrated regulator. - Establish internal structure, organization and leadership for the new functions at an early stage; select leadership from NBM, NCFM or external staff and identify staffing needs. - Identify initiatives (regulatory changes and systems developments) to reformulate or defer in light of the transfer and reschedule other work plans as necessary to avoid jeopardizing core supervisory tasks. - Develop a vision and key principles for NBM’s new role as an integrated regulator, deciding on scope and timeframe for common regulatory standards (corporate governance, risk management) and common processes (licensing, single risk assessment framework, enforcement); seek TA as needed. - Ensure statutory objectives are aligned with NBM’s approach, including any role in business conduct/consumer protection and potential role in market development. *Source: IMF | REPUBLIC OF MOLDOVA Financial Sector Stability Review (excerpts).* ### 39. The NBM should and NCFM and other authorities should collectively identify and ### 39. The NBM should and NCFM and other authorities should collectively identify and ### B. Macroprudential Framework — Baseline diagnostics - Institutional arrangements - The NBM serves as the main macroprudential authority; an explicit legal mandate is still lacking in the law. - The NCFM supervises non-bank financial institutions and collaborates with the NBM by sharing data and participating in regular bilateral discussions on financial sector risks. - Financial stability is coordinated by the National Committee for Financial Stability (NCFS), chaired by the NBM; the Committee can issue recommendations but does not have implementation powers. - NBM financial stability function - Financial stability surveillance performed by the Financial Stability Department (FSD), reporting to the First Deputy Governor. - FSD prepares regular monthly and quarterly reports, recommendations for macroprudential policies, and an annual Financial Stability Report (FSR). - FSD is understaffed: about six regular staff members (currently only four), limiting capacity for monitoring tools, analytical studies, and external communication. - Internal Working Group for Financial Stability is to be established for inter-departmental discussions. - External visibility is weak: financial stability content is placed under Supervision on the NBM website; apart from annual FSR and short press releases there are no policy notes, research studies or links to presentations/articles by NBM staff on financial stability topics. - Macroprudential powers and tools - The Law on the activity of banks No. 202/2017 aligned with CRR/CRD IV and allows calibration of capital buffers for macroprudential purposes. - Capital buffers available: - capital conservation buffer (existence noted); - countercyclical capital buffer (CCyB), currently set at 0 percent for Moldavan exposures; - systemic risk buffer, currently at 1 percent for all banks and an add-on of 2 percentage points for certain banks; - buffer for systemically important banks, ranging between 0.5 and 1.5 percent for the four systemically important banks. - Discussions underway on borrower-based tools (DSTI and LTV caps) for banks and NBCOs to address household indebtedness risks. ### B. Macroprudential Framework — Main recommendations (p.50) - Mandate, visibility, and staffing - Amend the Law on the NBM to explicitly include a financial stability and macroprudential policy mandate. - Increase staffing of the NBM’s FSD to at least 10 full-time equivalent (FTE) positions. - Make the internal NBM Working Group for Financial Stability fully functional and start meeting regularly in the second half of 2021. - Strengthen external presentation (including on the NBM website) and targeted communication with industry and public. - Toolkit expansion - Enlarge macroprudential toolkit by introducing borrower-based tools (LTV/DSTI caps) for banks and NBCOs. - Introduce an overall level of the DSTI cap jointly by the NBM and NCFM and ensure proper enforcement. - Calibrate DSTI/LTV using: - (i) detailed analysis of distribution of household indebtedness; - (ii) link between observed DSTI and loan delinquencies using micro-level data covering all sources of debt; - (iii) experience from implementing this instrument in other comparable countries. ### Systemic Risk Assessment — Baseline diagnostics - Current practices and tools - FSD produces regular quarterly reports covering time and structural dimensions, including differentiated sensitivity stress tests, contagion analysis, aggregate vulnerability indices, credit-to-GDP gap (used as conditioning indicator for CCyB), financial cycle index, and visual tools (cobwebs, color-coded heatmaps). - Methodology to identify domestic systemically important banks is appropriate. - Analyses underpinning macroprudential decisions are mostly internal; only parts reproduced in the FSR. - FSD capacity for analytical work is high, supported by Joint Vienna Institute courses. - Data availability and gaps - Sectoral and institution-level data widely available; qualitative surveys in place (quarterly Bank Lending Survey, semi-annual Systemic Risk Survey, annual Survey of Financial Conditions and Perspectives of Households and Corporations). - NBM collects loan-level data from banks in the Credit Risk Register since 2011 (improved format since 2016). - Lack of granular borrower-level data on NBCO and SCA loans to households; NCFM shares only institution-specific and sectoral data, no distributional or borrower-level data. - Private credit bureaus have some data; household income only reported from March 2021 and not currently shared with NBM or NCFM. ### Systemic Risk Assessment — Main recommendations (p.51) - Tool development and forecasting - Further develop and revise systemic risk monitoring tools, especially financial cycle analysis using a broader range of early warning indicators beyond the credit-to-GDP gap. - Make analyses more forward looking; develop models to project key indicators (bank and non-bank credit growth, house prices, loan rates) over a 1-2 years horizon. - Ensure baseline projections are consistent with NBM official macroeconomic forecast prepared by the Monetary Policy Department (MPD). - Strengthen monitoring of contagion risks related to foreign ownership of banks in the medium term. - Data on non-bank lending - NBM and NCFM should jointly explore options to regularly receive borrower-level data on NBCO and SCA loans to households. - Options include: - (i) ad-hoc collection of selected micro-level data or distributional indicators from NBCOs/SCAs; - (ii) regular reporting of such data to the NCFM; - (iii) exchange of data with private credit bureaus; - (iv) including NBCOs/SCAs in regular reporting to the NBM’s Credit Risk Register in view of the forthcoming transfer of non-bank oversight to the NBM. ### Stress testing — Baseline diagnostics - Current stress testing practice - NBM conducts regular macro solvency and liquidity stress tests, but methodologies are not up to date and not in line with best practices. - Solvency stress testing uses a “what if” sensitivity approach without a specific time horizon; baseline scenario based on the Ministry of Economy’s forecast; adverse scenarios calibrated in a simplified way without MPD input. - Transmission of macro shocks to credit risk uses pre-defined elasticities from a Basel II Quantitative Impact Study, not estimated for the Moldovan banking sector. - Liquidity stress tests use a 30 days horizon and do not sufficiently account for contractual cash flows; calibration is simple relative to LCR granularity. - Bottom-up and non-bank testing - Bottom-up solvency stress tests conducted every two years; results not extensively used in supervisory process. - FSD organizes bottom-up tests; results shared with Banking Supervision Department (BSD) but not used to calibrate Pillar 2 add-ons. - No macro stress tests for non-bank financial institutions (NBCOs, SCAs, insurance companies) at NBM or NCFM. - NBCOs and SCAs have very high capital to assets ratio (over 30 percent of assets in both subsectors) compared to required minimum (5 percent capital to assets ratio or 10 percent for those who borrow from banks). - Micro stress tests of households and corporations have not yet been performed despite availability of loan-level data in the Credit Risk Register. ### Stress testing — Main recommendations (p.51) - Revise top-down stress tests - Build a state-of-the-art solvency framework based on alternative macroeconomic scenarios, credit risk satellite models projecting loan transitions across credit risk classes, and consistent projection of banks’ balance sheet and profit & loss items over a 2-3 years horizon. - Involve MPD in calibration of macroeconomic scenarios in cooperation with FSD; use MPD’s official forecast as starting point and adjust for adverse scenarios by expert judgment. - Make approach consistent with rules for regulatory capital, risk-weighted assets, and treatment of difference between IFRS 9 and prudential provisions. - Replace bank liquidity stress test with a cash-flow based approach using LCR-reported data and extend horizon beyond 30 days. - Use of stress test results in supervision - BSD should use macro and bottom-up stress test results in the supervisory process and to analyze IFRS 9 practices. - BSD to develop capacity to understand methodologies and results and apply them in supervisory policy. - Bottom-up stress tests should require banks to report both prudential and IFRS 9 Expected Credit Loss (ECL) provisions and IFRS 9 underlying parameters (PD, LGD, discount factor, repayment schedules, maturity, macroeconomic model elasticities for all three IFRS 9 stages). - Stress testing non-bank institutions and micro tests - Develop capacity at NBM and NCFM to perform stress tests of non-bank financial institutions, even if NBCOs and SCAs are well capitalized. - Conduct stress tests of insurance companies to assess resilience to insurance-specific and financial market shocks. - Use available borrower-level data to conduct micro stress tests of corporate and household sectors; once borrower-level data on NBCO and SCA loans become available, include them to analyze impacts on borrowers linked to both banks and NBCOs/SCAs. ### C. Financial Crisis Management and Safety Net — Depositor protection (Baseline diagnostics) - Deposit Guarantee Fund (DGF) - Deposit Guarantee Law (DGL) in place since 2004; DGF is an ex-ante funded scheme with a narrow mandate ("paybox plus") to make prompt payments to guaranteed depositors and may facilitate assisted transfers by financing asset shortfalls. - 2018 amendments to DGL: - extend protection to deposits of private legal persons; - increase coverage to MDL 50,000 effective January 2020; - introduce risk-based contributions; - allow DGF to take loans (with no cap) also from the Ministry of Finance. - As at end-March 2021, the DGF had 728 million MDL of available resources, which corresponds to 4.8 percent of total guaranteed deposits in the system. *Italic: Source — IMF Republic of Moldova Financial Sector Stability Review (excerpts provided in content unit).* ### 58. While the legal framework is broadly compliant with international standards, there ### 58. While the legal framework is broadly compliant with international standards, there ### Deposit Guarantee Fund (DGF) — Baseline diagnostics - The legal framework is broadly compliant with international standards, but there are implementation shortcomings and challenges. - Despite recent updates to bylaws and internal regulations, the DGF’s capacity, including its readiness to discharge its functions in a crisis, is limited. - The DGF is understaffed compared to peer countries and focused on collecting and managing contributions. - A World Bank–supported project to create a dedicated fund within the DGF for the protection of deposits of Category B SCAs would increase DGF membership sixfold, increasing the importance of expanding operational capacity. ### Deposit Guarantee Fund — Main recommendations - Additional preparations for reimbursement of deposits should be made by the DGF, including crisis simulations to test: - the DGF’s capacity to perform its functions; and - banks’ ability to provide the information needed. - Operationalize and test in simulation exercises the new provisions of the DGL allowing the DGF to take loans from the Ministry of Finance. - Revise the DGL to: - (i) clarify certain reimbursement procedures, mainly the criteria for assessing the unavailability of deposits and the reimbursement timeline; - (ii) provide the DGF access to depositors' records at all times and prescribe specific formats in which information should be provided (Single Costumer View files); and - (iii) provide the DGF with powers to assess the quality of the information provided and request banks to correct it and to improve their management information systems if needed. - Promote engagement between the DGF and SCAs (potentially through the Central National Association of SCAs) to test SCAs’ capacity to file reports and comply with DGF requirements during an appropriate transition period. - Increase DGF staffing: currently the DGF has only 6 staff members (excluding the executive director). IADI information from a 2020 survey indicates IADI members with a “paybox plus” mandate have an average of 43 staff (with a median of 17). An increase in headcount is suggested given upcoming challenges, including crisis readiness and increased membership. ### Bank Recovery and Resolution — Baseline diagnostics - A 2016 Bank Recovery and Resolution Law (BRRL), based on EU law, created a comprehensive set of tools and powers to deal with failing banks, aiming to protect depositors and preserve financial stability while limiting taxpayer money use. - The framework appears broadly compliant with the Financial Stability Board’s (FSB) Key Attributes of Effective Resolution Regimes (KA). - The BRRL provides for an ex-ante Resolution Fund (RF), set up in 2020 and managed by the DGF, as the default resolution financing mechanism. Its funding began in 2020, with the target level of 3 percent of guaranteed deposits (around MDL 475 million, updated annually) to be reached at the end of 2024. - The NBM has made noteworthy efforts to operationalize the legal framework, including banks’ recovery plans and its own resolution planning. Most secondary legislation (issued by NBM) has been approved or is expected to be finalized by end-2021. - Banks have submitted recovery plans; the NBM has been assessing them and engaging with banks on the credibility of recovery measures. The World Bank provided an assessment used to update guidance on effective recovery plans, expected by end-2021. - Resolution plans have been prepared for all banks, but improvements are needed in identification of critical functions, internal and external interconnectedness, and separability assessments. - Resolution preparedness has improved but gaps remain: - lack of sufficiently detailed operational plans for implementation of resolution; - beyond the Sale of Business tool, Bridge Bank and Bail-In tools may need application if no acquirer is found; - no resolution simulation exercise has been undertaken to test authorities' preparedness and inter-agency cooperation. - The MREL requirement needs reform because banks are mainly funded by deposits and lack access to developed capital markets to issue and trade MREL-eligible instruments. - Conditions for access to the RF may be too restrictive given banks’ limited internal loss absorption capacity: - BRRL conditions require an initial mandatory minimum bail-in by shareholders and creditors of 8 percent of total liabilities and own funds. - Even when met, total financial support of the RF is limited to 5 percent of total liabilities and own funds. - This could entail bailing in a substantial share of depositors, including eligible deposits, with potential unintended consequences for financial stability and the economy. - Use of DGF resources to finance a resolution is not expressly provided for in the law. The BRRL is more restrictive than the corresponding EU Directive. The least-cost test limit is likely to impede use of the DGF to finance a resolution if RF resources are not available or conditions for RF use are not met. - The NBM expressed concern about legal certainty regarding BRRL criteria for determining whether a bank is "failing or likely to fail"; detailed criteria are not expressly set out in law or regulations and could be contested. ### Bank Recovery and Resolution — Main recommendations - Continue to develop resolution planning: - Prioritize resolvability assessment and identification of impediments to resolvability for the four largest systemically important banks; enforce removal of impediments swiftly. - Engage more with banks by sharing main results of resolvability assessments and identifying substantive impediments as per applicable law and KA guidance (Annex II, Section 3). - For banks whose parent companies are required to draft group resolution plans, include an overview of how the Moldovan subsidiary is included in the group resolution plan and outcomes of discussions with group resolution authorities. - Develop a medium-term strategy to deal with the current mandatory MREL requirement given its material impact on the viability of some banks. - Continue resolution preparedness efforts focusing on operational plans for implementation of all resolution tools and strengthening human resources: - Prioritize Bridge Bank and Bail-In tools as ancillary to other transfer tools. - NBM, MoF and DGF should perform resolution simulation exercises to test crisis preparedness and inter-agency cooperation mechanisms (including viability of MoUs), both bilaterally and under the NCFS scope. - Simulation exercises should test articulation and cooperation mechanisms in MoUs between the NBM and potential foreign group resolution authorities. - Strengthen staffing of the Banking Resolution Department (BRD) as bank resolution and liquidation require highly qualified staff. - Revise the BRRL to adapt to Moldovan banking system specificities: - Change MREL framework to provide flexibility (for example, adequate transition period and a calculation methodology that does not demand a high amount of additional subordinated or senior debt beyond existing high capital levels). - Amend conditions for access to the RF to introduce flexibility (e.g., lowering the minimum bail-in requirement or introducing a financial stability exception). - Provide in law the possibility to use DGF funds in resolution (perhaps allowing indirect costs to be considered when calculating potential costs to the DGF). - This would allow DGF financial resources to be used to promote financial stability more efficiently than collecting additional contributions or bailing in eligible deposits. - Adopt a regulatory instrument for determination of whether a bank is "failing or likely to fail", potentially based on European Banking Authority guidelines, tailored to local legal and judicial systems to balance legal certainty and authorities' discretion. ### Bank Liquidation — Baseline diagnostics - Non-systemic banks whose orderly resolution is not in the public interest may enter forced liquidation: an administrative procedure where the NBM withdraws the banking license, appoints a liquidator and oversees the procedure. This framework has governed the failure of three banks since 2014 under continuing liquidation procedures. - An assisted transaction within forced liquidation is possible under current law and complies with the FSB KA, providing flexibility and adequacy for smaller banks. The liquidator, under NBM direction, can execute a sale of assets and liabilities of a bank subject to forced liquidation. - A recent legal change allows the DGF to finance the shortfall of assets up to the amount of the bank’s covered deposits. - The NBM perceives flaws in the liquidation framework and has proposed reform options, including originally intending to delegate the bank liquidation function to the DGF but later being open to a court-led system. ### Bank Liquidation — Main recommendations - Devise a new model for bank liquidation and change the law accordingly to balance: - protecting creditors and promoting financial stability; and - safeguarding discharge of NBM’s other functions. - Avoid merely transferring NBM competencies to another public entity (e.g., DGF) or the courts, which would perpetuate concentration of functions in one entity. - Consider a court-based procedure that includes an administrative pre-judicial phase: - The pre-judicial phase should allow the NBM to execute a sale of assets and liabilities financed by the DGF as per the FSB's KAs (KA 3.2 (xii)). - The NBM should retain an active role in the judicial phase: appointing/proposing liquidator(s), appointing/proposing members of any other body (e.g., Committee of Creditors), being notified of important decisions and requests to the court, and being consulted on critical decisions or important transactions. - Consider appointing legal entities as professional liquidators (for example, audit firms). - Bolster legal protection of the NBM and its staff to support both liquidation and resolution functions, including improving internal operational arrangements (e.g., choice and timing of payment of legal representation, protection against self-incrimination during internal investigations, and liability and legal aid insurance covering realistic monetary amounts). ### Box 2 — Reform of the Bank Liquidation Framework (summary) - The NBM views the current liquidation framework as a drag on resources, entailing liabilities and reputational costs, and limiting its supervisory mandate. - Litigation related to liquidation of banks that failed in 2014 has impaired the NBM’s regular functions and made appointing liquidators harder. - The mission recognizes that while resolution authorities should have powers to effect closure and liquidation, resolution authorities may not be best placed to handle all aspects of liquidation; transferring liquidation to the DGF may not bring net benefits. - Preferred option is thorough change to the legal framework and institutional setup: a hybrid court-based procedure with an administrative pre-judicial phase where the NBM retains substantial control could increase efficiency without hindering the NBM’s functions and comply with the FSB KAs. *IMF | REPUBLIC OF MOLDOVA Financial Sector Stability Review (excerpts from the provided content)* ### 77. The NBM has made substantial progress in its framework of Emergency Liquidity ### 77. The NBM has made substantial progress in its framework of Emergency Liquidity ### Emergency Liquidity Assistance (ELA): progress and gaps - Findings - The NBM established a transparent ELA framework and operationalized mobilization of credit claims as ELA collateral following the 2014 crisis. - Remaining gaps include: - moving from a point-in-time to a forward-looking assessment of solvency; - distinguishing between the maximum maturity of each ELA loan (two weeks) and the maximum timeframe for a bank to receive consecutive loans (three months, extendable up to one year); - finalization and operationalization of the NBM's ELA collateral framework, including a more efficient and digitalized model of mobilization, the accounting treatment of ELA and the communication strategy; - refining internal organization and improving staff preparedness for ELA. - Main Recommendations (p. 53) - Strengthen analytical tools for advance monitoring and estimation of banks' potential liquidity needs for ELA and for accounting consequences of ELA loans. - Capacity needs identified by the NBM and mission: - Implementation, back testing, and performance evaluation of the Early Warning System (EWS) for ELA, with possible consequence for re‑calibrating the EWS in terms of suitable indicators and their signaling thresholds; - Development and implementation of liquidity stress testing for potential ELA needs, with a possibility to run such stress tests at a weekly or, if necessary, daily frequency; - Estimation of PD of domestic banks and LGD of potential ELA loans for calculating the IFRS 9 ECL provisions on such loans. - Organizational recommendations: - These tools should be developed jointly by three NBM departments—FMD, FSD and BSD. - For the EWS, each department would construct indicators in its own area of competence with overall coordination to avoid overlaps. - The FSD should be in charge of extending liquidity stress tests to allow for more frequent exercises estimating potential ELA needs. - The FMD’s risk management section should lead PD and LGD estimation, relying where relevant on inputs from BSD and FSD. - Review whether the NBM would be able to offer ELA to banks in resolution, and if not, review powers to do so or whether and how to establish a separate liquidity support facility for such cases. ### Financial Inclusion — Institutional framework - Baseline diagnostics - No National Financial Inclusion Strategy (NFIS) exists that considers all dimensions relevant to provision and use of affordable financial products. - No high-level inter-agency institutional body (e.g., an FI Committee) with specific mandate to develop, implement and monitor an NFIS. - NFIS typically includes policy objectives and quantitative targets for key indicators. - Main Recommendations (p. 53) - Develop an NFIS and set up a high-level coordination mechanism. - Consider establishing a high-level FI committee including NBM, NCFM, and the Ministries of Finance, Economy and Education. - Committee should be accountable for development, implementation and monitoring of the NFIS. - Authorities will benefit from technical assistance (TA). ### Financial Inclusion — Services, providers, digital finance, and remittances - Baseline diagnostics and key statistics - SCAs and NBCOs provide financial services (mainly credit) to more than 600,000 clients (nearly one fourth of the population). - Number of mobile connections in Moldova is equivalent to 101 percent of the population. - Remittances accounted for 13 percent of GDP in 2020. - 80 percent of remittances are paid through banks. - Average cost of sending remittances to Moldova is 5.6 percent; comparable figures reported: Romania 4 .3 percent, Uzbekistan 1.8 percent, and Georgia 1.1 percent. Data as of third quarter of 2020. - Many SCAs and NBCOs have not developed innovative digital products; account opening requires substantial paperwork and in-person identification for AML/CFT due diligence regardless of client risk profile. - Insurance market focuses on traditional mandatory insurance; life and agricultural insurance are at an incipient stage; no micro-insurance or retail investor initiatives in capital markets. - Main Recommendations (p. 53) - Authorities (NBM and NCFM) should pursue initiatives to develop inclusive financial products: - Work with industry to increase access and use of deposit accounts and consider adoption of a standard “basic deposit account” focused on payment services, low-cost, simple features and simplified account opening. - Develop digital accounts, including electronic wallets. - Implement simplified customer due diligence, including digital identification, for predefined “low risk” population groups as recommended by FATF Standards on AML/CFT and FI. - Adopt initiatives to develop micro-insurance. - On capital markets, consider development of investment opportunities for retail investors and simplified requirements for SMEs to access the market. - Encourage digital finance and attract more market participants: - Make a digital finance strategy a key NFIS element, including digital transfer of remittances to reduce costs. - Provide ancillary financial products for remittance receivers (such as credit and deposit accounts). - Boost infrastructure for acceptance of cashless payments: increase ATMs, POS and digital access through mobile phones. - Consider direct deposits of government subsidies and social transfers to bank accounts to promote active use of bank accounts. - Maintain a proportionate approach to regulation and supervision for SCAs and NBCOs to avoid driving clients to informal channels. ### Financial Consumer Protection (FCP) and Financial Literacy - Baseline diagnostics and issues - Legal and regulatory framework for FCP is fragmented and assigns different responsibilities to Ministry of Economy, Consumer Protection Agency (CPA), NBM and NCFM. - Fragmentation results in material gaps (e.g., lack of effective powers for dispute resolution) and overlaps (e.g., NCFM and CPA working on same petitions without effective inter-agency communication). - Disclosure and transparency requirements are fragmented; some providers (SCAs/NBCOs) do not disclose the effective total cost of credit. - Reports of opaque and potentially abusive clauses in credit contracts, especially at NBCOs/SCAs serving low-income clients. - Abusive debt collection practices observed; 2020 amendments limited amounts third parties can collect but regulatory framework lacks comprehensive prohibitions on abusive practices (false statements, harassment, false credit information). - Complaints handling and redress mechanisms suffer material deficiencies: - Banks and payment providers must disclose complaint mechanisms and respond within 15 days; for NBCOs, investment firms and insurers, legal framework does not require disclosure of petitions modalities, maximum response days, or complaints handler name. - Consumers can submit petitions to NCFM or CPA; CPA has limited operational capacity and shortcomings exist in information exchange with NBM and NCFM. - No out-of-court formal dispute resolution mechanism for financial consumers; none of NBM, NCFM or CPA have legal powers to resolve conflicts; mediation under law No. 202/2013 for consumer credit is not widely used; courts remain the main option. - Box summary (Issues in Financial Consumer Protection) - Fragmented FCP framework with material deficiencies: weak disclosure/transparency, abusive contractual clauses and debt collection practices, poor complaints handling and redress mechanisms. - Lack of harmonized disclosure requirements across products and providers; SCAs/NBCOs may not disclose effective total cost of credit. - Regulatory limits on amounts third parties can collect exist, but comprehensive prohibitions on abusive practices are absent. - No authority has resolution powers; no out-of-court ADR mechanism; courts are the only route for resolution. - Main Recommendations (pp. 53-54) - Comprehensive reform of the legal framework to implement effective FCP. - Amend fragmentation of responsibilities and establish an overarching legal framework with clear mandates and responsibilities for all stakeholders. - Harmonize requirements for efficient internal complaint-handling procedures across financial institutions and market segments so consumers have effective tools to resolve complaints timely and cheaply. *I M F | REP UBL I C OF M O L DO V A Financial Sector Stability Review* ### 97. The framework for FCP would benefit from the implementation of an alternative ### 1mdaea2022002 - 97. The framework for FCP would benefit from the implementation of an alternative ### Alternative Dispute Resolution and Financial Education - ADR (alternative dispute resolution) recommended as an independent and impartial out-of-court mechanism for resolution of conflicts. - Proposed hosting model: ADR hosted as an independent unit within the NBM with firewalls (e.g., direct reporting to the Board) to forestall conflicts of interest. - Rationale: NBM better positioned in terms of expertise; configuration would promote cooperation among financial supervisors. - Technical assistance (TA) recommended: "The authorities would benefit from TA to implement the reforms in the area of FCP." - Recommendation: Competent authorities should collaborate to develop a Strategy for Financial Education. - Financial literacy to be a key workstream within the NFIS. - Key public sector participants: NBM, NCFM, Ministries of Finance, Economy and Education. ### Capital Markets Development — Overview - Current state: Moldovan capital market is underdeveloped and not sufficiently contributing to financing, risk management and investment needs of the real economy. - Three dimensions required for development: - (i) strengthening the institutional framework; - (ii) improving regulatory capacity for supervision of capital markets intermediaries; - (iii) expanding the range of and depth of trading in financial instruments. - Sustained, whole-of-government efforts led by NCFM are urgently needed. ### Institutional Framework — Baseline Diagnostics - Responsibility: NCFM responsible for capital markets regulation (primary issues and secondary trading on the MSE of corporate securities, licensing and supervision of investment companies and CIS). - New scope: Under the new law on facultative pension funds, regulation will include facultative pension fund administrators and depositories. - Transition: After transfer of non-capital markets functions to the NBM in 2023, NCFM responsibilities will be centered on capital markets and facultative pension funds supervision. - Market infrastructure: MSE operational for over 20 years with the same trading system; a single CSD established more recently and maintaining joint stock company records for listed companies, banks and insurance companies. - Legal need: Improve law regarding deregistration of inactive joint stock companies so records can be archived rather than retained as part of CSD active records. - Systemic risk: Current capital market poses little risk to overall financial stability. - Investment companies hold less than one percent of total financial sector assets. - Trading volumes on the MSE are very small. - Investors required to prepay and deposit securities in advance of trading, reducing operational and market risk. - Retail investors are not actively engaged; major investment scheme collapse impact is remote in the near term. ### Institutional Framework — Main Recommendations - Craft and publish a coherent, whole-of-government strategy for capital markets development (see Box 4). - Strategy objectives: provide investment opportunities and alternative finance for business enterprises including SMEs while balancing financial stability and investor protection. - Consider investor protection for vulnerable retail investors. - Amend current statutory goals of the NCFM to include a specific mandate to develop the capital markets. - Safeguard sustainability of capital markets supervision given NCFM will likely be a much smaller agency after 2023. - Risk: NCFM industry-funded, income restricted to capital markets and facultative pension industry, potentially highly dependent on volatile securities trading volumes. - Potential undesirable outcomes: undue influence by industry or need for State budget top-ups. - Data points: - The Capital Markets Department accounted for 15 of the NCFM’s total 59 staff in 2020. - Revenue from the capital market as a percentage of the NCFM’s total income was 43.5 percent in 2018, 53.7 perfect in 2019 and 20.4 percent in 2020. - Upgrade NCFM powers to obtain and exchange information with foreign counterparts to meet IOSCO MMoU international standard. - Current provisions (Chapter VII of the Law on Capital Markets No 171 of 2012; Article 5 of the Law on the NCFM No 192 of 1998) fall short. - Few MoUs currently in place with foreign regulators. - Prioritize development of normative rules to support establishment of facultative pension funds. - Short term: assistance to develop detailed rules and regulations under the new law on facultative pension funds covering permitted investments and fees. - Longer term: develop laws covering payments of voluntary pensions and a guarantee fund for contributions. ### Regulatory Capacity — Baseline Diagnostics - NCFM approach: Largely compliance-based supervisory approach for capital markets intermediaries. - Licensed entities: 15 investment companies licensed by the NCFM to conduct capital markets activity: - 7 are stand-alone non-bank entities; - 8 are part of commercial banking groups. - Regulatory transposition: Requirements for investment companies transposed from relevant European directives; capital requirements being phased in up to 2024. - Surveillance: NCFM analyses daily, monthly and other periodic reports to check compliance with capital requirements, Investor Protection Fund contributions, and related party transaction requirements. - Supervision tools: Guidelines exist for on-site inspections, but no comprehensive supervisory manual for consistent risk-based supervision. - CIS status: Regulatory system largely in place but no current licensees and no funds operating in Moldova. ### Regulatory Capacity — Main Recommendations - Improve off-site supervision framework to be more risk-targeted and document it in a comprehensive supervisory manual. - Implement a risk-scoring system for systematic identification of risk areas in individual licensees. - For facultative pension funds, develop supervision framework consistent with normative rules and build regulatory capacity from the ground up. - Enhance practical supervision to build investor confidence: - Ensure off-site assessments prepared systematically and consistently with methodology. - Plan and execute on-site inspections that are risk-targeted. - Ensure alignment of off-site supervision, on-site inspection and enforcement processes. - NCFM to obtain external expertise in conducting risk assessments and on-site inspections of investment companies and CIS managers. ### Range and Depth of Trading — Baseline Diagnostics - Trading insufficiency: Insufficient trading volume and instruments to support a viable investment environment. - Around 40 listed companies on the MSE, including banks and insurance companies, but trading is very thin. - Institutional investors report lack of financial instruments for investing and managing long-term liabilities. - Contributing factors: major shareholders’ desire to retain control by not trading shares; longstanding taxation treatments making shares and bonds less attractive than bank deposits. - Bond market: Dominated by Government securities; over one-quarter held by banks. - At end-2019 there were MDL 23,168 million of Government securities in the market, of which the banks held MDL 6,290 million or 27 percent. - Privatization: Government ongoing privatization program selling some shares in public-owned assets has not generated much retail participation or active trading. - Foreign investment: - Foreign direct investment increased from US$290 million in 2010 to US$502 million in 2019, equating to around 4 percent of GDP in 2019. - Comparative data: Albania, Montenegro and Georgia had around 7 to 8 percent of GDP in 2019. - Non-adjusted growth: FDI grew by 73 percent between 2010 and 2019; Romania’s FDI grew by 129 percent from 2010 to 2020. - Market features: All instruments traded in MDL and no derivatives available to manage currency risk. ### Range and Depth of Trading — Main Recommendations - Coordinate measures to encourage a greater range of financial instruments for trading consistent with the overall capital markets development strategy. - Consider fiscal stimulants to promote competitive neutrality between financial products. - Implement plans to commence secondary trading of government securities of more than one year’s maturity and municipal bonds on the MSE. - Accompany listing with investor education programs about benefits of investing in bonds and equities. - Given Moldova’s longer-term government securities provide a positive real yield, both retail and foreign investors could be interested in the secondary market. - Consider whether regulatory requirements for corporate bond issuance are too strict and whether disclosure requirements could be relaxed for less complex bonds. - Consider regulatory impediments to innovative market-based finance for SMEs, such as crowdfunding. - Encourage development of CIS in alternative investments (e.g., real estate) and more liquid investments (e.g., equities and bonds). - CIS can provide retail investors access to equities and bonds even where trading volumes are low. - Alternative investment funds permitting investment in illiquid assets should provide additional options for investors with long-term liabilities. ### Technical Assistance Roadmap - A TA Roadmap (TARM) was developed in cooperation with the authorities and in consultation with IMF departments. - TARM based on discussions during the main FSSR mission and a comprehensive list of TA recommendations across five topical areas. - Key recommendations were shared with principal collaborators in MCM and the area department team who agreed with the thrust of the recommendations overall. *IMF | REPUBLIC OF MOLDOVA Financial Sector Stability Review (excerpt).* ### 117. The TARM proposes TA to build capacity in the authorities to address risks and ### 117. The TARM proposes TA to build capacity in the authorities to address risks and ### FINANCIAL SECTOR OVERSIGHT (Section II.A) - Key vulnerability: Risk of ineffective oversight if banking sector reforms are not completed and implementation consolidated. - Recommendation: Complete implementation of remaining prudential standards from EU/Basel framework, enhance supervisory practices (including of systemically important banks), evaluation of governance, risk management, etc.; and review possible alignment of regulatory provisioning with accounting standards (IRFS 9). - TA Activity: Need ed - Responsible Agency: NBM - Priority: High - Completion Timeframe: MT - Key vulnerability: Risk that the reform of insurance regulation and supervision is not completed or implemented in full. - Recommendation: Adopt a detailed plan for implementing the new legislation with workstreams (a) governance/risk management implementation including on-site work; (b) overhaul of financial supervision to reflect IFRS 17, Own Risk and Solvency Assessment, impact of tariff liberalization; (c) increased enforcement including revised approach to weak companies, resolution/liquidation; (d) intermediary and business conduct supervision covered by IAIS principles. Increase resources in insurance supervision. - TA Activity: Need ed (planned in some areas - World Bank and proposed EU twinning project) - Responsible Agency: NCFM - Priority: High - Completion Timeframe: LT - Key vulnerability: Exposure to risks arising from foreign ownership of banks and insurance companies. - Recommendation: Further develop framework for banking cross-border supervision, agree cooperation agreements where outstanding, seek participation in supervisory colleges, develop approach to assessment and mitigation of risk in foreign (including non-bank) owners; develop enhanced cooperation with Austrian supervisory agency for insurance companies. - TA Activity: Need ed - Responsible Agency: NBM and NCFM - Priority: High - Completion Timeframe: MT - Key vulnerability: Risk that all risks to NBCO customers from NBCO conduct are not addressed, resulting in customer detriment. - Recommendation: Strengthen business conduct supervision including enhanced risk assessment, enforcement, on-site supervisory attention on conduct-related controls, governance especially at larger NBCOs. - TA Activity: Need ed - Responsible Agency: NCFM - Priority: High - Completion Timeframe: MT - Key vulnerability: Risk that payment services providers and key infrastructure are inadequately supervised. - Recommendation: Complete regulatory framework for payment services and enforcement framework for consumer protection. - TA Activity: Need ed - Responsible Agency: NBM - Priority: Medium - Completion Timeframe: MT - Recommendation: Clarify NBM/NCFM roles and responsibilities for CSD supervision and implement cooperation mechanisms; develop regulations and internal processes for CSD supervision. - TA Activity: In progress from IMF/EU - Responsible Agency: NBM - Priority: High - Completion Timeframe: ST - Key action: Preparations for transfer of certain NCFM responsibilities to the NBM (readiness for July 2023). - Recommendation: Agree transfer plan, communicate to staff and industry; joint working; NBM to establish internal structure and select staff for key leadership positions; develop vision and principles to govern role as integrated financial services regulator. - TA Activity: In progress some areas (IMF/Bank). Need ed for others - Responsible Agency: NBM and NCFM - Priority: High - Completion Timeframe: ST ### MACROPRUDENTIAL FRAMEWORK, SYSTEMIC RISK ASSESSMENT AND STRESS TESTING (Section II.B) - Key vulnerability: Unfinished domestic institutional arrangements for financial stability. - Recommendation: Amend the law on NBM to explicitly include a financial stability and macroprudential policy mandate, make the internal NBM Working Group on Financial Stability functional, and strengthen external visibility and communication of the NBM's macroprudential function. - TA Activity: No t n eed ed - Responsible Agency: NBM - Priority: Medium - Completion Timeframe: MT - Key vulnerability: Insufficient resources for financial stability surveillance and policies. - Recommendation: Upgrade resources for monitoring financial stability risks by increasing staff in the NBM Financial Stability Department to at least 10 full-time eq uivalen t (FTE) positions. - TA Activity: No t n eed ed - Responsible Agency: NBM - Priority: High - Completion Timeframe: ST - Key vulnerability: Limited macroprudential tools to tackle excessive credit growth. - Recommendation: Extend the existing macroprudential policy toolkit to include borrower-based tools (LTV/DSTI caps) for bank and NBCO/SCA loans. - TA Activity: No t n eed ed - Responsible Agency: NBM, NCFM - Priority: High - Completion Timeframe: MT - Key vulnerability: Lack of availability of micro-level data on NBCO/SCA loans to households. - Recommendation: Explore options to regularly receive borrower-level data on NBCO/SCA loans to households and enhance analysis of household total indebtedness to underpin calibration and enforcement of the planned DSTI cap for bank and non-bank loans. - TA Activity: No t n eed ed - Responsible Agency: NBM, NCFM - Priority: High - Completion Timeframe: ST - Key vulnerability: Only partial assessment of systemic risk evolution. - Recommendation: Revise existing systemic risk monitoring tools and broaden financial cycle analyses by assessing a larger range of early warning indicators beyond the credit-to-GDP gap. - TA Activity: Need ed - Responsible Agency: NBM - Priority: Medium - Completion Timeframe: MT - Key vulnerability: Remaining FSI data gaps. - Recommendation: Assess additional data collection and dissemination needs (e.g., NBFI sector) after completion of the transfer of non-bank oversight from the NCFM to the NBM. - TA Activity: No t n eed ed - Responsible Agency: NBM - Priority: Medium - Completion Timeframe: LT - Key vulnerability: Inadequate bank solvency and liquidity stress testing. - Recommendation: Build a state-of-the-art macro solvency and liquidity stress testing for banks, with solvency tests based on alternative macro economic scenarios, satellite models, and consistent projections over a longer horizon; liquidity tests based on a cash-flow approach and higher granularity in line with LCR. - TA Activity: Need ed - Responsible Agency: NBM - Priority: High - Completion Timeframe: MT - Key vulnerability: Lack of stress testing of other financial institutions. - Recommendation: Develop capacity to perform stress tests of non-bank financial institutions (NBCOs, SCAs, insurance companies). - TA Activity: Need ed - Responsible Agency: NBM, NCFM - Priority: Medium - Completion Timeframe: LT - Key vulnerability: Only partial assessment of resilience of corporate and household sectors to shocks. - Recommendation: Use available borrower-level data to conduct micro stress tests of corporate and household sectors. - TA Activity: Need ed - Responsible Agency: NBM - Priority: Medium - Completion Timeframe: LT - Key vulnerability: Lack of use of stress test results for supervisory purposes and calibration of prudential policies. - Recommendation: Strengthen the use of macro and bottom-up stress test results of banks in on-site and off-site supervision. - TA Activity: No t n eed ed - Responsible Agency: NBM - Priority: Medium - Completion Timeframe: MT ### FINANCIAL CRISIS MANAGEMENT AND SAFETY NET (Section II.C) - Key vulnerability: Lack of legal clarity of the deposit reimbursement procedures and DGS powers and competences in line with the EU Law. - Recommendation: Amend the DG Law to provide: (i) more legal clarity regarding the criteria for assessing the unavailability of deposits and the reimbursement timeline; (ii) the DGF access to depositors' records at all times and to prescribe specific formats (Single Costumer View files); and (iii) the DGF powers to assess the quality of information provided and request banks to correct it and to improve their management information systems if needed. - TA Activity: In Progress - Responsible Agency: DGF - Priority: Med ium - Completion Timeframe: MT - Key vulnerability: Current legal framework pertaining to bank resolution not adapted to the specific circumstances of the banking system in Moldova. - Recommendation: Adopt a targeted review of the BRRL and/or secondary legislation to adapt it to Moldova, mainly regarding the MREL requirement, conditions of access to the resolution fund and participation of the DGF in financing resolution measures. - TA Activity: Need ed - Responsible Agency: NBM - Priority: High - Completion Timeframe: MT - Key vulnerability: Lack of legal clarity regarding criteria for determination of a bank as “failing or likely to fail”. - Recommendation: Adopt a regulatory instrument (regulation or guidelines) with additional guidance on how to apply the general criteria in the BRRL for the determination of a bank as “failing or likely to fail”. - TA Activity: Need ed - Responsible Agency: NBM - Priority: Med ium - Completion Timeframe: MT - Key vulnerability: Current forced bank liquidation procedure is a source of reputational, legal and financial risk for the NBM. - Recommendation: Undertake an assessment of adequacy of the current legal framework and adopt a revised Bank Liquidation Law with a forced liquidation procedure that achieves public policy goals without hindering other functions of the NBM. - TA Activity: Need ed - Responsible Agency: NBM - Priority: High - Completion Timeframe: MT - Key vulnerability: Lack of adequate advance preparation for reimbursement of deposits, mainly regarding stress-testing/crisis simulation. - Recommendation: Enhance advance preparations for the reimbursement of deposits, including stress tests on both the capacity of the DGF to perform its functions and on the capacity of banks to provide the information needed (SCV files or other relevant data). - TA Activity: Need ed - Responsible Agency: DGF, Mo F - Priority: Med ium - Completion Timeframe: LT - Key vulnerability: Lack of adequate operational plans/procedure manuals for implementation of resolution tools. - Recommendation: Strengthen resolution preparedness of the NBM for Sale of Business, Bridge Bank and Bail-in tools, including preparation or improvement of operational plans. - TA Activity: Plan n ed (Bail-In). Need ed (Bridge Bank) - Responsible Agency: NBM - Priority: High - Completion Timeframe: MT - Key vulnerability: Absence of crisis simulation exercises to test resolution preparedness and inter-agency cooperation. - Recommendation: Carry out resolution simulation exercises to test authorities’ internal resolution preparedness, robustness of operational plans, and inter-agency cooperation and communication. - TA Activity: Need ed - Responsible Agency: NBM, DGF, Mo F - Priority: Med ium - Completion Timeframe: LT - Key vulnerability: Lack of robust systems for advance monitoring and estimation of liquidity needs of banks for ELA and supervisory purposes. - Recommendations / TA Activities (carry out): - Implementation, back testing, and performance evaluation of the Early Warning System (EWS) for ELA, with possible consequence for re-calibrating the EWS in terms of suitable indicators and their signaling thresholds; - Development and implementation of liquidity stress testing for potential ELA needs, with a possibility to run such stress tests at a daily or weekly frequency; - Estimation of Probabilities of Default (PD) of domestic banks and Loss Given Default (LGD) of potential ELA loans for calculating the IFRS 9 Expected Credit Loss (ECL) provisions on such loans. - TA Activity: Need ed - Responsible Agency: NBM - Priority: High - Completion Timeframe: MT ### FINANCIAL INCLUSION (Section II.D) - Key vulnerability: Lack of a comprehensive National Financial Inclusion Strategy (NFIS) and a high-level coordination mechanism for FI. - Recommendation: Develop and implement a comprehensive NFIS, including a mechanism for monitoring and evaluation. Set up a high-level institutional body accountable for development, implementation, and monitoring of the NFIS. - TA Activity: Need ed - Responsible Agency: NBM, NCFM - Priority: High - Completion Timeframe: LT - Key vulnerability: Lack of inclusive financial products targeted to low-income segments. - Recommendation: Revise the respective regulatory framework to adopt a standard “basic deposit account”, and micro-insurance. - TA Activity: Need ed - Responsible Agency: NBM, NCFM - Priority: High - Completion Timeframe: MT - Key vulnerability: Low degree of provision of ancillary financial products to remittance receivers and informal delivery channels. - Recommendation: Develop and implement a targeted strategy for digitalization of remittances and provision of ancillary financial products such as payments, saving and credit. - TA Activity: In progress (IFAD) - Responsible Agency: NBM, the NCFM - Priority: Med ium - Completion Timeframe: MT - Key vulnerability: Fragmented legal framework for financial consumer protection (FCP). - Recommendation: Conduct a comprehensive reform to the legal framework on FCP, including setup of an independent out-of-court mechanism for resolution of conflicts; review regulatory framework and enforcement mechanisms related to (i) disclosure of the effective total cost of credit, and (ii) eradication of abusive contractual clauses and debt collection practices. - TA Activity: Need ed - Responsible Agency: NBM, NCFM - Priority: High - Completion Timeframe: LT - Key vulnerability: Gaps and overlaps in individual initiatives for financial education. - Recommendation: Develop and implement a strategy for financial education, with financial literacy a key workstream within the NFIS. - TA Activity: In progress (OECD-INFE, only NBM) - Responsible Agency: NBM, NCFM, Mo F, Ministry of Economy, Ministry of Education - Priority: High - Completion Timeframe: LT ### CAPITAL MARKETS DEVELOPMENT (Section II.E) - Key vulnerability: Lack of an overarching strategy on capital market development to ensure a coordinated approach across Government. - Recommendation: In conjunction with the NFIS, develop and publish a capital markets development strategy involving NCFM, NBM and Mo F, including developing a funding and operating model for capital market supervision; amending the NCFM Law to include an explicit capital market development mandate; and amending the Law to enable deregistration of inactive companies. - TA Activity: Need ed - Responsible Agency: NBM / NCFM - Priority: High - Completion Timeframe: MT - Key vulnerability: Inability to share information with foreign counterparts for securities enforcement purposes in keeping with global standards. - Recommendation: Develop amendments to the NCFM and Capital Markets Laws and upgrade internal processes to enable NCFM to obtain and share information as required by the IOSCO MMoU, and submit an application to become a signatory to the MMoU. - TA Activity: Need ed - Responsible Agency: NCFM - Priority: High - Completion Timeframe: MT - Key vulnerability: Lack of normative rules to support development of facultative pension funds. - Recommendation: Develop rules under the Law on Facultative Pension Funds to provide the normative regulatory framework, and financial education programs and resources for beneficiaries. - TA Activity: Need ed - Responsible Agency: NCFM - Priority: High - Completion Timeframe: ST - Key vulnerability: Inadequate risk-based supervision framework and practices for capital market intermediaries. - Recommendation: Review and update existing risk assessment framework for securities intermediaries and CIS managers; develop risk assessment framework for facultative pension fund administrators and custodians; develop a supervisory manual for off-site and on-site supervision; implement improved and more consistent off-site assessments and on-site inspections using a risk-targeted approach. - TA Activity: Need ed - Responsible Agency: NCFM - Priority: High - Completion Timeframe: MT - Key vulnerability: Lack of tradeable financial instruments for institutional and retail investors. - Recommendation: Implement plans for trading government bonds of more than one year’s maturity and municipal bonds on the Moldova Stock Exchange; develop market-based options for SME finance such as crowdfunding; develop and implement a targeted strategy to encourage CIS including equity and bond funds and alternative investment funds. - TA Activity: Need ed - Responsible Agency: NCFM - Priority: High - Completion Timeframe: LT - Note: Timeframe definitions — ST, short-term, less than six months; MT, medium-term, with results around 18 months; LT, long-term, with results around 30 months. *I M F | REP UBL I C OF M O L DO V A Financial Sector Stability Review* ### ANNEX I. ASSESSMENT OF FINANCIAL SECTOR STATISTICS ### ANNEX I. ASSESSMENT OF FINANCIAL SECTOR STATISTICS ### A. Financial Soundness Indicators (FSIs) - Reporting coverage and frequency - The NBM reports 11 of the 12 core and seven of the encouraged FSIs for deposit takers (DTs), as well as both indicators for other financial corporations, on a quarterly basis, all reported on a domestic consolidation basis. - The one missing indicator, sectoral distribution of loans, is reported in the FS2 form but not in the FSD form. - Some encouraged indicators are not reported because they have zero or insignificant values; authorities indicated they can begin reporting zeros. - Methodology and alignment - Moldova is moving its FSI methodology to that of the 2019 Guide. - The core indicators are calculated based on the 2019 methodology; the authorities hope for all indicators to be fully in line with the 2019 Guide in the near future. - The authorities implemented Basel III in 2018. - Data gaps and planned actions - NBM has data for many missing indicators but needs to fully harmonize them with the FSI reporting methodology before publishing. - No FSIs are produced for non-financial corporations, households, or market liquidity; the NBM plans to address these gaps. - NBM is seeking access to household income data collected by the MoF and is working with the Credit Registry to get granular household data on debt and debt service. - NBM receives annual data for nonfinancial corporations from the NBS, but coverage is incomplete; increased penalties for nonreporting NFCs have improved compliance. - Real estate source data exist for real estate loans and a residential real estate price index has been produced and published on the NBM website; the authorities hope to report it to the IMF soon but have concerns about the accuracy of historical values and currently lack resources for compilation into FSIs. - Dissemination and metadata - The NBM does not disseminate metadata for FSIs on the National Summary Data Page for Moldova; NBM is encouraged to disseminate metadata to confirm alignment with the IMF’s FSI Compilation Guide. - STA will follow up as needed with FSI compilers as part of its regular monitoring. - Timeliness and consistency - Moldova reports FSI data with good timeliness and consistency. - No asymmetries were identified between FSIs and related numerators/denominators or between the FSD report form and the FS2 underlying sectoral financial statements. - As of completion of the mission in early June 2021 the NBM had reported FSIs through the first quarter of 2021. - Technical assistance (TA) - Moldova received TA for FSIs in 2019; the mission found source data available for additional indicators (sectoral distribution of loans and deposit-lending rate spread) and recommended increasing the number of reported indicators. ### B. Monetary and Financial Statistics (MFS) - Compilation and methodology - Monthly MFS data are compiled for the NBM and other depository corporations (ODCs) in line with the methodology of the 2016 Monetary and Financial Statistics Manual and Compilation Guide. - In 2005, the NBM adopted the Standardized Reporting Forms (SRFs) to report monetary data to the IMF. - Coverage - Coverage of ODCs includes all banks and SCAs; these also report quarterly MFS statistics to the NCFM, which passes them on to the NBM. - Category A SCAs are not included in the ODC survey because they do not take deposits and are classified as OFCs. - Category B SCAs do take deposits and are classified as ODCs, but their data are not included in the ODC Survey because they report with a lag of more than the three-month timeliness target for MFS reporting. - Authorities plan to include Category B SCA data in MFS reporting once processes to interpolate monthly data and to estimate recent data are agreed. - OFCs and reporting - The NBM reports quarterly data for OFCs. The MFS (4SR) reporting for OFCs fully covers insurance, microfinance, and Category A SCAs. - No MFIs in Moldova take deposits and therefore all are classified as OFCs. - TA assessment - Coverage of MFS statistics in Moldova is strong and no TA is envisioned. - The NBM reports MFS in line with the 2016 Manual and performs validations and regular interactions with banks to address data issues. - The NBM is working to make better use of available data on SCAs and to improve coverage of the other financial corporation sector but sees no need for TA to assist with this effort. ### C. Balance Sheet Approach (BSA) and International Investment Position (IIP) - BSA compilation and plans - NBM is preparing BSA matrices for 2015-2020 for publication in June 2022 using their own analysis and the BSA tool developed by STA. - The BSA compiles balance sheets of each sector: government; financial sector (central bank, ODCs, OFCs); nonfinancial private sector (NFCs, HHs); and external sector (rest of the world), and estimates intersectoral assets and liabilities. - A BSA matrix for Moldova can be produced as recently as 2020, though the 2019 matrix is presented because government finance statistics (GFS) data for 2020 were not yet available. - It is of utmost importance to regularly assess intersectoral consistency and address any asymmetries, paying attention to proper recording of most relevant transactions. - Data sources and limitations - Main data sources: MFS statistics, followed by the IIP, and the government financial balance sheet. - As is common, nonfinancial corporation and household data by sector are not available; data coverage, consistency and interlinkages are essential to produce a meaningful BSA matrix. - IIP compilation - Moldova compiles quarterly IIP statistics based on BPM6. - Data are available by functional categories, instruments, sectors, and original maturity. - Country-specific assumptions used in mission analysis for 2019 - For MFS: the share of the government in NBM’s capital and reserves is 100 percent. - For ODCs: two thirds of the capital is owned by nonresidents, a quarter by households (HHs), and most of the rest by nonfinancial corporations (NFCs). - For OFCs: most capital is held by HHs. - Currency holdings: 55 percent by HHs, 34 percent by NFCs, and the rest by ODCs (plus a negligible amount by OFCs). - Miscellaneous assets of the NBM were held mainly by NFCs; more than half of miscellaneous liabilities were held by nonresidents with the rest distributed among ODCs, OFCs, and NFCs. - For ODCs, all miscellaneous assets and liabilities were assigned to NFCs. - For IIP: almost all asset positions are in foreign currency (a figure of 100 percent was used); 29 percent of the liability positions were in national currency, with the remaining 71 percent in foreign currency. - Direct investment assets equity positions and direct investment equity liabilities corresponded to NFCs except for equity liabilities, which were held 23 percent by ODCs, 6 percent by OFCs, and the rest by NFCs. - All reserve assets are held by the central bank. - Published matrix snapshot - A Balance Sheet Approach Matrix for Moldova (2019 - Percent of GDP (17 Billions)) is provided in Annex I. Table 2 (matrix values appear in the source table). ### D. Financial Access Survey (FAS) - Coverage and gaps - The NBM produces a Financial Access Survey that includes most indicators for banks, credit cooperatives, and insurance companies. - There is little coverage of the MFI or mobile money sectors, which are important for monitoring financial inclusion. - Most gender-related indicators are included for the sectors that are covered. ### ANNEX II. ASSESSMENT OF TA NEEDS IN FINANCIAL SECTOR STATISTICS - Overall TA assessment - Moldova has no immediate needs for financial sector TA. The NBM has a clear work program to improve its financial statistics reporting and can address earlier stages without TA. - TA may be beneficial in the medium to long-term as the NBM generates source data for NFCs and HHs and as the nonbank financial sector develops. - TA needs should be reassessed following completion of the transfer of responsibilities from the NCFM to the NBM; more source data will become available and may require TA for mapping to report forms. - Potential future development of other financial sectors, including pensions and insurance funds, could create new TA needs. - FSIs (TA specifics) - NBM received TA on FSIs in 2019; FSI reporting was found strong overall. - NBM is addressing recommendations including fully reporting loans by sector and the deposit-lending rate spread. - Once source data for NFC and HH indicators are ready, TA could be useful to assist with mapping source data to the FSI reporting form. - MFS (TA specifics) - Coverage of MFS statistics in Moldova is strong and no TA is envisioned for MFS. - The NBM reports MFS in line with the 2016 Manual and performs validations and regular interactions with banks; it does not see a need for TA to improve SCA data usage or OFC coverage. *Source: ANNEX I. ASSESSMENT OF FINANCIAL SECTOR STATISTICS* --- _Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1mdaea2022002.pdf_