## _cr10148

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---

### Introduction and assessment scope
- Assessment conducted as part of the Financial Sector Assessment Program (FSAP) updated evaluation of the Serbia financial system from October 6 to October 21, 2009.
- Supervisory framework assessed against the BCP methodology issued in October 2006.
- Assessment team: Mr. Miquel Dijkman (World Bank staff) and Mr. Fernand Naert (consultant with the IMF and former CBFA staff).
- Compliance ratings use a four-part system: compliant; largely compliant; materially non-compliant; non-compliant.

### Institutional, market structure and pre-crisis metrics
- Banking sector dominance and structure:
  - Banking industry accounts for 89 percent of the financial sector assets.
  - Total financial assets amount to 71 percent of GDP.
  - 34 banks operate in Serbia: 8 state-controlled banks (representing 15 percent of total financial sector assets), 6 local private banks (8 percent of total financial sector assets) and 20 foreign-owned banks (66 percent of total financial sector assets).
- Nonbank financial institutions (NBFIs) assets represent 11% of the banking sector.
- Pre-2008 balance-sheet characteristics:
  - Capital adequacy in the order of 20 percent.
  - Liquid assets representing more than 40 percent of total assets.
  - Profitability: average return on equity (ROE) amounted to 4.1 percent by 2009H1, compared to 9.3 percent in 2008.
- Regulatory measures pre- and during crisis:
  - Special risk-weights: 125 percent risk-weight on unsecured foreign-currency lending to borrowers with an unmatched foreign currency position; 75 percent risk-weight on foreign-currency lending to borrowers with unmatched foreign currency position but secured by a mortgage on residential property.
  - Limits on gross household loans to core capital: lowered from 200 percent to 150 percent in November 2007; abolished in June 2009.

### Crisis impact and policy response
- Macroeconomic and market events:
  - Late 2008: sharp deterioration in financial outlook, rising sovereign spreads, slowing capital inflows, depreciation of the dinar with high volatility and frequent NBS interventions.
  - Deposit runs: households withdrew some foreign-currency denominated deposits.
  - Credit growth halted and economy entered recession.
- Asset quality:
  - Nonperforming loans (NPLs) increased from 11.3 percent of total loans in 2008 to 16.5 percent in 2009H1.
  - NPLs are more than covered with total provisions.
- Financial Sector Support Program (FSSP) measures:
  - Parent banks committed to maintain exposure at end-2008 levels and provide capital/liquidity support; participating banks to facilitate voluntary conversion of FX and FX-linked loans and partake in diagnostic stress tests.
  - Participating banks granted access to an extended dinar liquidity facility and an FX swap facility.
- Deposit insurance and liquidity support:
  - Deposit insurance coverage raised from EUR 3,000 per private individual depositor per bank to EUR 50,000; list of eligible depositors extended to include sole entrepreneurs and SMEs.
    - Coverage: 99 percent of deposits by number and 90 percent by volume are covered by the Deposit Insurance Fund (DIF).
    - DIF total financial assets: EUR 98.4 million; total insured deposits: EUR 5.4 billion.
  - NBS opened LOLR facilities up to one year at 150 percent of the policy rate to solvent banks against selected liquid collateral.
  - DIF funding capacity limited; no government contingency funding lines of credit; DIF prohibited from using its funds for bank resolution actions like mergers or sale of selected liabilities and assets.
  - Banking Stability law outlining contingency measures awaiting enactment.

### Preconditions for effective supervision and key systemic risks
- Macroeconomic context:
  - NBS introduced inflation targeting by end-2006 and conducts a managed float of the dinar.
  - Headline inflation figures gradually declined to currently around 9 percent y-o-y.
  - Gross public debt currently stands at around 32 percent of GDP.
- Key risks identified:
  - Prolonged external weakness could further deteriorate asset quality and banks’ balance sheets.
  - Recurrence of FX market pressures: depreciating currency increases stress for unhedged borrowers.
- Legal and insolvency weaknesses:
  - Judicial enforcement can take up to 2-3 years to enforce a judgment on collateral.
  - Collective insolvency procedures costly and ineffective; creditor recoveries among the most costly and lowest returns in the region.
- Market discipline and competitiveness:
  - 34 banks in a small, bank-dominated financial system; market discipline appears well-established.
  - Stability of net interest margins despite profitability drop in 2009.

### Aggregate BCP compliance and main findings
- Aggregate BCP ratings reported:
  - Compliant (C) – 7
  - Largely Compliant (LC) – 14
  - Materially Non-Compliant (MNC) – 9
  - Non-Compliant (NC) – 0
  - Not Applicable (N/A) – 0
- Selected detailed findings:
  - BCP 1.1 Responsibilities and objectives: LC — "Supervisory objectives are not stated explicitly."
  - BCP 1.2 Independence, accountability and transparency: LC — "There is a need for capacity building, both in terms of headcount but also in terms of upgrading skills."
  - BCP 6 Capital adequacy: LC — "Capital adequacy requirements and risk weights are conservative. There is scope for aligning the capital requirements framework with that of most EU countries."
  - BCP 13 Market risks: MNC — "Scheduled Basel II implementation as of 2011 makes this an urgent issue."
  - BCP 20 Supervisory techniques: LC — "The main challenge facing the NBS is to focus towards more qualitative assessments (onsite)... NBS needs to step up capacity building for this effort as a priority"
  - BCP 24 Consolidated supervision: MNC — "For the future, NBS is recommended to require formal reporting for financial data and risk profiles on a consolidated basis and to build proper tools for analysis."
  - BCP 25 Home-host relationships: MNC — "The requirement for the NBS to exchange information with domestic tax authorities needs to be revisited and aligned with European practice; this would enable the NBS to sign MOU’s with all significant home supervisors over Serbian banks."

### Methods and techniques for ongoing supervision
- Reporting and analytical framework:
  - Comprehensive reporting requirements provide ample information; NBS uses CAMEL-based methodology for planning and prioritization.
  - NBS compiles individual and aggregate analyses and uses semi-automated analysis system and proprietary exploitation program (enhanced “ACCESS”).
  - Footnote: "The NBS is currently reviewing the possibility to push back Basel II implementation due to the changes in the international environment and legislation."
- Supervision challenges and improvements:
  - Shift onsite supervision emphasis towards more qualitative assessments.
  - Make framework more forward looking by developing a full early warning system.
  - Formalize sector-level analysis procedures and further align reporting with EU practices.
  - Improve cooperation between external auditors and NBS accounting and finance to enhance prudential reporting quality.

### Key thematic assessments and recommendations (select)
- Capital adequacy (CPs 6–18):
  - Minimum CAR is 12 percent; absolute capital minimum of EUR 10 million; core capital must constitute at least 50 percent of the bank’s capital.
  - Special 125 percent risk-weight applied to unsecured foreign currency related lending for CAR purposes.
  - Assessment: Largely compliant.
  - Recommendation: Consider aligning capital requirements framework with most EU countries.
- Problem assets, provisioning and loan classification:
  - Five-class loan classification with provisioning brackets per class: 1-2%, 5-10%, 20-35%, 40-75%, 100% (classes A–E).
  - Divergent interpretations observed; joint case study indicated divergence on 1/3 of loan portfolio; joint impact could increase required provisions by approximately 50% for reviewed portfolio.
  - Assessment: Compliant.
  - Recommendation: Establish more precise criteria for loan classification and clearer provisioning regime.
- Market risk, IRBB, operational risk:
  - Market risk: no specific regulation on other market risk categories; limits for open FX position set at 10% of capital (temporarily relaxed to 20% during crisis). Assessment: Materially Non Compliant. Recommendation: Issue specific regulation, require stress tests and contingency planning.
  - Interest rate risk in the banking book (IRBB): general guidance only. Assessment: Materially non-compliant. Recommendation: Issue specific regulation on IRBB.
  - Operational risk: partial regulation (BCP), limited IT-audit capacity. Assessment: Materially Non Compliant. Recommendation: Prioritize IT-audit capacity building and comprehensive operational risk guidance.
- Liquidity risk:
  - Liquidity ratio thresholds:
    - at least 1.0 if calculated as the average liquidity ratio for all business days in a month;
    - at least 0.9 for more than three days in a row;
    - at least 0.8 if calculated for one business day only.
  - Weights applied to liabilities with no agreed maturity: 40% demand deposits by banks; 20% demand deposits by other depositors; 10% savings deposits; 5% guarantees and other sureties; 20% undisbursed irrevocable credit facilities.
  - As of June 2009: liquid assets account for 42% of total assets and cover 67% of short-term liabilities; loans to deposits around 100 percent in June 2009.
  - Assessment: Largely Compliant.
  - Recommendation: Enhance secondary legislation to ensure other risks’ impact is considered in liquidity strategies and consider upgrading BIS Principles elements into secondary legislation.
- Consolidated supervision and cross-border cooperation:
  - NBS supervises banks, leasing companies, insurance undertakings and pension funds; full consolidation not generally practiced and no systematic consolidated risk analysis.
  - MOUs with Austria, France and Germany not concluded due to mandatory exchange of information with national tax authority raising confidentiality concerns.
  - Assessments: Consolidated supervision — Materially non compliant; Home-host relationships — Materially non compliant.
  - Recommendations: Require consolidated reporting for key elements; revisit domestic tax-information exchange obligations to enable MOUs with remaining home supervisors.
- Supervisory capacity and staffing:
  - Supervisory Department employs some 100 employees; onsite and offsite divisions each employ some 20 staff members; legal division employs 11; research and finance division has 3; supervision of exchange offices and payment systems has 40 (to be split).
  - Offsite division has two special units: Basel II implementation (4) and stress-testing (3).
  - Inspection teams usually consist of some four members; full-scope inspections last five weeks (three weeks onsite and one week for preparation and report writing).
  - Findings: Salary scales typically do not compare well with private sector; mandatory salary cuts in state organs lowered salaries by up to 20%.
  - Assessment: Largely Compliant with staffing/capacity concerns.
  - Recommendations: Increase headcount; upgrade supervisory skills; ensure competitive compensation, career prospects and training; strengthen IT-audit capacity.

### Corrective powers, accounting, AML/CFT and supervisory reporting
- Corrective powers:
  - Toolkit includes written warnings; ordering letters; formal NBS Decisions; appointment of receiver; removal of license; fines; removal/suspension of board/executive members.
  - Assessment: Largely Compliant.
  - Recommendation: Strengthen cooperation with other supervisors and ensure internal procedures do not prevent rapid decisive action.
- Accounting, disclosure and external audit:
  - Serbian accounting legislation in full compliance with IFRS; banks publish IFRS reports; external auditors licensed by NBS and legally obliged to notify NBS when aware of breaches.
  - Assessment: Largely Compliant.
  - Recommendation: Further enhance disclosure to align with Pillar III of Basel II and consider stronger external-auditor certification of prudential reports.
- AML/CFT:
  - Law on AML/CFT (RS Official Gazette No. 20/2009); APML member of Egmont group since 2003; NBS–APML cooperation via MOU.
  - KYC obligation for transactions of EUR 15,000 or more.
  - Assessment: Compliant.
  - Recommendations: Routine staff screenings and consider prohibiting correspondent relationships with non-compliant countries.

### Recommended prioritized action plan (select)
- High priority:
  - Capacity building: increase headcount and upgrade supervisory skills; retain experienced staff through competitive compensation, training and career prospects to support Basel II implementation scheduled for 2011.
  - Problem assets, provisions and reserves: establish more precise criteria for loan classification and provisioning.
  - Home-host relationships: reconsider obligations to exchange information with domestic tax authorities to enable MOUs with Austria, France and Germany.
- Medium term:
  - Issue risk management regulation for market risk, country risk, operational risk and interest rate risk, building on EU regulation and Basel guidance.
  - Shift onsite supervision toward a risk-based approach with greater reliance on qualitative assessments; develop tools, manuals and supervisory skills accordingly.
  - Develop framework for prudential reporting on a consolidated basis referencing EU developments.
  - Consult with accounting and auditing associations to align disclosure and external audit frameworks with EU best practice and enhance cooperation with external auditors.

### NBS response — summary
- NBS "appreciates the recommendations" and considers them "in line with our own assessment and priorities."
- Priority areas highlighted by NBS:
  - Upgrade supervisory skills and retain experienced staff.
  - Improve risk management regulations and supervisory tools to cover all types of risk in more detail.
  - Align regulation and supervisory practices with internationally recognized best practices in line with Republic of Serbia EU integration orientation.
- Actions taken:
  - In 2007 NBS adopted the Basel II Implementation Strategy and Action Plan addressing many shortcomings.
  - NBS adheres to principles of transparency and communication with the industry and monitors international developments to align plans accordingly.
- NBS caveat on home-host cooperation: "this is a two way process and adequate improvement in this area is subject to effort on both sides."

*Source: _cr10148 - Introduction and IMF staff assessment as presented in the provided PDF content.*

### Introduction ...........................................................................................................

### _cr10148 - Introduction ...........................................................................................................

### Introduction
- Assessment conducted as part of the Financial Sector Assessment Program (FSAP) updated evaluation of the Serbia financial system from October 6 to October 21, 2009.
- Supervisory framework assessed against the BCP methodology issued in October 2006.
- Assessment team: Mr. Miquel Dijkman (World Bank staff) and Mr. Fernand Naert (consultant with the IMF and former CBFA staff).

### Information and Methodology used for Assessment
- Key documentation provided by the National Bank of Serbia (NBS) included a self-assessment of compliance with the 25 BCPs completed by the Banking Supervision Department, legal and regulatory framework, and numerous documents from the NBS website.
- Assessors held extensive discussions with NBS banking supervision department staff (on- and off-site division, legal division, Basel II implementation unit), legal department, accounting and finance, international relations department; also met Ministry of Finance and banking institutions’ representatives.
- Assessment of compliance with each principle is qualitative using a four-part system: compliant; largely compliant; materially non-compliant; non-compliant.
  - “Compliant”: all essential criteria generally met without significant deficiencies.
  - “Largely compliant”: only minor shortcomings not sufficient to raise serious doubts about authority’s ability to achieve the objective.
  - “Materially non-compliant”: shortcomings sufficient to raise doubts about the authority’s ability to achieve compliance, but substantive progress has been made.
  - “Non-compliant”: no substantive progress toward compliance has been achieved.
- Ratings are not comparable to 2005 FSAP due to revised methodology (October 2006) raising the bar and adding/redefining criteria.

### Institutional and Macroeconomic Setting and Market Structure-Overview
- Banking sector dominance:
  - Banking industry accounts for 89 percent of the financial sector assets.
  - Total financial assets amount to 71 percent of GDP.
  - Number and composition of banks: 34 banks operate in Serbia — 8 state-controlled banks (representing 15 percent of total financial sector assets), 6 local private banks (8 percent of total financial sector assets) and 20 foreign-owned banks (66 percent of total financial sector assets).
- NBS responsibilities: licensing, regulation and supervision of “scheduled banks”; supervision of insurance companies, voluntary pension funds and leasing companies.
- Nonbank financial institutions (NBFIs): assets representing 11% of the banking sector.
- Legal and regulatory upgrades:
  - 2005 Law on Banks (LOB) envisaged harmonization with international standards, EU Directives and the BCPs.
  - NBS issued regulations requiring banks to set up risk management systems (risk identification, measurement, assessment and mitigation) commensurate with scope, type, and complexity of operations.
  - Specific rules issued on liquidity risk management, capital adequacy requirements, loan classification and provisioning, external auditing and know-your-customer procedures.
  - NBS intensified cooperation with foreign supervisors, though bilateral Memoranda of Understanding (MOU) with a number of important home supervisors remain to be formalized.
- Pre-2008 crisis developments:
  - Rapid expansion of banks’ balance sheets financed primarily by foreign-currency deposits and foreign borrowing.
  - New loans predominantly dinar-denominated but mostly indexed to the euro, increasing borrowers’ exchange rate exposure.
  - NBS introduced special risk-weights: 125 percent risk-weight on unsecured foreign-currency lending to borrowers with an unmatched foreign currency position; 75 percent risk-weight on foreign-currency lending to borrowers with unmatched foreign currency position but secured by a mortgage on residential property.
  - NBS imposed limits on ratio of gross household loans to core capital: lowered from 200 percent to 150 percent in November 2007; abolished in June 2009.
  - Result: Serbian banks among best-capitalized in the region, with capital adequacy in the order of 20 percent.
  - Liquidity: liquid assets representing more than 40 percent of total assets.
  - Profitability: by 2009H1, average return on equity (ROE) amounted to 4.1 percent, compared to 9.3 percent in 2008.

### Crisis impact and policy response
- Global turmoil spillover in late 2008: sharp deterioration in financial outlook, stock market corrections, rising sovereign spreads, slowing capital inflows, depreciation of the dinar amid high volatility and frequent NBS interventions.
- Deposit runs: households withdrew some foreign-currency denominated deposits following rumors of a banking crisis; credit growth halted and economy entered recession.
- Asset quality deterioration:
  - Nonperforming loans (NPLs) increased from 11.3 percent of total loans in 2008 to 16.5 percent in 2009H1.
  - NPLs are more than covered with total provisions.
- Financial Sector Support Program (FSSP):
  - Commitments by parent banks of participating foreign subsidiaries to maintain exposure to Serbia at end-2008 level, provide adequate capital and liquidity support, and have subsidiaries participate in diagnostic stress tests.
  - Participating subsidiaries and local banks required to facilitate voluntary conversion of FX and FX-linked loans into local currency loans, work with NBS on a common loan workout scheme, and facilitate loan restructuring under pre-agreed framework (extension of remaining loan maturity by at least 12 months or 20 percent with reduced monthly payments, or any restructuring lowering monthly payments by at least 20 percent).
  - In return, banks participating in FSSP granted access to an extended dinar liquidity facility and an FX swap facility.

### Preconditions for Effective Banking Supervision
- Macroeconomic context prior to crisis:
  - Several years of solid economic growth driven by buoyant domestic demand, accompanied by increasing external imbalances.
  - NBS introduced inflation targeting by end-2006 and conducts a managed float of the dinar.
  - Headline inflation figures gradually declined to currently around 9 percent y-o-y.
  - Rising fiscal deficits were offset by booming economy; gross public debt currently stands at around 32 percent of GDP.
- Key risks to macroeconomic and financial stability relevant to banking sector:
  - Scenario of prolonged weakness, possibly exacerbated by slow recovery in Serbia’s main trading partners, further deteriorating asset quality and banks’ balance sheets.
  - Recurrence of FX market pressures: depreciating currency increases financial stress for unhedged borrowers, primarily households; FX risk resurfaces as rising credit risk.
- Weaknesses in enforcement and insolvency mechanisms:
  - Collateral and enforcement framework evolving but uneven; complicates restructuring, leads to delays and lower recoveries.
  - Some collection mechanisms (e.g., blocked account process) can cause rapidly escalating blockages of company current accounts and immobilize corporate activity.
  - Collective procedures for voluntary dissolution and court-supervised insolvency are still costly and ineffective.
  - Judicial enforcement can take up to 2-3 years to enforce a judgment on collateral.
  - Creditor recoveries in insolvency process among the most costly and yield the lowest returns in the region.
- Market discipline and competitive environment:
  - Market discipline seems well-established; 34 banks operating in a small, bank-dominated financial system.
  - Stability of net interest margins despite large drop in profitability in 2009.
  - Banking regulation and supervisory practices do not discriminate between categories of banks, ensuring a level playing field.
- Crisis-era enhancements to crisis management framework:
  - Additional liquidity facilities for banks participating in the FSSP.
  - NBS opened LOLR facilities up to one year at 150 percent of the policy rate to solvent banks against selected liquid collateral.
  - Deposit insurance coverage raised from EUR 3,000 per private individual depositor per bank to EUR 50,000; list of eligible depositors extended to include sole entrepreneurs and SMEs.
    - Coverage: 99 percent of deposits by number and 90 percent by volume are covered by the Deposit Insurance Fund (DIF).
    - DIF total financial assets: EUR 98.4 million; total insured deposits: EUR 5.4 billion.
    - DIF funding capacity limited; no government contingency funding lines of credit in place.
    - DIF prohibited from using its funds for bank resolution actions like mergers or sale of selected liabilities and assets.
  - Banking Stability law outlining legal framework for contingency measures awaiting enactment.

### Main Findings
- Overall progress since previous FSAP:
  - Considerable progress toward enhanced compliance with the BCPs following the 2005 LOB and new regulations.
  - Current assessments: “compliant” with 9 BCPs, “largely compliant” with 13, and “materially non-compliant” with 8.
  - Overall outcome corresponds to an overall “largely compliant” score.
- Remaining challenges:
  - International cooperation: formalization of cooperation with important home supervisors via MOUs remains incomplete; main impediment is mandatory exchange of information with national tax authority raising confidentiality concerns for home authorities.
  - Strengthening supervision on risk management beyond credit risk: need to upgrade regulatory framework for market risk, country risk, operational risk and interest rate risk even if presently of limited relevance.
  - Urgency intensified by Basel II implementation scheduled for 2011 and expected growth and complexity of the financial system.
- Specific supervisory and regulatory findings:
  - Objectives, independence, powers, transparency and cooperation (CP1):
    - Legal framework improved by LOB; NBS functionally independent; staffing levels seem adequate for current responsibilities.
    - Importance of capacity building and retention of experienced staff; need for competitive compensation, training and promotion.
  - Licensing and structure (CP 2–5):
    - LOB improved licensing process and framework for transfer of significant ownership; licensing process split in two stages; NBS can withdraw a bank’s license if original conditions no longer exist.
    - Threshold levels for supervisory approval for transfer of significant ownership lowered to align with best practices.
    - LOB spells out clear limits on maximum investments banks may undertake.
    - Framework does not explicitly address acquisition of non-bank financial institutions.
  - Prudential regulation and requirements (CPs 6–18):
    - Capital adequacy framework conservative by regional standards and broadly aligned with international sound practice; seems adequate given current sector structure and operations.
    - Need to upgrade regulatory framework beyond credit risk; new regulations being prepared as part of Basel II preparations.
    - Regulatory framework for asset classification and provisioning: clear and prudent regarding number of overdue days, but qualitative elements and formulation of brackets rather than minimum provisioning levels create interpretation differences between banks and NBS with potentially far-reaching implications.
    - Suggestion: enhancement of the compliance function regarding governance requirements.
  - Methods of ongoing banking supervision (CPs 19–21):
    - (Assessment text transitions here to detailed assessment; see detailed sections for further evaluations.)

*Source: _cr10148 - Introduction (IMF assessment document).*

### 23. Methods and techniques for ongoing supervision appear broadly adequate given the

### 23. Methods and techniques for ongoing supervision appear broadly adequate given the

### Ongoing supervision: findings
- Comprehensive reporting requirements give the NBS ample information on all relevant aspects of the banking sector.
- Through analysis of individual data and compilation of aggregate figures the NBS has a good overview of the state of affairs at individual banks as well as the banking sector at large.
- The NBS uses a capital adequacy, asset quality, management quality, earnings and profitability, liquidity, and sensitivity to market risk (CAMEL)-based methodology, which is also used as a planning and prioritization tool.
- Footnote: "The NBS is currently reviewing the possibility to push back Basel II implementation due to the changes in the international environment and legislation."

### Supervision challenges and recommended improvements
- Shift onsite supervision emphasis towards more qualitative assessments.
- Make the framework more forward looking, e.g. by developing a full early warning system.
- Build on coordinated EU efforts within the framework of Basel II implementation.
- Further formalize policies and procedures for sector-level analysis.
- Enhance prudential reporting quality by improving cooperation between external auditors and the accounting and finance department of the NBS.
- Further align reporting requirements with EU practices.

### Accounting and disclosure (CP 22): findings and recommendations
- Serbian accounting legislation has been brought in full compliance with IFRS standards.
- Bank accounts are audited and certified by external auditors recognized by the NBS; external auditors are legally obliged to notify the NBS when they become aware of breaches of laws or NBS regulations.
- Banks must publish qualitative and quantitative information on risk exposures and/or risk management strategy according to IFRS 7.
- Recommendation: Further enhancements to bring the framework into full compliance with international standards stipulated in Pillar III of Basel II.

### Corrective and remedial powers of supervisors (CP 23): findings and recommendations
- Corrective measures and sanctioning powers appear well-established.
- Available framework consists of:
  - written warnings;
  - ordering letters;
  - a formal NBS Decision to eliminate irregularities;
  - appointment of receiver;
  - removal of the license of the bank.
- Framework expansion in progress: enhanced responsibility and authority for receivers, including capacity to impose a temporary moratorium.
- NBS authority also includes imposing fines and removing/suspending members of the Board of Directors and of the Executive Board.
- NBS observes the principle of proportionality when imposing measures.
- Main priorities: strengthen cooperation with other supervisors (domestic and international) and ensure internal procedures do not prevent speedy decisive action in the face of serious irregularities.

### Consolidated and cross-border supervision (CPs 24-25): findings and recommendations
- NBS supervises banks, leasing companies, insurance companies and pension funds, enabling consolidated supervision over banking groups whose controlling entity is established in Serbia.
- NBS exercises due diligence on shareholder structures, transparency, and potential supervisory impact.
- Serbian law requires publication of consolidated statements based on standards inspired by international practice; possibility to exclude minor entities from consolidation and limited impact of subsidiaries reduce the scope of this requirement.
- NBS does not systematically analyze consolidated risk position; supervisory requirements for consolidated reporting can be improved.
- NBS proactive internationally: signed regional and bilateral MOUs, participates in supervisory colleges, conducted joint inspections with foreign supervisors.
- Shortcoming: NBS prevented from signing MOUs with three important EU home supervisors due to obligations on domestic information exchange with the tax authorities.
- Recommendation: reconsider the requirement to exchange information with domestic tax authorities to enable MOUs with Austria, France and Germany.

### Summary compliance with the BCPs — key items
- Aggregate: Compliant (C) – 7, Largely Compliant (LC) – 14, Materially Non-Compliant (MNC) – 9, Non-Compliant (NC) – 0, Not Applicable (N/A) – 0
- Selected detailed findings (as reported):
  - BCP 1.1 Responsibilities and objectives: LC — "Supervisory objectives are not stated explicitly."
  - BCP 1.2 Independence, accountability and transparency: LC — "There is a need for capacity building, both in terms of headcount but also in terms of upgrading skills."
  - BCP 6 Capital adequacy: LC — "Capital adequacy requirements and risk weights are conservative. There is scope for aligning the capital requirements framework with that of most EU countries."
  - BCP 13 Market risks: MNC — "Scheduled Basel II implementation as of 2011 makes this an urgent issue."
  - BCP 20 Supervisory techniques: LC — "The main challenge facing the NBS is to focus towards more qualitative assessments (onsite)... NBS needs to step up capacity building for this effort as a priority"
  - BCP 24 Consolidated supervision: MNC — "For the future, NBS is recommended to require formal reporting for financial data and risk profiles on a consolidated basis and to build proper tools for analysis."
  - BCP 25 Home-host relationships: MNC — "The requirement for the NBS to exchange information with domestic tax authorities needs to be revisited and aligned with European practice; this would enable the NBS to sign MOU’s with all significant home supervisors over Serbian banks."

### Recommended action plan — priority items (selected)
- High priority:
  - Capacity building: increase headcount and upgrade supervisory skills; retain experienced staff through competitive compensation, training opportunities and career prospects to support Basel II implementation scheduled for 2011.
  - Problem assets, provisions and reserves: establish a more precise set of criteria for loan classification and provisioning that is clear, transparent and acceptable to both banks and supervisors.
  - Home-host relationships: reconsider obligations to exchange information with domestic tax authorities to clear the way for concluding MOUs with Austria, France and Germany.
- Medium term:
  - Issue risk management regulation for market risk, country risk, operational risk and interest rate risk, building on EU regulation and Basel guidance.
  - Shift onsite supervision toward a risk-based approach with greater reliance on qualitative assessments; develop tools, manuals, and supervisory skills accordingly.
  - Develop a framework for prudential reporting on a consolidated basis, referencing EU developments.
  - Consult with accounting and auditing associations to align disclosure and external audit frameworks with EU best practice and enhance cooperation with external auditors to enable more systematic certification of prudential reports.

*Source: IMF staff assessment as presented in the provided PDF content.*

### 31. The following response was received from the NBS: “The National Bank of Serbia

### _cr10148 - 31. The following response was received from the NBS: “The National Bank of Serbia

### NBS response — summary of stance and actions
- The National Bank of Serbia (NBS) "appreciates the recommendations, considers them as very valuable and, in general, in line with our own assessment and priorities for the forthcoming years."
- Priority areas the NBS highlights:
  - "Necessity to further upgrade supervisory skills in terms of number of supervisors and their expertise, as well as to provide for adequate framework for retaining experienced staff."
  - "Risk management regulations, as well as internal supervisory tools and manuals, need to be additionally improved in order to cover all types of risk in more details."
  - Commitment to "aligning both regulation and supervisory practices with internationally recognized best practices in line with strategic orientation of the Republic of Serbia to integration in EU."
- Actions taken:
  - "During the year 2007 the National Bank of Serbia adopted the Basel II Implementation Strategy and Action Plan and this project addresses most of the shortcomings identified in the assessment."
  - The NBS "upholds to principles of full transparency and communication with the industry" in this process.
- Observations and caveats from the NBS:
  - "We are closely observing the most recent developments and changes in the international standards and principles, triggered by the recent financial crisis, and we are aligning our plans and actions with them."
  - "The priorities in developing regulations and supervisory tools for risk management categories are based on the assessment of their materiality for Serbian banking sector."
  - On home-host cooperation: "the National Bank of Serbia is participating in all initiatives from the host supervisors, and continuously initiates communication and information sharing. However, this is a two way process and adequate improvement in this area is subject to effort on both sides."

### Detailed assessment — Principle 1 (overview)
- Principle title: "Objectives, autonomy, powers, and resources."
- Key descriptive points:
  - The 2005 Law on Banks "redressed a number of weaknesses mainly related to legal powers and protection and hence greatly contributed to supervisory empowerment."
  - Remaining areas for attention: "staffing autonomy, international cooperation and the lack of explicit objectives for supervision."

### Principle 1(1) — Responsibilities and objectives
- Legal framework:
  - "The 2005 Law on Banks and the Law on the NBS constitute the primary legal framework and clearly define the NBS’s responsibility in the area of banking, insurance, leasing company and voluntary pension funds."
  - "The Law on Banks establishes the NBS’s authority to conduct supervision and impose remedial actions (Art 9, Law on Banks)."
  - Secondary legislation (NBS "Decisions") spells out prudential and corporate governance requirements in greater detail.
- Objectives:
  - "The NBS has not issued official objectives for supervision."
  - "Price stability is the primary objective of the NBS, while the secondary objective is to maintain financial stability."
  - In practice, "supervision is understood to support the second objective of the NBS, with the NBS performing supervision of safety and soundness and legal compliance of activities of banks (Art 9)."
- Assessment: Largely Compliant
- Comment/recommendation:
  - "It is recommended that the NBS is more explicit in this regard, as the identification of overarching objectives provides an anchor for the advancement of future supervisory policies and practices."
  - Example objectives mentioned: "depositor protection, or a stable and efficient financial sector."

### Principle 1(2) — Independence, accountability and transparency
- Progress since previous FSAP:
  - "The NBS has made major strides in establishing its supervisory authority, both with regard to the sector and to the Government."
  - NBS staff indicated "Government interference in supervisory practices is entirely absent and that the supervisory department enjoys budgetary autonomy."
- Staffing and resources:
  - "The Supervisory Department currently employs some 100 employees, of who some 20 are engaged in supervision of foreign exchange houses."
  - "It can also hire additional staff after the NBS’s Executive Board clearance."
  - "The NBS’s Executive Board members can only be removed from office during their term for reasons specified in the Law on NBS (Art 30)."
  - "Supervision does not have specific reporting requirements vis-à-vis Parliament, but a section on supervision is included in the general NBS reporting to Parliament."
- Areas for attention and recommendations:
  - "A number of areas for attention still exist. NBS’s banking supervision staffing levels seem adequate given the current stage of financial development, although there are staff shortages in a number of specialist areas, notably IT and auditing."
  - "Staffing constraints are likely to become more pressing over the next years as the preparation of Basel II implementation requires a shift in emphasis to qualitative assessment of organization, systems, processes, procedures and manuals."
  - Recommended priority: "capacity building for the Banking Supervisory Department, both in quantitative and in qualitative terms."
  - Rationale: "This is necessary in view of the expected future growth and increasing complexity of the Serbian financial sector and the challenges posed by the implementation of international regulations and standards."
  - "The capacity of the NBS to attract and retain qualified staff not only depends critically on the competitiveness of its remuneration regime but also on the career prospects that it can offer to its staff."
  - "The NBS intends to hire additional staff in" [text ends].

*Source: IMF staff report excerpt and NBS response contained in the provided document.*

### 2010. Although the NBS claims that it doesn’t experience major difficulties in retaining

### _cr10148 - 2010. Although the NBS claims that it doesn’t experience major difficulties in retaining

### Staffing and capacity
- Findings:
  - Salary scales typically do not compare well with the private sector; mandatory salary cuts in state organs lowered salaries by up to 20%.
  - NBS brought a case to court arguing independence; awaiting court rule.
  - Onsite and offsite divisions each employ some 20 staff members; legal division employs 11; research and finance division has 3; supervision of exchange offices and payment systems has 40 (to be split).
  - Offsite division has two special units: Basel II implementation (4) and stress-testing (3).
  - Inspection teams usually consist of some four members; full-scope inspections last five weeks (three weeks onsite and one week for preparation and report writing).
- Assessment: Largely Compliant (overall staffing/capacity concerns noted).
- Recommendations:
  - Prioritize capacity building for the Banking Supervisory Department by increasing headcount and investing in staff skills.
  - Ensure compensation packages are competitive and provide career perspective and training opportunities.
  - Strengthen IT-audit capacity within onsite division; address shortages of specialists.

### Legal framework, powers and protections
- Findings:
  - Law on Banks (Section 2) designates NBS as sole authority for granting/withdrawing banking licenses and setting prudential standards; secondary legislation (“Decisions”) details requirements.
  - NBS can make ad hoc information requests (Art 102) and inspect related legal entities.
  - Art 112 allows remedial actions; toolkit includes written warnings, ordering letter, orders, receivership, revocation of operating licenses.
  - Article 121 provides legal protection to NBS employees except for intentional acts or extreme negligence; reimbursement of representation expenses.
  - Receivers acting on NBS’s behalf currently lack separate legal coverage.
- Assessments:
  - Legal framework: Compliant.
  - Legal powers: Compliant.
  - Legal protection: Largely compliant.
- Recommendations:
  - Amend Law on Banks to specify NBS pays upfront for legal representation costs for staff.
  - Enhance legal protection for receivers.

### Cooperation and information exchange (domestic and international)
- Findings:
  - Art 65 of Law on NBS obliges cooperation with foreign and domestic supervisory bodies.
  - Domestic agreements exist with administration for AML prevention, bankers association, Deposit Insurance Agency (DIA), tax administration, securities commission, Belgrade Stock Exchange, commission for protection of competitions; MoF, NBS and DIA concluded a national MOU.
  - Numerous regional and bilateral MOUs with foreign supervisors largely follow an EU template; however MOUs not yet reached with Austria, France and Germany.
  - Mandatory exchange of information between NBS and national tax authority raises confidentiality concerns with home supervisors.
- Assessment: Materially non-compliant.
- Recommendations:
  - Revisit obligation to exchange information with national tax authority to enable formal cooperation with remaining home country supervisors and promote banks’ willingness to share information.

### Permissible activities and use of the word “bank”
- Findings:
  - “Bank” defined in Law on Banks as joint stock company headquartered in the Republic of Serbia with NBS license performing deposit and credit activities (Art 4, Art 5, Art 6).
  - Use of the word “bank” prohibited for non-bank institutions.
- Assessment: Compliant.

### Licensing and fit-and-proper processes
- Findings:
  - Licensing split into two stages (Art 15–18). Preliminary approval requires detailed business plan, owner statement capital will be paid in, proof of stable income of effective shareholders, fit and proper check for proposed boards, three-year business plan, risk management plan, and home supervisory approval (if applicable).
  - Operating license requires proof capital effectively paid in and that staffing, external auditing and housing requirements are met.
  - Art 130 enables NBS to withdraw license if original conditions no longer exist.
- Assessment: Compliant.
- Comment: Importance of internal coordination within NBS; Banking Supervision Department involved in business plan assessment.

### Transfer of significant ownership and thresholds
- Findings:
  - Definitions:
    - Significant participation: 20 percent or more of voting rights or capital, or ability to exercise influence.
    - Controlling participation: 50 percent or more of voting rights or capital, or ability to elect at least half of board members, or dominant influence.
  - Prior NBS approval required if planned acquisition exceeds 5% of voting rights; ladder of thresholds: 5-20 percent, over 20-33 percent, over 33-50 percent and over 50 percent.
  - Exemptions include inheritance, legal succession or other acquisition independent of will (Art 100).
  - NBS may nullify earlier supervisory clearance (Art 98).
- Assessment: Compliant.

### Review of major acquisitions and cross-sector investments
- Findings:
  - Art 34: investment of a bank in a single non-financial sector person may not exceed 10% of bank’s capital; total investments in non-financial persons and fixed assets may not exceed 60% of bank’s capital.
  - Banks may only establish/acquire subordinated companies in financial sector after NBS consent (Art 124).
  - Art 133 sets criteria for bank acquisitions: financial resilience, organizational capacity to handle risks, economic rationale and competition impact.
  - Shortcoming: supervisory approval process explicitly addresses acquisitions of banks but not explicitly acquisitions of non-bank financial institutions (insurance, pension funds, brokers, leasing).
- Assessment: Largely compliant.
- Recommendation: Broaden criteria to include acquisition of non-bank financial persons.

### Capital adequacy
- Findings:
  - Art 23 authorizes NBS to set Capital Adequacy Requirements (CAR); minimum CAR is 12 percent.
  - Absolute capital minimum of EUR 10 million.
  - Core capital must constitute at least 50 percent of the bank’s capital.
  - Detailed definitions of Tier 1 and supplementary capital components and specified deductions preserved exactly in legislation (see source).
  - Special 125 percent risk-weight applied to unsecured foreign currency related lending for CAR purposes; housing loan risk weights conservative; highest risk weights for loans to banks and governments lower than CRD countries.
  - Growth limits on lending applied since end-2007: first at 150 percent, now at 200 percent of core capital.
  - Serbian banks had capital adequacy around 20 percent at onset of financial crisis.
  - NBS aims for full Basel II implementation as of January 2011.
- Assessment: Largely compliant.
- Recommendation: Consider aligning capital requirements framework with most EU-countries to reduce supervisory arbitrage.

### Risk management processes
- Findings:
  - Law on Banks and Decision on Risk Management require boards to define and supervise risk policy; banks must have independent risk management function.
  - Need for further regulations/guidance for IRBB, market risk and specific operational risk aspects.
  - Onsite examinations focus on risk management function; need for more qualitative supervisory approaches.
- Assessment: Materially non-compliant.
- Recommendations:
  - Issue regulations/guidance for all risk categories beyond credit and liquidity risk.
  - Build supervisory capacity to perform qualitative assessments.

### Credit risk
- Findings:
  - Credit risk is the main banking risk category in Serbia; regulation requires comprehensive credit risk arrangements.
  - Detailed reporting on asset classification and provisioning facilitates timely monitoring.
  - NBS’s classification and provisioning requirements are prudent; limits on consumer credit-capital ratio and increased risk weights for unhedged unsecured foreign currency lending used to slow credit growth.
- Assessment: Compliant.
- Recommendation: Monitor banks’ strategies/practices regarding restructuring and rescheduling loans.

### Problem assets, provisioning and loan classification
- Findings:
  - Classification of loans in five categories; interest accrual allowed until payment arrears exceed 90 days.
  - Thresholds for past-due days: 30, 60, 90 and 180 days.
  - Qualitative factors affecting classification include collateral quality (adequate, acceptable, insufficient), borrower financial position (benchmarks: mortgage loans 30 percent debt service/income; total exposure 50 percent), restructuring/rescheduling (downgrade by at least one category), foreign currency loans (automatic downgrade; unhedged unsecured FX loans subject to 125% CAR risk-weight), absence of recent financial information.
  - Provisioning brackets per class: 1-2%, 5-10%, 20-35%, 40-75%, 100% (classes A–E).
  - Judgmental elements and broad provisioning brackets create scope for divergent interpretations; NBS–bank case study showed divergence on 1/3 of loan portfolio; joint impact could increase required provisions by approximately 50% for reviewed portfolio.
  - IFRS reporting excludes provisioning for expected losses; prudential reporting is separate and submitted quarterly electronically.
- Assessment: Compliant.
- Recommendations:
  - Consider establishing more precise criteria for loan classification and clearer provisioning regime.
  - Reconsider automatic downgrading of exposures in foreign currency given higher risk weights, weighing potential for “forex-induced credit risk”.

### Large exposures and concentration limits
- Findings:
  - Large exposures defined as exposures >= 10% of bank’s capital.
  - Ceiling for exposures to a single person or group: 25% of bank’s capital.
  - Art 33 prescribes a range of 400% and 800% of bank’s capital within which NBS can set maximum total large exposures in its bylaw.
  - NBS can flexibly define groups of connected counterparties (Art 2).
  - NBS lacks necessary information to highlight geographical concentrations.
- Assessment: Compliant.
- Recommendation: Upgrade reporting to allow highlighting geographical portfolio concentrations.

### Exposures to related parties
- Findings:
  - Law on Banks defines related parties broadly (subsidiaries, affiliates, parties under control, key players’ direct business interests, family members).
  - Art 37 forbids granting more favorable conditions to related parties.
  - Reporting requirements include related party exposures; NBS definition is flexible, which may allow interpretation differences.
  - Limits: 5% of capital to single related party; aggregate exposures to related parties may not exceed 20% of bank’s capital (Art 33).
  - Prior board approval required for loans to related parties except those collateralized by high quality debt securities or linked deposits.
- Assessment: Largely Compliant.
- Recommendation: Issue additional guidance clarifying which parties are considered related to reduce interpretation differences.

### Country and transfer risk
- Findings:
  - Country risk included in Decision on Risk Management; banks must define limits by borrower’s country of origin or region.
  - In practice, country risk receives limited supervisory attention; mostly left to banks to define limits and provisioning.
- Assessment: Materially Non Compliant.
- Recommendation: Issue secondary legislation specifying minimal supervisory requirements for managing country risk.

### Market risk
- Findings:
  - Market risk defined in Decision on Risk Management; NBS distinguishes exchange rate risk and other market risks.
  - Limits for maximum open foreign currency position: 10% of capital (temporarily relaxed to 20% during crisis).
  - No specific regulation on other market risk categories; no requirement for stress tests and contingency planning for market risk.
  - Model validation difficult due to lack of data and IT specialists; subsidiaries largely use parent banks’ models with required local adaptations.
- Assessment: Materially Non Compliant.
- Recommendations:
  - Issue specific regulation on market risk.
  - Enhance supervisory assessment of appropriateness of limits and require stress testing and contingency planning.

### Liquidity risk
- Findings:
  - Liquidity explicitly mentioned in Law on Banks (Art 30); Decision on Liquidity Risk Management requires planning and monitoring and internal audit checks.
  - Liquidity ratio calculation and thresholds:
    - at least 1.0 if calculated as the average liquidity ratio for all business days in a month;
    - at least 0.9 for more than three days in a row;
    - at least 0.8 if calculated for one business day only.
  - Weights applied to liabilities with no agreed maturity: 40% demand deposits by banks; 20% demand deposits by other depositors; 10% savings deposits; 5% guarantees and other sureties; 20% undisbursed irrevocable credit facilities.
  - Off-balance sheet receivables and classified receivables in “loss” and “doubtful” excluded from receivables in ratio.
  - As of June 2009: liquid assets account for 42% of total assets and cover 67% of short-term liabilities; loans to deposits around 100 percent in June 2009.
  - Banks must inform supervisor of shortfalls within one business day. As of July 1, 2009 banks required to have liquidity contingency plans.
  - Liquidity tested in October (bank run) with almost 20 percent of household savings deposits withdrawn; more than half of withdrawn deposits returned.
- Assessment: Largely Compliant.
- Recommendation: Enhance secondary legislation to ensure impact of other risks is considered in banks’ liquidity strategies; consider upgrading BIS Principles for Liquidity Risk Management elements into secondary legislation.

### Operational risk
- Findings:
  - Partial regulation exists, notably on business continuity planning (BCP); no comprehensive operational risk guidance.
  - NBS monitors implementation of BCP in onsite inspections, but effectiveness hampered by absence of adequate IT-audit capacity.
  - Banks must inform NBS about major incidents potentially affecting business continuity or operational integrity or involving potential losses over certain threshold.
  - Regulations on outsourcing broadly in line with essential criterion 8 but could be upgraded (e.g., CEBS guidance alignment).
- Assessment: Materially Non Compliant.
- Recommendation: Prioritize capacity building in onsite division, especially IT-audit skills, to fully assess operational risk management.

### Interest rate risk in the banking book (IRBB)
- Findings:
  - General guidance in Decision on Risk Management; NBS distinguishes repricing/maturity mismatch, base risk and optionality risk.
  - Banks required to set strategy, loss limits and procedures; NBS monitors via onsite inspections and reporting.
  - Banks required to periodically perform limited scenario testing for IRBB impact.
- Assessment: Materially non-compliant.
- Recommendation: Issue specific regulation on IRBB to provide clear guidance.

### Internal control and audit
- Findings:
  - Art 82 contains governance standards; Art 85 requires independent internal audit function with defined responsibilities and access.
  - Internal audit independence is required but no explicit requirement ensuring full access to outsourced functions.
  - Audit committee equivalent (Committee for Monitoring Business Activities) requires only one independent director; not fully aligned with international practice.
  - Compliance function defined (Art 83) but scope should be broadened to cover all domains exposing bank to reputational risk.
- Assessment: Largely compliant.
- Recommendations:
  - Align scope of compliance function with international best practice.
  - Enhance reporting line of internal audit by requiring an audit committee in line with international standards.

### Abuse of financial services, AML/CFT
- Findings:
  - Law on AML and CFT ("RS Official Gazette" No. 20/2009) is legal framework; APML (FIU) member of Egmont group since 2003.
  - MOU between NBS and APML enables exchange of relevant information; cooperation well-established.
  - Banks obliged to KYC for transactions of EUR 15,000 or more; Decision on KYC covers client acceptability, risk classification, customer due diligence, AML/CFT risk management and training.
  - Compliance officers required (Art. 39 AML/CFT Law) with direct reporting to management and legal protections.
  - Loro correspondent relationships subject to enhanced due diligence; specific documentation required, including written statements regarding banking license, supervision and shell-bank status (Art 29 AML/CFT Law).
- Assessment: Compliant.
- Recommendations:
  - Require banks to conduct screenings of new staff as routine.
  - Consider prohibiting correspondent banking relationships with non-compliant countries altogether.

### Supervisory approach, sector analysis and macroprudential tools
- Findings:
  - Comprehensive reporting and CAMEL-based methodology in use; scenario analysis and cooperation within NBS for adverse scenarios; early detection of consumer credit risks.
  - Semi-automated analysis system and proprietary exploitation program (enhanced “ACCESS”).
  - Portfolio managers coordinate supervisory approach, draft quarterly reports, propose remedial measures and act as primary contact points.
  - Need to develop full early warning systems to make approach more forward looking.
- Assessment: Largely compliant.
- Recommendation: Formalize sector-level analysis procedures and develop full early warning system.

### Supervisory techniques, onsite and offsite supervision
- Findings:
  - BSD organized in four divisions; inspection cycle for full scope inspections on three-year cycle.
  - Inspection manual under review to shift emphasis to qualitative assessments for Basel II.
  - External auditors’ modest contribution increases onsite workload verifying prudential reporting.
  - Average procedure for imposing corrective actions takes some two weeks due to checks and balances.
- Assessment: Largely Compliant.
- Recommendations:
  - Strengthen capacity building in both onsite and offsite divisions; address budgeting, career planning, salary structure and education opportunities.
  - Provide IT-audit capacity to enable risk-based approach and qualitative assessments.
  - Shift onsite focus from compliance checking to qualitative assessment under Basel II.

### Supervisory reporting
- Findings:
  - Comprehensive reporting regime based on Art 101; quarterly cycle for structural analysis and detailed CAR monitoring; monthly reporting on balance sheet, P/L, cash-flow; daily reporting for liquidity and forex-exposure.
  - Temporary special ad hoc reporting required in special circumstances.
  - Reporting submitted electronically with automated internal consistency tests and manual probability checks; automated analysis tool produces standardized reports.
  - Lack of regular certification by external auditors of prudential reporting; prudential reporting quality is assessed mainly during inspections every two to three years on average.
- Assessment: Largely Compliant.
- Recommendations:
  - Ensure reliability of reporting through more regular certification, cooperating with external auditors.
  - Consider redesigning reporting along EU practices (e.g., FINREP/COREP) to minimize burden while retaining content.

### Accounting, disclosure and external audit
- Findings:
  - Serbian accounting legislation fully compliant with IFRS; banks publish IFRS financial reports and disclosures.
  - Annual reports deposited at NBS and published on banks’ websites; project to deposit reports at Ministry of Economic Affairs and enhance publication obligations as part of Basel II (Pillar III).
  - External auditors licensed by NBS; NBS approves appointment and can request revocation; NBS receives auditors’ reports and may require specific verifications.
- Assessment: Largely compliant.
- Recommendations:
  - Enhance disclosure requirements to fully align with Basel II international standards.
  - Update NBS instruction for bank accounting to align with best practice.
  - Discuss with audit profession a joint paper on specific audit methodology for banks and explore modalities for external auditors’ contribution to supervisory process (e.g., periodic certification of prudential reports).

### Corrective and remedial powers of supervisors
- Findings:
  - NBS corrective toolkit includes written warnings, ordering letters, formal Decisions, appointment of receiver, license removal (Art. 110–120); fines under Art. 137–141.
  - NBS can remove/suspend board/executive members (Art. 118), order capital increases, restrict activities, rationalize organizational structure or suspend dividend payouts (Art. 116).
  - Principle of proportionality and consideration of systemic importance apply (Art. 120).
  - In practice, NBS mostly uses ordering letters; has never withdrawn a license and only once appointed a receiver.
- Assessment: Largely Compliant.
- Recommendations:
  - Strengthen cooperation with other supervisors domestically and internationally.
  - Ensure internal procedures do not prevent rapid decisive action in face of serious irregularities.

### Consolidated supervision
- Findings:
  - NBS conducts consolidated supervision for groups controlled in Serbia (Art. 122); supervises banks, leasing companies, insurance undertakings and pension funds.
  - Full consolidation of all entities not generally practiced; no comprehensive supervisory requirements for consolidated reporting and no systematic consolidated risk analysis or consolidated capital requirements.
  - Strengthening consolidated reporting would improve enforcement of large exposure and related party limits.
- Assessment: Materially non compliant.
- Recommendations:
  - Require proper consolidated reporting for key elements (CAR, risk measurement, provisioning, risk concentration).
  - Establish procedures within offsite division for consolidated analysis and management reporting.

### Home-host relationships and cross-border cooperation
- Findings:
  - Majority of Serbian banks are foreign-owned subsidiaries; Serbia does not allow branches by foreign banks.
  - Bilateral MOUs with most regional banking supervisors; MOUs pending/held with France, Germany and Austria due to NBS obligation to share information with national tax authority.
  - NBS proactive in supervisory colleges and joint inspections; about three joint onsite inspections have been performed.
  - NBS informs home supervisors ad hoc of onsite inspections and is open to their participation.
- Assessment: Materially non compliant.
- Recommendations:
  - Revisit legal provision on cooperation in fiscal matters to enable formal MOU agreements with all relevant home supervisors.
  - Proactively enhance information exchange with home supervisors, invite consultative participation in inspection planning, and consider regular exchanges of periodic analysis and onsite findings to build trust.

*Source: _cr10148 - 2010. Although the NBS claims that it doesn’t experience major difficulties in retaining (PDF content provided).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10148.pdf_