Financial Sector Advisory Center (FinSAC)

Support to the Albanian Deposit Insurance Agency has enhanced the legal and regulatory framework towards alignment with the International Association of Deposit Insurers Core Principles and European Union Directives. FinSAC activities have included regulatory advice on legal reforms; assessment of the adequacy of the deposit insurance coverage levels and the target fund size of the bank deposit insurance fund; review of the Deposit Insurance Law and advice on implementing improvements; advice on effective coordination between the Bank of Albania and the Agency during bank liquidation and resolution processes, and support to update and reaffirm the public funding backstop mechanism.  

In 2015, amidst an escalating Greek sovereign crisis, FinSAC supported the Bank of Albania to test its crisis management framework. Following that exercise, FinSAC assisted with implementing macroprudential policy instruments aimed at mitigating systemic risks and safeguarding financial stability. This included linking macroprudential policy tools with model-based evaluations of market dynamics. Examples include assessment of the build-up of macro-financial vulnerabilities in the context of the credit cycle, calibrating countercyclical capital buffers, and drivers of credit growth and lending rates.  

With FinSAC support, Albania has reduced nonperforming loan stock in the banking sector which has encouraged the resumption of lending to viable companies and households. Assistance included comprehensive diagnostics, including assessment of corporate financial health in different economic sectors, the development and implementation of an action plan, and support for the introduction of an out-of-court non-performing loan resolution framework for large multi-creditor nonperforming loan cases (the “Tirana Approach”).  

FinSAC supported the Bank of Albania prepare to implement full International Financial Reporting Standards (IFRS), including through the introduction of a new prudential reporting framework aligned with the EU and the development of prudential reporting templates. 

Albania was one of the first countries in the region to adopt a resolution framework aligned with the Financial Stability Board Key Attributes and with the EU. FinSAC reviewed the existing regime, prepared a gap analysis, assisted with the drafting of legislation, analyzed the potential impact of introducing the bail-in requirements, supported implementation of the new law, and assisted with institutional capacity building within the Bank of Albania.  

FinSAC has helped to advance the assessment of banks’ recovery plans, the drafting of resolution plans, and the introduction of secondary legislation, including a minimum requirement for own funds and eligible liabilities (MREL) by-law, a bridge bank manual, a manual on application of bail-in combined with a bridge bank, a methodology for bank resolution valuation, as well as a bail-in playbook. It has also supported capacity building via workshops, study tours, expert discussions, and producing manuals and other materials. 

FinSAC is supporting the Bank of Albania in designing and actioning a multi-year strategy assessing climate risks to the banking system and possible approaches, including integration into the regulatory and supervisory frameworks. The aim is for banks to include environmental, social, and governance elements in their business models and properly identify, measure, control, and report risks.

FinSAC undertook a comprehensive gap assessment of crisis management arrangements for the Central Bank that reviewed the core components of the financial sector safety net, including (i) early intervention measures; (ii) recovery and resolution planning arrangements; (iii) liquidity support mechanisms, including lender of last resort framework; and (iv) bank resolution and deposit insurance. Following the assessment, an action plan was agreed with the Central Bank which is being implemented with FinSAC support. 

FinSAC has delivered two crisis simulation exercises that included a focus on managing cyber incidents and attacks on systemic banks and on maintaining critical financial infrastructure such as payment settlement systems. 

FinSAC conducted a gap assessment that covered the bank supervisory framework, focusing on organizational structure, administrative procedures within the supervisory function, supervisory methodologies, human and material resources available to the supervisory function, and coordination arrangements. FinSAC recommended enhancing risk-based supervision by upgrading the banks’ rating methodology and making better use of the internal capital adequacy assessment process and stress testing. FinSAC supported the Central Bank with the design and implementation of the new risk-based methodology and operational framework for conducting the supervisory review and evaluation process (SREP), including staff training. Among other things, FinSAC has also supported the assessment of bank recovery plans, including development of an assessment methodology with guidelines for banks on good practices.

FinSAC support to the Central Bank and other relevant stakeholders has included a comprehensive assessment of the legal framework for banking resolution and preparation of new legislation to establish a modern bank resolution regime. FinSAC has organized numerous workshops and training on bank resolution tools, resolution funding arrangements, and cross-border bank resolution issues. FinSAC also advised on the operationalization of the resolution framework, including the establishment of a separate resolution unit and internal reporting lines to ensure separation from other key functions.

FinSAC is supporting the Central Bank of Armenia to frame its regulatory strategy to financial risks stemming from climate change, including capacity-building activities to prepare Central Bank staff to conduct macro level climate stress tests. 

FinSAC has been working with the authorities on macroprudential institution building since 2013, including benchmarking national financial stability frameworks, development of credit growth forecasting and credit risk stress testing models, enhancement of early warning systems, and publication of the Financial Stability Report. Since 2015, FinSAC has been supporting the Deposit Insurance Agency, providing analytical and conceptual policy guidance on aspects of the resolution fund institutional setup, revision of the Law on Deposit Insurance, strengthening institutional capacity, and helping develop a target fund ratio methodology. FinSAC has reviewed the insured deposit payout rulebook and crisis management guidelines, and helped prepare a draft regulation on payout of covered deposits. FinSAC has provided a review of how the 2020 Law on Deposit Insurance compares to European legislation on deposit guarantee schemes.

FinSAC has been working with the supervisory agencies of the Federation of Bosnia & Herzegovina and Republika Srpska since 2016 to enhance micro-prudential regulatory and supervisory frameworks. Activities have included studying the potential impact of introducing new capital and liquidity requirements; assisting with drafting key prudential regulations (on e.g. capital, internal capital adequacy assessment process, liquidity, large exposures, risk management, interest rate risk in the banking book, consolidated supervision), as well as developing reporting templates and instructions. There was intensive work to put in place a new supervisory approach based on the European Supervisory Review and Evaluation Process (SREP), including the assessment of bank business models, internal governance, and risk management practices, as well as capital and liquidity adequacy. The operational capacity of the agencies was enhanced by workshops for on- and off-site supervisory staff and the preparation of operational procedures for dealing with smaller, less-systemic banks. FinSAC has advised on potential transition to the Pillar 2 capital requirements approach, based on SREP supervisory ratings. It has also supported revision of on-site inspection procedures, including inspection techniques, credit risk inspections, inspections of internal governance and risk management aspects, and on liquidity risk. An important achievement for Bosnia and Herzegovina in 2021 was the European Commission’s decision to consider the supervisory and regulatory frameworks as equivalent to that applied in the EU.

FinSAC also supports the Banking Agencies in their efforts to enhance the nonperforming loans resolution framework in BiH. It supported the drafting of guidelines, with standardized reporting templates, for banks to prepare nonperforming loan reduction strategies and operational plans. It is working with the Agencies to ensure their assessment of non-performing loan plans is consistent and harmonized. 

Since 2016, FinSAC has been working with the Banking Agencies to enhance bank recovery and resolution frameworks in line with EU legislation. New banking laws and 15 recovery and resolution by-laws were prepared and are being implemented with FinSAC support. These address a range of topics including recovery and resolution planning, reporting templates, valuation, bail-in, bridge banks, and guidelines on the assessment of recovery plans. FinSAC supported the Agencies to amend their statutes to reflect their resolution responsibilities and enhanced supervisory powers and to define cooperation and information exchange requirements in light of the new resolution responsibilities. 

FinSAC is supporting the Banking Agencies with their sustainability strategies for addressing the financial risks stemming from climate change. In addition to support with the strategies and the agencies’ Guidelines on Sustainability for banks, FinSAC is organizing capacity-building workshops for the staff of the Agencies.

FinSAC has been supporting the establishment of a deposit insurance system since 2015. The first phase focused on awareness and capacity-building activities for the authorities, supporting the design of a strategy, and then drafting the Georgian Deposit Insurance Scheme Law which became effective in 2017. The second phase supported reform implementation and the launch of deposit insurance coverage. FinSAC assisted with setting up the Deposit Insurance Agency and developing core regulations and procedures for the launch of the system.

FinSAC has subsequently assisted the Deposit Insurance Agency and the National Bank of Georgia to continue updating deposit exposure analysis and calculation of the deposit insurance scheme’s funding needs to meet the target fund level established in law. Activities have focused on strengthening institutional capacity, ensuring an efficient deposit insurance payout system and procedures, as well as risk analysis, strategy planning, crisis management, and contingency financing. With FinSAC support, new regulatory adjustments were introduced that increased the coverage for household deposits threefold and included a methodology for calculating risk-based premiums.

FinSAC has conducted two crisis simulation exercises on cyber security to support authorities’ efforts to test the crisis management framework.

In 2013-2014, FinSAC supported the National Bank to assess the prudential implications of the banking system implementing International Financial Reporting Standards (IFRS) for prudential reporting purposes. The project reviewed the legal framework, prudential regulations and practices, and analyzed the areas where IFRS differs from prudential reporting instructions. FinSAC proposed recommendations and an action plan for IFRS transition.

The National Bank has undertaken significant work to implement its bank recovery and resolution framework, a regime broadly aligned with that of the EU. To help improve operational readiness, FinSAC ran two bank recovery and resolution simulation exercises for participants in the financial safety net. The first focused on the recovery and resolution of a single failing bank and the second on the legal drafting of the resolution decision and bail-in execution.

FinSAC had no engagement with the client country authorities on this thematic topic yet.

FinSAC delivered a crisis simulation exercise in 2015, to test the crisis preparedness framework and identify gaps in crisis response and decision-making. This was followed up with technical assistance to enhance the crisis preparedness framework.

From 2018, FinSAC engaged with the authorities to improve contingency planning and the capacity to respond to financial distress. The National Committee for Financial Stability was reinvigorated with revised terms of reference, a review of internal policies, and formulation of a medium-term strategy to address gaps in crisis contingency measures. FinSAC also produced a communication strategy for Central Bank outreach and coordination with other financial safety net stakeholders in a crisis. Among other things, FinSAC advised on the development of an analytical model for evaluating credit growth sustainability in Kosovo and identifying potential systemic risks. 

FinSAC has been supporting the Deposit Insurance Fund of Kosovo since 2019. This has encompassed strengthening interagency cooperation and information exchange, preparing and operationalizing a deposit insurance funding policy, and developing the supervisory process to ensure bank compliance with deposit insurance requirements. Draft amendments to the Law on Deposit Insurance were prepared addressing the Fund’s institutional mandate, approach to internal governance, requirements for member institutions, compensation procedures, and legal protection issues, among others. FinSAC has also supported the strengthening of the Fund’s internal organization, including staff capacity, internal governance, operational capacity, readiness to respond, business continuity strategy, analytical capacity for target fund size calibrations, and investment policies.

During initial engagements, FinSAC reviewed the nonperforming loans framework, including the relevant nonperforming loan and provisioning regulations, as well as the inspection reports and trends in the banking system. FinSAC supported the Central Bank in its efforts to develop and implement a risk-based methodology for bank supervision, including advising on the organization of the supervisory authority and ways to enhance the performance of risk-based supervision through the Supervisory Review and Evaluation Process (SREP) methodology.

FinSAC is supporting the Central Bank to move towards a modern bank resolution framework. This has included a review of the draft Bank Resolution Law and implementing regulations, with a focus on compliance with the Financial Stability Board’s Key Attributes of Effective Resolution Regimes for Financial Institutions and EU legislation, albeit adapted to Kosovo’s particular features. The engagement also examines the proposed framework for possible operationalization enhancements.

Since 2022, FinSAC has been supporting the Central Bank in designing and implementing a multi-year strategy to assess physical and transition risks to the banking system related to climate change. The strategy aims to embed environmental, governance, and social aspects in banks’ planning and governance framework and ensure that banks properly identify, measure, control, and report on such risks. The Central Bank is enhancing its supervisory framework to embed the assessment of climate-related risk in its supervisory activities. FinSAC assistance includes capacity building for staff on regulatory and supervisory aspects related to climate-related and environmental risks.

FinSAC’s first engagement in Moldova was 2013, supporting the National Bank to design and operationalize a liquidity stress testing model to improve monitoring of emerging financial stability risks. FinSAC ran a financial sector crisis simulation exercise for financial sector authorities in April 2014 and made a number of policy recommendations to enhance crisis preparedness.

In 2023, FinSAC activities supported the Deposit Guarantee Fund to prepare for implementation of the new Deposit Guarantee Scheme Law, including the development of a management information system, drafting a by-law on member banks’ new reporting requirements, including instructions for banks, devising a methodology for calculating risk-based contributions, and work on a memorandum for backstop funding.

FinSAC has worked closely with the National Bank to improve ongoing supervision, including assistance with the development of a regulation on bank governance and risk management and the legal provisions on bank governance in a new Banking Law of 2017. FinSAC also advised on measures related to banking fraud, including steps to initiate legal action and forensic audit of defrauded banks to trace stolen funds. FinSAC delivered two training programs on corporate governance, for banks and supervisors, providing an overview of international standards of modern corporate governance and outlining the challenges of measuring and assessing corporate governance and the supervisory approach to corporate governance. Among other things, FinSAC provided the National Bank with draft guidelines for recovery plan assessment as well as tools for supervisors to contribute to more harmonized assessments.

FinSAC has been engaged with the Moldovan authorities on bank recovery and resolution since 2014. It supported the authorities’ efforts to resolve and restructure three banks that were under “special administration”. Assistance also helped develop legislation to enhance the toolkit for future resolution cases and to address gaps in the overall supervisory and resolution framework.

FinSAC has supported the National Bank to better tailor the bank resolution framework to the specificities of the Moldovan financial system. This included the development of a methodology for calculating risk-based ex-ante contributions to the resolution fund; analysis of the feasibility of implementing a minimum requirement for own funds and eligible liabilities; and development of a regulation laying out the rules on bailing-in derivative contracts. FinSAC supported the establishment of a resolution fund and assessed resolution planning procedures. 

FinSAC assistance aimed at operationalizing the toolkit to deal with failed banks has involved drafting secondary regulations towards ensuring that banks have sufficient loss-absorbing instruments that can be either converted or written down if the bank is resolved and setting out requirements for valuation in resolution. It has advised on streamlining the resolution planning process and supported the operationalization of resolution plans for banks and assisted in the preparation of an internal operational plan/procedure for bail-in execution. FinSAC continues supporting the National Bank to update legislation with the aim of streamlining the law and making it more consistent with the EU.

A FinSAC bank recovery and resolution crisis simulation exercise in 2022 tested the operational readiness of the National Bank and Deposit Guarantee Agency and helped identify potential issues in the appropriateness and coherency of the recovery and resolution framework, recovery and resolution planning, as well as internal and interagency coordination. 

FinSAC had no engagement with the client country authorities on this thematic topic yet.

A FinSAC crisis simulation exercise in 2013 helped identify weaknesses in the crisis management and resolution framework and recommended areas in need of further strengthening related to the management of potential financial distress and systemic crisis.

FinSAC has been working with the Deposit Protection Fund of Montenegro since 2016. Assistance has helped identify weaknesses and support the strengthening of the legal, regulatory, and institutional framework and ensure compliance with EU legislation and the International Association of Deposit Insurers (IADI) Core Principles. FinSAC has helped develop a methodology for a risk-based premium framework and draft amendments to the Deposit Protection Law and related by-laws. FinSAC is supporting the Fund to achieve its target fund size and time-to-fund objectives with assistance in areas such as coverage, funding, and premiums policies and the use of a formal quantitative approach to determine the adequacy of the ex-ante fund for dealing with idiosyncratic bank failures. 

Montenegro sought FinSAC assistance to develop and implement a strategy to reduce its nonperforming loans ratio (one of the highest in the region at the time). This centered on addressing core operations, looking at the nexus between prudential and supervisory actions and banks’ debt restructuring efforts; developing an enabling environment, through addressing legal, regulatory, and tax issues that may hamper debt restructuring; and introducing policy action-oriented corporate debt mapping and a framework to assess the macro-implications of nonperforming loans resolution.

FinSAC has supported the Central Bank in the preparation of a Banking Supervision Report, to analyze the structure of the Banking Supervision Division, including staffing, internal organization, functions, supervisory process, and internal coordination, to identify and implement changes that can help improve the supervisory framework and support effective, sound, and comprehensive implementation of the supervisory review and evaluation process (SREP). 

FinSAC had no engagement with the client country authorities on this thematic topic yet.

FinSAC had no engagement with the client country authorities on this thematic topic yet.

In the aftermath of the Global Financial Crisis, North Macedonia had a strong presence of Greek banks and faced negative spillover risks from the parent banks. A FinSAC crisis simulation exercise in 2014 identified potential gaps in policy tools and operational bottlenecks. From 2019, FinSAC engaged with the implementation of key reforms covering the areas of macroprudential frameworks and crisis preparedness and support in the preparation of a Financial Stability Law.

FinSAC assistance to the Deposit Insurance Agency began in 2022 with a comparative analysis of the existing legal framework for deposit insurance against the International Association of Deposit Insurers (IADI) Core Principles and EU legislation, identifying gaps and potential areas of improvement, and recommending revisions to the Law on Deposit Insurance Fund. FinSAC also prepared a detailed analysis report on the scope and level of deposit insurance coverage and presented the main principles and methodological alternatives in evaluating the adequacy of target fund sizes. Support continues to be provided around legislation, establishing an adequate fund size target, and improving the implementation capacity of the policy changes. 

In the years following the crisis simulation exercise in 2014, FinSAC supported the National Bank in introducing enhancements to the microprudential framework. FinSAC reviewed the architecture and control framework within the Bank Supervision Department and assessed the effectiveness of the licensing and regulation-writing functions. FinSAC proposals to improve the efficiency of on- and off-site microprudential supervision were implemented. FinSAC supported North Macedonian banks to transition to the new accounting standard, International Financial Reporting Standards (IFRS) 9, which was made mandatory for North Macedonian banks starting January 2018. FinSAC worked with the National Bank, and with technical experts from the Banco de España, to construct the necessary tools and systems, including an expected credit loss model, using data from the National Bank’s credit registry.

Since 2017, FinSAC has been supporting the reform of the bank recovery and resolution framework in North Macedonia, including the drafting of a new Bank Resolution Law in compliance with EU legislation and good international practice that was approved in 2023. FinSAC has also assisted with capacity building at the National Bank through hands-on advice and frequent meetings and is engaged with the relevant authorities regarding coordination of the regulatory framework and resolution financing options.

In 2022, with the support of FinSAC, the National Bank designed, and subsequently published, a multi-year Strategy on Climate-Related Risks/Sustainability for assessing the climate risks to the banking system and possible approaches, including how standards may be integrated into the regulatory and supervisory frameworks. The strategy aims to ensure that banks include environmental, social, and governance elements in their business models, and can identify, measure, control, and report on these risks as part of the governance and risk management framework. The strategy also aims to embed the assessment of climate-related risks in the supervisory framework, including in the Supervisory Review and Evaluation Process (SREP) model and on-site and off-site supervisory activities. FinSAC has also been supporting the National Bank in designing a soft law instrument covering climate-related guidelines, recommendations, or supervisory expectations to set standards that banks should follow when identifying, measuring, managing, controlling, and reporting their climate-related risks. Activities include work on establishing a green dashboard, reporting on banking sector exposure to climate risks, identifying relevant data sources, and building capacity on climate stress testing.

In 2014, FinSAC supported the Ukrainian authorities to establish a high-level Financial Stability Council as a platform for regular discussions of financial stability issues, with the participation of the Ministry of Finance, the Deposit Guarantee Fund, and two other financial regulators. From 2015, FinSAC assisted the newly established Financial Stability Department within the National Bank, including in the design and implementation of a liquidity stress testing model; setting up an early warning system for the Ukrainian banking sector; construction of a financial stress index; and development of a quantitative model of long-run relationship between the level of consumer loans and a set of explanatory variables, used to estimate the dynamics of consumer loan growth rates and determine when macroprudential tools should be used to curb excessive consumer lending.

FinSAC has been working with Ukraine since 2013 in the areas of capital adequacy, liquidity, leverage ratio, and disclosure of qualitative information, aimed at bringing Ukraine closer to meeting EU and international standards. This has included an impact assessment of implementing EU capital requirements legislation and introducing a special regulatory regime for domestically important systemic banks.  FinSAC input to legal revisions included a liquidity coverage ratio regulation , a regulation regarding the calculation of the regulatory capital on consolidated basis, and a draft regulation setting capital adequacy requirements for market risks. FinSAC has also assisted with establishing a leverage ratio for banks and amending the regime for large exposure limits, as well as initiating a risk weight asset calculation for credit risks under the Basel standardized approach. FinSAC has offered inputs to the National Bank on the organizational framework, distribution of functions, allocation of resources to different units and subunits, and current supervisory procedures, methodologies, and deliverables.

A new regulatory and supervisory framework was adopted by the National Bank in 2015 that governed the transactions with bank related parties, reflecting extensive advice and technical support from FinSAC. FinSAC has subsequently suggested further legislative amendments and supported the drafting of new reporting forms, the establishment of a separate related parties supervision unit, a special review of related party transactions, and analysis of bank restructuring plans to unwind above the limits related party exposures. 

Since 2014, FinSAC has supported efforts to reduce an extremely high level of nonperforming loans in Ukraine. FinSAC has helped identify priority areas and advised on addressing them including comprehensive assessment, support in the introduction of new legislation, and the provision of guidelines/methodologies/models.

FinSAC has provided technical assistance to the State Property Fund of Ukraine to improve the framework of asset valuation in Ukraine, bringing it closer to international good practice and providing more transparency to the market.

An important area of cooperation since 2015 is the enhancement of the bank recovery and resolution framework. FinSAC has supported the National Bank and the Deposit Guarantee Fund to develop a revised framework and draft legislation in line with the EU Directives. It has provided extensive pieces of training and organized workshops for both authorities on different aspects of bank resolution, including on financing and alignment with the EU framework.

FinSAC is working with the National Bank to support its efforts to design and implement its Strategy on Sustainability (part of the country’s commitments for reducing its greenhouse gas emissions).

FinSAC had no engagement with the client country authorities on this thematic topic yet.

Following adoption of new banking legislation, FinSAC technical assistance has focused on all the key phases of the supervisory cycle: (i) market entry (licensing); (ii) prudential regulatory framework, (iii) off-site and on-site supervision, and (iv) supervisory enforcement. Support for improving the supervisory framework has included, for example, drafting of a comprehensive risk-based supervision manual (using EU Supervisory Review and Evaluation Process (SREP) methodology) and other internal manuals and procedures, hands-on support in implementing the new supervisory methodology, and preparing risk profiles for pilot banks, capacity building for supervisors on various topics, and drafting a multi-year SupTech strategy aimed at leveraging digital means to boost the Central Bank’s effectiveness in supervision. FinSAC has also supported the drafting of regulations encompassing bank licensing, corporate governance and risk management, asset classification and provisioning, large exposures framework, capital and liquidity requirements, and disclosure requirements.

FinSAC had no engagement with the client country authorities on this thematic topic yet.

FinSAC is supporting the Central Bank of Uzbekistan in developing and implementing its medium-term strategy for addressing financial risks in the banking sector that stem from climate change.