1. State and future of the financial sectors in the region Jorgovanka Tabaković Governor Belgrade, November 8 th 2013

2. 2 SEE region is most often perceived as a single market with common characteristics across countries… We should always be reminded that preservation of financial stability with competitive and relatively free financial markets is in the long term interest of both the regulators and the industry, and is essential also for the future growth and the overall prosperity of market economies in the region; Monitoring and closely following developments in the region on an ongoing basis should provide us with timely information, needed for the intervention in early stage (before problems in particular bank or system-wide escalate);

3. 3 … as well as with common challenges… Common challenges for the countries of SEE region include: –weak economic outlooks; –deleveraging pressures; –troublesome quality of banking portfolios due to buildup of NPL levels in the post crisis period; –EU integration challenges, especially regarding the adoption of the Acquis Communautaire. Real GDP dynamics and projectionsUnemployment rate (% of total labor force) trends and projections

4. 4 …especially having in mind increasing government debt in the entire region High public debt levels and thus the need for fiscal consolidation represent key challenge in order to avoid further pressures on current account balances Full awareness of the risks taken by banks, other financial institutions, their clients and the system as a whole should be considered a must. It is important to be realistic, to understand where the system stands and where we want to be in the future Avoiding additional pressures of foreign exchange market is essential due to high dependence on FX and FX indexed lending activity. Government debtCurrent account balance (in % of GDP)

5. 5 Deleveraging risk becomes more concentrated Although deleveraging is in essence a healthy process, even for the host country, it is critical that the process is gradual, or better yet, in accordance with the adjustment capacities of the economy concerned; Besides significant deleveraging pressures from domestic markets on consolidation, investments in SEE region are still highly profitable; Foreign funds may have been an important growth accelerator in the pre crisis period, however current balance sheet structure indicates that domestics sources represent the primary source of banks funding; Gross exposure of BIS reporting banks to SEE countries (indice, 2007=100) Loan to deposit ratio

6. 6 Similar characteristics regarding FX lending brought upon us common risks: FX induced credit risk as a systemic risk Foreign currency indexed loan portfolio could enhance risks in the banking book given the regions strong dependence on EU/EMU, and its fragile economic recovery. On its part, the NBS continued to implement measures geared at a greater use of the dinar and a gradual reduction of the FX risk in the domestic financial system. The NBS adopted the Decision on Measures for Safeguarding and Strengthening Stability of the Financial System, which introduced a set of measures regarding FX-denominated and FX-indexed lending to citizens; Share of FX loans to total banking loans (Q1 2013) Serbian banking sector loan currency structure (Q3 2013)

7. 7 Deteriorating portfolio quality gave rise to NPL levels Economic downturn and sudden credit contraction led to rapid increase in NPL levels. However, in case of Serbia, countercyclical prudential measures created more than adequate buffers for loss absorption. While waiting for international standards in this field to be developed (EBA) – cautiousness is needed when performing international comparisons. LLR/Gross NPL IFRS provisioning/Gross NPL Net NPL/Total Capital 113,951,251,235,435,4 Share of NPLs to total banking loans Gross NPL levels in Serbia by sector, September data Capitalization indicators %, as of Q3 2013 Regulatory capital to risk-weighted assets19,9 Regulatory Tier I capital to risk-weighted assets 18,918,9 Capital to assets20,8

8. 8 A way forward: Focusing on international standards and best practices with consideration of market specific conditions We should always be aware that the implementation of international standards is very important for all of us, but not without taking into account the specificities of local markets and the characteristics od local banking sectors! National Bank of Serbia is currently analyzing the most suitable manner and timetable for the implementation of Basel III in Serbia, and is closely following the developments concerning the adoption of EU acts implementing Basel III (CRR and CRD IV); By the end of 2013, the NBS will formalize a Strategy for the implementation of Basel III, which will cover all relevant issues under the new set of standards and will put forward a timetable for adoption of particular requirements thereof;

9. 9 Conclusions - what is important for the future? In defending our countries from the ongoing crisis, economic policy makers face numerous limitations and challenges; Although there are many questions to be answered and issues to be addressed, the general direction of all of us should be forward, by further strengthening of supervision and regulation; Only after such careful consideration will we be able to produce adequate and timely policy responses that will shape our financial systems in the coming years! Sharing opinions and experiences, as well as cooperation between home and host supervisors and with the industry, is now and in future more important than ever!

10. 10 Thank you for your attention!