On January 23, 2020, the European Banking Authority (EBA) acknowledged in an Opinion1 (the Opinion) the European Commission's (EC) decision to consider the supervisory and regulatory framework applicable to credit institutions in Serbia, as well as South Korea, as equivalent to the rules applied in the European Union (EU). This means that certain categories of exposures to entities located in those two countries can benefit from the same treatment as applied to EU Member States' exposures under the Capital Requirements Regulation (CRR) in terms of capital requirements. 

The Opinion acknowledging the EC's decision comes at the end of a process that started when the EBA provided technical advice and assessed non-EU countries' equivalence with the EU's prudential supervision and regulatory requirements. Following said assessment, the EBA provided its Opinion to the EC in November 2018 that the supervisory and regulatory framework applied to credit institutions in domestic laws and regulations in Serbia and South Korea could be regarded as equivalent to those in the EU. The EC approved this and published a related Decision on Equivalence2. The current EBA Opinion comes after the publication of the Decision of Equivalence. EC Decisions of Equivalence, while capable of being withdrawn or further amended mark a major move forward in firms on both sides being able to access each other's markets. 

There are two annexes to the Opinion, one for each country. This Client Alert analyzes the Serbian Annex and delves deeper into its opportunities for firms and their counterparties operating in both the EU and in Serbia as well as the next steps to be taken. This Client Alert should be read in conjunction with our separate coverage on the South Korean Annex.  The EU's recognition of equivalence of the Serbian regulatory regime is of course important as of the 29 banking groups active in Serbia, 13 were EU headquartered (9 of which were in the Banking Union and represented 61% of total assets in the Serbian banking sector), 7 were headquartered outside of the EU and the remaining 9 were domestic. The Serbian Annex to the Opinion points to Serbia following EU supervisory approaches so that overall it is deemed to be "Largely Equivalent" i.e. yellow, with most sub-parts, as discussed below, being considered green and thus equivalent but there being some red i.e., non-equivalent areas.

The recognition is also important for the wider Western Balkans region3 that is yet to accede to the EU as the EU is the leading trade partner accounting for over 72% of the region's total trade with an upwards trade growth on both sides of imports and exports in goods, services and foreign direct investment by EU companies into Serbia. For banks this provides ample opportunity to assist companies from household names to SMEs on both sides to trade and build closer linkages, in particular if Serbia is to press ahead with its accession to the EU by 2025.

EBA's Annex's findings relating to the Republic of Serbia

The first Annex4 to the Opinion deals with the Republic of Serbia. It starts with an overview of the banking sector. The national regulator and supervisor for the major part of the Serbian financial sector is the National Bank of Serbia (NBS). The NBS is in charge of prudential supervision and regulation of banks and insurance companies, payment and electronic money institutions as well as financial leasing companies and voluntary pension fund management companies. The NBS is also the regulatory authority for Serbia as well as the bank resolution authority, although the activities pertaining to prudential supervision and regulation are organizationally separated from the bank resolution activities. The organizational part of the NBS is called "the Administration for Supervision of Financial Institutions" and was created to enable more effective performance of the supervision activities. The Securities Commission on the other hand is authorized to license and supervise operations of investment firms. The main legal acts in the banking sector consist of the Law on Banks5, the Law on the Protection of Financial Service Consumers6, the Law on the Prevention of Money Laundering and Financing of Terrorism7 and the Law on Payment Services8 as well as several decision implementing the Basel standards, such as the Decision on Capital Adequacy of Banks9, the Decision on Risk Management by Banks10 and the Decision on Liquidity Risk Management by Banks.11

The Annex then presents an overview of Serbia's financial system as well the structure and performance of the Serbian banking sector with a focus on its capital adequacy, liquidity, profitability and share of Non-Performing Loans (NPLs). 

The main part of the Annex consists of a detailed assessment of the Republic of Serbia of particular topics and sections, which despite set out with wrong numbering do get the relevant points across. 

Topic I – Supervisory Framework – Largely Equivalent

Serbia has already introduced the Basel III International Regulatory Standards for Banks as well as taken steps to harmonize its domestic regulation with the relevant EU banking regulation via provisions based on EU Guidelines and Technical Standards.

  • Section 1 – General questions – Equivalent
    As all principal financial institutions in Serbia are subject to prudential regulation, credit institutions by the NBS and investment firms by the Securities Commission, this area has been deemed equivalent in light of the provisions implemented above as described under Topic I. 
  • Section 2 – Competencies of supervisory authorities – Largely Equivalent
    NBS's institutional independence is established by law and requirements about expertise and professionalism of supervisory staff are also in place. The NBS also has the power to issue and revoke banking licenses, while the fit and proper regime is in line with the EU framework with some slight divergences. The Serbian legislation also provides for a verification of the suitability of founding shareholders during the authorization procedure as well as cooperation with foreign authorities in this respect.
  • Section 3 – Prudential Supervision – Largely Equivalent
    The NBS exercises supervision both at the consolidated level and at the level of the individual institution and is legally empowered to impose a set of administrative measures and penalties on institutions including the right to withdraw the operating license. The legislator also provides for the same reporting duty as provided for in the EU framework for persons responsible for the legal control of annual and consolidated accounts in relation to informing the authorities about findings of material breach of regulations. 
  • Section 4 – Supervisory Review Process – Equivalent
    The Annex states the Serbian banks need to have an Internal Capital Adequacy Assessment Process (ICAAP) in place. On the Governance side, the Serbian legislator has similar provisions to those in the EU's Capital Requirements Directive component of the CRR II/CRD V Regime for banks to have an adequate governance arrangements, internal control mechanisms, and an independent risk management function in place. The Supervisory Review and Evaluation Process (SREP), in turn, has been designed in a way that mirrors the EBA SREP guidelines. The NBS is empowered to levy higher capital requirements if necessary and its internal acts describe the aspects to be considered when these are imposed. There is no provision equivalent to Art. 105 CRD in relation to specific liquidity requirements, but the Law on Banks refers to the possibility of introducing more stringent liquidity requirements. In terms of the supervisory review of internal models, credit institutions must require approval from the NBS for using internal models for the calculation of risk-weighted assets, this too follows the EU and notably the Banking Union approach.
  • Section 5 – Professional Secrecy and International Cooperation – Equivalent 
    The NBS's professional secrecy provisions are similar to the EU regime and there are legal provisions in place for the NBS's cooperation with international regulatory and resolution authorities.

Topic II – Own Funds – Largely Equivalent

The Own Funds provisions are deemed largely on par with those set in the CRR. 

  • Section 6 – Own Funds – Equivalent 
    The own funds requirements are structured as follows: (i) 4.5% CET1 (ii) 6% T1 and (iii) 8% Total Capital with core capital items being the same as in CET1 as per CRR.
  • Section 7 – General requirements – Largely Equivalent 
    The own fund requirements cover credit, market and operational risk and the provisions on reporting and disclosure are similar to those envisaged by the CRR.

Topic III – Credit Risk Requirements – Equivalent 

Most of the local regulations in this area of Serbian law that were analyzed were assessed as being identical to the CRR provision or more conservative. Serbia's regulation includes provisions on Credit Risk Standardized Approach and IRB Approach as well as on Credit risk mitigation techniques.

  • Section 8 – Capital requirements for credit risk – Equivalent 
    Credit risk requirements and the calculation of own funds for credit risk are identical to the CRR requirements for the Standardized and IRB approaches. Banks can also use IRB approach if they have obtained the consent from the NBS, under the conditions and manner specified in that consent.

  • Section 9 – Credit Risk Mitigation – Equivalent
    In relation to provision regarding credit risk mitigation (CRM), the Serbian regulation is more restrictive then the CRR.  The unfunded credit protection is similar to the CRR with mores of the provisions matching exactly the CRR provisions. 

  • Section 10 – Securitization – Equivalent
    The Serbian regulation on securitization include a minimum requirements for the recognition of significant credit risk transfer in both traditional and synthetic securitization, the use of credit assessments of an assessment institution to determine the credit risk weight of a securitization position, as well as the calculation of the risk-weighted exposure amounts for securitization positions framework.

  • Section 11 – Exposure to transferred credit risk – Equivalent
    Minimum requirements for recognition of significant credit risk transfer in both traditional and synthetic securitization were introduced in 2017.

Topic IV – Market Risk – Equivalent

Serbia's capital adequacy regulation takes into account the counterparty credit risk as well as all other risks under market risk. The legal provisions are based on the same ideas and principles as the CRR for these types of risks and their regulation is identical to the CRR. 

  • Section 12 – Counterparty Credit Risk – Equivalent
    Serbia's rules for the treatment of counterparty credit risk (CCR) are identical to the respective rules of the CRR.
  • Section 13 – Own funds requirement for market risk, settlement risk and CVA risk – Equivalent
    Serbia has a trading book concept in place, similar to the CRR trading book concept. Its market risk provisions are based on an approach taking account of position risk for trading book activities, foreign exchange risk and commodities risk for all business activities. Serbia has also implemented the provisions on Stressed-VaR and Incremental Risk Charge (IRC) while capital adequacy regulation imposes own funds requirement for CVA risk and both methods, Standardized and Advanced, have been introduced.

Topic V – Operational Risk – Equivalent

The regulations in Serbia are driven by the same principles and follow the same direction as the EU counterparts.

  • Section 14 – Operational Risk – Equivalent
    Operational risk includes legal risk and is defined as the risk of possible adverse effects on financial results and capital of the bank caused by omissions in employees' work, inadequate internal procedures and processes, inadequate management of information and other systems, as well as by unforeseeable external events. There are several approaches to regulation while the NBS has practical experience with the supervision of all three approaches, namely BIA, TSA and AMA. 

Topic VI – Liquidity – Largely Equivalent

  • Section 15 – Liquidity – Largely Equivalent
    The Serbian law requires banks to maintain a Liquidity Coverage Ratio (LCR) of 100%. Alongside with the LCR, Serbian law also prescribes banks to maintain certain levels for the liquidity ratio and the narrow liquidity ratio. The Net Stable Funding Ratio (NSFR) is currently under development. 

Topic VII – Capital buffers and macroprudential tools – Equivalent

The NBS is the designated macroprudential authority and several macroprudential tools are already used to reduce risks in the financial system, namely those connected with FX-exposure. 

  • Section 16 – Capital Buffers – Equivalent
    Four capital buffers are implemented: (i) capital conservation buffer, (ii) countercyclical capital buffer, (iii) systemic risk buffer and (iv) capital buffer for systemically important banks (O-SII). Where a bank fails to meet its combined buffer requirement on an individual, consolidated or subconsolidated basis, it has to apply the capital conservation measures and present a capital conservation plan as prescribed, which are in line with respective requirements of the CRD.
  • Section 17 – Macroprudential Tools – Equivalent
    The Decision on Temporary Measures for Preserving Financial Stability in the Republic of Serbia prescribes measures aimed at reducing risks in the financial system arising from the high share of FX-denominated and -indexed dinar loans. In 2015 the NBS published a document (Macroprudential Framework)12 setting out macro prudential policy, objectives, instruments and decision making processes which is fully harmonized with the Recommendation of the ESRB on intermediate objectives and instruments of macroprudential policy (ESRB 2013/1) .

Topic VIII – Other regulatory requirements – Equivalent

Both Serbia's framework for large exposures and for leverage ratio are aligned with the provisions set out in the EU regulation.

  • Section 18 – Large Exposures – Equivalent
    The Large Exposure definition provided in the Serbian legislation is the same as in the EU, the large exposure limits are applied both at consolidated and solo level, the definition of connected clients is aligned with the one used in the CRR. The provisions related to large exposures in the trading book are very much in line with the EU framework while the exempted exposures are substantially the same as those envisaged in the CRR. Large exposures are constantly monitored through reporting and there are administrative and accounting procedures to identify and report them.
  • Section 19 – Leverage – Equivalent
    The leverage ratio has been introduced by the Decision on Reporting Requirements for Banks (DRR).The leverage ratio itself is not as of yet a hard requirement but the reporting obligation, the form and content of the reports as well as the exposures of banks included in the calculation are mandatory.
  • Section 20 – Disclosure – Equivalent
    The Serbian Regulator's approach was assessed and found to apply qualitative and quantitative disclosure elements that are largely comparable to the EU requirements.

So what does this mean for Serbian firms accessing the EU?

While the above has assessed what this might mean for EU firms' operations in Serbia and the Serbian banking sector more generally, the Decision on Equivalence also means greater business opportunities more generally, especially given the growing links between the Serbian economy and the EU. Some of the key attributes that ought to be considered in relation to this development are:

  • growth of local financial market, with expected increased interest for investments in Serbian dinar (RSD) government securities;
  • expansion of secondary markets trading securities in local currency;
  • enhanced conditions for cross-border contribution to fair and open trade between the EU and Serbia;
  • reduction of overlaps in banking compliance requirements between the EU and Serbia; and
  • enabling market participants from Serbia who are active in the EU to comply with only one set of rules.


While the EBA's recognition is certainly welcome and timely, it also coincides with the EU's revised enlargement methodology. This revised methodology is of relevance to Serbia along with other EU-Accession candidates in the Western Balkans but it is also subject (regrettably) to the outcomes of national elections, notably in France, scheduled in April-May 2022. Consequentially, the EBA recognition does offer a road for both the financial sector and the wider economy, for Serbia, the Western Balkans and the wider EU-27, to work more constructively and in a more cost-efficient manner with one another. 


1. Available at the bottom of the page here.

2. Available here.

3. Albania, Bosnia and Herzegovina, Kosovo, North Macedonia, Montenegro and Serbia. Designation of Kosovo is without prejudice to positions on status, and in line with UNSCR 1244/1999 and the ICJ Opinion on the Kosovo declaration of independence.

4. Available at the bottom of the page here.

5. Available here.

6. Available here.

7. Available here. Please note that this law has been recently amended, however the latest amendments are only available in Serbian and may be found here.

8. Available here.

9. Available here.

10. Available here.

11. Available here.

12. Available here.

13. Available here.

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