In such an environment, our commitment could be to protect the domestic banking system, to foster banks’ mergers and takeovers process with as much as possible, minor negative consequences. Another challenge, is the introduction of the new Basel III regulatory framework, with more restrictive liquidity and capital requirements that may impact the cost and availability of financing for SEE. In case of Macedonia, the straightforward structure of banks’ balance sheets as well as the presence of a high quality capital facilitates a relatively comfortable position for the NBRM and the Macedonian banks in their efforts to achieve the new Basel III capital requirements. The banks are of universal type with “simple” banking services without complex and structured financial instruments (credit risk is the dominant), well capitalized (capital ratios range from 9.1 per cent to 38.2 per cent, well-above the regulatory minimum of 8%) and our current regulatory framework limits the definition of equity and tier one capital only to high quality capital instruments. However, there are some challenges regarding to the implementation of the capital buffers, especially the countercyclical capital buffer. In addition, capital market is still underdeveloped. In the past several years there are limited number of private bond issuances. As a result, banks have limited options to fund themselves through local bond markets. This feature could be considered as an advantage for the current quality of capital of the Macedonian banks, but it could present a considerable constraint in meeting the liquidity standards established by the Basel III package.

Nonperforming loans rose moderately in the second quarter of this year (to 11.9% of total private sector credits), but the growth is continuously slowing, and they are fully covered by loan loss provisions (RM is within the group of countries with largest LL provision coverage ratio). Profitability is lower but positive, and profits are being used largely to strengthen capital buffers. The euroization of deposits continues to decrease gradually to below pre-crisis levels (44% of total deposit are FX deposits or with FX clause). Even though the banking sector is in overall sound shape, the credits developments are not favorable and supportive to companies. The reasons for deceleration of the credits growth are on both sides, but mostly relay on supply side. Banks are likely to remain risk averse in an environment of low interest rate margin and the group strategies limit the credits’ growth potential. Thus, although the banking system mainly relies on domestic sources of funding, the consolidation of the Euro zone banking system and the EC pressure on troubled European banks that have received international bailout to sell their subsidiaries in the region, are the potential source of risks. The slow realization of this process could cause confidence shocks in our economies, thus endangering financial stability. The latest Deleveraging and Credit Monitor well notes this process, it says -while past efforts were focused on raising capital on the market, future efforts are expected to emphasize the sales of assets and affiliates.