03 April, 2020
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Banking in times of crisis – Central Bank of Montenegro introduces new measures

Montenegro was one of the last countries in Europe to be affected by the pandemic.  Although the situation in the country is now under control, the impact on the country’s economy is already serious.  Small economies in countries such as Montenegro pose a big risk to the survival of banks, as crises such as this one open a bigger window for banks to perish. The Central Bank of Montenegro (Montenegrian: Centralna banka Crne Gore – CBCG”), therefore, reacted promptly by adopting two provisional measures in order to preserve banks’ liquidity.

 

How are banks’ operations changing?

The CBCG has introduced two provisional measures that substantially change banks’ operations, deviating somewhat from the statutory rules.

Payment of dividends

Banks will not be able to pay dividends in cash or other assets.  If banks decide to pay part of their profits to their stockholders, they will only be able to do so in the form of stocks.  According to Montenegrin law governing companies, stockholders have the right to transfer stocks free of charge.  Secondly, the number of new stocks that stockholders receive must be proportional to the total number of stocks they own.  This measure should improve banks’ capitalization, as this will stem the outflow of money that would otherwise serve to cover the banks’ debt.

Exposure of banks

A bank’s exposure is the sum of its claims on loans and other assets.  This includes both the amount of off-balance sheet liabilities and the outstanding assets written off, less the amount of receivables secured by quality collateral.  According to the Banks Act, the total exposure of a bank to one person or to a group of related parties may not exceed 25% of the bank’s own funds.  The second provisional measure adopted by the CBCG allows for exposure above the standard 25% ceiling of the bank’s fixed assets.  However, banks will not be able to undertake activities that increase their exposure on their own, but require the approval of the CBCG.  The decision of the CBCG will depend on the reasons underlying the increase request, the amount of the increase and the date by which the bank will return the exposure to the statutory level.  This will make it easier for banks to operate, as they will be able to exceed the percentage of exposure.  Another important effect of this measure is that it is possible for clients to obtain the necessary funds through credit and improve their liquidity.  In this way, companies that are beneficiaries of bank loans have an opportunity to continue their business, as they will be able to ride out the crisis more easily with a loan taken from a bank.

 

Subsequent steps

The CBCG emphasized that these are temporary measures that will change in line with the further development of the economic situation in Montenegro.  Also, according to CBCG, banks in Montenegro have adequate liquidity.  The CBCG is monitoring the situation and the potential impact of the risk to the economy, medium-term inflation, resilience of the banking system and financial stability.  The CBCG has the necessary funds to support the banks if the need for additional funds arises.