The NBS Head Office Building was built from 1888 – 1890, on the basis of blueprints designed by Konstantin Jovanovic (Vienna 1849 – Zurich 1923), son to distinguished artist Anastas Jovanovic...
Financial stability function aims to limit a systemic risk in the financial system. A systemic risk is a risk that affects the functioning of the entire financial system, not only specific institutions. A systemic risk is defined as the risk of disruption to financial services provision that might have serious negative consequences for the real economy. It may be caused by an impairment in the entire financial system or its component and means that certain financial services are temporarily inaccessible or that the cost of those services increased abruptly, regardless of whether the cause of the disruption lies in or outside of the financial system. Materialisation of the systemic risk may have an adverse impact on the real sector as well, manifesting as a contraction of economic activity.
There are two dimensions to systemic risk. The first is structural and stems from the linkages among financial institutions (so called cross sectional dimension). The second one is the time component, i.e. the risk that varies over time and depends on the phase of the financial cycle (so called procyclical risk dimension). The procyclical risk dimension means that during the upward phase of the cycle risk tolerance increases as well as borrowing, liquidity, prices of securities and real estate, possibly leading to the overvaluation of their assets, whereas in the downward phase, the trend reverses, triggering a build-up in market uncertainties, a fall in financial asset prices, deleveraging, liquidity squeeze, and possibly ending in a financial crisis.
Macroprudential instruments are legally binding macroprudential policy measures aimed at achieving the policy goals. Macroprudential instruments may be classified according to the systemic risk dimension. In order to limit the risk of procyclicality, the following measures may be applied: countercyclical capital buffer, restrictions on profit distribution, public warning on the rising systemic risk, LTV and DSTI ratios, etc. On the other hand, to keep the structural dimension of systemic risk in check, the following should be determined: a capital buffer for systemically important banks, a capital buffer for structural systemic risk, a ban on non-core activities, a special leverage ratio for systemically important financial institutions, etc.
Amendments and Supplements to the Law on the National Bank of Serbia from 2010 entrusted the central bank with the role of preserving and strengthening the stability of the financial system (Article 3). To achieve this goal, the legislator introduced as one of the new statutory functions of the NBS the identification and implementation of activities and measures aimed at preserving and strengthening the stability of the financial system, i.e. vested the NBS with an explicit authority to use macroprudential instruments and measures. The use of these instruments and measures has been entrusted to the highest executive body of the National Bank of Serbia – the Executive Board (Article 14, paragraph 1, item 11).
A systemically important bank is a bank whose distress or failure would have serious negative consequences on the financial system stability. Systemically important banks are identified by the NBS based on the defined methodology and selected criteria. The risks affecting these institutions thus turn into systemic risks to the financial system. For this reason, measures must be taken to ensure special treatment for these banks relative to other institutions in view of their significance for the financial system and financial stability.
In line with European Banking Agency’s (EBA) Guidelines for specifying the criteria for the assessment of systemic importance of banks in the Republic of Serbia, the use of at least one of the following criteria is required: 1) size; 2) importance for the Serbian economy; 3) the significance of cross-jurisdictional activities; 4) interconnectedness in the financial system; 5) substitutability in the financial system, or 6) the complexity of bank operations. These criteria are prescribed by the Decision on Capital Adequacy and are the basis of methodology for assessing a bank’s systemic importance in line with the EBA’s Guidelines. The methodology is adapted to the specific characteristics of the domestic banking sector.
At least once a year the NBS identifies systemically important banks for the Republic of Serbia and sets capital buffers for them. For additional information on capital buffers for systemically important banks and the List of systemically important banks and their buffers see NBS website Objectives and functions/Financial stability, Capital buffers.
Further, Financial Stability Board (FSB) developed the methodology for assessing global systemic importance of banks and publishes the List of systemically important banks on an annual basis.
