## _cr08274

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---

### Executive summary: overall assessment
- Governance (specifically bank ownership) was identified in the 2004 FSAP as a significant vulnerability; supervisors have made successful efforts but do not yet have full information on some owners in at least one systemically important bank, and in several other banks information is incomplete.
- Reputable foreign investors were recently allowed to purchase domestic banks.
- Supervisors in insurance and securities have had limited success in clarifying ownership; the National Commission on Financial Markets (NCFM) was newly established but not fully functional at the time of the FSAP update.
- Major interlinked sources of vulnerability: monetary policy credibility and excessive domestic liquidity leading to inflation pressures and potential unsound credit growth (handled largely in the staff report).
- Dependence on remittances is "more than 30 percent of GDP", creating vulnerability to volatility in these inflows.
- Stress tests, including extreme scenarios within historical parameters, show the banking sector as a whole can withstand shocks; however, some major banks warrant closer monitoring to enable timely intervention.
- Financial sector developmental needs are substantial: the sector is small, markets are shallow, and infrastructure is missing (e.g., no central securities registry); indicators are worse for insurance and securities than for banking.

### Progress since the 2004 FSAP
- Key 2004 issues: (i) "fit and proper" standards for owners; (ii) privatization of Banca de Economii; (iii) supervisory cooperation; improvements in insurance regulation; consolidation and development of securities markets; payment system infrastructure; governance/accounting legal framework.
- Since 2004:
  - Major progress in addressing bank ownership: identifying borrower–shareholder connections and requiring beneficial shareholders to disclose ownership.
  - Privatization of Banca de Economii has been slow; authorities should accelerate privatization to private strategic financial investors.
  - Regulatory framework improved; little progress in supervision outside banking.
  - NCFM set up in second half of 2007 but at the time its operation was ineffective and faced issues over regulatory overhaul and financing.
  - RTGS placed into operation.
  - Accounting legal framework improved.

### Financial sector risks — macroeconomic and liquidity
- Excessive domestic liquidity:
  - Fueled by remittances and FDI; a liquidity overhang has persisted.
  - Reluctance to allow exchange rate appreciation and to raise interest rates could undermine NBM credibility and entrench inflationary expectations.
  - Potential fiscal pressures ahead of national elections in 2009 may add to inflationary pressures.
  - Continued strong growth in credit and broad money suggests inflation risks are not contained.
- Rapid credit growth:
  - Recent rapid expansion in bank credit from a low base; if unabated, medium-term concerns may arise.
  - Banks’ internal risk management may be inadequate to preempt lending to unviable projects, increasing NPL ratios.
  - NBM should develop an early warning system to signal emerging macroprudential risks.
- Dependence on remittances:
  - Remittances exceeded "more than 30 percent of GDP"; in 2006 remittances amounted to 33 percent of GDP.

### Supervisory, institutional, and market vulnerabilities
- Supervisory cooperation and ownership transparency:
  - Supervision should be a joint task of NBM and NCFM; unification of supervision not necessary now but coordination is required.
  - Supervisors lack information on some ultimate beneficial owners; identifying all such owners is a priority.
  - Cross-ownership and financial products crossing subsectors increase need for cooperation.
  - NBM and NCFM should seek to exempt the financial sector from provisions of the Law on The Core Principles of Regulating Entrepreneurial Activities that might impede supervisory actions.
- Supervisory capacity:
  - NBM began stress testing since 2004 FSAP; needs capacity to adjust scenarios to changing conditions—short-term priority.
  - Implement an early warning system for domestic and external disruptions.
  - Enforce standards for banks’ internal risk-management systems; leverage investments by well-regarded foreign banks to raise industry practices.
- NCFM operational readiness and financing:
  - NCFM faces differing risk profiles and supervisory cultures across insurance and securities.
  - Insurance: focus on developing regulatory and supervisory regime.
  - Securities: revitalize markets and extend supervisory activities to leasing.
  - NCFM financing via fees may be insufficient short- to medium-term; NCFM should be guaranteed budgetary support as needed.

### Infrastructure and governance needs
- Payments and securities infrastructure:
  - RTGS is a major improvement.
  - Key remaining issues: settlement systems for securities markets, electronic payment instruments, domestic FX market.
  - Move to a modern Central Securities Depository structure, including registrar functions (and RTGS payments) for at least listed companies.
  - Implement National Net Settlement Service for leu transactions with NBM leadership.
- Governance and disclosure:
  - Accounting and auditing laws revised; further actions needed:
    - Functioning central registry for company financial statements.
    - Require posting of full financial statements of banks on websites.
    - Establish full fiduciary duties for all company Board members and executive managers.
  - Expand public disclosure by banks: financial statements, bank charters, statements of compliance with the Corporate Governance Code on websites.
  - Revise insurance legislation to reduce threshold for supervisory approval of shareholders and require detailed description of indirect holdings in insurers.

### Stress testing and resilience
- Tests used bank-by-bank data as of end-June 2007, including sensitivity and macro scenarios.
- Regulatory minima:
  - Minimum capital adequacy ratio (CAR) per NBM regulation: 12 percent.
  - NBM Liquidity Principle 2: minimum 20 percent ratio of current liquidity to total assets.
- Overall outcome:
  - Banking system as a whole can withstand credit, liquidity, and macro shocks due to abundant capital cushions.
  - Even under extreme historic shocks banks remain solvent, although three systemically important banks and several smaller banks would become undercapitalized and require close monitoring.
- Selected stress test quantitative results (Table 4 summary):
  - Total assets as percent of total banking system assets: Group I 67, Group II 22, Group III 11, Total 100.
  - Baseline CAR: Total 27, Group I 23, Group II 27, Group III 59.
  - Credit risk — NPLs to 17 percent:
    - New CAR: Total 23, Group I 18, Group II 24, Group III 56.
    - Size of impact (MLD millions): Total 903, Group I 630, Group II 171, Group III 90.
    - Additional capital to meet min. CAR: Total 16, Group I 16, Group II 0, Group III 0.
    - Number of institutions falling below minimum requirements: Total 1, Group I 1, Group II 0, Group III 0.
  - Credit risk — NPLs to 31 percent:
    - New CAR: Total 17, Group I 12, Group II 20, Group III 53.
    - Size of impact (MLD millions): Total 1,861, Group I 1,298, Group II 353, Group III 186.
    - Additional capital to meet min. CAR: Total 340, Group I 336, Group II 4, Group III 0.
    - Number of institutions falling below minimum requirements: Total 4, Group I 3, Group II 1, Group III 0.
  - Liquidity risk — baseline liquidity ratio: Total 33, Group I 35, Group II 30, Group III 28:
    - 5 percent of total deposits outflow:
      - New liquidity ratio: Total 31, Group I 34, Group II 25, Group III 23.
      - Size of impact: Total 1,069, Group I 367, Group II 493, Group III 208.
      - Number below minimum: Total 3, Group I 0, Group II 1, Group III 2.
    - 14 percent outflow:
      - New liquidity ratio: Total 26, Group I 29, Group II 20, Group III 18.
      - Size of impact: Total 2,751, Group I 1,607, Group II 796, Group III 349.
      - Number below minimum: Total 7, Group I 1, Group II 2, Group III 4.
    - 20 percent outflow:
      - New liquidity ratio: Total 19, Group I 21, Group II 15, Group III 12.
      - Size of impact: Total 4,796, Group I 3,169, Group II 1,111, Group III 515.
      - Number below minimum: Total 11, Group I 3, Group II 3, Group III 5.
  - Combination Scenario I (10 percentage point increase in interest rates; NPLs to 30 percent; leu appreciation vs USD 30 percent):
    - New CAR: Total 16, Group I 9, Group II 19, Group III 55.
    - Size of impact: Total 2,117, Group I 1,509, Group II 389, Group III 219.
    - Additional capital to meet min. CAR: Total 370, Group I 363, Group II 7, Group III 0.
    - Number below minimum: Total 4, Group I 3, Group II 1, Group III 0.
  - Combination Scenario II (Gas price increase and deterioration in portfolios: NPL shocks 45 percent Energy, 27 percent industry and trade, 30 percent consumer):
    - New CAR: Total 21, Group I 16, Group II 21, Group III 56.
    - Size of impact: Total 1,230, Group I 835, Group II 300, Group III 95.
    - Additional capital to meet min. CAR: Total 73, Group I 73, Group II 0, Group III 0.
    - Number below minimum: Total 1, Group I 1, Group II 0, Group III 0.
  - Combination Scenario III (Remittances shock: 30 percent increase of NPLs in consumer and real estate combined and decline in net income of 10 percent):
    - New CAR: Total 19, Group I 15, Group II 20, Group III 55.
    - Size of impact: Total 1,448, Group I 991, Group II 338, Group III 119.
    - Additional capital to meet min. CAR: Total 53, Group I 39, Group II 10, Group III 4.
    - Number below minimum: Total 1, Group I 1, Group II 0, Group III 0.
- Box 2 summary:
  - Credit risk: manageable for NPL increases to 17 percent or 31 percent; several banks would fall below minimum capital licensing requirements but remain solvent.
  - Liquidity risk: vulnerability remains; a 5 percent deposit outflow causes three banks to fall below minimum liquidity requirements; 14 percent outflow causes seven banks to fall below minimum liquidity requirements.
  - Plausible macro scenarios lead to several banks falling below minimum regulatory capital while remaining solvent.
  - No significant sensitivity to plausible interest rate, exchange rate, and remittance shocks; net open position sensitivity to USD, euro, and Russian ruble fluctuations is relatively low.

### Summary of Key Recommendations (Box 1)
- High priority (selected):
  - Tighten monetary policy to eliminate excess liquidity and reduce inflation (details in the Staff Report).
  - Improve liquidity management; develop capacity to forecast and manage liquidity via staff increases and development of forecast models.
  - Increase transparency of monetary operations.
  - Create framework for effective cooperation between supervisors; sign MOUs between NBM and NCFM and between central bank and subsectoral supervisors.
  - Develop joint supervisory databases and joint handling of some supervisory databases.
  - Improve effectiveness of bank supervision; issue guidelines for consolidated accounting requirements.
  - Continue efforts to identify beneficial owners of banks.
  - Improve capacity to adapt stress testing scenarios.
  - Enhance bank risk management capacity by issuing guidelines.
  - Start effective operation of the NCFM; review and redefine licensing process under the NCFM; ensure necessary NCFM funding through government budget if needed.
  - Move to a modern Central Securities Depository structure and implement National Net Settlement Service for leu transactions.
- Medium term and developmental (selected):
  - Upgrade nonbank financial supervision.
  - Set new prudential standards for entities supervised by the NCFM based on international standards.
  - Develop statutory returns in insurance on solvency, reinsurance, claims, and expenses; build NCFM technical capacity to analyze reinsurance.
  - Implement risk-based supervision for capital markets; expand NCFM remit to include leasing.
  - Improve public disclosure by banks and revise insurance legislation to reduce shareholder approval thresholds and specify indirect holdings.

### Economic growth, remittances, and inflation (Chapter 5 highlights)
- Growth driven by consumer demand and construction stimulated by remittances and growing FDI.
- Remittances amounted to 33 percent of GDP in 2006; they:
  - Exert appreciation pressure on the leu.
  - Pump liquidity into the system, fuelling inflation (13.4 percent at the end of 2007).
- Selected macro indicators (Table 1 key):
  - Real growth rate: 7.4 (2004), 7.5 (2005), 4.0 (2006), 5.0 (2007), 7.0 (2008).
  - Nominal GDP (billions of lei): 32,032 (2004), 37.7 (2005), 44.1 (2006), 51.3 (2007), 58.8 (2008).
  - Nominal GDP (billions of U.S. dollars): 2,598 (2004), 3.0 (2005), 3.4 (2006), 4.2 (2007), 5.3 (2008).
  - Consumer price index (end of period): 12.6 (2004), 10.1 (2005), 14.1 (2006), 13.4 (2007), 9.0 (2008).
  - Remittances and compensation of employees (net): 660 (2004), 869 (2005), 1,119 (2006), 1,548 (2007), 2,008 (2008).
  - Current account balance (percent of GDP): -2.0 (2004), -10.3 (2005), -12.0 (2006), -9.7 (2007), -10.3 (2008).
  - Gross official reserves (months of imports): 2.1 (2004), 2.2 (2005), 2.2 (2006), 3.0 (2007), 3.2 (2008).
  - Exchange rate (MDL/$) end of period: 12.5 (2004), 12.8 (2005), 13.1 (2006), 11.3 (2007), 10.8 (2008).

### Banking sector: achievements and remaining challenges (Chapter 15 highlights)
- Actions since 2004 FSAP:
  - Threshold for significant shareholding reduced to 5 percent from 10 percent; banks must submit shareholder information exceeding this limit; NBM limits operations for noncompliance.
  - NBM requires information on shareholders with holdings between 1-5 percent to prevent circumvention.
  - Foreign strategic investor entries: Banca Comerciala Romana (Erste Bank) established subsidiary; Veneto Bank purchased Eximbank in 2006; Societe Generale acquired Mobiasbanca in 2007; Unibank purchased by an Austrian venture capital fund.
  - Foreign strategic investors account for slightly more than 20 percent of total banking sector assets.
- Remaining vulnerabilities:
  - Ownership uncertainties persist: incomplete information on 30 shareholders of some banks, including largest systemically important banks.
  - Dollarization and FX lending issues.
  - NBM capacity constraints for risk analysis.
- Privatization:
  - Privatization of majority state-owned bank stalled after conflict of interest by evaluation expert; process should continue aiming at strategic investor.
- FX lending and dollarization:
  - Banks are not allowed to lend in foreign exchange to exporters, only to importers; no constraints on placing FX deposits.
  - Deposit dollarization stable and not outstandingly high regionally.
  - Staff recommends exporters be allowed to borrow in foreign currency up to the amount of their export revenues.
  - Prudential rules could internalize dollarization risks (e.g., higher liquidity requirement on foreign currency deposits).
- NBM stress testing capacity:
  - Basic toolkit developed; lacks capacity to change scenarios for new risks.
  - Data collection needed: borrowers’ indebtedness, deposit concentration by currency and type, NPLs by sector/currency, remittance-based lending/income data.
  - NBM should examine possible reorganization to better use research capacity for stress testing.

### Insurance sector and capital markets (selected)
- Insurance sector weaknesses:
  - Underdeveloped relative to potential and neighbors due to low per capita income, small middle class, low public understanding/confidence, lack of prudential regulations and enforcement.
  - De facto lack of enforcement of strict licensing and minimum capital has led to proliferation of insurers.
  - Recommendation: create nationwide insurance association; Actuarial and Policyholder Protection Association is a positive first step.
- Capital market diagnosis:
  - Very few government bonds; outstanding amount MDL 222 million; no secondary market activity.
  - Main securities: NBM certificates and MOF T-bills, most activity in 90-day segment.
  - Equity market: reflects voucher privatization; about 1,000 companies registered for trading but only a small number listed.
  - Recommendation: concentrate on a much smaller number of companies to provide a basis for a liquid capital market and segment nonlisted-but-traded companies into relevant groups.

### Equities market infrastructure, payment systems, and governance (Chapter 31 and payment system chapters)
- Equities market infrastructure:
  - Nearly all securities dematerialized, but no central register of ownership; 14 registrars perform registrar functions.
  - National Securities Depository (NSD) functions as clearing/settlement and custody for the exchange but does not have a registrar license and is not a full Central Securities Depository.
  - MSE electronic trading system exists but market functions via daily fixing (auction); no continuous trading and no market maker schemes.
  - Money side of settlement performed over a commercial bank rather than central bank accounts; moving money settlement to NBM RTGS has been discussed and needs conclusion.
- Payment systems assessment (RTGS and DNS):
  - RTGS and DNS largely observant of BIS Core Principles for Systemically Important Payment Systems; some improvements needed.
  - RTGS accounts for about 5 percent of transactions and 85–90 percent of the total amount.
  - AIPS participants: 17 (15 commercial banks, Treasury of MOF, Tiraspol Settlement Centre).
  - Compulsory reserve requirements: current compulsory reserve requirements stand at 15 percent for bank liabilities in both local and foreign currencies and may be used for settlement during operational day.
  - Recommended NBM actions:
    - Support development of cashless payment instruments and reduce transaction cost.
    - For domestic FX market, examine ensuring transfer of proceeds of one currency only after receipt of funds corresponding to the other leg.
    - Define minimum measurable requirements for AIPS; extend oversight to securities settlement and retail payment systems; prepare White paper on payment system oversight; consider National Payments Systems Council.
  - DNS-specific suggestions: improve queue management; conduct second settlement earlier to allow rejected payments to be resubmitted to RTGS with same value date.

### Observance with Basel Core Principles and supervision (Chapter 55 highlights)
- Institutional setting:
  - Assessment conducted October 2007.
  - NBM Law places BRSD as responsible for banking supervision; objective to maintain financial stability and protect depositors.
  - Banking sector assets 54 percent of GDP; lending 33 percent of GDP.
  - 15 universal banks; majority resident-owned banks control two thirds of assets.
  - Foreign participation in banking sector assets increased from 49 percent in 2004 to 64 percent in 2006.
  - One of the largest banks (15 percent of assets) is majority state-owned.
- Main findings:
  - NBM Law and LFI supplemented by regulations provide sound basis; supervisory independence exists in practice but legal protection for supervisors absent.
  - Memoranda of Understanding lacking with NCFM; exchange of letters in place.
  - Licensing infrastructure adequate; threshold for "significant interest" reduced to 5 percent in 2005.
  - Deficiencies: large exposure limits and connected lending; incomplete owner information; lack of power for consolidated supervision over holding companies and sister companies.
  - Capital adequacy rules generally conform to Basel 1988; lack capital charge for market risk except FX risk.
  - NBM conducts comprehensive annual on-site inspections; off-site unit reviews periodic financial information.
  - With 2007 Accounting Law, IFRS mandatory for public interest companies from January 1, 2009; NBM reporting formats should be revised accordingly.
- Selected main recommendations (from Table 5):
  - Amend "Guillotine Law" to preserve NBM’s powers to suspend a bank’s activities without immediate court review.
  - Amend NBM Law to include legal protection for supervisors.
  - Set up cooperation agreement between NBM and NCFM beyond exchange of reports.
  - Continue aggressive action to obtain transparency on beneficial shareholders and ownership sources.
  - Implement capital charge for market risk; require pre-payment dividend notification.
  - Ensure banks upgrade risk management; establish a Credit Registry financed and owned by financial institutions (authorities disagreed it should be the supervisor’s task).
  - Develop tools to extract large credit details; consider more granular delinquency buckets; implement early remedial action regime with thresholds; formalize contacts with home supervisors of western European banks present in Moldova.
- Authorities’ response:
  - Broad agreement with the assessment; determined to improve legal framework and supervision.
  - Noted budget requirements for bank supervision are met from NBM operating budget and found separating BRSD budget inconvenient.
  - Disagreed with recommendation that NBM ensure setting up a credit registry, viewing it as the banking system’s task.

*Source: Executive Summary and selected chapters, _cr08274*

### Executive Summary ......................................................................................................

### _cr08274 - Executive Summary

### Executive summary: overall assessment
- The 2004 FSAP had identified governance (specifically bank ownership) as a significant source of financial sector vulnerability; the update found that bank supervisors have made successful efforts to address this problem but do not yet have full information on some owners in at least one systemically important bank, and in several other banks this information is incomplete.
- Reputable foreign investors were recently allowed to purchase domestic banks, indicating authorities’ determination to clean up the sector.
- Supervisors in other parts of the financial sector (particularly insurance and securities) had much more limited success in clarifying ownership; the newly established National Commission on Financial Markets (NCFM) has yet to function in full capacity.
- Monetary policy credibility and excessive domestic liquidity that led to inflation pressures and the possibility of unsound credit growth are the major, interlinked sources of vulnerability in the financial system today; handling of these is largely outside the scope of the FSAP update (but is covered in the staff report).
- Dependence on remittances is one of the highest in the world (more than 30 percent of GDP), making the financial system vulnerable to potential volatility in these inflows.
- The effects of the above macroeconomic risks on the financial system appear manageable at present: stress tests, including extreme scenarios within historical parameters, show the banking sector as a whole can withstand them; nevertheless, the situation in some major banks should be followed more closely to enable timely supervisory/central banking intervention if a simulated shock occurs.
- The financial sector’s developmental needs are substantial: the share of the financial sector in the economy is still small, markets are shallow, and some elements of infrastructure are missing (e.g., no central registry for securities). These indicators are worse for insurance and securities than for banking.

### Progress since the 2004 Financial Sector Assessment Program
- The 2004 FSAP identified key issues: (i) implementation of the "fit and proper" standards for owners of financial institutions; (ii) privatization of Banca de Economii; (iii) close cooperation among supervisory agencies; improvements in insurance regulatory environment; consolidation and development of securities markets; payment system infrastructure; and governance/accounting legal framework.
- Since 2004:
  - Major progress in addressing bank ownership structure: identifying connections between borrowers and shareholders and requiring beneficial shareholders to fully disclose ownership.
  - Privatization of Banca de Economii has been slow; authorities should accelerate privatization to private strategic financial investors to improve competition.
  - Regulatory framework recently improved, but little progress in improving supervision except in banking.
  - A new regulator/supervisor, the NCFM, was set up in the second half of 2007 to improve oversight of the nonbank financial sector; at the time of the FSAP its operation was ineffective and it faced issues over regulatory overhaul and financing.
  - Payment systems infrastructure strengthened by putting into operation an RTGS system.
  - Improvements in legal framework for accounting practices.

### Financial sector risks — macroeconomic and liquidity
- Excessive domestic liquidity:
  - Fueled by growing inflows of foreign exchange from remittances and foreign direct investment (FDI), a liquidity overhang has persisted, calling for active and consistent monetary policy.
  - Reluctance to allow more exchange rate appreciation and to raise interest rates could undermine central bank credibility and entrench inflationary expectations.
  - Potential fiscal pressures in the run-up to national elections in 2009 may also add to inflationary pressures.
  - Continued strong growth in credit and broad money suggests inflation risks are not contained, which might lead to an overall economic slowdown, negatively affecting banking system growth prospects.
- Rapid credit growth:
  - Recent rapid expansion in bank credit, if unabated, might give rise to medium-term concerns; while growth is from a very low base, a continued rapid increase will require careful attention to preempt deterioration in banks’ credit portfolios.
  - Banks’ internal risk management systems may be inadequate to preempt lending to ultimately unviable projects that would increase nonperforming loan (NPL) ratios in the medium term.
  - The NBM should develop an early warning system to signal emerging macroprudential risks to the financial system.
- Dependence on remittances:
  - Remittances exceed "more than 30 percent of GDP", creating vulnerability to volatility in these inflows.

### Supervisory, institutional, and market vulnerabilities
- Supervisory cooperation and ownership transparency:
  - Financial sector supervision should be viewed by the institutions (primarily the NBM and the NCFM) as a joint task; unifying supervision is not necessary now, but the NBM and the NCFM face similar challenges.
  - Supervisors continue to lack information on some ultimate beneficial owners of financial institutions; identifying all such owners should be a priority for all financial sector supervisors.
  - Financial institutions are becoming more intertwined by cross-ownership; financial products cross subsectors (e.g., life insurance products that resemble bank products).
  - Bank and nonbank supervisors should develop practical mechanisms (including Memoranda of Understanding, sharing experience, joint studies) to cooperate in sharing and analyzing information.
  - NBM and NCFM should jointly seek to modify the Law on The Core Principles of Regulating Entrepreneurial Activities to exempt the financial sector from some provisions that might impede supervisory actions by immediately and automatically subjecting such actions to judicial review.
- Supervisory capacity enhancements:
  - NBM has begun to conduct stress testing since the 2004 FSAP; the challenge is to build capacity to adjust stress testing scenarios to align with changing economic and financial sector conditions—this capacity build-up and possible reorganization within the NBM should be a short-term priority.
  - The supervisor should implement an early warning system for potential domestic and external disruptions.
  - The supervisor should enforce standards for internal risk-management systems in banks; recent investments by well-regarded foreign banks provide an opportunity to spread higher quality internal risk-management practices via regulatory changes and consultations.
- NCFM operational readiness and financing:
  - NCFM’s task is complicated by differences in risk profiles and supervisory cultures across intermediaries; priorities differ across insurance and securities sectors.
  - In insurance: focus on developing an adequate regulatory and supervisory regime.
  - In securities: develop strategy to revitalize markets and extend supervisory activities to cover leasing.
  - NCFM financing is based on fee payments by supervised sectors; because these sectors are small and upfront costs are large, fee financing may be insufficient in the short- to medium-term—NCFM should be guaranteed budgetary support, as needed, to meaningfully start operations.

### Infrastructure and governance needs
- Infrastructure:
  - RTGS is a major improvement for wholesale payments.
  - Key remaining issues: improve settlement systems for securities markets, electronic payment instruments, and the domestic foreign exchange market.
  - Move to a modern Central Securities Depository structure, including registrar functions (and RTGS payments) for at least the listed companies.
  - Implement, with leadership of the NBM, the National Net Settlement Service for leu transactions.
- Governance:
  - Revision of accounting and auditing laws has been accomplished, but further actions are needed:
    - Functioning central registry for company financial statements.
    - Require posting of full financial statements of banks on their websites.
    - Establish full fiduciary duties for all company Board members and executive managers.
  - Expand public disclosure statements of banks and require financial statements, bank charters, and statements of compliance with the Corporate Governance Code be posted on their websites.
  - Revise insurance legislation to reduce the threshold for approval of shareholders by the supervisor and provide a detailed description of indirect holdings in the capital of insurers.

### Stress testing and resilience
- Stress tests simulating possible shocks and extreme scenarios within historical parameters indicate the banking sector as a whole can withstand them.
- The financial sector, particularly the banking sector, withstood serious exogenous shocks during the past year-and-a-half.
- Some major banks’ situations warrant closer monitoring to enable timely intervention if adverse shocks materialize.
- The NBM should enhance capacity to adapt stress testing scenarios as circumstances change.

### Summary of Key Recommendations (Box 1)
A. High priority
- Tighten monetary policy to eliminate excess liquidity and reduce inflation (details in the Staff Report).
- Improve liquidity management.
- Develop the capacity to better forecast and manage liquidity, inter alia by the necessary staff increases and the development of forecast models.
- Further increase the transparency of monetary operations.
- Create the framework for effective cooperation between the supervisors.
- Make joint NBM and NCFM efforts to exempt the financial sector from the application of some provisions of the Law on The Core Principles of Regulating Entrepreneurial Activities.
- Sign Memoranda of Understanding between the NBM and the NCFM and separately between the central bank and all subsectoral supervisors.
- Develop the joint handling of some of the supervisory databases.
- Improve the effectiveness of bank supervision.
- Issue guidelines for the implementation of consolidated accounting requirements.
- Continue to make efforts to identify the beneficial owners of banks.
- Improve the capacity to adapt stress testing scenarios to the changing circumstances.
- Enhance bank risk management capacity by setting guidelines.
- Start the effective operation of the NCFM.
- Review and redefine the licensing process for intermediaries under the NCFM.
- Ensure the necessary NCFM funding through the government budget, if needed.
- Upgrade staff technical capacity to implement and enforce insurance legislation.
- Move to a modern Central Securities Depository structure, including the registrar functions (and RTGS payments) for at least the listed companies.
- Implement, with the leadership of the NBM, the National Net Settlement Service for leu transactions.

B. Medium term and developmental
- Upgrade nonbank financial supervision.
- Set new prudential standards for all entities supervised by the NCFM based on international standards and best practices.
- Develop statutory returns in the insurance sector that provide relevant information on solvency, reinsurance, claims, and expenses. Build technical capacity in the NCFM to analyze reinsurance programs; develop minimum reinsurer criteria.
- Implement risk-based supervision principles for the capital markets sector.
- Expand the NCFM’s remit to include leasing.
- Improve the financial sector environment.
- Expand the public disclosure statements of banks and require that the financial statements, bank charters, and statements of compliance with the Corporate Governance Code be posted on their websites.
- Revise the insurance legislation to reduce the threshold for approval of shareholders by the supervisor and provide a detailed description of indirect holdings in the capital of insurers.

*Source: Executive Summary, _cr08274 - Executive Summary*

### 5.      Economic growth has been robust in recent years, driven by consumer demand

### _cr08274 - 5.      Economic growth has been robust in recent years, driven by consumer demand

### Economic growth, remittances, and inflation
- Economic growth has been robust in recent years, driven by consumer demand and construction activity stimulated by remittances and, more recently, by growing FDI.
- Remittances amounted to 33 percent of GDP in 2006 and:
  - Exert appreciation pressure on the leu
  - Pump liquidity into the system, fuelling inflation (13.4 percent at the end of 2007)
- Table 1 key macro indicators (selected):
  - Real growth rate: 7.4 (2004), 7.5 (2005), 4.0 (2006), 5.0 (2007), 7.0 (2008)
  - Nominal GDP (billions of lei): 32,032 (2004), 37.7 (2005), 44.1 (2006), 51.3 (2007), 58.8 (2008)
  - Nominal GDP (billions of U.S. dollars): 2,598 (2004), 3.0 (2005), 3.4 (2006), 4.2 (2007), 5.3 (2008)
  - Consumer price index (end of period): 12.6 (2004), 10.1 (2005), 14.1 (2006), 13.4 (2007), 9.0 (2008)
  - Remittances and compensation of employees (net): 660 (2004), 869 (2005), 1,119 (2006), 1,548 (2007), 2,008 (2008)
  - Current account balance (percent of GDP): -2.0 (2004), -10.3 (2005), -12.0 (2006), -9.7 (2007), -10.3 (2008)
  - Gross official reserves (months of imports): 2.1 (2004), 2.2 (2005), 2.2 (2006), 3.0 (2007), 3.2 (2008)
  - Exchange rate (MDL/$) end of period: 12.5 (2004), 12.8 (2005), 13.1 (2006), 11.3 (2007), 10.8 (2008)

### Risks associated with remittance dependence
- Main vulnerabilities:
  - Concentration of emigrant destinations in Russia and the EU creates exposure: if economic conditions in Russia and the EU worsen, or immigration and labor law enforcement tightens, remittances may slow down considerably.
  - A slowdown would:
    - Put the exchange rate under pressure
    - Diminish availability of financial resources for the financial sector
    - Increase credit risk where bank lending is based on borrowers earning/receiving remittances
- Assessment:
  - Based on stress test results (see below in source), this risk seems to be manageable.

### Monetary policy framework and institutional changes
- Legal and institutional changes:
  - Changes to the Law on the National Bank of Moldova (NBM Law) made price stability the primary objective of monetary policy.
  - Direct lending to the government was prohibited.
  - A service agreement based on market principles was signed between the Ministry of Finance (MOF) and the NBM.
  - A plan was developed to securitize, by end-March 2008, the existing stock of nontradable government debt into treasury bills to provide the NBM with a portfolio of marketable securities for open market operations (equal to Moldovan Leu (MDL) 1.8 billion, or 3.6 percent of GDP).
- Remaining institutional gaps:
  - Room for improvement in budgetary autonomy, legal protection for staff, and safeguards against conflicts of interest.

### Monetary policy conduct and credibility issues
- Observed inconsistencies:
  - The NBM places more emphasis on exchange rate and interest rate stability than called for by the new inflation focus.
  - Foreign exchange interventions to offset exchange rate appreciation and political resistance to interest rate increases are inconsistent with the NBM’s price stability objective.
  - The NBM’s resistance to raising interest rates by a sufficient margin to absorb the liquidity overhang is undermining its credibility.
- Financial position and operational weaknesses:
  - The government provided a direct cash injection of MDL 250 million to boost the NBM’s financial position.
  - Possibility of future losses may require another recapitalization.
  - Operational weaknesses have stemmed from high sterilization costs and revaluation losses associated with exchange rate appreciation.
  - Market perception that the NBM may deviate from optimal policy choices to avoid financial losses would undermine its reputation.

### Communication, transparency, and competence
- Market uncertainty:
  - Despite efforts at transparency, market participants appear uncertain about the NBM’s true intentions and objectives.
  - Example: commercial banks were surprised when the NBM “unexpectedly” raised its policy rate in September 2007 after keeping it practically unchanged since end-2006; many perceived the move as temporary despite the NBM’s statement that tightening was a response to rising inflation.
- Recommended improvements:
  - The NBM needs to ensure markets clearly understand the policy framework to restore the signaling function of monetary policy.
  - Strengthen transparency practices and communication strategy, including a “public education campaign” of frequent press releases, public appearances, newspaper articles, and analytical publications.
  - Address inadequate competence in understanding macro-financial linkages in some commercial banks.

### Challenges in liquidity management
- Main challenges:
  - Manage excess liquidity
  - Improve the interest rate transmission mechanism
- Managing excess liquidity:
  - Foreign exchange interventions have not been consistently sterilized.
  - Recent increases in policy rates and reserve requirements were positive steps to tame growing inflation.
  - Markets are segmented and retail lending and deposit rates are disconnected from money market instruments.
  - Lack of competition in the banking system and market shallowness with limited maturities distort the yield curve.
  - Decision to move accounts of the National Social Insurance House, the National Health Insurance Company, and territorial budgets from commercial banks to the single treasury account at the NBM by end-2007 eases part of the liquidity pressure.
  - The interest rate pass-through will function if excess liquidity is mopped up and sterilization rates become high enough; this would help develop financial markets by creating heterogeneity in banks’ structural positions.
- Weak forecasting capacity:
  - Under reserve money targeting, the NBM’s capacity to forecast and manage liquidity remains weak.
  - Weaknesses include lack of proper models of the economy and insufficient staff for reliable forecasts.
  - Reserve money has exhibited high volatility partly due to inconsistency in targeting quantities (reserve money) by setting prices (interest rates) without a clear connection between the two.
  - Coordination between the NBM and MOF has improved via the joint liquidity management committee, but volatility persists.
- Improvement of monetary policy tools:
  - The NBM’s main liquidity management instrument is the sale of NBM certificates.
  - The NBM uses a “corridor” structure of policy rates with standing facilities of overnight deposits and credits forming lower and upper bounds for market rates.
  - Identified shortcomings:
    - The corridor is too wide and its lower limit is too low to provide a floor to the interbank market rate: the overnight deposit rate is set at 2 percent, while seven-day NBM certificates are auctioned at 16 percent.
    - The base rate is set by the NBM as a main policy reference rate, but in practice no transactions take place at this rate; it is only used as an upper limit for sterilization operations.
    - Reserve requirements are intended to affect structural demand for money but ambiguity remains between the base rate and sterilization rate.
  - Suggested instrument adjustments:
    - Adopt a sterilization rate as a base rate to remove ambiguity
    - Shift sterilization operations to shorter maturities

### Financial sector metrics and banking system (selected indicators)
- Table highlights:
  - Total banking assets/GDP: 38 (2003), 42 (2004), 48 (2005), 52 (2006), 54 (2007)
  - Credit to nongovernment sector (percent of GDP): 14 (2000), 16 (2001), 19 (2002), 22 (2003), 23 (2004), 27 (2005), 31 (2006), 33 (2007)
  - Capital adequacy ratio (Total regulatory capital over total risk-weighted assets): 49 (2000), 43 (2001), 36 (2002), 32 (2003), 31 (2004), 27 (2005), 28 (2006), 27 (2007)
  - Nonperforming loans as a share of total loans: 21 (2000), 10 (2001), 8 (2002), 6 (2003), 7 (2004), 5 (2005), 4 (2006), 4 (2007)
  - Return on equity: 25 (2000), 14 (2001), 17 (2002), 20 (2003), 18 (2004), 15 (2005), 21 (2006), 25 (2007)
  - 91-day T-bill (effective nominal yield): 25 (2000), 8 (2001), 11 (2002), 18 (2003), 7 (2004), 4 (2005), 12 (2006), 12 (2007)
  - Share of foreign currency deposits in broad money: 28 (2000), 28 (2001), 31 (2002), 34 (2003), 31 (2004), 30 (2005), 36 (2006), 36 (2007)
- Banking system depth and structure (Table 2, selected):
  - Lending/GDP: 22 (2003), 23 (2004), 27 (2005), 31 (2006), 33 (2007)
  - Deposits/GDP: 25 (2003), 30 (2004), 37 (2005), 39 (2006), 40 (2007)
  - Capital adequacy ratio: 32 (2003), 31 (2004), 27 (2005), 28 (2006), 27 (2007)
  - Foreign currency loans/Total loans: 43 (2003), 42 (2004), 37 (2005), 38 (2006), 40 (2007)
  - Foreign currency deposits/Total deposits: 46 (2003), 42 (2004), 39 (2005), 49 (2006), 48 (2007)

*Source: IMF staff summary of the chapter.*

### 15.      The authorities have achieved some success in addressing the critical banking

### The authorities have achieved some success in addressing the critical banking sector recommendations of the 2004 FSAP

### Achievements on FSAP recommendations
- Critical issues identified in the 2004 FSAP: (i) the government’s role in the banking system; (ii) the opaque ownership structure of a relatively large number of banks in the country; and (iii) the absence of reputable strategic investors.
- Preparatory work for the privatization of the state owned bank has commenced, but at a much slower pace than originally expected and the sale has not been completed yet.
- To make ownership more transparent:
  - The threshold for significant shareholding was reduced to 5 percent from the previous 10 percent.
  - Banks are obliged to submit information on their shareholders exceeding this limit.
  - In case of noncompliance, the NBM limits the operations of the banks that do not support the enforcement of the regulation.
  - The NBM requires that information be provided on shareholders with holdings between 1-5 percent to prevent circumvention by splitting holdings.
  - In at least one case, the owners sold the shares as a result of an intensified NBM inquiry.
- Investments of reputable strategic investors occurred: in 2006–2007 there were acquisitions including Banca Comerciala Romana (Erste Bank) establishing a Moldovan subsidiary, Veneto Bank purchasing Eximbank in 2006, Societe Generale acquiring Mobiasbanca in 2007, and Unibank purchased by an Austrian venture capital fund.
- Foreign strategic investors account for slightly more than 20 percent of total banking sector assets.

### Present challenges in the banking sector
- Remaining vulnerabilities relate to:
  - The remaining uncertainties in the ownership structure despite NBM efforts.
  - Dollarization and lending in foreign exchange.
  - NBM’s capacity constraints to analyze risks and vulnerabilities.
- Ownership transparency:
  - Information collection is still ongoing in the case of 30 shareholders of some banks, including the largest, systemically important banks.
  - Lack of information is more prevalent in banks in the second and third subgroup.
  - Concerns include large exposures, connected lending, loan concentration, and whether owners can provide contingency funds in stress situations.
- Privatization:
  - The privatization process of the majority state-owned bank halted after the selected evaluation expert had a conflict of interest.
  - Recommendation: privatization process should continue with emphasis on selling to a strategic investor to increase competition.
- Foreign ownership quality:
  - While foreign participation has increased, the majority of foreign holdings belong to investors that are not internationally highly-rated financial institutions, with a significant percentage of owners being residents in offshore centers.
  - Owners with more than a 5 percent stake have been mostly found to be fit and proper, but their ability and willingness to provide know-how and capital or liquidity support is not obvious.
  - Supervisors could continue to exert pressure on banks to consolidate ownership through strategic investors.
- Operational environment weaknesses:
  - Uncertainties in policy implementation complicate bank operations and increase costs.
  - Monetary operations of the NBM are often unpredictable, prompting banks to keep higher liquidity.
  - The recent increase in the level of required reserves raises the cost of compliance.
  - Inefficiencies are reflected in very high returns on equity and returns on assets.
  - Margins between deposit and lending rates have decreased mainly due to the increase in deposit rates as banks attract deposits to finance increased loan volume.
  - High profitability may change if foreign strategic investor–owned banks move beyond “cherry-picking” and induce competition.
- Foreign exchange lending and dollarization:
  - Banks are not allowed to lend in foreign exchange to exporters, but only to importers; there are no constraints on placing foreign exchange deposits.
  - Deposit dollarization has not increased during the last year and is not outstandingly high compared to regional peers.
  - NBM’s concern: allowing exporters to borrow in foreign exchange could increase deposit dollarization because banks might raise dollar interest rates to attract foreign currency deposits.
  - Risk for importers: lack of a natural hedge could create difficulties if the leu depreciates.
  - Prudential rules could be adjusted to require internalization of risks from dollarization (for example, higher liquidity requirement on foreign currency deposits than lei deposits).
- Recommendation on FX lending:
  - Staff recommends that exporters be allowed to borrow in foreign currency up to the amount of their export revenues.
  - Rationale: limited broadening of foreign currency lending would not result in a significant increase in macroeconomic risk because bank ability to extend FX loans remains constrained by prudential rules on credit extension and net open position limits.
- NBM stress testing capacity:
  - NBM has developed and implemented a basic stress testing toolkit but lacks capacity to change stress testing scenarios to accommodate newly emerging risk factors.
  - More work needed to identify additional risk factors and properly assess credit and liquidity risks.
  - Data collection needed includes: level of borrowers’ indebtedness; deposit concentration by currency and by type; NPLs by sector or currency; remittance-based lending and remittance-based income data.
  - NBM should examine whether reorganization is needed to better use research capacity across departments for stress testing model development.

### Stress testing: methodology and key findings
- Stress tests conducted using detailed bank-by-bank data as of end-June 2007; coordinated with NBM staff.
- Tests included sensitivity analyses to credit, liquidity, interest rate, and exchange rate risks, and macroeconomic scenarios combining shocks.
- Tests were performed at individual, group, and banking system levels; shock sizes chosen based on historical and hypothetical changes.
- Results reported for each banking subgroup and for the banking system in terms of additional capital and liquidity required to satisfy the minimum regulatory CAR and liquidity ratio.
- Regulatory minima:
  - Minimum capital adequacy ratio (CAR) per NBM regulation: 12 percent.
  - NBM Liquidity Principle 2: minimum 20 percent ratio of current liquidity to total assets. Current liquidity comprises cash, deposits with the NBM, liquid securities and net bank lending and borrowing.
- Overall outcome:
  - The banking system as a whole can withstand credit, liquidity, and macroeconomic shocks.
  - Fundamental reason for resiliency: abundant capital cushion reflected in high capital adequacy ratios.
  - Even under extreme (but historic) shocks, banks would remain solvent, although three systemically important banks and several smaller banks would become undercapitalized and should be monitored closely.
- Selected quantitative stress test results (Table 4 summary):
  - Total assets as percent of total banking system assets: Group I 67, Group II 22, Group III 11, Total 100.
  - Baseline CAR: Total 27, Group I 23, Group II 27, Group III 59.
  - Credit risk: Increase in NPLs to 17 percent of total loans:
    - New CAR: Total 23, Group I 18, Group II 24, Group III 56.
    - Size of impact (MLD millions): Total 903, Group I 630, Group II 171, Group III 90.
    - Additional capital to meet min. CAR: Total 16, Group I 16, Group II 0, Group III 0.
    - Number of institutions falling below minimum requirements: Total 1, Group I 1, Group II 0, Group III 0.
  - Credit risk: Increase in NPLs to 31 percent of total loans:
    - New CAR: Total 17, Group I 12, Group II 20, Group III 53.
    - Size of impact (MLD millions): Total 1,861, Group I 1,298, Group II 353, Group III 186.
    - Additional capital to meet min. CAR: Total 340, Group I 336, Group II 4, Group III 0.
    - Number of institutions falling below minimum requirements: Total 4, Group I 3, Group II 1, Group III 0.
  - Wine industry credit risk (all loans to winemakers and related industries reclassified as nonperforming):
    - New CAR: Total 24, Group I 19, Group II 25, Group III 56.
    - Size of impact: Total 628, Group I 418, Group II 157, Group III 52.
    - Number of institutions falling below minimum requirements: 0 across groups.
  - Liquidity risk (baseline liquidity ratio: Total 33, Group I 35, Group II 30, Group III 28):
    - 5 percent of total deposits outflow:
      - New liquidity ratio: Total 31, Group I 34, Group II 25, Group III 23.
      - Size of impact: Total 1,069, Group I 367, Group II 493, Group III 208.
      - Number of institutions below minimum: Total 3, Group I 0, Group II 1, Group III 2.
    - 14 percent of total deposits outflow:
      - New liquidity ratio: Total 26, Group I 29, Group II 20, Group III 18.
      - Size of impact: Total 2,751, Group I 1,607, Group II 796, Group III 349.
      - Number of institutions below minimum: Total 7, Group I 1, Group II 2, Group III 4.
    - 20 percent of total deposits outflow:
      - New liquidity ratio: Total 19, Group I 21, Group II 15, Group III 12.
      - Size of impact: Total 4,796, Group I 3,169, Group II 1,111, Group III 515.
      - Number of institutions below minimum: Total 11, Group I 3, Group II 3, Group III 5.
  - Combination of risks:
    - Scenario I (Credit risk, interest rate risk and foreign exchange risk: 10 percentage point increase in interest rates combined with increase in NPLs to 30 percent and appreciation of the leu against the U.S. dollar 30 percent):
      - New CAR: Total 16, Group I 9, Group II 19, Group III 55.
      - Size of impact: Total 2,117, Group I 1,509, Group II 389, Group III 219.
      - Additional capital to meet min. CAR: Total 370, Group I 363, Group II 7, Group III 0.
      - Number of institutions falling below minimum requirements: Total 4, Group I 3, Group II 1, Group III 0.
    - Scenario II (Increase in Gas prices and deterioration in the credit portfolio; NPL shocks were 45 percent Energy portfolio, 27 percent industry and trade portfolio, and 30 percent consumer):
      - New CAR: Total 21, Group I 16, Group II 21, Group III 56.
      - Size of impact: Total 1,230, Group I 835, Group II 300, Group III 95.
      - Additional capital to meet min. CAR: Total 73, Group I 73, Group II 0, Group III 0.
      - Number of institutions falling below minimum requirements: Total 1, Group I 1, Group II 0, Group III 0.
    - Scenario III (Remittances: 30 percent increase of NPLs in consumer and real estate combined with decline in net income of 10 percent):
      - New CAR: Total 19, Group I 15, Group II 20, Group III 55.
      - Size of impact: Total 1,448, Group I 991, Group II 338, Group III 119.
      - Additional capital to meet min. CAR: Total 53, Group I 39, Group II 10, Group III 4.
      - Number of institutions falling below minimum requirements: Total 1, Group I 1, Group II 0, Group III 0.
- Box 2 summary findings:
  - Credit risk: Manageable for NPL increases to 17 percent or 31 percent; while several banks would fall below minimum capital licensing requirements, they would remain solvent.
  - Liquidity risk: Vulnerability remains; even a 5 percent total deposit outflow causes three banks to fall below minimum liquidity requirements, and a 14 percent outflow causes seven banks to fall below minimum liquidity requirements.
  - Plausible macroeconomic scenarios combining shocks lead to several banks falling below minimum regulatory capital while remaining solvent.
  - No significant sensitivity detected to plausible interest rate, exchange rate (appreciation or depreciation), and remittance shocks; net open position sensitivity to USD, euro, and Russian ruble fluctuations is relatively low.

### Insurance sector: weaknesses and recommendations
- The insurance sector is underdeveloped relative to potential and neighboring countries.
- Contributing factors: low per capita income; income distribution (life sector growth dependent on middle class size); low understanding of insurance products; low public confidence; lack of necessary prudential regulations and their implementation.
- De facto lack of enforcement of strict licensing criteria, including minimum capital levels, has led to proliferation of insurance companies.
- With the exception of motor third party liability (MTPL), nonlife and life markets are underdeveloped.
- Technical infrastructure and lack of policyholder protection hinder development of sophisticated products.
- Recommendation:
  - Creation of a nationwide insurance association to enforce discipline in the MTPL market and reach consensus on a new rating system to replace the current tariff.
  - The Actuarial and Policyholder Protection Association is a positive first step toward a nationwide association and providing some protection for policyholders.

### Financial markets — Capital market: diagnosis and suggested moves
- Need to build a well structured government bond market by implementing technical changes and considering issuing government bonds even if financing is not absolutely necessary.
- Current situation:
  - Very few government bonds issued; a few issues with maturities up to two and three years.
  - Outstanding amount in government bonds: only MDL 222 million.
  - No secondary market activity in government bonds.
  - Main securities are money market instruments: NBM certificates and MOF Treasury bills (T-bills) with maturities up to one year, most activity in the 90 days segment.
  - Securitization of government debt owed to the NBM would likely yield short-term securities used primarily for monetary operations.
  - A handful of small corporate bond private placements exist; no other bond types present.
- Equity market:
  - Strongly reflects voucher privatization process; internationally tiny and illiquid.
  - Around 1,000 companies registered for trading on the exchange but only a small number listed.
  - Recommendation: move to a model with a much smaller number of companies that can provide a basis for a well-functioning and liquid capital market.
  - Suggest segmenting the 1,000 nonlisted-but-traded companies into relevant groups (e.g., a “candidate list for listing”).
  - The stock exchange should have clear plans for using the “Public Interest Entity” concept or the Corporate Governance Code as segmenting criteria to focus on a relevant subset of companies.

*Source: IMF staff report excerpt (chapter on banking sector, stress testing, insurance, and capital markets).*

### 31.      The infrastructure for the equities market is unnecessarily complex and there is

### _cr08274 - 31.      The infrastructure for the equities market is unnecessarily complex and there is

### Equities market infrastructure
- Nearly all the securities are dematerialized, but there is no central register of ownership; this task is handled by 14 registrars.
- Registrars use information technology (IT) systems to varying degrees; some registrars have established joint IT solutions.
- The National Securities Depository (NSD) functions as a clearing/settlement and custody organization (with possibility for individual accounts) for the exchange but does not at present have a registrar license and thus does not operate as a “full blown” Central Securities Depository as is now the usual international practice.
- The NSD system is a “sister system” to the Moldova Stock Exchange (MSE) trading system; the two systems are connected so trades are automatically routed for settlement.
- The MSE operates an electronic trading system but the market functions through a daily fixing (auction); there is no use of the electronic trading system for continuous trading during the trading day.
- There are no market maker schemes.
- Trading entry is currently performed by brokers going to the exchange’s computer hall; discussions to introduce trading from members’ own offices have not led to results.
- The system should be updated.
- The money side of settlement is performed over a commercial bank rather than central bank accounts, contrary to best international practice; discussions for moving money settlement to the NBM RTGS payment system have been ongoing for several years and need to be concluded as soon as possible.

### Payment systems — assessment and recommendations
- Only the RTGS is systemically important and was assessed against the ten Core Principles for Systemically Important Payment Systems developed by the Bank for International Settlements (BIS). The designated-time net settlement (DNS) was assessed informally against the same standard.
- Both RTGS and DNS are fully observant for the majority of the systemically important payment systems core principles; in some cases a few improvements are still needed (see Appendix II, Table 6 referenced in source).
- The NBM should do more to support development of cashless payment instruments and reduce related transaction cost; the NBM should view this part of the payment system as falling under its purview.
- For the domestic foreign exchange market, the NBM should examine the possibility of ensuring the transfer of proceeds of one currency only after it has also received the funds corresponding to the other leg.
- In the settlement of corporate securities, the settlement bank is supervised by the NBM, but there is no specific supervision of its settlement function.

### Governance — progress and remaining needs
- Since the 2004 FSAP, progress has been made to improve corporate governance in Moldova; of the 14 corporate governance recommendations in the FSAP, over two-thirds have been fully or partially implemented, particularly those related to the accounting and auditing laws.
- Recommended amendments to the Law on Joint Stock Companies:
  - establish full fiduciary duties for all board members and executive managers;
  - permit only the shareholders' meeting (and not the board of directors) to approve capital increases;
  - set adequate policies and procedures for approval of large related-party transactions.
- Governance in banks has improved due to expanded NBM regulations, but should be strengthened further:
  - NBM regulations follow the EU Directive on transparency related to ownership and control, but the NBM still can not always enforce the rules for identification of all ultimate shareholders of banks.
  - Public information includes names of legal entities incorporated in offshore zones, whose ownership is not transparent; presence of such owners reduces public confidence in the banking sector.
  - "Fit and proper" provisions for significant shareholders follow EU norms but do not include "suspicion" or "bad reputation".
  - Banks should be required to provide additional information to the public, including posting on their websites their full financial statements, the bank charters, and an annual statement of the extent of conformity of their disclosure with the Corporate Governance Code, recently approved by the NCFM.
- Accounting and auditing laws revised; legislation requires the use of International Financial Reporting Standards for all “public interest entities,” including listed companies and financial institutions from January 1, 2009.
- A functioning central registry where third parties can obtain company financial statements and charters would improve risk management. The mission views the Registration Chamber as a more effective solution than the National Statistical Bureau because the Registration Chamber already has records on all legal entities and necessary software/systems.

### Supervision and regulation — banking supervision
- The 2004 FSAP reported Moldova’s bank supervision and regulations were reasonably comprehensive and, with certain exceptions, adhered to the BCPs then in effect; there were 19 recommendations suggesting room for further improvement.
- Almost all prior recommendations have been implemented through new regulations, more forceful use of existing supervisory powers, or better practices; legal protection for supervisors, however, is still absent from the NBM Law and the Law on Financial Institutions (LFI).
- Current BCP assessment: bank supervision and regulation remain reasonably comprehensive and, with some exceptions, adhere to the BCPs as revised in October 2006.
- Remaining significant weaknesses:
  - lack of a formal memorandum of understanding (MOU) and effective cooperation with the NCFM (timely given financial products resembling bank products, e.g., life insurance);
  - lingering problems extracting full information on owners of some banks;
  - deficiencies in large exposure limits and connected lending (related to lack of full information on some bank owners);
  - weaknesses in consolidated supervision, including lack of power for NBM supervisors to extend supervision to bank holding companies or banks’ sister companies and need to set up communication mechanisms with the respective “home” supervisors of the four Western European banks that have established subsidiaries in Moldova since the 2004 FSAP.
- Emerging risk: a new law (the Law on the Core Principles of Regulating Entrepreneurial Activities, the so-called Guillotine Law) could limit NBM’s and other supervisors’ powers if implemented unchanged; changes should be made expeditiously in line with the PRGF program document (Box 3).

### Box 3 — Provisions of the Guillotine Law (as presented)
- The law was adopted in July 2007 to become effective as of Jan 1, 2008.
- In late December 2007 amendments to exclude the financial sector from Articles 11 and 17 were passed by Parliament, but have not been enacted since then.
- According to the law, rules would apply to the whole economy including:
  - (i) prior court approval of the suspension of licenses; and
  - (ii) suspension of the effectiveness of supervisory measures under judicial review.
- The law would apply to all financial sector supervisors, including the NBM’s bank and foreign exchange licensing activity, as well as any licensing activity of the NCFM, potentially greatly weakening supervisory powers by making decisions easily contestable and subject to lengthy juridical processes prevalent in Moldova.

### Supervisory information, reporting, and databases
- The NBM currently lacks both information and capacity to analyze all aspects of systemic vulnerabilities in the banking sector.
- There is no prudential database for credits extended in foreign exchange to the economy or for borrowers’ natural hedge, if any.
- No systematically gathered information on domestic and foreign currency deposits for large depositors shown separately by currency.
- The NBM should develop efficient and effective means to extract useful supervisory information, particularly regarding large loans and loans to banks' related parties, from its loan database already compiled from on-site and off-site supervision.
- NBM reporting formats should be revised and made consistent with the 2007 Accounting Law; there is enough time to make these revisions because IFRS reporting for public interest companies starts January 1, 2009.

### Unified supervision of nonbank financial institutions (NCFM)
- Consolidation of regulatory and supervisory responsibilities under the NCFM is a positive step, but not complete; the leasing subsector has not been included and this omission needs to be addressed.
- Transfer of licensing authority from the Licensing Chamber to the NCFM planned for October 1, 2008, provides an opportunity to review and redefine the licensing process; NCFM needs to be well prepared with staff, IT systems, and regulations.
- Licensing savings and loan associations will be a special challenge due to the large number of such institutions.
- Creation of appropriate on-site supervisory capacity and prudential requirements is of particular importance; on-site supervision was not previously practiced by some supervisors.
- Enforcement powers of the NCFM should be better defined and strengthened, along lines applicable to bank supervision; new laws or amendments should address NCFM powers including licensing (suspension/withdrawal), obtaining documents, supervising, investigating, and imposing specific sanctions such as fines.
- The Guillotine Law should be revised as noted above.
- NCFM financing:
  - envisaged as a self-financing body collecting taxes and other payments from financial market participants;
  - potential funding sources include fees, issuance and trading charges from the securities sector, capital or turnover-based fees of supervised entities, service fees and penalties;
  - self-financing in shallow and unstable markets might not work; a realistically high level of self-financing should be encouraged but state budget support should cover shortfalls to keep NCFM fully functioning until markets stabilize.

### Insurance sector supervision
- Problems include weaknesses in licensing procedure and lack of proper on-site insurance supervision.
- Analysis of financial information submitted by companies is weak and does not provide a good basis for early detection and corrective action.
- Off-site surveillance should be complemented by an on-site inspection program.
- Implementation and enforcement of the insurance legal framework need strengthening to ensure soundness and protect policyholders.
- Due to lack of regulations prescribing proper solvency rules and lack of information, the mission could not analyze sector solvency.
- Ensuring solvency requires publication and enforcement of prudential regulations based on international best practices as soon as possible.
- Technical regulations were to be fully in place as of November 2007 per the insurance law; absence of technical regulations is an important weakness.

### Securities regulation and supervision
- Tools and methods for off-site and on-site supervision should be improved.
- An informal assessment of International Organization of Securities Commissions principles showed the use of risk-based methods is at present very weak.
- Supervision of securities intermediaries should become risk-based.
- NCFM strategy should switch from very detailed regulations to focusing on regulating key risk areas; focus on collecting data to support meaningful risk ratios and early warning signals.
- Calculating sector averages and encouraging self-assessments may be useful strategies.

### Payment system oversight — recommended NBM actions
- The NBM performed more poorly in relation to the four Central Bank Responsibilities than to the ten Core Principles for Systemically Important Payment Systems; fulfillment of the four Central Bank Responsibilities will require significant improvements.
- Recommended actions for the NBM:
  - define minimum measurable requirements that the Automated Interbank Payment System (AIPS) has to comply with to ensure safety and efficiency;
  - enhance focus of its oversight;
  - extend oversight over the Securities Settlement System to guarantee integrity of the payment system infrastructure;
  - monitor international payment flows not only for balance of payments and anti-money laundering, but also to analyze payment system efficiency, transparency, risks, and consumer protection.

*IMF mission summary as presented in source document.*

### 55.      This detailed assessment of Observance with the BCP is the second external

### _cr08274 - 55.      This detailed assessment of Observance with the BCP is the second external

### Institutional setting
- The assessment was conducted in October 2007 by Keith Bell, World Bank expert, and Walter Zunic, IMF expert.
- The Law on the National Bank of Moldova (NBM) specifies that the NBM, through its Bank Regulation and Supervision Department (BRSD), is responsible for banking supervision in Moldova and is the sole authority for supervising banking institutions licensed under this law.
- The objective of the NBM is to maintain the financial stability of the banking system with a view to protecting the interests of depositors.
- Banking sector size and intermediation:
  - Banking sector assets amount to 54 percent of the GDP.
  - Lending represents 33 percent of GDP.
  - 2004 comparative figures: assets 42 percent of GDP, lending 23 percent of GDP.
- Cash usage, remittances, and financial development:
  - Relatively low level of financial intermediation is partially due to early market development and widespread use of cash.
  - Continuous growth of deposits indicates increased confidence, but cash holdings remain prevalent and are supported by inflows of remittances through official and nonofficial channels.
- Banking sector structure and ownership:
  - There are 15 banks, all universal with broad licenses.
  - Majority resident-owned banks control two third of the banking sector’s assets.
  - Foreign participation in banking sector assets increased from 49 percent in 2004 to 64 percent in 2006.
  - Majority foreign owned banks represent 23 percent of the sector’s total assets.
  - One of the largest banks, with 15 percent of the banking sector assets, is in majority state ownership.
- Dollarization:
  - Banking sector assets and liabilities are highly dollarized.

### Main findings
- Objectives, independence, powers, transparency, and cooperation (CP 1)
  - The NBM Law and the LFI, supplemented by regulations, recommendations, and internal manuals and guidelines, provide a sound basis for banking supervision.
  - Supervisory independence exists in practice.
  - Legal protection for supervisors is absent from the NBM Law and the LFI.
  - An information-sharing mechanism exists via exchange of letters between the NBM and the newly created NCFM; no formal MOU is in place.
  - Participation of the Ministers of Economy and Finance at NBM Council meetings (raised in 2004 FSAP) remains unaddressed in recent amendments; frequency of participation is unclear.
  - A Collaboration Agreement between the NBM and the Center for Combating Economic Crime and Corruption (CCECC) was signed in June 2005 and remains in effect.
- Licensing and structure (CPs 2–5)
  - Licensing infrastructure and process are adequate.
  - Threshold for “significant interest” was reduced to 5 percent from 10 percent in 2005.
  - NBM has striven to obtain necessary shareholder information, with reasonable success, but in one case holders of 27 percent of a licensed bank remain unidentified; other cases have only incomplete information.
  - “Fit and proper” provisions now approximate the EU standard.
- Prudential regulation and requirements (CPs 6–18)
  - Essential elements for effective ongoing prudential regulation and supervision are in place.
  - Deficiencies noted in large exposure limits and connected lending; incomplete owner information hinders exposure analysis.
  - The “Guillotine Law” threatens to limit the NBM’s remedial supervisory powers by subjecting actions to immediate court review.
  - Capital adequacy rules generally conform to the Basel Capital Accord of 1988 but lack a capital charge for market risk except for foreign exchange risk.
  - Banks’ trading portfolios are relatively small and CARs are well in excess of the 12 percent required minimum.
  - NBM has undertaken significant efforts to address weaknesses from the 2004 BCPs assessment in country risk, market risk, liquidity risk, operational risk, and interest rate management.
- Methods of ongoing supervision (CPs 19–21)
  - Supervision combines offsite surveillance and full and limited-scope on-site monitoring.
  - NBM conducts comprehensive annual on-site inspections of all banks; limited-scope inspections are used when warranted.
  - Off-site unit reviews periodic financial information and performs financial analyses of individual banks and the system.
  - NBM should develop means to extract supervisory information on large loans and loans to related parties from its loan database.
  - More explicit powers are needed to extend supervision to bank holding companies or banks’ sister companies for consolidated supervision.
  - With the 2007 Accounting Law, all public interest companies (including banks) will be required to maintain financial statements in accordance with IFRS from January 1, 2009, requiring prompt reworking of NBM reporting formats.
- Accounting and disclosure (CP 22)
  - The 2007 Accounting Law will largely align financial reporting and auditing practices with EU practices upon implementation.
  - NBM should undertake formal discussions with external auditors and banks to facilitate implementation and revise its reporting formats to accommodate IFRS.
- Remedial measures (CP 23)
  - The LFI provides broad remedial powers used by the NBM.
  - If the “Guillotine Law” is enacted unchanged, certain supervisory powers will be curtailed.
- Consolidated cross-border supervision (CPs 24–25)
  - NBM has full authority to supervise domestic banks’ foreign subsidiaries; currently there are no foreign subsidiaries of Moldovan banks.
  - NBM has exchanged letters enabling exchange of supervisory information with regulators in Belarus, Kazakhstan, Romania, and Russia.
  - Foreign banking institutions are subject to similar regulatory requirements as other banks in Moldova.
  - NBM should consider communication mechanisms with “home” supervisors of four western European banks that established subsidiaries in Moldova since the 2004 FSAP.

### Main recommendations (selected, from Table 5)
- CP 1 (Objectives, independence, powers, transparency, and cooperation)
  - CP 1(2): Ensure publication of the BRSD’s objectives is matched with a subsequent report measuring performance against them.
  - CP 1(2): Separate the budget of the BRSD from the overall budget of the NBM.
  - CP 1(4): Amend the “Guillotine Law” to preserve the NBM’s powers to suspend a bank’s activities without requirement for immediate review of the action by the court (see CP 23).
  - CP 1(5): Amend the NBM Law to include legal protection for supervisors.
  - CP 1(6): Set up an agreement for cooperation between the NBM and the NCFM (i.e. above and beyond the exchange of reports).
- CPs 3–4 (Licensing criteria, Ownership)
  - Continue aggressive action to obtain transparency on suitability of banks’ significant, beneficial shareholders, ownership structure and source of initial capital.
- CP 6 (Capital adequacy)
  - Begin revision of reporting formats to accommodate implementation of IFRS consolidated accounting in 2009.
  - Implement a capital charge for market risk.
  - Require pre-payment dividend notification to the NBM.
- CP 7 (Risk management process)
  - Ensure all banks upgrade their risk management policies and processes.
- CP 8 (Credit risk)
  - NBM’s on-site inspectors should ensure banks undertake effective analysis of risk under currently valid, alternative stress test scenarios.
  - NBM should facilitate the banking industry establishing a Credit Registry—to be financed by, owned by and operated solely by financial institutions—and ensure it is operational without delay.
- CP 9 (Problem assets, provisions, and reserves)
  - Consider implementing greater detail by “time buckets” for delinquency reporting (i.e. 30, 60, 90+ days) rather than the 30-60 and 60+ days now in effect.
  - Determine impact of banks’ required implementation of IFRS and particularly use of International Accounting Standards 36 “Impairment of Assets”.
- CP 10–11 (Large exposure limits; Exposures to related parties)
  - Develop a tool to extract and combine detail on large credits from prudential reporting.
  - Continue aggressive action to have banks ascertain links between borrowers and shareholders.
  - Recommend internal control units establish limits covering both deposits accepted and “due from” deposits.
- CP 12 (Country and transfer risk)
  - Ensure accurate implementation of the new NBM recommendation covering off-balance sheet exposures in foreign currency.
- CP 13 (Market risks)
  - Continue to promote adequate policies and practices for risk management and encourage banks to perform effective stress testing covering significant risks.
  - Implement a capital charge on market risk.
- CP 14 (Liquidity risk)
  - NBM’s on-site inspectors should ensure banks undertake effective analysis of risk under currently valid, alternative stress test scenarios.
- CP 18 (Abuse of financial services)
  - Revise NBM’s “Recommendations”/“Regulations” to reflect amended AML legislation.
  - Banks should ensure customers using exchange facilities at more than one branch on the same day for exchanging foreign currency below US$5,000 equivalent are properly identified to ensure transactions do not exceed the legal daily limit.
- CP 19 (Supervisory approach)
  - Introduce an early warning system drawing on information from all pertinent NBM areas.
  - Require banks to notify BRSD promptly of substantive or materially adverse changes (including breach of legal or statutory requirements).
- CP 20 (Supervisory techniques)
  - Develop a tool to extract and combine details on large credits from prudential reporting (see CP 10).
- CP 22 (Accounting and disclosure)
  - Issue “Recommendations”/“Regulations” for implementation of consolidated accounting requirements in 2009.
  - Begin revision of reporting formats to accommodate IFRS consolidated accounting in 2009.
- CP 23 (Supervisors’ corrective and remedial powers)
  - Amend the “Guillotine Law” to preserve the NBM’s powers to suspend a bank’s activities without requirement for immediate court review.
  - Consider revision of statute to provide for an “early remedial action” regime with defined thresholds.
- CP 24 (Consolidated supervision)
  - Revise statute to provide capacity to conduct consolidated supervision.
  - Extend periodic analysis to a bank’s parent or controlling owner and significant “sister” companies.
- CP 25 (Home-host relationships)
  - Formalize contacts with supervisors of western European countries whose banks have a presence in RM.

### Authorities’ response to the assessment
- Authorities are in broad agreement with the BCP assessment and are determined to further improve the legal framework for banking and its supervision, and the supervisory methods.
- Authorities appreciated the assessors’ recognition of progress in bank supervision.
- Authorities noted budget requirements for bank supervision are fully met from the operating budget of the NBM and considered it inconvenient to determine a separate budget for supervisors outside the aggregate.
- Authorities disagreed with the recommendation that the NBM should ensure the setting up a credit registry by the banks (CP 8), contending this is the task for the banking system and not its supervisor.

### Appendix II — Assessment of Basel Core Principles for Systemically Important Payment Systems and Payment System Oversight
- The payment and settlement system assessment was performed as part of the FSAP for Moldova.
- The assessment objective: determine level of observance with the BIS CPSS Core Principles for Systemically Important Payment Systems (CPSIPS) and suggest reforms.
- Assessment focused on the AIPS operated by the NBM, comprising:
  - RTGS for large value and time critical payments.
  - DNS system for low value payments.
- RTGS and DNS usage:
  - RTGS accounts for about 5 percent of transactions and 85–90 percent of the total amount.
  - The NBM requested compliance be assessed for both RTGS and DNS (the latter informally).
- Payment system infrastructure and participants:
  - NBM may organize settlement facilities and is responsible for overseeing payment systems to ensure efficiency.
  - AIPS operates only in domestic currency; foreign exchange transactions use SWIFT and correspondent relations.
  - Moldovan regulations require all domestic interbank payments to be carried out through the AIPS.
  - AIPS participants: 17 participants including 15 commercial banks, the Treasury of the MOF, and the Tiraspol Settlement Centre.
  - Each participant has a current account at the NBM.
  - Commercial banks may open direct correspondent accounts with each other in local currency only for settlement of payment cards and securities market transactions.
- Payment instruments and usage:
  - Cash remains the major payment instrument, particularly for payments among individuals.
  - Banks have introduced internet banking and payment card schemes.
  - 12 commercial banks issue payment cards of international brands (VISA and MasterCard), used mostly for cash withdrawals from automated teller machines.
  - Credit transfers are the major payment instruments among legal entities.
  - Checks are not used in the payment system.

*Source: _cr08274 - 55.      This detailed assessment of Observance with the BCP is the second external*

### 72.      Legal Foundation (CP 1): The payment system legal framework in Moldova is

### _cr08274 - 72.      Legal Foundation (CP 1): The payment system legal framework in Moldova is

### Legal foundation (CP 1)
- The payment system legal framework in Moldova is complete and comprehensive.
- The NBM Law:
  - Stipulates that the NBM may assist banks in organizing facilities for clearing and settlement of interbank payments, issue rules and regulations, and oversee the payments system to achieve its efficient and reliable functioning.
- The LFI includes the basis for opening banks, branches, their liquidation and licensing.
- Electronic digital signatures have legal validity according to the Law on Electronic Documents and Digital Signatures.
- The Law on Insolvency allows only the NBM to initiate bank insolvency procedures, followed by the revocation of the banking license. Hence the zero-hour rule is not applicable.
- The Civil Code of Moldova includes general definitions of netting arrangements.
- Necessary implementation regulations are also in place.

### Understanding and management of risks (CPs 2–3)
- The AIPS has clear rules and procedures for the clearing and settlement of payment instructions; these are properly documented and available to all participants.
- Rules and procedures describe responsibilities of participants and the financial risks to which they may be exposed and how the various risks are monitored and managed.
- The large value payment system RTGS is designed as a pure real time gross settlement system; participants therefore are not exposed to any credit risks.
- Participants have access to real time information regarding their balances at the NBM, their payments, and queues.
- In the DNS system:
  - To limit credit risk exposure, a payment value must not exceed MDL 50,000.
- The queuing system in the RTGS offers multiple options for participants to arrange payments to solve liquidity problems.
- Compulsory reserve requirements:
  - Current compulsory reserve requirements stand at 15 percent for bank liabilities in both local and foreign currencies and these may be used for settlement purposes during the operational day.
- The AIPS is monitored by the NBM and participants in real time.
- Participants are clearly informed of the risks and the consequences of a default.

### Settlement (CPs 4–6)
- Finality in the AIPS is technically and legally achieved.
- RTGS provides real-time settlement.
- DNS has two settlement sessions with T+0 finality.
- RTGS: netting mechanisms are not used.
- DNS measures to ensure timely completion of daily settlements:
  - (i) Mandatory financial acceptance criteria, which should be met before the payment acquires a status “accepted for settlement” (this approach guarantees the full coverage of debit position by liquidity in the RTGS).
  - (ii) The NBM intraday collateralized overdrafts.
  - (iii) Limitation of maximum payment value (MDL 50 000).
  - (iv) Twice a day settlement.

### Security, operational reliability, and contingency arrangements (CP 7)
- Full back-up processing is located outside the main building.
- There are rules for emergency situations and a Business Continuity Plan.
- Business Continuity Plan arrangements are tested annually or on ad hoc basis if changes were made.
- The payment center and the back-up are linked via fiber-optic channel and data replication is organized in hot mode.
- The NBM established special requirements for the organization of the working place in banks, subject to close oversight by the NBM.

### Efficiency and practicality of the system (CP 8)
- In general terms the AIPS is efficient.
- The system operates with modern payment instruments (i.e., electronic credit transfers) and its architecture allows for fully electronic straight through processing for both interbank payments as well as for payments on behalf of third parties.
- RTGS efficiency is supported by:
  - Real time access to information about balances and payments.
  - Queuing mechanism allowing participants to manage payments in queues with first-in-first-out principle, prioritization, and cancellation applicable.
- DNS queue management limitations:
  - Queue management is limited to message cancellation initiated by participants during the collection period.
  - Prioritization and the first-in-first-out principle are not applicable.
- Operational day schedule concerns:
  - The second DNS session ends at 8 pm and there is no time left for submission of rejected payments for execution with the same value date to the RTGS as customer payments cannot be accepted any longer.

### Criteria for participation (CP 9)
- Participation criteria are fair, objective, and publicly available.

### Governance of the payment system (CP 10)
- The NBM has made reasonable progress in developing its oversight capacity in the payment system area, but further improvements are needed, especially in defining the objectives of the oversight and establishing a measurable set of criteria for assessing oversight.

### Recommended actions to improve adherence to Core Principles (selected)
- Management of risks (Reference Principle 3)
  - Prices in the RTGS and the DNS are fixed during the day. According to statistics provided by the NBM, the volume of payments in AIPS is unequally distributed during the day, sharply rising from 12 pm until the end of the day.
  - Considering the steady growth of the volume of payments in AIPS, a new price incentive scheme should be applied by the NBM to smooth the payment flow and attract liquidity early in the day.
- Security and operational reliability (Reference Principle 7)
  - Business continuity plan tests should involve payment system participants to ensure adequate reaction from their side in case of emergency.
- Efficiency and practicality of the system (Reference Principle 8)
  - The NBM has to improve the adherence of the DNS queue management procedures to best international practices. Those procedures must be transparent for the DNS participants.
  - Specifically, by conducting the second settlement in the DNS earlier during the operational day participants would have a chance to settle rejected payments in the same value date in the RTGS.
- Governance of the payment system (Reference Principle 10)
  - The NBM should have well defined oversight objectives, continue to further develop and implement a clear oversight concept, and establish a set of measurable minimum requirements.
  - The Oversight Division should have a direct reporting line with a higher authority (e.g., the vice governor responsible for payment systems) to ensure full separation of operations from the oversight.
  - The NBM should define minimum measurable requirements that the AIPS system has to comply with to ensure its safety and efficiency and change the focus of its oversight.

### Central bank’s responsibilities (selected recommended actions by responsibility)
- Responsibility A
  - Oversight function should be more clearly separated from the operational function. A clear set of minimum requirements for the AIPS should be defined to ensure its safety and efficiency.
  - The scope of oversight should be extended to the securities settlement systems and to the retail area (card systems, remittances).
  - The NBM should prepare a White paper on payment system oversight in the country to redefine the oversight role and discuss the outcomes to the relevant stakeholders in the financial community.
- Responsibility C
  - In order to guarantee the integrity of the payment system infrastructure, the NBM should, at a minimum, extend its oversight over the Securities Settlement System.
  - The NBM oversight powers should also apply to payment systems operating outside the central bank. Hence, it is necessary to start developing the specific arrangements, tools, and the cooperative framework for the oversight of all systems in the country.
  - The NBM should also monitor cross-border flows and the systems/service providers that support them. In this regard, it is suggested that the focus on international remittance be broadened from the traditional areas of balance of payments and money laundering to include payment system issues, in particular issues related to efficiency, transparency, risks, and consumer protection (see the CPSS-World Bank’s General Principles for International Remittance Services).
- Responsibility D
  - A structured cooperative body, such as a National Payments Systems Council, should be created to discuss issues related to further development of the payment infrastructure in Moldova, the systems’ safety and efficiency, oversight aspects, etc.
  - Cooperation with other authorities—and mutual responsibilities, for example in securities settlement area—should be formalized in a MOU.

### Authorities’ response to the assessment
- The authorities were in broad agreement with the CPSIPS assessment.
- They noted that because the DNS cannot be considered systemically important and its requirements may be different from the RTGS, the implementation of a queue management system similar to the RTGS is not desirable.

*Source: _cr08274 - 72.      Legal Foundation (CP 1): The payment system legal framework in Moldova is*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr08274.pdf_