88087 THE WORLD BANK – FinSAC Financial Sector Advisory Center – Vienna ANNUAL REPORT 2013 THE WORLD BANK – FinSAC FINANCIAL SECTOR ADVISORY CENTER – VIENNA ANNUAL REPORT 2013 March, 2014 ( ) Contents Foreword.......................................................................................................................................v I.  FinSAC Strategic R ationale and Thematic/Geographic Focus......................................................... 1 Regional Strategic Priorities in the Financial Sector – Implications of the European Banking Union .........1   A ssessment of Needs and Priorities in FinSAC Target Countries.................................................................2 FinSAC Thematic Pillars...................................................................................................................................5 FinSAC Geographical Focus............................................................................................................................6 FinSAC Staffing and Results Framework........................................................................................................7 ..................................................................... 9 II.  FinSAC Activities Delivered (or Underway) in 2013. Pillar I: Financial Stability and Macroprudential Frameworks........................................................................9 Pillar II: Microprudential Frameworks...........................................................................................................10 Pillar III: Bank Recovery and Resolution Frameworks.................................................................................. 13 Pillar IV: Financial Consumer Protection and Financial Literacy.................................................................. 14 2013 Operating Expenditures.......................................................................................................................15 .................................................................................... 17 III.  FinSAC Work Program in 2014–2018. Expansion of Sectoral Focus......................................................................................................................... 17 Expansion of Geographical Coverage ......................................................................................................... 17 Indicative Annual Work Program for 2014.................................................................................................... 17 iii iv FINANCIAL SECTOR ADVISORY CENTER  |  ANNUAL REPORT 2013 Annex I.  FinSAC Staffing............................................................................................................ 19 Current Staffing: Alignment with Thematic Pillar and Country Priorities...................................................19 Future Staffing Plans.....................................................................................................................................20 Annex II. Results Framework. ...................................................................................................... 21 FinSAC Objective: Regional Center of Excellence for Financial Sector Reform Implementation.............21 Strategic Results Framework........................................................................................................................22 Operational Results Framework...................................................................................................................22 Project Result Monitoring.............................................................................................................................22 Stakeholders’ Feedback................................................................................................................................24 FIGURES Figure I: Four Thematic Pillars of FinSAC activities.......................................................................................6 Figure 2: FinSAC Geographical Focus ...........................................................................................................6 Figure 3: FinSAC Objectives.........................................................................................................................21 Figure 4: FinSAC Strategic Results Framework............................................................................................22 Figure 5: FinSAC Operational Results Framework.......................................................................................23 Figure 6: FinSAC Project Result Monitoring.................................................................................................23 TABLES Table 1: FinSAC 2013 Expenditures............................................................................................................15 Table 2: FinSAC’s Expected 2014 Work Program.......................................................................................18 Foreword FINANCIAL SECTOR DEVELOPMENT AND STA- implementation assistance services to client countries bility is critical to the growth and shared prosperity in the ECA region, with financial help from Austria’s of the Europe and Central Asia (ECA) region. The Federal Ministry of Finance2 (Donor). World Bank’s regional strategy, reconfirmed with the In order to achieve its objectives, FinSAC identi- Board in January 2013, revolves around interventions fied a programmatic approach based on four thematic in the Competitiveness area (where financial sector pillars: i) Financial Stability, Crisis Prevention, and work features among the Bank’s key delivery chan- Macroprudential Frameworks; ii) Microprudential nels), in addition to interventions in adjoining pillars Regulatory and Supervision Frameworks; iii) Bank on social inclusion and climate change. Recovery and Resolution; and iv) Consumer Protection A broad financial sector reform agenda is also and Financial Literacy. FinSAC provides advisory and pursued by European Union (EU) institutions, with analytical services in relation to these four strategic immediate impact—both via direct and indirect chan- thematic choices through three distinct channels: (a) nels—on most ECA countries, and particularly so undertaking of client-specific technical assistance among EU member states and candidate countries. assignments; (b) organization of technical workshops, One of the most visible initiatives is the design and conferences, and seminars, and (c) execution of implementation of the European Banking Union, regional research projects with corresponding outreach including a series of EU Directives on Capital Require- activities. Through these activities, and within its ments, Bank Recovery and Resolution, and Deposit programmatic focus, FinSAC aims to become a lead- Insurance, which will require adoption by all EU ing regional “knowledge center” over time. member states. In addition, a number of mechanisms FinSAC’s geographical focus is expanding accord- are to be implemented at the eurozone level for ing to three key priority groups: i) EU candidate and banking supervision and resolution, which will be potential candidate countries (Albania, Bosnia and optional for non-eurozone members, posing a number of challenges for client countries in the ECA region. In order to further reinforce the World Bank ECA region’s focus on financial sector work, and to respond 2 According to the Trust Fund Agreement signed in April 2011 and to the needs derived from financial sector reforms amended in December 2013, the Austrian Trust Fund will finance the establishment of the Vienna Center for Financial Sector Advi- taking place in the region, the Financial Sector Advi- sory Services (FinSAC) and the implementation of the program, sory Centre (FinSAC) was established in late 2011 as consisting in the provision of advisory and analytical services on a dedicated Vienna-based technical unit of the ECA policy, technical, capacity building and institution building issues in the financial services sector to the financial authorities in World Region Private and Financial Sector Development Bank member countries in the Europe and Central Asia. The Bank Department (ECSPF)1 to deliver technical advice and will manage and administer the program through FinSAC, which will: (a) coordinate the activities under program and administer the Trust Fund; and (b) implement the program at the regional 1 Going forward from July 1, 2014 and following the restructuring of level in support of financial sector development at the country the World Bank Group along global practices, FinSAC will be managed level. FinSAC will be headed by a Program Coordinator reporting by the Finance and Markets Global Practice. to a World Bank Sector Manager. v vi FINANCIAL SECTOR ADVISORY CENTER  |  ANNUAL REPORT 2013 Herzegovina, Kosovo,3 FYR Macedonia, Montenegro, structure. This allows FinSAC to undertake complex and Serbia); ii) EU member states as active non-grad- engagements, which can be seen through to their uated World Bank clients (Bulgaria, Croatia, Poland, actual implementation by country authorities. and Romania); and iii) EU neighborhood countries Based on the success of the program to date, and (Belarus, Moldova, Ukraine, Armenia, Azerbaijan, and to meet the strong demand from client countries, the Georgia). The expansion to Central Asia is envisaged World Bank and the Donor agreed in 2013 to extend in future consultations with the Donor. the closing date of the Trust Fund Agreement to Through the combination of its strong integra- June 2018, to increase the amount of the grant by tion and coordination with ECSPF’s work and its an additional €8 million,5 and to include additional decentralized physical location, FinSAC has emerged activities to be carried out by FinSAC. as a key strategic institutional initiative in the deliv- In accordance with the current work program, it ery mechanism of impact-oriented financial sector is envisaged that FinSAC should be able to engage technical assistance to the region. In the context of in eight client assignments and deliver four technical client relationship strategically managed by ECSPF conferences/seminars and regional research projects staff, FinSAC builds on ECSPF’s analytical and assess- across the four thematic pillars, every year for the ment work to engage in technical work that helps period 2014-2018. This will require a substantial countries implement concrete legislative, regulatory increase in the number of full-time staff and the avail- and institution-building initiatives that strengthen the ability of project-specific technical expertise. Much resilience and efficiency of financial systems. of this scale-up effort is well underway. In its first two years of operation, FinSAC has FinSAC has now moved beyond the initial phase started 15 client assignments in 10 ECA countries4 of being a vision, positioning itself as a recognized (eight of which have been completed), delivered three brand, capable of delivering timely and expert financial major regional conferences, and undertaken three sector technical assistance to the region. In its second research projects with its initial staff of five. FinSAC phase of operation, it will need continued dedicated has, therefore, progressively developed outreach, management attention, and continuing strategic sup- impact and influence within the region. port from both the World Bank’s management and Since FinSAC began operations experience has the Austrian Government, in order to maintain the highlighted solid client demand for financial sector common vision of its two founding partners to roll technical assistance. FinSAC’s geographical proximity out an effective, results-focused advisory program to prospective clients in ECA countries has allowed it and to become a well-recognized regional “Center of to provide flexibility and effectiveness in its responses. Excellence” for financial sector reform implementa- Added to this, FinSAC’s distinct comparative advantage tion. In this regard, the World Bank appreciates the vis-à-vis other technical assistance providers is the generous financial support provided by the Austrian unique combination of its implementation-oriented Authorities and the vote of confidence in the success multi-pillar thematic focus and its long-term funding of the second phase of FinSAC. 3 This designation is without prejudice to positions on status, and is in line with UNSCR 1244 and the ICJ Opinion on the Kosovo Declaration of Independence. 4 Including South-East European countries, EU Member States, 5 Taking the total amount of the grant under the Trust Fund and EU Neighborhood countries. Agreement to €13.2 million. Chapter 1 F i n S AC St r at e g i c R at i o n a l e a n d Th e m at i c /G e o g r a p h i c F o c u s  EGIONAL STRATEGIC PRIORITIES IN THE R created as a forum to bring together financial supervi- FINANCIAL SECTOR – IMPLICATIONS OF THE sion stakeholders at the national and at the EU level EUROPEAN BANKING UNION to act as a network. This has been followed by the development of a harmonized regulatory setup and, The global financial crisis unveiled weaknesses in subsequently, by the creation of a single supervisor. supervisory structures and institutional arrangements A single resolution institution and (industry-funded) for financial sector supervision and regulation. In funding mechanism is still being debated. Europe, the rapid financial integration experienced The key elements of the European Banking Union in the past decades was not accompanied by integra- are to be implemented through a combination of enti- tion of the legal and regulatory framework, which, ties already established and mechanisms which are during the eurozone crisis, allowed uncoordinated currently under discussion (see Box 1). The European actions which led to deleveraging of banks, causing Central Bank (ECB) provides liquidity as lender of adverse cross-border externalities. Fragmentation last resort to Eurozone banks, and will perform micro of the legal and regulatory framework prevented an and macroprudential supervisory functions for banks integrated approach to systemic risk. The systemic in the region. The EBA will have a coordination and weakness highlighted the need to create an integrated mediation role between the authorities of participat- architecture to improve financial stability that could ing and non-participating Member States, and would bring a uniform and high standard of enforcement, retain responsibility for the development of technical remove national distortions, and mitigate the buildup standards in banking and ensure convergence and of risk concentrations. consistency of supervisory practice. The European The EU is following a multi-stage approach toward Systemic Risk Board (ESRB) will keep its mandate as the completion of a full Banking Union, based on a the macroprudential oversight body for EU financial consensus about the essential elements that such a systems (which will require coordination with the framework should have. Any banking system or full ECB). While a provisional agreement on the Single Banking Union requires the following elements: (i) a Resolution Mechanism (SRM) was reached in March, well-defined supervisory mechanism; (ii) a lender of a common deposit insurance is still being debated. last resort, to provide liquidity in case of distress, but Three EU Directives provide the legal foundation not insolvency; (iii) a well-defined and effective resolu- for this new framework, along with a number of tion regime to allow for the direct recapitalization of Regulations. The Capital Requirements Regulation banks, spelling out clear rules for the orderly exit of (CRR) and Capital Requirements Directive (CRD IV) non-viable institutions, including bail-in rules to share were approved and are being gradually implemented. losses among shareholders and creditors; and (iv) a The final compromise text of the Bank Recovery single resolution/common deposit insurance system. and Resolution (BRR) Directive was agreed upon in Initially, the European Banking Authority (EBA) was December 2013, and is pending the formal adoption 1 2 FINANCIAL SECTOR ADVISORY CENTER  |  ANNUAL REPORT 2013 by the EU Parliament and the European Council. It event for EU member states and EU candidate and will be in effect as of January 1, 2015, (bail-in rules potential candidate countries, given its potential contained in the proposed Directive will start to be to identify significant balance sheet weaknesses in applied in 2016). The proposed Directive on Deposit parent banks. The AQR will be an assessment of all Guarantee Schemes (DGS) has been under discussion asset classes, including on and off-balance sheet since 2010, but no decision has been made pending positions, conducted on the basis of harmonized the adoption of the BRR Directive. definitions. Results will feed into a new round of This new framework has different applicability stress tests conducted by the ECB and the EBA, with across the European Union. While the directives out- banks required to adopt corrective measures if capital lined in the previous paragraph are applicable to all shortfalls are identified. These could create volatility 28 member states, the Single Supervisory Authority in the markets, and subsidiaries of affected banks (the ECB), Single Resolution Authority, and common could suffer new rounds of deleveraging, as parent deposit insurance are applicable to Eurozone members banks seek to shrink assets to reduce their capital and non-Eurozone members who opt to join. Institu- needs. Therefore, authorities in these countries need tions such as the ESRB and EBA will work mostly to be prepared to face potential adverse effects derived as coordinators and mediators between participants from the AQR results. and non-participants. ECA countries, particularly EU member states and  SSESSMENT OF NEEDS AND PRIORITIES IN A EU candidate and potential candidate countries, are FINSAC TARGET COUNTRIES facing the regulatory uncertainty in the region with the implementation of the European Banking Union. The annual program discussions, diagnostic assess- The EU Directives covering capital requirements, bank ments through the World Bank’s regular regional recovery and resolution, and deposit insurance will financial sector monitoring (including Financial Sec- have to be implemented in the future, and national tor Assessment Program (FSAP) diagnostics and authorities will need to adjust their supervisory prac- recommendations), as well as regular policy dialog tices as a consequence. In addition, non-Eurozone carried out by the World Bank ECSPF financial sector countries must consider if it is in their interest to join staff help to put together a framework of technical the Single Supervisory Mechanism (SSM) and Single assistance (TA) advisory needs and potential sources Resolution Mechanism (SRM), but the current uncer- of TA providers including other bilateral and multi- tainty makes this decision difficult. Conditions under lateral sources. However, there are still areas which which opt-in countries join the SSM and SRM should need specific implementation focus over a longer be discussed with all actors involved and agreed upon term horizon. These are usually the focus areas of in a timely manner, allowing non-Eurozone countries FinSAC TA activities, which often coincide with what to make an informed decision. is requested by country authorities from FinSAC. Well In addition, the latest developments in the Euro- within FinSAC’s four thematic pillars, client demand pean Banking Union pose questions about the extent of includes, but is not limited to the following: participation of EU candidate and potential candidate countries. The banking systems of those countries • Client institutions such as Central Banks, Financial are closely tied to parent banks in EU-countries, and Supervisors, and Ministries of Finance are extreme- therefore will be impacted by the implementation ly interested in keeping abreast of and implement- of the SSM and SRM. Questions remain about the ing the latest regulatory proposals, and are keen consideration given to the financial stability of non- to develop the capacity to do so. For example, the EU countries in the supervision and resolution of a Bank Resolution Conferences in Vienna created a EU bank with subsidiaries in such countries. In this forum for ECA countries to participate in discus- regard, formal procedures for the participation of non- sions of regulatory issues and generated demand EU countries in the banking union process should be for best practice implementation through country- developed and the institutional setup for a mediation specific follow up. to handle conflicts of interest should be established. • Ministries of Finance, financial sector authorities, Finally, the asset quality review (AQR) to be and other high level policy makers in the region undertaken by the ECB on the banks over which have shown a high level of interest in banking it will assume supervisory authority is a key risk regulatory issues to ensure sound financial and F I N S A C S T R AT E G I C R AT I O N A L E A N D T H E M AT I C / G E O G R A P H I C F O C U S  3 credit systems and allow for the speedy recovery high interest to non-EU clients. Regulators in of their economies by ensuring that banks and many countries are keen to receive guidance on the financial system in general adhere to sound how to implement them. solvency, liquidity, governance, risk management, • Several countries are interested in regulatory and other regulation. methods and mechanisms for dealing with trou- • The EU Directives covering capital requirements, bled bank assets and nonperforming loans using bank recovery and resolution, and deposit insur- efficient workout mechanisms under sound prin- ance will have to be implemented in the future ciples, with the objective of restoring the condi- by all EU member states, and national authorities tions for growth. will need to adjust their supervisory practices as • Countries are keen to explore bank resolution a consequence. In addition, other globally-led mechanisms, including active bank recovery and initiatives on Basel III, home-host supervision, resolution planning, an area started up in Europe consumer protection, and other matters are of (specifically in the UK), as a contingency planning BOX 1 KEY BUILDING BLOCKS OF A EUROPEAN BANKING UNION* As a response to the weaknesses and shortcomings identified after the onset of the global financial crisis, and particularly of the sovereign debt crisis of some of the peripheral Eurozone countries, the European Union is in the process of improving its regulatory and supervisory framework, toward the goal of creating an integrated architecture for financial stability, that is, a European Banking Union. Some building blocks of the banking union are already in place or are in the process of being implemented, while others are still under discussion. Moreover, some elements of the banking union are applicable only in the Eurozone (with non-Eurozone members having the option to participate), while others are EU-wide. 1. Liquidity Provision: performed by the ECB for all Eurozone banks. 2. Macroprudential Regulatory and Supervisory Functions: performed by the European Systemic Risk Board (ESRB), applicable to all EU Member States. 3. Microprudential Regulatory and Supervisory Functions: a. Regulatory Framework: the CRD IV/CRR package, which transposes Basel III capital requirements standards into EU laws. It came into force in July 2013, and implementation began in 2014, phased in gradually until 2019. b. Supervisory Functions: performed by i) the European Banking Authority (EBA), ensuring effective and consistent prudential regulation and supervision across the EU, by contributing to the creation of a single set of harmonized prudential rules for banks (the “European single rulebook”) and promoting the convergence of supervisory practices; and ii) the Single Supervisory Mechanism (SSM), transferring supervisory functions to the ECB, which will perform direct supervision of banks in the eurozone with over €30 billion in assets or 20 percent of national GDP, and those considered systemically relevant. The ECB will assume its supervisory tasks on November 2014. 4. Bank Resolution: a. Regulatory Framework: the Bank Recovery and Resolution (BRR) Directive, seeking to ensure that national authorities in the EU have strong preventative powers, including those in relation to recovery planning, along with early intervention powers and resolution tools. It includes a set of bail-in rules forcing shareholders, bondholders, and some depositors to contribute to the cost of a bank failure. The final compromise text of the Directive was agreed upon in December 2013, and pending the formal adoption by the EU Parliament and the European Council, it will be implemented as of January 1, 2015 (bail-in rules contained in the proposed Directive will start to be applied in 2016). b. The Single Resolution Mechanism (SRM): creation of a centralized resolution authority to manage the failure of any bank in the Eurozone. The current proposal—under discussion—stipulates the following procedure to resolve a bank: i) ECB or national supervisor notifies that a bank is failing; ii) a Single Resolution Board (SRB) assesses if there is a systemic threat and no private sector solution, and adopts a resolution scheme including the use of the Single Resolution Fund; iii) the European Commission endorses or objects to the resolution scheme; and iv) national resolution authorities implement the approved resolution scheme, under the supervision of the SRB. c. Funding: a proposed Single Resolution Fund would be capitalized with contributions from the banking sector, but would not have a sizable level—one percent of covered deposits—until 2023. 5. Deposit Insurance: a. Regulatory Framework: the Deposit Guarantee Schemes (DGS) Directive, aimed at harmonizing national deposit guarantee schemes, including their funding and mutual borrowing. The proposed Directive has been under discussion since 2010, and a final decision has not yet been made pending the adoption of the BRR Directive. b. Common Deposit Insurance: the most controversial element of the banking union, with preliminary discussions raising concerns regarding the amount of risk-sharing involved. To date, no proposal has been made on the matter. * This is a summary of the latest ECA Financial Sector Outlook (Issue N° 19, October 2013), a special edition dedicated to the European Banking Union. 4 FINANCIAL SECTOR ADVISORY CENTER  |  ANNUAL REPORT 2013 and moral hazard mitigating tool to lessen the fis- of the legal and regulatory impediments; (ii) the cal cost of rescuing banks if that were necessary. introduction of voluntary debt restructuring frame- • Regulators of several countries are also interested works, along with a judiciary prepared to expedite in improving and benchmarking their supervisory resolution for those uncooperative borrowers; (iii) a practices for the validation of regulatory capital willingness to set achievable interim and longer-term inputs generated by internal models of commer- NPL reduction goals; (iv) the robust and sustained cial banks. engagement of key local stakeholders—well beyond • Supervisors continue to be interested in new the banking authorities—to see through the adop- comprehensive stress-testing approaches and tion of needed measures; and (v) a recognition that quantitative impact assessments, as well as link- earlier asset classification and provisions relaxation ing these to macroprudential triggers related to measures, adopted by all authorities in the past two credit growth and the resulting activation and years, will in time have to be unwound, impacting depletion of macroprudential capital buffers and banks’ provisioning, and thus, capital levels. All of other associated prescriptions for macropruden- which should be carefully sequenced in accord with tial policy response. an agreed upon, time-bound strategy.6 • Regulators in many countries are keen to imple- Regarding EU member states, the priorities remain ment better regulation for financial consumer pro- focused on financial sector stability, as the countries tection. ECSPF’s experience in this area, acquired continue to recover from the global crisis, with a through work in many EU member states, will longer-term view directed toward strengthening the enable useful knowledge transfer in this regard. supervision of non-bank financial institutions. On financial sector stability issues, the priorities identified Considering the geographical focus outlined before, are aligned with the EU Bank Recovery and Resolution the challenges and priorities of EU candidates and EU Directive. In particular, the World Bank identified a potential candidate countries are of particular inter- number of challenges in Bulgaria, Croatia, Poland and est. Authorities in these countries have made progress Romania, such as adopting modern bank-resolution in implementing banking reforms over the past year regimes, adopting sound macroprudential policies, with the aim of improving their resilience and super- enhancing supervision and monitoring of banks visory capacity. Macroprudential frameworks were and the nonbanking sector to extend the regulatory strengthened to varying degrees, home-host relations perimeter, strengthening consolidated supervision, improved, and several countries are making efforts revamping deposit insurance systems, addressing to reduce their elevated non-performing loan (NPL) insolvency and creditor rights, continuing pension levels (with FinSAC’s technical assistance in the cases reform, addressing weaknesses in other subsectors of Albania and Montenegro), but challenges remain. like insurance, and managing foreign currency risks.7 Crisis preparedness frameworks are not in full accord During FY14, a programmatic approach to financial with best practice; a specific bank resolution regime sector technical assistance in EU member states has is lacking in some cases, while in other instances, been developed by ECSPF, with the objective of assist- there is no legal framework in place for the use of ing individual countries in (i) upgrading the regula- public funds in times of systemic distress. In addi- tory frameworks and standards of client countries tion, the operational aspects of the framework need in accordance with the latest international practices strengthening. The utilization of modern resolution and EU norms, and (ii) addressing specific financial tools for systemic banks (i.e., bridge bank, purchase sector vulnerabilities in order to maintain financial and assumption transaction authority, good bank/ sector stability and contribute to economic growth. bad bank, etc.) is untested, and deposit insurance In EU neighboring countries, the main priorities schemes are mostly simple pay boxes, with evident are the implementation of risk-based supervision gaps. Moreover, most deposit insurance schemes of the banking sector, crisis preparedness, bank- lack operational readiness, which undermines their ing resolution framework, NPL workouts, building potential effectiveness to contain contagion effects. Amongst the most pernicious of challenges banking 6 These issues were identified in the second Western Balkan authorities face is reducing the stock and flow of Financial Sector Outlook (June 2013), prepared by ECSPF. NPLs, which requires advancing a number of key 7 These challenges are also based on the recommendations of dimensions: (i) developing a clear, objective grasp the latest FSAP Updates in these countries. F I N S A C S T R AT E G I C R AT I O N A L E A N D T H E M AT I C / G E O G R A P H I C F O C U S  5 financial sector infrastructure, consumer protection • Pillar I – Financial Stability, Crisis Prevention, and financial literacy, and non-bank financial institu- and Macroprudential Frameworks: To promote tions and capital markets development. A particular development of institutional capacity to moni- feature of some of these countries is the high level tor and manage systemic risk, and develop crisis of participation of the state in the financial sector. management frameworks. The initial motivation Therefore, a mid-to-long term goal in this region is of this pillar originated from the international to evaluate the role of state in the financial sector response to the 2008 crisis, and FinSAC’s experi- especially with a view to reducing the state’s stake. ence working with clients in the past two years There is also a keen interest in these countries on has unveiled the need to nurture client country creation of a development bank to mobilize medium- preparedness to implement analytical and insti- to long-term finance for exporters and SMEs, and they tutional strengthening measures in the macro are looking for advice on the proper institutional and stability area. Therefore, FinSAC has defined an governance structure for such institutions. implementation path for macroprudential strength- ening measures, with necessary institutional con- FINSAC THEMATIC PILLARS ditions (in line with ESRB guidelines) for effective macroprudential framework, and is developing Under this new paradigm in financial regulation and institutional analytical capacity to monitor and oversight, the Vienna-based Financial Sector Advisory manage systemic risk as a catalyst for further Centre (FinSAC) was created as a dedicated techni- institutional strengthening initiatives. FinSAC’ cal unit of the World Bank’s ECA Region Private and s initial experience suggests that there is also a Financial Sector Department to deliver technical advice strong demand in the region for crisis simulation and reform implementation assistance services to cli- exercises, another well-established World Bank ent countries in the Emerging Europe and Central Asia product, which help ECA countries to test their region. FinSAC delivers services through three distinct crisis management frameworks and to identify channels: (a) undertaking of customized client-specific potential improvements. technical assistance assignments; (b) organization of • Pillar II – Microprudential Regulatory and group technical assistance activities such as workshops, Supervisory Frameworks: To upgrade banking conferences, and seminars; and (c) execution of regional sector legislation, regulatory standards and super- research projects with corresponding outreach activities. visory frameworks and practices, putting in place Through these activities, it aims to become a leading more robust microprudential measures including regional “knowledge center” over time. effective home-host supervision, NPLs workout, FinSAC’s guiding principles are the execution of regulatory capital requirements, institutional struc- specific policy and institutional changes, improving tures, etc. With an international regulatory devel- financial stability and intermediation efficiency, with opment agenda in constant change, largely driven a medium-term implementation timeframe and with by EU developments, and NPL resolution acquiring a proactive division of labor with authorities, local much stronger operational relevance than what experts, and other stakeholders. There are three com- was expected in the initial stage, FinSAC’s opera- parative advantages of FinSAC. First, integration with tional focus will be to assist prudential supervi- ECSPF operational activities, this ensures that the TA sors with: a) prudential regulation and supervisory provided is leveraged. Second, high specialization of practices to promote NPL recovery and resolution its staff. Third, geographical closeness to clients in ECA and help prevent future surges; b) making best use countries and to the main financial sector policy mak- of home-host supervision arrangements to fulfill ers in the region, which enhances delivery efficiency. their domestic mandates; and c) implemention of In order to achieve these goals, four strategic local solutions compatible with the forthcoming thematic choices for FinSAC were identified in its CRR/CRD IV-prudential regulations and interna- initial stage (see below). FinSAC has accumulated tional best practice experience in the practical implementation of thematic • Pillar III – Bank Recovery and Resolution: To pillars in the two years since it started. The global strengthen bank recovery and resolution frame- and European regulatory environment has evolved as works, including Recovery and Resolution Plans well. These changes have resulted in the refining of (RRPs) for Domestic Systemically Important some aspects of FinSAC’s implementation approach. Financial Institutions (DSIBs), and incorporation 6 FINANCIAL SECTOR ADVISORY CENTER  |  ANNUAL REPORT 2013 FIGURE 1 FOUR THEMATIC PILLARS OF FINSAC ACTIVITIES Four Thematic Pillars of FinSAC activities Financial Stability, Micro-prudential Consumer Crisis Prevention and Regulatory Bank Recovery Protection Macro-prudential Supervisory and Resolution and Frameworks Frameworks Financial Literacy of modern resolution tools to deal with struggling the context of comprehensive reform strategy institutions. Also in this area, international regula- that identifies early wins for tangible consumer tory developments are in rapid flux. Operationally, benefits. FinSAC will work with authorities to strengthen their bank recovery and resolution frameworks, FINSAC GEOGRAPHICAL FOCUS downstream from the forthcoming adoption of the EU Directive in this area. FinSAC’s initial geographic focus was on EU can- • Pillar IV – Consumer Protection and Financial didate and potential candidate countries. In 2013, Literacy: To improve market conduct regimes FinSAC has gradually expanded its geographical for financial institutions, building a consumer operational footprint, according to the following Key protection and financial literacy framework, and Priority Groups: strengthen corporate governance, truth in lending practices, transparency, accounting standards, and Group 1: EU candidate and potential candidate payment systems, as well as other mechanisms. countries: These include Albania, Bosnia and Her- This area is a very vast one and a critical one for zegovina, Kosovo, FYR Macedonia, Montenegro, broadening financial inclusion. It is therefore an and Serbia. To date FinSAC is active in all countries area where FinSAC can play a strong leadership except Macedonia. role, especially the area of consumer protection Group 2: EU member states as active non-graduated and financial literacy is governed by less devel- World Bank clients: Bulgaria, Croatia, Poland, and oped international norms than those applicable Romania. FinSAC is currently active in Romania and to the other three pillars. FinSAC will prioritize Croatia. However, since the Austrian Government work to improve market conduct regimes, in wishes to restrict the utilization of the their trust funds FIGURE 2 FINSAC GEOGRAPHICAL FOCUS EU Candidates and Potential Candidate Countries EU Member States EU Neighboring Countries Albania Belarus Bosnia and Herzegovina Bulgaria Moldova Kosovo Croatia Ukraine FYR Macedonia Poland Armenia Montenegro Romania Azerbaijan Serbia Georgia F I N S A C S T R AT E G I C R AT I O N A L E A N D T H E M AT I C / G E O G R A P H I C F O C U S  7 to only official development assistance(ODA)-eligible FINSAC STAFFING AND RESULTS countries (excludes EU members), it has been agreed FRAMEWORK upon that within this Group 2, FinSAC will cap the cost of its involvement to 10 percent of the Donor FinSAC’s current staffing consists of a core team of resources (leaving the possibility open for additional five staff members based in Vienna, supported by staff involvement through funding arrangements other from WB headquarters and international consultants. than those provided by Donor). FinSAC is in the process of doubling its capacity, by Group 3: EU neighborhood countries: Belarus, Mol- adding another set of five staff. Details on current dova, Ukraine, Armenia, Azerbaijan, and Georgia. and future staffing plans can be found on Annex 1. FinSAC is already active in Moldova, Ukraine, and A brief description of FinSAC’s results framework Georgia. is found in Annex 2. Chapter 2 Fi n SAC Activiti e s D eliver ed (o r U n d e r way) i n 2 0 1 3 PILLAR I: FINANCIAL STABILITY AND coordination. For this purpose, a crisis simula- MACROPRUDENTIAL FRAMEWORKS tion exercise organized by FinSAC, was held in February 2013. The exercise tested information Moldova Liquidity Stress Testing: The objective a.  analysis and sharing, decision making, home-host of this project was to help the Central Bank of cooperation, and communications between the Moldova improve its capabilities in liquidity stress Croatian National Bank and other authorities with testing, strengthening the authorities’ ability to primary responsibility for financial stability and monitor emerging financial stability stress. The crisis management. Three teams were created to project was carried out through the following carry out the exercise: i) the Croatian National Bank sequential activities: i) building a liquidity stress (CNB), ii) the State Agency for Deposit Insurance testing model for the Moldovan banking system, and Bank Rehabilitation (DAB) and the Ministry together with the central bank’s Financial Stabil- of Finance (MoF), and iii) the Croatian Financial ity Department (FSD) staff; ii) presentation of Services Supervisory Agency (HANFA). An addi- the model to the Banking Supervision staff, the tional team was created comprising members of Deputy Governor and senior managers, and the the World Bank, CNB, DAB, and HANFA. The Financial Stability Working Group (an interdepar- scenario revolved around three banking entities tamental body); and iii) training FSD staff on the and related asset management companies as well model’s operation. A technical note on the model as four smaller banks in the Croatian financial was delivered to the client, and a template for a system. FinSAC delivered a report to the client regular internal report on the model’s results was exploring the gaps in the current frameworks for prepared by FSD staff under FinSAC supervision. resolution, liquidity assistance, and coordination, Status: Delivered. and provided recommendations to address these Achieved Result: The objective was achieved gaps. This was followed by a dissemination semi- with the implementation of a liquidity stress test- nar for the participants of the exercise, in which ing model by the Financial Stability Department they had the opportunity to give feedback on the (client intermediate outcome). FinSAC’s output findings and provide the rationale for their actions was the delivery of a techncical note and various and decisions. Presentations by FinSAC staff were presentations on the topic. made on the key themes of the exercise: emergency liquidity provision, resolution of failing banks, and Croatia Crisis Simulation Exercise: The overall b.  supervision of a banking system predominately goal of the project was to examine how the Croa- owned by foreign banks. Status: Delivered. tian authorities respond to distress in the financial Achieved Result: The objective was achieved system and to explore the adequacy of existing through a crisis simulation exercise that exposed laws, regulations, policies, and procedures in the Croatian regulatory and decision-making order to strengthen supervisory cooperation and authorities to the demands, stresses, and implica- 9 10 FINANCIAL SECTOR ADVISORY CENTER  |  ANNUAL REPORT 2013 tions of a systemic crisis event, thus raising their have been delivered to the client; two more mod- awareness about the weaknesses of their crisis ules on analytical capacity building relating to management and resolution framework, and iden- credit risk models and early warning systems are tifying the areas in need of further strengthening. under preparation. FinSAC’s output was the delivery of the report with the findings of the exercise and recommendations Montenegro Crisis Management Simulation: d.  to bridge the gaps identified, and the organization The overall objective of the exercise was to ana- of a dissemination seminar for the participants of lyze and enhance the tools and processes related the exercise. to the managment of potential financial distress and systemic crisis by simulating a “crisis event” Bosnia and Herzegovina Financial Stability Insti- c.  and assessing the decision making and response tutional Building: The objective of this project is of Montenegrin authorities to the “crisis event.” to strengthen the financial stability framework in For this purpose, a crisis simulation exercise orga- Bosnia and Herzegovina, following a request from nized by FinSAC was held in November 2013 at the Central Bank (CBBH), in order to enhance the the Central Bank of Montenegro (CBCG), with the analytical capabilities of CBBH’s Financial Stability participation of around 30 staff from the CBCG Unit (FSU) for them to play its supporting role in the (including its Governor and Deputy Governor) Standing Committee of Financial Stability (SCFS), and the Ministry of Finance (including its Deputy and identify institutional solutions by which the Minister). Status: Delivered. functioning of the current SCFS framework can be Achieved Result: The objective was achieved improved and gradually moved toward international through a crisis simulation exercise that exposed best practices. The project is being carried out the regulatory and decision-making authorities through the following activities: i) a benchmark- to the demands, stresses and implications of a ing paper (technical note) delivered to the client systemic crisis event, thus raising their awareness on the emerging post-crisis national financial about the weaknesses of their crisis management stability frameworks, to help authorities identify and resolution framework and identifying the areas a suitable path for institutional strengthening from in need of further strengthening. FinSAC’s output the perspective of converging to EU practices; ii) was the delivery of a comprehensive report with the development of a credit growth forecasting the findings of the exercise and recommendations model for FSU, including training FSU staff on to bridge the gaps identified. The draft version of its operation (a technical note on the model was the report was prepared and sent to the CBCG for delivered to the client); iii) the development of a comments in December 2013 and a final version credit risk model tailored to the Bosnian financial of the report was delivered to the client in Janu- system, with the aim of bringing CBBH’s stress ary, 2014. testing framework closer to best practice; iv) the development of early warning systems jointly PILLAR II: MICROPRUDENTIAL FRAMEWORKS with CBBH’s staff; and v) a presentation to CBBH officials exploring ways to expedite the production Montenegro NPL Resolution: The objective of this a.  process of Bosnia’s Financial Stability Report, in project was to help the CBCG and the Ministry of order to reduce the significant lag with which it is Finance develop and implement a Montenegro- published currently. Status: Underway. specific strategy to reduce the level of NPLs. Fin- Expected Result: The objective of a strengthened SAC scoped its intervention around three main financial stability via the enhancement of the diagnostic areas: i) core operations, looking at analytical capabilities of CBBH’s Financial Stability the nexus between prudential and supervisory Unit and the improvement of SCFS’s framework actions and banks’ debt restructuring efforts; ii) toward international best practices is being gradu- enabling environment, through an assessment of ally achieved with the activities that have been legal, regulatory, and tax issues that may hamper completed and currently ongoing. Two FinSAC debt restructuring; and iii) analytics, to develop outputs, one technical note on benchmarking a policy action-oriented corporate debt mapping macroprudential institutional arrangements and and a framework to assess the macro-implications another one on a credit growth forecasting model, of NPL resolution. F I N S A C A C T I V I T I E S D E L I V E R E D ( O R U N D E R W AY ) I N 2 0 1 3  11 Following the completion of an assessment phase, Albania NPL Resolution: The policy objective of b.  and on the basis of a mandate from the Govern- this project is to help the Bank of Albania (BoA) ment of Montenegro and CBCG, FinSAC prepared and the Ministry of Finance develop and implement the Law on Voluntary Financial Restructuring to an Albania-specific strategy to reduce the level on facilitate the resolution of NPLs, which was enact- NPLs. FinSAC scoped its intervention around three ed by Parliament. FinSAC also helped the CBCG main diagnostic areas: i) core operations, looking organize a review of the restructuring prospects at the nexus between prudential and supervisory of eight nonperforming borrowers, involving pro- actions and banks’ debt restructuring efforts; ii) bono professional experts from eight international enabling environment, through an assessment of management consulting firms, who acted as a proxy legal, regulatory, and tax issues that may hamper credit committee. To create deeper awareness of debt restructuring; and iii) analytics, to develop the operational implications of NPL restructuring, a policy action-oriented corporate debt mapping FinSAC also organized a “Montenegro NPL Day” and a framework to assess the macro-implications where eight Vienna-based experts delivered a brief- of NPL resolution. ing to the Governor and Chief Economist of CBCG. On the basis of the mandate received from the The Governor of CBCG committed in early BoA in October 2012, FinSAC completed an assess- 2013 to carry out a set of steps and actions to ment of the obstacle to efficient NPL resolution in implement the so-called “Podgorica Approach” the Albanian legal and regulatory environment. (the term under which the NPL resolution program In addition, FinSAC prepared specific re-drafting is called), and to “put the reduction of the NPL suggestions for nine articles of the Civil Procedural ratio on a downward trajectory to return to its Code and three articles of the Civil Code, jointly pre-crisis level.” This was followed by an official with a technical note to facilitate legislative activi- request for FinSAC’s assistance to organize a NPL ties. Following the suggestions made by FinSAC, Recovery Mapping assessment of four banks with the Civil Procedural Code and the Civil Code were the largest corporate NPL portfolio, in order to amended in order to facilitate the execution of help banks prepare exit strategies (and relative creditor rights. In April 2013, the Parliament of costs) to work out the entire NPL portfolio in the Albania approved the proposed changes. 2014–15 period. The assessment was launched in FinSAC also completed an assessment of the the third quarter of 2013, and concluded in the supervisory stance and prudential framework gov- last quarter or 2013. erning BoA’s monitoring activities of banks’ NPL Finally, FinSAC helped Montenegrin authori- resolution efforts. A set of possible instruments ties mobilize involvement of the European Bank of was identified, including potential technical assis- Reconstruction and Development (EBRD) and the tance services from FinSAC. This was followed by European Investment Bank (EIB) in raising post- a policy letter from the BoA to launch this policy restructuring financing for banks and corporates, design, leading to an agreement with FinSAC for a in the context of the IFI Joint Action Plan. Status: NPL Recovery Mapping exercise that will involve Delivered a review of the NPL portfolio of most banks in Achieved Result: The objective of developing Albania, launched in the last quarter of 2013 and and implementing a Montenegro-specific strategy to be concluded in April 2014. Status: Delivery to reduce the level of NPLs was achieved with expected by June 2014 the completion of a series of activities aimed at Expected Result: The objective to develop and facilitating the reduction of nonperforming loans implement an Albania-specific strategy to reduce through voluntary restructuring, including a new the level of NPLs is being gradually achieved with Law on Voluntary Financial Restructuring, and the amendment of the Civil Procedural Code and assistance in NPL restructuring for authorities the Civil Code, and the launch of a policy design and banks. The NPL Recovery Mapping assess- to strengthen BoA’s supervisory powers in order ment will help Montenegrin banks to work out to counteract the strong disincentives by banks their NPL portfolio in the next two years, and the to reduce their NPL stock. The future launch of involvement of EBRD and EIB will help mobilize the NPL Recovery Mapping assessment will help resources for the post-restructuring financing needs Albanian banks to workout their NPL portfolio in of the banking sector. the medium-term. 12 FINANCIAL SECTOR ADVISORY CENTER  |  ANNUAL REPORT 2013 NPL Business Development and Regional Out- c.  harmonization in prudential regulation regarding reach: The objective of this project is to initiate loan classification and provisioning through the discussions with client countries on NPL manage- dissemination of the paper and its findings, with ment, seeking to secure client advisory mandates. a view to initiate discussions with client countries To date, discussions have been initiated with the on potential advisory services for the develop- authorities of Kosovo and Macedonia, and efforts ment and improvement of related regulation, have started to engage authorities in Serbia. In and strengthening of the supervisory approach particular, a seminar on NPL resolution was held for enforcement. at the National Bank of the Republic of Macedonia after the invitation of its Governor. In addition, Georgia IFRS Implementation – Prudential Inter- e.  a regional NPL resolution workshop was held in actions: The policy objective of this project was to Vienna with the collaboration of senior staff from help the National Bank of Georgia (NBG) assess the Central Bank of Ireland. Status: Underway the prudential implications of the banking system Expected Result: To secure client advisory man- implementing International Financial Reporting dates on NPL resolution through delivery of semi- Standards (IFRS) for prudential reporting purposes. nars and wokshops on the topic, discussions with The project consisted of a review of the legal authorities, and scoping missions. framework, prudential regulations and practices, and an analysis of the areas where IFRS differs Report on Asset Classification and Provisioning d.  from prudential reporting instructions. Status: in Europe and Central Asia: The objective of this Delivered. project is to prepare a report on asset classifica- Expected Result: The outcome of sound imple- tion and provisioning regulations and practices for mentation of IFRS for prudential purposes will be NPLs in Western Europe and Central and Eastern gradually achieved with the findings and recom- Europe countries. The paper provides a discussion mendations identified in the assessment, and the on the main drivers for loan classification and next steps agreed upon with the authorities. provisioning by performing a review of the range of regulation and practices. The different criteria Ukraine CRD IV Assessment: The objective of f.  used by jurisdictions worldwide, the effectiveness this project is to help the Ukrainian authorities to of its implementation, as well as the decision to evaluate the potential impact on financial stabil- use such criteria for accounting purposes can be ity of implementing the EU CRD IV package, and significantly difficult and/or distort comparisons to decide if, and how, regulatory amendments between banks in terms of profitability and the need to be made. The main activity under the soundness of their loans portfolios. Different cri- project was the preparation of an assessment of teria for classifying a loan as nonperforming, for the regulatory consistency of the existing capital accruing interest (in case of non-payment), and adequacy regulation and the liquidity regulation also for provisioning make comparisons between of the National Bank of Ukraine (NBU) with the banks a challenge. More importantly, the actual EU CRD IV package, including the identification effectiveness of implementation, encompassing of areas that diverge from the European regulatory the robustness of the supervisory approach toward requirements. A detailed draft report was deliv- the enforcement of proper implementation cannot ered to NBU in the last quarter of 2013. Status: be underestimated. Therefore, proper implementa- Delivered (pending final face-to-face discussion tion of asset classification and provisioning rules, with client). particularly in what refers to qualitative criteria Expected Result: The outcome of evaluating the and recognition of problem assets, is a key element potential impact on financial stability of implement- in ensuring comparability of portfolios. For the ing the EU CRD IV package will be achieved with purposes of the paper, regulations and practices the delivery and discussions with authorities of in 26 countries of the region were analyzed. The the assessment report on regulatory consistency paper is currently under internal review. Status: (FinSAC output). If regulatory amendments are Delivery expected by June 2014 suggested and agreed upon, potential advisory Expected Result: To create awareness among rel- services for the development and improvement evant ECA policy makers about gaps and areas for of related regulation can be envisaged. F I N S A C A C T I V I T I E S D E L I V E R E D ( O R U N D E R W AY ) I N 2 0 1 3  13 Serbia NBS Operational Risk/IT Supervision: g.  project is to design a regulatory framework for FinSAC, in partnership with FDIC, is assisting the the implementation of RRPs for Domestic Sys- Supervision Department of National Bank of Ser- temically Important Banks (DSIBs). In addition bia (NBS) to establish a new unit responsible for to the enhancement of the legal and regulatory the supervision of IT-related operational risk. The framework, the scope of the project will include assistance started with a comprehensive training the integration of the RRP assessment within the program on the IT architecture of banks along with supervisory review process and improving super- its attendant risks and supervision modalities. It visory capacity in the DSIBs’ RRP review. Status: also included assistance in i) drafting the regulation Under development. that will establish the powers of NBS in this new Expected Result: Recovery plans aim to reduce the area; ii) preparing a three-year institution-building likelihood of a systemic bank failure by requiring plan; iii) helping to design a suitable questionnaire senior management to identify options to achieve of off-site supervision and the procedures manual recovery that can be implemented when a crisis for on-site supervision. It also included assistance occurs. This conceptually minimizes the require- in reviewing the results of the first off-site and ment for state intervention as the recovery plan on-site inspections. Status: Dropped. will set out in advance the essential actions a Achieved Result: After a good start in 2011 and bank will take to restore its viability in the event 2012, the project stalled in 2013 during the reorga- of a crisis without the support of fiscal resources. nization of the NBS Supervision Administration. Ultimately, well maintained recovery plans should The client stopped seeking technical assistance lessen the probability of resolution. The Recovery for implementation activities, and subsequently Plan regulation has been drafted by FinSAC and the project was dropped. has been submitted for approval at the February central bank’s Supervisory Council Board meeting. PILLAR III: BANK RECOVERY AND RESOLUTION FRAMEWORKS Bank Recovery and Resolution Strengthening c.  in Croatia and Serbia: The objective of these Second Regional Banking Resolution Conference, a.  projects is to help authorities strengthen their December 2013: A Bank Recovery and Resolution bank resolution framework, in preparation of the (BRR) seminar was held in Vienna in December future implementation of the EU Directive on Bank 2013 with around 50 participants from 11 coun- Recovery and Resolution (for EU member states), tries, to promote and refresh awareness among or in line with such Directive and best interna- ECA policy makers about this essential piece of tional practices (for EU candidate and potential financial regulatory framework, incentivizing cli- candidate countries). The project has been carried ent countries to strengthen their bank recovery out through an assessment of the current bank and resolution frameworks. The seminar received resolution framework, and a definition of specific significant positive feedback from participants, areas of potential further assistance by FinSAC. To with increasing interest from client countries in date, assessments have been carried out in Croatia similar events in the future. Status: Delivered. and Serbia. Status: Delivered. Achieved Result: The objective to maintain aware- Achieved Result: The objective to strengthen bank ness about the importance of a comprehensive resolution frameworks was achieved thorugh the and credible legal and institutional framework to completion of the corresponding assessments. deal with the failure of banks was achieved. The seminar also served as a tool to engage clients in Report on Bank Recovery and Resolution in the d.  potential advisory services delivered by FinSAC, as Western Balkans: The purpose of this project is to demonstrated by the interest of some client coun- prepare a regional study on the institutional and tries to work on topics related to bank recovery legal frameworks for bank recovery and resolution and resolution (see below). in EU candidate and potential candidate countries Status: under preparation Albania Recovery and Resolution Plans (RRPs) b.  Expected Result: To create awareness among and Resolution Regime for Savings and Cred- relevant policy makers about caveats and gaps in it Associations (SCAs): The objective of this country bank recovery and resolution frameworks 14 FINANCIAL SECTOR ADVISORY CENTER  |  ANNUAL REPORT 2013 through the dissemination of the presentation and financial consumers reap early benefits from an its findings, with a view to the initiation of discus- expedited execution of the measures proposed in sions with client countries on potential advisory the diagnostic review. The sequential activities services for the development and improvement under the project included i) an implementation of the framework. plan including a list of priority implementation actions, discussed with the Governor of the CBK; PILLAR IV: FINANCIAL CONSUMER ii) the approval and launch by CBK’s Board of PROTECTION AND FINANCIAL LITERACY a Consumer Protection Strategy prepared by FinSAC; iii) the preparation of Memoranda of The following projects are part of a broader initiative Understanding between the CBK and the Ministry to strengthen the consumer protection and financial of Economy and the Ministry of Trade & Industry literacy framework in Kosovo to ensure that fairer (with FinSAC assistance); iv) introduction and outcomes are achieved for consumers, and achieve implementation of market conduct supervisory sustainable and long-term improvement for Kosovar tools (designed by FinSAC) in the CBK’s insur- consumers. ance on-site inspections; and v) review of the draft microfinance law and inclusion of consumer Kosovo Consumer Protection and Financial Lit- a.  protection aspects into the proposed MFI legisla- eracy Diagnostic Review: The policy objective of tion. Status: Delivered this project was to help the Central Bank of Kosovo Achieved Result: The objective to implement reme- (CBK) identify policy and institutional-building dial activity to ensure financial consumers reap measures that will increase the confidence of early benefits from an expedited execution of the retail clients in the services provided by financial measures contained in the diagnostic review was institutions in Kosovo. The main activity under achieved through the implementation activities the project was a diagnostic review developed by outlined above (client intermediate outcomes). The the World Bank that has been implemented across CBK’s Consumer Protection Strategy was launched several countries including many within the ECA in July 2013 at a dissemination event in Pristina region. The diagnostic is based on international attended by 100+ participants including the Gov- best practices, assessing the following five key ernor of CBK and the Deputy Prime Minister. The areas: i) laws, regulations, and practices; ii) trans- event received wide coverage by the local media parency and disclosure of information; iii) retail and obtained positive feedback from the financial business practices of financial institutions; iv) industry. FinSAC’s output included a technical note complaints and dispute resolution mechanisms; on the implementation of a legal and regulatory and v) consumer awareness and education. The review, preparation of the CPFL strategy and imple- scope of the work included the dominant banking mentation plan, drafting of the Memorandum of sector, as well as insurance and non-bank credit Understanding, and the design of a market-conduct institutions. Status: Delivered supervision tool for on-site assessments. Achieved Result: The objective to identify policy and institutional-building measures to increase Kosovo Consumer Protection and Financial c.  the confidence of retail clients in the services Literacy Complaints Handling: The objective of provided by financial institutions was achieved this project is to help the CBK in strengthening its through the delivery of a FinSAC output, namely, framework for complaints handling. The activities a comprehensive diagnostic review with a set of under this project include the drafting of the regula- detailed findings and customized policy recom- tion on complaints handling, and a technical note mendations to strengthen Kosovo’s legal, regula- on the implementation approach for complaints tory, and institutional consumer protection, along handling, both of which have been finalized and with its financial literacy framework. circulated to the industry for comments. In addi- tion, a Central Bank of Kosovo Complaint Form Kosovo Consumer Protection and Financial Lit- b.  was designed, and input was provided for the eracy Implementation: Following the diagnostic design of a complaints leaflet. Status: Delivery review outlined above, the next step consisted of expected by June 2014 the implementation of remedial activity to ensure F I N S A C A C T I V I T I E S D E L I V E R E D ( O R U N D E R W AY ) I N 2 0 1 3  15 Expected Result: The objective to strengthen Koso- obligations when purchasing financial products vo’s framework for complaints handling is gradu- and services to enable them to manage their indi- ally being achieved through the activities outlined vidual and household finances. This a long term above. Two FinSAC outputs have been delivered to policy program. The outputs from the first phase the client, which, combined, will impose minimum of implementation will be a series of Q&A articles requirements for financial institutions’ complaints published on the central bank’s website providing handling procedures, and make it easier for Kosovar information about issues identified through the financial consumers to raise complaints and expect identification analysis. redress, taking the pressure off the Kosovar authori- ties in handling individual consumer complaints. 2013 OPERATING EXPENDITURES Kosovo Financial Education: The objective of this d.  The cost of FinSAC 2013 activities was less than €2 project is to develop a financial education strategy million (US$2.5 million equivalent), entirely covered for the CBK. Activities under this project include by the Austrian Ministry of Finance Trust Fund. About identifying key financial education issues through 30 percent of the professional costs are represented complaints analysis and drafting financial educa- by consultant fees, in line with the high technical tion articles based on this research for publication content of FinSAC deliverables. Staff and consultant on the CBK’s website. Status: Underway costs account for almost 90 percent of FinSAC total Expected Result: The objective to strengthen finan- expenditures, including travel, which shows the high cial education in Kosovo will empower financial cost efficiency level of a decentralized professional consumers with knowledge about their rights and team(see Table 1). TABLE 1 FINSAC 2013 EXPENDITURES EURO thousand Jan-Jun 13 Jul-Dec 13 2013 World Bank Staff 598 571 1168 Consultants 159 298 457 Travel Expenses 82 111 193 Other 11 13 25 Total 850 993 1843 Chapter 3 F i n S AC Wo r k P r o g r a m i n 2 0 1 4 – 2 0 1 8 EXPANSION OF SECTORAL FOCUS activities in the context of its annual business plan- ning discussions with the Donor. After consolidation of FinSAC’s program delivery It is also possible that FinSAC may engage in fee- capabilities across the four pillars in its core banking based technical services to graduated World Bank focus, it can be envisaged that limited operations in members, if this is deemed useful for the purpose of an amount to be jointly defined with the Donor may strengthening FinSAC’s professional credentials as a be possible around a second sectoral focus on “Non- knowledge center capable to deliver state-of-the-art Bank Financial Institutions.” This work addresses reform implementation assistance. financial stability issues through the complementary channel of improving resilience of funding sources INDICATIVE ANNUAL WORK PROGRAM FOR for the real economy through efficient non-bank 2014 intermediation. Work in this area spans issues of pension systems, insurance products, and capital At time of writing this Annual Report, the inventory market intermediation among other. The premise of committed (or highly likely) activities is presented for FinSAC’s envisaged engagement in this area is in Table 2. This includes new engagements in the are the centrality of these topics in the international of financial stability and macroprudential frameworks regulatory agenda, expected strong client demand in Albania, Kosovo, FYR Macedonia, and Moldova. and availability of strong technical capabilities New work on NPL is likely to be undertaken in Serbia already present in the World Bank Group. If the and Romania. Work on bank resolution will continue opportunity to expand the sectoral focus were to and expanded in Albania, while new activities under materialize and prove desirable in order to augment this pillar are expected to take place in Bulgaria, the overall impact of FinSAC’s activities, FinSAC Croatia, Romania, Moldova, and Ukraine. Finally, will detail its strategic rationale in the context of its consumer protection work is expected to be carried annual reporting obligations to the Donor and will out in Belarus and Ukraine. present it in its periodic activity plan consultations More projects are being and will be identified in with the donor. the course of the year, as a result of ECSPF policy dialogue with client countries. The present pipeline of projects more than adequately absorbs the new EXPANSION OF GEOGRAPHICAL COVERAGE staff that is expected to join FinSAC in the course of the summer of 2014. New programmatic directions for FinSAC does not wish to convey an immediate com- FinSAC activities will also result from the operational mitment to plan operations in Central Asia. However, roll-out of the World Bank Finance and Markets Global successful delivery of operations in the current geo- Practice which will succeed ECSPF as managing unit graphical coverage may prompt us to consider further for FinSAC effective July 1, 2014. leveraging our track record in reform implementation Project Teams: FinSAC activities will be delivered by assistance in selected Central Asia countries. If this project teams comprising both FinSAC-based staff and were the case, FinSAC will discuss the proposed other ECSPF staff, based both in headquarters and 17 18 FINANCIAL SECTOR ADVISORY CENTER  |  ANNUAL REPORT 2013 country offices, in order to secure synergies and integra- All FinSAC projects, regardless of the organizational tion between the FinSAC and overall ECSPF program. base of their project leaders, should comply with the The overall cost of projects led by non-FinSAC staff FinSAC objectives and be accounted for as FinSAC (including external consultants) will not exceed one- deliverables, and be executed under the day-to-day third of the FinSAC resources provided by the Donor. coordination of the FinSAC Program Coordinator. TABLE 2 FINSAC’S EXPECTED 2014 WORK PROGRAM A. Workshops Country Date Theme/Topic Partnership Croatia May NPLs resolution: Best Practices n.a. Croatia, Poland, Bulgaria, June Deposit Insurance International: Poland Deposit Guarantee Scheme Romania Funding, Investment Practices and Corporate Governance   Bulgaria, Croatia, Poland, July Consumer Protection: (i) Responsible Bulgarian Financial Services Romania, BiH, Serbia, lending and debt counseling; (ii) Commission—comprising representatives from FYR Macedonia, Albania Approaches to Alternative Dispute the Bulgarian National Bank (BNB), Financial Resolution; (iii) Technology and its Supervision Commission (FSC), Consumer impact on consumer protection; (iv) Protection Commission (CPC), and Ministry of Compliance and supervision Finance (MOF) B.  FinSAC and Overall WB Engagement Country WB Engagement FinSAC Potential Engagement Albania The WB is preparing a US$100 million budget support operation with • Bank Recovery and Resolution an aim to (i) strengthen regulation and supervision of the banking sector • Crisis Simulation Exercise and financial safety net; (ii) expedite resolution of non-performing loans (NPLs); and (iii) strengthen regulation and supervision of Nonbank Financial Institutions (NBFIs). The budget support operation is built on the findings of the FSAP that was completed in 2014. Kosovo No current WB engagement • Crisis Simulation Exercise FYR No current WB engagement • Crisis Simulation Exercise Macedonia Serbia The WB has engaged with the Government of Serbia with a Results • NPL Resolution Based Investment Project Financing (IPF) for an amount of €145.3m to strengthen the financial and institutional capacity of the Deposit Insurance Agency (DIA) Bulgaria No current WB engagement • Asset Classification and Provisioning • Bank Recovery and Resolution Croatia No current WB engagement • BRRD Directive Implementation Romania The WB is preparing a €500m budget support operation with an aim to: • Deposit Insurance Reform i) strengthen fiscal management and SOE performance; and ii) improve • NPL Resolution the functioning of property, energy, and financial markets. Under the second pillar, improvements in the functioning of the Deposit Insurance Fund is included. Belarus FSAP completed in March 2014 • Consumer Protection and Financial Literacy Moldova The WB is preparing a series of budget support operations amounting • Macroprudential Frameworks to $60m with an aim to: i) improve business enabling environment; ii) • Microprudential Regulation and strengthen financial sector stability; and iii) create greater efficiency in Supervision public investment. In addition, an FSAP update was completed in April • Bank Recovery and Resolution 2014. Ukraine The WB is preparing a series of US$500 million budget support • Systemic Bank Diagnostic and operations with the aim of the implantation of a comprehensive bank Subsequent Enforcement Action restructuring program • Bank Recovery and Resolution • Consumer Protection and Financial Literacy Annex 1 F i n S AC Sta f f i n g CURRENT STAFFING: ALIGNMENT WITH as well as within the World Bank, she is involved THEMATIC PILLAR AND COUNTRY PRIORITIES in products related to the microprudential super- vision area. FinSAC’s staffing has been guided by the strategic • Tamanna Talukder: Senior Financial Sector pillars outlined above. Currently, the team consists Specialist – Banking Recovery and Resolution of a core team of five staff members based in Vienna and Consumer Protection and Financial Literacy. supported by a set of senior staff from WB headquar- In her time at the Bank of England working as a ters and international consultants. supervisor implementing regulatory programmes for UK banks, and previous experience in the UK Staff based in Vienna banking sector, she developed the skills required to engage in crisis management framework activi- • Luigi Passamonti: FinSAC Coordinator and ties. She is involved in products related to bank Program Leader, NPL Reduction. His contribu- recovery and resolution, and to consumer protec- tion to FinSAC’s objectives is to coordinate day- tion and financial literacy. to-day program activities and to lead the delivery • Nurgul Irsalieva: Program Assistant . She is of technical assignments with client countries. responsible for organization of all FinSAC events, In addition, he is involved with products related and for the administrative and budget parts of to NPL reduction. Luigi played a central role in team activities. Prior to joining FinSAC, Nurgul orchestrating the preparation of FinSAC’s 2014– worked for five years as Executive Assistant to 2017 Program Document, with its specific Result the Country Manager in the World Bank Country Framework articulation. Luigi brings to the table Office in Bishkek, Kyrgyz Republic, gaining oper- three decades of professional experience in bank- ational experience in support of complex World ing, financial markets, technical advisory and Bank activities. policy areas both inside and outside the WB. • Attila Csajbok: Senior Financial Sector Specialist Staff from World Bank Headquarters – Financial Stability and Analytics. With a long career in central banking, working in various areas In addition to the core staff, senior staff from World such as financial markets, monetary policy, financial Bank HQ with strong experience in the financial sector stability, and crisis prevention in the past 15 years, have been involved in providing technical support to Attila was the former Deputy Director of Financial FinSAC projects on a regular basis. These include one Stability Department in the Central Bank of Hungary. Sector Manager (Lalit Raina), four Lead Financial Sec- • Katia D’Hulster: Senior Financial Sector Specialist tor Specialists (Michael Edwards, John Pollner, Aquiles – Microprudential Banking Regulation. With an Almansi, and Samuel Munzele Maimbo), two Senior extensive career in banking regulation and super- Financial Sector Specialists (Valeria Salomao Garcia vision in the Australian Prudential Regulation and Ji Hoon Jeong), one Financial Sector Specialist Authority (APRA), the Bank for International (Yejin Carol Lee), and two Financial Analysts (Elena Settlements (BIS), and PriceWaterhouseCoopers, Kantarovich and Raquel Letelier). 19 20 FINANCIAL SECTOR ADVISORY CENTER  |  ANNUAL REPORT 2013 International Consultants Institutional Building), Ivo Jenik and Tomas Prouza (Kosovo Consumer Protection and Financial Literacy Besides the Vienna and HQ-based staff, FinSAC man- Implementation ). ages a roster of experienced consultants specializing in some of the above technical areas. These include three firms: Adastra Business Consulting (Prague), FUTURE STAFFING PLANS Karanovic & Nikolic (Belgrade), and TJP (Vienna) (NPL Reduction); and six individuals: Gordon John- FinSAC is in the process of increasing its staffing son and Danijela Vukajlovic-Grba (NPL Resolution), numbers, by adding another set of about five staff, Peter Nicholl and Adam Gersl (BiH Financial Stability thus effectively doubling FinSAC capacity. Annex 2 R e s u lt s F r a m e w o r k FINSAC OBJECTIVE: REGIONAL CENTER objective to become a well-recognized regional OF EXCELLENCE FOR FINANCIAL SECTOR “center of excellence” for financial sector reform REFORM IMPLEMENTATION implementation. While each of FinSAC’s engagement is client-driven FinSAC’s mission to contribute to financial sector to ensure successful implementation of proposed stability and sustainable deepening of financial reforms, it can be anticipated that FinSAC’s impact will intermediation in its region of operations will be be optimized through coordinated country interven- fulfilled through operational interventions across its tions in several of the thematic pillars, and supported four thematic pillars. Figure 3 summarizes FinSAC’s by public-good activities in terms of technical confer- objectives, framed around the overarching strategic ences and research projects,. For instance, in a specific FIGURE 3 FINSAC OBJECTIVES FinSAC Objectives Strategic FinSAC to become a recognized center of excellence for financial sector reform advice and implementation assistance in eca countries by client authorities, ifis, eu authorities and international community Operational Strengthened financial stability and sustainable deepening of financial intermediation in eastern europe Financial Stability, Crisis Micro-Prudential Bank Recovery and Consumer Protection Prevention and Macro- Regulatory Frameworks Resolution and Financial Literacy Prudential Frameworks Overall Strengthened financial Strengthened safety and Strengthened financial Sustainabale impact stability through more soundness of individual stability and protection deepening of financial Effective preventive supervised entities of insured depositors and intermediation via policies through forward-looking taxpayer resources increased consumer supervision and sound protection and regulations financial Literacy for retail financial consumers Client Improved macroprudential Establishment and Introduction of bank Improved financial outcomes institutional framework implementation of recovery and resolution consumer protection and enhanced analytical sound prudential frameworks customized framework and capacity of the regulations that are in to the local environment iIncreased financial macroprudential authority line with international which protect insured literacy for retail standards and best depositors and tax consumers practice. resources FinSAC Technical Notes, Draft Legislation and Regulations, Draft Memorandum of Understanding, Workshops, outputs Internal procedures and manuals 21 22 FINANCIAL SECTOR ADVISORY CENTER  |  ANNUAL REPORT 2013 country, fulfillment of FinSAC’s mission may require Bank)’s direct sphere of operational control, particu- interventions in financial stability, micro-prudential larly in the context of voluntary technical assistance regulations, and financial consumer protection. It activities devoid of financial or policy conditionality. can also be envisaged that interventions in each They will, however, be considered by FinSAC in the pillar may occur in stages, ranging from systemic to context of the results framework as indicative factors technical and vice-versa, depending on opportunities aimed at helping FinSAC establish a high level of for impact and policy priorities. ambition and a very strong discipline for the choice of FinSAC activities and for how they are conducted STRATEGIC RESULTS FRAMEWORK so as to maximize their impact. FinSAC activities (the “Program”) are designed to PROJECT RESULT MONITORING pursue the strategic objective of providing relevant client advisory services through the establishment of Additionally, in order to further strengthen the micro- a dedicated technical unit in Vienna recognized as a foundations of the result orientation of its projects, regional “Center of Excellence” in supporting financial FinSAC will carry out an result framework analysis for sector reform implementation. Accordingly, Figure 4 new projects to be undertaken, followed by an ex-post illustrates the chain of activities through which this assessment at project closing, in the format shown strategic objective will be attained, starting from in Figure 6. These project-specific result framework the bottom box of FinSAC activities and moving up analyses, which can be run only in the concrete to the top box with the overall impact. context of a specific project once it is identified and endorsed by client authorities, will be discussed dur- OPERATIONAL RESULTS FRAMEWORK ing each annual business review session and will be monitored via the regular quarterly activity reports. This Downstream from this strategic results framework, assessment will ensure that the portfolio of FinSAC’s Figure 5 shows the expected additional quantitative proposed project activities contributes maximally to operational results of FinSAC’s planned interventions both program operational and FinSAC strategic results in its second phase of operations, moving from FinSAC framework, as described in Figure 5 and 4 respectively. outputs to client intermediate outcomes, as framed in Similarly, the stock-taking of the ex-post achievements their respective policy objectives context. The client will help build the evidence for FinSAC’s actual policy intermediate outcomes are outside FinSAC (and World impact through its various project activities. FIGURE 4 FINSAC STRATEGIC RESULTS FRAMEWORK FinSAC Strategic Results FrameworK (2014–2017) Overall Stronger IFI support platform for financial sector reform in Eastern Europe Impact FinSAC FinSAC recognized as the place-to-go, by client authorities, IFIs, EU and international community (e.g., Strategic Vienna Initiative), for advice and implementation assistance on financial sector reforms that strengthen Outcome financial stability and enhance sustainability of financial intermediation in Eastern Europe Intermediate Reforms took place in client countries with FinSAC’s contribution in areas considered critical for financial Outcomes stability and/or deepening of financial intermediation FinSAC Contributions to draft legislation and regulations; Technical Notes; Conferences, workshops and Outputs seminars; Publications FinSAC Client work ; IFI networking ; Professional Networking Activities R E S U LT S F R A M E W O R K  23 FIGURE 5 FINSAC OPERATIONAL RESULTS FRAMEWORK  FinSAC Operational Results Framework (2014–2017) Financial Stability, Crisis Prevention and Micro-Prudential Regulatory Frameworks Macro-Prudential Frameworks Bank Recovery and Resolution Consumer Protection and Financial Literacy CLIENT FINAL STRENGTHENED FINANCIAL STABILITY AND SUSTAINABLE OUTCOMES DEEPENING OF FINANCIAL INTERMEDIATION EXPECTED CLIENT [ 3 – 6 ] LEGISLATIVE CHANGES ; INTERMEDIATE [ 16 – 20 ] REGULATORY CHANGES ; OUTCOMES [ 8 – 12 ] NEW FUNCTIONS ESTABLISHED ; [ 10 – 18 ] NEW TOOLS/ACTIVITIES STARTED ; [ 4 – 8 ] MEMORANDA OF AGREEMENT SIGNED ; [ 4 – 8 ] NEW/STRENGTHENED REPORTS FinSAC OUTPUTS Contributions to draft legislation and regulations; Technical Notes; Conferences, workshops and seminars; publications TOTAL # OF CLIENT ADVISORY PROJECTS APPROXIMATELY EIGHT ONGOING/COMPLETED PROJECTS/YEAR - TOTAL 32 PROJECTS TOTAL # OF REGIONAL KNOWLEDGE ACTIVITIES APPROXIMATELY FOUR PROJECTS/YEAR—TOTAL 16 PROJECTS FIGURE 6 FINSAC PROJECT RESULT MONITORING Financial Stability, Crisis Prevention and Macro-Prudential Frameworks Country Project name and description …………………… FinSAC Activities FinSAC Outputs Client Intermediate Client SMART Client Outcomes Outcomes Indicators LIST OF SPECIFIC WILL CLIENT Regulatory Micro-Prudential WHAT HOW CAN FrameworksHOW CLIENT ACTIVITIES OUTPUTS DO WITH FinSAC CLIENT ACTIVITIES Country OUTPUTS Project name and description ACTIVITIES …………………… CONTRIBUTE BE MEASURED TO OVERALL FinSAC Activities FinSAC Outputs Client Intermediate Client SMART Client Outcomes TO MONITOR POLICY GOALS Outcomes Indicators IMPACT LIST OF Bank Recovery and SPECIFIC WHATResolution / Consumer WILL CLIENT HOW CAN Protection HOW and Financial Literacy CLIENT ACTIVITIES OUTPUTS DO WITH FinSAC CLIENT ACTIVITIES Country OUTPUTS Project name and description ACTIVITIES …………………… CONTRIBUTE BE MEASURED TO OVERALL TO MONITORClient FinSAC Activities FinSAC Outputs Client Intermediate SMART POLICY GOALSClient Outcomes Outcomes IMPACT Indicators LIST OF SPECIFIC WHAT WILL CLIENT HOW CAN HOW CLIENT ACTIVITIES OUTPUTS DO WITH FinSAC CLIENT ACTIVITIES OUTPUTS ACTIVITIES CONTRIBUTE BE MEASURED TO OVERALL TO MONITOR POLICY GOALS IMPACT Contribution DISCUSSED DURING Contribution to FinSAC ANNUAL BUSINESS REVIEW SESSIONS to FinSAC OPERATIONAL AND MONITORED VIA STRATEGIC Results QUARTERLY ACTIVITY REPORTS Results Framework Framework 24 FINANCIAL SECTOR ADVISORY CENTER  |  ANNUAL REPORT 2013 STAKEHOLDERS’ FEEDBACK countries and partners. Media attention, measured for example by the traffic to FinSAC’s website, to gauge In addition to the Results Framework described above, the relevance of the research products and outreach feedback from relevant stakeholders will be taken into activities carried out, may be included. Finally, further account to assess the success of FinSAC in achieving measures of success may be the amount of resources its strategic objective. This could include feedback leveraged from other donors. from the Donor, regional stakeholders, as well as client