The decision on temporary measures to soften the negative effects of the covid-19 epidemic and the situation in Ukraine on the financial system, refers only to part of the unrealized losses of banks that occurred after the beginning of the war in that country, explained the Central Bank (CBCG).
“Also, the debt financial instruments to which the temporary measure is applied are the debt financial instruments issued by the central government from Article 131 of the Decision on Capital Adequacy of Credit Institutions and regional and local self-government units from Article 132 of the Decision on Capital Adequacy of Credit Institutions.” “In essence, taking into account the structure of Montenegrin banks’ portfolios, the temporary measures are mostly related to Montenegrin Eurobonds,” stated the CBCG.
The CBCG, with the aim of objectively informing the public, and bearing in mind the arbitrary interpretations of the Decision on temporary measures to soften the negative effects of the epidemic of the infectious disease covid-19 and the situation in Ukraine on the financial system, which was published on May 24 last year, provided clarification according to to the issue of unrealized losses of banks.
“Significant disruptions at the global level during the previous period brought into focus the issue of unrealized losses of banks based on the re-evaluation of part of the banks’ investments.” Unrealized losses have reached enormous proportions in certain jurisdictions, calling into question the financial stability of those systems and requiring an adequate and timely reaction from regulators around the world,” the CBCG added. All the countries of the region, the European Union (EU) and the United States of America (USA) are facing this issue.
The supreme monetary institution announced that the issue of unrealized losses is also present in the Montenegrin banking system, but to a much lesser extent. The increased level of volatility in the financial markets caused by the pandemic, together with the uncertainty due to the situation in Ukraine, led to the occurrence of unrealized losses based on the revaluation of Montenegrin banks’ investments in securities.
“It is important to note that unrealized losses are calculative losses that, if the securities are not sold before maturity, turn into a profit in accordance with the yield that the said securities bear. This is precisely the reason for the temporary nature of the adopted measure. “Also, the mentioned unrealized gains/losses have no influence on the amount of banks’ realized profits,” the CBCG said.
They noted that during the preparation of changes to the temporary decision from December 5 last year, the initiative of the Minister of Finance Aleksandar Damjanović from the session of the Council for Financial Stability was taken into account, to consider the possibility of a temporary “more relaxed” application of the International Accounting Standard 9 to banks, with the aim of their easier placements.
“In accordance with the above, the exposure of banks based on investments in Montenegrin state bonds, in the period from June 30 of last year, when the application of the aforementioned decision began, until March 31 of this year, increased from EUR 585 million to EUR 663 million , that is, for EUR 78 million. In addition to the above, the newly granted loans of Montenegrin banks during the last year amounted to EUR 1.47 billion, which represents a growth of 31.5 percent compared to
2021, and with which the banks gave their support to the remediation of vulnerabilities and economic growth”, they said from CBCG.
Montenegrin banks’ investments in securities (HOV), at the end of the first quarter of this year, amount to EUR 1.08 billion and represent 16.97 percent of the banks’ total assets. Of the stated amount, EUR 663.6 million, i.e. 61.26 percent of the total investment of Montenegrin banks in HOV, is related to investments in Montenegrin government bonds.
“In addition to the positive effect on the treatment of investments in Montenegrin government bonds, banks were also enabled by temporary measures to adapt to the negative effects of strong volatility on the markets of public debt instruments, caused by extraordinary events such as the covid-19 pandemic and the war in Ukraine,” they said from the CBCG.
Banks adapted through recapitalization, as well as changing the business model in accordance with IFRS, after receiving positive opinions from external auditors. Bearing in mind the above, as stated by the Central Bank of Serbia, the banks are ready to wait for the expiry of the aforementioned temporary measures, i.e. June 30 of this year.
“The strong capital position of the banks is also a consequence of the temporary measures of the CBCG, which limit the payment of dividends based on the net profit achieved in the period since the outbreak of the covid-19 pandemic, which is still in effect,” the statement added.
However, in order for “banks to turn to support programs for citizens and the economy” on an even larger scale, it is necessary to create an adequate business environment – from the execution of the capital budget to the creation of appropriate public policies, which is a prerequisite for a quality investment cycle that includes more active lending.
“Creating an adequate and predictable business environment and quality public policies is the exclusive mandate of the Government, primarily the Ministry of Finance, and not the mandate of the CBCG. The mandate of the CBCG is to ensure financial stability, which the CBCG continues to do,” the statement added.
The CBCG noted that before the adoption of temporary measures, the supreme monetary institution analyzed the impact of the negative effects of the fall in the market price of the securities held by the banks in their portfolios on the capital adequacy of the banks.
The analysis carried out showed that since the middle of the first quarter of last year, there have been serious disturbances in the financial markets, resulting in an almost constant drop in prices, which is especially evident in the case of Montenegrin Eurobonds.
The biggest drop in the prices of Montenegrin Eurobonds has been recorded since the outbreak of the war in Ukraine, so that the prices reach their minimum values and produce negative effects on the financial positions of the banks that have them in their portfolios.
“Taking into account the above, and acting within the scope of its mandate to preserve financial stability, on May 17 of last year, the CBCG adopted a Decision on temporary measures to mitigate the negative effects of the epidemic of the infectious disease covid-19 and the situation in Ukraine on the financial system,” said the CBCG.
The aforementioned decision allows banks to exclude 70 percent of the amount of unrealized losses determined after the entry into force of this decision from the calculation of regular core capital items, as part of regulatory capital, until June 30 of this year, when valuing debt financial instruments available for sale in accordance with IFRS 9, which are included in the total other result.
The basis for calculating the amount that is excluded from the calculation of regular basic capital is the difference between the market value of debt financial instruments on February 24 of the previous year and the market value of those instruments on the day of calculation of that capital.
The data show that the largest amount of total unrealized losses of Montenegrin banks, based on investments in financial instruments measured by FVOCI, amounted to EUR 67 million in September of last year.
Also, the largest mitigation of the effects of the drop in bond prices to which the temporary measures apply amounted to EUR 25.6 million, also in September of last year. “As of the last available date, i.e. March 31 of this year, the total unrealized losses of Montenegrin banks, based on investments in all financial instruments measured by FVOCI, amount to EUR 22.7 million, while mitigating the effects of the drop in bond prices related to temporary measure amounts to EUR 12.5 million”, specified the CBCG.
Bearing in mind that the total regulatory capital as of March 31 of this year amounts to EUR 569 million, the mitigation of the effect of the fall of the bonds to which the temporary measure applies, in the amount of EUR 12.5 million, does not materially affect its amount, as well as adequacy of total capital.
“In accordance with the stated conclusion, the performed analysis shows that the capital adequacy of all banks individually, as well as the system as a whole, on March 31 of this year, would be above the regulatory requirements, even if the banks do not apply the mentioned items of the temporary regulation”, they added from the CBCG.
They emphasized that a similar solution is applied in EU countries. In the immediate environment, after the CBCG, a similar measure was adopted by the National Bank of Serbia, with an identical foundation in the relevant EU regulations.
“The aim of the decision on temporary measures of the Central Bank, as well as the regulations adopted by the EU, is to mitigate the significantly negative impact of the volatility of the public debt instrument market due to the covid-19 pandemic and the situation in Ukraine on the regulatory capital of credit institutions, and consequently on the capacity of credit institutions to approve loans”, the CBCG concluded.