## _cr1671 ## Source details **Canonical URL:** [_cr1671](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr1671.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr1671.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr1671.pdf.json) --- ### Executive summary — progress in prudential and supervisory framework - Two medium-term strategies designed since 2008; most recent spans "2013–17" focusing on higher efficiency, transparency, performance of the NBM and corporate governance. - Transition from Basel I to Basel II underway; NBM plans to implement the standard risk-weighting model of Basel II and other elements of Basel III as part of Association Agreement with the EU, and to gradually implement the EU Capital Requirements Regulation and Directive (CRR/CRD). - Capital requirements tightened: - Minimum regulatory capital increased from Lei 100 to 200 mmillion (approximately EUR 12.3 million) in 2013. - Capital Adequacy Ratio (CAR) increased from 12 to 16 percent. - As of January 2014, average risk-weighted capital adequacy in the banking system maintained at about 23 percent. - Adoption of IFRS: - Decision No. 238/29.02.2008 required use of IFRS. - From January 1, 2012, banks started to implement IFRS and submit FINREP templates. - New regulations and methodologies adopted: improved internal control framework, stress testing requirement for every type of risk, revised asset classification with “time bucket” delinquency reporting, new definitions (“dominant influence”, “close link”, “persons acting in concert”), AML/CFT guidance (2011, 2013), and AML/CFT on-site inspection methodologies (with U.S. Treasury TA). ### Main strengths and supervisory capacity - Strong professionalism within the Banking and Regulation Supervisory Department (BRSD). - High quality internal analysis and Board reports; density and thoroughness of inspection reports noted as outstanding. - Use of full-scope on-site inspections to increase transparency in bank ownership and publication of significant data; examiners check internal controls for identifying persons exerting significant influence, ownership structures, and source of contributed capital. ### Key shortcomings, institutional constraints, and preconditions - Rule of law and corruption: - The rule of law is absent in Moldova; concerns about corruption in the judiciary. - Transparency International ranking: 102 out of 177 (also referenced as 105 out of 178 in other parts of the assessment). - Financial stability framework and crisis management: - Financial stability policy framework not fully operational; small NBM unit for financial stability and a Financial Stability sub-Committee exist since 2011 but translation of BRSD analysis into actions unclear. - National Committee for Financial Stability (NCFS) established June 2010; mandate not well defined and capacity to act untested. - Framework for crisis management and resolution in infancy; NBM has track record with problem banks but intervention conditions not well established. - Deposit guarantee inadequacy: - Deposit Guarantee Fund secured so far: MLD 171.9 million = 0.37 percent of the total deposits in the banking sector. - Market discipline and corporate governance: - Corporate governance in banks extremely weak and sometimes driven by shareholders; in three banks (one systemically important) CEO is directly appointed by shareholders assembly per charters. - Risk management and compliance in banks: - Culture of Risk Management poor; compliance functions almost nonexistent. - Regulation on internal control systems silent on need for proper RM and compliance functions; no specific professional requirements for internal auditors. - Poor RM and voluntary breaches led to excessive concentration risks and significant losses in some banks. - Transparency of ownership and related risks: - Significant challenges ensuring full transparency of beneficial ownership; many acquisitions conducted opaquely and piecemeal to circumvent NBM vetting. - External audit company: only 2 banks out of 10 (excluding foreign ones) “have more or less a clear, transparent shareholder structure”. - Lack of UBO information affects surveillance of related parties and large exposure limits. - ML/TF concerns: - National Strategy to combat ML/TF approved by Parliament (strategy for 2013-2017). - FIU reports cross-border transactions amounting to about 1 trillion LEI (NBM considers this figure exaggerated). - Outbound financial flows to Transnistria: 2 billion LEI in 2013; Transnistria treated as a “black hole” for AML/CFT. - NBM AML/CFT unit appears understaffed. - NBM powers, autonomy, and legal constraints: - MOJ interferes in secondary legislation; NBM regulations must be registered by MOJ, causing amendments and delays (may take about one year). - NBM recommendations are not binding and thus not enforceable. - Constitutional Court ruling (October 1, 2013) allowed challenges to all NBM acts and decisions; NBML amendments entered into force on January 24, 2014 to mitigate immediate suspension but concerns remain about NBM’s capacity to take prompt corrective measures. - Legal protection and independence insufficient; conditions for dismissing Governor and Board members unclear; Article 27(f) refers to “incompatibility” without definition; Board members and employees lack clear protection against lawsuits while acting in good faith. - Enforcement and sanctions: - NBM can use wide range of instruments under Article 38 of the LFI; however, assessors consider that for persistent deficiencies NBM should have taken more forceful actions. - Sanctions in law (LFI, NBML, AML/CFT law) do not seem dissuasive, particularly pecuniary sanctions. - NBM lacks in-house methods to guide application of criteria for sanctions; prescription periods per NBM law: - Sanctions taken by the NBM (Article 75²(4)) are subject to legal prescription of 6 months after NBM report is submitted to the bank. - The violation itself to a prescription of 3 years. - After 6 months, application of sanctions is understood to be not possible. - NBM staffing and budget transparency: - NBM is understaffed; BRSD manpower and skills insufficient given four problematic banks, EU alignment, and migration to Basel II. - Budget allocation conditions to BRSD are not transparent; absence of clear budget indication hampers forward-looking supervisory strategy design. ### Key statistics and preserved dates (verbatim) - Strategic period: "2013–17". - Minimum regulatory capital: from Lei 100 to 200 mmillion (approximately EUR 12.3 million) in 2013. - CAR increased: from 12 to 16 percent. - Average risk-weighted capital adequacy: about 23 percent (as of January 2014). - Decision requiring IFRS: Decision No. 238/29.02.2008. - IFRS implementation start date: January 1, 2012. - Deposit Guarantee Fund size: MLD 171.9 million = 0.37 percent of total deposits. - Transparency International ranking: 102 out of 177 (also cited as 105 out of 178 in a separate excerpt). - Banks with clear shareholder structure: 2 banks out of 10 (excluding foreign ones). - Cross-border transactions reported by FIU: about 1 trillion LEI. - Transnistria outbound flows: 2 billion LEI in 2013. - Constitutional Court ruling date: October 1, 2013. - NBML entry into force date: January 24, 2014. - Prescription periods: 6 months (sanctions after NBM report), 3 years (violation). ### Summary conclusion and high-level recommendation direction - Despite progress—strategic planning, Basel transition, higher capital requirements, IFRS adoption, improved regulations and methodologies—the effectiveness of banking supervision is significantly constrained by: - Poor rule of law and corruption concerns. - Weak financial stability framework and crisis management tools. - Insufficient legal independence and protection for NBM and staff. - Inadequate enforcement powers and non-dissuasive sanctions regime. - Lack of transparency in bank ownership and serious ML/TF vulnerabilities (including large cross-border flows and Transnistria-related risks). - Insufficient NBM staffing and opaque supervisory budgeting. - Essential legal and institutional reforms are indispensable to raise Moldova’s conformity with International Standards for banking supervision; recommendations summarized in the assessment (Table 2 reference in source). ### Detailed assessments — selected Principles, findings and recommended actions - Principle 1 (Responsibilities, objectives and powers) — Assessment: MNC - Deficiencies: no explicit statutory statement that primary objective of banking supervision is safety and soundness; MOJ interference in secondary legislation; normative acts labeled “recommendations” are not binding; Constitutional Court ruling of October 1, 2013 affected enforceability. - Recommendations (verbatim): - Strengthen NBM power by lifting 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 (Independence, accountability, resourcing and legal protection) — Assessment: MNC - Key findings: governance shortcomings, unclear removal grounds (Article 27(f) “incompatibility”), Board composition issues, limited legal protection for Board members and staff, BRSD staffing figures and training constraints. - BRSD staffing numbers (as cited): authorized staff 47; BRSD total staff cited as 50; supervisory staff numbers by year: 2010: 45; 2011: 48; 2012: 49; 2013: 50. - AML/CFT compliance surveillance unit: 3 staff (two very junior). - BRSD budget for training: MDL 200 000 (approximately US$ 15 thousand) per year—equivalent to US$ 285 per employee. - Recommendations include legal protections, governance reforms, transparency in budget allocation, prohibition on staff holding equity in banks, and increased manpower for Basel II/Basel III transition. - Principle 3 (Cooperation and collaboration) — Assessment: LC - Findings: NCFS established; cooperation agreements exist domestically; NBM lacks access to Credit Bureau; MoUs with some home supervisors outstanding. - Recommendations include expanding cooperation agreements (DGF, Credit Bureau), clarifying information exchange, and finalizing MoUs with home supervisors. - Principle 8 (Supervisory approach) — Assessment: LC - Findings: CAMELS/CA(M)ELS used; on-site full-scope inspections annually for each bank without differentiation by systemic importance; off-site quarterly macro stress testing; stress testing performed monthly for some analyses; consolidated supervision framework not yet fully in force. - Key resource constraints: young, inexperienced staff; 4 vacant positions; manual off-site work due to IT limitations. - Recommendations (verbatim excerpts): - Adopt a more risk-based approach; move towards comprehensive risk-based supervision. - Explore possibility to enhance off-site and on-site resources. - Implement the framework for crisis management. - Improve examination process by shortening delay between end of on-site visit and official submission of report to the bank. - Enhance on-site and off-site supervision for systemically important banks. - Principle 9 (Supervisory techniques and tools) — Assessment: LC - Findings: mix of on-site and off-site supervision; full-scope on-site inspections per year; delays issuing final reports sometimes up to one year; reporting system SIRBNM used; from December 31, 2013 biannual consolidated FINREP required. - On-site inspection counts: 2011: Full Scope 14 / Targeted 2; 2012: Full Scope 14 / Targeted 4; 2013: Full Scope 13 / Targeted 1. - Recommendations: shorten report issuance delays; strengthen supervision for systemically important banks; improve methodologies and engagement with internal/external auditors. - Principle 10 (Supervisory reporting) — Assessment: LC - Findings: extensive reporting (daily, monthly, quarterly, biannual); reporting instructions and FINREP implementation since January 1, 2012; consolidated FINREP approved July 2013 but consolidated prudential returns not required at assessment time. - Recommendations: amend secondary regulations to require consolidated prudential ratios; implement new IT application for off-site function. - Principle 11 (Corrective and sanctioning powers) — Assessment: MNC - Findings: wide range of tools under LFI Articles 37–38; historical enforcement: warnings 24 since 2009; pecuniary sanctions 5 fines since 2009; licenses withdrawn 2 instances since 2008; judicial challenges and prescription regime (sanctions subject to 6 months prescription after report submission; violation to 3 years). - Recommendations include taking more forceful action, increasing fines, reconsidering prescription regime, setting internal guidelines, and establishing objective criteria/timeframes for Special Supervision regime. - Principle 12 (Consolidated supervision) — Assessment: MNC - Findings: limited consolidated prudential supervision; four groups prepared consolidated financial statements in 2012; no consolidated prudential returns; MoUs with home supervisors largely absent. - Recommendation: develop consolidated prudential supervision rules and pursue agreements with home supervisory authorities. - Principle 13 (Home-host and cross-border cooperation) — Assessment: LC - Findings: no cross-border presence of Moldovan banks at assessment time; limited MoUs with home supervisors of subsidiaries; NBM encouraged to pursue MOUs and cross-border cooperation. - Principle 14 (Corporate governance) — Assessment: MNC - Findings: weak corporate governance in practice; lack of mandatory Board-level committees and independent RM/compliance functions; planned amendments to Regulation on internal controls to strengthen governance. - Recommendations include faster implementation of internal control amendments, broaden executive functions requiring NBM prior approval, more intrusive supervisory challenge of risk appetite and tone at the top, and notification obligations for material fitness/propriety issues. - Principle 15 (Risk management) — Assessment: MNC - Findings: no system-wide requirement for dedicated RM departments; one bank among 14 has a Board-level risk management committee; contingency plan submissions (February 2012): seven banks comply, 6 partially comply, one noncompliant. - Recommendations: ensure all banks develop RM policies; require annual reporting on internal control conditions with separate RM/compliance/internal audit sections; speed up approval of Regulation on internal controls; increase oversight intensity where RM weak. - Principle 16 (Capital adequacy) — Assessment: LC (findings indicate material deficiencies) - Findings: Basel I framework in use; minimum Tier 1 to RWA required: 16 percent; initial capital thresholds: MDL 100 million initially, regulatory capital Tier I not less than MDL 200 million (approx. EUR 12.3 million) since December 2012; average RW capital adequacy around 23.4 percent (December 2013 cited elsewhere as 23.4 percent). - Deficiencies: market risk and operational risk excluded from RWA; mortgages receive 50 percent weighting irrespective of borrower; no capital charge for FX exposures. - Recommendations: proceed with Basel II migration, review mortgage treatment, introduce charges for FX/market/operational risk, clarify deductions from eligible capital. - Principle 17–20 (Credit risk, problem assets, concentration, related parties) — Findings and numeric points - Principle 17 (Credit risk): reliance on collateral rather than borrower capacity; regulators recommend stricter valuation standards and FX risk monitoring. - Principle 18 (Problem assets/provisions): provisioning bands: 2 percent; 5 percent; 30 percent; 60 percent; 100 percent. Write-offs: 2.3 billion lei at end-2013 vs 1.1 billion lei in 2012. IFRS allowances ~46 percent of prudential allowances at end-December 2013. NPL coverage: around 84 (prudential provisions) and 48 (IFRS provisions). - Principle 19 (Concentration/LEL): LEL limits: - Net exposure to a person/group ≤ fifteen percent (15 percent) of Total Regulatory Capital. - Sum of net credit exposure to 10 biggest debtors ≤ 30 percent of total credit portfolio. - Sum of all Large Exposures ≤ five (5) times Total Regulatory Capital. - Net exposure in Lei linked to FX to individuals ≤ 30 percent of regulatory capital, 10 percent if mortgages not included. - Example breach: a domestic systemically important bank had LEL breaches of 84 percent for two lines of credit and a loss of LEI 300 million. - Principle 20 (Related parties): reporting thresholds and limits include exposures to affiliated persons limited to 10 percent of total regulatory capital and aggregate limits; monitoring of deposits of related parties applies only to deposits exceeding 1 million LEI. - Recommendations: improve ownership knowledge, enforce concentration limits, strengthen related-party monitoring and UBO identification. - Principle 21–24 (Country/transfer, market, interest rate, liquidity risks) — Assessments and recommendations - Principle 21 (Country/transfer risk) — Assessment: LC; recommendations include promoting policies and stricter individual exposure limits. - Principle 22 (Market risk) — Assessment: LC; no trading book capital charge; recommendation to include trading book market risk in regulations and require capital charge for market risk. - Principle 23 (Interest rate risk in banking book) — Assessment: LC; recommendation to require banks to compute/report economic value change under standardized shock (e.g., 200 basis points). - Principle 24 (Liquidity risk) — Assessment: LC; long-term liquidity ratio 0.7 (required minimum: 1) and short-term liquidity ratio 33.8 percent (required minimum: 20 percent) as of December 2013; recommendations to account for off-balance sheet commitments and require liquidity buffers, contingency funding plans and intraday liquidity practices. - Principle 25 (Operational risk) — Assessment: MNC - Findings: no comprehensive OR regulation; OR referenced in internal control regulation; banks required business continuity plans; IT deficiencies observed. - Recommendation: speed up issuance of OR regulation and impose detailed reporting obligations. - Principle 26–27 (Internal control/audit and external audit) — Assessments and recommendations - Principle 26 — Assessment: LC; recommendations to require fit-and-proper for heads of internal audit, accelerate approval of Regulation on internal controls, and strengthen internal audit effectiveness. - Principle 27 — Assessment: LC; recommendations to take forceful action on audit quality, arrange more frequent meetings with auditors, grant NBM power to access auditors’ working papers where necessary, and increase IFRS expertise among staff. - Principle 28 (Disclosure and transparency) — Assessment: C - Findings: disclosure framework exists; NBM publishes aggregated banking indicators; Pillar III alignment needed when Basel II implemented. - Principle 29 (AML/CFT) — Assessment: MNC - Findings: AML law #190-XVI (July 26, 2007) in force; annual AML on-site visits required; AML/CFT on-site methodology revamped July 4, 2013; AML Unit: 3 staff (two junior). FIU reported cross-border transactions “about 1 trillion LEI” (NBM considers exaggerated); Transnistria outbound flows: 2 billion LEI in 2013; none of the banks had performed ML/TF risk assessments. - Enforcement: counts of violations and sanctions by year (selected): - 2008: Violations 25 — Fines 1 — Warnings 4 - 2009: 15 — 2 — 4 - 2010: 50 — 1 — 18 - 2011: 45 — (blank) — 7 - 2012: 46 — 1 — 6 - 2013: 46 — 1 — 4 - Recommendations (verbatim excerpts): - perform targeted on-site visits—preferably in conjunction with OPCML—to determine the nature, magnitude and economic rationale of the cross-border transactions identified by the FIU; - increase scrutiny in banks for PEPs, UBO, correspondent banking; - instruct banks to perform their internal ML/TF risk assessments; - increase sanctions for recurrent AML/CFT violations; - equip NBM examiners with proper software to conduct AML/CFT on-site visits; - implement without delay aspects of the AML/CFT National Strategy related to NBM mandate (strategy for 2013-2017 approved June 2013). *Source: REPUBLIC OF MOLDOVA — EXECUTIVE SUMMARY and Detailed Assessment (IMF staff assessment text provided).* ### EXECUTIVE SUMMARY___________________________________________________________________________ 4 ### _cr1671 - EXECUTIVE SUMMARY___________________________________________________________________________ 4 ### Progress in prudential and supervisory framework - Two medium-term strategies designed since 2008; most recent spans "2013–17" aiming for higher efficiency, transparency, and performance of the NBM, focusing on corporate governance. - Transition underway from Basel I to Basel II; NBM plans to implement the standard risk-weighting model of Basel II and other elements of Basel III as part of Association Agreement with the EU, and to gradually implement the EU Capital Requirements Regulation and Directive (CRR/CRD). - Capital requirements tightened: - Minimum regulatory capital increased from Lei 100 to 200 mmillion (approximately EUR 12.3 million) in 2013. - Capital Adequacy Ratio (CAR) increased from 12 to 16 percent. - As of January 2014, average risk-weighted capital adequacy in the banking system maintained at about 23 percent. - Adoption of IFRS: - Decision No. 238/29.02.2008 required use of IFRS. - From January 1, 2012, banks started to implement IFRS and submit FINREP templates. - New regulations and methodologies adopted: - Improved internal control system Framework for stress testing; banks required to perform stress-tests for every type of risk. - Regulation on asset classification revised to capture greater detail by “time bucket” for delinquency reporting. - New definitions (e.g., “dominant influence”, “close link”, “persons acting in concert”) introduced. - AML/CFT guidance: recommendations on risks-based approach to customers (2011) and on monitoring customers’ transactions and activities (2013). - Development and dissemination of AML/CFT on-site inspection methodologies (with U.S. Treasury TA). ### Main strengths and supervisory capacity - Strong professionalism within the Banking and Regulation Supervisory Department (BRSD). - High quality of internal analysis and Board reports; density and thoroughness of inspection reports noted as outstanding. - NBM has used full-scope on-site inspections to increase transparency in bank ownership structure and required banks to publish significant data; examiners check internal controls for identifying persons exerting significant influence, ownership structure, and source of contributed capital. ### Key shortcomings, institutional constraints, and preconditions - Rule of law and corruption concerns: - The rule of law is absent in Moldova; concerns raised about levels of corruption in the judiciary. - Transparency International ranking: 102 out of 177. - Financial stability framework and crisis management: - Financial stability policy framework not fully operational. - Small NBM unit for financial stability and a Financial Stability sub-Committee exist since 2011; translation of BRSD analysis into concrete actions unclear. - National Committee for Financial Stability (NCFS) established June 2010; mandate not well defined and capacity to act untested. - Framework for crisis management and resolution in infancy; NBM has track record with problem banks but intervention conditions not well established. - Deposit guarantee inadequacy: - Size of the Deposit Guarantee Fund secured so far (MLD 171.9 million) represents only 0.37 percent of the total deposits in the banking sector. - Market discipline and corporate governance: - Corporate governance in banks extremely weak and sometimes driven by shareholders. - In three banks (one systemically important), CEO is directly appointed by shareholders assembly per charters. - Risk management and compliance in banks: - Culture of Risk Management (RM) is poor; compliance functions almost nonexistent. - Regulation on internal control systems silent on need for proper RM and compliance functions. - No specific professional requirements for internal auditors. - Poor RM and voluntary breaches have led to excessive concentration risks and significant losses in some banks. - Transparency of ownership and related risks: - Significant challenges remain ensuring full transparency of beneficial ownership. - Most recent changes in ownership conducted opaquely; many acquired piecemeal to circumvent NBM vetting. - External audit company: only 2 banks out of 10 (excluding foreign ones) “have more or less a clear, transparent shareholder structure”. - Lack of UBO information affects surveillance of related parties and large exposure limits, exposing banks to excessive concentration risks. - ML/TF concerns: - National Strategy to combat ML/TF approved by Parliament; Penal Code amendments to enter into force in 2014 to reinforce sanctions. - Office for Preventing and Combating ML requested TA (November 2013) for a National Risk Assessment based on World Bank methodology. - NBM AML/CFT unit appears understaffed. - FIU reports cross-border transactions of major proportions amounting to about 1 trillion LEI involving Moldovan banks (NBM considers this figure exaggerated). - Transnistria issues: - Region treated as Autonomous territorial unit with special legal status. - From AML/CFT standpoint, region is a “black hole”; authorities declare suspicious any single transaction between Moldovan banks and Transnistrian banks. - Outbound financial flows to Transnistria: 2 billion LEI in 2013. - Moneyval (2012) noted absence of a risk assessment and that adequate risk-based supervision was not demonstrated. - NBM powers, autonomy, and legal constraints: - Ministry of Justice (MOJ) interferes in secondary legislation; NBM regulations must be registered by MOJ, often leading to substantial amendments and delays (may take about one year for a regulation to be issued). - NBM recommendations are not binding and thus not enforceable. - Constitutional Court ruling (October 1, 2013): all acts and decisions of the NBM can be challenged in court, potentially suspending decisions; until January 2014 suspension was immediate. - Amendments to the Law (NBML) entered into force on January 24, 2014, to mitigate suspension issues; actions by NBM can be suspended by the court under NBML at the request of the plaintiff, with compulsory summoning and after challenge before the Council of Administration of the NBM (art. 11¹ of the revised NBML). - Despite amendments, concerns remain about NBM’s capacity to take prompt corrective measures; some provisions (e.g., regulation on Large Exposure Limit) have been suspended. - Legal protection and independence: - Current legal regime does not provide enough independence to the NBM; conditions for dismissing Governor and Board members are unclear. - LNBM, art. 27, f: Governor and other Council members “shall be removed from office (...) if they are incompatible, as established by a definitive act”. - Board members and employees, including staff appointed as bank liquidator, do not enjoy enough protection against lawsuits while discharging duties in good faith; law amendments remain too general and lack specific protections; law does not indicate nature of liability (civil and/or criminal); staff receive no financial assistance in case of lawsuits. - Enforcement and sanctions: - Under Article 38 of the LFI, NBM can use a wide range of instruments; NBM has adopted measures for infringements (insufficient Tier I, asset quality, misreporting, deficiencies in internal controls, AML/CFT violations). - Assessors consider that for persistent deficiencies NBM should have taken more forceful actions. - Lack of protection may discourage management from taking tougher measures. - Sanctions in law (LFI, NBML, AML/CFT law) do not seem dissuasive, particularly pecuniary sanctions. - NBM lacks in-house methods to guide application of criteria for sanctions, limiting proportionate response. - Prescription periods per NBM law: - Sanctions taken by the NBM (Article 75²(4)) are subject to legal prescription of 6 months after NBM report is submitted to the bank. - The violation itself to a prescription of 3 years. - After 6 months, application of sanctions is understood to be not possible. - NBM staffing and budget transparency: - NBM is understaffed; BRSD manpower and skills insufficient given four problematic banks, EU alignment, and migration to Basel II. - Budget allocation conditions to BRSD are not transparent; absence of clear budget indication makes forward-looking supervisory strategy design almost impossible for BRSD Head. ### Specific notable figures and dates preserved from the assessment - Strategic period: "2013–17". - Minimum regulatory capital: from Lei 100 to 200 mmillion (approximately EUR 12.3 million) in 2013. - CAR increased: from 12 to 16 percent. - Average risk-weighted capital adequacy: about 23 percent (as of January 2014). - Decision requiring IFRS: Decision No. 238/29.02.2008. - IFRS implementation start date: January 1, 2012. - Deposit Guarantee Fund size: MLD 171.9 million = 0.37 percent of total deposits. - Transparency International ranking: 102 out of 177. - Banks with clear shareholder structure: 2 banks out of 10 (excluding foreign ones). - Cross-border transactions reported by FIU: about 1 trillion LEI. - Transnistria outbound flows: 2 billion LEI in 2013. - Constitutional Court ruling date: October 1, 2013. - NBML entry into force date: January 24, 2014. - Prescription periods: 6 months (sanctions after NBM report), 3 years (violation). ### Summary conclusion and high-level recommendation direction - Despite significant progress—strategic planning, Basel transition, higher capital requirements, IFRS adoption, improved regulations and methodologies—the effectiveness of banking supervision is significantly constrained by: - Poor rule of law and corruption concerns. - Weak financial stability framework and crisis management tools. - Insufficient legal independence and protection for NBM and staff. - Inadequate enforcement powers and non-dissuasive sanctions regime. - Lack of transparency in bank ownership and serious ML/TF vulnerabilities (including large cross-border flows and Transnistria-related risks). - Insufficient NBM staffing and opaque supervisory budgeting. - A series of essential legal and institutional reforms are indispensable to raise Moldova’s conformity with International Standards for banking supervision; recommendations are summarized in Table 2 of the assessment. *Source: REPUBLIC OF MOLDOVA — EXECUTIVE SUMMARY.* ### 1. This assessment of Moldova current state of compliance with the Basel Core Principles ### This assessment of Moldova current state of compliance with the Basel Core Principles for Effective Banking Supervision (BCPs) ### Methodology and scope of the assessment - Performed as part of a joint IMF-World Bank mission within a Financial Sector Assessment Program exercise. - Conducted according to the revised content and methodology introduced in 2012; not comparable to assessments in 2008 and 2005. - Greater focus on risk management policies and practices implemented by supervised institutions and their assessment by the supervisory authority, and on quality implementation of supervisory standards. - Assessment based on: - Extensive discussions with officers and staff of the Banking Supervision Department in NBM. - Review of internal supervisory documents: manuals, operating policies, examination reports, external audit reports. - Review of the BCP self-assessment undertaken by NBM and detailed questionnaire responses on supervisory issues. - Meetings with NBM (including the Governor), the Minister of Finance (MOF), the Moldovan Banks Association, senior officials of several local banks, and an external auditing firm. - Review of laws and regulations: Law on Financial Institutions (LFI), Law on the National Bank of Moldova (LNBM), and prudential regulations and decisions. - Authorities provided comments on a draft version of the assessment. - Ratings assigned against both the Essential and the Additional Criteria, but based on compliance with the Essential Criteria. - Assessment relies on: (i) legal and documentary evidence; (ii) work of the supervisory authority; and (iii) implementation in the banking sector. - Assessment made on the factual situation at the date of completion; regulatory initiatives not yet implemented were noted where applicable. - Recognizes judgments are required; adherence to the common methodology provides an internationally consistent measure relative to the 2012 revision of the Core Principles. ### Institutional and macroeconomic setting and market structure - Banking sector: - Comprises 14 commercial banks with assets equivalent to about 70 percent of GDP. - Structure based on universal banking. - Cross-border linkages and exposures: - High degree of interconnectedness on the interbank market and significant exposure to Russian banks. - Since 2011 foreign placements almost doubled as a percent of GDP; foreign liabilities increased by more than 50 percent. - These developments, combined with governance problems, increase systemic risk vulnerability. - Concentration (end-December 2013): - Largest six banks (Peer group 1) hold about 77 percent of total assets, 74 percent of outstanding loans, and 77 percent of deposits. - Three smallest banks (Peer group 3) hold 3 percent of total assets. - Corporate loans concentrated by sector: 45 percent to the trade sector and 11 percent to food industry. - Ownership and credit composition (end-2013): - Almost 72 percent of capital in the banking system is reported to be in foreign ownership (0.5 percent more than in 2012). - Seven banks with majority foreign shareholding; four are subsidiaries of foreign banks. - Subsidiaries represent about 17 percent of total banking sector assets. - Bank credit concentrated in corporate sector, representing 88 percent of loans; household loans mainly consumer loans. - Asset quality and provisioning (end-2013): - Sector-wide average NPLs: 11.6 percent, trending down since 2012, with wide variation across banks. - Some banks have NPL ratios exceeding 60 percent. - Volatility in NPLs observed; collateral practices (cash collateral, residential property) used to manage distress. - Capital and liquidity (December 2013): - Aggregate capital adequacy ratio: 23.4 percent (required minimum: 16 percent). - Long-term liquidity ratio: 0.7 (required minimum: 1). - Short-term liquidity ratio: 33.8 percent (required minimum: 20 percent). - NPLs net of provisions as percentage of regulatory capital: 16.6 percent. - NBM uses Basel 1 framework; capital adequacy depends heavily on collateral; some liquid assets may be encumbered via undisclosed side agreements. - Nonbank financial institutions and markets: - Equity and FX markets are shallow; nonbank financial institutions are small. - Regulated/supervised by the NCFM: 2 stock exchanges, 16 insurance companies, 80 insurance brokers, 83 microfinance institutions, and 338 savings and credit associations. ### Preconditions for effective banking supervision - Macroeconomic policy framework: - Institutional leadership: NBM and MOF. - NBM conducts monetary policy; MOF manages budgetary policy within a fiscal framework. - NCFS established in 2010 to discuss financial stability issues. - Financial stability policy formulation: - NBM exclusively responsible for licensing, supervision and regulation of banking financial institutions. - NBM main responsibilities include: economic and monetary analyses, licensing/supervision/regulation, providing credits to banks, supervising payment systems, undertaking obligations from international participation. - NCFM responsible for supervising and regulating non-banking financial institutions; main functions include enhancing stability/transparency/security/efficiency of non-banking financial sector and reducing systemic risks and abusive practices. - NCFS (operational since 2010) is a high-level financial stability group chaired by the Prime Minister; membership includes Governor of NBM, Chairman of NCFM, Minister of Economy, General Secretary of Government, Minister of Finance, Chairman of the Commission on Economy, Budget and Finance, Parliament representative, General Executive Director of DGFBS. - Public infrastructure and legal framework: - Numerous reforms to debtor/creditor relationship laws; many laws covered in the 2014 ICR assessment are less than ten years old. - Insolvency and debtor/creditor regimes still not functioning effectively; need to develop a “rescue culture” and strengthen institutional framework to facilitate early filing and support going-concern sales and reorganizations. - Lending practices: - Lending is essentially secured lending based on real property collateral. - Very little unsecured credit for enterprises; secured lending against moveable assets (inventory, receivables) rarely used. - Lending based primarily on collateral value rather than borrower viability. - Lack of functional share registry constrains pledges over shares as collateral. - Access to financing consistently cited as a major constraint on entrepreneurial activity. - Mortgage regime generally adequate and effective; secured transactions over moveable assets require improvement, including registration system and enforcement mechanisms. - Credit bureau: - Privately-owned Credit Bureau operational since 2011; provides information on most bank borrowers. - As sole provider, vigilant oversight and data reliability are advisable. - Bureau could include other non-bank lenders, utilities, and service providers; loans from leasing companies, microfinance institutions, and savings and loans associations are not yet reported. - Auditing and accounting: - Legal framework reformed, but implementation and enforcement need stronger focus. - Adoption by banks of IFRS in 2012 is a major improvement. - Since January 2012, reports Balance Sheet (FIN1) and Profit and Loss (FIN2) filed according to the Instruction on FINREP financial situation at individual level, applicable to banks. ### Crisis management, recovery, and resolution - Institutional arrangements: - NCFS established June 2010 to promote coordinated framework for financial crisis response; membership includes Government, Commission on Economy/Budget/Finance, NBM, MOF, DGF, and NCFM. - Technical Sub-Committee chaired by the Minister of Finance to coordinate crisis resolution. - NBM internal committee on financial stability chaired by a Vice Governor coordinates NBM crisis policies/procedures. - Legal powers and gaps: - LFI provides NBM with powers: place a bank under special supervision, give binding directions in certain circumstances, appoint special administrator, facilitate recapitalization, transfer business to another bank, prepare failed bank for liquidation. - Deposit insurance under DGF provides protection up to MDL 6,000 per depositor (see “Adequacy of Systemic Protection” below). - Significant gaps and deficiencies in law impede cost-effective and credible bank resolution. - NBM preparedness and needs: - NBM has required banks to develop recovery plans and developed internal guidance on crisis resolution. - Needs to: - Refine solvency assessment capacity (especially under time pressure). - More closely assess banks’ ability to action recovery plans. - Undertake resolvability assessments of all systemically important banks. - Develop crisis resolution strategies (including bail-in, bridge bank and recapitalization). - Develop bank-specific resolution plans. ### Adequacy of systemic protection (public safety net) - Deposit insurance: - Coverage level: MDL 6,000 per depositor (equivalent of some USD440). - Coverage is the lowest in Europe. - DGF reasonably funded for current level of coverage, including FX deposits, but only for very small bank failures. - DGF lacks sufficient funds for medium to large bank failures without MOF funding; no established funding lines exist currently. - DGF lacks access to sufficient and timely data for rapid payouts; banks are not required to have systems to calculate deposit balances on a single customer view basis, hindering prompt and accurate payout. - Non-bank deposit takers: - Some small non-bank deposit takers supervised by the NCFM exist; their deposits are not insured. ### Market discipline, corporate governance, and transparency - Corporate governance weaknesses: - Major weaknesses in framework and practice. - Recent ownership shifts resulted in nontransparent changes in Board members and CEOs. - Roles and responsibilities of ownership, oversight (Board), and management are substantially blurred; no clear accountability. - In practice, CEOs report to controlling shareholders directly or indirectly despite reporting lines to Boards. - Boards lack objectivity, independence, and adequate qualification to oversee financial institution operations. - Transparency of ownership: - NBM led drafting of amendments to enhance shareholder transparency: ownership disclosure (including affiliated persons), transactions, volume and quality of information to NBM by shareholders; strict provisions on mandating banks and non-banking financial companies to publicly disclose UBOs. - In practice, identity of UBOs of some of the largest banks is not clear; control exerted by these UBOs and their motivations/actions do not appear aligned with the interests of the financial system or other stakeholders (minority shareholders, depositors, public). *This assessment of Moldova current state of compliance with the Basel Core Principles for Effective Banking Supervision.* ### 27. Although Moldova has a policy framework for tackling corruption and the country has ### _cr1671 - 27. Although Moldova has a policy framework for tackling corruption and the country has ### Main findings on governance and corruption - Although Moldova has a policy framework for tackling corruption and the country has made strides in closing the large implementation gap, serious issues related to governance and corruption remain. However, the country continues to face significant challenges in improving the enforcement and implementation of legislation adopted largely because of EU accession requirements. - Moldova ranks 105 out of 178 countries in Transparency International’s corruption perception index 2010, which is better than almost all former Soviet republics, yet lower than other countries in Eastern Europe. - Corruption in the Judiciary has stemmed from malpractice by multiple stakeholders and as a result, the rule of Law does not apply. ### Summary compliance with the Basel Core Principles — grades and key comments - Principle 1 — MNC - 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. - Principle 2 — MNC - 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 BSRD 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 account of its performance in regard to its supervision activities. - Principle 3 — LC - Delineation of responsibilities among members of the NCFS (including the NBM) is not clear. - Principle 4 — C - Principle 5 — LC - Full ownership details of certain banks licensed in the past, including details on the UBO, are still missing. - Regulation does 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. - Principle 6 — MNC - Ownership structure is still opaque in several banks. - Questionable rulings by Provincial courts undermine the integrity of the regime applied to transfer of ownership. - Principle 7 — C - Principle 8 — LC - 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. - Principle 9 — LC - 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. - Principle 10 — LC - In the absence of proper IT application, the BSRD devotes excessive resources to perform manually several off-site activities. - Prudential returns are not provided on a consolidated basis. - Principle 11 — MNC - The enforcement powers of the NBM have been diminished. - Fines contemplated in relevant laws (e.g., LFI, NBML 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 (art. 75²(4)) are subject to a legal prescription of six months after the submission of the report to the bank and the violation itself to a prescription of three years. Beyond this period of six months, sanctions cannot be applied. Also, if the commission of the violation is older than three years, it cannot be sanctioned. - Principle 12 — MNC - The NBM’s approach to consolidated supervision is not comprehensive and effective. - Principle 13 — LC - 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. - Principle 14 — MNC - The CG regime exhibits important weaknesses. - Principle 15 — MNC - 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. - Principle 16 — LC - Exposures secured by Real estate mortgages do not receive proper capital charge. - There is no capital charge for FX exposures (open positions). - Principle 17 — MNC - Excessive reliance on collateral rather than on the financial capacity of the debtor. - Principle 18 — MNC - There are multiple cases of misclassification. The periodicity for classification is too long. - Principle 19 — MNC - 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. - Principle 20 — MNC - 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. - Principle 21 — LC - Several banks are excessively exposed through inter-banking placements in cross-border banks. - Principle 22 — LC - Market risk from trading book not captured. - Principle 23 — LC - 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. - Principle 24 — LC - Off-balance sheets commitments are not included in prudential liquidity requirements; consequently the risk profile of the bank did not capture risks arising from these exposures. - Principle 25 — MNC - OR not well captured in current regulation. - Principle 26 — LC - Compliance functions nonexistent in banks. - No professional qualification requirements and fit and proper assessment for head of internal audit. - Principle 27 — LC - Banks disregard qualified opinion expressed by external auditors. - Principle 28 — C - Principle 29 — MNC - 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 — key recommendations by Principle - 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 DGF 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 BSRD 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) - 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 Article 15(4) of the LFI by setting a specific timeframe for the prohibition contemplated under this article 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 reproduced from source: - 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.” - The law does not indicate whether the prohibition will expire after a certain period of time. - Principle 7 — (no specific actions listed) - 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 - 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; - banks to identify, assess and frequently monitor indirect FX risk as part of the credit underwriting and monitoring process; - Consider stricter collateral requirements (LTV 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 FX 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) - Principle 29 - Perform targeted on-site visits—preferably in conjunction with OPCML—to determine the nature, magnitude and economic rationale of the cross-border transactions identified by the FIU and determine proper supervisory response; - Increase level of scrutiny in banks by doing more targeted on-site inspections in the area of PEPs, UBO, 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 2013-2017 that was approved by the Parliament in June 2013 contains several activities that are directly under the ambit of the NBM. *Source: AUTHORITIES’ RESPONSE TO THE ASSESSMENT (excerpt from the provided content).* ### 28. The National Bank of Moldova, as a banking regulation and supervision authority, ### 28. The National Bank of Moldova, as a banking regulation and supervision authority, ### Acknowledgement of FSAP contribution - The National Bank of Moldova "highly appreciates the contribution of the International Monetary Fund and World Bank within the Financial Sector Assessment Program performed in the Republic of Moldova regarding the alignment with international standards in the respective area." - The mission’s results and recommendations "have helped to receive an independent and objective opinion on the real position of the banking sector in the Republic of Moldova, as well as to highlight the issues that require maximum attention and action from the banking regulation and supervision authority." ### Independence and legal framework - Since the last FSAP mission "from 2008 and till now, the legal framework has been completed and amended as to strengthen the independent and autonomous statute of the National Bank of Moldova, including with regard to banking regulation and supervision activities." - The National Bank of Moldova states: "It is obvious that a series of issues shall be aligned to the best international practices in the nearest future, but at the same time the present situation demonstrates the existence of a positive tendency in ensuring the highest level of independence of the banking regulation and supervision authority as it is provided by the Basel Core Principles." ### Ownership transparency - The National Bank of Moldova notes that "according to the mission’s recommendations, the transparency in ownership structure represents a subject of major importance in the supervision process." - The Bank "acknowledges the need to increase the level of knowledge on the banks’ ownership structure that could be performed by applying the measures required to comply with the best international practices in force." ### Risk management and corporate governance - A major objective is "to create and implement regulations on banking risks management, both financial and non-financial, which at the moment is an ongoing process." - The Bank links progress on risk-management regulations to corporate governance reforms: "Simultaneously, the positive results in achieving the respective objective shall lead to a significant improvement of the normative framework related to the corporate governance, which, also, represent a key area within the banking regulation and supervision process." *Source: _cr1671 - 28. The National Bank of Moldova, as a banking regulation and supervision authority,* ### 34. In conclusion, the National Bank of Moldova will continue to develop and improve the ### _cr1671 - 34. In conclusion, the National Bank of Moldova will continue to develop and improve the ### Conclusion and scope of the detailed assessment - The National Bank of Moldova (NBM) will continue to develop and improve the normative framework and financial institutions’ supervision methodologies to comply with the Basel Core Principles. - The document provides a Detailed Assessment of Compliance with the Basel Core Principles covering Supervisory Powers, Responsibilities and Functions (Principles 1–7 in the excerpt). ### Principle 1 — Responsibilities, objectives and powers: key findings - Legal basis: - Two major legislations: the Law on the NBM (LNBM) and the Law on Financial Institutions (LFI). - Article 5 (d) and Article 44 of LNBM vest the NBM with the power to license, supervise and regulate the activity of financial institutions and grant sole responsibility for banking supervision. - Articles 11 and 44 of LNBM: NBM issues normative acts related to supervision, approved by the NBM’s Council of Administration and mandatory for financial institutions. - Article 4 of LFI: NBM has exclusive right for licensing banks. Article 28 and Article 37 of LFI subject banks to prudential measures and staff inspection; Article 37 (1) establishes NBM special “supervision powers” for problem banks (performed by BRSD). - AML/CFT: NBM supervises AML/CFT compliance in banks; FIU can perform on-site assessments at NBM request. - Limitations and defects identified: - No explicit statutory statement that the primary objective of banking supervision is the safety and soundness of banks; Article 4 of LNBM makes price stability the primary NBM objective. - Legal framework does not explicitly grant NBM power to increase prudential requirements for individual banks or groups based on risk profile and systemic importance; Article 37 (9) allows increasing bank’s capital only in Special Administration Regime. - Normative acts labeled “recommendations” are not binding (Article 2 of LNBM), which can be problematic for areas like AML/CFT. - MOJ interference: NBM regulations must be registered by the Ministry of Justice before publication; MOJ can suggest or impose amendments, causing delays (possibly about one year) and risking substantive dilution of banking expertise. - Constitutional Court ruling (October 1, 2013): all NBM acts and decisions can be challenged in court, potentially suspending decisions; amendments entered into force January 24, 2014, but concerns remain about prompt corrective action. - NBM has no responsibilities over non-bank financial institutions (NCFM handles them). - Assessment: MNC for CP1. - Recommendations (as stated): - Strengthen NBM power by lifting any interference of the MOJ in the process of secondary legislation. - Include 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 — Independence, accountability, resourcing and legal protection: key findings - Independence and accountability: - LNBM Article 1 and Article 6 (4): NBM is an autonomous public legal entity and independent in exercising tasks; accountable to Parliament (Article 1 paragraph (2) and Article 8 (3)). - Normative acts are subject to MOJ legal expertise and state registration, limiting full autonomy. - Governance and appointments: - Council of Administration (CA) composed of 5 people: the Governor (Chairman), the First Vice-Governor (Vice-Chairman) and 3 vice-governors (one responsible for BRSD operations). - Governor and other CA members appointed for 7 years; conditions for removal specified in Article 27; Governor may be dismissed only by a vote of two thirds of the members of Parliament; other CA members by a simple majority (50 percent+1). - Article 27(f) introduces “incompatibility” as a ground for removal but the term is undefined, raising concerns. - Governance shortcomings: - Current Board is executive-only; plans to restructure to a mix of executive and non-executive members (3 executive members and four non-executive members) and an Executive Committee with five people. - No requirement to publish detailed supervisory strategy; annual report section on supervision is general and lacks details on number of inspections or supervisory approach. - Professionalism, conflicts and secrecy: - Code of Conduct (2012) requires staff declarations of conflicts and shareholdings; no sanctions in code for breaches. - Article 36 of LNBM and Regulation on secure use of information require confidentiality; Anti-fraud policy (2010) in place. - Resources and staffing: - BRSD authorized staff of 47 persons deployed in three divisions: Bank Regulation and Licensing Division (14 staff); Special and Off-site Supervision division (17 staff); Division for Banking control and monitoring including AML (16). - BRSD total staff cited as 50 people in the document; supervisory staff numbers by year: 2010: 45; 2011: 48; 2012: 49; 2013: 50. - Special Supervision Section: 7 staff dealing with 4 problematic banks; one of these 7 is appointed liquidator. - AML/CFT compliance surveillance unit: 3 staff, 2 very junior (ages and experience: respectively 22 and 23 years old with almost no previous professional experience). - BRSD budget for training: MDL 200 000 (approximately US$ 15 thousand) per year—equivalent to US$ 285 per employee. - Technology budget assessed as sufficient; no separate budget for on-site visits outside the country. - “Transform NBM” project for 2015 and beyond to modernize HR systems and introduce performance-based bonuses. - Legal protection and liability: - Article 38 of LFI: NBM employees, members of special supervision commission, special administrator, liquidator and persons assisting them shall not be liable for damages for actions in exercise of duties unless proven intentional and unlawful; does not include Board members—major flaw. - Staff sentiment: law viewed as vague and not providing enough protection; some NBM staff refrained from taking remedial measures due to personal risk. - Assessment: MNC for CP2. - Recommendations (as stated): - Reform the Corporate Governance structure of the NBM to ensure clear segregation of functions. - 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. - Restore full independence of the NBM by protecting members of the board from external influence. - Provide full legal protection and assistance to all NBM employees in case of lawsuits for actions in good faith. - Specify in the law the types of liability NBM employees are subject to. - Improve transparency in budget allocation for Supervision activities, in particular by disclosing to the Head of the BSRD the total budget allocated to supervision in the overall NBM budget. - Include clear sanctions in the code of conduct in case of breach. - Prohibit NBM employees from holding equity interest in banks. - Explore increasing NBM manpower, particularly for the transition to Basel II/Basel III and an enhanced banking resolution mechanism. ### Principle 3 — Cooperation and collaboration: key findings and recommendations - Domestic cooperation: - Legal basis: Article 6 and Article 24 of LNBM authorize cooperation with government bodies and supervisory agencies. - NBM and NCFM: Joint Action Plan (07.03.2012) and Cooperation Agreement on exchange of information (27.12.2010). - National Committee for Financial Stability (NCFS) created by Governmental Decision no.449 (June 2, 2010); Memorandum of Understanding on maintaining Financial Stability dated February 28, 2011. Prime Minister chairs NCFS; Governor of NBM is deputy-chair. - NCFS meets quarterly; unclear whether BRSD has timely access to NCFS minutes. - NBM signed cooperation agreements with National Commission for Securities, State Chamber of Registration, Tax Administration, State enterprise “Cadastru”, General Prosecutor’s Office. - NBM does not have access to the Credit Bureau (law governing Credit Bureau does not mention NBM among authorities with access). - Foreign cooperation: - Articles 7, 24, 36 of LNBM permit cooperation with foreign supervisors. Letters of agreement signed with supervisors from Romania, Russia, Belarus, Kazakhstan and Georgia. - Process to sign MoUs with Germany, Italy, France, Austria is ongoing or stalled on confidentiality/technical grounds. - Member of BSCEE (Group of Banking Supervisors from Central and Eastern Europe). - Confidentiality and information use: - Article 36 of LNBM defines conditions under which professional secrecy may be lifted for cooperation and requires confidentiality and limited use of information by recipients. - NBM is strict on protecting classified information; foreign-sourced confidential information may be disclosed only with express consent of the provider. - Resolution support: - NBM is the resolution authority. Article 44 of LNBM authorizes placing banks under conservatorship (special administration regime) or liquidation; Special Supervision Unit handles resolution; NBM Board appoints liquidator (in practice an NBM staff member). - Decision to place a bank under special administration or liquidation must be communicated to NCFS. - Assessment: LC for Principle 3. - Observations and recommendations: - Revisit NCFS MoU to clearly delineate responsibilities and ensure supervisory bodies retain decision-making control; ensure limits on information exchange to protect confidentiality. - Ensure BRSD is informed timely of NCFS decisions on bank issues. - Strengthen cooperation with FIU; address instances where FIU has not shared cross-border transaction information with undisclosed UBOs. - Consider expanding cooperation agreements with Deposit Guarantee Fund and Credit Bureau. - Pursue finalizing MoUs with home supervisors of foreign subsidiaries (Italy, France, Germany, Austria). ### Principle 4 — Permissible activities: summary findings - Definitions: - LFI Article 3 defines a bank and a financial institution (bank accepts deposits transferable by payment instruments; financial institution accepts deposits not transferable by payment instruments). - Permissible activities: - Article 26 of LFI lists detailed permissible financial activities for banks; authorization governed by Articles 6, 7, 26 and Regulation No. 23/09-01 on Bank Licensing. - Article 26 (3) LFI: a bank may not engage in activities not included in its authorization. - Use of “bank” in names: - Article 12 (3): the word “bank” and derivatives may only be used by licensed institutions except where law or context indicates otherwise. - Deposit-taking: - Article 12 paragraph (2) LFI: only banks may accept household deposits or equivalents. - Public listing of licensees: - NBM maintains and publishes list of authorized banks on its website; register of authorized banks maintained (LFI Article 9). - Assessment: no specific non-compliance commentary in provided excerpt. ### Principle 5 — Licensing criteria: findings and assessment - Licensing authority and withdrawal: - NBM has exclusive right to issue bank licenses (LNBM Articles 5, 11, 44; LFI Article 4). - NBM may reject applications or withdraw licenses where criteria are not met (LFI Article 7; Article 10). - “Handbook on Licensing of banks” (1999, updated) provides detailed procedures. - Licensing criteria and process: - Articles 6, 7, 15–158 and 21 of LFI and Regulation no.23/09-01 set prudential standards relative to capital, assets, liquidity and other matters. - Applicants must provide business plan, organizational structure, projected financial statements for first three years, details on administrators and shareholders, criminal records for administrators, evidence on source of funds, and fit and proper documentation. - Regulation on requirements to Bank’s administrators (Decision No. 134 of July 1, 2010) details administrator fit and proper tests. - Minimum initial capital: Regulation on Risk Weighted Capital Adequacy stipulates minimum initial capital of at least MDL 200 million (about 7.4 US$ million). - Home supervisor consent: - Annex 3 of Regulation #23/09-01: foreign bank establishing a subsidiary must provide written opinion from home supervisor (licensed to collect deposits, operating at least two years, good standing) and a no objection letter from the home supervisor. - Monitoring new entrants: - On-site manual and LFI Article 10 permit NBM to monitor whether new banks implement approved business plans during first three years and withdraw license if activities differ substantially. - Challenges: - Lack of shareholder transparency and difficulty determining ultimate beneficial owners (UBO) for some banks licensed in the past. - Licensing unit within BRSD has 6 people, which may be under-resourced given complexity. - Assessment: LC for Principle 5. - Recommendation noted: - Increase efforts to establish full ownership details of banks licensed in the past, including UBOs. - Use licensing proactively to obtain commitments from UBOs and impose conditions on them and related parties. ### Principle 6 — Transfer of significant ownership: findings and assessment - Definitions and thresholds: - LFI Article 3: “significant interest” means direct or indirect holding equal to 5 percent or more of equity or voting rights or ability to exercise significant influence. - NBM Regulation No. 127 (June 27, 2013) provides definitions of “dominant influence”, “close link”, “persons acting in concert”, and indirect holding. - Notification and approval requirements: - Article 15 (1) LFI and NBM Regulation #127: prior NBM authorization required before acquiring or increasing qualifying holding to reach or exceed 20 percent, 33 percent or 50 percent. - Notification: any holder planning disposal or acquisition crossing 5 percent, 20 percent, 33 percent, 50 percent must notify NBM; banks must notify NBM within 3 working days when they become aware of acquisitions reaching those thresholds (Regulation #127 Article 59; Article 65). - Supervisory powers and enforcement: - NBM may reject requests; if ownership acquired without permission, voting rights denied and prohibition on receiving dividends; three-month disposal requirement; failure leads to executive Board canceling shares. - NBM due diligence for transfers comparable to licensing: fit and proper, qualifications, reputation, financial soundness, origin of funds (Article 55). - In last five years: 14 permissions for holding/increasing significant interest granted; 7 requests rejected. - Data collection: - Monthly bank reporting required for shareholders holding equities of 1 percent or more; lists of affiliated persons annually. - Key concerns and deterioration since 2008: - Ownership opacity increased: piecemeal acquisitions below 5 percent used to circumvent NBM vetting; many small stakes believed to be held through shell companies with common undisclosed UBOs and potential offshore jurisdictions. - Poor supervision of National Depository by Markets Commission; NCFM seen as insufficiently active in identifying UBOs. - Court rulings in some cases enabled transfers without owner knowledge, involving bailiffs and share registries. - Assessment: MNC for Principle 6. - Policy measures and recommendations (as provided): - Support NCFS measures including: - Limit participations of financial institutions in capital of other banks pending reforms. - Require independent registrars to report to NCFM about all changes in shareholders’ structure of the largest Joint Stock Companies. - Decrease threshold from 5 percent to 1 percent above which NBM permission to acquire shareholding in banks is needed (temporary measure supported). - Additional recommendations: - Put pressure on NCFM to ensure identification of UBO via National Depository. - Align LFI and NBM regulations with market activity laws to address absence of “acting in concert” concept in market law. - Increase penalties for fraudulent acquisition of shareholdings; consider stricter timeframes and bans where Article 15₆(4) currently lacks specificity. - Perform due diligence to ensure entities in Non Cooperative Jurisdictions do not hold direct or indirect equity in banks. - Consider requiring private registrars to report shareholder transfers systematically to NBM (not only to NCFS). - Suspend voting and dividend rights of shares until UBO disclosure; consider deducting from capital the excess risk involved. ### Principle 7 — Major acquisitions: summary findings - Legal limits and approval: - Article 28 (7) LFI: single equity interest in a non-financial legal entity should not exceed 15 percent of bank's regulatory capital; total net current value of all equity interests may not exceed 50 percent of regulatory capital. - Exceeding these limits requires prior written authorization from NBM; Regulation on equity investments requires detailed application information. - Assessment criteria: - NBM assesses whether acquisition exposes bank to undue risks and whether prudential indicators remain within limits (examples mentioned: Tier I limits, net exposure, long-term liquidity ≤1, current liquidity ≥20 percent, CAR ≤ 16 percent, exposures less than 5 times total regulatory capital). - Resource and managerial adequacy: - NBM determines whether banks have adequate financial, managerial and organizational resources to handle acquisitions; banks must adopt policies and internal procedures and establish commissions for investment control. - Cross-border activities: - NBM considers effectiveness of supervision in host countries and whether information flows are sufficient for consolidated supervision; only one bank had invested in a foreign company (in Macedonia) at the time of assessment. - Assessment: NBM evaluates acquisitions, but document notes lack of clarity whether NBM assesses whether acquisitions hinder future corrective measures or orderly resolution. *Source: IMF staff Detailed Assessment of Compliance with the Basel Core Principles for the Republic of Moldova (excerpt).* ### section 6 of the same Regulation, banks shall have in place monitoring mechanisms over the ### _cr1671 - section 6 of the same Regulation, banks shall have in place monitoring mechanisms over the ### Supervisory approach (Principle 8) — overview and framework - Principle 8 requires a forward-looking assessment of risk profiles of individual banks and banking groups, proportionate to systemic importance; identification, assessment and addressing of risks across the banking system; a framework for early intervention; and plans for orderly resolution in partnership with relevant authorities. - NBM legal and operational basis: - NBM empowered by LNBM (Articles 44, 47, 75) and LFI (Articles 37 and 40) to carry out on-site inspections and off-site controls. - Article 25 (2) of LFI: financial institutions shall maintain at all times adequate capital and sufficient liquid resources, proportionate to the type of activity and shall diversify their financial assets according to the risk of loss. - Supervisory methodologies in use: - CAMELS (on-site) and CA(M)ELS (off-site). - CAMELS elements: capital adequacy (C), assets quality including credit risk management practices (A), management (M), earnings (E), liquidity (L), sensitivity to market risks (S). - CAELS addresses same elements except management (M); NBM also separately assesses internal/external audit, information system management and anti-money laundering. - CAMELS rating scale: CAMELS 1 (strong), CAMELS 2 (satisfactory), CAMELS 3 (unsatisfactory), CAMELS 4 (deficient), CAMELS 5 (critical). - CAELS ratings updated monthly; example: in March, "BANCA SOCIALA" S.A. was assigned CAELS rating 3, but in April the rating was lowered to 4. ### Findings on risk-based supervision, systemic importance, and inspection cycle - Inspection frequency and systemic relevance: - Manual for on-site controls: each bank is subject to a full scope examination every year. - When establishing the "On-site inspection schedule" on a semi-annual basis, systemic importance of each bank is not taken into consideration. - All banks are subject to the same inspection cycle despite NBM having an internal methodology to identify systemically important banks. - Banks are classified on a scale from 1 to 14 with the first 5 or 6 categories considered as systemically important. - Draft regulation (with U.S. Treasury TA) provides criteria for monthly classification by systemic relevance. - Supervision approach critique and planned changes: - On-site methodology is mostly compliance based and does not sufficiently take systemic relevance into account; not proportionate. - NBM considering shifting inspection approach to emphasize risks and systemic importance more. ### Off-site, stress testing, macroprudential integration (EC2–EC5) - Off-site activities and forward-looking assessment (EC2): - Primary approach: assess performance and trends within peer groups using Manual on financial institutions analysis. - Dynamic analysis of prudential indicators, including resilience in stressed conditions. - Off-site supervisors conduct quarterly macro stress test for each individual bank and for the whole banking system (based on macro scenarios). - BRSD “Banking control and monitoring” unit assesses compliance with credit risk, interest rate risk, FX risk and liquidity risk and quality of banks' own stress tests during full-scope examinations. - Consolidated supervision: - LFI lacks explicit consolidated prudential supervision requirement; NBM recently amended regulations to create framework for consolidated supervision but requirements are not yet in force. - From December 31, 2013, banks are required to submit biannual FINREP financial statements at consolidated level. - Macro and cross-sector analysis (EC4–EC5): - Article 4 of LFI: NBM primary objective is to ensure and maintain price stability; no explicit NBM mandate in financial stability. - NBM undertakes macroprudential analysis via Agreement of Cooperation with NCFM (December 27, 2010), internal Sub-committee on Financial Stability, and a new BRSD division. - Special and off-site supervision division incorporates macro-prudential analyses; macroprudential stress testing of credit risk assesses impact of key macro indicators on loan portfolio quality. - Stress testing approaches: - Macro prudential stress test: uses GDP, Inflation rate, credit interest rate, appreciation/depreciation of domestic currency; assesses impact on credit risk and portfolio quality under stability and stress. - Liquidity stress tests: systemic impact based on inflows and outflows of liquid assets during a given month. - Stress testing performed monthly; shock parameters based on lowest and highest historical values recorded by the domestic banking sector; stressed ratios for non-performing loans, capital adequacy and liquid assets are calculated. - Results reported monthly in “Report on the financial condition of the banking system” to NBM Board; information related to non-banking market participants reported to NCFS and NCFM per agreements. - NBM stress test results are not shared with the industry nor published in the Annual report. ### Resolvability and crisis framework (EC6–EC7) - Resolution powers and recovery measures (EC6): - NBM is sole resolution authority under LFI. - Possible NBM measures: special supervision regime, special administration, liquidation. - Article 38 LFI: NBM may require direct and indirect holders of a significant interest to develop and implement recovery measures, including: - a) changing the structure of assets and liabilities of the bank; - b) changing the organizational structure of the bank; - c) additional financing from the bank's shareholders and others; - d) increasing the bank's capital; - e) other measures approved by the NBM. - NCFS (per MoU, article 9 c) February 28, 2011) should be kept informed by NBM about banks needing additional capital or requiring special administration, liquidation or other urgent measures. - December 2011: NBM required banks to prepare and submit contingency plans, addressing capital, liquidity, profitability and asset management, but only on an individual basis. - Framework shortcomings (EC7): - LFI, 2011 MoU, and NBM Financial Stability sub-Committee Regulation provide framework for bank resolution; Articles 37 and 38 of LFI include tools for special administration and liquidation. - Despite extensive tools, there is no clear framework or process for handling banks in times of stress (see preconditions: Framework for crisis management, recovery and resolution). - Regulation on internal control systems requires banks have contingency plans approved by the Board, but broader crisis management framework is lacking. ### Perimeter issues and supervisory reach (EC8) - Consolidated supervision gap limits awareness of bank-like activities outside regulatory perimeter. - During the mission, assessors were informed that only few banks control other financial institutions (mainly leasing companies) and they do not contemplate disposing of their participation. - NBM provides information to the National Anticorruption Center relating to money laundering and other crimes per agreement; NBM notifies relevant competent authorities when finding legal infringements by a bank related to permissible activities under its license. ### Assessment, shortcomings, and recommended actions (Principle 8 assessment: LC) - Overall assessment: LC (Largely Compliant) for Principle 8. - Key shortcomings and operational constraints: - Inspection planning does not reflect banks’ risk profiles nor systemic importance; all banks subject to same annual inspection cycle. - On-site methodology is still a mix of risk-based and compliance-based approaches and is resource/time intensive; attention sometimes given to minor issues. - Human resources limitations: - Staffing increased but new staff are very young with limited professional experience. - There are 4 vacant positions (3 staff have been on maternity leave for more than 3 years). - Supervision under pressure; situation may worsen with Basel II migration and need to establish crisis management framework. - NBM may wish to consider the following recommendations: - Adopt a more risk-based approach; move towards a comprehensive system of risk-based supervision in the short term. - Explore the possibility to enhance off-site and on-site resources. - Implement the framework for crisis management. --- ### Supervisory techniques and tools (Principle 9) — findings and practices - Mix and integration of on-site and off-site supervision (EC1–EC2): - NBM employs both on-site and off-site supervision per law and manuals. - Off-site is main instrument for monitoring with on-site used to verify compliance and investigate off-site findings. - On-site work types: full scope on-site inspections and targeted examinations. - Latest revision of internal manual for on-site supervision: June 2012. - Strategic Plan 2013-2017 plans: implement Basel II Capital Accord, align legal framework with EU requirements, implement COREP prudential reporting, consolidated supervision, automate generation of reports, improve legal instruments. - Internal audit used to review supervisory framework; 2012 annual internal audit report identified 9 recommendations addressing banking supervision. - Organizational structure: - BRSD on-site: Division for banking control and monitoring of AML/CFT — two units: bank activity control (13), AML/CFT (3). - BRSD off-site: Special Supervision and Off-site Division — units: regular monitoring/risk assessment/financial reporting (6), special supervision (7), crisis management (4). - Coordination: joint meetings before each on-site inspection; effective information sharing. - Planning process for on-site inspections considers: risk data matrix, last CAMELS rating, last CA(M)ELS rating, breaches of prudential indicators, condition at last off-site analysis. Yet regular on-site inspections remain uniform annually regardless of risk/systemic status. - On-site inspection execution data: - 2011: Full Scope On-site Inspections 14; Targeted Inspections 2 - 2012: Full Scope On-site Inspections 14; Targeted Inspections 4 - 2013: Full Scope On-site Inspections 13; Targeted Inspections 1 - Information, tools and verification (EC3–EC5): - Reporting and data sources: - Banks submit daily, monthly, quarterly, biannually 37 financial and prudential reports per FINREP on a solo basis. - From December 31, 2013, biannual consolidated FINREP required. - Banks submit quarterly and biannually financial reports of legal entities where they hold 25 percent or more of the share. - Other sources: bank annual reports, certified financial statements, ad hoc reporting, publicly available information. - Verification methods: - Cross-checks with registers: real estate ("Cadastru"), identity register ("Access"), official websites of foreign banks and rating companies, credible media. - Correspondent banks confirmation of balances and pledged accounts; statutory audit reports and limited audit reviews required. - NBM inspectors require administrators to sign a statement confirming all assets, liabilities and off-balance items are reflected in the balance sheet as of inspection date. - Supervisory tools: - Early warning system: quarterly monitoring of six sectors — real economy; financial sector; external; fiscal; the EU; CSI — based on internal indicators. - Horizontal peer reviews: banks classified by total assets into three groups: - small (total assets < Lei 1.5 billion), - medium (total assets >Lei 1.5 billion lei Lei 4.5 billion). - CAMELS/CA(M)ELS methodology applied; corporate governance and internal controls assessed during on-site inspections. - Stress testing: credit, interest rate, currency, liquidity, and combinations; NBM checks banks' internal stress testing policies and issues proposals for improvement. - Communication and enforcement: - Full scope/thematic inspection results discussed with bank management during inspections; banks receive preliminary inspection results and can comment before finalization (Article 75 of LNBM). - Remedial measures imposed by NBM Council of Administration upon proposal by BRSD Director. - Monthly report on banking system sent to NBM Council of Administration describing main trends and problematic banks. - Internal controls, audits and management engagement (EC6–EC7): - Supervisors evaluate internal audit and internal control functions during on-site inspections; inspection comments on audit efficiency and suggests improvements. - NBM assesses Board and management performance, technical competence, organizational structure, internal procedures, conformity with NBM limits, minutes of governing bodies, and ALCO reports during inspections. *Source: _cr1671 - section 6 of the same Regulation, banks shall have in place monitoring mechanisms over the* ### conclusions on the quality of the bank’s management and is discussed with the bank ### _cr1671 - conclusions on the quality of the bank’s management and is discussed with the bank ### EC8 — Communication of on- and off-site supervisory analyses - The supervisor communicates findings to the bank’s management in a timely manner by written reports or through discussions or meetings. - On-site analysis results are submitted to NBM management and discussed with bank management. - Prior to issuing the examination report the inspection team holds a formal exit meeting to communicate final issues and recommendations to executive management to ensure correct and representative conclusions and to allow immediate corrective actions. - The exit meeting is followed by the inspection report, which is presented to heads of Divisions and Units from the BRSD for checking correctness, completeness and accuracy and is subsequently communicated to the bank management and the Board for them to present agreement or disagreement. - The final Report on on-site inspection results is approved by the Director of BRSD and is submitted to the NBM Council of Administration. - The Board and president of the executive body of the bank are invited to participate in a meeting with the NBM Council of administration; thereafter the NBM Council of Administration adopts a decision that includes all measures necessary to be taken by bank and, where necessary, remedial actions or sanctions. - Findings from off-site analysis are communicated to the bank in a Letter, in accordance with the article 75 of Law on NBM; NBM usually meets with the bank if any material issues have arisen. - Issuing the final report typically takes between two and four months. Assessors noted instances of significant delay, where some final reports were not yet issued in respect of inspections that had taken place a year or more prior to the assessment. ### EC9 — Follow-up on supervisory concerns - Banks are asked to submit an action plan addressing inspection report recommendations. - The action plan is reviewed by the Special supervision and off-site division together with On-site control division before responding to the bank. - If the action plan does not address supervisory concerns, thematic inspections may be planned. - If the bank has not acted to remedy previous issues as agreed in its last action plan, the Special and off-site supervision division develops proposals to rectify the situation. - In practice, problems in certain banks can continue for a long period of time. ### EC10 — Notification of substantive changes - Banks are required to apply for supervisory approval for important changes: performing new activities that require a license from the NBM, opening branches and representative offices, and appointing administrators (See also CP 5). - Banks are required to apply for supervisor approval on intended distribution of dividends. - A bank must notify immediately the NBM when it is in default or over indebted, or there is a risk that the bank will enter into default (LFI article 38). ### EC11 — Use of independent third parties - The NBM may commission a special audit by external auditors; article 44 of LNBM allows NBM to delegate some supervisory tasks to qualified professionals (i.e. auditors) to perform on-site inspections. - Article 37 paragraph 4 from LFI grants external auditors the right to: a) examine the accounts, records and other documents; b) require administrators, employees and agents of the bank or subsidiary to provide any information on their activity and operations. - Detailed terms of reference are drawn up and NBM gives particular regard to the track record of the company providing the audit. ### EC12 — Information systems for prudential information - NBM uses different information systems (e.g.,”Invoke FAS Regulatory,” ”BOSS” and”Statistica”), to collect financial and prudential information that facilitate off-site supervision. - These systems enable timely monitoring of negative trends; a number of reports are generated each month to assess bank performance and compliance with prudential requirements. - Financial condition of each bank is analyzed monthly, and a CA (M) ELS rating is assigned to the bank. - If a negative signal is identified, the Director of BRSD is expected to propose measures to the Council of Administration of the NBM, which shall adopt, where necessary, a decision regarding remedial measures to be taken. ### AC1 — Periodic independent review of supervisory tools - NBM processes are reviewed by the Internal Audit Department of NBM to examine adequacy and effectiveness of supervisory instruments and provide proposals for improvement. ### Assessment of Principle 9 (Supervisory Powers, Responsibilities and Functions) - Assessment: LC - Comments: - NBM uses a mix of on- and off-site supervision with regular and frequent contact between NBM and banks’ management. - It takes sometimes between two to four months to issue an on-site inspection report, and several reports were issued after one year (during FY 2013). These delays may affect timely corrective measures. - The NBM should explore ways to address this problem; moving towards a more comprehensive Risk-based supervisory system will be a major step forward. - Frequency and intensity of supervision should depend more on systemic relevance of banks and risks identified; systemically relevant banks should receive more resources for off-site analysis and higher on-site examination intensity. - Recommendations to address these issues: - 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 systemically 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 — Supervisory reporting (overview) - The supervisor collects, reviews, and analyzes prudential reports and statistical returns from banks on both a solo and a consolidated basis, and independently verifies these reports through either on-site examinations or use of external experts. ### EC1 — Power to require supervisory information - NBM empowered to collect supervisory information in accordance with Article 44 of LNBM and Article 37 of the LFI. - Banks shall prepare and submit to the NBM reports on management, operations, liquidity, solvency, profitability, and on subsidiaries, separately and consolidated. - For monitoring prudential requirements, banks submit reports on classification of assets, large exposures, exposures related to affiliated persons, bank deposits, calculation of total regulatory capital, risk weighted capital adequacy, liquidity, operative information (daily data on liquid assets, the balance of interbank deposits and loans), diverse information, bank’s shareholders, equity investment of banks in legal entities, large deposits — submitted on a solo basis. - NBM’s detailed reporting instructions stipulate that all banks are required to submit their prudential returns within 10 days of the end of the reporting period. - Most reports are submitted on a monthly basis except reports on: large exposures, affiliated persons (both exposure and the list of affiliated persons), assets taken into possession/purchased for debt repayment, etc. - From the end of March 2014, more detailed information with respect to banks shareholders, shareholders which own more than 1 percent of the bank capital, disposed shares etc. will be reported to the NBM. - All regulatory returns are filed on an electronic transmission system (SIRNBM,). - There are no requirements for banks to submit prudential returns on a consolidated basis. ### EC2 — Reporting instructions and accounting standards - Article 33 of the LFI: banks accounts and financial reports must comply with accounting standards set by the NBM, prepared in accordance with generally accepted accounting practice. - NBM established detailed reporting instructions for prudential reporting forms. - In 2011 NBM issued Instructions on FINREP (based on IFRS) individual financial statements applicable to banks. - According to these instructions, since January 1, 2012, banks have been required to submit financial reports in accordance with these new requirements. - Consolidated FINREP requirements were approved in July 2013; this Instruction provides for reports on the financial situation of the group and shall be reported by banks on an annual basis. ### EC3 — Valuation methodologies and validation - Article 25 of the LFI requires banks to conduct administration and operations in accordance with sound administrative and accounting procedures and NBM regulations. - Regulation on Internal controls: banks’ governing bodies must ensure complete, accurate and timely reporting, with procedures to ensure truthful, accurate and timely bookkeeping. - Applicable valuation treatments for assets and liabilities are those provided by IFRS standards. - External auditors validate accuracy of returns in accordance with IFRS; internal audit verifies accounting records and analyzes transactions against financial statements. - During on-site examinations, accuracy of prudential reports is reviewed; NBM may request adjustments or apply remedial measures and/or sanctions per Article 38 of the LFI. - Example: an external auditor required supplementary adjustments of allowances for loan losses; prudential reports were adjusted and resubmitted to the NBM. ### EC4 — Frequency of data collection and analysis - NBM empowered to collect supervisory information per Article 37 of LFI. - NBM collects information from all banks on monthly and quarterly basis. - Individual FINREP data are required on a monthly, quarterly and semi-annual basis. - From December 2013 NBM will collect annually consolidated financial information based on FINREP. - Capital requirements data is collected, at solo level, on a monthly frequency. - NBM does not collect data on consolidated level for capital requirements or other prudential ratios. - The NBM responsible subdivision identifies systemic banks based on an internal methodology. - NBM develops monthly, quarterly and semiannually stress tests based on information collected from banks. - Monthly reports on the condition of the banking system and individual banks are submitted to NBM’s management and the Council of administration. ### EC5 — Comparable data across banks and groups - NBM collects data from all banks on a solo level based on standardized frameworks and same frequency. - Reporting instructions are based on IFRS rules for financial data and supervisory rules for capital requirements data and assets classification. - IT platform and standardized frameworks allow comparisons between banks and peer groups. - NBM will collect financial data through FINREP on a consolidated basis for banks and their affiliates in accordance with Article 37 of the LFI. - Few banks have such affiliates and their impact on the consolidated balance sheet of the group is negligible. ### EC6 — Power to request information from group entities - NBM empowered to request data and documents necessary for supervisory purposes; Article 47 paragraph (1) of the LNBM allows requiring all information deemed material, including management information. - Regulation on equity investments of banks in legal entities: banks submit financial statements of entities where they hold 25 percent or more of capital and information on large exposures of those entities. ### EC7 — Access to bank records and personnel - Article 37 paragraph 4 grants NBM inspectors, during on-site inspections, the right to examine accounts, records and other documents and require administrators, employees and agents to provide any information on their activity and operations. ### EC8 — Enforcement of timely and accurate submissions - Bank competent bodies are responsible for accuracy and fairness of information and adequacy of procedures to develop and check reporting. - Reporting instructions require banks to amend inaccurate information. - LFI (article 38) empowers NBM to issue administrative sanctions to individuals with administration functions (article 21 of the LFI) for breaches mentioned in article 38 para.1 of the LFI. - No specific requirements referring to persons who sign prudential reports are provided by NBM Regulations. ### EC9 — Validation and integrity checks of supervisory information - NBM employs internal checks including periodic analysis and checking against annual accounts (financial statements). - Reports are submitted through reporting system SIRBNM, which helps ensure accuracy. - Banks are required to resubmit reports when differences, mistakes and/or significant errors are detected by the NBM compared with previous reports. - Banks must correct system-generated errors and any later-found errors and resend electronic reports within reporting deadlines. - Banks are obliged to notify NBM about errors found in previously submitted reports for all reporting periods affected and to explain changes made. - Supervisory returns are also verified during annual full scope on-site inspections. ### EC10 — Roles and responsibilities of external experts - Article 44 of LNBM empowers NBM to perform inspections through staff or other qualified professionals and to examine books, documents and accounts. - When commissioning a special audit by external auditors, detailed terms of reference are drawn up and NBM considers the track record of the audit company. - During the mission assessors were informed that NBM employed an audit company to perform a special audit mission in one bank, all details being mentioned in the Terms of Reference. *REPUBLIC OF MOLDOVA — INTERNATIONAL MONETARY FUND* ### References. ### References (excerpts on supervisory powers, responsibilities and functions) ### External experts, reporting, and off-site information (EC11–EC12; Principle 10) - EC11: External experts (e.g., external auditors) must promptly report material shortcomings identified during supervisory work. External experts may conduct reviews used by the supervisor, but the supervisor must be satisfied with the results of such reviews. - Description and findings re EC11: - Article 34 of the LFI and Regulations on elaboration and submission of the annual audit results: independent audit shall inform the NBM about any fraudulent act of bank officials or subsidiaries and any irregularity that could lead to material losses. - Assessors noted one case where the NBM and bank management were informed about fraudulent acts. Regular meetings are organized with auditors at NBM management level with bank management present. - EC12: The supervisor periodically reviews collected information to determine it satisfies supervisory needs. - Description and findings re EC12: - Under prudential reporting regulations, NBM reviews bank submissions and improved the reporting framework in 2012-2013 by requiring additional information on loan portfolio and guarantees issued, tangible assets taken into possession, and large deposits. - Assessment of Principle 10: LC - Comments: - NBM receives and analyzes information at frequencies: daily, monthly, quarterly, bi-annually and annually. A robust validation process exists. - Off-site function devotes significant manual work in absence of a proper IT application. - Prudential returns are neither required nor provided on a consolidated basis. - Recommendations: - amend relevant secondary regulations to require banks to submit consolidated prudential ratios (e.g., capital adequacy, large exposure, transactions with affiliated parties); - implement a new IT application to improve off-site function execution. ### Corrective and sanctioning powers (Principle 11; EC1–EC7, AC1–AC2) - Principle summary: Supervisor acts early to address unsafe or unsound practices; has range of tools including license revocation/recommendation of revocation. - EC1 (raising concerns and remedial actions): - NBM raises supervisory concerns early, usually at end of on-site visits; preliminary inspection report is submitted to the bank; bank has 5 business days to comment. - For CAMEL rating 4 or 5 (four entities as of assessment) banks, Special Supervision Section performs intensive scrutiny. Under Article 37¹, a Special Supervision Commission (SSC) of 3 to 5 examiners is appointed for 3 months to issue recommendations to the bank’s Board and executive body; SSC can recommend measures to the NBM Board. The SSC does not substitute for bank management (art LFI, Article 37³). - Only one bank has been placed so far under SSC; note: the bank was ultimately liquidated. - NBM follows up remedial measures via bank reports and on-site visits; failure to comply can lead to more severe measures including sanctions. - EC2 (range of supervisory tools): - Legal basis: LFI Article 37 and 38; NBM law Article 75. - Possible measures (examples from Article 38(1) and practice): - issuance of warnings; issuance of orders to undertake remedial actions; - restrict or suspend bank activities including lending; prohibit certain transactions; force organizational changes or sale of subsidiaries; instruct increase of capital or maintenance of higher liquid assets; prohibit payment of dividends or bonuses; replace administrators. - For problematic banks (CAMELS 4 or 5) can be placed under special supervision (Article 37); special administration regime can replace/restrict powers and impose temporary management (during special administration shareholders’ rights are suspended and exercised by special administrator). - License withdrawal permitted under Article 38 of the LFI. - Decision-making: sanctions recommended by Special Supervision Unit, final determination by Governor, Vice Governor or Special Supervision Unit with Vice Governor approval. - Historical use: - warnings: 24 since 2009; - pecuniary sanctions: 5 fines since 2009; - bank licenses withdrawn: 2 instances since 2008. - Observed judicial challenges to NBM measures (examples include Bank A and Bank B cases). - EC3–EC5 (powers re regulatory thresholds and sanctions on individuals): - LFI Article 38 empowers NBM to require capital increases, restrict dividends, limit lending, prohibit loans, and otherwise take necessary measures where banks fall below thresholds or engage in unsound practices. - Example: a bank with Tier I capital below minimum required to suspend bonus distributions, reduce expenditures, and prohibited from opening new deposit accounts to individuals until Tier I capital restored. - NBM can apply sanctions to administrators (Board, executive body, Audit/Censors Committee members) and impose pecuniary sanctions: - fines up to 0.5 percent of the capital of the bank (Article 38); - fines to direct or indirect holders of equity interests up to 10 percent of the size of their shareholding calculated at face value; - fines to administrators in the amount between 1 to 10 average salaries on financial activities. - EC6 (ring-fencing): - Article 38 allows supervisory and remedial measures where parent/subsidiary or linked companies negatively influence a bank. In practice, ring-fencing strategy contemplated but has never been applied. - EC7 (cooperation on orderly resolution): framework for crisis management and resolution is at an early stage; NBM has track record in dealing with problem banks but conditions for intervention are not well established. - AC1–AC2: - AC1: No specific laws or internal timelines require corrective actions be imposed within defined periods; authorities strive to complete process quickly after examinations. - AC2: NBM has not had occasion to notify supervisors of non-bank financial entities and coordination opportunities are limited. - Assessment of Principle 11: MNC - Key legal and operational issues reducing effectiveness: - Constitutional Court decision on October 1, 2013 declared Article 11 (4) of the NBM law “unconstitutional” (that Article had stipulated that decisions taken by the Central Bank and challenged in courts cannot be suspended until final tribunal decision). Consequence: NBM acts/decisions can be challenged in court and may be suspended by lowest court in the country (suspension does not apply to licensing including withdrawal of license and liquidation). - Government and NBM prepared amendments to the NBM law in December 2013 (Joint IMF/WB letter dated December 9, 2013 reviewed draft). Amendments aim to require evidence of irreparable damage before suspension, establish internal appeal process within NBM, and restrict suspension of NBM decisions to extreme cases. NBML amendments entered into force on January 24, 2014. - Remaining concerns in revised law: - Article 11 (9) of the revised NBM law: when a plaintiff challenges an NBM decision, the act shall be judged within 3 months from submission; appeals can lengthen this timeframe—3 months is viewed as very long for troubled bank interventions. - Revised law does not clearly state that NBM decisions are immediately enforceable unless suspended or annulled; law is silent on whether contested NBM decisions stay in force until suspension ruling. - Legal prescription regime for sanctions: - Article 75²(4) of NBM law: sanctions subject to legal prescription of 6 months after violation detected by NBM; violation itself to a prescription of 3 years. After 6 months, application of sanctions is not possible. - Sanctions levels and guidance: - Fines and sanctions not necessarily dissuasive; lack of internal guidance for proportionality and escalation; no increased response for persistent breaches. - Special Supervision regime issues: - SSC recommendations may delay urgent action and law lacks objective criteria for placement under SSC (“precarious financial situation” not objectively defined) and no statutory timeframe for banks to adopt SSC recommendations. - Specific recommendations: - Take more forceful action in case of persistent problems, and apply a gradual response including stricter remedial measures. - Amend the law to increase the level of fines applicable to banks, shareholders and administrators. - Reconsider the prescription regime for sanctions by expanding the six months timeframe from discovery by NBM. - Set internal guidelines to assist NBM management in determining the most adequate response in case of breach or violation. - Monitor application of the new LNBM law by judges to assess whether amendments mitigate Constitutional Court ruling consequences. - Distinguish between remedial measures/corrective actions (apply when NBM deems risk exposure too high) and sanctions (apply only when bank breached law or regulation). - For the Special Supervision regime: - establish objective criteria for subjecting banks to special supervision; - set a time frame for adopting SSC recommendations by banks; - apply regime with discernment (e.g., when financial condition not compromised). ### Consolidated supervision (Principle 12; EC1–EC7, AC1) - Principle summary: Supervisor should supervise banking groups on a consolidated basis, monitoring group-wide risks. - EC1 (understanding group structure and activities): - For 2012, only four financial groups prepared consolidated financial statements. Each group consists of one banking institution and several NBFIs (mainly leasing companies) located in Moldova, with no cross-border presence. - NBM empowered by Article 37 of the LFI to collect balance sheet and activity information annually. Banks must monitor entities with significant interest (25 percent) and maintain data per “Regulation on equity investments of banks in legal entities.” - NBM actions to assess group risks: - receives/analyzes consolidated financial reports from banks; - receives/analyzes report on participation shares in capital of economic units; - analyzes information reported under “Regulation on equity investments of banks in legal entities”; - analyzes during on-site inspections risks related to equity investments where bank has >50 percent interest. - EC2 (prudential standards and consolidated reporting): - At assessment time, CARs and other prudential ratios (large exposures, exposures to related parties, etc.) were not required or computed on a consolidated basis. - Four banks had subsidiaries; some banks publish annual consolidated financial statements with CARs for solo and consolidated basis under Basel I; differences insignificant due to low non-banking activity. - EC3–EC4 (oversight of foreign operations and visits): - NBM has rights under prevailing laws but has not applied them due to absence of cross-border bank presence. - EC5 (review of parent companies’ activities): - NBM is not entitled to review main activities of parent companies and affiliates directly; it can request full information from the domestic bank and request information from home supervisor based on collaboration agreement or official letter. - No MoUs signed with home supervisory authorities (Austria (FMA), France (ACPR), Italy (BoI) and Germany (BAFIN)) of four banking groups with subsidiaries in Moldova, except National Bank of Romania as sub-consolidated supervisor for BCR SA (parent of BCR Chisinau). - EC6 (limiting group activities/locations): - Cross-border operations require NBM authorization (Article 13 paragraph (4) LFI) and are subject to “Regulation on equity investments of banks in legal entities” and ”Regulation on branches, representative offices and secondary offices of banks”. NBM can conduct on-site inspections, but no Moldovan banks have cross-border presence. - EC7 (solo supervision in addition to consolidated): - NBM supervises each bank on a solo basis; domestic groups are subject to consolidated supervision only in limited form (consolidated financial statements since 2012), but consolidated prudential returns are missing. - AC1 (fit and proper for owners and parent company senior management): - Under regulations on equity holdings (Article 30), if proposed acquirer is a legal entity, NBM conducts assessment of integrity and professional competence for the entity and persons directing it. - Assessment of Principle 12: MNC - Comments: - LFI amended to require reports on management, operations, liquidity, solvency, profitability and subsidiaries on both separate and consolidated basis. - NBM consolidated supervision framework is only partially developed; no requirements for consolidated prudential supervision and consolidated prudential returns. - Four foreign-owned subsidiaries in Moldova; NBM has limited information from home supervisors and no MoUs (except National Bank of Romania sub-consolidated supervision). - Four domestic groups have small non-bank activities; NBM receives consolidated financial statements (since 2012) and individual financial statements and LEL reports, but lacks consolidated prudential returns. - Ownership structures and dramatic shareholder changes (including largest 6 institutions) over past 2 years have occurred with limited transparency; suspicion of common UBO for at least three banks—these should be treated as same group for consolidated supervision. - Recommendation: - develop consolidated prudential supervision rules for domestic groups and pursue agreements with home supervisory authorities. ### Home-host relationships and cross-border cooperation (Principle 13; EC1–EC10) - EC1–EC4: - No Moldovan bank had cross-border presence at assessment time; hence no bank-specific supervisory colleges were established by NBM. - LNBM Article 7 enables sharing of information with other financial sector supervisors; draft cooperation agreements have been under negotiation since 2008 but none signed with Germany, Austria, France, Italy supervisors. - Home supervisors did not invite NBM to participate in colleges of supervisors for the banking groups. - EC5–EC6 (cross-border crisis cooperation and resolution planning): - NBM has sought cooperation agreements since 2008; Austria refused to continue negotiations given concerns on banking secrecy; Germany in discussions. No home authority shared crisis management information with NBM. - NBM’s ability to develop a cross-border resolution plan is undeveloped due to lack of MoUs and home supervisor inaction. - EC7–EC10 (host requirements, on-site access, consultation): - Foreign bank subsidiaries are subject to same licensing, prudential regulation, off-site and on-site supervision as domestic banks. - LFI lacks clear provisions for direct on-site access by home supervisors to subsidiaries; absence of MoUs complicates potential on-site inspections by home supervisors. None of the home supervisors had performed on-site inspections of Moldovan subsidiaries. - NBM does not consult home supervisors before taking action against subsidiaries in absence of MoUs. - Assessment of Principle 13: LC - Comments: - NBM’s approach to sharing information with overseas supervisors is open and cooperative within legal secrecy constraints, but formal agreements are lacking. - NBM is encouraged to pursue agreements with home supervisory authorities. - NBM’s capacity to develop cross-border resolution plans for existing four subsidiaries has not been developed due to inaction of home supervisors. ### Corporate governance, board responsibilities and supervisory assessment (Principle 14; EC1–EC9, AC1) - Principle summary: Supervisor ensures banks and groups have robust corporate governance proportional to risk and systemic importance. - EC1 (laws/regulations establishing board and senior management responsibilities): - LFI Articles 18–20 and Regulation on internal controls set responsibilities for GSM, Board, executive body and Censors Committee. - Board: odd number ≥ 3 members (LJSC sets ≥ 5 for state-owned or >50 shareholders); majority should be independent. Board members appointed for four-year term with re-election permitted. - Censors Committee: odd number ≥ 3, appointed for four years, reports to GSM; responsible for adequacy of external and internal audit functions; does not conform to typical Audit Committee practice where Audit Committee is elected by the Board and reports to it. - Regulation on internal control requires banks to establish a corporate governance code, to be published; NBM issued recommendation letters rather than binding regulations to implement international best practices. - NBM regulations do not require independent risk management and compliance functions (see CP 15 and CP 26). - EC2 (supervisory assessment of governance): - NBM internal manuals (e.g., Manual on on-site controls) require regular assessment of corporate governance via on-site inspections and off-site monitoring. On-site focus areas include ownership structure, board duties, strategic planning, internal controls, MIS, conflicts of interest, internal/external audit findings. - Supervisors require remedial actions where deficiencies noted. - EC3 (nomination/board committees): - LFI Article 17 requires internal regulations; Board members are subject to prior NBM approval (Article 21). - Few banks have risk management, remuneration, or nomination committees; collateral valuation committees are common. - No legal/regulatory requirement for such committees. - EC4 (board qualifications and duty of care/loyalty): - LFI Article 21 and Regulation on requirements for bank administrators prescribe “fit and proper” qualifications; NBM assesses via ongoing monitoring and on-site inspections. - No specific requirement that individual Board members or the Board collectively have sound knowledge of material activities the bank intends to pursue. - EC5 (board oversight of strategy, risk appetite and culture): - LFI Article 18 requires Board to elaborate and ensure implementation of bank policy and to approve internal control systems; Regulation on internal controls lists required documents (strategy, corporate governance code, codes of conduct, conflict of interest policies). - On-site inspections assess whether policies and strategies are approved, commensurate with risk, and communicated. - EC6 (fit and proper selection of senior management and succession planning): - LFI and Regulation on requirements of bank administrators prescribe fit and proper standards and prior approval for administrators. No specific NBM requirement for Boards to establish fit and proper standards for senior management or maintain succession plans. - EC7 (compensation alignment with prudent risk-taking): - Law on joint stock companies: Board approves wage bill and employee remuneration. - Regulation on internal controls: banks must document and have Board-approved short/long term objectives, policies, strategies including remuneration. - On-site inspections assess compensation systems for compliance. - EC8 (board/management understanding of operational structure and risks): - Regulation on internal controls mandates procedures for planning/approving new activities with risk descriptions and annual reviews. On-site inspectors verify Board and executive body review and approval of new activities and risk analysis. - Absence of independent risk management function and specialized Board committees (see CP 15) may impair accuracy of NBM supervisors’ assessments. - EC9 (power to require board composition changes): - Article 38 of the LFI empowers NBM to withdraw confirmation of administrators, suspend administrators up to one year, or approve dismissal for failure to disclose conflicts or for infractions. - AC1 (notification of material information affecting fitness and propriety): - LFI: external auditor shall inform NBM about fraudulent acts and irregularities that could result in material loss. - No specific NBM regulatory requirement for banks to notify supervisor as soon as they become aware of material information affecting fitness and propriety of Board or senior management. - Assessment of Principle 14: MNC - Comments: - Regulations require banks to have strategies, policies, procedures and governance codes, but absence of binding specific requirements (independent risk management and compliance functions; specialized Board committees; Board knowledge of material activities and associated risks) reduces corporate governance effectiveness in practice. - Lack of shareholder transparency in banks could impede sound governance. - NBM assesses corporate governance via on-site and off-site work, but gaps in requirement scope and enforcement remain. *Source: Excerpts from “Table 3. Detailed Assessment of Compliance with the Basel Core Principles” (Republic of Moldova), as contained in the provided PDF content.* ### conclusion that banks and banking groups do not have robust and effective corporate ### _cr1671 - conclusion that banks and banking groups do not have robust and effective corporate ### Corporate governance and supervisory oversight — key findings - Assessors concluded that banks and banking groups do not have robust and effective corporate governance policies and processes (see also CP 5, 15, and 26). - Important forms of oversight that should exist in any bank: oversight by the Board; oversight by senior management; direct line supervision of different business areas; and independent risk management, compliance and audit functions. - Current regulatory action planned by NBM: - Amend the Regulation on Internal controls to establish the mandatory role for bank’s Board and promote the elaboration of a corporate governance code. - Regulation to incorporate elements including: (i) relations between executive body, bank’s Board, shareholders and other persons; (ii) structures for establishing bank objectives; (iii) means to achieve objectives and monitor performance; (iv) staff responsibilities; (v) management of the bank’s activity by the Board. - Regulation plans to set the Board responsibility to define a code of conduct and require the internal audit function to check independently compliance with conflict of interest policies. - Supervisory recommendation summary: - Foster implementation of amendments to the Regulation on internal control systems within banks as soon as possible to promote Corporate Governance. - Amend the LFI to broaden the executive functions requiring prior approval of NBM (fit and proper) (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). - NBM to take more intrusive action by challenging banks’ risk appetite and risk tolerance and evaluating the tone at the top. - Continue assessing balance of power, incentive systems and risk appetite using instruments such as assessing the leadership profile of an administrator. - Introduce a legal or regulatory obligation for 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 senior management. *Source: IMF staff assessment text provided.* ### Principle 15 — Risk management process: findings - Legal and regulatory framework: - Article 18 of the LFI: Board responsible for preparing and ensuring the bank‘s internal policy application. - Regulation on internal controls (article 8, article 30): banks shall prepare, organize and implement internal control systems in line with Basel Committee documents and European Community Directives; internal control systems must provide identification, assessment, monitoring and control of risks. - Observed weaknesses: - No specific regulatory requirement to have a dedicated risk management department or risk specialists for each major banking risk; few banks have such departments. - No general system-wide good practice to set up a risk management committee at the Board level (one bank among 14 has a risk management committee at the Board level). - Boards do not receive useful independent monitoring information on level and nature of risks to enable remedial action. - NBM supervision is heavily reliant on on-site monitoring and is not deemed sufficiently robust to capture all qualitative aspects of risk management. - Supervisory processes and practices: - On-site inspections verify presence of organizational risk management function; documented strategies, policies and codes of conduct; adequate flow of information between senior management and operational staff; risk management policies and methodology; adequate information systems. - During on-site inspections supervisors review Board and senior management decisions on all material risks. - Stress testing and contingency planning: - Regulation requires stress tests; in December 2011 NBM required banks to prepare and submit contingency plans; February 2012 submissions: seven banks comply, 6 partially compliant, one noncompliant. - NBM reviews contingency plans during on-site inspections but review has not translated into concrete coercive action to improve banks’ emergency preparedness. ### Principle 15 — Risk management: policy recommendations - Ensure all banks continue to develop risk management policies and processes. - Introduce legal/regulatory obligation for banks to draw up annually a report about conditions on which internal control is performed, with distinct presentation of risk management, compliance and internal audit functions. - Speed up approval of the new Regulation on internal control systems within banks and include strategic risks. - NBM to be more intrusive in challenging banks’ risk appetite and risk tolerance and assessing tone at the top. - Increase oversight intensity where risk-management processes are poor. ### Principle 15 — Specific operational observations and numeric details - One bank among 14 has a Board-level risk management committee. - On-site sampling for loans: typically 50 to 80 percent for loans granted to non-bank clients (higher for other asset types). - Contingency plans submitted in February 2012: seven banks comply, 6 partially comply, one noncompliant. ### Principle 16 — Capital adequacy: findings - Current regime: - Capital adequacy in Moldova governed by Basel I. - NBM planning to implement Basel II and some elements of Basel III with EU assistance to harmonize with CRD. - “Regulation on Risk-Weighted Capital Adequacy” (Decision no. 269 of NBM’s Council of Administration on October 17, 2001, last amended on December, 20 2012) defines capital components. - Capital definitions and limits: - Tier I Capital includes ordinary shares; preferred shares; capital surplus; undistributed profit and reserves obtained or increased as a result of profit distribution. - Tier II Capital includes cumulative and partially cumulative preferred shares with unfixed maturity; surplus related to these shares; subordinated debts with unfixed maturity; amount of Tier II shall not exceed Tier I. - Moldova banks required to maintain a Ratio of Tier 1 Capital to RWA of 16 percent. - Prescribed minimums and system averages: - Initial (share) capital must be not less than MDL 100 million. - Regulatory capital (Tier I Capital)—not less than MDL 200 million—approx. EUR 12.3 million—since December 2012. - Minimum risk-weighted capital adequacy is 16 percent (it was set at 12 percent in 2011). - In practice, the average RW capital adequacy in the banking system is maintained at around 23 percent. - Observed deficiencies: - Capital regime still excludes market risk and operational risk from RWA calculation. - Exposures secured by real estate mortgages receive a 50 percent weighting irrespective of borrower occupation; no connection between borrower and collateral in instruction on RWA computation. - No capital charge for FX exposures (open positions). - Unclear whether deductions for risk excess from eligible capital are consistently applied (e.g., large exposures and related parties from undisclosed UBO). ### Principle 16 — Capital adequacy: policy recommendations - Proceed with planned migration toward Basel II / CRD harmonization (including standardized approaches). - Review treatment of mortgages and collateral linkage to borrower characteristics. - Introduce capital charges for FX exposures and expand RWA to capture market and operational risks. - Clarify and enforce deduction of risk excess from eligible capital where applicable. ### Principle 17 — Credit risk: findings - Legal and regulatory framework: - LFI (articles 28, 32) and Regulation on bank lending activity and Regulation on classification of assets and conditional commitments set explicit requirements for credit risk management, including internal rules for granting loans, limits, decision-making, asset classification, collateral monitoring and documentation. - NBM has additional regulations: equity investments, large exposures, transactions with affiliated parties, foreign currency loans to residents. - Observed weaknesses: - No explicit legal requirement for an independent risk management function; credit risk management mainly driven by lending departments. - Few banks have separate risk management functions; Boards lack independent monitoring information. - No specific regulatory requirements for collateral valuation procedures except for repossessed assets and mortgages where independent appraiser prior to closing mortgage contract is mandatory (Article 8 of the Law on Mortgage). - No specific regulatory standards for assessing creditworthiness of unhedged retail clients (LTV ratios, maximum indebtedness ratios, types of eligible incomes, credit scoring). - In several bank submissions, information on related parties was missing due to lack of due diligence identifying groups of debtors and single-debtor exposures. - Supervisory practices: - On-site examinations cover full credit lifecycle; off-site monitoring via monthly prudential reports including detailed loan information. - On-site sampling and loan-file review is extensive. - Supervisory recommendations summarized by assessors: - Enhance supervisory scrutiny of financial analysis and valuation of collateral through loan reviews. - Focus more on determining if bank credit underwriting policies are prudent. - Introduce regulation provisions requiring banks to have procedures for assessing collateral, especially tangible collateral, by certified evaluators based on International Valuation Standards. - Require banks to identify, assess and frequently monitor indirect FX risk as part of credit underwriting and monitoring. - Consider stricter collateral requirements (LTV ratios), different indebtedness ratio for individual loans, more restrictive lending criteria for legal entities and lower concentration limits for borrowers subject to FX risk. - In the new Regulation on internal controls, define and distinguish between FX risk arising at the borrower level and risk arising from banking activity. ### Principle 18 — Problem assets, provisions and reserves: findings - Framework and practices: - NBM requires internal policies and procedures for identification, monitoring and evaluation of credit risk, valuation and management of non-performing exposures, and quarterly assessment and adjustment of provisions. - NBM uses a five-tier rating system with provisioning allocations of 2 percent, 5 percent, 30 percent, 60 percent, 100 percent for standard, supervised, sub-standard, doubtful and loss respectively (article 27, Regulation on classification of assets). - Banks classify loans at least quarterly; no requirement to classify between reporting dates even if asset quality deteriorates. - IFRS (IAS 39) requires impairment assessment at end of each reporting period; impairment recognized when there is objective evidence. - Observed weaknesses and quantified issues: - Multiple cases of misclassification observed in practice despite clear regulatory classification scheme. - Periodicity for classification (quarterly) considered too long; no intra-quarter requirement to reclassify, risking understatement of required provisions. - Large gap between IFRS allowances for impairments and prudential provisions: IFRS allowances for impairments represented at end of December 2013 around 46 percent from allowances for debts on loans. - Coverage ratios end-December 2013: - IFRS: allowance for impairments/debt on credit -4,7 percent - Prudential: allowances for debt on credits/debt on credits -9,7 percent - NPL coverage: around 84 (prudential provisions) and 48 (IFRS provisions) - High threshold for individual significance in impairment assessment in at least one case around Euro 5 million. - External audit issues: at least one external audit report unable to obtain sufficient audit evidence that repossessed assets are stated at lower of cost and fair value at audit date. - Write-offs: volume of reported write off is 2.3 billion lei at end of 2013 compared to 1.1 billion lei in 2012. - Assessors’ recommendations: - Amend Regulation on assets and conditional commitments classification to require more frequent classification at least monthly and increase monitoring period from three to six months for 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 18 — Selected numeric and documentary points - Provisioning bands: 2 percent; 5 percent; 30 percent; 60 percent; 100 percent. - Observed write-offs: 2.3 billion lei at end-2013 vs 1.1 billion lei in 2012. - IFRS/prudential allowance relationship: IFRS allowances ~46 percent of prudential allowances at end-December 2013. - Coverage ratios quoted verbatim: "(allowance for impairments/debt on credit -4,7 percent)" and "(allowances for debt on credits/debt on credits -9,7 percent)"; NPL coverage "around 84 based on prudential provisions and 48 based on IFRS provisions." ### Principle 19 — Concentration risk and large exposure limits: findings - Legal and regulatory framework: - Regulation on "large" exposures (Revised Regulation from 12/19/2013, in force from 1/24.2014) defines exposures, net exposure, large exposure and group of inter-related persons. - NBM amended LEL regulation to broaden notion of exposure (e.g., include interbank assets regardless of maturity, "Nostro" accounts). - LEL numeric limits (NBM regulation): - Net Exposure of the bank to a person or group of inter-related persons shall not exceed fifteen percent (15 percent) of the bank's Total Regulatory Capital. - The sum of the net credit exposure to the 10 biggest debtors, including groups of interrelated persons, shall not exceed 30 percent of the bank’s total credit portfolio. - The sum of all Large Exposures shall not exceed five (5) times the bank's Total Regulatory Capital. - Limit on currency-linked FX exposures to individuals: net exposure in Moldovan Lei linked to foreign currency rate to individuals shall not exceed 30 percent of regulatory capital, 10 percent if mortgages are not included. - Observed problems: - Several banks use strategies to circumvent LEL and exceed limits. - Case study: a domestic systemically important bank breached LEL far above 15 percent (84 percent for two lines of credit); related companies were inter-dependent and should have been treated as a group — bank refused to treat them as such; bank suffered a major loss of LEI 300 million (approx. US$ 22 million) as a result of concentration. - Lack of transparency in ownership structures undermines understanding of connected lending and concentration risks. - At time of mission a court in Chisinau had suspended some provisions of the LEL (assessors were informed that on March 13, 2014 the requirement related to interbanks exposure, previously suspended, was restored). - Assessors’ recommendations: - Increase level of knowledge on banks’ ownership structure. - Enforce observance of risk concentration limits through greater sanctions. - Improve language in the regulation on LEL by defining in more detail the concept of risk concentration. - NBM to consider providing further guidance using CEBS 2010 Guidelines on management of concentration risk under supervisory review as reference. - Supervisory monitoring: - Banks required to submit quarterly report on large exposures with detailed debtor identification and exposure details. ### Principle 20 — Transactions with related parties: findings and recommendations - Definitions and reporting: - LFI Article 31 and Article 3 define “related persons”, “administrators”, “affiliated persons”, “significant interest” (5 percent threshold) and include related transaction scope. - Banks required to keep registers (affiliated persons; transactions with them) and submit quarterly reports on related parties and transactions. - Numeric limits and rules: - Current limits: - Total credit exposure of a bank to its employees limited to 10 percent of total regulatory capital (with maximum amount per use and limited uses). - NBM regulation No. 240 limits to 10 percent of a bank’s total regulatory capital its total exposure to any affiliated person or group of persons acting in concert. - Regulation limits total exposures to affiliated persons and groups of persons acting in concert to 20 percent of a bank’s tier one capital. - LFI prohibits banks to extend credit to related persons on more favorable terms than to unrelated persons. - Observed weaknesses: - Progress since 2008 but recent changes in bank ownership often opaque; many ownership changes did not receive NBM clearance. - Undisclosed ultimate beneficial owners (UBOs) and “raiders” acquiring controlling stakes in banks impair surveillance of related-party transactions and LEL compliance. - External audit feedback: three banks expected to receive qualified opinions in 2013 due to imprudent transactions with affiliated parties. - Current monitoring of deposits of related parties applies only to deposits exceeding 1 million LEI (approx. US$ 73K), which may be too high. - Assessors’ recommendations: - NBM should pursue identification of shareholders and UBOs who own controlling interest in banks. - Enforce regulations more forcefully in case of grave deviations. - Increase NBM monitoring on terms and conditions applied to deposits of related parties (consider lowering the 1 million LEI monitoring threshold). ### Principle 21 — Country and transfer risks: findings - Requirements and guidance: - Regulation on internal controls and Recommendations on country/transfer risk require banks to have a comprehensive country/transfer risk management program with Board supervisory policies; risk management policies and procedures; country analysis and rating processes; exposure limits for countries, currencies and entities; regular evaluation (at least once per year) and adequate internal control mechanisms. - Valuation and provisioning for country/transfer risk: - Regulation on classification of assets provides provisioning based on international rating agencies’ ratings (use lowest rating among S&P, Moody’s, Fitch-IBCA) with prescribed provisioning bands: - 2 percent—for ratings AAA/Aaa to A-/A3 inclusive. - 5 percent—for ratings BBB+/Baa1 to BBB-/Baa3 inclusive. - 30 percent—for ratings BB+/Ba1 to BB-/Ba3 inclusive. - 60 percent—for ratings B+/B1 to CCC-/Caa3/C inclusive. - 100 percent—for ratings CC/Ca/DDD to R/C/D inclusive. - Countries not assessed by these agencies are evaluated by banks based on internal policies. - Supervisory practices: - On-site inspections determine compliance with country/transfer risk requirements and NBM can impose remedial measures under the LFI if deviations or excessive risk detected. *Source: IMF staff assessment text provided.* ### conclusions sent to appropriate units within the bank in order to adjust limits if necessary. The ### _cr1671 - conclusions sent to appropriate units within the bank in order to adjust limits if necessary. The ### Country and transfer risk (Principle 21) - Findings: - Banks required by the Regulation on internal controls to have procedures to manage country risk and transfer risk, including stress tests in crisis situations tailored to size, complexity and diversification. - NBM obtains country exposure reports for individual banks on daily, monthly and/or quarterly basis (per FX reporting instructions). Reports include: (1) Report on foreign currency purchase and sale operations performed by the licensed bank; (2) Report on “FX loans and credits of the licensed bank”; (3) Report on FX guarantees of the licensed bank; (4) Report on licensed bank’s operations with cash in foreign currency and traveler’s checks in foreign currency; (5) Report on “Loans/credits related to direct investments in the Republic of Moldova received by the licensed bank”; (6) Report on “Operations according to the loan/credit contracts related to direct investments in the Republic of Moldova received by the licensed bank”; (7) Report on “Foreign securities of the licensed bank”; (8) Report on “Correspondent accounts and other placements of the licensed bank”. - NBM regularly checks accuracy and analyzes reports for significant variations and trends; more thorough review during on-site examinations. - NBM entitled (Articles 44 and 47 of the LNBM) to require any information necessary for supervision, e.g., March 2013 request on exposures/obligations to residents of Cyprus or related parties. - Since 2012–2013 several banks had excessive exposure via inter-bank placements to banks from one neighboring country; breaches of internal limits or poorly assessed limits were evident. Although excessive country risk exposure was identified at some banks, the NBM did not impose measures to address the issue. - Assessment: LC - Recommendations: - 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. ### Market risk (Principle 22) - Findings: - Market risk requirements derive from Regulation on Internal controls (article 30) and specific regulations on open FX position and interest rate risk. - No requirements for trading book market risk as Moldova has not adopted the Market Risk Amendment and banks do not have trading books. Banks mainly exposed to interest rate and FX risk. - FX limits set by Regulation on FX positions: total net open foreign position end of day ≤ 20 percent of regulatory capital; net open foreign position in every foreign currency end of day ≤ 10 percent of regulatory capital. - No capital charge (Basel I framework); capital charges for market risk not imposed. Held for trading portfolio insignificant; valued according to IFRS market-based approach. - On-site manual includes valuation checks; quarterly stress testing by Special supervision and off-site division. - Banks classify assets and submit FIN reports; NBM verifies size, quality, provisions; on-site inspectors verify classifications and may adjust capital adequacy. Stress tests performed by both NBM and banks but remedial measures were rarely imposed. - Assessment: LC - Recommendations: - 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 for managing market risks in the trading book. - Require capital charge on market risk (NBM did not require Basel I methodology to calculate capital requirement for market risk—e.g., 8 percent capital against global net FX positions was not required). ### Interest rate risk in the banking book (Principle 23) - Findings: - Banks required by Regulation on internal controls (article 30) and specific Regulation on managing interest rate risk to have procedures and policies subject to Board approval, implemented by executive bodies, reviewed regularly. - ALCO responsible for drafting policy; FIN 27 report (introduced January 1, 2012) presents rate-sensitive positions classified by earliest date of contractual rate change/maturity; detailed annual analysis submitted no later than April 30. - NBM assesses policies during on-site inspections; stress tests (at least quarterly) required, gap analysis commonly used; banks not required to report internal interest rate risk measurement results to NBM. - Assessment: LC - Recommendations / suggested actions: - Promote adequate policies and practices for interest rate risk management and establish an independent risk management function. - Prescribe clearer provisions for banks to calculate potential changes in economic value from interest rate changes. - Require banks to compute and report to the NBM change in economic value from a standardized interest rate shock (for example a 200 basis point shock, in both directions, regardless of the currency). ### Liquidity risk (Principle 24) - Findings: - Laws and Regulation on bank’s liquidity require compliance with: - Principle I — long-term liquidity: assets with remaining maturity > two years shall not exceed amount of financial resources; - Principle II — short-term liquidity: liquid assets shall not be less than 20 percent of the bank's total assets. - Banks report liquidity position monthly; current liquidity reported daily. - Regulation requires liquidity management policy, contingency funding plans, stress tests; off-balance sheet commitments were not included in liquidity requirements (prior to recent reporting framework changes); FIN 26 under new reporting framework takes financial guarantees into account when determining liquidity gaps. - No requirement for intraday liquidity practices. - NBM can establish individual liquidity requirements for each bank; in 2009–2013 imposed limits for liquidity ratios in two cases. - FX-related limits to reduce FX risk: long open FX position ratio per currency ≤ “+10 percent”; short open FX position ratio per currency ≥ “-10 percent”; sum of long open FX position ratios for all currencies ≤ “+20 percent”; sum of short open FX position ratios for all currencies ≥ “-20 percent”; ratio of sum of balance-sheet assets in foreign currency to sum of balance-sheet liabilities in foreign currency shall not exceed “+25 percent” or be less than “-25 percent”. - NBM conducts quarterly liquidity stress test in foreign currency assessing inflows/outflows for one month, applying individual shocks and systemic solvency links. - Identified practices circumventing Liquidity Principle II by taking long-term deposits from cross-border banks and placing them short-term to meet 20 percent short-term liquidity requirement. - Encumbered assets may not be included in calculation of Principle II (reporting instructions December 2011); NBM requires confirmation of non-encumbrance by counterparties. - Assessment: LC - Recommendations: - Complete amendments to Regulation on internal control system and liquidity risk management to require banks to: (i) regularly assess capacity to sell liquid assets; (ii) have an adequate liquidity buffer aligned with risk tolerance; (iii) establish formal alternative funding plans; (iv) set limits to manage day-to-day liquidity; and (v) set limits on correspondent banks. - Amend liquidity regulation to take into account off-balance sheet commitments when determining liquidity ratios. ### Operational risk (Principle 25) - Findings: - No comprehensive, detailed NBM regulation specifically on operational risk (OR); OR addressed in Regulation on internal control with laconic language. - General requirements for OR in article 31 of Regulation on internal control systems (“Procedures for ensuring activity continuity”). NBM sent a letter on December 13, 2011 with detailed requirements on contingency plans and operational risk management; regulation on outsourcing issued November 2011. - Internal audit required to verify continuous monitoring of risks including OR and IT risk. - Banks required to have business continuity plans, disaster recovery provisions; plans assessed during on-site inspections and by Crisis management and prevention unit. - Several banks have outdated IT systems; NBM uses in-house IT indicators; contingency plans assessed in 2012 by Crisis management and prevention unit. - Assessment: MNC - Recommendations: - Speed up issuance of the regulation on Operational Risks and subject banks to more detailed OR reporting obligations beyond fraud reporting. - Include clear prescriptions in draft OR regulation for banks to have appropriate and sound IT infrastructure ensuring data and system integrity, security, availability. ### Internal control and audit (Principle 26) - Findings: - LFI requires Board and Censors Committee; Regulation on internal controls requires internal control frameworks proportionate to banks’ risk profiles. - Internal audit function required, independent, reporting to Board; Censors Committee oversees internal audit and liaises with external auditors. - Regulation prescribes internal audit unit organization, staffing sufficient to carry out targets, head appointed by Board, reporting to Board; head of internal audit not subject to explicit fit-and-proper requirements. - NBM inspectors evaluate internal audit resources, independence, methodology, audit planning during on-site inspections; remedial actions required when necessary. - Assessment: LC - Recommendations: - Require improvements in the internal audit function to enhance overall effectiveness. - Speed up approval of the new Regulation on internal controls. - Introduce explicit professional qualification and fit-and-proper requirements for heads of internal audit and obligation to notify NBM upon dismissal of Head of internal audit. - Exchange regularly views on quality and independence of internal audit with external auditors during tri-partite meetings. ### Financial reporting and external audit (Principle 27) - Findings: - Banks must keep accounting records and prepare financial statements in accordance with IFRS; LFI articles 29, 33, 34 govern recordkeeping and audit requirements. - Banks required to contract an independent audit firm accepted by NBM; annual audited financial statements and auditor opinion to be published within four months of fiscal year end. - Audit must be performed in accordance with International Standards on Auditing (ISA) and IFRS; external auditors must be attested/qualified by NBM per Regulation on issuing qualification certificate. - NBM can order special audits/diagnostic studies; NBM reviews audit reports and management letters and requests explanations and remediation. - Rotation requirement: audit firm or auditing partner rotated every seven years; prohibited to participate in audit activities for minimum two years subsequent to rotation; audit partner cannot join bank as administrator for two years post-audit. - No explicit legal requirement that NBM has right to access external auditors’ working papers; NBM has had discussions with auditors with bank agreement or presence of bank representatives. - Assessment: LC - Recommendations: - Take more forceful action to ensure audit quality by actively challenging external auditors and banks' management when understatement of provisions is identified. - Arrange more frequent periodic meetings with auditors to discuss common concerns. - Give NBM examiners power to access external auditors’ working papers, where necessary. - Increase level of IFRS expertise among NBM staff. ### Disclosure and transparency (Principle 28) - Findings: - Article 30 of LFI and Regulation on publishing information require banks to adopt policies on transparency and disclosure; banks publish monthly, quarterly, annually in press, branch boards and on websites. - Disclosures required to include qualitative and quantitative information on strategy, ownership, corporate governance, accounting policies, annual audited financials and audit opinion, capital and liquidity factors, risk exposures, efficiency and profitability ratios, conditions of lending/deposits, and other relevant information. - LFI article 33 and accounting standards require consolidated and solo reporting and disclosure of all material group entities. - NBM reviews and enforces disclosure compliance via on-site and off-site functions and accountancy department; supervisor can direct restatements and impose remedial measures/sanctions. - NBM publishes aggregated data on banking system indicators (equity, fixed income and profitability, liquidity, FIN1, FIN2, loan portfolio structure, deposits structure, number of branches and staff starting June 2013); additional aggregated data in NBM annual report. - Assessment: C - Comment: - NBM aims to implement Basel II; disclosure requirements need adaptation to Pillar III framework. ### Abuse of financial services / AML-CFT (Principle 29) - Findings: - AML law #190-XVI of July 26, 2007 establishes duties, responsibilities and powers; NBM can inspect and impose administrative sanctions via Article 38 of LFI. - Banks required to adopt CDD/KYC, internal control mechanisms, action plans, appoint AML officer, report suspicious transactions to OPCML, and report automatic cash transactions exceeding Lei 100,000 and electronic transactions exceeding Lei 500,000. - AML/CFT on-site methodology revamped July 4, 2013 with U.S. Treasury assistance; NBM has a Unit of 3 staff in Banking Regulation and Supervision Department for AML/CFT supervision. - NBM examines CDD/KYC in on-site inspections; in several cases NBM detected suspicious activities banks did not; NBM itself reported such cases to FIU. - Difficulties exist in identifying beneficial owners for entities registered in offshore centers (Cyprus, BVI, Dutch West Indies); sometimes only nominal owners identified. - NBM performs full-scope AML/CFT inspections annually; inspection counts by year (Full Scope Inspections / Thematic Inspections): - 2008: 16 / 5 - 2009: 15 / 5 - 2010: 15 / 10 - 2011: 13 / 1 - 2012: 14 / 1 - 2013: 13 / 1 - Enforcement: Article 10(3) AML law and Article 38 LFI allow remedial measures and sanctions including written warnings and license withdrawal. Since last FSAP, NBM applied seven fines and issued 43 warnings. Annual counts of violations with fines and warnings: - 2008: No. of Violations with AML Rules 25 — Fines 1 — Warnings 4 - 2009: 15 — 2 — 4 - 2010: 50 — 1 — 18 - 2011: 45 — (blank) — 7 - 2012: 46 — 1 — 6 - 2013: 46 — 1 — 4 - NBM has signed cooperation agreements with domestic authorities (OPCML, Tax authorities, NCFC, Public Prosecutor office) and letters of agreement with foreign supervisors (Romania, Russia, Belarus, Kazakhstan, Georgia). - Assessment: MNC - Recommendations and observations: - Moldova has paid close attention to ML/TF issues and Moneyval assessed the AML/CFT regime in 2012 (assessment referenced in source). - Constraints noted: absence of legal protection for NBM staff, interference of MOJ in secondary legislation, lack of deterrent pecuniary sanctions raise enforcement concerns. - NBM to inform banks on ML/TF methods and trends (Article 10(4) AML law). - NBM should continue to strengthen AML/CFT supervision given limited staff resources in AML Unit (Unit of 3 staff, two recently graduated). *Source: _cr1671 - conclusions sent to appropriate units within the bank in order to adjust limits if necessary. The (PDF chapter/section).* ### conclusion that “AML/CFT supervision is effectively carried out by the NBM with regard to the ### Conclusion on AML/CFT supervision by the NBM (excerpt) ### Progress and recent developments - Parliament approved the National Strategy to combat ML/TF (strategy for 2013-2017 approved in June 2013). - Sanctions for AML/CFT violations have been taken against banks. - Key amendments made to the Penal Code enter into force in 2014, reinforcing sanctions in case of AML/CFT breaches. - All banks are subject to an annual AML on-site visit. - The Office for Preventing and Combating ML requested in November 2013 TA 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. ### Main shortcomings and supervisory challenges (findings) - The assessors applied MNC for CP 29 due to the challenges below. - AML Unit understaffed: - The AML unit of the NBM is made of three staff; two of them assigned to overseeing AML/CFT have just graduated from university and have virtually no experience in this area. - Human resources for AML/CFT supervision are very low and not proportionate to the risks the banking industry is facing. - Massive cross-border operations: - According to the Financial Intelligence Unit, cross-border transactions of major proportions (amounting to about 1 trillion LEI) involving Moldovan banks have been detected. - The NBM considers, however, that the information about 1 trillion lei is exaggerated. - Transfers seem to be performed by companies operating from off-shore centers with undisclosed UBO, likely for tax evasion purposes according to NBM’s senior management opinion. - These operations have not been subject to intense scrutiny so far. - Operations with Transnistria: - All operations with Transnistria have been declared suspicious. - Outbound financial flows are quite significant (2 billion LEI in 2013) and are operated by companies with unknown beneficial owners. - The payment system department of the NBM is responsible for monitoring these transactions on a daily basis, but supervisory authorities (at least the NBM) have little room for maneuver and to adopt remedial actions as it would bring immediate political reaction. - Banks have not performed ML/TF risk assessments: - None of the banks in Moldova has performed an ML/TF risk assessment. - The NBM issued a recommendation in 2013 suggesting banks to do such exercises; however, banks have not followed this recommendation. - Without such analysis, banks cannot define their risk appetite and adjust internal limits and surveillance mechanisms accordingly. - Two transparency concerns in banks (2013): - Sale of NPLs by a domestic systemically important bank: - Transaction amounting to Lei 1.2 billion (approx. US$ 87 million) representing one-third of the total portfolio. - Identities of the companie(s) and their UBOs, as well as the origin of funds used to buy these bad assets, were not disclosed to the NBM despite its request. - Rapid deposit growth at another systemically important bank: - Total deposits increased from Lei 6.2 billion to 9.8 in one year only (US$ 236 million). - No interest rate was applied to these deposits; bank claims depositors selected the bank "because of its good reputation". - Commercial companies account for about 50 percent in this increase. - Sanctions applied so far do not seem dissuasive and deterrent: - The NBM has imposed fines and warnings to banks for failure to comply with AML/CFT obligations. - In cases of persistent and recurrent breaches, the response has not been increased. ### Recommendations (prescribed supervisory actions) - perform targeted on-site visits –preferably in conjunction with OPCML- to determine the nature, magnitude and economic rationale of the cross-borders transactions identified by the FIU and determine proper supervisory response; - increase level of scrutiny in banks by doing more targeted on-site inspections in the area of PEPs, UBO, 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. Sampling of transactions for example is done manually; and - implement without delay aspects of the AML/CFT National Strategy that relates to the NBM mandate. In effect, this strategy for 2013-2017 that was approved by the Parliament in June 2013 contains several activities that are directly under the ambit of the National bank. *REPUBLIC OF MOLDOVA INTERNATIONAL MONETARY FUND* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr1671.pdf_