Government of Montenegro
Ministry of Finance
Questionnaire
Information requested by the European Commission to the Government of Montenegro for the preparation of the Opinion on the application of Montenegro for membership of the European Union – ADDITIONAL QUESTIONS –
VI Financial markets
Minister: Igor Luksic VI Financial markets - Additional Questions -
2 VI Financial markets - Additional Questions -
TABLE OF CONTENTS ECONOMIC CRITERIA...... 5 VI Financial markets ...... 6 A. General ...... 6 B. The banking sector...... 8 a) Liquidity risk...... 11 b) Credit risk ...... 11 c) Market risk ...... 11 C. Capital market...... 19 E. Non-bank financial institutions ...... 21 Annex...... 25 1. National strategy of sustainable development of Montenegro ...... 25 2. Economic policy of Montenegro for 2010...... 25 3. Quarterly macro-analytical report 31.12.2009...... 26
3 VI Financial markets - Additional Questions -
4 VI Financial markets - Additional Questions -
ECONOMIC CRITERIA
5 VI Financial markets - Additional Questions - VI Financial markets
A. General
23. (Ref to Q. 32): Please provide examples of private sector access to international financial markets
In relation with the borrowing of banks abroad, loans from the international financial markets account for 99.91% of the overall bank loans on 31 December 2009 (excluding subordinate debt), the beneficiaries thereof being ten banks in the system. Loans to the subsidiaries in Montenegro by their parent banks account for 76.74% of the overall foreign-loan-amount. Terms for the banks’ access to the international financial markets are provided in the table hereunder:
Original Date of Maturity Creditor amount Interest rate approval date (000€)
1 EFSA 11/23/2005 1 100 31/12/2010 EURLIBOR+3
2 EFSA 4/13/2005 1 000 31/12/2010 EURLIBOR+2
3 EFSA 12/15/2005 3 000 31/03/2011 EURLIBOR+3
4 EFSA 10/5/2006 10 000 31/03/2016 EURL IB OR+ 3 , 5
5 EFSA 5/22/2006 500 31/03/2012 EURL IB OR+ 3 , 5
6 EFSA 7/16/2008 10 000 30/09/2015 EURLIBOR+3
7 KFW 6/30/2008 15 000 30/06/2015 EURL IB OR+ 2 , 3
8 KFW 11/25/2008 15 000 31/12/2018 EURL IB OR+ 2 , 4
9 KFW 3/28/2008 420 31/12/2015 EURLIBOR+1,305
10 KFW 7/15/2008 300 31/12/2015 EURLIBOR+1,306
11 EFSE Luxembourg 01/09/2007 3 516 22/03/2010 4.00%
12 EFSE Luxembourg 01/03/2008 2 500 22/03/2018 7.25%
13 EFSE Luxembourg 01/03/2008 7 500 22/03/2015 6.87%
14 EFSE Luxembourg 01/07/2008 3 000 22/09/2013 7.66%
15 ING NETHERL ENDS 6/19/2008 3 000 6/19/2010 3 month
EURIBOR +2,75%
16 STEIERMAERKISCHE BANK UND SPARKASSEN AG 12/31/2009 2 665 12/31/2014 1 month
EURIBOR +3,7%
17 KFW 7/31/2009 2 000 6/30/2016 2.4% FIXED
18 KFW 7/31/2009 4 000 6/30/2016 6.6% FIXED
19 KFW 10/1/2009 4 500 6/30/2016 6.6% FIXED
20 KFW 12/8/2009 4 500 6/30/2016 6.6% FIXED
21 EURO PEA NINV ESTMENT B A NK 12/22/2009 1 400 12/21/2021 0.0392
22 EURO PEA NINV ES TMENT B A NK 11/16/2009 2 600 11/16/2021 0.041
6 VI Financial markets - Additional Questions -
23 European Investment Bank 12/1/2009 1 000 01.12.2016 0.0337
24 EURO PEA N INV ES TMENT B A NK 12/7/2009 2 000 07.12.2020 0.03
25 Raiffeisen bank 5/23/2008 10 000 23.05.2010 6month.eurib.+2.25%
26 EFSE 4/23/2007 10 000 22.09.2014 6month.eurub.+2.20%
27 EFSE 3/31/2008 5 000 22.09.2013 6month.eurib.+2,00%
28 EFSE 4/30/2009 7 000 22.03.2014 6month.eurib +4,25%
29 SID banka 11/30/2007 10 000 30.11.2014 6month.eurb.+1,45%
30 KFW 10/26/2009. 14 000 30.12.2016 6month.eurib.+3,60%
31 IFC Washington 6/16/2009 10 000 16.06.2013 6month eurib.+3,375%
32 NLB Pristina 7/27/2007 1 100 21.07.2010 0.065
33 Zavarovalnica Triglav 7/27/2007 1 003 21.07.2010 0.065
34 Poteza Ljubljana 7/27/2007 1 001 21.07.2010 0.065
35 STEIERMA ERKISCHE BA NK UND SPA RKA SSEN A G GR 2/27/2007 3 000 2012.02.27 euribor+2%
36 L A NDESBA NK BERL IN A G 12/1/2008 450 2013.12.01 euribor+1.75%
37 L A NDESBA NK BERL IN A G 6/2/2007 432 2012.06.01 euribor+1.75%
Data source: Reports submitted quarterly to the Central Bank by banks Private companies in Montenegro have free access to all the international financial institutions, therefore having a possibility of direct credit arrangement agreements. In addition, the possibility herein has been defined by the Law on Foreign Current and Capital Operations, where it has been defined as quoted: Current and capital operations, including transfers of property from and to Montenegro, shall be performed freely, unless otherwise prescribed by law. In the past period, the companies from Montenegro have mostly cooperated with the European Bank for Reconstruction and Development (EBRD), while one company has made cooperation with the International Financial Corporation (IFC). The arrangements herein refer to the following companies: Voli – DOO Podgorica (Voli – Ltd., Podgorica)(the export-import turnover and services company); Mesopromet – AD Podgorica (Mesopromet – JSC Podgorica) (the poultry production and processing company); MPM Cosmetics Markets – DOO Podgorica (MPM Cosmetics Markets – Ltd., Podgorica)(import and wholesale of cosmetic and decorative products, costume jewellery and hair accessories); and the Turkish company Gintas Inc, which has used the IFC funds in the construction of a shopping mall in Podgorica. The cooperation with the European Bank for Reconstruction and Development (EBRD)
Company Amount
Voli 4.23 mil. €
Mesopromet 5.mil. €
MPM Cosmetics 1.5 mil.€ Markets
Total 10.73 mil. €
Cooperation with the International Financial Corporation (IFC – WB)
Company Amount
Gintas Inc. 10 mil. €
7 VI Financial markets - Additional Questions - Based on the data hereabove, according to the information available to the Ministry of Finance, the overall cooperation between the companies in Montenegro and the international financial institutions amounts to EUR 20.73 million. Additionally, some companies from Montenegro have made direct credit arrangements with financial institutions, mostly with the parent banks (OTP, NLB, etc.).
B. The banking sector
24. (Ref to Q. 40): Please provide data on the ownership of foreign public institutions in commercial banks.
Foreign public institutions do not participate in the equity structure of the Montenegrin banking system. EBRD has the 8.08% share in the capital of one bank (NLB bank).
25. (Ref to Q. 42): Conclusion on competitiveness on bank market seems to clash with objective data. Could you explain why interest rates show an upward tendency and why access to bank financing for private citizens and SMEs appears to become more difficult?
There is a number of reasons due to which the access to credit lines has become more difficult, but this has not been faced only by the citizens and SMEs but also by big companies. The first reason is that the crisis has largely been transferred to the real sector. The transfer of the crisis to the real sector has been manifested by a fall in economic activity, fall in employment, rise in enterprise illiquidity and fall in disposable income of population, which has reduced the possibility for the economy and households to savings and repayment of debts, and the possibility for further borrowing in terms of loans. This has resulted in a dramatic past-due loans’ growth which, according to the January data, exceeded 30% of overall loans. In addition, there has been a dramatic rise in the number of illiquid companies. The latest data shows that around one fourth of companies have their accounts blocked by the Commercial Court’s decisions, due to accounts payable thereof. The number of illiquid companies has been significantly higher than that. A significant number of citizens and enterprises have been over-indebted. As a result of the crises, a part of deposits has been withdrawn from banks while, at the same time, parent banks have reduced their credit exposure to Montenegro (to that sense, Montenegro is not protected as it is the case with the parties to the Vienna Initiative). Compared to October 2008, the deposits in the banking system have been reduced by 400 million euros, while parent banks’ lending has dropped by 117 million euros. It should be kept in mind that the abovementioned difficulties have resulted in a loss as to the banking system operations in 2009. At the same time, the access of Montenegrin banks to international financial market has been aggravated, while the assets have become more expensive. Thus, there is a combination of operational risk increase (risk premiums), decrease in available credit assets, and more expensive sources of assets. In such conditions it is logical that banks have reduced their credit activity and increased the amount of interest rates. The demand is constantly larger than the supply of credit assets, thus also making pressure as to the increase in interest rates. Such a trend, aggravated access to loans, and more expensive loans are not typical of Montenegro only, but of the rest of the region’s countries, and partly of the EU states.
8 VI Financial markets - Additional Questions -
26. (Ref to Q. 46): Apart from the influence of the global financial crisis on the local market, in which measure the banking sector crisis in Montenegro has been influenced by mismanagement, expansive credit growth and inadequate credit risk management? Has the Central Bank fully exercised its supervisory role in case of Prva Banka? Please clarify what kind of (EUR 42 million) debt Government prematurely repaid to commercial banks. Are EUR 141 million guarantees to IFIs part of overall issuance of EUR 200 million guarantees mentioned under the reply to Q no. 41 or not?
The global financial crisis has incited and deepened the consequences of the expansive credit growth and liberal credit policy which banks have run by the end of 2007, which reflect in worsening the assets quality and profitability of the banking sector. There is no doubt that bad bank practices in risk management in some banks have contributed to the rise of their risk profile, and thus in worsening of their financial situation. In the expansion period, banks have taken too much risk with a view to more aggressive positioning in the market, i.e. to making larger profits. In the period of aggressive growth of individual banks, the Central Bank of Montenegro (CBCG), in its supervising activity by the end of 2007, has requested from those banks to set aside additional reservations and larger solvency coefficient that the statutory one, which amounted to 8% by March 2008 i.e. by passing the new Law. In addition, the CBCG has limited the credit growth of banks by its regulatory measures of the end of 2007. During 2007, aimed at limiting the expansion of credit growth and strengthening the function of risk management in banks, the following have been adopted: - Decision on amendment to the Decision on minimum standards for credit risk management and operations with bank related persons, which, depending on the level of accounts receivable for net loans and leasing operations on 31 December 2007, limited their annual growth as to the amount of 30%, 40% or 60%, starting from 1 January 2007. - Decision on amendments to the Decision on minimum standards for bank capital; which depending on the achieved annual growth of accounts receivable for net loans and leasing operations (over 60%, or over 100%), provided for a minimum amount of the solvency coefficient of 10% or 12%, starting from 1 January 2008, with a view to ensure more adequate protection of interests of deponents and other creditors of banks through the increased bank capital; - Decision on amendments to the Decision on criteria and procedure of assets classification and reserves' creation for potential credit losses, which provides for the reserves for general banking risks, dependent on the growth of the credit portfolio and extra-balance-sheet items, which represent potential liabilities of a bank. The decision has obliged banks to carry out the assets and extra-balance-sheet items classification at least once a month, aimed at more quality credit risk management in banks and more precise reserves' classification and creation. By its regulatory and supervisory activity in 2008 and 2009, when it created an entire set of counter-cyclic prudential measures, the Central Bank has influenced as to ensuring the security and stability of the banking system. Apart from the abovementioned measures of regulatory nature, the Central Bank has used its supervising activities, in the case of banks with bad banking practices in risk management, to initiate management replacements, to provide for the prohibition measures as to performing the credit activities, issuing guarantees and credit cards, and approving current account overdrafts, and to demand the provision of a proper level of liquidity and capital. During that period, the Central Bank has indisputably performed more intensive supervising activities in the case of Prva banka, and taken measures in line with its legal authorities, with a view to ensure the protection of interests of deponents and creditors of the bank and, on the other hand, security of the entire banking system.
9 VI Financial markets - Additional Questions - Having in mind that, due to negative effects of the global financial crisis, Prva banka faced a liquidity crisis in the second half of 2008, the Central Bank took measures towards Prva banka already in October 2008, aimed at management replacement, cease in the risk profile growth, and provision of additional liquid assets. However, the Central Bank did not assess as justified and purposeful to introduce compulsory management to Prva banka, considering the limited authorities of a compulsory manager. Even now, the Central Bank's measures towards Prva banka are in effect, despite the fact that Prva banka reports show the liquidity indicators to have been above the statutory minimum for the last six months. However, due to a high level and concentration of credit risk, the Central Bank has forbidden Prva banka to perform credit activities, ordered the reduction in the credit risk concentration, and instructed additional requirements for providing the capital adequacy (a higher level of own assets) by virtue of capital increase. The text below is the detailed outlook of supervisory activities of the CBCG towards Prva banka. Until entering into force the new Law on Banks, i.e. until 19 March 2008, the Central Bank of Montenegro (hereinafter the Central Bank) has perform control of the banks’ operations in line with law and regulations passed on the basis of the law, meaning, the control of financial situation (by assessing the individual and overall risk in operations), application of the CAMELS methodology, and harmonisation of the operations with law, regulations, and business policy acts. To that regard, where the control of a bank’s operations had identified irregularities in the operations thereof, i.e. acting of the bank contrary to regulations, business policy acts, and banking practices, the Central Bank instructed measures in line with provisions of Articles 73 and 74 of the Law on Banks (Official Gazette of the Republic of Montenegro 52/00 and 32/02). Pursuant to provisions of Articles 73 of the Law on Banks, where it is identified that a bank acts contrary to regulations or that it entered some insecure and non-solid affairs, the Central Bank may: 1) warn the bank in written; 2) request that the bank acts compliant to a written agreement, acceptable for the Central Bank, by which the bank with be obliged to remove the identified irregularities according to a defined timescales; 3) instruct the bank in written to remove drawbacks and lacks in regulation compliance in the defined timescales; 4) request that the bank suspend or replace a member of a management body or management of the bank, and 5) request that the bank stops the activities which were determined by the Central Bank as potentially jeopardising the bank operations, causing bank losses or jeopardising the interests of deponents. Where it is determined that the solvency coefficient or risk capital of the bank is below the statutory level, the Central Bank may, in the sense of Article 74 of the Law on Banks, in addition to the abovementioned measures from Article 73 of this law, provide for the following measures: 1) instruct the bank to develops a plan of capital renewal, acceptable for the Central Bank, within 60 days; 2) instruct the bank to reduce or cut one or several activities which were identified by the Central Bank to have caused significant losses of the bank or represent a serious risk for the bank; 3) instruct the bank to limit the wages and other receipts of the bank’s management and officers with special authorities and responsibilities; 4) instruct that all interest rates paid on deposits do not exceed market interest rates for comparable amounts and maturities; 5) instruct the bank to demand from its depending person to reduce or stop the activity which the Central Bank determined to have caused significant losses of the bank and represent serious risk for the bank; 6) instruct a reduction of the bank’s assets growth or prohibit the further assets growth for some time; 7) instruct the bank to sell stocks or share in another legal person to which capital the bank participates in, and 8) prohibit all further investments. By the application of the abovementioned regulations, in the course of performing the control function, the Central Bank has taken measures in the case of Prva banka Crne Gore Akcionarsko društvo Podgorica – osnovana 1901. godine (The First Bank of Montenegro Joint Stock Company Podgorica – established in 1901) (hereinafter: the Bank) in line with Article 73 of the Law on Banks, which has been in effect until 19 March 2008. 1. Since the beginning of 2006 up to the mid-2007, the Central Bank of Montenegro has performed two comprehensive and one targeted control of the Bank’s operations, being the control of credit
10 VI Financial markets - Additional Questions - worthiness and financial situation, and compliance of the operations thereof with law, regulations and business policy acts. Based on the comprehensive and targeted control of the Bank’s operations during 2006, the Central Bank of Montenegro identified certain lower-level irregularities in the operations of this bank, and the Central Bank has ordered corrective measures in line with provisions of Article 73 of then-valid Law on Banks, aimed at removing the detected irregularities in certain segments of risk management within the set deadlines. In the first half of 2007, the Central Bank identified, by a comprehensive control of the Bank’s operations, that the acting by the Bank has been to a more significant extent incompliant with regulations, the Bank’s business policy acts and banking practices, and application of the defined criteria on the type of the bank’s revitalisation measures, and decided to demand from the Bank to make commitments as to removing the irregularities in the defined deadline by entering into the Agreement with the Bank, of 6 July 2007. Having in mind that the irregularities identified in the Bank’s operations during 2007 related to the inadequacy of the risk management system in place, the Bank committed itself, by entering into the abovementioned Agreement, to improve the risk management system of its operations, especially in terms of liquidity risk management, and to improve the degree of compliance with regulations, business policy acts and sound banking practices until 31 December 2007. The Bank committed itself to do the following in the area of risk management, namely: a) Liquidity risk - to establish liquidity limits stricter than the statutory ones – a) the average decade liquidity minimum in cash amounting to 20% of short-term sources of funds, and b) daily liquidity minimum in cash amounting to 15% of short-term sources of funds; - to establish the ratio of liquid assets and total assets to the level of at least 15%; - to improve measuring and monitoring of liquidity risk by improving policies and procedures. b) Credit risk The Bank committed itself to enhancing the credit risk management through improving the strategy on credit risk management in the part of lending authorisation procedure, and to maintain its solvency coefficient at the level of minimum 15%. c) Market risk The Bank committed itself to enhancing the process of the interest rate, price, and foreign currency risk management through improving the policies and procedures, developing the GAP report and setting limits to price risk. d) Operations risk The Bank committed itself to enhancing internal systems, processes and controls, aimed at establishing more efficient and effective system of internal control. 2. The targeted control of the Bank’s operations (12 – 30 November 2007) identified that, in the period between the two 2007 controls, the Bank has not removed the irregularities, and that the Bank entered into insecure and unsound affairs, the potential consequences of which, in case that the risk endures, were loss or damage to the deposit institution. Based on the findings obtained from the Bank’s operations control, the Central Bank, in early 2008, took compulsory measures towards the Bank by applying Article 73 of the Law on Banks – it instructed the Bank to take specific activities aimed at stopping the Bank’s further risk profile growth i.e. at maintaining security and stability in the Bank’s operations. The Decision 0104-632/1 of 13 February 2008 instructed the Bank as follows: - until 30 September 2008, to remove illegalities and irregularities identified by the report on control, strictly confidential 03-60/1 of 26 December 2007 (hereinafter: the Report); - to maintain the solvency coefficient at the level of minimum 15%;
11 VI Financial markets - Additional Questions - - to establish liquidity/assets management adequate to the Bank’s risky profile, as determined by the Report. Additionally, the Bank has been required to stop with lending authorisations, in performing credit activities, which are not in line with regulations, healthy banking practices and business policy acts of the Bank, (noted in the Report) and with further performance of those insecure and unsound affairs. Apart from the abovementioned, the Bank has been obliged to submit monthly reports to the Central Bank on the activities implemented as to applying the measures from this Decision, with written positions and conclusions of the Bank’s Management Board, until the 10th of the month, for the previous month. 3. By mid-2008, and after entering into effect of the new Law on Banks (Official Gazette of Montenegro 17/08) – hereinafter: the Law, the Central Bank has started the control of the Bank’s operations, inter alia, with the goal of determining the adequacy of the risk management and compliance of the Bank’s operations with law, as well as the financial situation of the Bank. Upon the completion of the control (the Report on control strictly confidential 03-26/1 of 29 August 2008, by which the irregularities in the Bank’ operations were identified), the Central Bank assessed that the Bank was highly exposed to the liquidity risk. In addition, it was estimated that the irregularities identified in the Bank’s operations may jeopardise interest of the deponents and creditors, and significantly influence the financial situation of the Bank. For the reasons herein, the application of the provisions of Article 116 of the Law, the Bank was ordered measures for enhancing the financial situation (Written warning 0104-4328/1 of 2 October 2008). According to provisions of Article 116 of the Law, where it is determined that a bank does not manage adequately the risks which it is exposed to in its operations, or has acted contrary to regulations, the Central Bank may impose on the bank one of the following measures: 1) warn the bank in written of the identified irregularities and demand from the bank to assume one or more activities in a specified deadline, aimed at removing the irregularities, including the activities which may be ordered by the decision from paragraph 1 item 3 of this Article; 2) enter into a written agreement with the bank, by which the bank will commit to removing identified irregularities in its operations within the specified deadline; 3) adopt decision, by which it provides for one or more of the following measures: - to instruct the bank to remove the identified irregularities in its operations and/or take other activities aimed at enhancing the situation in the bank; - to instruct the bank to reduce or stop one or more activities for which the Central Bank has determined to have caused the losses to the bank, or are contrary to best banking practices; - to instruct the bank to set limits in its operations stricter than the limits provided for by this law, the Central Bank’s regulation, or the bank’s business policy acts; - to instruct classification of assets based on a credit risk exposure to a more risky group; - to instruct the bank to set aside adequate reserves based on the country risk exposure; - to instruct the bank to increase the amount of own assets, ensure a solvency coefficient and/or a level of other capital adequacy indicators higher than the statutory ones, where one or more of the conditions from Article 71 of this law has been met; - to demand from the bank to suspend or replace a member of a management body or the management of the bank; - to instruct that the bank, within 60 days, develops a plan of capital renewal, acceptable for the Central Bank; - to instruct the bank to reduce general expenditure, including the ceilings on wages and other receipts of executives and other persons with special authorities and responsibilities; - to instruct that all the interest rates payable on deposits may not exceed the market interest rates for comparable amounts and maturities;
12 VI Financial markets - Additional Questions - - to instruct the bank to demand from its dependable person to reduce or stop the activity which the Central Bank has identified to have caused significant losses to the bank or to represent big risk for the bank; - to prohibit or limit the bank’s assets growth; - to instruct the bank to sell a part of the assets; - to prohibit the bank to invest in other legal persons; - to instruct the bank to terminate a contract concluded with a person outside the bank on the provision of services to the bank which exposes the bank to a high operations risk; 4) introduce a interim management into the bank; 5) revoke the licence for the bank’s operations. As previously pointed out, by application of Article 116 of the Law, for the following 30 days, the Bank was (by the act 0104-4328/1 of 2 October 2008) prohibited from the assets growth, except in the part which improves the liquidity position in the offset account and correspondent account of the Bank. In addition, the Bank was required to: suspend the authorities for disposability of cash funds of the Bank to all persons except for the Director General; to take activities for enhancing the situation in the Bank; to reduce general expenditure, including the ceilings to wages and other receipts by persons with special authorities in the Bank, as well as to submit daily reports on cash inflows and outflows, for the previous day. On 3 November 2008, the Central Bank started direct control of the Bank’s operations, with financial data on 30 September of the current year, aimed at determining whether the Bank has removed the irregularities identified by the Report on control (the act strictly confidential 03-26/1 of 29 August 2008). During the control, in the first two weeks already, the Central Bank has established that the Bank’s liquidity was critically insufficient due to the Bank’s incapacity to meet all of its due liabilities, and that the liquidity risk of the Bank is high due to mismatch between maturities and cash flows of assets and liabilities. Additionally, in the stated period, it has been established that the Bank failed to execute all the payment orders, issued by the ordering parties, on the same banking day or the value date, i.e. that the Bank has about 30 mil. of outstanding payment orders in local and international payment operations. Considering the abovementioned, the Central Bank assessed that the continuation of the Bank’s operations was endangered due to the current financial situation, and that it was necessary to improve the financial situation of the Bank by providing a higher level of liquid assets and by stopping further risk profile growth of the Bank. For those reasons, and for the urgent need for removing the identified irregularities and endangered continuation of the Bank’s operations, by applying provisions of Article 115 of the Law, the Central Bank ordered measures from Article 116 of the Law by the Decision 0104-32/1 of 21 November 2008, upon the proposal by the control-managing person in the course of the direct control. The Bank was instructed to immediately launch activities for enhancing the situation in the Bank, which, especially, assume: payment of all due accounts receivable, improvement of liquid position of the Bank through ensuring external sources of finance; cashing illiquid assets; capital increase of the bank; etc., so that the ratio of liquid and total assets be 10%. In addition, the Bank was instructed to immediately terminate any credit activity, assuming of extra-balance-sheet liabilities, activity of issuing credit cards and authorising overdrafts to the accounts of the Bank’s clients, with the obligation of reporting to the Central Bank, with no delay. After issuing the abovementioned Decision (0104-32/1 of 21 November 2008), in the later phase of the same direct control of the Bank’s operations, the Central Bank also identified other irregularities in the Bank’s operations, and on 12 December 2008 it was informed that the Government of Montenegro had decided to ensure a liquid position by a credit support to the Bank, amounting to EUR 44 million. Credit support to Prva banka has been approved on the basis of the Law on
13 VI Financial markets - Additional Questions - Measures for support of banking system, on the grounds of the positive opinion of the Central Bank of Montenegro. Having in mind the abovementioned, it was assessed as justified to repeat the procedure and issue a new decision on taking measures towards the Bank, which repealed the previously issued Decision 0104-32/1 of 21 November 2008. The Decision 0104-5723/1 of 12 December 2008 instructed the Bank (the Board of Directors) to immediately develop a Plan on special-purpose use of cash funds provided by the credit support of the Government of Montenegro, acceptable for the Central Bank, under condition that the special- purpose use of the abovementioned funds may take place only after the Central Bank’s assessment of the Plan as acceptable. The Bank was also instructed to: terminate immediately any credit activity, undertake extra- balance-sheet liabilities, activity of issuing credit cards and authorising overdrafts on the Bank’s clients’ accounts; take activities aimed at enhancing the situation in the Bank, which especially envisages the collection of due accounts receivable, especially from cash collaterals, ensuring liquidity of the Bank for a longer term, prohibition of pay-outs of time deposits and cash collaterals, reconsidering the calculated interest rate on time deposits, cashing illiquid assets, etc; establish a system of corporative management and provide the execution of the functions of representing the signing of the Bank. The same Decision nominates the authorised persons of the Central Bank to immediately monitor the implementation of the instructed measures, in particular the special- purpose use of cash funds provided by the credit support of the Government of Montenegro, as well as the set obligation of the Bank to daily reporting to the authorised persons on implementing the instructed measures.
As already pointed out, the Government of Montenegro has approved the credit support to the Bank, and the cash funds thereof were transferred to the Bank on 18 December 2008, when the funds started to be used. However, apart from a number of recommendations by the Central Bank on undertaking additional activities, on the purpose and dynamics of utilizing the funds provided through the credit support, the Bank has used the cash funds therefrom at its own discretion. The Bank has also continued its practice of using cash funds herein for settling liabilities, where the Bank has afterwards reported on the activities implemented to the authorised persons of the Central Bank. In such a way, the authorised persons of the Central Bank have actually been prevented from an immediate monitoring of the use of the cash funds provided through a credit support of the Government. Given the abovementioned, in the further course of the immediate control of the Bank, apart from the previously identified irregularities in the Bank’s operations, the Central Bank has determined that the Bank has also faced numerous new deposit-withdrawal requests, especially by natural persons. It has been evidently identified that in addition to the liquid funds provided from the credit support of the Government of Montenegro, and to settling liabilities of the Bank towards creditors, the liquidity risk of the Bank was still extremely high. Considering the previously mentioned reasons, the Central Bank has estimated as necessary to issue a new decision on ordering measures towards the Bank, which repealed the previous Decision 0104-5723/1 of 12 December 2008. By the Decision 0104-5899/1 of 24 December 2008, in addition to the orders and measures issued – the Bank was instructed to immediately cease any credit activity, credit card issuing activity, overdraft authorisations for the Bank’s client accounts, and assuming any extra-balance- sheet liabilities exclusive of the issuing of tender and customs guarantees, and, in taking the activities for enhancing the situation, the Bank was ordered to sell a part of the Bank’s assets. The Bank was ordered to sell a part of the Bank’s assets, by 31 January 2009 the latest, by which it would provide a minimum of 150 million liquid assets, relating primarily to the Bank’s credit portfolio. Additionally, aimed at effective realisation of the activity herein, the Bank was ordered to
14 VI Financial markets - Additional Questions - hire and authorise, by the end of 2008, a renowned investment banker or consultancy company specialised in the subject transaction, which would perform the sale of the part of the assets for the Bank’s account. By the decision herein, the Bank was obliged to submit with no delay to the Central Bank a proper proof and information on having hired a renowned investment banker or consultancy company, and on the course of the part of the Bank’s assets’ sale and credit portfolio. The same Decision additionally obliged the Bank to daily reporting to the appointed authorised persons of the Central Bank for their immediate monitoring of the ordered measures’ implementation. Based on the Law on Measures for the Protection of the Banking System (Official Gazette of Montenegro 64/08), the Government of Montenegro has provided support to the banking system in Montenegro pursuant to Article 4 paragraph 1 referring to a pre-term debt repurchase, by repurchasing EUR 42 million of debt from commercial banks in 2008. In the session of 16 October 2008, the Government of Montenegro adopted the Information on the pre-term repurchase of loans of budgetary beneficiaries from commercial banks. In line with the information herein, and upon a request by banks, the Ministry of Finance has repurchased loans, until 31 December 2008 inclusive, totalling EUR 27 532 214.94. The loans herein have been used for the implementation of social programmes for the employees of enterprises, for implementation of the Public Works Directorate’s projects (a school construction, street reconstruction, bridge construction, construction of the regional public administration school), reconstruction of the National Security Agency building, etc. In the session of 23 October 2008, the Government of Montenegro also adopted the Information on taking over the loan of the Željeznica Crna Gora a.d. Podgorica (Railway Company of Montenegro, JSC Podgorica) at commercial banks in Montenegro, by 31 December 2008 inclusive, totalling EUR 14 277 429.97. As to the EUR 141 million of guarantees which the Government has issued towards the international financial institutions, the guarantees herein make a part of EUR 200 million of total guarantees issued, which were stated in the answer 41. However, we must point out that in the course of 2009 there has been no realisation of the total amount of the guarantees issued, but the guarantees have been issued in the amount of EUR 121 million, out of which EUR 91 million of guarantees have been issued to the European Investment Bank (EIB), while out of the anticipated EUR 50 million, the Government of Montenegro issued guarantees amounting to EUR 31 million, to the German bank KfW. The previous amount has been reduced since there was no agreement reached between KfW and one Montenegrin commercial bank.
27. (Ref to Q. 50): Please provide rationale why the liquidation is the most expensive solution for the Government. Proposed solution for Prva Banka (capital increase by the government) to some extent contradicts with answer under Q. 40 (f) - "The Government of Montenegro does not consider or take part in re-nationalisation of any bank." Is ther any reason to keep deposits with the bank (funds from EPCG privatisation € 150 million) instead of utilising them to repay loans taken from foreign commercial banks with high interest rates?
The basic reason for the answer to the question herein should be sought in that, in the moment of writing the answer, the Law on the Protection of the Banking System was in effect, anticipating the full state guarantee for all the deposits. On 30 June 2009, the deposits in Prva banka amounted to EUR 319.7 million or 18.2% of total deposits in the system. Out of the total amount of deposits, the deposits of population accounted for EUR 107.5 million or 33.63%, and the deposits of legal persons accounted for EUR 212.2 million or 66.37%. The state would be obliged to provide, in line with the Law on Measures of the Protection of the Banking System valid until the end of 2009, the amount of the secured deposits of all legal and natural persons – the bank’s deponents (i.e. the amount of deposits exceeding the
15 VI Financial markets - Additional Questions - guaranteed deposit level of EUR 5 000 which would be paid by the Deposit Insurance Fund in line with the Deposits Protection Law). The total secured deposits on 30 June 2009 amounted to EUR 239 million, while the guaranteed which would be payable by the Deposit Insurance Fund amounted to EUR 18 million. The state deposits amounted to EUR 98 million (including the deposits of majority-state-owned enterprises). Thus, the state should, excluding its own deposits, provide EUR 123 million for payment of secured deposits of legal and natural persons in case of liquidation. In addition, the state claimed EUR 22 million of short-term liquidity support from the Bank which the state provided to the Bank in line with the Law on Measures for the Protection of the Banking System. It should be especially kept in mind that the announcement of the Prva banka liquidation process would cause distrust of deponents in the stability and security of the rest of the banking system, and would reflect in deposit withdrawals, which would lead to a systemic risk and endanger some other banks. Naturally, the deponents’ assets – especially of legal persons – would be blocked for a while, until the state provides the payment thereof, and the same deponents are present at other banks in the system, which could provoke the domino effect – contingency risk. In line with international recommendations on the issue, it is possible to implement a number of alternative strategies: · Provision of a renowned strategic investor for the bank’s capital increase in a specified (short) term, with a thorough control check performed by the Central Bank of Montenegro, in order to identify the reputation and funds’ sources of each strategic investor, · Parallel to the previous item activities, it would be useful to develop a plan of potential intervention by the state i.e. Government of Montenegro and Central Bank, in case the capital increase from a private source is not carried out in a defined timescale. The intervention may take the form of nationalisation i.e. capital increase of the bank, in line with relevant legislation. The answer to the question Q40 (f) was in the context of ownership capital structure of Montenegrin banks where the state capital share accounts for only 2.6%. Therefore, the intention of the state was and still is to execute a full privatisation of the state-owned capital. As to the question of the deposit utilisation, we point out the following: The reason for the Government of Montenegro to hold deposits at banks lies in the need to maintain reserves aimed at a quality liquidity management. The Ministry of Finance covers its liabilities towards foreign and local creditors in a regular manner and, having in mind the current situation, there is no plan so far for their pre-term payment.
16 VI Financial markets - Additional Questions - The deposit status on 31 December 2009 amounted to EUR 208 281 234.08 Table 1. The deposit status on 31 December 2009
117 839 734.29 Central Bank of Montenegro (excl. gold 88 214 621.82)
Podgorička banka 767 996.88 €
Crnogorska komercijalna banka 4 013 031.03 €
Atlasmont banka 2 603 240.90 €
Montenegrobanka NLB 8 550 000.00 €
Prva banka Crne Gore 10 267 971.02 €
Erste banka 2 000 000.00 €
Komercijalna banka - Budva 400 000.00 €
Employment Office 4 848 975.69 €
Compensation Fund 7 821 177.71 €
Deposits of Embassies 342 132.17 €
Cultural Institutions 29 974.39
DEPOSITS INCL. GOLD 159 481 234.08 €
DEPOSITS EXCL. GOLD 129 856 121.61 €
DEPOSITS OF UNINTEGRATED FUNDS 48 800 000.00 €
TOTAL DEPOSITS 208 281 234.08 €
Table 2. Status of deposits of unintegrated funds on 31 December 2009, in EUR 000
Health Insurance Development NAME OF THE BANK Pension and Disability Total Fund Fund Insurance Fund
Crnogorska komercijalna banka 15 248 614 2 747 18 609
Podgoricka banka 3 042 234 153 3 429
Montenegrobanka 2 914 465 2 051 5 430
Atlasmont banka 660 343 3 481 4 484
Prva banka Crne Gore 8 893 247 4 784 13 924
Hipotekarna banka 6 - 343 349
Hypo Alpe Adria banka 15 - 1 857 1 872
Komercijalna banka Budva - - 700 700
TOTAL 30 778 1 903 16 116 48 797
17 VI Financial markets - Additional Questions - As it can be seen from Tables 1 and 2, most of the deposit assets are kept in the master account of the state treasury at the Central Bank of Montenegro. As to the amount of deposits obtained from the EPCG privatisation, it amounted to about EUR 92 million. On 31 December 2009, the total amount of the EPCG privatisation deposits amounted to EUR 87.5 million. Out of the amount herein, about EUR 78.6 million is kept in the account of the Central Bank of Montenegro at the Deutsche Bank, while about EUR 8.8 million is kept in the master account of the state treasury at the Central Bank of Montenegro. The deposits at Prva banka Crne Gore, together with unintegrated funds, as well as the funds of the Employment Office at the bank herein (amounting to EUR 4 279 050.36), amounts to about EUR 25.5 million. The Ministry of Finance has not withdrawn funds from Prva banka Crne Gore for the reason of problems faced by that bank, since we consider that a more important withdrawal of funds could additionally endanger its operations. Upon a normalisation of the situation in the bank, the dynamics of fund withdrawals will be defined in line with liquidity needs for the following period. In relation with high interest rate loan repayments, we think that the procedure will be started for their pre-term repayment in the future, if there would be any chance thereto. As for the present, we consider an adequate liquidity management to be the priority, due to the economic crisis. We would also like to note that, apart from the Government, significant inflows in the process of the capital increase and partial privatisation of the EPCG has been exercised by the EPCG itself. The funds amounting to EUR 94 million, which the company obtained in this process, will be used to implement the EPCG investment plan. The funds’ utilisation dynamics and relations with banks come under the auspices of the A2A company, which has taken over the management of EPCG in line with the purchase agreement. In relation to explaining further the issue of the Prva banka liquidation costs, we think that this would be the most expensive measure for the Government of Montenegro from the point of view of endangering other Montenegrin banks. To that regard, the Prva banka liquidation would result in distrust of citizens and the economy in the banking system of Montenegro, which could lead to deponent fund withdrawals from the banks, and thus to a reduction of their liquidity. In the past period, with a view to preserving the banking sector, the Government has taken adequate measures, in line with the Law on Measures for the Protection of the Banking System, due to ensure stability of all the banks in Montenegro. In addition, in relation to undertaking certain measures towards Prva banka, we would like to note that the Central Bank of Montenegro currently carries out control of this bank, and that any possible decisions of the Government related to this issue would depend on the results of the control and recommendations by the Central Bank.
18 VI Financial markets - Additional Questions - C. Capital market
28. (Ref to Q. 53): Please provide further clarifications on the following point: Does capital market provide, in practice, an alternative source of finance for enterprises? How much was raised on the market in recent years? Please better clarify the remaining part of the answer by completing it and explaining the used abbreviations.
The equity market in Montenegro has developed in the past six years to a large extent and has been an important segment of the overall economic system. The regulatory and institutional framework for the operation of equity market has been constantly developing in line with best international practices and standards. Such a development has been recognised by foreign investors and international institutions. In 2008, the International Organization of Securities Commissions (IOSCO) – the most important international institution which monitors the operations in equity markets has accepted Montenegro and its equity market as the 50th country having met the requirements for signing the Multilateral Memorandum of Cooperation with the IOSCO. Such a development on the equity market has attracted a large volume of new capital which has been invested through the equity market into the enterprises in Montenegro.
New capital / secondary Year New capital New capital / GDP turnover
2007 EUR 411 764 348.51 16.17% 56.60%
2008 EUR 203 538 217.26 6.86% 126.94%
2009 EUR 314 483 883.50 9.36% 78.14%
A) Capitalisation of joint stock companies (JSCs), Funds, banks, bonds - data by the Central Depository Agency (CDA)
Capitalisation by year
Segment 2005 2006 2007 2008 2009
JSCs EUR 1 029 548 514 EUR 1 992 106 758 EUR 3 412 877 391 EUR 1 033 663 325 EUR 1 883 033 370
Funds EUR 96 088 667 EUR 200 758 422 EUR 410 882 319 EUR 78 520 884 EUR 110 183 438
Bonds EUR 148 344 640 EUR 143 392 881 EUR 133 868 167 EUR 257 272 706 EUR 148 077 549
Banks EUR 83 909 630 EUR 237 344 812 EUR 677 136 331 EUR 727 510 704 EUR 723 804 780
TOTAL EUR 1 357 891 503 EUR 2 573 602 872 EUR 4 634 764 208 EUR 2 096 967 620 EUR 2 865 099 137
B) Number of all the securities in trade, turnover – data from stock exchanges 2009 Year No. of all securities in trade Turnover
2005 EUR 1 279 877 070 EUR 239 085 990
2006 EUR 609 208 156 EUR 312 233 612
2007 EUR 815 065 387 EUR 711 073 450
2008 EUR 306 630 719 EUR 161 189 438
2009 EUR 289 288 214 EUR 404 791 924
19 VI Financial markets - Additional Questions - c) Developments in indices in the past 5 years – data from stock exchanges Stock exchange indices represent technical methods of measuring developments in the stock prices. The basic goal of calculating and publishing the indices is to offer information to the public on developments in certain market segments. The Montenegrin stock exchanges currently calculate three stock exchange indices, namely: · New stock exchange for securities of Montenegro (NEX Montenegro) calculate the indices NEX20 and NEX PIF · Montenegroberza (Stock Exchange of Montenegro) calculates the MOSTE index
NEX20 The NEX20 index has been generated out of 20 issuers with the largest market capitalisation, recorded turnover, and number of operations in the NEX Montenegro exchange. The index is weighted, meaning that the contribution of an individual issuer in the index is determined based on the capitalisation, turnover, and the number of operations performed in the NEX Montenegro exchange. The contribution of individual issuers in the index is determined based on the following criteria: · Market capitalisation – 80% · Turnover recorded – 10% · Number of concluded operations in the NEX Montenegro exchange – 10%
NEXPIF The NEX PIF index has been generated out of the stocks of six Joint Venture Funds. The index is weighted which means that the contribution of an individual fund in the index is determined based on the capitalisation, number of the fund’s stocks, and number of operations performed in the NEX Montenegro exchange. The contribution of individual funds in the index is determined based on the following criteria: · Market capitalisation of the fund – 50% · Number of stocks of the fund – 25% · Number of operations performed in the NEX Montenegro exchange since the beginning of trade in the fund’s stocks – 25%
MOSTE The MOSTE index covers the developments in price of the stocks of 29 companies from various fields of economy which are most often the subject to trade in Montenegroberza, as well as of the stocks of six Joint Venture Funds. The MOSTE index is a price index and is calculated in real time, based on the average price of securities which comprise the index. The criteria for becoming a part of the index is frequency of trade in certain security i.e. its liquidity.
Percentage Percentage Percentage Year NEX20 NEX20 index NEXPIF NEXPIF index MOSTE MOSTE index change change change
2004 2 523.44 1 603.51 115.18
2005 9 781.28 287.62% 8 095.57 404.87% 463.05 302.02%
2006 18 050.89 84.55% 17 763 63 119.42% 918.88 98.44%
20 VI Financial markets - Additional Questions -
2007 34 168.63 89.29% 39 229.17 120.84% 1 627.69 77.14%
2008 10 002.93 -70.72% 5 844.64 -85.10% 469.53 -71.15%
2009 14 598.88 45.95% 7 020.66 20.12% 638.99 36.09%
d) The Central Depositary Agency data on how many securities are owned by foreigners
Total no. of shares owned by Share of foreigners Year Total no. of shares foreigners in %
2005 491 157 985 3 065 053 040 16.22%
2006 518 796 451 3 139 531 244 16.52%
2007 509 699 999 3 410 655 850 14.94%
2008 509 467 071 4 105 366 095 12.41%
2009 588 724 797 4 384 790 793 13.43%
Total no. of shares Total no. of shares
E. Non-bank financial institutions
29. (Ref to Q. 61): Please provide data update (for 2009). Please elaborate more on the degree of competition in the insurance sector.
In the Montenegrin insurance market during 2009, the insurance operations have been performed by eleven insurance companies, although the Agency has revoked licence of one of those companies by the end of the year, due to a legal incompliance thereof. Therefore, at the beginning of 2010, four insurance companies deal with non-life operations only, five companies deal only with life insurance operations, while one company performs operations of both life and non-life insurance, which will be subject to a division by 31 December 2010. According to the preliminary data of the end of 2009, the market concentration, when compared to the end of 2008, has been further reduced, thus the market share of five biggest insurance companies in 2009/2008 amounted to: Lovćen osiguranje a.d.1 – 55.70% (60.95%), Sava Montenegro osiguranje a.d. – 16.93% (18.75%), Grawe osiguranje a.d. – 7.70% (9.44%), Delta Generali osiguranje a.d. – 7.57% (2.03%), and Uniqa neživotno osiguranje a.d.2 – 4.26% (0.64)%.
1 …osiguranje a.d. – …insurance, joint stock company 2 ...neživotno osiguranje a.d. – ...non-life insurance, joint stock company
21 VI Financial markets - Additional Questions - A review of insurance companies operating in Montenegro in early 2010:
Insurance company Type of insurance
Lovćen osiguranje a.d. Life/Non-life
Sava Montenegro osiguranje a.d. (ex Montenegro osiguranje a.d.) Non-life
Swiss osiguranje a.d. Non-life
Grawe osiguranje a.d. Life
Atlas life a.d. Life
Uniqa neživotno osiguranje a.d. Non-life
Uniqa životno osiguranje a.d. Life
Delta generali osiguranje a.d. Non-life
Delta generali životna osiguranja a.d. Life
Merkur osiguranje a.d. Life
In 2009, the following have also been issued: § 2 business licenses to insurance representation companies § 3 business licenses to entrepreneurs-representatives in insurance; § 1 business licence to an agency for providing other insurance services; § 17 powers of attorney to natural persons for performing the operations of insurance representation. With the exception of one insurance company with mostly domestic equity capital ownership, at the end of 2009 and beginning of 2010 all the companies were of a majority-foreign-ownership structure.
30. (Ref to Q. 63): With reference to the pension system, please provide data on the capitalisation dynamics of private pension funds in 2008 and 2009.
The first voluntary pension fund in Montenegro Penzija Plus, which obtained the license from the Securities Commission of Montenegro based on the Decision 03/16-7/6/08 of 16 July 2008, had its first payment by fund members on 2 February 2009, the date being considered as the beginning of the fund’s operations.
22 VI Financial markets - Additional Questions - During 2009, the amounts of total assets, net assets and unit of account’s value of this voluntary pension fund have developed as follows:
VOLUNTARY PENSION FUND - PENSION PLUS
VALUE OF THE UNIT TOTAL ASSETS NET ASSETS MONTH OF ACCOUNT (MONTH-END) (MONTH-END) (MONTH-END)
FEBRUARY 3 853.70€ 3 734.97€ 0.9982€
MARCH 7 268.63€ 7 038.36€ 1.0387€
APRIL 10 918.25€ 10 067.22€ 1.0777€
MAY 13 095.01€ 12 674.17€ 1.1126€
JUNE 16 789.41€ 16 228.48€ 1.1095€
JULY 21 057.50€ 20 337.68€ 1.1249€
AUGUST 22 984.57€ 22 155.01€ 1.1142€
SEPTEMBER 27 643.94€ 25 822.95€ 1.1474€
OCTOBER 31 220.14€ 30 062.17€ 1.1600€
NOVEMBER 34 684.85€ 33 353.84€ 1.1618€
DECEMBER 41 110.53€ 39 504.65€ 1.1588€
The other voluntary pension fund in Montenegro is Market Penzija, which obtained the license from the Securities Commission of Montenegro based on the Decision 03/16-1/8-09 of 3 July 2009, had its first payment by the fund members on 27 July 2009, the date being considered as the beginning of the fund’s operations.
23 VI Financial markets - Additional Questions - During 2009, the amounts of total assets, net assets, and value of the unit of account of this voluntary pension fund have developed as follows:
VOLUNTARY PENSION FUND - MARKET PENZIJA
VALUE OF THE UNIT TOTAL ASSETS NET ASSETS MONTH OF ACCOUNT (MONTH-END) (MONTH-END) (MONTH-END)
JULY3 3 197.98€ 3 197.98€ 1.0002€
AUGUST 4 221.82€ 4 221.82€ 1.0097€
SEPTEMBER 4 866.26€ 4 841.48€ 1.0490€
OCTOBER 6 300.51€ 6 237.12€ 1.1595€
NOVEMBER 6 882.01€ 6 773.86€ 1.0919€
DECEMBER 8 449.38€ 8 289.12€ 1.1544€
3 During July and August, the company for managing the voluntary pension fund Market Invest a.d. Bijelo Polje and custody bank CKB a.d. Podgorica have charged no fees for management and custody services, therefore the amounts of total assets and net assets were the same in those two months.
24 VI Financial markets - Additional Questions - Annex
1. National strategy of sustainable development of Montenegro
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2. Economic policy of Montenegro for 2010.
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25 VI Financial markets - Additional Questions -
3. Quarterly macro-analytical report 31.12.2009.
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