’ required reserves with the national bank of serbia with an aim to strengthen the local currency and longer term liability side of the banks ’ balance sheets. reserve requirements for local currency sources of bank funding were set to 0 % ( for maturities over two years ) and 5 % ( for maturities up to two years ). however, the reserve requirement ratio for fx sources of funding is set to 25 % ( for maturities over two years ) and 30 % ( for maturities up to two years ). the message intended for banks was the promotion of financial stability, namely : more long term funding and more local currency funding equals cheaper financing. also, daily liquidity loans and short - term dinar loans may be extended to banks by the nbs only against the collateral of dinar securities issued by the republic of serbia and the nbs. in case of need, the nbs will also conduct dinar liquidity - providing repo operations, again against the collateral of dinar securities. to encourage interbank fx swap trading and the development of the fx hedging market, the nbs continued conducting 3 - month fx swap auctions in 2011. 2. in may 2011, the nbs adopted the decision on measures for safeguarding and strengthening stability of the financial system. the decision entering into force in june 2011 introduced a set of measures regarding fx - denominated and fx - indexed lending to citizens : a ) fx - denominated and fx - indexed loans may be approved only subject to a down payment or placement of deposit of no less than 30 % of the loan amount. this rule does not apply to housing loans ; b ) the ltv of fx - denominated and indexed mortgage loans are limited to a maximum of 80 % ; c ) loans may be indexed only to the euro, i. e. banks can no longer grant loans indexed to the swiss franc and other currencies. 3. the law on the protection of financial services consumers, which entered into force in early june and is implemented as of december 2011, prescribes an obligation for banks to primarily offer to their clients loans in dinars, and to provide an fx linked product only at client request. in such a case, bank is obliged to warn their clients of the fx risk they assume. 4. by the end of 2011, preparations for introduction of basel ii in 2012 were completed. domestic banking sector was recapitalized to a large extent and new risk management capacities with the

dejan soskic : challenges for macro - and microprudential policies in serbia speech by mr dejan soskic, governor of the national bank of serbia, at the closing event of the eurosystem cooperation programme on “ strengthening macro - and microprudential supervision in eu candidates and potential candidates ”, frankfurt, 16 january 2012. * * * ladies and gentlemen, first of all, on behalf of the national bank of serbia i would like to express our gratitude to the ecb for organizing, and inviting us to participate in the eurosystem cooperation programme on strengthening macro and micro - prudential supervision in eu candidate countries and potential candidate countries. it has been a valuable capacity building experience for the national bank of serbia. out of a number of well - known systemic risk factors, lending in foreign exchange to unhedged borrowers has a special role in some of the small open economies of the eu and eu candidate countries. this phenomenon of fx borrowing by unhedged financial clients has its history in many countries across the world. however, it produces specific challenges to the emerging economies without enough hedging instruments available, which still face challenging current account deficits and where fx lending is relatively widespread throughout the economy. moreover, some of these countries have a relatively recent history of price instability and overall financial instability. a good example in the group of such countries is serbia. what are the major challenges of fx lending in serbia? in addressing this issue, it is fair to say that in financial systems with widespread lack of confidence due to the recent history of high inflation and widespread banking insolvencies, as was the case with serbia at the beginning of 2000s, fx lending has played a significant role in creating longer term financial assets, important for the increase in investments and economic growth. however, persistence of relatively high level of fx denominated financial instruments in a financial system ( around 70 % of bank assets in serbia ) can have several serious consequences : first : it hampers the effectiveness of the monetary policy and increases the volatility of the reference rate set by the central bank. since the level of the reference rate directly influences the local currency term structure of interest rates, if a price of the majority of financial instruments is not related to the movement of the local currency reference rate ( but rather to the movement of libor, euribor or other international rates ), the effectiveness of the local currency reference rate as a major monetary policy tool is lower and its movements