Preserving financial stability

The Central Bank of Montenegro is currently developing regulations for the implementation of the regulatory package Basel III, i.e. the CRD IV package (Regulation 575/2013 and Directive 2013/36/EU) already implemented in the EU. The development of instruments necessary for the implementation of the aforesaid regulations, subject to appropriate calibration, will be coordinated through the transposition of the CRD IV package into the national legislation, which is planned for 2019. As a preparation for the introduction of Basel III and the full operationalization of the macroprudential policy mandate, the CBCG developed the Macroprudential Policy Framework.

In accordance with its mandate, the CBCG acts to preserve financial stability by using all available instruments. Some measures implemented by the Central Bank can be recognized as macroprudential instruments at all times of their effect. Looking back, before the economic crisis hit Montenegro in 2008 and among other actions, the CBCG introduced administrative restrictions on credit growth, while during the crisis period, also as a part of a set of other measures aimed at preserving stability, it temporarily relaxed the criteria for credit classification and regulatory requirements for credit losses. Then, in 2012 and early 2013, the level of banking interest rates were subjet to prudential measures. The Law on Voluntary Financial Restructuring of Debts Towards Financial Institutions (OGM 20/15, 37/17, 43/18), which is currently in effect and whose draft was initiated and prepared by the CBCG, was adopted with a view to restructuring the debts of the real economy, reviving credit growth, and decreasing the share of non-performing loans in the system.

Also, one of the few monetary policy instruments at the CBCG`s disposal, the reserve requirement  instrument, is used for macroprudential purposes, that is, the provision of reserve liquid assets. In addition, the instrument is implemented through differentiated reserve requirement rates, whereby the higher rate applies to demand deposits and deposits of shorter maturity, and a lower rate to deposits of longer maturity, with the aim of reducing the maturity mismatch between loans and deposits. At present, a 7.5% rate applies to demand deposits and deposits with the maturty up to one year, while a 6.5% rate is applied to deposits over one year. In addition, in March 2017, the CBCG introduced the interest rate equal to the ECB's marginal lending rate yet reduced by 10 basis points, to funds of banks placed with the CBCG in their RTGS accounts in order to encourage banks to divert their free financial assets to the real economy and to a more dynamic recovery.

During the previous period, the CBCG has made great efforts to strengthen the resilience of the banking sector, as well as supervison and addressing the issue of credit risk in the system. Namely, credit risk, as reflected in a high share of non-performing loans, was the key vulnerability of the banking system in Montenegro after the economic crisis. In this regard, the main efforts of the CBCG were focused on cleaning the banks' balance sheets from non-performing loans and the restructuring of debt towards banks, as well as on reviving credit growth. The adoption of a set of regulations aimed at resolving the issue of asset quality in banks' balance sheets resulted in a strong drop in the share of non-performing loans in total loans (from over 25% in 2011 to below 7% in 2018).