## Republic of Moldova Financial Sector Assessment (IMF) — _cr1670 ## Source details **Canonical URL:** [Republic of Moldova Financial Sector Assessment (IMF) — _cr1670](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr1670.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr1670.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr1670.pdf.json) --- ### Major macro-financial context and system structure - Remittances from Moldovan workers abroad are around 24 percent of GDP (on a declining trend). - Donor support to the budget is equivalent to 10 percent of total spending. - Inflation is within the NBM’s target range of 5 percent ±1.5 percent. - Nominal exchange rate depreciation since end-2012 is 9 percent; the MDL has depreciated by 1 percent in real terms. - In per capita GDP terms, Moldova is the poorest country in Europe. - Financial system dominated by the banking sector: - 14 commercial banks (four are subsidiaries of foreign banks) with assets equivalent to about 77 percent of GDP. - Five of the six largest banks reportedly form two de facto groups and have a combined 60-70 percent share of the banking system. - Funding is primarily from retail deposits; credit appears mainly to commerce and industry. - FX assets and liabilities account for around 45 percent of balance sheet totals. - Since end-2011, foreign placements by Moldovan banks more than doubled to 11 percent of GDP—with most of this growth occurring in 2013—while their liabilities increased to 10 percent of GDP. - Nonbank financial institutions and markets are small and underdeveloped: - Insurance sector about 3.5 percent of total financial sector assets. - Moldova Stock Exchange turnover in 2013 represented less than 1 percent of GDP; market capitalization around 6 percent of GDP. - Domestic government debt around 5 percent of GDP; total government debt some 30 percent of GDP. - Government securities limited to short-term issues, maximum maturity of three years. ### Key financial stability risks and vulnerabilities - Governance, supervision, legal powers, and data quality weaknesses create significant, hard-to-quantify risks. - Non-transparent ownership, weak governance, connected lending, questionable cross-border exposures, and data gaps mean regulatory data likely substantially understate vulnerabilities. - Governance structures, internal oversight, and risk management practices poorly developed. - Cross-border exposures and transaction patterns suggest serious money laundering risk. - Asset quality and reporting concerns: - Reported NPLs for some banks are remarkably high; reductions in other banks may reflect regulatory arbitrage. - Large exposures sometimes exceed regulatory norms by a wide margin. - Liquidity risk measurement is difficult: high reported liquid assets may be encumbered via undisclosed side agreements. - Geopolitical and regional risks: - Impact depends on crisis spillover beyond Ukraine, escalation of trade tensions with Russia, and disruptions to trade routes and gas supplies. - Financial and trade links with Ukraine are modest, but further slowdown in Russia or escalation with Russia would have significant impact given cross-border bank exposures to Russia. - Insurance and market infrastructure concerns: - Insurance market concentrated in motor insurance; anticompetitive practices deter development. - Two securities settlement systems are old; corporate securities registration split among 11 private registries with manual systems and governance weaknesses. - Recently adopted law on capital markets does not provide a forceful or timely framework to address shortcomings. ### Legal, supervisory and governance constraints - Constitutional Court rulings: - December 2012 ruling critically constrains NCFM’s supervisory powers by allowing any court to suspend NCFM’s decisions pending final court decision. - October 1, 2013 ruling curbed the NBM’s powers by permitting any court to suspend key NBM actions before final settlement, with two exemptions: decisions to revoke a license or to liquidate a bank. - Legislative amendments and remaining impediments: - December 2013 legislative amendment partly restores some NBM powers, protecting monetary authority and limiting some court suspensions. - Remaining issues: procedural consistency and clarity on preliminary appeal of NBM decisions; clarity on scope of judicial review; allocation of burden of proof; need for detailed procedures of appeal to shorten unlimited timeframes; limitation of court powers to issue injunctions against NBM decisions. - Supervisory capacity and enforcement: - Enforcement hampered by court challenges; NBM and NCFM board members and staff lack sufficient protection against lawsuits while discharging duties in good faith. - Parliamentary approval for needed legislative changes progressing slowly. - Insufficiently forceful actions taken in response to violations of existing regulatory obligations. ### Crisis management, resolution framework, and safety nets - NCFS (National Committee for Financial Stability): - Set up in June 2010; useful in 2012 but needs stronger contingency planning, testing, and coordination. - Recommendation to establish a specific body (e.g., Council of National Regulators chaired by the NBM) for regular information exchange and system-wide assessments. - Crisis resolution legal gaps: - LFI provides powers (special supervision, binding directions, appointment of special administrator) and NBM Law permits emergency lending to solvent banks against collateral; NBM may lend against a government guarantee if NCFS determines systemic problem. - Key deficiencies: uncertainty on scope of direction powers; direction powers apply only to banks not subsidiaries; moratorium protection limits; uncertainty on business transfer scope; risk of judicial challenges; lack of explicit power for bridge banks or bail-in; no statutory quick government funding/guarantee powers without prior Parliamentary approval. - No resolvability assessments or bank-specific resolution plans in place. - Recommendation: develop a contingency plan for crisis resolution covering solvency assessments, systemic impact assessments, resolvability assessments, and bank-specific resolution plans. - Deposit Guarantee Fund (DGF): - DGF established 2004; paybox mandate; membership compulsory for all banks. - Coverage: MDL 6,000 (about USD 445) per depositor (not legal entities) per bank; foreign currency deposits covered. - Funding: fund equal to 7.1 percent of insured deposits accumulated; appears adequate to cover payout of the six smallest banks combined or a single medium-sized bank. - Operational limitations: reimbursement period ranges from 17–30 days for majority of depositors; lacks capacity for rapid payout beyond very small cases; no established funding lines; DGF creditor ranking in insolvency too low. - Recommendations: raise coverage limit (after analysis of impact and after special assessment obligations paid by banks in 2015); provide DGF earlier access to detailed depositor information and ability to verify on-site; develop target fund methodology; provide a line-of-credit from MOF; include NBM as additional source of back-up funding. ### Ownership, governance, and internal oversight weaknesses - Complex ownership structures using shell companies, often offshore, to disguise UBOs. - Major ownership changes executed via acquisitions under 5 percent threshold and fraudulent “raider attacks.” - Nontransparent changes in boards and CEOs; controlling shareholders nominate board members and appoint CEOs; boards lack independent members; minimum number of three directors is unusually low. - Boards lack independence, qualifications, and do not fulfil strategic planning, oversight, or risk management roles; no board audit or risk committees; internal audit departments understaffed and not independent. - Controlling shareholders sometimes promote imprudent activities: - Exceptional balance sheet growth funded by high-cost deposits, including interbank placements channeled via offshore banks. - Funding used to finance owners’ related-party transactions masked by disguised UBOs. ### Asset quality, dollarization, and reporting issues - Sector-wide asset quality deteriorating; NPLs trends: - NPLs reached 11.6 percent by year end 2013 (down in 2013) and rose to 13.2 percent in Q1 2014. - Some banks, including systemic institutions, have NPL ratios exceeding 60 percent of total loans. - Insolvency culture weak; foreclosure is prolonged. - Risk classification and reporting weaknesses: - Incorrect use of low risk weights for loans secured on residential property; loan misclassification undermines reported capital adequacy. - Connected lending to shell companies and breaches of large exposure limits create concentration risk. - Very large deposits sometimes placed cross-border in obscure transactions combining potential fictitious 'liquid' assets, tax evasion, and money laundering. - Some banks rely on sizeable (largely FX) deposits placed by government and state-owned companies. - FX exposures and dollarization: - FX loans ranged from 40 percent to 46 percent; FX deposits ranged from 44 percent to 54 percent over last six years. - Annual remittances roughly equal the stock of FX loans. - NBM should ensure banks do not provide FX or FX-linked loans unless borrower has reliable FX income. - Some balances notionally overnight may be encumbered; FX assets placed abroad must be freely available. ### Financial market infrastructure (FMI) and securities registration - Corporate securities records scattered across 11 registrars with outdated practices; reforms to a central depository have stalled. - NCFM plans (via CML amendments) to consolidate registries of Public Interest Entities (PIEs) into a single CSD; adoption targeted by mid-2014. - NSD liquidity and operational risks: - Three day settlement standard creates liquidity risk; guarantee fund fixed at MDL 30,000 per participant appears insufficient. - History of NSD losses limits investment scope in new infrastructure. - Recommendations: - Adopt CPSS-IOSCO Principles for FMIs consistently; allocate or share responsibilities; establish joint committee for regulatory cooperation. - Conduct cost analysis and a four part approach for CSD reform: Working Group, cost analysis, assess private sector capacity, and phased reform strategy approved by NPC. - Consider loss-sharing mechanisms when reconciling registries during dematerialization. ### Insurance sector - Consolidation since 2007 Law on Insurance: nonlife insurers reduced from 28 to 16. - Capital and solvency requirements based on “Solvency I” introduced and enforced; reported technical provisions improved. - Systemic risk limited by small size; insurer investments in banking sector manageable. - Ownership linkages with unknown bank UBOs suspected; governance and transparency need addressing before sector growth. - NCFM moving from compliance to risk-based supervision; implementation to be phased. - Resolution: compensation scheme arrangements incomplete and should be finalized. ### Stress testing: scenarios, results, and vulnerabilities - Coverage: stress tests covered all 14 banks; top-down solvency tests (FSAP team and NBM) complemented by bottom-up bank tests and liquidity sensitivity analysis. - Macroeconomic scenarios (four considered): - Baseline using latest IMF staff projections. - Two external adverse scenarios based on GRAM of September 2013 (moderate slowdown in Russia; severe global shock with sharp fall in Russia’s GDP growth). - Severe domestic drought combined with restrictions on exports to Russia. - Quantified credit risk losses: - Potential loan losses estimated from MDL 1.7 billion (2 percent of GDP) in the first adverse scenario to MDL 5 billion (7.5 percent of GDP) in the most severe scenario. - Under the most severe scenario, system-wide NPL-ratio increases from 11.6 percent to 33.2 percent in the top-down stress test. - Market, concentration, and contagion risks: - Floating rate lending limits interest rate vulnerability; exchange rate risk and other market risks appear contained. - Concentration risks high in specific segments; a couple of banks could become insolvent if a small number of largest exposures default. - Contagion risks in interbank market small overall, but some banks have sizeable interbank and cross-border exposures. - Liquidity tests (Basel III LCR-type proxies) show system-wide liquidity coverage ratio exceeding 100 percent in aggregate and similar results for foreign currency. - Four banks exhibit an LCR below 100 percent using Basel III assumptions; combined assets of these banks represent 20.6 percent of total banking system assets. - Aggregate stress losses mainly related to increased provisions are manageable though non-negligible; some banks have major vulnerabilities including questionable quality of liquid assets and large cross-border interbank exposures. ### Key financial soundness and stress-test statistics (selected) - Number of banks: 15.0 (Dec-09), 15.0 (Dec-10), 15.0 (Dec-11), 14.0 (Dec-12), 14.0 (Mar-13), 14.0 (Jun-13), 14.0 (Sep-13), 14.0 (Dec-13) - Total bank assets (billions of lei): 39.9 (Dec-09), 42.3 (Dec-10), 47.7 (Dec-11), 58.3 (Dec-12), 59.9 (Mar-13), 63.5 (Jun-13), 69.1 (Sep-13), 76.2 (Dec-13) - Total bank assets (percent of GDP): 0.1 (Dec-09), 58.9 (Dec-10), 57.9 (Dec-11), 66.1 (Dec-12), 60.4 (Mar-13), 64.0 (Jun-13), 69.7 (Sep-13), 76.8 (Dec-13) - Liquidity ratio (liquid assets in percent of total deposits): 62.6 (Dec-09), 50.3 (Dec-10), 48.5 (Dec-11), 48.2 (Dec-12), 49.0 (Mar-13), 45.4 (Jun-13), 48.4 (Sep-13), 49.6 (Dec-13) - Nonperforming loans as a share of total loans: 16.3 (Dec-09), 13.3 (Dec-10), 10.7 (Dec-11), 14.5 (Dec-12), 13.0 (Mar-13), 12.7 (Jun-13), 12.4 (Sep-13), 11.6 (Dec-13) - Solvency stress test (30-Sept-2013, top-down examples): - Total regulatory capital - before shock: 7,766 (MDL) - Total risk-weighted assets (RWAs): 33,376 (MDL) - Total assets: 69,094 (MDL) - CAR before shock: 23.3 (percent) - Total expected losses (examples, MDL): (257); (1,595); (4,712); (2,358) - Total regulatory capital - after shock (examples, MDL): 7,509; 6,195; 3,054; 5,408 - CAR after shock (examples, percent): 22.5; 18.6; 9.2; 16.2 - Implied capital shortfall (percent of GDP) (examples): 0.1; 0.6; 2.9; 1.0 - Number of banks with CAR below regulatory minimum (16 percent) (examples): 1; 5; 9; 6 - Liquidity stress test summary: - Liquid assets (MDL): 21,941,563,184; 17,769,843,907; 9,819,595,677 (across methodologies) - Potential outflows (MDL): 13,130,155,177; 16,133,990,538; 6,119,226,749 - System-wide LCR (percent): 167.1; 110.1; 160.5; 112.9 (across LCR methodologies) - Liquidity shortfall (MDL): 1,631,320,909; 1,163,746,596; 1,200,733,944 (across scenarios) - Number of banks with LCR below 100 percent: 0; 4; 4; 3 (across methodologies) ### Risk Assessment Matrix — selected risks, likelihood and policy responses - 1. Sharp increase in geopolitical tensions around Russia/Ukraine - Relative Likelihood: Medium - Impact if Realized: High - Policy Response: accelerate trade/energy diversification; let exchange rate adjust; maintain prudent macro policy; strengthen monitoring of bank exposures to exchange rate and cross-border risks. - 2. Protracted period of slower European growth - Relative Likelihood: High - Impact if Realized: High - Policy Response: allow fiscal automatic stabilizers; let exchange rate adjust; speed up structural reform to increase competitiveness. - 3. Deterioration of banking system soundness from weak governance - Relative Likelihood: High - Impact if Realized: High - Policy Response: enforce shareholder and beneficial ownership transparency and suitability; intervene in troubled systemic banks and liquidate small ones; step up anti-corruption and AML/CFT efforts. - 4. Decline in official external financing - Relative Likelihood: Low - Impact if Realized: Medium - Policy Response: seek alternative funding for priority projects in context of prudent fiscal policy. - 5. Political cycle (parliamentary elections) - Relative Likelihood: High - Impact if Realized: Medium - Policy Response: restore prudent macro policies and accelerate structural reforms. ### AML/CFT and abuse of financial services - Massive cross-border operations originating from and/or flowing to off-shore centers identified. - All operations with Transnistria declared suspicious; outbound flows to Transnistria were MDL 2 billion in 2013. - Banks have not performed their own ML/TF risk assessments. - AML/CFT unit of NBM understaffed; difficulties identifying UBOs and weak compliance functions call preventive measures into question. - Recommended actions include targeted on-site inspections, instructing banks to perform ML/TF risk assessments, increasing sanctions for recurrent violations, and equipping NBM examiners with appropriate software. ### Priority recommendations and actions (selected, ST = within 6 months; MT = within 6–24 months) - Strengthen financial stability framework and supervisory powers: - Amend the LNBM and LNCFM, and other legislation as required, to provide NBM and NCFM ability to enforce supervisory and regulatory actions in a timely manner. (NBM, NCFM — ST — High) - Establish a formal body (e.g., Council of National Regulators) to conduct system-wide financial stability assessments. (Financial regulatory authorities — MT — Medium) - Bank governance and ownership transparency: - Re-evaluate bank shareholders to ensure disclosure of ultimate UBOs; ensure continuous monitoring of owners and UBOs. (NBM — ST — High) - Amend the LFI and the JSC Laws to enumerate distinct roles of owners, board members, and senior management. (NBM, MOF — MT — High) - Require bank board directors to sign attestations annually, affirming compliance with all prudential requirements. (NBM — MT — Medium) - Supervision and enforcement: - Amend the NBM Law to provide full legal protection and assistance to all NBM employees in case of lawsuits for actions in good faith. (NBM — ST — High) - Amend the NBM law to remove MoJ power to amend the content of regulations. (NBM — ST — Medium/High) - Increase intensity of AML/CFT supervision via targeted, risk-based on-site inspections. (NBM — ST — Medium/High) - Crisis resolution and preparedness: - Develop comprehensive financial crisis resolution contingency plan and identify necessary legislative amendments. (NCFS members — ST — High) - Implement resolvability assessments and recovery and resolution plans for systemically important financial institutions. (NCFS members — ST — High) - Develop capacity-building on crisis resolution and strengthen coordination arrangements. (NCFS members — ST — High) - Deposit insurance and funding: - Clarify legislation to assure DGF earlier access to detailed depositor information and ability to verify on-site. (DGF, MOF — MT — Medium) - Enhance funding by developing target fund methodology; provide a line-of-credit to the DGF from the MOF; include the NBM as additional source of back-up funding. (DGF, MOF, NBM — MT — Medium) - Insurance supervision and market infrastructure: - Implement risk-based insurance supervision. (NCFM — ST-MT — Medium) - Develop group supervision elements, particularly with agencies outside Moldova. (NCFM — ST — Medium) - Finalize resolution regime and compensation scheme arrangements. (NCFM — MT — Medium) - Amend LNCFM to provide necessary powers and consolidate corporate securities registration into regulated central securities depository. (NCFM — ST — High) - Insolvency and court administration: - Assign insolvency cases to designated Court of Appeals members trained in insolvency case management. (Council of Magistracy, Supreme Court of Justice, MoJ — MT — Medium) *Source: EXECUTIVE SUMMARY and selected chapters — Republic of Moldova Financial Sector Assessment (IMF), content unit _cr1670.* ### EXECUTIVE SUMMARY __________________________________________________________________________ 5 ### EXECUTIVE SUMMARY ### Major findings: macro-financial context and system structure - Remittances from Moldovan workers abroad are around 24 percent of GDP (on a declining trend). - Donor support to the budget is equivalent to 10 percent of total spending. - Inflation is within the NBM’s target range of 5 percent ±1.5 percent. - Nominal exchange rate depreciation since end-2012 is 9 percent; the MDL has depreciated by 1 percent in real terms. - In per capita GDP terms, Moldova is the poorest country in Europe. - The financial system is dominated by the banking sector: - 14 commercial banks (four are subsidiaries of foreign banks) with assets equivalent to about 77 percent of GDP. - Five of the six largest banks reportedly form two de facto groups and have a combined 60-70 percent share of the banking system. - Funding is primarily from retail deposits; credit appears mainly to commerce and industry. - FX assets and liabilities account for around 45 percent of balance sheet totals. - Since end-2011, foreign placements by Moldovan banks more than doubled to 11 percent of GDP—with most of this growth occurring in 2013—while their liabilities increased to 10 percent of GDP. - Nonbank financial institutions and markets are small and underdeveloped: - The insurance sector is small at 3.5 percent of total financial sector assets. - Moldova Stock Exchange turnover in 2013 represented less than 1 percent of GDP; market capitalization was around 6 percent of GDP. - Domestic government debt is around 5 percent of GDP; total government debt stands at some 30 percent of GDP. - Government securities are limited to short-term issues, with a maximum maturity of three years. ### Key financial stability risks and vulnerabilities - Overall assessment: - Significant, hard-to-quantify risks stem from deep and interconnected weaknesses in governance, supervision, legal powers, and data quality. - Non-transparent ownership, weak governance, connected lending, questionable cross-border exposures, and data gaps mean regulatory data likely substantially understate vulnerabilities. - Governance structures, internal oversight processes, and risk management practices are poorly developed. - Some cross-border exposures are substantial and transaction patterns suggest a serious risk of money laundering. - Asset quality and reporting concerns: - Reported nonperforming loans (NPLs) for some banks are remarkably high; in other banks, reductions in NPLs may reflect regulatory arbitrage rather than substantive risk reduction. - Large exposures in some cases exceed regulatory norms by a wide margin. - Liquidity risk measurement is difficult: the high reported level of liquid assets appears unreliable because some assets may be encumbered through undisclosed side agreements. - Geopolitical and regional risks: - The impact of regional geopolitical developments will depend on whether the crisis spreads beyond Ukraine, trade tensions with Russia escalate, and trade routes and gas supplies are disrupted. - Financial and trade relationships with Ukraine are modest but a further slowdown in the Russian economy and/or escalation of trade tensions with Russia would have a significant impact, given some significant cross-border bank exposures to Russia. - Insurance and market infrastructure: - Insurance market concentrated in motor insurance; few new entrants and anticompetitive practices deter market development. - Two securities settlement systems are old and ill-suited to expansion; corporate securities registration is split among 11 private registries running manual systems with governance and infrastructure weaknesses and vulnerability to fraud and data abuse. - The recently adopted law on capital markets does not provide a forceful or timely framework for addressing these shortcomings. ### Legal, supervisory and governance constraints - Legal system and supervisory powers: - A Constitutional Court ruling in December 2012 critically constrains the NCFM’s supervisory powers by allowing any court to suspend NCFM’s decisions pending final court decision. - A Constitutional Court ruling on October 1, 2013 curbed the NBM’s powers by permitting any court to suspend key NBM actions before final settlement, with two exemptions: decisions to revoke a license or to liquidate a bank. - A December 2013 legislative amendment partly restores some NBM powers, protecting monetary authority and placing some constraints on court orders to suspend regulatory actions. - Remaining impediments include need for procedural consistency and clarity on preliminary appeal of NBM decisions; clarity on scope of judicial review; allocation of burden of proof; need for detailed procedures of appeal to shorten unlimited timeframes; and limitation of court powers to issue injunctions against NBM decisions. - Supervisory capacity and enforcement: - Enforcement has been seriously hampered by court challenges; NBM and NCFM board members and staff lack sufficient protection against lawsuits even while discharging duties in good faith. - Progress in obtaining parliamentary approval for needed legislative changes has been slow. - Insufficiently forceful actions have been taken in response to violations of existing regulatory obligations. ### Crisis management and safety nets - Crisis management framework and coordination: - A National Committee for Financial Stability (NCFS) was set up in 2010 with a remit focused on crisis management; it proved useful in 2012 but could do more on contingency planning, testing processes and powers, and coordination among member agencies. - Significant gaps and deficiencies exist in statutory powers needed for cost-effective bank crisis resolution. - If systemic pressures emerge, coordinated and collegial management through the NCFS will be critical. - Deposit insurance and payout capacity: - The Deposit Guarantee Fund (DGF) is reasonably funded for the current level of coverage, which includes foreign exchange deposits. - Depositor protection is the lowest in Europe at MDL 6,000 (about USD 445). - The DGF lacks capacity for rapid payout in anything other than very small cases; no established funding lines are available. - The DGF needs better access to sufficient and timely data for more rapid and accurate payouts. - Some small financial entities supervised by NCFM accept deposits which are not insured. ### Insolvency, creditor/debtor regime, and market development - Insolvency and creditor/debtor regime: - Weaknesses create uncertainty and may deter stakeholders from engaging in financial transactions. - No rescue culture for distressed enterprises; system incentivizes administrators to liquidate rather than reorganize. - Financial market infrastructure and securities registration: - Settlement of government and central bank securities, and of equities, is delivery versus payment (DVP) in central bank money. - Settlement systems are old and ill-suited to expansion of trade. - The corporate securities registry system displays governance and infrastructural weaknesses not expected to be addressed in the near term. ### Stress testing and capital/liquidity assessments - Stress tests suggest the banking sector is well capitalized and liquid in aggregate, but: - Important pockets of weakness remain and vulnerabilities may be masked by fraud or misreporting. - Liquidity metrics may be unreliable due to encumbrance and undisclosed side agreements. - Cross-border exposures, concentration, and concealed connected lending could amplify shock transmission. ### Key recommendations and priority actions (short-term ST = within 6 months; medium-term MT = within 6–24 months) - Strengthen the financial stability framework and supervisory powers: - Amend the LNBM and LNCFM, and other legislation as required, to provide NBM and NCFM with the ability to enforce supervisory and regulatory actions in a timely manner. (NBM, NCFM — ST — High) - Establish a formal body (e.g., a Council of National Regulators) to conduct system-wide financial stability assessments. (Financial regulatory authorities — MT — Medium) - Bank governance and ownership transparency: - Re-evaluate bank shareholders to ensure disclosure of ultimate UBOs; ensure continuous monitoring of owners and UBOs. (NBM — ST — High) - Amend the LFI and the JSC Laws to enumerate the distinct roles of owners, board members, and senior management. (NBM, MOF — MT — High) - Require that bank board directors sign attestations annually, affirming compliance with all prudential requirements. (NBM — MT — Medium) - Supervision and enforcement: - Amend the NBM Law to provide full legal protection and assistance to all NBM employees in case of lawsuits for actions in good faith. (NBM — ST — High) - Amend the NBM law to remove MoJ power to amend the content of regulations. (NBM — ST — Medium/High) - Progressively increase intensity of supervision and severity of corrective actions, including fines and restrictions, against banks persistently violating laws and regulations. (NBM — MT — Medium) - Increase intensity of AML/CFT supervision by performing more targeted, risk-based on-site inspections in key areas. (NBM — ST — Medium/High) - Crisis resolution and preparedness: - Develop a comprehensive financial crisis resolution contingency plan and identify necessary legislative amendments. (NCFS members — ST — High) - Implement resolvability assessments and recovery and resolution plans for at least the systemically important financial institutions. (NCFS members — ST — High) - Develop capacity-building on crisis resolution, including strengthened coordination arrangements. (NCFS members — ST — High) - Deposit insurance and funding: - Clarify legislation to assure the DGF has earlier access to detailed depositor information and to allow it to verify such information on-site. (DGF, MOF — MT — Medium) - Enhance funding by developing a target fund methodology; provide a line-of-credit to the DGF from the MOF; and include the NBM as an additional source of back-up funding for the DGF. (DGF, MOF, NBM — MT — Medium) - Insurance supervision and market infrastructure: - Take forward implementation of a risk-based approach to insurance supervision. (NCFM — ST-MT — Medium) - Develop key elements of group supervision, particularly with agencies outside Moldova. (NCFM — ST — Medium) - Complete the resolution regime by finalizing arrangements for the compensation scheme. (NCFM — MT — Medium) - Amend the LNCFM to provide the NCFM with all necessary regulatory and supervisory powers, and consolidate the corporate securities registration function into an appropriately regulated and governed central securities depository. (NCFM — ST — High) - Insolvency and court administration: - Assign insolvency cases to designated members of the Court of Appeals who are specially trained in the management of insolvency cases. (Council of Magistracy, Supreme Court of Justice, MoJ — MT — Medium) *Source: EXECUTIVE SUMMARY — Republic of Moldova Financial Sector Assessment (IMF).* ### 9. Many bank ownership structures are unduly complex, using shell companies, often ### _cr1670 - 9. Many bank ownership structures are unduly complex, using shell companies, often ### Ownership, governance, and internal oversight - Many bank ownership structures are unduly complex, using shell companies, often offshore, to disguise the identity of ultimate beneficial owners (UBOs). - Major ownership changes in the largest banks over the past two years were accomplished by acquisition of voting shares in parcels below the 5 percent threshold for regulatory consent and through fraudulent “raider attacks.” - Ownership changes have resulted in nontransparent changes in board members and CEOs. - Controlling shareholders, through new management, in some cases promote imprudent activities, notably: - Exceptional balance sheet growth funded by high-cost deposits, including interbank placements channeled via offshore banks. - A substantial portion of funding used to finance owners’ related-party transactions which cannot be identified as such under NBM regulations because UBOs’ identity is disguised. - Roles and responsibilities of ownership, internal oversight (board), and management are substantially blurred: - Controlling shareholders nominate and appoint board members; boards’ primary goal is shareholder representation with no acknowledgement of depositors, public, and taxpayers despite fiduciary duty imposed by the Law on Financial Institutions (LFI). - Ambiguity of UBOs and nontransparent actions masks board member nomination processes. - There are no independent board members and the minimum number of three directors is unusually low. - Controlling shareholder typically appoints the CEO, who is vested with substantial decision-making authority, providing direct access by shareholder(s). - Board composition and function weaknesses: - Boards lack independence and are not well qualified to oversee financial institution operations. - Board members can exhibit conflicts of interest; few have substantial financial institution experience. - Members are appointed for a term of four years, and they can be renewed an unlimited number of times. - Boards do not fulfill roles of strategic planning, oversight, or risk management; critical functions such as compliance, independent risk management, and internal audit are under-developed. - Neither board audit committees nor board risk committees are in place. - Boards are not made explicitly responsible, by law, for the truthfulness and integrity of their banks’ financial reporting. - Internal audit functions lack independence: - Although auditors meet with the board, none indicated they regularly meet without management present. - Audit departments are consistently understaffed and, in many cases, auditors lack training. ### Asset quality - Sector-wide asset quality is deteriorating and is of significant concern in some banks. - NPL trends: - NPLs were trending down in 2013, reaching 11.6 percent by year end. - NPLs rose to 13.2 percent in the first quarter of 2014. - Some banks, including systemic institutions, have NPL ratios exceeding 60 percent of total loans. - Insolvency and recovery: - Despite the Insolvency Law of 2013, insolvency culture remains weak; general tendency is to reschedule or enforce; foreclosure, when it occurs, is a prolonged process. - An NBM regulation requires collateralized lending except for enhanced creditworthiness, risking emphasis on collateral rather than good credit appraisals. - Risk classification and reporting weaknesses: - Incorrect use of low risk weights for loans secured on residential property and numerous cases of loan misclassification undermine reported capital adequacy figures. - Weak governance allows significant connected lending, some to insubstantial shell companies, and breaches of large exposure limits create concentration risk. - Very large deposits are sometimes placed cross-border in obscure transactions, combining potential fictitious creation of ‘liquid’ assets, tax evasion, and money laundering. - A few commercial banks have substantial reliance on sizeable (largely FX) deposits placed by the government and state-owned companies. - Dollarization and FX exposure: - Proportion of FX assets and liabilities on commercial bank balance sheets has been stable over the last six years. - FX loans ranged from 40 percent to 46 percent during this period; FX deposits ranged from 44 percent to 54 percent. - Annual remittances are roughly the same as the stock of FX loans. - It is important for the NBM to ensure banks do not provide FX or FX linked loans unless the borrower has a reliable FX income. - Some balances notionally overnight may be encumbered; FX assets placed in banks abroad must be freely available. ### Insurance sector - Insurance market has consolidated and improved financial strength since the 2007 Law on Insurance: - Number of insurers reduced from 28 to 16 in the nonlife sector, though actual concentration may be greater due to unidentified UBOs. - Capital and solvency requirements based on the “Solvency I” regime have been introduced and enforced. - Reported technical provisions have improved. - Systemic risk and exposures: - Small size and absence of development imply no material systemic risk. - Insurer investments in the banking sector appear manageable compared to capital levels. - Cash and bank deposits represent just 3 percent of life insurance assets and 9 percent of nonlife assets. - Ownership linkages with unknown bank UBOs are widely suspected; governance and transparency issues should be addressed before sector growth. ### Financial market infrastructure (FMI) risks - Opaque share registry system compromises effective regulation: - Securities records of joint stock companies (JSCs) are scattered across 11 registrars operating independently with outdated standards and practices. - Reforms to replace independent registrars with a central depository have failed to date; attempts to reform the Capital Market Law (CML) aim to mandate transfer of registries of Public Interest Entities (PIEs) to a central securities depository (CSD). - Adoption by parliament is targeted by mid-2014; NCFM is developing a database system to provide daily backups of all corporate securities transactions once legislation is passed. - Legal uncertainty for settlement of government and central bank securities: - Draft laws address finality, collateral, and netting arrangements in insolvency and investors’ rights in the Book-Entry System (BES). - Adoption is important though current trade volume is low. - Plans exist to allow trading of government bonds onto the Moldova Stock Exchange (MSE); Bloomberg trading will continue. - NSD liquidity and operational risks: - Liquidity risk arises from a three day settlement standard; no participant default since operations started in 1998. - Guarantee fund fixed at MDL 30,000 per participant appears insufficient for potential settlement risks. - History of NSD losses suggests little scope to raise funds for investment in new infrastructure; no comprehensive risk management framework. - Operational disruptions could impact liquidity for participants in the Real-Time Gross Settlement System (Automated Interbank Payment System (AIPS)), where the cash leg is settled. - Regulatory fragmentation: - Fragmentation between NBM and NCFM could undermine effective oversight of FMIs. - Authorities need to adopt and apply consistently the CPSS-IOSCO Principles for FMIs and allocate or share responsibilities according to mandates. - A joint committee should be established to deepen regulatory cooperation under the existing memorandum of understanding. ### Stress testing: scope, scenarios, and key results - Exercise scope and coverage: - Stress testing was comprehensive, illustrating potential vulnerabilities; some results require cautious interpretation due to data issues and unidentified UBOs. - Stress tests focused on the banking system and covered all 14 banks. - Top-down solvency stress tests were conducted jointly by the FSAP team and NBM using supervisory data; complemented by bottom-up stress tests by individual banks and liquidity stress tests with sensitivity analysis. - Macroeconomic scenarios (four considered): - Baseline scenario using latest IMF staff projections. - Two external adverse scenarios based on the GRAM of September 2013: (i) deeper-than-expected slowdown in major emerging markets causing moderate slowdown of the Russian economy with consequences on Moldova's trade, remittances, and capital inflows; (ii) severe global shock from disorderly unwinding of unconventional monetary policies triggering increased sovereign spreads, re-intensification of Euro Area periphery stress, fall in global oil prices, and a sharp fall in Russia’s GDP growth, with severe consequences for Moldova’s economy. - A severe drought in Moldova combined with restrictions on Moldovan exports to Russia, adversely affecting agriculture output and exports, leading to lower GDP growth, depreciation, and higher interest rates. - Risk assessment and quantified losses: - Stress tests include comprehensive assessment of risk factors and sensitivity analysis for concentration and contagion risks; FX liquidity assessed separately. - Potential credit risk losses on the loan book are the most important risk factor. - Potential loan losses due to credit risk estimated to range from MDL 1.7 billion (2 percent of GDP) in the first adverse scenario to MDL 5 billion (7.5 percent of GDP) in the most severe scenario. - Under the most severe scenario, system-wide NPL-ratio increases from 11.6 percent to 33.2 percent in the top-down stress test. - Market and concentration risks: - Floating rate lending practices limit vulnerability to interest rate movements; exchange rate risk and other market risks appear contained. - All banks comply with regulatory market risk limits; banks exhibit modest net open FX positions. - Concentration risks are high in specific segments; a couple of banks could become insolvent if a small number of their largest exposures default. - Contagion and liquidity: - Contagion risks in domestic interbank market appear small overall, but some banks have sizeable interbank and cross-border exposures. - Certain domestic banks could become insolvent if cross-border placements (possibly cash collateral against weak credits) become impaired. - Liquidity stress tests, based on Basel III LCR-type proxies, show the banking system as a whole has ample liquidity, with the system-wide liquidity coverage ratio exceeding 100 percent and similar results for foreign currency. - Four banks exhibit an LCR below 100 percent using Basel III assumptions on haircuts and potential run-off rates; the combined assets of these banks represent 20.6 percent of total banking system assets. - Some banks are dependent on large scale cross-border interbank placements, making them highly vulnerable to a potential shock. - Aggregate conclusions: - Aggregate stress losses, mainly related to increased provisions in the loan book, remain manageable although non-negligible. - Reported system-wide liquidity ratios appear broadly adequate in both local and foreign currencies. - Major vulnerabilities for some banks include large concentration risk, significant cross-border interbank exposures, and questionable quality of some liquid assets. - This group of banks is highly interconnected among themselves but has low interconnectedness with other domestic banks; potential losses likely to have limited direct spillovers, though indirect contagion effects may be unpredictable. ### Conditions for effective supervision and rule of law - Fundamental conditions for effective supervision are not in place, including the rule of law, market discipline, safety nets and resolution capacity, and financial stability architecture. - Absence of impartial and predictable rule of law: - Grave concerns exist about levels of corruption in the judiciary; court rulings against supervisory authorities have overturned or suspended enforcement actions and decisions. - Constitutional Court rulings in 2012 and 2013 had substantial impact on effectiveness of supervisory actions. - Legal and institutional weaknesses: - Legal certainty undermined by weaknesses in financial regulation legislation, including lack of clarity in drafting and gaps in coverage. - Notable deficiency: lack of clarity on legal protection afforded to staff of the NBM and NCFM in pursuit of their duties. *Source: IMF staff report content provided in the supplied PDF chapter/section.* ### 36. Institutional architecture to support system-wide financial stability is not fully in place. ### 36. Institutional architecture to support system-wide financial stability is not fully in place. ### Institutional architecture and crisis coordination - The National Committee for Financial Stability (NCFS) was created in June 2010, tasked with defining and managing crisis events; however, there is not yet an effective and fully operational framework for financial stability policy formulation. - While changes to the mandate of the NCFS may be needed, it is important that the members of the NCFS and the technical subcommittee, as appropriate, can make independent decisions related to their areas and functions as designated in legislation. - Crisis coordination should be supplemented by consistent system-wide assessment during non-crisis periods. - Some stability analysis is carried out at individual institutions, including the NBM and NCFM, but transparency and coordination between individual authorities and institutions need to be enhanced. - Recommendation: Establish a specific body (for example, a Council of National Regulators chaired by the NBM) with a mandate for the regular exchange of information between financial regulators and to perform system-wide financial stability assessments. ### Banking supervision — developments and enhancements - The NBM has made significant progress in reinforcing its prudential and supervisory framework and has taken several initiatives to address a number of key recommendations from the 2008 FSAP. - The NBM’s Banking Regulation and Supervision Department (BRSD) shows strong professionalism; internal analysis quality and inspection reports are noteworthy. - The NBM has designed two successive medium-term strategies since 2008 to set a forward-looking approach for supervision. The second spans 2013–17. - Moldova is in the process of transitioning from Basel I to Basel II and has tightened capital requirements. In the context of an Association Agreement to be signed with the European Union, the NBM plans to implement the standard approach for credit, market, and operational risk under Basel II as well as other elements of Basel III. - The NBM has enhanced on-site supervision, adopted new regulations and recommendations, improved the stress-testing framework, and enhanced regulations on asset classification and equity holdings in banks. - Banks’ accounting and reporting standards have benefited from the recent adoption of IRFS. - Methodologies have been devised for identifying banking-sector vulnerabilities and for conducting AML/CFT on-site inspections (with technical assistance of the U.S. Treasury). ### Banking supervision — outstanding weaknesses and vulnerabilities - NBM powers have been seriously hampered in many respects: - Amendments to NBM regulations by the Ministry of Justice (MOJ) undermine the NBM’s autonomy and create delays, sometimes up to a year. - NBM recommendations are not binding instruments. - All actions and decisions of the NBM, with the exception of revocation of license and bank liquidation, can be challenged in court and suspended pending decision on the case. - Recent suspension of parts of the NBM’s revised regulation on large exposures raises concern about prompt corrective capacity. - Legal independence and protection issues: - The conditions for dismissing the governor and other board members are unclear and the LNBM permits political interference. - NBM board members and employees, including staff appointed as a bank’s liquidator, have insufficient protection against lawsuits while discharging their duties in good faith. - Staff does not receive any legal assistance in case of lawsuits. - Draft legislation to address this issue is with parliament, but there are indications that enhanced legal protection for NBM staff may be postponed or compromised as a quid pro quo for restoring NBM legal powers weakened by the CC ruling. - Enforcement limitations: - Enforcement of prudential regulations should be more forceful; the current legal regime contains serious limitations and flaws. - Existing legal sanctions may not be dissuasive enough, particularly fines. - Timescale for action is inappropriately short: under the NBM law Article 75²(4) the NBM must pursue sanctions within 3 years of the violation and the process must be completed within 6 months. - Non-transparency of banks’ ownership and control structure: - Recent changes in ownership of Moldovan banks have been conducted in an opaque manner and were not subject to NBM scrutiny. - Undisclosed “raiders” acting in concert have been able to acquire or accumulate significant controlling stakes, impacting banks’ business and safety. - Supervision of related-party lending and large exposure limits is undermined if UBOs are disguised, exposing banks to excessive concentration risks. - Risk management and compliance weaknesses: - Risk management culture is very poor; regulatory standards are insufficient and compliance functions in banks are almost nonexistent. - Notable regulatory gaps include market risk and an over-arching risk management framework. - Independence and effectiveness of internal audit have been questioned. - Similar concerns apply to other financial institutions, particularly in insurance. - AML/CFT concerns: - Although Parliamentary approval of the National Strategy to combat Money Laundering/Terrorist Financing is significant and supervision intensity largely meets BCP standards, AML/CFT issues warrant close scrutiny. - The AML/CFT unit of the NBM seems to be understaffed. - Difficulties in identifying UBOs and weak compliance functions call into question the effectiveness of AML/CFT preventive measures, including customer due diligence. - Two high-attention issues: cross-border transactions and transactions with Transnistria, where flows of funds of MDL 1 trillion and MDL 2 billion respectively have been identified. - Recommendation: Increase the intensity of AML/CFT supervision of banks including targeted, risk-based on-site inspections. - Resource constraints: - Banking supervision would benefit from increased resources; current staffing and skill levels are insufficient given demands of problematic banks and migration to EU/Basel II/III requirements. - Lack of a clear and sufficient budget allocated to supervision frustrates effective forward planning. ### Insurance supervision - The 2007 Law on Insurance and transfer of supervision to NCFM has strengthened regulation, but few Insurance Core Principles (ICPs) are fully met. - Better performance areas: establishment of the NCFM, licensing, oversight of intermediaries, and consumer protection. - Shortcomings: lack of effective regulatory powers, lack of transparency in ownership impacting supervision of change of control, limited cooperation and coordination (especially for supervision of groups), and weaknesses in risk management and governance. - Restoration of the NCFM’s powers to supervise the insurance sector and other sectors under its authority is crucial and urgent; credibility relies on transparent and sustained enforcement of laws and regulations. Restoration should avoid court suspension of decisions. - NCFM initiatives have strengthened solvency and provisioning requirements and practices, reinforced role of actuarial advice, improved financial reporting and introduced IFRS—progress reflects constraints in conditions for effective supervision, sector capacity, and the sector’s nature, scale, and complexity. - Planned transition to risk-based supervision: - NCFM has decided to move from a pure compliance approach to a more risk-based methodology. - Implementation will need to be phased given technical capacity constraints. - Early gains expected in supervision of governance, internal controls, suitability of key persons, risk management, and capital assessment. - Group supervision and cross-border cooperation: - NCFM has few MOUs with supervisors outside Moldova and does not proactively engage with such supervisors despite growing complexity of ownership structures with non-domestic linkages. - Resolution and compensation scheme: - Resolution and wind-up processes are operational, but arrangements for the compensation scheme remain incomplete. - The insurance law includes provision for a compensation scheme which has not yet been implemented and should be acted upon. ### Crisis management and safety nets — Financial Stability Framework and Crisis Management - Progress and structure: - Moldova has made progress strengthening its financial crisis resolution framework. - NCFS established in June 2010 by the Government to promote a coordinated framework for responding to a financial crisis. - NCFS is chaired by the Prime Minister and comprises: the Government; the Parliamentary Commission on Economy, Budget and Finance; the NBM; Ministry of Finance (MOF); the Ministry of the Economy; the Deposit Guarantee Fund (DGF); and the NCFM. - Legal powers and gaps: - Some laws required for bank crisis resolution are in place. The LFI provides the NBM with a range of powers: ability to place a bank under special supervision; power to give binding directions to a bank in certain circumstances; ability to appoint a special administrator to assume control of a bank. - Once a bank is in administration the NBM has resolution options including facilitating recapitalization, transferring some or all of its business to another bank, and liquidation. - The NBM Law permits emergency lending to solvent banks, against collateral; NBM regulations and guidelines specify procedures and terms. If the NCFM determines a systemic problem has arisen, the NBM may lend against a government guarantee instead of collateral. - Gaps and deficiencies warranting high priority fall into: legal powers; crisis resolution strategies and procedures; and cross-agency crisis resolution capacity and coordination. - Legal powers — specific deficiencies: - Uncertainty as to scope of the NBM’s direction power, including ability to require a bank to restructure to enable least-cost resolution (e.g., pre-positioning for separation of systemically important business functions). - Direction powers apply only to banks, not their subsidiaries; same limitation for special administrator—impeding group resolution if important functions are in subsidiaries. - Moratorium protection under administration does not apply to subsidiaries. - Uncertainty in scope and protections associated with business transfer powers: unclear whether transfers apply to all contractual rights and obligations, IT systems, and staffing contracts. - Risk that appointment of a special administrator would trigger termination or close-out of financial contracts and exercise of set-off rights by counterparties due to absence of a statutory override to contractual early termination rights. - Major concern: risk of judicial challenges to exercise of resolution powers (direction powers, appointment of special administrator, restructuring under administration). - Unclear legal authority to establish a bridge bank or other legal entity for resolution purposes. - LFI includes no specific power to implement a bail-in, nor statutory powers to enable government to provide funding, guarantees, or indemnities quickly (without prior Parliamentary approval). - Crisis resolution strategies and procedures: - Substantial gaps remain: general resolution options have not been adequately identified. - Resolvability assessments of systemically important banks have not yet been undertaken; there are no bank-specific resolution plans in place. - No internal guidance to assist rapid assessment of bank solvency; NBM’s stress testing methodology helps but is not a substitute for a proper asset quality review. - Little consideration given to legal and process aspects necessary for NBM to take collateral other than government or NBM securities. - Recommendation: Develop a contingency plan for crisis resolution covering solvency assessments, systemic impact assessment of different resolution options, resolvability assessments, and bank-specific resolution plans; renew focus on banks’ recovery plans and capacity to implement recovery actions. - Agency responsibilities and coordination: - Each relevant agency needs to develop resolution plans: MOF for recapitalization/funding/guarantee arrangements; DGF for prompt pay-out plans and access to MOF funding; NCFM for resolution plans for institutions under its jurisdiction. - All resolution plans must be coordinated under NCFS framework. - The NCFS MOU provides a helpful framework for coordination; further capacity-building on crisis resolution across agencies is needed. - Progress through NCFS Technical Sub-Committee meetings has occurred; recommendation for a much more intensive process of regular, collegial interagency coordination at senior management and working levels. - A crisis resolution exercise held after the FSAP mission should be followed by development of a program of regular crisis testing within each agency and across all agencies via the NCFS. ### Deposit insurance - The Deposit Guarantee Fund (DGF), established in 2004, has dealt effectively with two recent bank failures. - DGF mandate: a paybox mandate focused on depositor reimbursement, although it may also provide financial assistance on a least-cost basis. - Membership is compulsory for all banks. - Coverage: limited to MDL 6,000 (USD 445) per depositor (but not legal entities) per bank; foreign currency deposits as well as MDL deposits are covered. - Funding: A variety of funding mechanisms is in place and a fund equal to 7.1 percent of insured deposits has been accumulated. - Recommendation: The coverage limit should be raised to increase depositor protection and better contribute to financial stability. - The coverage limit in law is very low (i.e., 72 percent of individual depositors and 8 percent of the total value of deposits). - Prior to changing the coverage limit, a thorough analysis should be undertaken on the impact of raising coverage on: - (i) the proportion of depositors and the total value of deposits covered; - (ii) fund adequacy; and - (iii) required premiums. - Any increase in coverage should come after the banks complete paying special assessment obligations related to an existing bank resolution, in 2015. *Italic source: _cr1670 - 36. Institutional architecture to support system-wide financial stability is not fully in place.* ### 67. A target fund methodology and greater assurance of back-up funding should be ### _cr1670 - 67. A target fund methodology and greater assurance of back-up funding should be developed. ### Deposit Guarantee Fund (DGF): funding, legal, and operational measures - Funding model and target methodology - The DGF utilizes an ex-ante funding model with the ability to charge ex post assessments. - The existing fund size "appears adequate" and would allow for the payout of the six smallest banks combined or a single medium-sized bank. - There is no methodology to establish target funding ratios. - Consideration should be given to: - providing the DGF with a pre-defined line-of-credit from the MOF; and - amending the DGF and NBM laws to include the NBM as an additional source of emergency liquidity back-up funding. - Emergency back-up liquidity - Emergency back-up liquidity funding can be obtained from special premium assessments on banks or borrowing from the MOF, which requires parliamentary approval. - Legal protection, conduct, and conflict-of-interest - The DGF and those working on its behalf require legal protection and appropriate codes of conduct/ethics. - Conflict-of-interest codes for DGF staff need to be made comprehensive. - Information sharing and payout performance - Information sharing and coordination arrangements (through legislation and MOUs) have been developed between the DGF and the NBM. - The reimbursement period ranges from 17–30 days for the majority of depositors; this could be reduced by legal clarifications to provide the DGF with access to more detailed information and the ability to verify such information on-site. - The DGF Law should be amended to allow the DGF to share information related to deposit insurance with insurers in other jurisdictions, subject to appropriate confidentiality provisions. - Creditor ranking in insolvency - The creditor ranking of the DGF in an insolvency is too low: the DGF has a lower status as a creditor in an insolvency than other unsecured creditors, leading to low or nonexistent recoveries for the DGF from failed banks. ### Financial Market Infrastructure (FMIs) and securities registration - Legal and settlement framework - The legal framework for FMIs needs to be strengthened. - Efforts should adopt settlement finality and financial collateral rules in line with international standards. - There is a need to fully dematerialize the transfer of corporate securities rather than require the intervention of the registrar. - CSD reform strategy and cost analysis - CSD reform efforts require a strategy and should include a cost analysis. - A four part approach suggested: - Establish a Working Group on CSD Reform, co-chaired by the NBM and NCFM, formed under the National Payments Council (NPC). - Conduct cost analysis to assess the economic feasibility of different approaches to a single CSD. - Assess financial and risk management and capital adequacy of the private sector. - Develop a well-sequenced reform strategy, approved by the NPC, to guide implementation and minimize industry impact. - Planned transfer to a single CSD and scope considerations - The NCFM plans, using CML amendments, to consolidate the registration system for corporate securities issued by PIEs and traded on the stock exchange into a single CSD. - The exclusion of nonpublic interest entities (i.e. over half of all registered JSCs) from mandatory transfer to the new CSD hampers efforts to prevent fraud risks. - The NCFM should weigh benefits of detecting fraud against the cost of moving additional securities to the planned new CSD. - Interim measure: increase the frequency of registrar inspections to strengthen oversight. - Loss-sharing mechanisms during dematerialization - Loss-sharing mechanisms should be considered in the move from a registrars-based system to a fully dematerialized system for all securities’ transfers. - Reconciling securities records could reveal data inconsistencies (more securities recorded than effectively issued); loss-sharing arrangements could be organized ex ante, using pro-rata loss allocation or the investors’ protection fund. ### Insolvency and creditor/debtor regime improvements - Transparency, judicial integrity, and capacity - The insolvency process, including access to court records, should be more transparent to the public. - The system for judicial appointment and supervision lacks adequate assurances for integrity and credibility. - The judicial system for managing insolvency proceedings is not perceived as reliable. - Administrators and liquidators lack sufficient independence, training and supervision. - Restructuring and secured transactions - Limited use of restructuring techniques when debtors experience financial distress. - Very limited use of out-of-court collective restructuring tools. - Lending by financial institutions is largely secured, but use of financial collateral is undermined by issues in share registries, constraining pledges over shares as viable collateral. - Regime for secured transactions over movable assets requires improvement; lack of confidence in taking security over pools of assets. - Little unsecured credit for enterprises; secured lending against important movable assets (inventory, receivables) is rare. - Mortgage regime works well. - Ongoing project to reform the law of pledge should allow improvements in registration and enforcement. ### Key financial soundness and stress-test statistics (selected) - Banking system size and liquidity (selected points from Financial Soundness Indicators) - Number of banks: 15.0 (Dec-09), 15.0 (Dec-10), 15.0 (Dec-11), 14.0 (Dec-12), 14.0 (Mar-13), 14.0 (Jun-13), 14.0 (Sep-13), 14.0 (Dec-13) - Total bank assets (billions of lei): 39.9 (Dec-09), 42.3 (Dec-10), 47.7 (Dec-11), 58.3 (Dec-12), 59.9 (Mar-13), 63.5 (Jun-13), 69.1 (Sep-13), 76.2 (Dec-13) - Total bank assets (percent of GDP): 0.1 (Dec-09), 58.9 (Dec-10), 57.9 (Dec-11), 66.1 (Dec-12), 60.4 (Mar-13), 64.0 (Jun-13), 69.7 (Sep-13), 76.8 (Dec-13) - Liquidity ratio (liquid assets in percent of total deposits): 62.6 (Dec-09), 50.3 (Dec-10), 48.5 (Dec-11), 48.2 (Dec-12), 49.0 (Mar-13), 45.4 (Jun-13), 48.4 (Sep-13), 49.6 (Dec-13) - Nonperforming loans as a share of total loans: 16.3 (Dec-09), 13.3 (Dec-10), 10.7 (Dec-11), 14.5 (Dec-12), 13.0 (Mar-13), 12.7 (Jun-13), 12.4 (Sep-13), 11.6 (Dec-13) - Solvency stress test summary (as of 30-Sept-2013; top-down and bottom-up results reported) - Total regulatory capital - before shock: 7,766 (MDL) - Total risk-weighted assets (RWAs): 33,376 (MDL) - Total assets: 69,094 (MDL) - Total regulatory capital-ratio (CAR) - before shock (in percent of RWAs): 23.3 - Total expected losses (example scenarios, top-down): (257), (1,595), (4,712), (2,358) (MDL) across Baseline and Adverse scenarios - Total regulatory capital - after shock (examples, top-down): 7,509; 6,195; 3,054; 5,408 (MDL) - Total regulatory capital-ratio (CAR) - after shock (in percent of RWAs) (examples): 22.5; 18.6; 9.2; 16.2 (percent) - Implied capital shortfall (in percent of GDP) (examples): 0.1; 0.6; 2.9; 1.0 - Number of banks with a CAR below regulatory minimum (16 percent) (examples): 1; 5; 9; 6 - Liquidity stress test summary (system-wide LCR proxies and shortfalls) - Liquid assets: 21,941,563,184 (MDL) and 17,769,843,907 (MDL) and 9,819,595,677 (MDL) across methodologies - Potential outflows: 13,130,155,177 (MDL); 16,133,990,538 (MDL); 6,119,226,749 (MDL) - System-wide LCR (in percent): 167.1; 110.1; 160.5; 112.9 (across LCR methodologies) - Liquidity shortfall: 1,631,320,909 (MDL); 1,163,746,596 (MDL); 1,200,733,944 (MDL) (across scenarios) - Number of banks with LCR below 100 percent: 0; 4; 4; 3 (across LCR methodologies) *Source: IMF staff report content provided in the content unit.* ### Appendix III. Risk Assessment Matrix ### Appendix III. Risk Assessment Matrix ### Overview - Scale—High, Medium, or Low. - The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). - The relative likelihood of risks listed is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability of 30 percent or more). - The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly. - In case the baseline does not materialize. ### 1. A sharp increase in geopolitical tensions surrounding Russia/Ukraine that creates significant disruptions in global financial, trade and commodity markets - Relative Likelihood: Medium - Impact if Realized: High - The intensification of geopolitical tensions related to the developments in Ukraine and any related slowdown of the Russian economy would inevitably worsen the external outlook for Moldova - A disruption of trade routes and gas supply and a decline in remittances could severely impact the economy - Policy Response: - Accelerate diversification of external trade products and markets, and energy sources. - Let the exchange rate adjust to facilitate absorption of the external shock. - Continue prudent macroeconomic policies to further strengthen external buffers; allow automatic fiscal stabilizers full play. - Strengthen monitoring of bank exposures to exchange rate and cross border risks. ### 2. Protracted period of slower European growth - Relative Likelihood: High - Impact if Realized: High - Larger than expected deleveraging or negative surprise on potential growth - Lower export demand (from EU and CIS), falling remittances and other financial flows (e.g., trade credits) would induce lower growth, higher budget deficit, exchange rate pressures, and banking sector difficulties - Policy Response: - Let fiscal automatic stabilizers work. - Let the exchange rate adjust to facilitate absorption of the external shock. - Speed up structural reform to increase competitiveness. ### 3. Deterioration of Moldova’s banking system soundness e.g. as a consequence of weak governance - Relative Likelihood: High - Impact if Realized: High - Reemergence of problems at individual banks, and/or soaring system-wide NPLs can undermine the banking system soundness - Credit supply would dwindle, and the government might need to intervene to prevent or resolve bank failures - Policy Response: - Enforce shareholder and beneficial ownership transparency and suitability requirements. - For banks in trouble, intervene in large systemically important ones and liquidate small ones. - Step up anti-corruption and AML/CFT efforts. ### 4. Decline in official external financing - Relative Likelihood: Low - Impact if Realized: Medium - Budget cuts in Europe or setbacks in Moldova could worsen donor’s sentiment and curtail donor aid - Scaling down of development projects and budget financing - Policy Response: - In the context of prudent fiscal policy look for alternative funding sources for priority projects. ### 5. Political cycle - Relative Likelihood: High - Impact if Realized: Medium - Intensifying political competition ahead of the 2014 parliamentary elections could lead to populist initiatives, delaying or reversing structural reforms - Deteriorating growth prospects and business climate would harm investment, competitiveness, and defer poverty reduction and would lead to fiscal slippages - Policy Response: - Restore prudent macroeconomic policies. - Accelerate structural reforms. *Source: IMF staff.* ### 19. Although Moldova has a policy framework for tackling corruption and the country has ### _cr1670 - 19. Although Moldova has a policy framework for tackling corruption and the country has ### Governance and corruption overview - Moldova has a policy framework for tackling corruption and has made strides in closing the large implementation gap, yet serious governance and corruption issues remain. - The country continues to face significant challenges in improving enforcement and implementation of legislation adopted largely because of European Union accession requirements. - Moldova ranks 105 out of 178 countries in Transparency International’s corruption perception index 2010. - Corruption in the judiciary has stemmed from malpractice by multiple stakeholders and as a result, the rule of Law does not apply. ### NBM objectives, powers, independence, accountability and cooperation (CPs 1–3) - NBM powers have been seriously hampered: - The Ministry of Justice (MOJ) interferes in secondary legislation; before coming into force, NBM regulations must be registered by the MOJ which performs a legal revision, sometimes leading to substantial amendments. - This interference undermines NBM’s powers and autonomy and creates unnecessary delays in implementing prudential policies; as a result, it may take about one year for a regulation to be issued. - NBM recommendations are not binding instruments and are not enforceable. - According to a recent CC ruling (October 1, 2013), all acts and decisions of the NBM can be challenged in court, leading to the suspension of the decision under certain circumstances by the lowest court in the country. - Amendments to the LFI were made to mitigate impact from the ruling, but concerns remain about NBM’s capacity to take prompt corrective measures in supervision (for example, some provisions of the regulation on Large Exposure Limit have been suspended). - Legal independence concerns: - Conditions for dismissing the Governor and other Board members are unclear; LNBM, art. 27, f leaves the door open to potential political interference. - NBM Board members and employees, including staff appointed as a bank’s liquidator, lack sufficient protection against lawsuits while discharging duties in good faith; the new language in the LFI is too general and does not include specific protection for Board members. - The current law does not indicate the nature of liability for employees (civil and/or criminal) and staff do not receive financial assistance in case of lawsuits. - Despite legal ambiguities, in practice no such dismissals have been reported; the previous NBM governor enjoyed several successive mandates, spanning 18 years in one case. - Cooperation: - The Memorandum of Understanding (MOU) between the NBM and public authorities for the NCFS should be revisited to clarify and confirm absence of political interference in NBM decisions. - NBM may consider expanding cooperation agreements with bodies such as the Deposit Guarantee Fund and the Credit Bureau. - At the international level, efforts should continue to finalize MOUs with home supervisors of foreign subsidiaries operating in the country (examples cited: Italy, France, Germany, and Austria). ### Ownership, licensing, and structure (CPs 4–7) - Transparency in banks’ ownership structure remains a major problem with cascading risk effects: - NBM has struggled to obtain a clear vision of banks’ ownership structures despite reinforced regulations and reporting. - Most recent changes in ownership have been conducted in an opaque manner and did not receive prior NBM clearance. - In many cases, ownership was acquired piecemeal through stock market operations, in transactions just under 5 percent of the subject bank’s capital, thus avoiding NBM vetting. - According to an external audit company, only 2 banks out of 10 (excluding subsidiaries of foreign banks) “have more or less a clear, transparent shareholder structure.” ### Methods of ongoing banking supervision (CPs 8–10) - Supervisory approach: - Tends to be compliance-based and should move towards risk-based supervision. - Current inspection planning does not take into account each bank’s risk profile nor their systemic importance, although elements of risk-based supervision (risk matrix, methodology for identifying systemic banks) have been used. - A new supervisory methodology aligned with Basel II is planned but a new supervisory cycle has yet to be developed. - Human resources for on-site and off-site supervision are inadequate. - On-site and off-site mix: - Appropriate mix exists but weaknesses include examination report issuance delays (sometimes up to one year), affecting timely corrective measures. - Frequency and intensity of supervision should depend more on systemic relevance and identified risks. - Reporting and IT: - Extensive reporting requirements provide wide solo-basis data, but prudential returns are not collected on a consolidated basis. - Secondary regulations should be amended to require consolidated prudential ratios and other important information. - In the absence of proper IT application, Banking Supervision and Regulation Department devotes excessive resources to manual off-site activities; an automated platform is necessary. ### Corrective and sanctioning powers (CP 11) - Enforcement limitations: - Under Art. 38 of the LFI, NBM can use a wide range of instruments to address bank problems, and it has adopted measures for issues including insufficient Tier I capital size; asset quality; misreporting; deficiencies in internal control systems; and violations in preventing and combating ML/TF. - In cases of persistent deficiencies, NBM should have taken more forceful actions; lack of protection for staff may lead management to refrain from tougher measures. - Sanctions in relevant laws (LFI, LNBM, AML/CFT law) do not seem sufficiently dissuasive, particularly pecuniary sanctions. - According to the NBM law, sanctions taken by the NBM (art. 75²(4)) are subject to a legal prescription of six months after the NBM report is submitted to the bank and the violation itself to a prescription of three years; after six months it is understood that application of sanctions is not possible. ### Consolidated and cross-border banking supervision (CPs 12–13) - Consolidated supervision: - NBM’s approach is not comprehensive and effective; NBM should develop consolidated prudential supervision rules for domestic groups and pursue agreements with home supervisory authorities. - MOUs: - MOUs are not in place with all relevant home supervisors; absence has not prevented effective supervision but formal supervisory information exchange should be facilitated. ### Corporate governance (CP 14) - Weaknesses in regime: - Banks and groups lack robust and effective corporate governance policies and processes. - No binding specific requirements for independent risk management and compliance functions or specialized Board committees. - Lack of shareholder transparency impedes sound governance. - NBM actions: - Should foster implementation of amendments to the Regulation on internal controls to promote corporate governance and be more intrusive by challenging risk appetite across all risk categories and alignment with policy and procedures. ### Prudential requirements and regulatory framework (CPs 15–25) - Risk management: - No binding requirements for banks to establish an independent risk management (RM) function; many banks lack RM functions and there is no explicit legal requirement for a dedicated risk officer. - Legal/regulatory frameworks assign responsibility to the executive body for effective management of major risk types but certain difficult-to-measure risks are not covered. - NBM evaluation of RM relies heavily on on-site monitoring which is not sufficiently robust; oversight intensity should increase where RM processes are poor. - Capital adequacy: - Issues: exposures secured by real estate mortgages should receive a proper capital charge; FX exposures (open positions) should be subject to a capital charge. - Risk-weighted capital ratios are maintained in average at 23 percent; NBM needs to ensure these ratios are not inflated by deducting risk excess from eligible capital (e.g., on large exposures and related parties from undisclosed UBOs). - Credit risk: - Banks have inadequate credit risk management, excessively relying on collateral rather than debtor financial capacity. - Poor loan portfolio quality and inadequate underwriting policies weaken some banks; violations related to lending and credit risk management are the most frequent. - NBM should enhance scrutiny of credit underwriting policies. - Accounting and provisioning: - New IFRS accountancy framework introduced starting January 1, 2012, but former regulation on assets and conditional commitments classification continued for prudential reasons. - Allowances for loan losses are calculated based on banks’ internal methodologies and certified by external auditors biannually; NBM supervisors examined only accuracy of specific provisions for assets and conditional commitments. - Flaws identified: misclassifications despite clear regime; classification periodicity too long, inflating prudential ratios; restructuring practices often delay loss recognition rather than resolve problem assets; large gap between IFRS allowances and prudential allowances. - In practice, IFRS loan loss allowances are often determined using cash flows from foreclosure minus costs, potentially understating needed provisions. - Concentration risk and large exposures: - Surveillance needs strengthening; observance of risk concentration limits by banks is questionable. - Lack of transparency in ownership undermines NBM’s understanding of connected lending and concentration risks. - Current regulation on LEL lacks a specific definition of risk concentration. - Related parties and ownership opacity: - Recent opaque ownership changes allowed undisclosed “raiders” to acquire significant stakes, affecting bank business and safety. - Lack of UBO information affects surveillance of related parties and LELs. - Country/transfer, market, interest rate and liquidity risk: - Internal procedures for country/transfer risk management are stipulated, but several banks were excessively exposed through inter-bank placements to banks from one neighboring country; NBM should require more stringent limits. - Market risk regulation implemented for FX risk and interest rate risk in the banking book, but not for FX risk in the trading book; capital charge on market risk not yet implemented. - Interest rate risk management needs strengthening; NBM should promote policies and require banks to compute and submit internal interest rate risk measures, including standardized shocks on the banking book. - Liquidity regulatory framework generally adequate, but off-balance sheet commitments are not included in prudential liquidity requirements and capacity to sell liquid assets is not required; some banks circumvented liquidity rules by taking long-term deposits from cross-border banks and placing them short-term to meet Liquidity Principle II. - Operational risk: - Regulation on Operational Risks has not been issued; operational risk management is covered only through regulation on internal control, with limited additional guidance on outsourced activities and contingency plans. ### Internal control, internal and external audit, financial reporting, market disclosure and transparency (CPs 26–28) - Internal control and audit: - NBM regulation on internal control strengthens requirements for a strong internal control environment. - No specific requirements for (i) existence of a separate compliance function and (ii) professional qualification and compulsory fit and proper standards for the head of the audit function. - Improvements needed in internal audit to enhance overall effectiveness. - External auditors: - External auditors are subject to professional and ethical standards; NBM can approve external auditing firms and requires rotation of audit firms periodically. - In the last two years, the vast majority of banks’ financial statements were audited by a single audit company. - Banks often pay little consideration to qualified opinions, preferring a qualified opinion to making appropriate provisions; this culture undermines the impact of external audits. *REPUBLIC OF MOLDOVA INTERNATIONAL MONETARY FUND* ### 45. Disclosure requirements have been tightened and cover a broad range of information. ### _cr1670 - 45. Disclosure requirements have been tightened and cover a broad range of information. ### Disclosure and Accounting - The banking system prepares its accounting records and reports financial information in accordance with IFRS, which have to be published. - Disclosure requirements have been tightened and cover a broad range of information. ### Abuse of financial services (CP 29) — ML/TF risks and findings - Moldova approved the National Strategy to combat ML/TF; key amendments to the penal code will enter into force in 2014, reinforcing sanctions for AML/CFT violations. - The Office for Preventing and Combating ML requested in November 2013 technical assistance to carry out the ML/TF National Risk Assessment of Moldova based on the World Bank methodology. - Efforts to equip NBM staff with advanced AML/CFT methodology have been pursued. - Persistent challenges warrant close scrutiny: - The AML/CFT unit of the NBM is understaffed. - Lack of transparency in bank ownership and difficulties identifying UBOs are serious concerns. - Cross-border transactions of major proportions (amounting to about 1 trillion lei) involving Moldovan banks have been detected; according to the NBM, this figure seems to be exaggerated. - Transactions appear to be performed by companies operating from off-shore centers with undisclosed UBOs, likely for tax evasion purposes. - The situation with Transnistria is a concern: - Transnistria is designated by the Republic of Moldova as an Autonomous territorial unit with special legal status but de facto the Moldovan government has not exercised authority there for some years. - From an AML/CFT standpoint, the authorities declare suspicious any single transaction, irrespective of the amount, between Moldovan banks and Transnistrian banks. - Outbound financial flows to Transnistria were quite significant (MDL 2 billion in 2013) and operated by companies with unknown beneficial owners. - The NBM monitors these transactions daily but has little room for remedial actions as they would bring immediate political reaction. - In 2012, Moneyval assessed Moldova’s AML/CFT regime and noted that in the absence of a risk assessment, implementation of “adequate risk-based supervision was not demonstrated.” ### Authorities’ Response (National Bank of Moldova — NBM) - The NBM values the IMF and World Bank contributions within the FSAP regarding alignment with international standards. - The mission’s results and recommendations provided an independent and objective opinion on the banking sector and highlighted issues requiring action. - NBM commentary and stated actions: - Since the 2008 FSAP mission, the legal framework has been completed and amended to strengthen the independence and autonomy of the NBM, including banking regulation and supervision activities; a positive tendency exists toward ensuring the highest level of independence as provided by the Basel Core Principles. - The NBM acknowledges the need to increase knowledge on banks’ ownership structures and to apply measures to comply with best international practices. - A major objective is to create and implement regulations on banking risk management, both financial and non-financial; this is an ongoing process. - Improvements in risk management regulation are expected to lead to significant improvements in the normative framework related to corporate governance. - The NBM will continue to develop and improve the normative framework and financial institutions’ supervision methodologies to comply with the Basel Core Principles. ### Summary Compliance with the Basel Core Principles — Key detailed assessment comments (by Core Principle) - 1. Responsibilities, objectives and powers. - NBM powers have been disminished by the country’s Constitutional Court. - The recommendations issued by the NBM are not binding. - It is not clear whether the NBM has the power to increase banks’ prudential requirements. - There is no explicit provision in the law stipulating that the objective of banking supervision is to promote safety and soundness of the financial system. - Objectives of banking supervision may conflict with other objectives. - 2. Independence, accountability, resourcing and legal protection for supervisors. - The corporate governance structure of the NBM is not satisfactory. - The conditions for dismissing the governor and other Board members are unclear. - NBM Board members and employees do not enjoy enough protection against lawsuits while discharging their duties in good faith. - NBM staffing seems to be insufficient in the context of growing activities. - The Banking and Regulation Supervisory Department (BRSD) budget allocation process is not transparent. - Sanctions for breaching the Code of conduct and the Anti-fraud Policy are not specified. - NBM staff is allowed to hold shares in banks. - There is no requirement for the NMB to render an account of its performance in regard to its supervision activities. - 3. Cooperation and collaboration. - Delineation of responsibilities among members of the NCFS (including the NBM) is not clear. - 4. Permissible activities. - (No specific comment provided in source excerpt.) - 5. Licensing criteria. - Full ownership details of certain banks licensed in the past, including details on the UBO, are still missing. - Regulations do not specifically require individual Board members or the Board collectively to have a sound knowledge of the material activities that the bank intends to pursue, and the associated risks. - 6. Transfer of significant ownership. - Ownership structure is still opaque in several banks. - Questionable rulings by Provincial courts undermine the integrity of the regime applied to transfer of ownership. - 7. Major acquisitions. - (No specific comment provided in source excerpt.) - 8. Supervisory approach. - The current supervisory inspection planning does not take into consideration risk profile of each bank nor their systemic importance. - The human resources allocated to both on-site and off-site supervision does not appear adequate. - 9. Supervisory techniques and tools. - It sometimes takes up to a year to issue an on-site inspection report (this was the case in 2013). These delays may affect the ability of a bank to take timely corrective measures. - The frequency and intensity of supervision should depend more on the systemic relevance of the banks and the risks identified. - 10. Supervisory reporting. - In the absence of proper IT application, the BRSD devotes excessive resources to perform manually several off-site activities. - Prudential returns are not provided on a consolidated basis. - 11. Corrective and sanctioning powers of supervisors. - The enforcement powers of the NBM have been diminished. - Fines contemplated in relevant laws (e.g. LFI, LNBM, and AML/CFT law) do not seem dissuasive enough. - The NBM does not have in-house methods that could provide management with guidance on how to apply criteria for sanctions as defined in the law. - The prescription regime applicable to sanctions diminishes effectiveness of enforcement. - The NBM response is not increased in case of persistent breaches. - The Special Supervision regime does not seem well designed. - Footnote: Sanctions taken by the NBM (Article 75² (4)) are subject to a legal prescription of 6 months after the submission of the report to the bank and the violation itself to a prescription of 3 years. Beyond this period of 6 months, sanctions cannot be applied. Also, if the commission of the violation is older than 3 years, it cannot be sanctioned. - 12. Consolidated supervision. - The NBM’s approach to consolidated supervision is not comprehensive and effective. - 13. Home-host relationships. - The ability of NBM to develop a resolution plan to address evolving bank problems and possible resolution in a cross-border situation, especially for the existing four subsidiaries of non-domestic banks, has not been developed due to the inaction of the home supervisor. - 14. Corporate governance. - The CG regime exhibits important weaknesses. - 15. Risk management process. - No clear RM framework. RM functions have not been established in a large number of banks. - The NBM approach to evaluating risk management in banks is heavily reliant on the on-site monitoring process. - 16. Capital adequacy. - Exposures secured by real estate mortgages do not receive proper capital charge. - There is no capital charge for FX exposures (open positions). - 17. Credit risk. - Excessive reliance on collateral rather than on the financial capacity of the debtor. - 18. Problem assets, provisions, and reserves. - There are multiple cases of misclassification. - The periodicity for classification is too long. - 19. Concentration risk and large exposure limits. - The current regulation on LEL does not contain a specific definition of risk concentration. - Interbank exposures are not captured by the regulation on the LEL. - Observance by banks of the risks concentration limits is questionable. - Lack of transparency in ownership structure of certain banks undermines the understanding of connected lending and as a result concentration risks. - Some provisions of the LEL regulations have been suspended by a Court. - 20. Transactions with related parties. - The lack of information on the ultimate beneficial owner of banks’ stakes is directly affecting the surveillance of related parties. - There are still concerns about the effectiveness of the current supervisory regime for related parties. - 21. Country and transfer risks. - Several banks are excessively exposed through inter-banking placements in cross-border banks. - 22. Market risk. - Market risk from trading book not captured. - 23. Interest rate risk in the banking book. - There are no requirements for banks to compute and submit to NBM the results of their internal interest rate risk measurement systems, expressed in terms of the threat to economic value, including using a standardized interest rate shock on the banking book. - 24. Liquidity risk. - Off-balance sheet commitments are not included in prudential liquidity requirements; consequently the risk profile of the bank did not capture risks arising from these exposures. - 25. Operational risk. - OR not well captured in current regulation. - 26. Internal control and audit. - Compliance functions nonexistent in banks. - No professional qualification requirements and fit and proper assessment for head of internal audit. - 27. Financial reporting and external audit. - Banks disregard qualified opinion expressed by external auditors. - 28. Disclosure and transparency. - (No specific comment provided in source excerpt; earlier text notes IFRS-based reporting must be published.) *Source: IMF staff report excerpt (Republic of Moldova FSAP chapters as provided).* ### 29. Abuse of financial services. ### 29. Abuse of financial services. ### Findings - Massive cross-border operations originating from and/or flowing to off-shore centers. - All operations with Transnistria have been declared suspicious. - Banks have not yet performed their own risk assessment of ML/TF risk. ### Recommended Action Plan to Improve Compliance with the Basel Core Principles - Principle 1 - Strengthen NBM power by removing any interference of the MOJ in the process of secondary legislation. - Include an explicit provision in the law stipulating that the objective of banking supervision is to promote safety and soundness of the financial system. - Include in the LFI an explicit stand-alone provision to grant NBM the power to increase the prudential requirements for individual banks and banking groups based on their risk profile and systemic importance. - Principle 2 - Reform the Corporate Governance structure of the NBM to ensure clear segregation of functions. - Restore full independence of the NBM by protecting members of the board from external influence. - Add in the NBM law a provision stipulating that no member of the NBM’s Board can be replaced for reasons or following a procedure other than those stipulated in Article 27. - Provide full legal protection to all NBM employees in case of lawsuits for actions in good faith. - Provide full indemnification benefits to NBM staff in case of litigation for action performed in good faith. - Specify in the law the types of liability NBM employees are subject to. - Improve transparency in budget allocation for Supervision activities. - Include clear sanctions in the code of conduct in case of breach. - Prohibit NBM’s employee from holding an equity interest in banks. - Increase NBM manpower, particularly with respect to the transition to Basel II/Basel III and the establishment of an enhanced banking resolution mechanism - Reinforce transparency by issuing a publication setting out the NBM‘s plans for a forward period (e.g., for two years) showing how it will achieve its mandate and the related costs (and funding thereof). - Principle 3 - Expand the NBM cooperation agreement with other relevant bodies such as the Deposit Guarantee Fund and the Credit Bureau. - Clarify the conditions of exchange of confidential information among all members of the NCFS. - Explore the possibility for the Head of BRSD to attend meetings of the NCFS, at least as an observer, or, at the minimum provide him access to the minutes of the committee meetings. - Pursue efforts to finalize MOUs with home supervisors of foreign subsidiaries located in Moldova e.g. Italy, France, Germany and Austria. - Principle 4 - (no specific actions listed in the provided excerpt) - Principle 5 - Increase efforts in establishing full ownership details of certain banks licensed in the past, including details on the UBO. - Include in the regulation a provision requiring individual Board members or the Board collectively to have a sound knowledge of the material activities that the bank intends to pursue, and the associated risks. - Principle 6 - Intensify pressure on the NCFM about its duties and accountability vis-à-vis the national depository to ensure identification of the UBO. - Ensure alignment between the LFI and other NBM regulations on significant holdings in banks’ capital and the law governing market activities. - Increase penalties in case of fraudulent acquisition of shareholdings. - revisit the language of art. 156 (4) of the LFI1 by setting a specific timeframe for the prohibition contemplated under this article 2 and by banning the person from holding interest, directly or indirectly in other banks. - Perform due diligence to ensure that entities located in NCJ no longer hold directly or indirectly equity interest in the capital of a bank. - Explore the possibility to subject private registrars to systemic reporting obligations to NBM on shareholder transfers (and not only to the NCFM as planned). - Footnotes related to Principle 6: - 1 Stipulating that a person who no longer meets the requirement for holding equity in a bank (e.g. when exercising an influence that might jeopardize bank’s sound management), “cannot further hold directly or indirectly new shares in that bank.” - 2 The law does not indicate whether the prohibition will expire after a certain period of time. - Principle 7 - (no specific actions listed in the provided excerpt) - Principle 8 - Adopt a more risk-based approach, instead of relying on compliance based procedures. - Explore the possibility to enhance off-site and on-site resources. - Implement the framework for crisis management. - Principle 9 - Improve the examination process by shortening the delay between the end of the on-site visit and the official submission of the report to the bank. - Enhance on-site and off-site supervision for systemic important banks. - Improve supervisory methodologies to enable a timely intervention in banks. - Take a more active stance in influencing the quality of internal audit in banks and establishing a regular dialogue with the bank’s internal auditors. - Engage more actively in a dialogue with external auditors. - Principle 10 - Amend the relevant secondary regulations in order to require banks to submit on a consolidated basis their prudential ratios and other important information, such as: capital adequacy, large exposure, transactions with affiliated parties. - Implement a new IT application for a better execution of the off-site function. - Principle 11 - Take more forceful action in case of persistent problems, and apply gradual response, including stricter remedial measures. - Amend the law to increase the level of fines that can be applicable to individuals. - Reconsider the prescription regime for sanctions, in particular by expanding the 6 months timeframe. - Set internal guidelines to assist NBM management in determining the most adequate response in case of breach or violation. - Monitor the application of the new LNBM law by judges to assess whether the new legal amendments introduced to mitigate the consequences of the Constitutional Court ruling are having the desired effects and do not lead to major restrictions to NBM powers. - Distinguish between remedial measures/or corrective actions (that could apply when, in the NBM opinion, the risk exposure is too high) and sanctions that should apply if and only if a bank breached the law or a regulation. - For the Special Supervision regime: - establish objective criteria for subjecting banks to the special supervision regime; - set a time frame for adopting the SSC recommendations by banks; and - Apply this regime with discernment, e.g., when the financial condition of the bank is not compromised. - Principle 12 - Develop consolidated prudential supervision rules for the domestic groups and pursue NBM’s efforts to conclude agreements with home supervisory authorities. - Principle 13 - NBM to pursue its efforts to conclude agreements with home supervisory authorities. - Principle 14 - Foster the implementation of the amendments to the Regulation on internal controls as soon as possible to promote Corporate Governance. - Amend the LFI in order to broaden the executive functions (e.g., key executives—categories of staff whose professional activities have a material impact on the credit institutions’ risk profile; heads of internal control functions-risk management, compliance, internal audit), that need prior approval of the NBM based on fit and proper standards. - NBM to take more intrusive action by challenging the risk appetite and risk tolerance of a bank and evaluate tone at the top. - Continue assessing the balance of power, the incentive system and the risk appetite of a bank using instruments such as assessing the leadership profile of an administrator. - Introduce a legal or regulatory obligation that calls for the banks to notify the supervisor as soon as they become aware of any material information that may negatively affect the fitness and propriety of a Board member or a member of senior management. - Principle 15 - Increase oversight intensity in banks where risk-management processes are poor. - Ensure that all banks continue to develop their risk management policies and processes. - Introduce a legal or regulatory obligation for banks to draw up annually a report about the conditions on which internal control is performed, with a distinct presentation of the aspects related to the risk management function, compliance function and internal audit function. - Principle 16 - Require banks to apply the correct RWA for loans secured by properties. - Principle 17 - Enhance supervisory scrutiny of financial analysis and valuation of collateral through loan reviews; - Focus more on determining if banks credit underwriting policies are prudent; - Introduce in the Regulation on lending activity provisions requiring: - banks to have in place procedures for assessing collaterals, especially tangible ones, based on International Valuation Standards by certified evaluators; and - banks to identify, assess and frequently monitor indirect foreign exchange risk as part of the credit underwriting and monitoring process; - Consider stricter collateral requirements (loan-to-value ratios), different indebtedness ratio for unhedged individual borrowers, more restrictive requirements for unhedged legal entities and lower limits on concentration of large borrowers subject to foreign exchange risk. - In the new regulation on internal controls, define and distinguish between FX risk arising at the level of the borrower and the risk arising from the banking activity. - Principle 18 - Amend the provisions of the regulation on assets and conditional commitments classification to require a more frequent classification at least monthly and to increase the monitoring period from three to six months in case of extended or renegotiated assets and conditional commitments. - Revise banks’ accounting policy on impairments of financial assets. - Perform more oversight over compliance with IFRS, particularly for impairments. - Principle 19 - Increase level of knowledge on banks’ ownership structure. - Enforce, through greater sanctions, observance of risks concentration limits. - Improve language in the regulation on LEL with defining in more details the concept of risk concentration. - Principle 20 - NBM to pursue its effort to identify shareholders and UBO who own controlling interest in banks. - Enforce the regulation more forcefully in case of grave deviations from the rules; - Increase NBM monitoring on the terms and conditions applied to deposits of related parties. - Principle 21 - Continue to promote adequate policies and practices for country/transfer risk management, - Implement and require more stringent limits in terms of individual exposure lower than those related to large exposure. - Principle 22 - Continue to promote adequate policies and practices for market risk management, including an independent risk management function. - Include in the draft Regulation on internal control system requirements on managing market risks from the trading book. - Principle 23 - Prescribe clearer provisions for banks to calculate potential changes in their economic value resulting from changes in the levels of interest rates, in accordance with their risk profile and risk management policies. - Require banks to compute and report to the NBM the change in their economic value as a result of applying a sudden and unexpected change in interest rates standard shock prescribed by the NBM (for example, a 200 basis point shock, in both directions, regardless of the currency). - Principle 24 - Complete amendments to the Regulation on internal control system and in the liquidity risk management to prescribe banks to: (i) regularly assess their capacity to sell liquid assets; (ii) have in place an adequate liquidity buffer aligned with the risk tolerance of the bank; (iii) establish formal alternative funding plans; (iv) set limits to manage day-to-day liquidity; and (v) set limits on correspondent banks. - Amend the regulation on liquidity to take into account the off-balance sheet commitments when determining liquidity ratios. - Principle 25 - Speed up the issuance of the regulation on Operational Risks and subject banks to more detailed reporting obligations on OR, beyond the reporting of frauds. - Principle 26 - Require improvements in the internal audit function to enhance overall effectiveness. - Speed up the approval process of the new Regulation on internal controls. - Introduce in the regulation on internal controls an explicit requirement for professional qualification and fit-and-proper assessment for heads of internal audit and impose an obligation on banks to notify the NBM of the dismissal of the Head of internal audit. - Exchange, on a regular basis, views on the quality and independence of internal audit with the external auditors during tri-partite meetings. - Principle 27 - Take more forceful action for ensuring audit quality by actively challenging external auditors and banks' management when understatement of provisions is identified. - Arrange more frequent periodic meetings with the auditors to discuss issues of common concerns and exchange information on important accounting, financial and auditing matters. - Give NBM examiners the power to access external auditors’ working papers, where necessary. - Increase level of expertise among NBM staff to deal with IFRS issues. - Principle 28 - (no specific actions listed in the provided excerpt) - Principle 29 - Perform targeted on-site visits—preferably in conjunction with the Office for Prevention and Control of Money Laundering—to determine the nature, magnitude and economic rationale of the cross-border transactions identified by the financial intelligence unit and determine proper supervisory response. - Increase level of scrutiny in banks by doing more targeted on-site inspections in the area of politically exposed persons, UBOs, correspondent banking relationships. - Instruct banks to perform their internal ML/TF risk assessments. - Increase sanctions in case of recurrent violations of AML/CFT regulation by the same institution. - Equip NBM examiners with proper software to conduct AML/CFT on-site visits. - Implement without delay aspects of the AML/CFT National Strategy that relates to the NBM mandate. In effect, this strategy for 2013–17 that was approved by the parliament in June 2013 contains several activities that are directly under the ambit of the NBM. *Source: _cr1670 - 29. Abuse of financial services.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr1670.pdf_