This content is from: Local Insights

Banks face regulatory reform

In December 2005, the Serbian parliament passed the new Law on Banks, introducing numerous changes in the regulatory framework of the Serbian banking sector. Although it has officially come into force, the Law will start to apply in two phases – the first set of its provisions will apply as of July 1 2006, while the rest of the Law will start to apply on October 1 2006. Meanwhile, the old law, which dates back to 1993, will continue to apply.

Two-step foundation procedure for new banks

The Law provides for a new, two-step procedure for setting up new banks. First, the prospective founders must receive preliminary approval from the National Bank of Serbia (NBS) to set up a new bank. After preliminary approval is granted, the founders must apply to the NBS for the relevant business licence. To receive the relevant licence, the founders must fulfil certain requirements, such as payment of initial capital, hiring an external auditor, and possessing the necessary business space.

Minimal initial capital

The Law kept the old law's requirement for the minimum of €10 million for the monetary portion of a new bank's initial capital.

Two-tier management structure

The Law introduces a two-tier management structure, comprising of a management board (MB) and an executive board (EB). Under the old law, the management functions were exercised by an MB and a director (that is, general manager), while the supervisory board exercised the supervisory role.

The Law requires that at least one-third of the MB members must be persons that are independent from the bank, whereas under the old law all of the MB members had to be appointed from the ranks of the bank's shareholders.

The EB comprises at least two members, one of which acts as the bank's president, who represents and acts on the entity's behalf. However, the Law also provides for so-called four-eye decision-making, in which the president must obtain a signature of another EB member to undertake a legal action in the bank's name. This is also a novelty – under the old law a director had the sole duty/right to represent the bank. In practice, many banks introduced the four-eye principle in their articles of association.

Acquisition of ownership interests in a bank

Under the old law, any acquisition of a stake of 15% of the bank's voting shares, as well as any further increase of a stake, are subject to prior NBS approval. However, the Law introduces different thresholds for such approval. Accordingly, the NBS approval is necessary for acquisition of a bank's shares carrying the voting rights in the range between: 5% to 20%; more than 20% and up to 33%; more than 33% and up to 50%; and more than 50%. The NBS will draft detailed requirements for granting the relevant approvals, as well as the conditions under which an international financial institution can acquire the relevant stakes in a domestic bank.

The Law mentions various situations in which the NBS must reject a request for prior approval, including the lack of a "good business reputation" on behalf of the applicant.

The NBS' supervisory role

The Law vests the NBS with increased supervisory functions over Serbian banking. The NBS will exercise control of banking groups on consolidated bases, in the light of the growing number of domestic banks that are owned by foreign banking groups.

The NBS also drafts and publishes the list of external auditors that banks can engage to perform the annual audit of their financial statements. An external auditor can conduct no more than three consecutive annual audits for a particular bank, and cannot render any consulting services to a bank in addition to the performance of its audit services.

A general impression is that the Law moves the weight of the NBS' supervisory role from the control of the legality of banks' operations to the assessment and analysis of relevant business and financial risks.

Great exposures

Under the old law, the aggregate amount of all great exposures of a bank could not exceed the amount equal to 400% of its capital. The Law empowers the NBS to determine the relevant percentage, but it cannot be lower than 400% or higher than 800% of the bank's capital.

Branislav Maric

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