The legal framework for functioning of the banking sector in the Republic of Serbia has recently gone through a change by the adoption of the Law on Amendments and Supplements to the Law on Banks (Official Gazette of RS, no. 14/2015) which entered into the force on 12 February 2015 and is applicable as of 1 April 2015 (hereinafter referred to as: the Law).
The main reason for the adoption of the Law lies in the need for improving the mechanism of resolving the problem of insolvent banks to which problem the previous legal framework and in particular the Law on the Assumption of Assets and Liabilities of Banks for the Purposes of Safeguarding Stability of the Financial System of the Republic of Serbia(‘’Official Gazette of RS’’, No 102/2012) only partially gave a positive response.
We would to use this opportunity to highlight the fact that the Law specifically regulates the question of bank restructuring (new Chapter of the Law, No 5, or Articles from 128a to 128h). Also, this extensive legislative text implements EU directives in the legal system of Republic of Serbia, particularly Directive 2014/59/EC (Directive 2014/59/EU on establishing a framework for the recovery and resolution of credit institutions and investment firms).
Together with the adoption of the amendments and supplements to the Law on Banks, amendments and supplements to the Law on the National Bank of Serbia, Law on Deposit Insurance, Law on Bankruptcy and Liquidation of Banks and Insurance Companies, Law on Deposit Insurance Agency as well as to the Law on Ministries were also adopted all with the same goal to implement new institutes introduced by the Law.
From significant novelties introduces by the Law, for this occasion we highlight only few as follows:
- New institutes introduced by the Law
The Law introduces following institutes to the legal framework of banking sector in Serbia:
- Undercapitalized bank
Instead of previous institutes of significantly and critically undercapitalized banks, the Law redefines undercapitalized bank as the bank whose capital adequacy ratio is lower than prescribed, or whose capital is lower than required, as well as the bank whose capital adequacy ratio is lower than the one prescribed by the National Bank of Serbia (hereinafter referred to as: NBS).
- Bank important for the system
The Law introduces institute of the Bank important for the system to the banking sector and defines it as the bank whose deterioration in the financial condition or termination of operation would have serious negative consequences on the stability of the financial system. Banks that are important for the system shall be designated by NBS on the basis of the criteria and methodology it prescribes which shall especially take into account the size of the bank, its links with other participants in the financial system and its substitutability in this system, as well as the complexity of its operations.
- Critical functions and Key business activities
The Law defines critical functions as activities, services or operations whose interruption would probably lead to endangering of the stability of the financial system or to disturbances in the provision of essential services to the real economy due to the size, market share and the relationship between the entity that performs them with the other participants in the financial system, especially taking into account the possibility of someone else taking over the performance of these activities, services or operations. Key business activities are commercial activities and services associated with these activities whereby substantial portion of revenue of the bank or banking group to which the bank belongs is achieved.
- Restructuring of the Bank
The Law introduces additional authorizations as well as additional measures and instruments to NBS as the body responsible for restructuring, as a special kind of administrative procedure in which will be possible intervention of NBS by measures prescribed by the Law over a bank that meets the legally prescribed conditions for restructuring, all in order to keep the critical functions and the key business activities of the bank, at the same time with limitation of the restructuring costs and negative impacts on economic and financial system.
Instead of revocation of bank’s operation license in the case of business difficulties, the Law predicts that in the case of restructuring of the bank with business difficulties, that otherwise would be reasons for revocation of bank’s operation license, bank’s operation license will not be revoked by force of the Law, if there is public interest to implement restructuring.
The Law predicts following restructuring instruments:
- Sale of shares and/or part or whole assets and liabilities of the bank;
NBS may sell the shares of the bank in restructuring or all assets or liabilities of that bank, or part thereof, to the acquirer who is not a bank for a specific purpose.
- Transfer of shares of one or more banks in the restructuring process or transfer of part or whole, assets or/and liabilities of one or more banks in restructuring process to the bank for specific purposes;
- Separation of property or transfer of the assets and liabilities of the bank in restructuring or the bank for specific purposes to the Deposit Insurance Agency or other legal entity (so called: asset management company).
NBS may transfer the assets and liabilities of the bank in restructuring or the bank for specific purposes to the Agency or other legal person that is not a bank for specific purpose, if conditions predicted by the Law are fulfilled. Aim of this instrument is to allow transfer of so called ‘’bad assets’’ of the bank in restructuring or the bank for the specific purpose.
- Distribution of losses to shareholders and creditors
We highlight the obligation of NBS to prepare a plan of restructuring for each of the banks active on the territory of the Republic of Serbia. In the opinion of the nominator of the Law, planning the process of bank restructuring is crucial for successful and efficiently bank restructuring because it is a condition which allows individual approach to the bank restructuring, which is way is necessary to consider systematic importance of the bank when drafting plan of bank restructuring as well as plan of bank recovery, to identify critic functions of the bank and ensure their continuity. That is way plans of restructuring have to consider precise information about bank, including dates about organization structure, business lines, financing source, planed instruments and measures of restructuring which shall be applied on the bank, about critical functions of the bank and ways of providing continuity of its performing, and have to consist analysis about critical interdependence and influences of appliance of restructuring instruments on the other financial institutions and financial market, as well as dates about way of communication and exchange of information between NBS and the bank.
Additionally, we highlight that the Law introduces that in the case of administrative dispute regarding procedure of restructuring, the Administrative Court cannot resolve in the proceedings of full jurisdiction. The Law predicts that the Court cannot resolve the administrative issue for which the present Law stipulates competence of NBS.
Also, by lawsuit against the decision to revoke the bank’s operation license, the decision whereby write-off and conversion of capital is implemented, and the decision adopted by NBS in the procedure of restructuring, the banks may only seek the determination of illegality and the annulment of that decision, as well as compensation for damages if that was not claimed in a separate proceedings. Third parties shall retain the rights and obligations acquired on the basis of the annulled decision, while the plaintiff’s rights shall be limited to the compensation of damages he suffered by the execution of that decision.
- Recovery plan as the instrument of preventive activities
The Law introduces the obligation for the Bank to prepare recovery plan which envisages measures that the bank shall apply in the case of a significant deterioration in its financial condition, to re-establish its sustainable business and the corresponding financial position.
Within the recovery plan, the bank shall determine different possibilities for recovery and measures that would be implemented within each of these options. The recovery plan shall be evaluated by NBS. The Bank shall update the recovery plan at least once a year, and at the request of NBS more often. NBS shall, within six months from the date of delivery of the recovery plan, evaluate whether the plan meets the requirements predicted by the Law.
- New control measures of NBS – Measures of Early Intervention
The Law introduces extended and control functions of NBS over banks and prescribes new corrective and coercive measures in the bank control process (Section 3, Chapter 5 of the Law).
Beside corrective and coercive measures (sending a written warning, imposing orders and measures to eliminate the determined irregularities, revoke of bank operating license), predicts, among other, new measures of early intervention.
The measures of early intervention may be taken by NBS, independently of prescribed corrective measures, over the bank that acted in contravention of regulations, or it is likely that, among other things (due to the fact that its financial situation is rapidly worsening, including the deterioration in liquidity, increase of the level of indebtedness, non-performing loans or concentration of exposure), the bank shall soon to act contrary to the relevant regulations. The measures of early intervention, among other, include carry out one or more measures of the recovery plan, measures of status corporative nature as to convene an assembly of the shareholders, as well as other measures that NBS find adequate.
Additionally, beside the measures of early intervention, NBS may issue a decision to order the dismissal of members of the management body of the bank, or the dismissal of other persons in management position in the bank, or issue a decision on the appointment of temporary administration of the bank.
- Change of competences of corporative bodies of the bank
The Law introduces the change of competences of corporative bodies of the bank including the General Meeting of Shareholders, the Board of Directors and the Executive Board as well as the change of conditions for the appointment and dismissal of the members of these boards.
Additionally, the Law now introduces possibility for representative of NBS to attend the meetings of the Board of Directors, the Executive Board of the bank, as well as meeting of the Audit Board, Credit Board and Board for managing assets and liabilities.
- Special obligations of banks introduced by the Law
Banks are obligated to harmonize their internal acts with the provisions of the Law, by no later than 01 July 2015.
Recovery plans as closely defined and described in the text above, banks are obliged to submit to NBS by no later than 30 September 2015.
The deadline for NBS to draft plans of restructuring as closely defined and described in the text above, is one year after the Law entered into force, for the banks holding operation license or two years after the Law entered into force for the banking group.
Contact: Miloš Čurović, email@example.com and Aleksa Anđelković