national bank of serbia speech at the presentation of the annual financial stability report for 2016 dr jorgovanka tabakovic, governor belgrade, 27 july 2017 ladies and gentlemen, members of the press, dear colleagues, welcome to the presentation of the annual financial stability report for 2016. consistent with best international practice, for the third year in a row, we have been presenting to you our analyses aimed at assessing the resilience of the financial system to shocks, and the measures that we adopt in order to make the system even more resilient. serbia is a small and open economy, which is why the developments in the international environment, notably in the euro area, may impact the domestic financial system. last year saw a slowdown in global economic growth, the uk ’ s decision to withdraw from the eu, and soaring oil prices following the decision of the major producers to cap oil production for the first time since 2008. coupled with this, the divergence of monetary policies of the leading central banks still remains the key factor of uncertainty in the international financial market given that the ecb decided to extend the quantitative easing programme at least until late 2017, while the fed continued with monetary policy normalisation. these decisions of the leading central banks may affect capital flows to emerging economies, including serbia. carefully following the developments in the domestic and international markets, we responded in a timely fashion, which, along with full coordination with fiscal policy, helped further narrow the internal and external imbalances in 2016. this buttressed the resilience of our economy to influences from the international environment. at the same time, we achieved economic growth, low inflation, a relatively stable exchange rate, and earned the trust of foreign investors in the domestic economy. the cycle of key policy rate cuts, launched in may 2013, continued into 2016. still, we exercised due caution over uncertainties in the international commodity and financial markets. the key policy rate was cut to 4 % – its lowest level in the inflation targeting regime. as a result, and given the falling risk premium of the country, interest rates on corporate and household loans declined, whilst government borrowing costs fell to their lowest. a reduction in average dinar and foreign currency borrowing costs was certainly one of the factors leading to a better financial result of the corporate sector. in 2016, economic agents achieved three and a half times higher positive net financial result compared to 2015. i presented concrete data at the presentation of the may inflation report. the share of corporate npls in

serbian market. the issue of these securities gave a contribution to the process of dinarisation, which is one of our priorities. the results have also been confirmed by serbia ’ s progress on the doing business list, with the country ranking among ten countries that achieved the strongest progress. we are satisfied with the fact that by achieving the main objectives of the national bank of serbia – preservation of price and financial stability, we contribute to the improvement of the position of our country in the international context. the national bank of serbia ’ s efforts in the past period focused also on resolving the npl issue. i can say with great pleasure that the national bank of serbia ’ s action plan for implementation of the npl resolution strategy has been fully implemented, within the envisaged deadlines. banks ’ capacities have been strengthened, with improvements made in the field of application of accounting standards, transparency of bank operation, practice of forbearance and the development of the npl market. the results of these activities are more than obvious. in may 2017, the share of npls in total banking sector loans equalled 16. 1 %, this being its lowest level since 2010. let me remind you that in august 2015, when the strategy was adopted, this share stood at 22. 2 %. this implies a drop of over 6 percentage points, which confirms that the systemic, interinstitutional and coordinated approach of the national bank of serbia, the government and market participants is yielding the desired results. by analysing the risks that may jeopardise financial stability, we always aim to act pre - emptively, among other things by enhancing the regulatory framework in accordance with the eu acquis and the strategy for introduction of basel iii standards in serbia. the regulations transposing these standards in the domestic legislation were adopted in december 2016, with the start of application on 30 june 2017. we may freely say that as of that date, the operation of serbian banks is regulated in the same way as in eu countries. the introduction of basel iii standards will further increase the already high resilience of the banking sector, by enhancing the quality of capital, better monitoring and control of risks, strengthening market discipline and transparency of bank operations. an important novelty are the capital buffers which increase the quality of bank capital and further limit systemic risks, thereby contributing to the preservation and strengthening of the stability of serbia ’ s financial system. ladies and gentlemen, members of the press, dear colleagues