The World Bank Report No: ISR9436 Implementation Status & Results Montenegro Programmatic Financial Sector Development Policy Loan (P116787) Public Disclosure Copy Project Name: Programmatic Financial Sector Development Policy Loan Program Stage: Implementation Seq.No: 2 Status: ARCHIVED Archive Date: 29-Jan-2013 (P116787) Country: Montenegro Approval FY: 2012 Product Line: IBRD/IDA Region: EUROPE AND CENTRAL ASIA Lending Instrument: Development Policy Lending Implementing Agency(ies): Key Dates Board Approval Date 01-Sep-2011 Original Closing Date 31-Jan-2013 Planned Mid Term Review Date 30-Sep-2012 Last Archived ISR Date 05-Jan-2012 Effectiveness Date 23-Jan-2012 Revised Closing Date 31-Jan-2013 Actual Mid Term Review Date Program Development Objectives Program Development Objective (from Program Document) The overarching objective of the operation is to strengthen the banking sector, which is a critical pre-condition for sustainable economic recovery and private sector-led growth. The proposed loan supports a comprehensive program of measures to strengthen thebanking sector, with a view to mitigating the impact of the global financial crisis and increasing the resilience of the sector to possible future shocks. The FSDPL would also support the Government#s goals of maintaining a stable macroeconomic framework, including sustainable budget deficit and debt levels. The specific reforms proposed to strengthen the banking sector are in the followingareas: (i) maintaining market confidence; (ii) strengthening bank liquidity framework; (iii) assessing and addressing banking sector vulnerabilities; (iv) enhancing regulatory framework for banking sector; and (v) problem bank restructuring. Has the Program Development Objective been changed since Board Approval of the Program? Yes No Overall Ratings Previous Rating Current Rating Public Disclosure Copy Progress towards achievement of PDO Satisfactory Moderately Satisfactory Overall Implementation Progress (IP) Moderately Satisfactory Moderately Satisfactory Implementation Status Overview The project achieved moderately satisfactory results against the targets, as key financial sector related risks were importantly mitigated, though apparently public deposits were not fully removed from Prva Bank, non-performing loans (NPLs) were reduced and lending increased, though not to the expected levels owing to affects from the on-going Eurozone crisis. Results Page 1 of 4 The World Bank Report No: ISR9436 Results Indicators Indicator Name Core Unit of Measure Baseline Current End Target Increased confidence in the banking sector Percentage Value -23.00 8.00 1.00 Public Disclosure Copy leading to stabilization of deposits -- annual Date 31-Mar-2011 30-Nov-2012 31-Jan-2013 deposit growth in % Comments September 2008 to March The target deposit growth rate Positive growth of annual 2011 was exceeded. deposits Resumption of lending -- annual credit growth Percentage Value -26.00 -3.70 1.00 Date 31-Mar-2011 30-Nov-2012 31-Jan-2013 Comments September 2008 to March The progress in lending Positive growth of lending 2011 growth has been improved, though hampered by the slower MNE economic growth and rising intra-company arrears. Enhanced ability of the central bank to provide Text Value The Borrower has, through The CBCG adopted Enhanced ability of the central emergency liquidity assistance. enactment of the Law on implementing regulations to bank to provide emergency Central Bank of Montenegro and/or Decisions to: enhance liquidity assistance of July 30, 2010 (Official its ability to provide Lender of Gazette 40/10 and 46/10), Last Resort facility, aligned the legislative Conditions for Loans to Banks framework for the Central to Maintain Liquidity, Open Bank of Montenegro (CBCG) Market Operations, Required with European Union sound Reserves of Banks, practices, including, inter alia, Management of International expanded powers and Reserves, Establishment of instruments for the CBCG#s the Investment Committee function as lender of last and on the Credit Registry. resort. Date 01-Sep-2011 23-Nov-2011 31-Jan-2013 Comments Baseline equal to completed prior action Public Disclosure Copy Liquidity in the banking sector (ratio of liquid Percentage Value 1.58 1.83 1.00 assets to liabilities) Date 31-Dec-2011 31-Dec-2012 31-Jan-2013 Comments The target was exceeded. In compliance with the CBCG requirement of minimum ratio of 1, calculated as an average for all working days in a ten- day period Improved quality of banks loan portfolio Percentage Value 23.00 17.65 8.00 Date 31-Mar-2011 30-Nov-2012 31-Jan-2013 Page 2 of 4 The World Bank Report No: ISR9436 Comments The quality of portfolio has below 8 percent, as measured improved, but the target was by the NPL level not met owing on the slow economic growth and banks’ Public Disclosure Copy reduced lending. Well-capitalized banks based on CAR Percentage Value 11.90 13.65 12.00 minimum requirement Date 30-Jun-2009 30-Sep-2012 31-Jan-2013 Comments The target was exceeded. above 12 percent Effective supervision of banking system Text Value two BCP ratings materially The two critical weaknesses Effective supervision of consistent with Basel Core Principles non-compliant, two not identified regard banking system consistent applicable strengthening legal protection with Basel Core Principles for supervisors and internal audit at the CBCG. The legal changes introduced in 2010 addressed the weaknesses in legal protection for supervisors. Date 31-May-2007 15-Jan-2013 31-Jan-2013 Comments 2007 FSAP BCP ratings The CBCG has not undertaken a BCP self- assessment to date. Strengthened legal authority of CBCG for Text Value bank resolution framework not The Borrower has, through Enhanced legal provisions for resolution of problem banks according to consistent with good enactment of the Law on bank resolution and their international and EU good practices. international practice Amendments to the Law on implementation Bankruptcy and Liquidation of Banks of August 7, 2010 (Official Gazette 44/10), provided CBCG with improved instruments for resolution of problem and insolvent banks in a timely and least costly manner Public Disclosure Copy Date 31-May-2007 30-Sep-2011 31-Jan-2013 Comments Following implementation of SAP and Percentage Value 25.00 100.00 withdrawal of central government deposits, Date 30-Apr-2011 15-Jan-2013 30-Jun-2012 Prva Banka no longer poses a systemic and Comments The Borrower has (a) End-2012 data is not % of withdrawal of central fiscal risk. withdrawn twenty five (25) per conclusive as to the level of government deposits from cent of central government public deposits on account at Prva Banka deposits from Prva Banka Prva Bank. byApril 30, 2011, and (b) Page 3 of 4 The World Bank Report No: ISR9436 adopted, through its Ministry of Finance, a decision on the complete withdrawal of central government deposits Public Disclosure Copy from Prva Banka by June 30, 2012. Data on Financial Performance (as of 08-Feb-2012) Financial Agreement(s) Key Dates Project Ln/Cr/Tf Status Approval Date Signing Date Effectiveness Date Original Closing Date Revised Closing Date P116787 IBRD-80910 Effective 01-Sep-2011 26-Sep-2011 23-Jan-2012 31-Jan-2013 31-Jan-2013 Disbursements (in Millions) Project Ln/Cr/Tf Status Currency Original Revised Cancelled Disbursed Undisbursed % Disbursed P116787 IBRD-80910 Effective USD 85.00 85.00 0.00 78.49 0.00 92.00 Tranches Tranche 1 Amount (USD) Expected Release Date Actual Release Date Status 0 Pending Released Key Decisions Regarding Implementation No decisions for disclosure. Restructuring History Public Disclosure Copy There has been no restructuring to date. Related Operations P116787-Programmatic Financial Sector Development Policy Loan Page 4 of 4