Serbia’s financial system reforms receive European Commission stamp of approval

The National Bank of Serbia is making inroads into harmonizing local legislation with European Union (“EU”) legislation, especially into amending regulations governing the operation of banks and other financial institutions.

The European Commission (“EC”) adopted a decision of importance for the Republic of Serbia, which was published on 18 December 2019 in the Official Journal of the EU. Serbia’s push to amend the regulatory and supervisory framework concerning banks’ operations and in particular to amend anti-money laundering and terrorist financing regulation has borne fruit and is a step in the right direction for building a stable financial system. This decision allows credit institutions domiciled in the EU member states to apply preferential treatment (risk weight) to exposures towards entities from Serbia, despite Serbia not being an EU member. The decision shall enter into force on 7 January 2020.

The legislative changes and the EC decision have a double impact on the Serbian financial market.

1. Primarily, Serbia is included in the list of countries whose regulatory and supervisory framework is equivalent to the EU framework adopted to treat the relevant categories of exposures in accordance with Capital Requirements Regulation No 575/2013 by a decision of the EC. The Capital Requirements Regulation No 575/2013 was chosen by the European Union as the mechanism for implementing Basel III standards, which were adopted after the outbreak of the global financial crisis in 2008, aimed at improving the risk management process and improving the quality of capital.

• Second, the treatment of investments in securities issued by the Republic of Serbia in Serbian dinars will change. Banks domiciled in the EU member states will have more confidence to invest in government securities as the securities will be eligible for preferential treatment. A more flexible limit for investing in long-term government securities has also been established.

These changes will accelerate the development of secondary markets trading these securities, while users of depository and other banking services should reap the most benefit.

These changes are fully harmonized with EU regulations and international standards. Further harmonization will ensure greater stability of the Serbian financial market, and this decision suggests that significant improvements have been made and that the allure of Serbia’s economic and commercial environment for foreign investments is on the rise.

Authors: Milinko Mijatović and Suzana Dončić

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