Central Bank of Montenegro Policy for 2010

Pursuant to Article 17 paragraph 1 point 1 of the Central Bank Law (OGRM 52/00, 47/01), the Council of the Central Bank of Montenegro, at its meeting held on 23 December 2009, established the following:

CENTRAL BANK OF MONTENEGRO POLICY FOR 2010

In line with the constitutional obligations and statutory authorities and accountability for monetary and financial stability and the banking system functioning, and adhering to the principles of transparency and independence, in 2010 the Central Bank of Montenegro (CBM) shall:

1. Maintain the banking stability and continuously monitor the banking system condition and, if needed, take corrective measures, promote the strengthening of corporate governance and risk management in banks, continue implementing internationally accepted banking standards and principles.
   
2. Continuously monitor and analyze the situation in the Montenegrin economy and the global and regional trends, focus on preserving financial stability, and communicate recommendations for boosting economic growth and maintaining financial stability.
   
3. Improve and maintain a sound and efficient national payment system. 
   
4. Continue improving the management of international reserves and risks associated with their investment, with the main objective to ensure the safety of investments, without jeopardizing liquidity, as well as analyzing new investment opportunities.
   
5. Improve the quality of international payment transactions through ongoing monitoring and compliance with best banking practices and standards. 
   
6. Enhance cooperation with international financial institutions, international organisations, central banks, and actively participate in Montenegro’s EU accession process. 
   
7. Continue with focused activities on the information system development and upgrade, professional advancement of employees, communication with domestic and professional public, as well as the promotion of the central bank’s role as a socially responsible institution. 
    

1. The financial crisis has imposed new solutions for addressing the issue of maintaining stability of the banking and the financial system, which imply the reconsideration of regulatory and supervisory mechanisms with a view to ensuring counter-cyclicality in provisioning and a more stringent approach in capital calculation. Risk management in banks and the financial system strengthening shall require the CBM to do the following in the next year:

• a. Further strengthen prudential regulations aimed at quantitative and qualitative strengthening of capital in order to minimize the risk of potential external shocks resulting from the withdrawal of foreign lending, as well as domestic lending induced by lower liquidity and high indebtedness of the real economy and the household sector;
• b. Supervise and perform stress testing of all banks in the system with a view to identifying capital and liquidity requirements;
• c. Additionally strengthen and develop control mechanisms, with the particular emphasis on the implementation of EU directives and supervision of adequacy of internal capital assessments, review of internal controls systems, overall risk assessment in banks, and the evaluation of  exercising and quality of the supervisory function of board of directors with a view to eliminating uncontrolled undertaking of risks (the so-called “moral hazard”);
• d. Strengthening of action mechanisms for banks in crisis by passing and implementing new regulations;
• e. Conduct conservative licensing policy, i.e. when granting approvals to new shareholders` entering the existing banking system, with a view to protecting the interests of both bank depositors and creditors;
• f. Further improve the procedures and scope of supervision with regard to money laundering and terrorist financing;
• g. Enhance cooperation with other regulatory and supervisory authorities in the country’s financial system, as well as intensify cooperation with home supervisory authorities of foreign banks operating in Montenegro, in particular through coordination of joint supervision and the exchange of information and data through supervisory colleges, with the aim being the synchronisation of supervisory activities at the national and global levels.

2. In order to pass efficient measures for financial stability maintenance, minimizing adverse effects of the global financial crisis, tendering recommendations to the Government of Montenegro for following appropriate economic policies, and giving its contribution to the general economic development, the CBM shall:

• a. Strengthen its constitutionally assigned role within the domain of its accountability for the financial system stability through binding cooperation of other financial system regulators with the CBM and the issuing of the regular publication – Financial Stability Report;
• b. Analyze the impact of the global financial crisis on Montenegro, particularly on financial stability, and take any required corrective actions within its authority and/or communicate recommendations for corrective actions which fall outside the CBM's authority;
• c. Contribute to the acceleration of economic growth through its measures and instruments and give support to the Government’s economic policies without prejudice to the achievement of the CBM`s primary objectives;
• d. Monitor and analyze macroeconomic trend in Montenegro, economies in transition, and the global economy and, depending on the existing circumstances, propose to the Government of Montenegro the following of an appropriate economic policy and take corrective measures, if needed;
• e. Keep track of and analyze international experiences in order to account for all opportunities and effectiveness of economic and monetary policy measures, particularly in South Eastern European countries and those which successfully completed the EU accession process;
• f. Prepare a new macroeconomic model for the Montenegrin economy for macroeconomic forecasting, as well as for the analysis of effectiveness of monetary policy instruments;
• g. Develop instruments and analysis for the financial stability monitoring, as well as the assessment of potential risks;
• h. Continuously reconsider the reserve requirement policy and amend it, as needed;
• i. Consider the possibilities for the implementation of other monetary policy instruments, primarily open market operations and the function of the lender of last resort. Develop mechanisms and pass required secondary legislation for the exercising of the lender of last resort function;
• j. Monitor the balance of payments trends and, as needed, propose corrective measures in accordance with its statutory powers;
• k. Regularly collect, process and publish monetary and balance of payments statistical data which fall within the CBM`s responsibility. Initiate the joining of Montenegro to the GDDS (Global Data Dissemination System) and the SDDS (Standard Data Dissemination System) of the International Monetary Fund. Improve Montenegro’s statistical system through the participation in the Statistical Council;
• l. Continue with regular publishing of all existing publications, their improvement and prepare work studies, if needed, that will deal with current macroeconomic and financial issues;
• m. Review and point to the deficiencies in the existing statistical, methodological and institutional basis for conducting economic policy and give recommendations for their removal.

3. In order to enhance and maintain stable and efficient national payment system, the Central Bank shall:

• a. Continuously work on maintaining the achieved level of stability and efficiency of the functioning of the Central Bank payment system for the execution of interbank fund transfers, as basic infrastructure of the payment system in Montenegro, and its further improvement;
• b. Improve regulatory national payment system framework through its harmonisation with the regulation of the European Union;
• c.  Monitor international standards, principles and best practices of the modern payment systems in general;
• d. Work on development of the Central Bank oversight activities of the payment systems;
• e. Perform qualitatively and efficiently national payment system services for the existing and new clients of the Central Bank;
• f. Enhance the regulation concerning enforced collection and conduct enforced collection activities, which are performed by the Central Bank in accordance with the provisions of the Law on the Enforced Procedures.

4. With a view to further improvement of international reserves management, the CBM shall:

• a. Engage in repositioning of the existing financial instruments in portfolio respecting the principles of liquidity, safety and profitability, and promote techniques already adopted in asset management and risks of international reserves to accomplish better risk to return ratio;
• b. Invest available funds of international reserves with central banks of the most developed states for the purpose of maximum protection and risk reduction, and invest one part of those funds into government securities of the members states of the European Monetary Union;
• c. Permanently monitor the situation at international financial market and after normalisation of relations and conditions at that market, re-establish cooperation with the commercial banks where a portion of available funds will be placed;
• d. If new legal solutions provide necessary normative assumptions review possibilities of investing funds in other financial instruments taking primarily into consideration principles of safety and liquidity;
• e. Promote planning of optimum amount of banknotes and coins for the purpose of regular supply of banks and other CBM clients and reduction of costs of keeping cash in its vaults, modernise processing of cash pursuant to ECB standards.

5. With a view to continuing improvement of the international payment system and quality of the existing services, the Central Bank shall:

• a. Continue with the activities to promote the existing and establish new correspondent relationship with foreign banks and banking institutions;
• b. Continue and promote the cooperation with the IMF, World Bank, Bank for International Settlements (BIS) and other international financial institutions to execute specific transactions;
• c. Continue to strengthen and intensify the cooperation with the competent state bodies and international institutions concerning detection and prevention of injecting counterfeited money in payment system channels.

6. With a view to promoting cooperation with the international financial institutions, other central banks and meeting the criteria for Montenegro membership to the European Union, the Central Bank shall:

• a. Continue the cooperation with the International Monetary Fund (IMF) and members of the World Bank Group, particularly in the part concerning exchange of information, use of financial assistance and creation of the conditions to use financial support within the arrangements important for Montenegro;
• b. Enhance the cooperation with other international financial and other organisations through direct contact, participation in the working bodies and parliaments of the international organisations, as well as monitoring and organising international conferences and seminars;
• c. Develop cooperation with other central banks and financial bodies through the realisation of the signed agreements and memoranda, particularly in the banking supervision area, as well as propose new forms of cooperation and establishment of strategic partnerships;
• d. Ensure active participation of Central Bank experts at the international organisations’ meetings, forums, seminars and conferences concerning global financial stability and central banking area;  
• e. Actively participate in the EU accession process through the cooperation with the competent institutions in Montenegro, continuance of the cooperation with the European Commission, and initiation of new ways of cooperation with EU institutions, primarily with the European Central Bank;
• f. Carry on the activities on the harmonisation of local legislation with the EU acquis communautaire  to create conditions for future undisturbed functioning of the Central bank in the ESCB, and continue the realisation of the project from EU IPA funds intended for Montenegro;
• g. Develop work studies and guidelines to identify key problems in fulfilling CBM obligations in the European integration process;
• h. Take all necessary activities to resolve the dispute concerning membership in the Bank for International Settlements.

7. CBM shall pay particular attention in the following period to the information system development and upgrade, professional advancement of employees, communication with domestic and international public, as well as the promotion of the central bank’s role as a socially responsible institution.

• a. For the purpose of information system development and upgrade, particularly in order to increase its security against the backdrop of increasing cyber crime, CBM shall:
  - intensify development and implementation of methodology for managing IT projects,
  - enhance security and availability of the information system through the implementation of new systems for storing and archiving data and putting into function remote location,
  - increase security of the system through full implementation of Public Key Infrastructure (PKI), and
  - improve efficiency of application of the existing information system through development and implementation of applications for the support of operations.
  
  
• b. With a view to further professional training and education of the employees in accordance with their job requirements, as well as their adequate motivation, CBM shall:
  - develop mechanism to stimulate employees, accomplish better results and provide adequate rewards for the achieved results,
  - pay special attention to the professional advancement of employees having small number of years of service, as well as advancement for those job positions that are crucial for the realisation of constitutional responsibilities,
  - encourage employees to continuously train the existing knowledge and carrier advancement, and
  - pay special attention to the selection of international training programme for education that is not possible to acquire in the country.
  
  
• c. CBM shall, in accordance with the highest transparency standards, pay special attention in 2010 to inform the public on all aspects of CBM activities, as well as pursue its constitutional and legal responsibilities. In that respect, the CBM shall:
  - supply, in a timely manner, with reliable information domestic and international public so that the information is understandable to professional and ordinary public,
  - with respect to the provision of information, special attention should be paid to the activities, objectives and results of the bank activities through press releases, web presentations, issuing publications, appearances in the media and in other ways,
  - promote financial stability and enhance economic knowledge in society to contribute to better understanding of the central banking, financial system and financial stability in general.
  
  
• d. CBM activities, as socially responsible institution, shall be based on universal principles of the protection of human and labour rights, environment protection, and development of the civil society. In that respect, CBM shall in 2010:
  - build, in its relationship with employees, mutual trust and respect of all human and labour rights,
  - continue to allocate funds for employees training, as well as to assist employees in contingencies,
  - in accordance with the financial possibilities, allocate a portion of its revenues as regards to its inclusion in humanitarian actions and support in the development of cultural, historical and other values of society,
  - continue to promote ten principles of global agreement of United Nations in Montenegro and create wide support for the implementation of these principles,
  - contribute to strengthening of civil society through public participation in numerous social and society activities,
  - develop a dialogue between CBM, Association of Banks and other financial institutions to maintain financial stability and accelerate economic development of Montenegro,
  - encourage development of research work in Montenegro in the areas of interest for CBM,
  - contribute to the development of educational system through the participation of CBM representatives as guest lecturers in the educational institutions, reward best graduated students, holders of M.A, and PhD degrees and in other ways of mutual interest for CBM and educational institutions,
  - review the possibility to open money museum within CBM.

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It should be borne in mind that the passing of the new CBM Law is expected in 2010. The amendments to the legal regulation may require specific amendments to the CBM policy.

COUNCIL OF THE CENTRAL BANK OF MONTENEGRO