Estonia is a member of the Euro zone. Estonia’s financial sector is modern and efficient. Credit is allocated on market terms and foreign investors are able to obtain credit on the local market. The private sector has access to an expanding range of credit instruments similar in variety to those offered by banks in Estonia’s Nordic neighbors Finland and Sweden.
Legal, regulatory, and accounting systems are transparent and consistent with international norms. The Estonian capital markets are rather inactive as both stock and bond market liquidity has been in a downward trend for the past ten years.
The Security Market Law complies with EU requirements and enables EU securities brokerage firms to deal in the market without establishing a local subsidiary. The NASDAQ OMX stock exchanges in Tallinn, Riga and Vilnius form the Baltic Market, which facilitates cross-border trading and attracting more investments to the region. This includes sharing the same trading system and harmonizing rules and market practices, all with the aim of reducing the costs of cross-border trading in the Baltic region.
Certain investment services and products may be limited to U.S. persons in Estonia due to financial institutions’ response to the U.S. Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank).
Estonia’s banking system has consolidated rapidly. Total assets of the commercial banks were approximately EUR 32 billion in early 2020. The banking sector is dominated by two major commercial banks, Swedbank and SEB, both owned by Swedish banking groups. These two banks control approximately 65 percent of the financial services market. The third largest bank is Luminor Bank. There are no state-owned commercial banks or other credit institutions.
The Scandinavian-dominated Estonian banking system is modern and efficient. Local and international banks in Estonia provide both domestic and international services (including internet and mobile banking) at competitive rates, as well as a full range of financial, insurance, accounting, and legal services. Estonia has a highly advanced internet banking system: currently 98 percent of banking transactions are conducted via the internet.
The Bank of Estonia (Eesti Pank) is the independent central bank. As Estonia is part of the Euro zone, the core tasks of the Bank are to help to define the monetary policy of the European Community and to implement the monetary policy of the European Central Bank, including the circulation of cash in Estonia. Eesti Pank is also responsible for holding and managing Estonian official foreign exchange reserves as well as supervising overall financial stability and maintaining reliable and well-functioning payment systems. The Central Bank and the government hold no shares in the banking sector.
EU legislation requires Estonia to make its AML regime compliant with EU directives. Due to strict anti-money laundering (AML) regulations and bank compliance practices, it can be difficult for non-residents to open a bank account. More info on opening a bank account for investors: https://transferwise.com/gb/blog/opening-a-bank-account-in-estonia Changes in local AML regulations and oversight are evolving following some large-scale money laundering cases through branches of Nordic banks uncovered in Estonia.
Foreign Exchange and Remittances
Foreign Exchange Policies
Estonia has been a member of the euro currency area since 2011. There are no restrictions on currency transfers or conversion.
Remittance Policies
There are no restrictions, limitations or delays involved in converting or transferring funds associated with an investment (including remittances of investment capital, earnings, loan repayments, or lease payments) into other currencies at market rates. There is no limit on dividend distributions as long as they correspond to a company’s official earnings records. If a foreign company ceases to operate in Estonia, all its assets may be repatriated without restriction. These policies are long-standing; there is no indication that they will be altered in the future. Foreign exchange is readily available for any purpose.
Sovereign Wealth Funds
There are no sovereign wealth funds or state owned investment funds in Estonia.
Finland
6. Financial Sector
Capital Markets and Portfolio Investment
Finland is open to foreign portfolio investment and has an effective regulatory system. According to the Bank of Finland, in January 2020 Finland had USD 11.4 billion worth of official reserve assets, mainly in foreign currency reserves and securities. Credit is allocated on market terms and is made available to foreign investors in a non-discriminatory manner, and private sector companies have access to a variety of credit instruments. Legal, regulatory, and accounting systems are transparent and consistent with international norms.
The Helsinki Stock Exchange is part of OMX, referred to as NASDAQ OMX Helsinki (OMXH). NASDAQ OMX Helsinki is part of the NASDAQ OMX Nordic division, together with the Stockholm, Copenhagen, Iceland, and Baltic (Tallinn, Riga, and Vilnius) stock exchanges.
Finland accepts the obligations under IMF Article VIII, Sections 2(a), 3, and 4 of the Fund’s Articles of Agreement. It maintains an exchange system free of restrictions on payments and transfers for current international transactions, except for those measures imposed for security reasons in accordance with Regulations of the Council of the European Union.
Money and Banking System
Banking is open to foreign competition. At the end of 2018, there were 255 credit institutions operating in Finland and total assets of the domestic banking groups and branches of foreign banks operating in Finland amounted to USD 945 billion. For more information see: https://www.finanssiala.fi/en/material/FFI-Finnish-Banking-in-2018.pdf
Foreign nationals can in principle open bank accounts in the same manner as Finns. However, banks must identify customers and this may prove more difficult for foreign nationals. In addition to personal and address data, the bank often needs to know the person’s identifier code (i.e. social security number), and a number of banks require a work permit, a certificate of studies, or a letter of recommendation from a trustworthy bank, and details regarding the nature of transactions to be made with the account. All authorized deposit-taking banks are members of the Deposit Guarantee Fund, which guarantees customers’ deposits to a maximum of EUR 100,000 per depositor.
In 2018 the capital adequacy ratio of the Finnish banking sector was 20.9 percent, above the EU average. Measured in Core Tier 1 Capital, the ratio was 17.2 percent. The average CET1 ratio in the EU banking sector was 14.4 percent at the end of 2018. The Finnish banking sector’s return on equity (ROE) was 8.5 percent, well above the average ROE for all EU banking sectors (6.2 percent). Standard & Poor’s in March 2020 reaffirmed Finland’s AA+ credit rating and stable outlook while Fitch kept Finland’s credit rating at AA+ in February 2020. Moody’s kept Finland’s credit rating unchanged at Aa1 in January 2020. The Finnish banking sector is dominated by four major banks (OP Pohjola, Nordea, Municipality Finance and Danske Bank), which together hold 81 percent of the market.
Nordea, which relocated its headquarters from Sweden to Finland in 2018, has the leading market position among household and corporate customers in Finland. The relocation increased the Finnish banking sector to over three times the size of Finland’s GDP. Nordea is the world’s 20th largest bank (2018) in terms of balance sheet. Consequently, Finland’s banking sector is one of Europe’s largest relative to the size of the national economy.
Nordea became a member of the “we.trade” consortium in November 2017, a blockchain based trade platform for customers of the European wide consortium of banks signed up for the platform. “we.trade” makes domestic and cross-border commerce easier for European companies by harnessing the power of distributed ledger and block chain technology.
The Act on Virtual Currency providers (572/2019) entered into force in May, 2019. The Financial Supervisory Authority (FIN-FSA) acts as the registration authority for virtual currency providers. The primary objective of the Act is to introduce virtual currency providers into the scope of anti-money laundering regulation. Only virtual currency providers meeting statutory requirements are able to carry on their activities in Finland.
Finland adopted the Euro as its official currency in January 1999. Finland maintains an exchange system free of restrictions on the making of payments and transfers for international transactions, except for those measures imposed for security reasons.
Remittance Policies
There are no legal obstacles to direct foreign investment in Finnish securities or exchange controls regarding payments into and out of Finland. Banks must identify their customers and report suspected cases of money laundering or the financing of terrorism. Banks and credit institutions must also report single payments or transfers of EUR 15,000 or more. If the origin of funds is suspect, banks must immediately inform the National Bureau of Investigation. There are no restrictions on current transfers or repatriation of profits. Residents and non-residents may hold foreign exchange accounts. There is no limit on dividend distributions as long as they correspond to a company’s official earnings records.
Travelers carrying more than EUR 10,000 must make a declaration upon entering or leaving the EU. As a Financial Action Task Force (FATF) member, Finland observes most of FATF’s 40 recommendations. In its Mutual Evaluation Report of Finland, released April 16, 2019, FATF concluded that Finland’s measures to combat money laundering and terrorist financing are delivering good results, but that Finland needs to improve supervision to ensure that financial and non-financial institutions are properly implementing effective AML/CFT controls. To improve supervision, a money laundering supervision register of the State Administrative Agency (AVI) and a register of beneficial owners controlled by the Finnish Patent and Registration Office were set up on July 1, 2019. In addition, the responsibility of preparing amendments to the Act on Preventing Money Laundering and Terrorist Financing was transferred to the Ministry of Finance (in charge of national FATF coordination) on January 1, 2019. FATF’s Mutual Evaluation Report of Finland, April 2019: http://www.fatf-gafi.org/countries/d-i/finland/documents/mer-finland-2019.html.
In Finland, the Fifth Anti-Money Laundering Directive was implemented, among other things, by means of the Act on the Bank and Payment Accounts Control System, which entered into force on May 1, 2019. Its provisions on the bank and payment account data retrieval system and on the bank and payment account registry will apply from September 1, 2020. The Ministry of the Interior has set up a legislative project to implement the EU directive on access to financial information at national level. The directive contains rules to facilitate the use of information held in bank account registries by the authorities for the purpose of preventing, detecting, investigating or prosecuting certain offences. The government proposal drafted is scheduled to be submitted to Parliament in September 2020.
Sovereign Wealth Funds
Solidium is a holding company that is fully owned by the State of Finland. Although it is not explicitly a sovereign wealth fund, Solidium’s mission is to manage and increase the long-term value of the listed shareholdings of the Finnish State. Solidium is a minority owner in 13 listed companies; the market value of Solidium’s equity holdings is approximately USD 96.4 billion (April 2020), https://www.solidium.fi/en/holdings/holdings/).
Georgia
6. Financial Sector
Capital Markets and Portfolio Investment
The National Bank of Georgia regulates the securities market. All market participants submit their reports in line with international standards. All listed companies must make public filings, which are then uploaded to the National Bank’s website, allowing investors to evaluate a company’s financial standing. The Georgian securities market includes the following licensed participants: a Stock Exchange, a Central Securities Depository, nine brokerage companies, and six registrars.
The Georgian Stock Exchange (GSE) is the only organized securities market in Georgia. Designed and established with the help of USAID and operating under a legal framework drafted with the assistance of American experts, the GSE complies with global best practices in securities trading and offers an efficient investment facility to both local and foreign investors. The GSE’s automated trading system can accommodate thousands of securities that can be traded by brokers from workstations on the GSE floor or remotely from their offices: https://gse.ge/en/
No law or regulation authorizes private firms to adopt articles of incorporation or association that limit or prohibit foreign investment, participation or control. Cross-shareholder or stable-shareholder arrangements are not used by private firms in Georgia. Georgian legislation does not protect private firms from takeovers. There are no regulations authorizing private firms to restrict the investment activity of foreign partners or to limit the ability of foreign partners to gain control over domestic enterprises.
The government and Central Bank (National Bank of Georgia) respect IMF Article VIII and do not impose any restrictions on payments and transfers in current international transactions.
Credit from commercial banks is available to foreign investors as well as domestic clients, although interest rates are high. Banks continue offering business, consumer, and mortgage loans.
The government adopted a new law in 2018 that introduced an accumulative pension scheme, which became effective on January 1, 2019. The pension scheme is mandatory for legally employed people under 40. For the self-employed and those above the age of 40, enrolment in the program is voluntary. The pension savings system applies to Georgian citizens, foreign citizens living in Georgia with permanent residency in the country, and stateless persons who are employed or self-employed and receive an income.
The government expects that that the new system will boost domestic capital market, as the pension funds will be invested within Georgia. The Pension Agency of Georgia made its first large scale investment in March 2020, when it invested 560 million GEL (around USD 200 million) in deposit certificates of high-rated Georgian commercial banks.
Money and Banking System
Banking is one of the fastest growing sectors in the Georgian economy. The banking sector is well-regulated and capitalized despite regional and global challenges faced in many neighboring countries. As of March 1, 2020, Georgia’s banking sector consists of 15 commercial banks, including 14 foreign-controlled banks, with 154 commercial bank branches and 830 service centers throughout the country. In January 2019, Georgian commercial banks held GEL 46.2 billion (around USD 15.5 billion) in total assets. As of early 2020, there were 17 insurance companies and 45 microfinance (MFI) organizations operating in Georgia. MFIs held GEL 500 million (USD155.5 million) in total assets as of January 1, 2020. Two Georgian banks are listed on the London Stock Exchange: TBC Bank (listed in 2014) and the Bank of Georgia (2006).
The National Bank of Georgia (NBG) is Georgia’s central bank, as defined by the Constitution. The rights and obligations of the NBG as the central bank, the principles of its activity, and the guarantee of its independence are defined in the Organic Law of Georgia on the National Bank of Georgia. The National Bank supervises the financial sector to facilitate the financial stability and transparency of the financial system, as well as to protect the rights of the sector’s consumers and investors. Through the Financial Monitoring Service of Georgia, a separate legal entity, the NBG undertakes measures against illicit income legalization and terrorism financing. In addition, the NBG is the government’s banker and fiscal agent. (www.nbg.gov.ge).
The International Finance Corporation (IFC), the European Bank for Reconstruction and Development (EBRD), the U.S. International Development Finance Corporation (DFC), the Asian Development Bank (ABD), and other international development agencies have a variety of lending programs making credit available to large and small businesses in Georgia. Georgia’s two largest banks – TBC and Bank of Georgia – have correspondent banking relationships with the United States through Citibank, N.A.
Georgia does not restrict foreigners from establishing a bank account in Georgia.
Foreign Exchange and Remittances
Foreign Exchange
Georgian law guarantees the right of an investor to convert and repatriate income after payment of all required taxes. The investor is also entitled to convert and repatriate any compensation received for expropriated property. Georgia has accepted the obligations of Article VIII, Sections 2, 3, and 4 of the IMF Articles of Agreement, effective as of December 20, 1996, to refrain from imposing restrictions on payments and transfers for current international transactions and from engaging in discriminatory currency arrangements or multiple currency practices without IMF approval. Parliament’s 2011 adoption of the Act of Economic Freedom further reinforced this provision.
Under the U.S.-Georgia BIT, the Georgian government guarantees that all money transfers relating to a covered investment by a U.S. investor can be made freely and without delay into and out of Georgia.
Foreign investors have the right to hold foreign currency accounts with authorized local banks. The sole legal tender in Georgia is the lari (GEL), which is traded on the Tbilisi Interbank Currency Exchange and in the foreign exchange bureau market.
The GEL’s official exchange rate is calculated based on transactions secured on the Interbank Foreign Exchange Market. Interbank trading with foreign currencies is organized via an international trading system (Bloomberg). Taking into consideration secured transactions, the weighted average exchange rate of the GEL against the USD is calculated and announced as the official exchange rate for the following day. The official exchange rate of the GEL against other foreign currencies is determined according to the rate on international markets or the issuer country’s domestic interbank currency market on the basis of cross-currency exchange rates. The cross-currency rates are acquired from the Reuters and Bloomberg information systems, and the corresponding webpages of central banks. The information is automatically received, calculated, and disseminated from these systems.
Georgia has a floating exchange rate. The National Bank of Georgia does not intend to peg the exchange rate and does not generally intervene in the foreign exchange market, except under certain circumstances when the GEL’s fluctuation has a high magnitude, such as during the COVID-19 pandemic.
Remittance Policies
There are no restrictions, limitations, or delays involved remittances from overseas. Several Georgian banks participate in the SWIFT and Western Union interbank communication networks. Businesses report that it takes a maximum of three days for money transferred abroad from Georgia to reach a beneficiary’s account, unless otherwise provided by a customer’s order. There is no indication that remittance policies will be altered in the future. Travelers must declare at the border currency and securities in their possession valued at more than GEL 30,000 (around USD10,000).
Sovereign Wealth Funds
Georgia does not have a Sovereign Wealth Fund.
Germany
6. Financial Sector
Capital Markets and Portfolio Investment
As an EU member state with a well-developed financial sector, Germany welcomes foreign portfolio investment and has an effective regulatory system. Germany has a very open economy, routinely ranking among the top countries in the world for exports and inward and outward foreign direct investment. As a member of the Eurozone, Germany does not have sole national authority over international payments, which are a shared task of the Eurosystem, comprised of the European Central Bank and the national central banks of the 19 member states that are part of the eurozone, including the German Central Bank (Bundesbank). A European framework for national security screening of foreign investments, which entered into force in April 2019, provides a basis under European law to restrict capital movements into Germany on the basis of threats to national security. Global investors see Germany as a safe place to invest, as the real economy – up until the COVID-19 crisis hit – continued to outperform other EU countries and German sovereign bonds retain their “safe haven” status.
Listed companies and market participants in Germany must comply with the Securities Trading Act, which bans insider trading and market manipulation. Compliance is monitored by the Federal Financial Supervisory Authority (BaFin) while oversight of stock exchanges is the responsibility of the state governments in Germany (with BaFin taking on any international responsibility). Investment fund management in Germany is regulated by the Capital Investment Code (KAGB), which entered into force on July 22, 2013. The KAGB represents the implementation of additional financial market regulatory reforms, committed to in the aftermath of the global financial crisis. The law went beyond the minimum requirements of the relevant EU directives and represents a comprehensive overhaul of all existing investment-related regulations in Germany with the aim of creating a system of rules to protect investors while also maintaining systemic financial stability.
Money and Banking System
Although corporate financing via capital markets is on the rise, Germany’s financial system remains mostly bank-based. Bank loans are still the predominant form of funding for firms, particularly the small- and medium-sized enterprises that comprise Germany’s “Mittelstand,” or mid-sized industrial market leaders. Credit is available at market-determined rates to both domestic and foreign investors, and a variety of credit instruments are available. Legal, regulatory and accounting systems are generally transparent and consistent with international banking norms. Germany has a universal banking system regulated by federal authorities, and there have been no reports of a shortage of credit in the German economy. After 2010, Germany banned some forms of speculative trading, most importantly “naked short selling.” In 2013, Germany passed a law requiring banks to separate riskier activities such as proprietary trading into a legally separate, fully capitalized unit that has no guarantee or access to financing from the deposit-taking part of the bank. Since the creation of the European single supervisory mechanism (SSM) in November 2014, the European Central Bank directly supervises 21 banks located in Germany (as of March 2020) among them four subsidiaries of foreign banks.
Germany supports a global financial transaction tax and is pursuing the introduction of such a tax along with other EU member states.
Germany has a modern and open banking sector that is characterized by a highly diversified and decentralized, small-scale structure. As a result, it is extremely competitive, profit margins notably in the retail sector are low and the banking sector considered “over-banked” and in need of consolidation. The country’s “three-pillar” banking system consists of private commercial banks, cooperative banks, and public banks (savings banks/Sparkassen and the regional state-owned banks/Landesbanken). This structure has remained unchanged despite marked consolidation within each “pillar” since the financial crisis in 2008/9. The number of state banks (Landesbanken) dropped from 12 to 5, that of savings banks from 446 in 2007 to 380 at the end of 2019 and the number of cooperative banks has dropped from 1,234 to 842. Two of the five large private sector banks have exited the market (Dresdner, Postbank). The balance sheet total of German banks dropped from 304 percent of GDP in 2007 to 242 percent by the end of 2019. Market shares in corporate finance of the banking groups remained largely unchanged (all figures for end of 2019): Credit institutions 27 percent (domestic 17 percent, foreign banks 10 percent), savings banks 31 percent, state banks 10 percent, credit cooperative banks 21 percent, promotional banks 6 percent.
The private bank sector is dominated by globally active banks Deutsche Bank (Germany’s largest bank by balance sheet total) and Commerzbank (fourth largest bank), with balance sheets of €1.3 trillion and €466.6 billion respectively (2019 figures). Commerzbank received €18 billion in financial assistance from the federal government in 2009, for which the government took a 25 percent stake in the bank (now reduced to 15.6 percent). Merger talks between Deutsche Bank and Commerzbank failed in 2019. The second largest of the top ten German banks is DZ Bank, the central institution of the Cooperative Finance Group (after its merge with WGZBank in July 2016), followed by German branches of large international banks (UniCredit Bank or HVB, ING-Diba), development banks (KfW Group, NRW.Bank), and state banks (LBBW, Bayern LB, Helaba, NordLB).
German banks’ profitability continued to deteriorate in the years prior to the COVID-19 crisis due to the prevailing low and negative interest rate environment that narrowed margins on new loans irrespective of debtors’ credit worthiness, poor trading results and new competitors from the fintech sector , and low cost efficiency. In 2018 according to the latest data by the Deutsche Bundesbank (Germany’s central bank), German credit institutions reported a pre-tax profit of €18.9 billion or 0.23 percent of total assets. Their net interest income remained below its long-term average to €87.2 billion despite dynamic credit growth (19 percent since end-2014 until end of 2019 in retail and 23 percent in corporate loans) on ongoing cost-reduction efforts. Thanks to continued favorable domestic economic conditions, their risk provisioning has been at an all time low. Their average return on equity before tax in 2018 slipped to 3.74 percent (after tax: 2.4 percent) (with savings banks generating a higher return and big banks a lower and Landesbanken a –2.45 percent return). Both return on equity and return on assets were at their lowest level since 2010. Brexit saw banking activities relocated from the United Kingdom to the EU, with many foreign banks (notably US and Japanese banks) choosing Frankfurt as their new EU headquarters. Their Core Tier 1 equity capital ratios improved as did their liquidity ratios, but no German large bank has been able to organically raise its capital for the past decade.
It remains unclear how the current COVID-19 crisis will affect the German banking sector. Prior to the pandemic, the bleaker German economic outlook prompted a greater need for value adjustment and write-downs in lending business. German banks’ ratio of non-performing loans was low going into the crisis (1.24 percent). In March 2020, the German government provided large-scale asset guarantees to banks (in certain instances covering 100 percent of the credit risk) via the German government owned KfW bank to avoid a credit crunch.
Foreign Exchange and Remittances
Foreign Exchange
As a member of the Eurozone, Germany uses the euro as its currency, along with 18 other EU countries. The Eurozone has no restrictions on the transfer or conversion of its currency, and the exchange rate is freely determined in the foreign exchange market.
The Deutsche Bundesbank is the independent central bank of the Federal Republic of Germany. It has been a part of the Eurosystem since 1999, sharing responsibility with the other national central banks and the European Central Bank (ECB) for the single currency, and thus has no scope to manipulate the bloc’s exchange rate. In a February 2020 report, the European Commission (EC) concluded Germany’s persistently high current account surplus – the world’s largest in 2019 at USD 293 billion (7.7 percent of GDP) – has again slightly increased despite a gradual decline between 2015 and 2018. While low commodity prices and the weak euro exchange rate explain some of the surplus’ increase in 2015-2016, the persistence of Germany’s surplus is a matter of international controversy. German policymakers view the large surplus as the result of market forces rather than active government policies, while the EC and IMF have called on authorities to rebalance towards domestic sources of economic growth by expanding public investment, using available fiscal space, and other policy choices that boost domestic demand.
Germany is a member of the Financial Action Task Force (FATF) and is committed to further strengthening its national system for the prevention, detection and suppression of money laundering and terrorist financing. Federal law is enforced by regional state prosecutors. Investigations are conducted by the Federal and State Offices of Criminal Investigations (BKA/LKA). The administrative authority for imposing anti-money laundering requirements on financial institutions is the Federal Financial Supervisory Authority (BaFin).
The Financial Intelligence Unit (FIU) is the national central authority for receiving, collecting and analyzing reports of suspicious financial transactions that may be related to money laundering or terrorist financing. It was founded in 2001 and initially located at the Federal Criminal Investigation Office. In 2017, it was transferred to the General Customs Directorate in the Federal Ministry of Finance and given more staff. At the same time, its tasks and competencies were redefined taking into account the provisions of the Fourth EU Money Laundering Directive. One focus is now on operational and strategic analysis. On January 1, 2020, legislation to implement the Fifth EU Money Laundering Directive and the European Funds Transfers Regulation (Geldtransfer-Verordnung) entered into force. The Act amends the German Money Laundering Act (Geldwäschegesetz – GwG) and a number of further laws. It provides, inter alia, the FIU and prosecutors with expanded access to data. In its annual report 2018, the FIU noted an “extreme vulnerability” in Germany’s real estate market to money laundering activities. In total, the FIU found 77,252 cases of money laundering in Germany in 2018, about 3,800 involving the real estate sector. Transparency International found that about €30 billion in illicit funds were funneled into German real estate in 2017. However, the FIU itself has come under criticism. Financial institutions deplore the quality of its staff and the effectiveness of its work. It will be subject to a FATF review in 2020.
There is no difficulty in obtaining foreign exchange.
Remittance Policies
There are no restrictions or delays on investment remittances or the inflow or outflow of profits.
Germany is the fifth-largest remittance-sending country worldwide. Migrants in Germany posted USD 25.4 billion (0.6 percent of GDP) abroad in 2018 (World Bank, Bilateral Remittances Matrix 2018). The most important receiving states for remittances from Germany are EU neighbors such as France, Poland, and Italy. Around USD 8 billion was sent to developing countries, out of which Lebanon, Vietnam, China, Nigeria and Serbia were the biggest receivers. Remittance flows into Germany amounted to around USD 18 billion in 2018, approximately 0.5 percent of Germany’s GDP.
The issue of remittances played a role during the German G20 Presidency in 2017. During its presidency, Germany passed an updated version of its “G20 National Remittance Plan.” The document states that Germany’s focus will remain on “consumer protection, linking remittances to financial inclusion, creating enabling regulatory frameworks and generating research and data on diaspora and remittances dynamics.” The 2017 “G20 National Remittance Plan” can be found at https://www.gpfi.org/publications/2017-g20-national-remittance-plans-overview
Sovereign Wealth Funds
The German government does not currently have a sovereign wealth fund or an asset management bureau.
Hungary
6. Financial Sector
Capital Markets and Portfolio Investment
The Hungarian financial system offers a full range of financial services with an advanced information technology infrastructure. The Hungarian Forint (HUF) has been fully convertible since 2001, and both Hungarian financial market and capital market transactions are fully liberalized. The Capital Markets Act of 2001 sets out rules on securities issues, including the conversion and marketing of securities. As of 2007, separate regulations were passed on the activities of investment service providers and commodities brokers (2007), on Investment Fund Managing Companies (2011), as well as on Collective Investments (2014), providing more sophisticated legislation than those in the Capital Markets Act. These changes aimed to create a regulatory environment where free and available equity easily matches with the best investment opportunities. The 2016 modification of the Civil Code removed remaining obstacles to promote collection of public investments in the course of establishing a public limited company.
The Budapest Stock Exchange (BSE) re-opened in 1990 as the first post-communist stock exchange in the Central and East European region. Since 2010, the BSE has been a member of the Central and Eastern Europe (CEE) Stock Exchange Group. In 2013, the internationally recognized trading platform Xetra replaced the previous trading system. Currently, the BSE has 40 members and 62 issuers. The issued securities are typically shares, investment notes, certificates, corporate bonds, mortgage bonds, government bonds, treasury bills, and derivatives. In 2018, the Budapest Stock Exchange had a market capitalization of USD 32 billion, and the average monthly equity turnover volume amounted to USD 1.1 billion. The most traded shares are OTP Bank, Richter Gedeon, MOL, Magyar Telekom, and FHB Mortgage Bank
Financial resources flow freely into the product and factor markets. In line with IMF rules, international currency transactions are not limited and are accessible both in domestic or foreign currencies. Individuals can hold bank accounts in domestic and foreign currencies as well as conduct transactions in foreign currency. Since March 2020, commercial banks introduced real time bank transfers for domestic currency transactions.
Commercial banks provide credit to both Hungarian and foreign investors at market terms. Credit instruments include long-term and short-term liquidity loans. All banks publish total credit costs, which includes interest rates as well as other costs or fees.
Money and Banking System
The Hungarian banking system has strengthened over the past two years, and the capital position of banks is adequate. Following several years of deleveraging after the 2008 crisis, the banking system is mainly deposit funded. Customer deposits account for roughly 60 percent of banks’ total liabilities
The Hungarian banking system is healthy and banks have a stable capital position. The loan-to-deposit ratio has been gradually decreasing from its 160 percent peak in 2009 after the financial crisis to 76.4 percent in 2019, similar to regional peers. The ratio of non-performing loans (NPLs) has declined from a high of 18 percent in 2013 to 4.8 percent in 2019 as a result of portfolio cleaning, the improving economic environment, and increased lending. The banking sector became profitable in 2016 after several years of losses, and the return on equity increased to 13.2 percent, up from a record low of negative 17 percent in 2015.The largest bank in Hungary is OTP Bank, which is Hungarian-owned and controls 25 percent of the market, with approximately USD 29 billion in assets.
Hungary has a modern two-tier financial system and a developed financial sector, although some reports that regulatory issues have arisen as a result of the Central Bank’s (MNB) 2013 absorption of the Hungarian Financial Supervisory Authority (PSZAF), which was the financial sector regulatory body. Between 2000 and 2013, the PSZAF served as a consolidated financial supervisor, regulating all financial and securities markets. PSZAF, in conjunction with the MNB, managed a strong two-pillar system of control over the financial sector, producing stability in the market, effective regulation, and a system of checks and balances. When the MNB absorbed PSZAF and took over all of its functions, including customer protection, this regulation system was weakened. A Hungarian State Audit Office (SAO) report published in April 2015 determined that the MNB’s consolidation of financial regulation undermined the system’s ability to provide effective enforcement. In March 2015, insolvency, lax regulations, and alleged embezzlement resulted in the failure of three brokerage firms (Buda-Cash, Quaestor, and Hungaria Ertekpapir), resulting in a total loss of over USD 1.2 billion, close to 1 percent of Hungary’s GDP. At the end of 2015, Parliament passed legislation to tighten control over brokerage firms’ operations as well as increase banks’ contribution to the fund established to compensate investors.
The proportion of foreign banks in total assets of the financial sector decreased to about 50 percent in 2017, down from its peak of 70 percent before the financial crisis and has stayed around this level since then. Foreign banks are subject to central bank uniform regulations and prudential measures, which are applied to Hungary’s entire financial market without discrimination. Commercial banks have extensive direct correspondent banking relationships and are capable of transferring domestic or foreign currencies to most banks outside of Hungary. Cashing of U.S. checks, however, is not possible since 2018. No loss or jeopardy of correspondent banking relations has been reported.
Recent regulations restrict foreign currency loans to only those that earn income in foreign currency, in an effort to eliminate the risk of exchange rate fluctuations. Additionally, the MNB lowered the loan-to-deposit ratio, forcing banks to restrict lending to firms in riskier sectors. Foreign investors continue to have equal – if not better – access to credit on the global market, with the exception of special GOH credit concessions such as small business loans.
There are no rules preventing a foreigner or foreign firm from opening a bank account in Hungary. Valid personal documents (i.e. passport) is needed and as of 2015, when the Foreign Account Tax Compliance Act (FATCA) came into force, a declaration whether the individual is a U.S. citizen. Banks have not discriminated against U.S. citizens in opening bank accounts based on FATCA.
Foreign Exchange and Remittances
Foreign Exchange
The Hungarian forint (HUF) has been convertible for essentially all business transactions since January 1, 1996, and foreign currencies are freely available in all banks and exchange booths. Hungary complies with all OECD convertibility requirements and IMF Article VIII. Act XCIII of 2001 on Foreign Exchange Liberalization lifted all remaining foreign exchange restrictions and allowed free movement of capital in line with EU regulations.
According to Hungary’s EU accession agreement, it must eventually adopt the Euro once it meets the relevant criteria, but the GOH has not set a specific target date even though Hungary meets most of the necessary fiscal and financial criteria. According to the Economic Ministry, Hungary‘s economic performance should mirror the Eurozone average more closely before adapting the Euro.
Short-term portfolio transactions, hedging, short, and long-term credit transactions, financial securities, assignments and acknowledgment of debt may be carried out without any limitation or declaration. While the Forint remains the legal tender in Hungary, parties may settle financial obligations in a foreign currency. Many Hungarians took out mortgages denominated in foreign currency prior to the global financial crisis, and suffered when the Forint depreciated against the Swiss Franc and the Euro. Despite strong pressure, the Hungarian Supreme Court ruled that there is nothing inherently illegal or unconstitutional in loan agreements that are foreign currency denominated, upholding existing contract law. New consumer loans, however, are denominated in Forints only, unless the debtor receives regular income in a foreign currency.
Market forces determine the exchange rate of the HUF to the Euro and thereby to other currencies.
Remittance Policies
There is no limitation on the inflow or outflow of funds for remittances of profits, debt service, capital, capital gains, returns on intellectual property, or imported inputs.
The timeframes for remittances are in line with the financial sector’s normal timeframes (generally less than 30 days), depending on the destination of the transfer and on whether corresponding banks are easily found.
Sovereign Wealth Funds
Hungary does not maintain a sovereign wealth fund.
Iceland
6. Financial Sector
Capital Markets and Portfolio Investment
Capital controls were lifted in March 2017 after more than eight years of restricting the free movement of capital. New foreign currency inflows fall under the Rules on Special Reserve Requirements for new Currency Inflows, no. 223/2019 which took effect on March 6, 2019, and replaced the older Rules no. 490/2016 on the same subject. The rules contain provisions on the implementation of special reserve requirements for new foreign currency inflows, including the special reserve base, holding period, special reserve ratio, settlement currency, and interest rates on deposit institutions’ capital flow accounts with the Central Bank of Iceland and Central Bank certificates of deposit. The rules set the interest rate on capital flow accounts with the Central Bank of Iceland and Central Bank certificates of deposits at 0 percent and specify the Icelandic krona as the settlement currency. The current rules set the holding period at one year and the special reserve ratio at 0 percent. For more information see the Central Bank of Iceland’s website (https://www.cb.is/foreign-exch/capital-flow-measures/).
Foreign portfolio investment has increased significantly over the past four to five years in Iceland after being dormant in the years following the economic crash. U.S. investment funds have been particularly active on the Icelandic stock exchange. The Icelandic stock exchange operates under the name Nasdaq Iceland. For companies listed on Nasdaq Iceland, follow this link: (http://www.nasdaqomxnordic.com/hlutabref/Skrad-fyrirtaeki/iceland).
The private sector has access to financing through the commercial banks and pensions funds.
The IMF 2019 Article IV Consultation report states that “the de jure exchange rate arrangement is free floating, and the de facto exchange rate arrangement under the IMF classification system is floating. In the period from November 2018 to October 31, 2019, the Central Bank of Iceland (CBI) intervened in the foreign exchange market on 14 of the 248 working days. The CBI publishes daily data on its foreign exchange intervention with a lag. Iceland has accepted the obligations under Article VIII, Sections 2(a), 3, and 4 and maintains no exchange restrictions subject to Fund jurisdiction under Article VIII, Section 2(a). Iceland continues to maintain certain measures that constitute exchange restrictions imposed for security reasons based on UN Security Council Resolutions.”
The Central Bank of Iceland is an independent institution owned by the State and operates under the auspices of the Prime Minister. Its objective is to promote price stability, financial stability, and sound and secure financial activities. The bank also maintains international reserves and promotes a safe, effective financial system, including domestic and cross-border payment intermediation. For more information see the Central Bank of Iceland’s website (https://www.cb.is/).
The Icelandic banking sector is generally healthy. The Central Bank of Iceland has since the financial collapse of 2008 introduced stringent measures to ensure that the financial system remains “safe, stable, and effective”. For more information see the Central Bank webpage (https://www.cb.is/financial-stability/). There are three commercial banks in Iceland, Landsbankinn, Islandsbanki, and Arion Bank. The Government of Iceland took over operations of the banks during the financial collapse in September and October 2008. Landsbankinn (formerly known as Landsbanki Islands) and Islandsbanki (formerly known as Glitnir) are government owned (the government of Iceland owns 98.2 percent shares in Landsbankinn and 100 percent shares in Islandsbanki), while Arion Bank (formerly known as Kaupthing Bank) has been privatized. Arion Bank is listed on the Icelandic stock exchange Nasdaq Iceland. There is one investment bank in Iceland, Kvika, which is listed on Nasdaq Iceland. The Minister of Finance is seeking to privatize Landsbankinn and Islandsbanki. Icelandic pension funds offer loans and mortgages and are active investors in Icelandic companies. There are no foreign banks operating in Iceland.
All companies have access to regular commercial banking services in Iceland. Businesses have access to financing with the commercial banks, but banks have reduced corporate lending in the past months due to the current economic climate (the Icelandic economy had started to cool in late 2019).
Establishing a bank account in Iceland requires a local personal identification number known as a “kennitala.” Foreign nationals should contact Registers Iceland for more information on how to register in Iceland (https://www.skra.is/english/individuals/).
Foreign Exchange and Remittances
Foreign Exchange
The Act on Investment by Non-residents in Business Enterprises no. 34/1991 and no. 46/1996 states that “non-residents who invest in Icelandic enterprises shall have the right to convert into any currency, for which the Central Bank of Iceland maintains a regular exchange rate any dividends received or other profits and proceeds from sales of investments.” (Source: https://www.stjornarradid.is/media/atvinnuvegaraduneyti-media/media/acrobat/act-no-34-1991-on-investment-by-non-residents-in-business-enterprises.pdf). In 2008, however, the Central Bank of Iceland temporarily imposed capital controls to prevent a massive capital outflow following the collapse of the financial sector; those restrictions were largely lifted in March 2017. Transactions involving imports and exports of goods and services, travel, interest payments, contractual installment payments and salaries were still permitted under the capital controls.
The Annual Report on Exchange Arrangements and Exchange Restrictions 2018, published by the International Monetary Fund (IMF), states that “Iceland fully eliminated exchange restrictions on conversions and transfers related to current international transactions with bonds.” “Iceland progressively relaxed and finally eliminated restrictions on withdrawing foreign currency cash from resident’s domestic foreign exchange accounts and eased rules governing transfers abroad for some financial transactions. It also gradually eased and eventually removed the requirement that residents repatriate foreign currency acquired abroad.”
The Central Bank of Iceland publishes the official exchange rate on its website (https://www.cb.is/statistics/official-exchange-rate/). “The exchange rate of the Icelandic krona is determined in the foreign exchange market, which is open between 9:15hrs. and 16:00 hrs. on weekdays. Once a day, the Central Bank of Iceland fixes the official exchange rate of the krona against foreign currencies, for use as a reference in official agreements, court cases, and other contracts between parties that do not specify another reference exchange rate; cf. Article 19 of the Act on the Central Bank of Iceland, and fixes the official exchange rate index at the same time. This is done between 10:45 hrs. and 11:00 hrs. each morning that regulated foreign exchange markets are in operation. Under extraordinary circumstances, the Central Bank may temporarily suspend its quotation of the exchange rate of the krona.”
Remittance Policies
New foreign currency inflows fall under the Rules on Special Reserve Requirements for new Currency Inflows, no. 223/2019 which took effect on March 6, 2019, and replaced the older rules no. 490/2016 on the same subject. The rules contain provisions on the implementation of special reserve requirements for new foreign currency inflows, including the special reserve base, holding period, special reserve ratio, settlement currency, and interest rates on deposit institutions’ capital flow accounts with the Central Bank of Iceland and Central Bank certificates of deposit. The rules set the interest rate on capital flow accounts with the Central Bank of Iceland and Central Bank certificates of deposits at 0 percent and specify the Icelandic krona as the settlement currency. The Foreign Exchange Act no. 87/1992 and the Act no. 42/2016 Amending the Foreign Exchange Act state that the holding period may range up to five years and that the special reserve ratio may range up to 75 percent; however, the aforementioned rules set the holding period at one year and the special reserve ratio at 0 percent. For more information see the Central Bank of Iceland’s website (https://www.cb.is/foreign-exch/capital-flow-measures/).
Sovereign Wealth Funds
The Government of Iceland has proposed establishing a sovereign wealth fund, called the National Fund of Iceland. The bill to establish the fund has not passed through Parliament. The stated purpose of the fund is “to serve as a sort of disaster relief reserve for the nation, when the Treasury suffers a financial blow in connection with severe, unforeseen shocks to the national economy, either due to a plunge in revenues or the cost of relief measures that the government has considered unavoidable to undertake.”
Italy
6. Financial Sector
Capital Markets and Portfolio Investment
The GOI welcomes foreign portfolio investments, which are generally subject to the same reporting and disclosure requirements as domestic transactions. Financial resources flow relatively freely in Italian financial markets and capital is allocated mostly on market terms. Foreign participation in Italian capital markets is not restricted. In practice, many of Italy’s largest publicly-traded companies have foreign owners among their primary shareholders. While foreign investors may obtain capital in local markets and have access to a variety of credit instruments, gaining access to equity capital is difficult. Italy has a relatively underdeveloped capital market and businesses have a long-standing preference for credit financing. The limited venture capital available is usually provided by established commercial banks and a handful of venture capital funds.
The London Stock Exchange owns Italy’s only stock exchange: the Milan Stock Exchange (Borsa Italiana). The exchange is relatively small — 375 listed companies and a market capitalization of only 36.6 percent of GDP at the end of December 2019. Although the exchange remains primarily a source of capital for larger Italian firms, Borsa Italiana created “AIM Italia” in 2012 as an alternative exchange with streamlined filing and reporting requirements to encourage SMEs to seek equity financing. Additionally, the GOI recognizes that Italian firms remain overly reliant on bank financing and has initiated some programs to encourage alternative forms of financing, including venture capital and corporate bonds. While financial experts have held that slow CONSOB processes and cultural biases against private equity have limited equity financing in Italy, the Italian Association of Private Equity, Venture Capital, and Private Debt (AIFI) indicate investment by private equity funds in Italy decreased by 26 percent from 2018 to 2019, totaling EUR 7,223 million – still a low figure given the size of Italy’s economy.
The Italian Companies and Stock Exchange Commission (CONSOB), is the Italian securities regulatory body: http://www.consob.it.
Italy’s financial markets are regulated by the Italian securities regulator (CONSOB), Italy’s central bank (the Bank of Italy), and the Institute for the Supervision of Insurance (IVASS). CONSOB supervises and regulates Italy’s securities markets (e.g., the Milan Stock Exchange). The European Central Bank (ECB) assumed direct supervisory responsibilities for the 12 largest Italian banks in 2019 and indirect supervision for less significant Italian banks through the Bank of Italy. IVASS supervises and regulates insurance companies. Liquidity in the primary markets (e.g., the Milan exchanges) is sufficient to enter and exit sizeable positions, though Italian capital markets are small by international standards. Liquidity may be limited for certain less-frequently traded investments (e.g., bonds traded on the secondary and OTC markets).
Italian policies generally facilitate the flow of financial resources to markets. Dividends and royalties paid to non-Italians may be subject to a withholding tax, unless covered by a tax treaty. Dividends paid to permanent establishments of non-resident corporations in Italy are not subject to the withholding tax.
Italy imposed a financial transactions tax (FTT, a.k.a. Tobin Tax) beginning in 2013. Financial trading is taxed at 0.1 percent in regulated markets and 0.2 percent in unregulated markets. The FTT applies to daily balances rather than to each transaction. The FTT applies to trade in derivatives as well, with fees ranging from EUR 0.025 to EUR 200. High-frequency trading is also subject to a 0.02 percent tax on trades occurring every 0.5 seconds or faster (e.g., automated trading). The FTT does not apply to “market makers,” pension and small-cap funds, transactions involving donations or inheritances, purchases of derivatives to cover exchange/interest-rate/raw-materials (commodity market) risks, and financial instruments for companies with a capitalization of less than EUR 500 million.
There are no restrictions on foreigners engaging in portfolio investment in Italy. Financial services companies incorporated in another EU member state may offer investment services and products in Italy without establishing a local presence.
Since April 2020, investors, Italian or foreign, acquiring a stake in excess of one percent of a publicly traded Italian firm must inform CONSOB but do not need its approval. Earlier the limit was three percent for non-SMEs and five percent for SMEs.
Any Italian or foreign investor seeking to acquire or increase its stake in an Italian bank equal to or greater than ten percent must receive prior authorization from the BOI. Acquisitions of holdings that would change the controlling interest of a banking group must be communicated to the BOI at least 30 days in advance of the closing of the transactions. Approval and advance authorization by the Italian Insurance Supervisory Authority IVASS are required for any significant acquisition in ownership, portfolio transfer, or merger of insurers or reinsurers. Regulators retain the discretion to reject proposed acquisitions on prudential grounds (e.g., insufficient capital in the merged entity).
Italy has sought to curb widespread tax evasion by improving enforcement and changing popular attitudes. GOI actions include a public communications effort to reduce tolerance of tax evasion; increased and visible financial police controls on businesses (e.g., raids on businesses in vacation spots at peak holiday periods); and audits requiring individuals to document their income. In 2014 Italy’s Parliament approved the enabling legislation for a package of tax reforms, many of which entered into force in 2015. The tax reforms aim to institutionalize OECD best practices to encourage taxpayer compliance, including by reducing the administrative burden for taxpayers through the increased use of technology such as e-filing, pre-completed tax returns, and automated screenings of tax returns for errors and omissions prior to a formal audit. The reforms also offer additional certainty for taxpayers through programs such as cooperative compliance and advance tax rulings (i.e., binding opinions on tax treatment of transactions in advance) for prospective investors.
The GOI and the Bank of Italy have accepted and respect IMF obligations, including Article VIII.
Money and Banking System
Despite isolated problems at individual Italian banks, the banking system remains sound and capital ratios exceed regulatory thresholds. However, Italian banks’ profit margins have suffered since 2011 as a result of tightening European supervisory standards and requirements to increase banks’ capital. The recession brought a pronounced worsening of the quality of banks’ assets, which further dampened banks’ profitability. The ratio of non-performing loans (NPLs) to total outstanding loans decreased significantly since its height in 2017. Currently net NPLs stand at EUR 26 billion (February 2020 data). In the last quarter of 2019, the ratio of new NPLs to outstanding loans was equal to 1.2%, against a level of 2.1% in the last quarter of 2007, on the eve of the global financial crisis. The share of NPLs in banks’ total loans continues to fall, also thanks to large-scale disposals made by a large number of banks. At the end of December 2019, The BOI) reported the NPL ratio was 3.3%, net of provisions — down from 9.8% in December 2015.
The GOI is also taking steps to facilitate acquisitions of NPLs by outside investors. In December 2016, the GOI created a EUR 20 billion bank rescue fund to assist struggling Italian banks in need of liquidity or capital support. Italy’s fourth-largest bank, Monte dei Paschi di Siena (MPS), became the first bank to avail itself of this fund in January 2019. The GOI also facilitated the sale of two struggling “Veneto banks” (Banca Popolare di Vicenza and Veneto Banca) to Intesa San Paolo in mid-2017. In January 2019, Banca Carige, the smallest Italian bank under ECB supervision, was put under special administration.
Italy’s central bank, the BOI, is a member of the euro system and the European Central Bank (ECB). In addition to ECB supervision of larger Italian banks, BOI maintains strict supervisory standards. The Italian banking system weathered the 2007-2013 financial crisis without resorting to government intervention.
The banking system in Italy has consolidated since the financial crisis, though additional consolidation is needed, according to the OECD and ECB. In 2018, the Italian banking landscape included 58 (down from 70) banking groups comprising 100 banks (down from 129), 327 (down from 393) banks not belonging to a banking group, and 78 (down from 82) branches of foreign banks. The GOI is taking further steps to encourage consolidation and facilitate acquisitions by outside investors. The Italian banking sector remains overly concentrated on physical bank branches for delivering services, further contributing to sector-wide inefficiency and low profitability. Electronic banking is available in Italy, but adoption remains below euro-zone averages and non-cash transactions are relatively uncommon.
In July 2019, Italy’s largest bank by assets, UniCredit, reported plans to cut 10,000 jobs from its global workforce under its new business plan. This includes jobs across Europe as well as in Italy where the bank has the largest number of employees. According to media reports, UniCredit’s business plan aims to cut labor costs by 10 percent through 2020-2023, with workforce reductions mostly handled via early retirements. According to analysts, Italy’s banking sector is overstaffed by an estimated 275,000 workers. Technological changes and evolution of the banking core business, combined with the reduced margins of profitability have pushed small and big banks, like UniCredit, to cut costs.
In 2019, the BOI said the profitability of Italian banks was broadly in line with that of European peers. The BOI noted that the annualized return of return on equity (ROE) at 5.0% net of extraordinary components was below the estimated cost of equity, and it expects further benefits from ongoing restructuring and consolidation in the banking sector. The process is especially strong among small cooperative banks, and the new framework is expected to strengthen their capacity to attract investors.
Most non-insurance investment products are marketed by banks, and tend to be debt instruments. Italian retail investors are conservative, valuing the safety of government bonds over most other investment vehicles. Less than ten percent of Italian households own Italian company stocks directly. Several banks have established private banking divisions to cater to high-net-worth individuals with a broad array of investment choices, including equities and mutual funds.
Credit is allocated on market terms, with foreign investors eligible to receive credit in Italy. In general, credit in Italy remains largely bank-driven. In practice, foreigners may encounter limited access to finance, as Italian banks may be reluctant to lend to prospective borrowers (even Italians) absent a preexisting relationship. Although a wide array of credit instruments are available, bank credit remains constrained. Weak demand, combined with risk aversion by banks, continues to limit lending, especially to smaller firms.
The Ministry of Economy and Finance and BOI have indicated interest in blockchain technologies to transform the banking sector. The Association of Italian Banks (ABI) continued its testing of an application through 2019, with a growing number of banks scheduled to take part in pilot projects throughout 2020. By the end of 2020 the Italian banking sector is expected to have distributed ledger technology at the core of the country’s banking system.
According to the Financial Action Task Force, Italy has a strong legal and institutional framework to fight money laundering and terrorist financing and authorities have a good understanding of the risks the country faces. There are areas where improvements are needed, such as its money-laundering investigative and prosecutorial action on risks associated with self-laundering, stand-alone money laundering, and foreign predicate offenses, and the abuse of legal persons.
Foreign Exchange and Remittances
Foreign Exchange
In accordance with EU directives, Italy has no foreign exchange controls. There are no restrictions on currency transfers; there are only reporting requirements. Banks are required to report any transaction over EUR 1,000 due to money laundering and terrorism financing concerns. Profits, payments, and currency transfers may be freely repatriated. Residents and non-residents may hold foreign exchange accounts. In 2016, the GOI raised the limit on cash payments for goods or services to EUR 3,000. Payments above this amount must be made electronically. Enforcement remains uneven. The rule exempts e-money services, banks, and other financial institutions, but not payment services companies.
Italy is a member of the European Monetary Union (EMU), with the euro as its official currency. Exchange rates are floating.
Remittance Policies
There are no limitations on remittances, though transactions above EUR 1,000 must be reported. In December 2018 Parliament passed a decree which imposed a 1.5 percent tax on remittances sent outside of the EU via money transfer. The government estimates that the tax on remittances to countries outside of the EU will raise several hundred million euros per year.
Sovereign Wealth Funds
The state-owned national development bank Cassa Depositi e Prestiti (CDP) launched a strategic wealth fund in 2011, now called CDP Equity (formerly Fondo Strategico Italiano – FSI). CDP Equity has EUR 3.5 billion in capital and has invested EUR 3.7 billion in eleven portfolio companies. CDP Equity generally adopts a passive role by purchasing minority interests as a non-managerial investor. It does not hold a majority stake in any of its portfolio companies. CDP Equity invests solely in Italian companies with the goal of furthering the expansion of companies in growth sectors. CDP Equity provides information on its funding, investment policies, criteria, and procedures on its website (http://en.cdpequity.it/). CDP Equity is open to capital investments from outside institutional investors, including foreign investors. CDP Equity is a member of the International Working Group of Sovereign Wealth Funds and follows the Santiago Principles.
Kosovo
6. Financial Sector
Capital Markets and Portfolio Investment
Kosovo has an open-market economy and the market determines interest rates. Individual banks conduct risk analysis and determine credit allocation. Foreign and domestic investors can get credit on the local market. Access to credit for the private sector is limited but improving.
The country generally has a positive attitude towards foreign portfolio investment. Kosovo does not have a stock exchange. The regulatory system conforms with EU directives and international standards. There are no restrictions beyond normal regulatory requirements related to capital sourcing, fit, and properness of the investors. The CBK has taken all required measures to improve policies for the free flow of financial resources. Requirements under the SAA with the EU oblige the free flow of capital. The government respects the IMF’s Article VIII conditions on the flow of capital.
Money and Banking System
Kosovo has 10 commercial banks (of which 8 are foreign) and 20 micro-financial institutions (of which 12 are foreign). The official currency of Kosovo is the euro, although the country is not a member of the Eurozone. In the absence of an independent monetary policy, prices are highly responsive to market trends in the larger Eurozone.
Kosovo’s private banking sector remains well capitalized and profitable. Difficult economic conditions, weak contract enforcement, and a risk-averse posture have limited banks’ lending activities, although marked improvement occurred in the past several years. In February 2020, the rate of non-performing loans was 2.5 percent, the lowest rate in the last ten years. The three largest banks own 56.4 percent of the total 4.8 billion euros of assets in the entire banking sector. Despite positive trends, relatively little lending is directed toward long-term investment activities. Interest rates have dropped significantly in recent years, from an average of about 12.7 percent in 2012 to an average of 6.3 percent in 2020. Slower lending is notable in the northern part of Kosovo due to a weak judiciary, informal business activities, and fewer qualified borrowers.
The Central Bank of Kosovo (CBK) is an independent government body responsible for fostering the development of competitive, sound, and transparent practices in the banking and financial sectors. It supervises and regulates Kosovo’s banking sector, insurance industry, pension funds, and micro-finance institutions. The CBK also performs other standard central bank tasks, including cash management, transfers, clearing, management of funds deposited by the Ministry of Finance and other public institutions, collection of financial data, and management of a credit register.
Foreign banks and branches can establish operations in the country. They are subject to the same licensing requirements and regulations as local banks. The country has not lost any correspondent banking relationships in the past three years and no such relationship is currently in jeopardy. There are no restrictions on foreigners opening bank accounts; they can do so upon submission of valid identification documentation.
The Foreign Investment Law guarantees the unrestricted use of income from foreign investment following payment of taxes and other liabilities. This guarantee includes the right to transfer funds to other foreign markets or foreign-currency conversions, which must be processed in accordance with EU banking procedures. Conversions are made at the market rate of exchange. Foreign investors are permitted to open bank accounts in any currency. Kosovo adopted the euro in 2002, but is not a Eurozone member. The CBK administers euro exchange rates on a daily basis as referenced by the European Central Bank.
Remittance Policies
Remittances are a significant source of income for Kosovo’s population, representing over 12 percent of GDP (or over USD 925 million) in 2019. The majority of remittances come from Kosovo’s diaspora in European countries, particularly Germany and Switzerland. The Central Bank reports that remittances are mainly used for personal consumption, not for investment purposes.
Kosovo does not apply any type of capital controls or limitations on international capital flows. As such, access to foreign exchange for investment remittances is fully liberalized.
Sovereign Wealth Funds
Kosovo does not have any sovereign wealth funds.
Latvia
6. Financial Sector
Capital Markets and Portfolio Investment
Latvian government policies do not interfere with the free flow of financial resources or the allocation of credit. Local bank loans are available to foreign investors.
Money and Banking System
Latvia’s retail banking sector, which is composed primarily of Scandinavian retail banks, generally maintains a positive reputation. Latvian banks servicing non-resident clients, however, have come under increased scrutiny for inadequate compliance with anti-money laundering standards. In 2018, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) identified Latvia’s third-largest bank as a “foreign bank of primary money laundering concern” and issued a proposed rule prohibiting U.S. banks from doing business with or on behalf of the bank. The Latvian bank regulator has also levied fines against several non-resident banks for AML violations in recent years.
Latvia is a member of the Council of Europe Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism (MONEYVAL), a FATF-style regional body. On August 23, 2018, MONEYVAL issued a report finding that Latvia’s AML regime was in substantial compliance with only one out of eleven assessment categories, was in moderate compliance with eight areas, but in low compliance with two areas. In late 2019 and early 2020, MONEYVAL and the Financial Action Task Force (FATF) concluded that Latvia has developed and implemented strong enough reforms for combating financial crimes to avoid increased monitoring via the so-called “grey list.” While it will continue enhanced monitoring under MONEYVAL to continue strengthening the system, with this decision, Latvia became the first member state under the MONEYVAL review to successfully implement all 40 FATF recommendations. The most recent MONEYVAL report can be found at: https://rm.coe.int/anti-money-laundering-and-counter-terrorist-financing-measures-latvia-/16809988c1.
According to Latvian banking regulators, its regulatory framework for commercial banking incorporates all principal requirements of EU directives, including a unified capital and financial markets regulator. Existing banking legislation includes provisions on accounting and financial statements (including adherence to international accounting), minimum initial capital requirements, capital adequacy requirements, large exposures, restrictions on insider lending, open foreign exchange positions, and loan-loss provisions. An Anti-Money Laundering Law and Deposit Guarantee Law have been adopted. An independent anti-money laundering unit (FIU) operates under the supervision of the Ministry of Interior. Some of the banking regulations, such as capital adequacy and loan-loss provisions, reportedly exceed EU requirements.
According to the Finance Latvia Association, total assets of the country’s banks at the end of 2019 stood at 23.20 billion euros. More information is available at: https://www.financelatvia.eu/en/industry-data/.
Securities markets are regulated by the Law on the Consolidated Capital Markets Regulator, the Law on the Financial Instrument Market, and several other laws and regulations.
The NASDAQ/OMX Riga Stock Exchange (RSE) (www.nasdaqomxbaltic.com) operates in Latvia, and the securities market is based on the continental European model. Latvia, together with Estonia and Lithuania have agreed to create a pan-Baltic capital market by creating a single index classification for the entire Baltic region. Latvia is currently rated by various index providers as a frontier market due to its small size and limited liquidity. More information is available here: https://www.ebrd.com/news/2019/latvia-takes-next-step-toward-a-panbaltic-capital-market.html
Latvian law provides for unrestricted repatriation of profits associated with an investment. Investors can freely convert local currency into foreign exchange at market rates, and have no difficulty obtaining foreign exchange from Latvian commercial banks for investment remittances. Exchange rates and other financial information can be obtained at the European Central Bank web site: https://www.ecb.europa.eu/stats/exchange/eurofxref/html/index.en.html.
Sovereign Wealth Funds
Latvia does not have a sovereign wealth fund.
Lithuania
6. Financial Sector
Capital Markets and Portfolio Investment
Government policies do not interfere with the free flow of financial resources or the allocation of credit. In 1994, Lithuania accepted the requirements of Article VIII of the Articles of Agreement of the International Monetary Fund to liberalize all current payments and to establish non-discriminatory currency agreements. Lithuania ensures the free movement of capital and does not plan to impose any restrictions. The government imposes no restrictions on credits related to commercial transactions or the provision of services, or on financial loans and credits. Non-residents may open accounts with commercial banks.
Money and Banking System
The banking system is stable, well-regulated, and conforms to EU standards. Currently there are 14 commercial banks holding a license from the Bank of Lithuania, nine foreign bank branches, two foreign bank representative offices, the Central Credit Union of Lithuania and 65 credit unions. Two hundred-eighty EU banks provide cross-border services in Lithuania without a branch operating in the country, and three financial institutions controlled by EU licensed foreign banks provide services without a branch. Nearly all foreign banks are headquartered in Sweden, Norway and Denmark. By the end of 2018 the total assets of major Lithuanian banks were $32.1 billion:
Effective January 1, 2015, all of the banks are controlled by the European Central Bank and the Bank of Lithuania. There is no restriction on portfolio investment. The right of ownership to shares acquired through automatically matched trades is transferred on the third working day following the conclusion of the transaction. The Vilnius Stock Exchange is part of the OMX group of exchanges and offers access to 80 percent of all securities trading in the Nordic and Baltic marketplace. OMX is owned by the U.S. firm NASDAQ and the Dubai Bourse. The supervisory service at the Bank of Lithuania oversees commercial banks and credit unions, securities market, and insurance companies. Lithuanian law does not regulate hostile takeovers.
Foreign Exchange and Remittances
Foreign Exchange
Lithuania has no restrictions on foreign exchange.
Remittance Policies
Lithuanian remittance policies allow free and unrestricted transfers.
Sovereign Wealth Funds
Lithuania does not maintain any Sovereign Wealth Funds.
Luxembourg
6. Financial Sector
Capital Markets and Portfolio Investment
Luxembourg government policies, which reflect the European Union’s free movement of capital framework, facilitate the free flow of financial resources to support the product and factor markets. Credit is allocated on market terms, and foreign investors can get credit on the local market, thanks to the sophisticated and extremely developed international financial sector, depending on the banks’ individual lending policies.
Since the financial crisis and tighter regulation through EU central banking authority and stability mechanisms, banks had become more selective in their lending practices pre-COVID. The private sector has access to a variety of credit instruments, including those issued by the National Public Investment Agency (SNCI), and there is an effective regulatory system established to encourage and facilitate portfolio investment.
Luxembourg continues to be recognized as a model for fighting money-laundering activities within its banking system through the enactment of strict regulations and monitoring of fund sources. Indeed, the number of enforcements reflects the degree to which the government remains committed to fighting money-laundering. The country has its own stock market, a sub-set of which was rebranded in 2016 as a “green exchange” to promote securities (primarily bonds in Luxembourg) reflecting ecologically sound investments.
Money and Banking System
Luxembourg’s banking system is sound and strong, having been shored up following the world financial crisis by emergency investments by the Government of Luxembourg in BGL BNP Paribas (formerly Banque Generale du Luxembourg and then Fortis) and in Banque Internationale a Luxembourg (BIL), formerly Dexia, in 2008. Now, in response to COVID, the government has adopted initiatives to assure both liquidity and solvency of banks.
At the end of 2018, 127 credit institutions were operating, with total assets of EUR 900 billion during the first quarter of 2020 (USD 1,060 billion), and approximately 26,000 employees.
Luxembourg has a central bank, Banque Centrale de Luxembourg. Foreign banks can establish operations, subject to the same regulations as Luxembourgish banks.
Due to the U.S. FATCA reporting requirements, local retail bank Raiffeisen refuses U.S. citizens as clients. However, two banks have offered to serve U.S. citizen customers despite the additional reporting requirements: BIL and the State Bank and Savings Bank (Banque et Caisse d’Epargne de l’Etat).
On February 21, 2018, the Luxembourg House of Financial Technology (LHoFT) signed a Memorandum of Understanding (MoU) with the European FinTech platform, B-Hive, based in Brussels, and the Dutch Blockchain Coalition, that will favor collaboration in the field of distributed ledger technology, otherwise known as blockchain. The MoU confirms mutual interest and defines the fields of collaboration, among other things, on how blockchain technology can benefit society and business in general or on how they can help define international and/or European standards for distributed ledger technology.
The Ministry of Finance is tracking developments very closely in the field of virtual currencies and has said it will adapt its legislation in accordance with the results of ongoing European and international studies. Luxembourg places virtual currencies under the legal regime of payment companies. The CSSF continues close supervision and oversight of virtual currencies.
Foreign Exchange and Remittances
Foreign Exchange
There are no restrictions on converting or transferring funds associated with an investment (including remittances of investment capital, earnings, loan repayments, lease payments) into a freely usable currency and at a legal market-clearing rate. Luxembourg was an original proponent of the euro currency and adopted it immediately at inception as part of the 1999 “Eurozone” that replaced their former domestic currencies. The European Central Bank is the authority in charge of the euro currency. Pre-COVID, Luxembourg had taken steps to move toward a “cashless” economy.
Remittance Policies
There have not been any recent changes to remittance policies with respect to access to foreign exchange for investment remittances. There is no difficulty in obtaining foreign exchange, which has been freely traded since the 1960s, and the Luxembourg stock market trades in forty different currencies, is truly international and expanding rapidly.
An average 24-hour delay period is currently in effect for remitting investment returns such as dividends, return of capital, interest and principal on private foreign debt, lease payments, royalties and management fees through normal, legal channels. Investors can remit through a legal parallel market including one utilizing cash and convertible negotiable instruments (such as dollar-denominated host government bonds issued in lieu of immediate payments in dollars). There is no limitation on the inflow or outflow of funds for remittances of profits, debt service, capital, capital gains, returns on intellectual property, or imported inputs.
Sovereign Wealth Funds
Luxembourg created a sovereign wealth fund in 2014. The fund is under the auspices of the Ministry of Finance and operates with 234 million euros of assets. Until the fund reaches 250 million euros of assets, it operates a conservative investment policy, with a portfolio of 57% of bonds, 40% of stocks and 3% of liquidities. The sovereign wealth fund only invests outside of Luxembourg and is audited by an independent audit company.
Montenegro
6. Financial Sector
Capital Markets and Portfolio Investment
The banking sector in Montenegro is fully privatized with 13 privately owned banks operating in the country. The banking sector operates under market terms. Foreign investors are able to get credit on the local market, and they have access to a variety of credit instruments since the majority of the banks in Montenegro belong to international banking chains. The largest foreign investor-banks are OTP (Hungary) operating as CKB in Montenegro, Erste Bank (Austria) and NLB (Slovenia). The remaining, smaller foreign banks do not belong to large international groups.
A new set of banking laws have been adopted and some of the existing laws have been amended to improve regulation of the banking sector, provide a higher level of depositor safety, and increase trust in the banking sector itself. The Law on the Protection of Deposits has been adopted to bring local legislation on protecting deposits up to European standards. In accordance with the law, a fund for protecting deposits has been established and deposits are guaranteed up to the amount of EUR 50,000 (approximately USD 55,556).
The Government of Montenegro has close cooperation with the IMF (primarily focused on the country’s fiscal consolidation), and it respects IMF guidelines on restrictions on payments and transfers of current international transactions.
Until 2010, Montenegro had two stock exchanges. After a successful merger (in 2010), only one stock exchange operates on the capital market under the name of Montenegro Stock Exchange (MSE). In December 2013, the Istanbul Stock Exchange purchased 24.38 percent of the MSE (www.montenegroberza.com). Three types of securities are traded: shares of companies, shares of investment funds, and bonds (old currency savings bonds, pension fund bonds, and bonds from restitution.)
Money and Banking System
The Montenegrin banking sector in 2019 was marked by a growth of basic monetary aggregates. The growth of deposits and capital continued with a mild recovery of credit activity. According to Central Bank of Montenegro, the banking sector remained solvent and liquid, with a share of 4.7 percent of non-performing loans. In 2019, lending activity grew by 4.5 percent in relation to the end of 2018 while the interest rate dropped to 6 percent as a result of increased competition.
Montenegro is one of a few countries that does not belong to the Euro zone but uses the Euro as its official currency (without any formal agreement). Since its authority is limited in monetary policies, the Central Bank, in its role as the state’s fiscal agent, has focused on control of the banking system and maintenance of the payment system. The Central Bank also regulates the process for establishing a bank. A bank can be founded as a joint-stock company and acquire the status of a legal entity by registering in the court register. An application for registration in the court register must be submitted 60 days from when the bank is first licensed.
On March 1, 2018, Montenegro’s Parliament approved the Foreign Account Tax Compliance Act (FATCA) agreement between the governments of Montenegro and the United States.
Foreign Exchange and Remittances
Foreign Exchange Policies
The Foreign Investment Law guarantees the right to transfer and repatriate profits in Montenegro. Montenegro uses the Euro as its domestic currency. There are no other limitations placed on the transfer of foreign currency.
Remittance Policies
There are no difficulties in the free transfer of funds exercised on the basis of profit, repayment of resources, or residual assets. The Central Bank of Montenegro publishes statistics on remittances as a proportion of GDP, with the latest data available indicating that in 2018 remittances accounted for approximately 10 percent of GDP.
Sovereign Wealth Funds
There are no sovereign wealth funds in Montenegro.
Netherlands
6. Financial Sector
Capital Markets and Portfolio Investment
The Netherlands is home to the world’s oldest stock exchange – established four centuries ago – and Europe’s first options exchange, both located in Amsterdam. The Amsterdam financial exchanges are part of the Euronext group that operates stock exchanges and derivatives markets in Amsterdam, Brussels, Lisbon, and Paris.
Dutch financial markets are fully developed and operate at market rates, facilitating the free flow of financial resources. The Netherlands is an international financial center for the foreign exchange market, Eurobonds, and bullion trade.
The flexibility that foreign companies enjoy in conducting business in the Netherlands extends into the area of currency and foreign exchange. There are no restrictions on foreign investors’ access to sources of local finance.
Money and Banking System
The Dutch banking sector is firmly embedded in the European System of Central Banks, of which the Dutch Central Bank (DNB) is the national prudential banking supervisor. AFM, the Dutch securities and exchange supervisor, supervises financial institutions and the proper functioning of financial markets and falls under the EU-wide European Securities and Markets Authority (ESMA).
The highly concentrated Dutch banking sector is over three times as large as the rest of the Dutch economy, making it one of Europe’s largest banking sectors in relation to GDP. Three banks, ING, ABN AMRO, and Rabobank, hold nearly 85 percent of the banking sector’s total assets. The largest bank, ING, has a balance sheetof around $1 trillion (€887 billion).
The DNB does not consider Bitcoin and similar cryptocurrencies to be legitimate currency, as they do not fulfill the traditional purpose of money as stable means of exchange or saving, and their value is not supported via central bank guarantee mechanisms. DNB considers current cryptocurrencies to be risky investments that are especially vulnerable to criminal abuse and has begun requiring that providers of financial services related to exchange and deposit of cryptocurrencies register with the DNB, per anti-money laundering (AML) legislation.
The DNB acknowledges however that in the future, cash transactions will likely be replaced with digital transactions that require central bank-issued and -guaranteed cryptocurrencies. Dutch society has already embraced cash-less commerce to a high degree – seventy percent of over-the-counter shopping is via PIN transactions and contactless payment – and DNB is participating with central banks from Canada, Japan, England, Sweden, Switzerland and the Bank for International Settlements in research about a possible central bank-issued cryptocurrency.
Foreign Exchange and Remittances
Foreign Exchange
The Netherlands is a founding member of the EU and one of the first members of the Eurozone. The European Central Bank supervises monetary policy, and the president of the Dutch Central Bank (DNB) sits on the European Central Bank’s Governing Council.
There are no restrictions on the conversion or repatriation of capital and earnings (including branch profits, dividends, interest, royalties), or management and technical service fees, with the exception of the nominal exchange-license requirements for nonresident firms.
Remittance Policies
The Netherlands does not impose waiting periods or other measures on foreign exchange for remittances. Similarly, there are no limitations on the inflow or outflow of funds for remittance of profits or revenue. The Netherlands, as a Eurozone member, does not engage in currency manipulation tactics.
The Netherlands has been a member of the FATF since 1990 and – because of the membership of its Caribbean territories in the Caribbean FATF (C-FATF) – strongly supports C-FATF.
With the promulgation of additional, preventative anti-money laundering and counterfeiting legislation, the Netherlands has remedied many of the deficiencies revealed in a 2011 Mutual Evaluation Report. As a result, FATF removed the Netherlands from its “regular follow-up process” in February 2014. The State Department’s Bureau of International Narcotics and Law Enforcement’s International Narcotics Control Strategy Report (INCSR) has listed the Netherlands as a “country of primary concern,” largely because the country is a major global financial center and consequently an attractive venue for laundering funds generated by illicit activities. More information can be found at https://www.state.gov/wp-content/uploads/2020/03/Tab-2-INCSR-Vol-2-508.pdf [2 MB].
Sovereign Wealth Funds
The Netherlands has no sovereign wealth funds.
North Macedonia
6. Financial Sector
Capital Markets and Portfolio Investment
The government openly welcomes foreign portfolio investors. The establishment of the Macedonian Stock Exchange (MSE) in 1995 made it possible to regulate portfolio investments. North Macedonia’s capital market is modest in turnover and capitalization. Market capitalization in 2019 was $3.4 billion, a 14.3 percent rise from the previous year. The main index, MBI10, increased by 34 percent, reaching 4,649 points at year-end. Foreign portfolio investors accounted for an average of 22.3 percent of total MSE turnover, 8.8 percentage points higher than in 2018. The current regulatory framework does not appear to discriminate against foreign portfolio investments.
There is an effective regulatory system for portfolio investments, and North Macedonia’s Securities and Exchange Commission (SEC) licenses all MSE members to trade in securities and regulates the market. In 2019, the total number of listed companies was 106, one more than in 2018, but total turnover dropped by 26.1 percent. Compared to international standards, overall liquidity of the market is modest for entering and/or exiting sizeable positions. Individuals generally trade at the MSE as individuals, rather than through investment funds, which have been present since 2007.
There are no legal barriers to the free flow of financial resources into the products and factor markets. The National Bank of the Republic of North Macedonia (NBRNM) respects IMF Article VIII and does not impose restrictions on payments and transfers for current international transactions. A variety of credit instruments are provided at market rates to both domestic and foreign companies.
Money and Banking System
In its regular report on Article IV consultations, published January 2020, the International Monetary Fund assessed that North Macedonia’s banking sector is healthy, well-capitalized, liquid, and profitable; and banks comfortably meet capital adequacy requirements, but efforts are needed to further mitigate credit risk. Domestic companies secure financing primarily from their own cash flow and bank loans, due to the lack of corporate bonds and other securities as credit instruments.
Financial resources are almost entirely managed through North Macedonia’s banking system, consisting of 15 banks and a central bank, the NBRNM. It is a highly concentrated system, with the three of the largest banks controlling 56.6 percent of the banking sector’s total assets of about $9.6 billion and collecting 69.2 percent of total household deposits. The largest commercial bank in the country has estimated total assets of about $2.2 billion, and the second largest of about $1.8 billion. The 10 smallest banks, which have individual market shares of less than 6 percent, account for 25.3 percent of total banking sector assets. Out of them, the five smallest banks hold a combined market share of just 7.2 percent. Foreign banks or branches are allowed to establish operations in the country at equal terms as domestic operators, subject to licensing and prudent supervision from the NBRNM. In 2019, foreign capital remained present in 14 of North Macedonia’s 15 banks, and was dominant in 11 banks, controlling 71.8 percent of total banking sector assets, 80.3 percent of total loans, and 70.2 percent of total deposits.
According to the NBRNM, the banking sector’s non-performing loans at the end of 2019 (latest available data) were 4.8 percent of total loans, dropping by 0.4 percentage points on an annual basis. Total profits in 2019 reached $122 million, which was 20 percent less than in 2018.
Banks’ liquid assets at the end of 2019 were 32.4 percent of total assets, 1.8 percentage points higher compared to the same period of 2018, remaining comfortably high. In 2019 NBRNM conducted different stress-test scenarios on the banking sector’s sensitivity to increased credit risk, liquidity shocks, and insolvency shocks, all of which showed that the banking sector is healthy and resilient to shocks, with a capital adequacy ratio remaining above the legally required minimum of eight percent. The actual capital adequacy ratio of the banking sector at the end 2019 was 16.3 percent, 0.2 percent lower compared to the end of 2018, with all banks maintaining a ratio above the required minimum.
There are no restrictions on a foreigner’s ability to establish a bank account. All commercial banks and the NBRNM have established and maintain correspondent banking relationships with foreign banks. The banking sector did not lose any correspondent banking relationships in the past three years, nor were there any indications that any current correspondent banking relationships were in jeopardy. There is no intention to implement or allow the implementation of blockchain technologies in banking transactions in North Macedonia. Also, alternative financial services do not exist in the economy—the transaction settlement mechanism is solely through the banking sector.
Foreign Exchange and Remittances
Foreign Exchange
The constitution provides for free transfer, conversion, and repatriation of investment capital and profits by foreign investors. Funds associated with any form of investment can be freely converted into other currencies. Conversion of most foreign currencies is possible at market terms on the official foreign exchange market. In addition to banks and savings houses, numerous authorized exchange offices also provide exchange services. The NBRNM operates the foreign exchange market, but participates on an equal basis with other entities. There are no restrictions on the purchase of foreign currency.
Parallel foreign exchange markets do not exist in the country, largely due to the long-term stability of the national currency, the Denar (MKD). The Denar is convertible domestically, but is not convertible on foreign exchange markets. The NBRNM is pursuing a strategy of pegging the Denar to the Euro and has successfully kept it at the same level since 1997. Required foreign currency reserves are spelled out in the banking law.
Remittance Policies
There were no changes in investment remittance policies, and there are no immediate plans for changes to the regulations. By law, foreign investors are entitled to transfer profits and income without being subject to a transfer tax. All types of investment returns are generally remitted within three working days. There are no legal limitations on private financial transfers to and from North Macedonia. Remittances from workers in the diaspora represent a significant source of income for Republic of North Macedonia’s households. In 2019, net private transfers amounted to $1.9 billion, accounting for 15 percent of GDP.
Sovereign Wealth Funds
North Macedonia does not have a sovereign wealth fund.
Norway
6. Financial Sector
Capital Markets and Portfolio Investment
Norway has a highly-computerized banking system that provides a full range of banking services, including internet banking. There are no significant impediments to the free market-determined flow of financial resources.
Foreign and domestic investors have access to a wide variety of credit instruments. The financial regulatory system is transparent and consistent with international norms. The Oslo Stock Exchange facilitates portfolio investment and securities transactions in general.
Money and Banking System
Norwegian banks are generally considered to be on a sound financial footing, and the banking sector holds an estimated USD 530 billion in assets. Conservative asset/liquidity requirements limited the exposure of banks to the global financial crisis in 2008/9. The Ministry of Finance reduced the requirement for banks’ countercyclical capital buffer from 2.5% to 1% on March 12, 2020 as part of the government’s economic response to COVID-19. This lower capital requirement is expected to help banks provide more liquidity to struggling businesses. Foreign banks have been permitted to establish branches in Norway since 1996.
Foreign Exchange and Remittances
Foreign Exchange
Norway’s currency is the Krone. Dividends, profits, interest on loans, debentures, mortgages, and repatriation of invested capital are freely and fully remissible, subject to Central Bank reporting requirements. Ordinary payments from Norway to foreign entities can normally be made without formalities through commercial banks. Norway is a member of the Financial Action Task Force.
Remittance Policies
See above, no restrictions.
Sovereign Wealth Funds
Norway’s sovereign wealth fund, the Government Pension Fund Global (GPFG), was established in 1990 and was valued at NOK 10,088 billion (USD 1.148 trillion) at year-end 2019. The management mandate requires the fund to be widely diversified, outside Norway. Petroleum revenues are invested in global stocks and bonds, and the current portfolio includes over 9,200 companies and approximately 1.5 percent of global stocks. The fund is invested across four asset classes. The fund aims to invest in most markets, countries, and currencies to achieve broad exposure to global economic growth. Close to 40 percent of the fund’s investments are in the United States, which is its single largest market. The fund tries to play an active role in its investments and aims at voting in almost all general shareholder meetings.
In 2004, Norway adopted ethical guidelines for GPFG investments that prohibit investment in companies engaged in various forms of weapons production, environmental degradation, tobacco production, human rights violations, and what it terms “other particularly serious violations of fundamental ethical norms.” In March 2019 the GON announced that companies classified by index provider FTSE Russell as being in the subsector “0533 Exploration & Production” in the sector “0001 Oil & Gas” no longer would be part of the GPFG portfolio. Current holdings in these companies will be phased out over time. More broadly-focused energy companies, which have investments in renewable and sustainable energy sources as well as oil & gas divisions, may still be included. The fund currently has over 100 companies on its exclusion list, at least 24 of which are U.S. companies. The ethical guidelines also highlight three focus areas in term of sustainability: children’s rights, climate change, and water management.
The fund adheres to the Santiago Principles and is a member of the IMF-hosted International Working Group on Sovereign Wealth Funds.
Poland
6. Financial Sector
Capital Markets and Portfolio Investment
The Polish regulatory system is effective in encouraging and facilitating portfolio investment. Both foreign and domestic investors may place funds in demand and time deposits, stocks, bonds, futures, and derivatives. Poland’s equity markets facilitate the free flow of financial resources. Poland’s stock market is the largest and most developed in Central Europe. In September 2018, it was reclassified as developed market status by FTSE Russell’s country classification report. The stock market’s capitalization amounts to around 48 percent of GDP. Although the Warsaw Stock Exchange (WSE) is itself a publicly traded company with shares listed on its own exchange after its partial privatization in 2010, the state retains a significant percentage of shares which allows it to control the company. WSE has become a hub for foreign institutional investors targeting equity investments in the region.
In addition to the equity market, Poland has a wholesale market dedicated to the trading of treasury bills and bonds (Treasury BondSpot Poland). This treasury market is an integral part of the Primary Dealers System organized by the Finance Ministry and part of the pan-European bond platform. Wholesale treasury bonds and bills denominated in PLN and some securities denominated in Euros are traded on the Treasury BondSpot market. Non-government bonds are traded on Catalyst, a WSE managed platform. The capital market is a source of funding for Polish companies. While securities markets continue to play a subordinate role to banks in the provision of finance, the need for medium-term financial support for the modernization of the electricity and gas sectors is likely to lead to an increase in the importance of the corporate bond market. The Polish government acknowledges the capital market’s role in the economy in its development plan. Foreigners may invest in listed Polish shares, but they are subject to some restrictions in buying large packages of shares. Liquidity remains tight on the exchange.
The Capital Markets Development Strategy, published in 2018, identifies 20 key barriers and offers 60 solutions. Some key challenges include low levels of savings and investment, insufficient efficiency, transparency and liquidity of many market segments, and lack of taxation incentives for issuers and investors. The primary aim of the strategy is to improve access of Polish enterprises to financing. The strategy focuses on strengthening trust in the market, improving the protection of individual investors, the stabilization of the regulatory and supervisory environment and the use of competitive new technologies. The strategy is not a law, it sets the direction for further regulatory proposals. Poland is one of the most rigorously supervised capital markets in Europe according to the European Commission.
The Employee Capital Plans program (PPK)—which is designed to increase household saving to augment individual incomes in retirement—could provide a boost to Poland’s capital markets and reduce dependence on foreign saving as a source for investment financing. The program has been halted due to the outbreak of the COVID-19 pandemic.
High-risk venture capital funds are becoming an increasingly important segment of the capital market. The market is still shallow, however, and one major transaction may affect the value of the market in a given year. The funds remain active and Poland is a leader in this respect in Central and Eastern Europe.
Poland provides full IMF Article VIII convertibility for current transactions. Banks can and do lend to foreign and domestic companies. Companies can and do borrow abroad and issue commercial paper, but the market is less robust than in Western European countries or the United States. The Act on Investment Funds allows for open-end, closed-end, and mixed investment funds, and the development of securitization instruments in Poland. In general, no special restrictions apply to foreign investors purchasing Polish securities.
Credit allocation is on market terms. The government maintains some programs offering below-market rate loans to certain domestic groups, such as farmers and homeowners. Foreign investors and domestic investors have equal access to Polish financial markets. Private Polish investment is usually financed from retained earnings and credits, while foreign investors utilize funds obtained outside of Poland as well as retained earnings. Polish firms raise capital in Poland and abroad.
Recent changes in the governance structure of the Polish Financial Supervisory Authority (KNF) are aimed at increasing cross governmental coordination and a better-targeted response in case of financial shocks, while achieving greater institutional effectiveness through enhanced resource allocation. KNF’s supplementary powers have increased, allowing it to authorize the swift acquisition of a failing or likely to fail lender by a stronger financial institution.
Money and Banking System
The banking sector plays a dominant role in the financial system, accounting for about 70 percent of financial sector assets. The sector is mostly privately owned, with the state controlling about 40 percent of the banking sector and the biggest insurance company. Poland had 30 locally incorporated commercial banks at the end of December 2019, according to KNF. The number of locally-incorporated banks has been declining over the last five years. Poland’s 538 cooperative banks play a secondary role in the financial system, but are widespread. The state owns eight banks. Over the last few years, growing capital requirements, lower prospects for profit generation and uncertainty about legislation addressing foreign currency mortgages has pushed banks towards mergers and acquisitions. KNF welcomes this consolidation process, seeing it as a “natural” way to create an efficient banking sector.
The Polish National Bank (NBP) is Poland’s central bank. At the end of 2019, the banking sector was overall well capitalized and solid. Poland’s banking sector meets European Banking Authority regulatory requirements. The share of non-performing loans is close to the EU average and recently has been falling. In December 2019, non-performing loans were 6.6 percent of portfolios. According to the S&P Rating Agency, Poland’s central bank is willing and able to provide liquidity support to the banking sector, in local and foreign currencies, if needed.
The banking sector is liquid, profitable and major banks are well capitalized, although disparities exist among banks. This was confirmed by NBP’s Financial Stability Report and stress tests conducted by the central bank. Profitability increased 12.5 percent in 2019 as a result of solid GDP growth, a pickup in investments and low provisioning costs, and remained at a reasonable level (ROE at 7.0 percent in 2019). Nevertheless, profits remain under pressure due to low interest rates, the issue of conversion of Swiss francs mortgage portfolios into PLN, and a special levy on financial institutions (0.44 percent of the value of assets excluding equity and Polish sovereign bonds). The ECJ issued a judgement in October 2019 on mortgages in Swiss francs, taking the side of borrowers. The ECJ annulled the loan agreements, noting an imbalance between the parties and the use of prohibited clauses. An additional financial burden for banks resulted from the necessity to return any additional fees they charged customers who repaid loans ahead of schedule.
Since 2015, the Polish government established an active campaign aiming to increase the market share of national financial institutions. Since 2017, Polish investors’ share in the banking sector’s total assets exceeds the foreign share in the sector. The State controls around 40 percent of total assets, including the two largest banks in Poland. These two lenders control about one third of the market. Rating agencies warn that an increasing state share in the banking sector might impact competitiveness and profits in the entire financial sector. There is concern that lending decisions at state-owned banks could come under political pressure. Nevertheless, Poland’s strong fundamentals and the size of its internal market mean that many foreign banks will want to retain their positions.
The financial regulator has restricted the availability of loans in euros or Swiss francs in order to minimize the banking system’s exposure to exchange risk resulting from fluctuations. Only individuals who earn salaries denominated in these currencies continue to enjoy easy access to loans in foreign currencies.
In 2019, NBP had relationships with 26 commercial and central banks and was not concerned about losing any of them.
Foreign Exchange and Remittances
Foreign Exchange
Poland is not a member of the Eurozone; its currency is the Polish zloty. The current government has shown little desire to adopt the Euro (EUR). The Polish zloty (PLN) is a floating currency; it has largely tracked the EUR at approximately PLN 4.2-4.3 to EUR 1 in recent years and PLN 3.7 – 3.8 to USD 1. Foreign exchange is available through commercial banks and exchange offices. Payments and remittances in convertible currency may be made and received through a bank authorized to engage in foreign exchange transactions, and most banks have authorization. Foreign investors have not complained of significant difficulties or delays in remitting investment returns such as dividends, return of capital, interest and principal on private foreign debt, lease payments, royalties, or management fees. Foreign currencies can be freely used for settling accounts.
Poland provides full IMF Article VIII convertibility for currency transactions. The Polish Foreign Exchange Law, as amended, fully conforms to OECD Codes of Liberalization of Capital Movements and Current Invisible Operations. In general, foreign exchange transactions with the EU, OECD, and European Economic Area (EEA) are accorded equal treatment and are not restricted.
Except in limited cases which require a permit, foreigners may convert or transfer currency to make payments abroad for goods or services and may transfer abroad their shares of after-tax profit from operations in Poland. In general, foreign investors may freely withdraw their capital from Poland, however, the November 2018 tax bill included an exit tax. Full repatriation of profits and dividend payments is allowed without obtaining a permit. A Polish company (including a Polish subsidiary of a foreign company), however, must pay withholding taxes to Polish tax authorities on distributable dividends unless a double taxation treaty is in effect, which is the case for the United States. Changes to the withholding tax in the 2018 tax bill increased the bureaucratic burden for some foreign investors (see Section 2). The United States and Poland signed an updated bilateral tax treaty in February 2013 that the United States has not yet ratified. As a rule, a company headquartered outside of Poland is subject to corporate income tax on income earned in Poland, under the same rules as Polish companies.
Foreign exchange regulations require non-bank entities dealing in foreign exchange or acting as a currency exchange bureau to submit reports electronically to NBP at http://sprawozdawczosc.nbp.pl. An exporter may open foreign exchange accounts in the currency the exporter chooses.
Remittance Policies
Poland does not prohibit remittance through legal parallel markets utilizing convertible negotiable instruments (such as dollar-denominated Polish bonds in lieu of immediate payment in dollars). As a practical matter, such payment methods are rarely, if ever, used.
Sovereign Wealth Funds
The Polish Development Fund (PFR) is often referred to as Poland’s Sovereign Wealth Fund. PFR is an umbrella organization pooling resources of several governmental agencies and departments, including EU funds. A strategy for the Fund was adopted in September 2016, and it was registered in February 2017. PFR supports the implementation of the Responsible Development Strategy.
The PFR operates as a group of state-owned banks and insurers, investment bodies, and promotion agencies. The budget of the PFR Group initially reached PLN 14 billion (USD 3.5 billion), which managers estimate is sufficient to raise capital worth PLN 90-100 billion (USD 22-25 billion). Various actors within the organization can invest through acquisition of shares, through direct financing, seed funding, and co-financing venture capital. Depending on the instruments, PFR expects different rates of return.
In July 2019, the President of Poland signed the Act on the System of Development Institutions. Its main goal is to formalize and improve the cooperation of institutions that make up the PFR Group, strengthen the position of the Fund’s president and secure additional funding from the Finance Ministry. The group will have one common strategy. The introduction of new legal solutions will increase the efficiency and availability of financial and consulting instruments. An almost four-fold increase in the share capital will enable PFR to significantly increase the scale of investment in innovation and infrastructure and will help Polish companies expand into foreign markets. While supportive of overseas expansion by Polish companies, the Fund’s mission is domestic.
PFR plans to invest PLN 2.2 billion (USD 520 million) jointly with private-equity and venture-capital firms and PLN 600 million (USD 140 million) into a so-called fund of funds intended to kickstart investment in midsize companies.
Since its inception, PFR has carried out over 30 capital transactions, investing a total of PLN 8.3 billion (approx. USD 2 billion) directly or through managed funds. PFR, together with the support of other partners, has implemented investment projects with a total value of PLN 26.2 billion (approx. USD 6.5 billion). The most significant transactions carried out together with state-controlled insurance company PZU S.A. include the acquisition of 32.8 percent of the shares of Bank Pekao S.A. (PFR’s share is 12.8 percent); the acquisition of 100 percent of the shares in PESA Bydgoszcz S.A. (a rolling stock producer); and the acquisition of 99.77 percent of the shares of Polskie Koleje Linowe S.A. PFR has also completed the purchase, together with PSA International Ptd Ltd and IFM Investors, of DCT Gdansk, the largest container terminal in Poland (PFR’s share is 30 percent).
In April 2020, the President of Poland signed into law an amendment to the law on development institution systems, expanding the competencies of PFR as part of the government’s Anti-Crisis Shield. The amendment expands the competences of PFR so that it can more efficiently support businesses in the face of the coronavirus epidemic. The fund will provide PLN 100 billion (USD 25 billion), in financial support for companies, known as the Financial Shield.
Portugal
6. Financial Sector
Capital Markets and Portfolio Investment
Portugal has a generally positive attitude toward foreign portfolio investment. The Portuguese stock exchange is managed by Euronext Lisbon, part of the NYSE Euronext Group, which allows a listed company access to a global and diversified pool of investors. The Portuguese Stock Index-20, PSI20, is Portugal’s benchmark index representing the largest and most liquid companies listed on the exchange. The Portuguese stock exchange offers a diverse product portfolio: shares, funds, exchange traded funds, bonds, and structured products, including warrants and futures.
The Portuguese Securities Market Commission (CMVM) supervises and regulates securities markets, and is a member of the Committee of European Securities Regulators and the International Organization of Securities Commissions. Portugal has an effective regulatory system that encourages and facilitates portfolio investment and tries to promote liquidity in the markets for investors to effectively enter and exit sizeable positions.
Portugal respects IMF Article VIII by refraining from placing restrictions on payments and transfers for current international transactions. Credit is allocated on market terms, and foreign investors are eligible for local market financing. Private sector companies have access to a variety of credit instruments, including bonds.
Money and Banking System
Portugal has 151 credit institutions, of which 62 are banks, with a wide penetration of banking services across the country. Portugal’s banking assets totaled €398 billion at the end of the third quarter of 2019, compared to €489 billion in 2014.
Portuguese banks sharply reduced non-performing loan portfolios since the eurozone debt crisis, leaving them in a healthier position to withstand future shocks. Total loans stood at just above €200 billion at the end of the third quarter of 2019, with a non-performing loan ratio of 8.3 percent ratio, compared to over 17% in 2016. Banks’ return on equity and on assets remained in positive territory in 2019. In terms of capital buffers, the Common Equity Tier 1 ratio improved to 13.9 percent as of June 2019, from 13.2% in June 2017.
Foreign banks are allowed to establish operations in Portugal. In terms of decision-making policy, a general ‘four-eyes policy’ with two individuals approving actions must be in place at all banks and branches operating in the country, irrespective of whether they qualify as international subsidiaries of foreign banks or local banks. Foreign branches operating in Portugal are required to have such decision-making powers that enable them to operate in the country, but this requirement generally does not prevent them from having internal control and rules governing risk exposure and decision-making processes, as customary in international financial groups.
No restrictions exist on a foreigner’s ability to establish a bank account and both residents and non-residents may hold bank accounts in any currency. However, any transfers of €10,000 or more must be declared to Portuguese customs authorities.
Foreign Exchange and Remittances
Foreign Exchange
Portugal has no exchange controls and there are no restrictions on the import or export of capital. Funds associated with any form of investment can be freely converted into any world currency.
Portugal is a member of the European Monetary Union (Eurozone) and uses the euro, a floating exchange rate currency controlled by the European Central Bank (ECB). The Bank of Portugal is the country’s central bank; the Governor of the Bank of Portugal participates on the board of the ECB.
Remittance Policies
There are no limitations on the repatriation of profits or dividends. There are no time limitations on remittances.
Sovereign Wealth Funds
The Ministry of Labor, Solidarity, and Social Security manages Portugal’s Social Security Financial Stabilization Fund (FEFSS), with total assets of around €20 billion. It is not a Sovereign Wealth Fund (SWF) and does not subscribe to the voluntary code of good practices (Santiago Principles), or participate in the IMF-hosted International Working Group on SWFs. Among other restrictions, Portuguese law requires that at least 50 percent of the fund’s assets be invested in Portuguese public debt, and limits FEFSS investment in equity instruments to that of EU or OECD members. FEFSS acts as a passive investor and does not take an active role in the management of portfolio companies.
Romania
6. Financial Sector
Capital Markets and Portfolio Investment
Romania welcomes portfolio investment. In September 2019, the Financial Times and the London Stock Exchange (FTSE) promoted the Bucharest Stock Exchange (BVB) to Emerging Secondary Capital Market status from Frontier Capital Market classification. The decision comes into force beginning September 1, 2020, when the BVB will transfer from FTSE Frontier Index to FTSE Global Equity Index Series (GEIS). The Financial Regulatory Agency (ASF) regulates the securities market. The ASF implements the registration and licensing of brokers and financial intermediaries, the filing and approval of prospectuses, and the approval of market mechanisms.
The BVB resumed operations in 1995 after a hiatus of nearly 50 years. The BVB operates a two-tier system with the main market consisting of 83 companies. The official index, BET, is based on an index of the ten most active stocks. BET-TR is the total return on market capitalization index, adjusted for the dividends distributed by the companies included in the index. Since 2015, the BVB also has an alternative trading system (MTS-AeRO) with 297 listed companies – mostly small- and medium-sized enterprises (SMEs) – and features a relaxed listing criteria. The BVB allows trade in corporate, municipal, and international bonds. Investors can use gross basis trade settlements, and trades can be settled in two net settlement cycles. The BVB’s integrated group includes trading, clearing, settlement, and registry systems. The BVB’s Multilateral Trading System (MTS) allows trading in local currency of 15 foreign stocks listed on international capital markets.
Despite a diversified securities listing, international capital and financial markets have adversely affected the Romanian capital market and liquidity remains low. Neither the government nor the Central Bank imposes restrictions on payments and transfers. Country funds, hedge funds, private pension funds, and venture capital funds continue to participate in the capital markets. Minority shareholders have the right to participate in any capital increase. Romanian capital market regulation is now EU-consistent, with accounting regulations incorporating EC Directives IV and VII.
Money and Banking System
Thirty-four banks and credit cooperative national unions currently operate in Romania. The largest is the privately-owned Transilvania Bank (17.7 percent market share), followed by Austrian-owned Romanian Commercial Bank (BCR-Erste, 14.4 percent); French-owned Romanian Bank for Development (BRD-Société Générale, 11.3 percent); Dutch-owned ING (9.01 percent); Italian-owned UniCredit ( 9.0 percent); and Austrian-owned Raiffeisen ( 8.7 percent).
The banking system is stable and well-provisioned relative to its European peers. According to the National Bank of Romania, as of December 2019, non-performing loans accounted for 4.08 percent of total bank loans. As of December 2019, the banking system’s solvency rate was 20.0 percent, which has remained steady over recent years.
The government has encouraged foreign investment in the banking sector, and mergers and acquisitions are not restricted. The only remaining state-owned banks are the National Savings Bank (CEC Bank) and EximBank, comprising 8.1 percent of the market combined.
While the National Bank of Romania must authorize all new non-EU banking entities, banks and non-banking financial institutions already authorized in other EU countries need only notify the National Bank of Romania of plans to provide local services based on the EU passport.
The Romanian Association of Banks has promoted a dialogue with interested parties – institutions, representatives of consumers’ associations, businesses, and the media – to improve the legal framework to allow adoption of digital technologies in the financial and banking sectors.
Foreign Exchange and Remittances
Foreign Exchange
Romania does not restrict the conversion or transfer of funds associated with direct investment. All profits made by foreign investors in Romania may be converted into another currency and transferred abroad at the market exchange rate after payment of taxes.
Romania’s national currency, the Leu, is freely convertible in current account transactions, in accordance with the International Monetary Fund’s (IMF) Article VII.
Remittance Policies
There is no limitation on the inflow or outflow of funds for remittances of profits, debt service, capital gains, returns on intellectual property, or imported inputs. Proceeds from the sales of shares, bonds, or other securities, as well as from the conclusion of an investment, can be repatriated.
Romania implemented regulations liberalizing foreign exchange markets in 1997. The inter-bank electronic settlement system became fully operational in 2006, eliminating past procedural delays in processing capital outflows. Commission fees for real-time electronic banking settlements have gradually been reduced.
Capital inflows are also free from restraint. Romania concluded capital account liberalization in September 2006, with the decision to permit non-residents and residents abroad to purchase derivatives, treasury bills, and other monetary instruments.
Sovereign Wealth Funds
Plans to establish a Sovereign Development and Investment Fund (SDIF) were repealed by the current government in January 2020.
Serbia
6. Financial Sector
Capital Markets and Portfolio Investment
Serbia welcomes both domestic and foreign portfolio investments and regulates them efficiently. The Government removed restrictions on short-term portfolio investments April 2018. Residents of Serbia are now allowed to purchase foreign short-term securities, and foreigners are allowed to purchase short-term securities in Serbia. Payments related to long-term securities have no restriction.
In 2019, Serbia recorded net outflows of USD 200 million in portfolio investment, according to the National Bank of Serbia (NBS). The Serbian government regularly issues bonds to finance its budget deficit, including short-term, dinar-denominated T-bills, and dinar-denominated, euro-indexed government bonds. The total value of government debt securities issued on the domestic market reached USD 10.8 billion in February 2020, with 67.3 percent in Serbian dinars, 33 percent in euros, and 0.6 percent in U.S. dollars. Serbia also issued a total value of EUR 3 billion of Eurobonds on international market.
Serbia’s international credit ratings are improving. In March 2017, Moody’s upgraded the Government of Serbia’s long-term issuer ratings to Ba3, from B1. In December 2019, Standard & Poor’s raised its ratings for Serbia from BB to BB+ with a positive outlook; it maintained the rating on May 1, 2020, while modifying the outlook to stable. Also in September 2019, Fitch raised Serbia’s credit rating from BB to BB+. The improved ratings remain below investment grade.
Serbia’s equity and bond markets are underdeveloped. Corporate securities and government bonds are traded on the Belgrade Stock Exchange (BSE) www.belex.rs. Of 990 companies listed on the exchange, shares of fewer than 100 companies are traded regularly (more than once a week). Total annual turnover on the BSE in 2019 was USD 860 million, which represents an increase of 47 percent. However, trading volumes have declined since 2007, when the total turnover reached USD 2.7 billion.
Market terms determine credit allocation. In June 2019, the total volume of issued loans in the financial sector stood at USD 23.3 billion. Average interest rates are decreasing but still higher than the EU average. The business community cites tight credit policies and expensive commercial borrowing for all but the largest corporations as impediments to business expansion. Around 67 percent of all lending is denominated in euros, an additional 0.5 percent in Swiss francs, and 0.6 percent in U.S. dollars, all of which provide lower rates, but also shift exchange-rate risk to borrowers. Foreign investors are able to obtain credit on the domestic market. The government and central bank respect IMF Article VIII, and do not place restrictions on payments or transfers for current international transactions.
Hostile takeovers are extremely rare in Serbia. The Law on Takeover of Shareholding Companies regulates defense mechanisms. Frequently after privatization, the new strategic owners of formerly state-controlled companies have sought to buy out minority shareholders.
Money and Banking System
The NBS regulates the banking sector. Foreign banks are allowed to establish operations in Serbia, and foreigners can freely open both local currency and hard currency non-resident accounts. The banking sector comprises 91 percent of the total assets of the financial sector. As of June 2019, consolidation had reduced the sector to 26 banks with total assets of USD 38 billion (about 80 percent of GDP), with 76.5 percent of the market held by foreign-owned banks. The top ten banks, with country of ownership and estimated assets, are Banca Intesa (Italy, USD 5.9 billion); UniCredit (Italy, USD 4.4 billion); Komercijalna Banka (majority Serbian government-owned, now in the process of being sold to Slovenia’s NLB Bank, USD 4.1 billion); Société Générale (France, USD 3.1 billion); Raiffeisen (Austria, USD 3.0 billion); Erste Bank (Austria, USD 2.2 billion) AIK Banka Nis (Serbia, USD 2.1 billion); Eurobank EFG (Greece, USD 1.6 billion); Vojvodjanska Banka (Hungary, USD 2.0 billion) Postanska Stedionica (Serbian government, USD 1.8 billion). See: https://www.nbs.rs/internet/latinica/55/55_4/kvartalni_izvestaj_II_19.pdf
Four state-owned banks in Serbia went bankrupt after the global financial crisis in 2008. The state compensated the banks’ depositors with payouts of nearly USD 1 billion. A number of state-controlled banks have had financial difficulties since the crisis because of mismanagement and, in one instance, alleged corruption. The banks honored all withdrawal requests during the financial crisis and appear to have regained consumer trust, as evidenced by the gradual return of withdrawn deposits to the banking system. In June 2019, savings deposits in the banking sector reached USD 14 billion, exceeding pre-crisis levels.
The IMF assessed in their July 2019 report on Serbia that since the 2017 Article IV Consultation, the financial sector has shown improved resilience. As of February 2019, banks’ capital adequacy was stable at 22.3 percent, well above the regulatory minimum, while asset quality is improving. Banks’ profitability remains robust with return on assets and return on equity ratios of 1.9 percent and 10.6 percent respectively in February 2019. The IMF assessed in 2018 that authorities had made important progress, with the aggregate stock of non-performing loans (NPLs) falling both in nominal terms and relative to total loans. Since the adoption of an NPL resolution strategy in mid-2015, NPLs have declined from 22.2 to 4.1 percent of the total loan portfolio as of February 2020. NPLs remain fully provisioned. In addition, there are significant foreign-exchange risks, as 74 percent of all outstanding loans are indexed to foreign currencies (primarily the euro). In April 2019, the government adopted a law that protected consumers who had taken mortgage loans denominated in Swiss francs by converting them into euros. Banks and the state shared losses resulting from a reduction of outstanding principal and interest balances. This law enabled borrowers to continue servicing debt at more favorable terms.
The NBS, as chief regulator of the financial system, has announced that cryptocurrencies are not money, and thus are not regulated by law in Serbia. Cryptocurrencies are only mentioned in Serbian legislation in the Law on Preventing of Money Laundering and Terrorist Financing. NBS is not currently preparing cryptocurrency regulations. NBS said it does not have the authority to issue licenses for trading in cryptocurrencies or for setting up cryptocurrency ATMs. Nor are cryptocurrency traders or internet platforms subject to NBS oversight. NBS stressed that those engaging in cryptocurrency transactions or activities are the sole carriers of risk. However, the Serbian Administration for Prevention of Money Laundering and Terrorist Financing oversees every transaction in cryptocurrencies performed on ATMs or online in Serbia.
Despite the lack of regulation, trading in cryptocurrencies in Serbia does occur. The company ECD Group has installed an online platform for trading in cryptocurrencies (Bitcoin BTC, Litecoin LTC, Ethereum ETH, Dash, and Bitcoin Cash) at https://ecd.rs/. The company claims to have over 20,000 registered users of the platform. ECD Group has also installed 10 ATMs for cryptocurrencies in Serbia, most of which are in Belgrade but also in Novi Sad, Nis, and Subotica. EDC claims that it has executed over 100,000 transactions since it was established in 2012. As of June 2019, Xcalibra established a new digital platform (Xcalibra.com) to trade cryptocurrencies in Serbian dinars without mediator currencies, which will avoid currency exchange loss. There is also a Bitcoin Association of Serbia.- http://www.bitcoinasocijacija.org.
Foreign Exchange and Remittances
Foreign Exchange
Serbia’s Foreign Investment Law guarantees the right to transfer and repatriate profits from Serbia, and foreign exchange is available. Serbia permits the free flow of capital, including for investment, such as the acquisition of real estate and equipment. Non-residents may maintain both foreign-currency and dinar-denominated bank accounts without restrictions. Investors may use these accounts to make or receive payments in foreign currency. The government amended the Foreign Exchange Law in December 2014 to authorize Serbian citizens to conclude transactions abroad through internet payment systems such as PayPal.
Many companies have raised concerns that the NBS uses excessive enforcement of the Foreign Exchange Law to individually examine all cross-currency financial transactions – including intra-company transfers between foreign headquarters and local subsidiaries, as well as loan disbursements to international firms – thus raising the cost and bureaucratic burden of transactions and inhibiting the development of e-commerce within Serbia. For this reason, international financial institutions and the business community have urged revision of the law. The NBS has defended the measure as necessary to prevent money laundering and other financial crimes.
The NBS targets inflation in its monetary policy, and regularly intervenes in the foreign-exchange market to that end. In 2019, the NBS made net purchases of EUR 2.7 billion on the interbank currency market in order to prevent sharp fluctuations of the dinar. In 2019, the dinar appreciated 0.5 percent against the euro and depreciated 1.5 percent against the U.S. dollar. No evidence has been reported that Serbia engages in currency manipulation. According to the IMF, Serbia maintains a system free of restrictions on current international payments and transfers, except with respect to blocked pre-1991 foreign currency savings abroad. JP Morgan assessed in December 2019 that the Serbian dinar is one of the two most realistically valued currencies among 25 emerging markets globally.
Remittance Policies
Personal remittances constitute a significant source of income for Serbian households. In 2019, total remittances from abroad reached USD 2.7 billion, or approximately 7 percent of GDP.
The Law on Foreign Exchange Operations regulates investment remittances, which can occur freely and without limits. The Investment Law allows foreign investors to freely and without delay transfer all financial and other assets related to the investment to a foreign country, including profit, assets, dividends, royalties, interest, earnings share sales, proceeds from sale of capital and other receivables. The Foreign Investors’ Council, a business association of foreign investors, confirms that there are no limitations on investment remittances in Serbia.
Sovereign Wealth Funds
Serbia does not have a sovereign wealth fund.
Slovenia
6. Financial Sector
Capital Markets and Portfolio Investment
Capital markets remain relatively underdeveloped given Slovenia’s level of prosperity. Enterprises rarely raise capital through the stock market and tend to rely on the traditional banking system and private lenders to meet their capital needs.
Established in 1990, the Ljubljana Stock Exchange (LSE) is a member of the International Association of Stock Exchanges (FIBV). In 2015, the Zagreb Stock Exchange acquired the LSE. However, the number of companies listed on the exchange is limited and trading volume is very light, with annual turnover similar to a single day’s trading on the NYSE. Low liquidity remains an issue when entering or exiting sizeable positions.
In 1995, the Central Securities Clearing Corporation (KDD) was established to provide central securities custody services, clear and settle securities transactions, and maintain the central securities registry on the LSE electronic trading system. In 2017, KDD successfully aligned its procedures to that of the uniform European securities settlement platform TARGET2-Securities (T2S). In 2019, Slovenia’s Securities Market Agency (ATVP) licensed KDD to operate under the EU’s Central Securities Depository Regulation (CSDR) and provide services as a Central Securities Depository (CSD), pursuant to Article 17 of the Regulation (EU) 909/2014 on improving securities settlement in the European Union and on central securities depositories. he Established in 1994, the ATVP has powers similar to those of the U.S. Securities and Exchange Commission and supervises investment firms, the Ljubljana Stock Exchange (LSE), the KDD, investment funds, and management companies. It also shares responsibility with the Bank of Slovenia for supervision of banking and investment services.
Slovenia adheres to Article VIII of the International Monetary Fund’s Article of Agreement and is committed to full current account convertibility and full repatriation of dividends.
The LSE uses different dissemination systems, including real-time online trading information via Reuters and the Business Data Solutions System. The LSE also publishes information on the Internet at http://www.ljse.si/.
Foreign investors in Slovenia have the same rights as domestic investors, including the ability to obtain credit on the local market.
Money and Banking System
There is a relatively high degree of concentration in Slovenia’s banking sector, with 12 commercial banks, three savings banks, and two foreign bank branches in Slovenia serving two million people. In 2008, the combined effects of the global financial crisis, the collapse of the construction sector, and diminished demand for exports led to significant capital shortfalls. Bank assets declined steadily after 2009 but rebounded in 2016 and have remained steady since then. Since the crisis, most banks have refocused their business activities towards SMEs and individuals/households, prompting larger companies to search for alternative financing sources. According to European Banking Federation data, Slovenia’s banking sector assets totaled EUR 38.8 billion (USD 43.5 billion) at the end of 2018, equaling approximately 84.4 percent of GDP, still EUR13.2 billion less than the total banking assets volume at the end of 2009, when banking sector assets equaled 146 percent of GDP.
Slovenia’s banking sector was devastated by the 2009 economic crisis. Nova Ljubljanska Banka (NLB) and Nova Kreditna Banka Maribor (NKBM) faced successive downgrades by credit rating agencies due to the large numbers of nonperforming loans in their portfolios. In 2013, the government established a Bank Asset Management Company (BAMC) with a management board comprised of financial experts to promote stability and restore trust in the financial system. In exchange for bonds, BAMC agreed to manage the nonperforming assets of three major state banks, conducting three such operations from December 2013 through March 2014. The government also injected EUR 3.5 billion (USD 3.94 billion) into Slovenia’s three largest banks, NLB, NKBM, and Abanka. These measures helped recapitalize and revitalize the country’s largest commercial banks.
According to World Bank data, just 7.6 percent of NLB’s total assets and an estimated 1.8 percent of all Slovenian banking assets were still nonperforming as of the end of 2018. According to European Bank Authority statistics, 5.3 percent of all loans in Slovenia were past due in June 2019, a marked turnaround from the post-crisis period.
NLB, the country’s largest bank, was privatized in 2019, although the government remains a major shareholder with a 25 percent plus one share stake. Of the remaining shares, more than fifty percent are spread among several international investors on fiduciary account at Bank of New York, while a number of Slovenian institutional and private investors purchased the remainder. The country’s second largest bank, Nova Kreditna Banka Maribor (NKBM), was sold to an American fund and the European Bank of Reconstruction and Development (EBRD) in 2016. In 2020, NKBM acquired the country’s third largest state-owned bank, Abanka. Once fully merged, NKBM/Abanka will have total assets of EUR 8.71 billion, and a 22.5 percent market share, rivaling NLB, which has EUR 8.81 billion in assets and a 23 percent market share.
Several foreign banks announced takeovers or merged with Slovenian banks prior to the 2008 financial crisis. In 2001, the French bank Société Générale acquired Slovenia’s largest private bank, SKB Banka. That same year, the Italian banking group San Paolo IMI purchased 82 percent of the Bank of Koper, Slovenia’s fifth largest bank. In 2002, the government sold 34 percent of NLB to Belgium’s KBC Group and another five percent to the EBRD. In the aftermath of the 2008 financial crisis, the government purchased KBC’s NLB shares back in December 2012 and recapitalized the bank.
Banking legislation authorizes commercial banks, savings banks, and stock brokerage firms to purchase securities abroad. Investment funds may also purchase securities abroad, provided they meet specified diversification requirements.
Despite Slovenia’s vibrant blockchain technology ecosystem and several global blockchain companies headquartered in the country, Slovenian banks have been slow to adopt blockchain technologies to process banking transactions.
The Bank of Slovenia, established on June 25, 1991, is the Republic of Slovenia’s central bank. The Bank of Slovenia has been a member of the European System of Central Banks (ESCB) since Slovenia joined the European Union in 2004. The Bank of Slovenia gave up responsibility for monetary policy to the Eurosystem when Slovenia adopted the euro as its currency in 2007. As a member of the Eurosystem, the Bank of Slovenia coordinates with other EU central banks to implement the common monetary policy, manage foreign exchange reserves, ensure the smooth functioning of payment systems, and issue euro banknotes.
Slovenian law allows non-residents to open bank accounts in Slovenia on presentation of a passport, a Slovenian tax number, and a foreign tax number. Company owners must be present to open a business bank account.
Slovenia’s takeover legislation is fully harmonized with EU regulations. In 2006, Slovenia implemented EU Directive 2004/25/ES by adopting a new takeover law. The law was amended in 2008 to reflect Slovenia’s adoption of the euro as its currency. The law defines a takeover as a party’s acquisition of 25 percent of a company’s voting rights and requires the public announcement of a potential takeover offer for all current shareholders. The acquiring party must publicly issue a takeover offer for each additional acquisition of 10 percent of voting rights until it has acquired 75 percent of voting rights. The law also stipulates that the acquiring party must inform the share issuer whenever its stake in the target company reaches, surpasses, or drops below five, 10, 20, 25, 33, 50, or 75 percent. The law applies to all potential takeovers.
It is common for acquisitions to be blocked or delayed, and drawn out negotiations and stalled takeovers have hurt Slovenia’s reputation in global financial markets. In 2015, the privatization of Slovenia’s state-owned telecommunications company, Telekom Slovenije, failed in large part due to political attempts to discourage the sale of a state-owned company. Slovenia’s biggest retailer, Mercator, faced similar challenges in 2014 when a lengthy and arduous process and strong domestic opposition preceded its eventual sale to a Croatian buyer. The U.S.-owned Central European Media Enterprises dropped its politically controversial sale of Slovenian media house Pro Plus to then-U.S. owned United Group in January 2019 after the Competition Protection Agency failed to issue a ruling on the proposed acquisition despite reviewing the case for more than 18 months. The government has also struggled to meet its commitment to open Slovenia’s economy to international capital markets.
Thirteen insurance companies, two re-insurance companies, three retirement companies, and five branches of foreign firms operate in Slovenia. The three largest insurance companies in Slovenia account for over 60 percent of the market, with the largest, state-owned Triglav d.d., controlling 36 percent, while foreign insurance companies constitute less than 10 percent. In 2016, two Slovenian and two Croatian insurance companies merged into a new company, SAVA. Insurance companies primarily invest their assets in non-financial companies, state bonds, and bank-issued bonds.
Since 2000, there have been significant changes in legislation regulating the insurance sector. The Ownership Transformation of Insurance Companies Act, which seeks to privatize insurance companies, has stalled on several occasions due to ambiguity over the estimated share of state-controlled capital. Although plans for insurance sector privatization have been under discussion since 2005, there has been no implementation.
Slovenia currently has three registered health insurance companies and a variety of companies offering other kinds of insurance. Under EU regulations, any insurance company registered in the EU can market its services in Slovenia, provided the insurance supervision agency of the country where the company is headquartered has notified the Slovenian Supervision Agency of the company’s intentions.
Foreign Exchange and Remittances
Foreign Exchange
Slovenia adheres to Article VIII of the IMF Article of Agreement and is committed to full current account convertibility and full repatriation of dividends. To repatriate profits, joint stock companies must provide evidence of the settlement of tax liabilities, notarized evidence of distribution of profits to shareholders, and proof of joint stock company membership (Article of Association). All other companies must provide evidence of the settlement of tax liabilities and the company’s act of establishment.
For the repatriation of shares in a domestic company, the party must submit its act of establishment, a contract on share withdrawal, and evidence of the settlement of tax liabilities to the authorized bank.
Slovenia replaced its previous currency, the Slovenian tolar, with the euro in January 2007. The Eurozone has a freely floating exchange rate.
Remittance Policies
Not applicable/information not available.
Sovereign Wealth Funds
Slovenia does not have a sovereign wealth fund.
Ukraine
6. Financial Sector
Capital Markets and Portfolio Investment
The Ukrainian government encourages foreign portfolio investment in Ukraine, but the capital market is underdeveloped. Ukraine’s capital market consists of two separate sectors: a stock market and a commodity market. Liquidity is limited and investors have limited investment options. The stock market includes ten stock exchanges and a settlement center. Government bonds constitute 95 percent of the trades. A few corporate securities are listed, but the volume of their trades is insignificant. Only Ukrainian-licensed securities traders may handle securities transactions, though there are limited exceptions. In January 2020, China’s Bohai Commodity Exchange acquired a 49.9% stake in one of Ukraine’s leading stock exchanges, JSC PFTS Stock Exchange. The commodity market in Ukraine does not have a transparent regulatory framework. It includes hundreds of commodity exchanges, and other participants that are not licensed or subject to any supervision.
The regulator of Ukraine’s capital market, the National Securities and Stock Market Commission, lacks financial and operational independence and, therefore, Ukraine is not a signatory of the Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information of the International Organization of Securities Commissions. Legislation to strengthen the independence of the Securities Commission was submitted to the Parliament but has not yet passed. In November 2019, Ukraine adopted the so-called “Split” law, which regulates the non-banking financial services sector. According to the law, the National Bank of Ukraine will supervise and regulate the insurance market, leasing and factoring companies, credit unions, credit bureaus, pawnshops and other financial companies, while the National Securities and Stock Market Commission will regulate private funds, including: pension funds, construction financing, and real estate transactions. The law provides for a transition period through June 30, 2020.
Ukraine has restrictions in place on payments and transfers for current international transactions. However, legislation adopted in 2018 on currency regulations came into effect in February 2019 that has begun to loosen some of these restrictions. Ongoing currency liberalization, along with the legislation and regulatory reform, should facilitate foreign investments into securities, including corporate ones. Credit is largely allocated on market terms, and foreign investors are able to get credit on the local market through a variety of credit instruments, though interest rates remain high. The credit market environment has long lacked transparency; enforcement of key laws and regulations has been weak; and investors, both domestic and foreign, continue to face significant uncertainty.
Money and Banking System
Ukraine’s banking sector has seen remarkable progress following the 2014-2015 crisis thanks in large part to the authorities’ banking sector cleanup, which resulted in the closure of over 100 banks for insolvency or money laundering activities, as well as sound policies from Ukraine’s independent central bank, the National Bank of Ukraine. The number of unprofitable banks has steadily decreased in the past few years; only six banks were unprofitable in 2019 compared to 13 in 2018. The banking sector nearly tripled 2018’s record high net profit of UAH 21.7 billion ($775 million), reporting a cumulative profit of UAH 60 billion ($2.4 billion) for 2019. State-owned PrivatBank earned half of the total profits in the banking system. Interests were the main source of the total profit. Foreign banks’ profits amounted to UAH 18.5 billion ($740 million) in 2019.
Non-performing loans, however, remain one of the biggest unresolved issues of the banking sector accounting for 48.4 percent of loans in 2019. State-owned banks hold nearly 75 percent of total NPLs. Moreover, the penetration of banking services in Ukraine remains low, as only approximately 63 percent of Ukrainians have a banking account. There are approximately 75 banks operating in Ukraine, with the top 20 banks accounting for 92 percent of net assets in 2019. As of end-2019, the banking sector’s net assets amounted to UAH 1.49 trillion ($57 billion).
Foreign-licensed banks may carry out all activities conducted by domestic banks, and there is no ceiling on participation in the banking system, including operating via subsidiaries. A foreign company can open a bank account in Ukraine for the purposes of investment operations; otherwise, it needs to register a representative office in Ukraine. A nonresident private person can open a bank account in Ukraine. A foreign investor may open an account in a bank operating in Ukraine and transfer in funds for further investment or invest directly to an account of a Ukrainian resident company. In 2017, the National Bank of Ukraine began allowing foreign investors to use escrow accounts to make investments in Ukraine.
Foreign Exchange and Remittances
Foreign Exchange
The National Bank of Ukraine (NBU) in 2019 continued to liberalize currency controls and restrictions on repatriating funds, which had been put in place to stabilize the Ukrainian foreign exchange market during the 2014 economic crisis. In February 2019, the Law “On Currency and Currency Transactions,” came into effect, marking the start of the most radical overhaul of the country’s currency environment in over a quarter of a century. Under the new law, individuals can purchase foreign currency online and against credit money. Individuals can transfer up to EUR 50,000 ($55,000) abroad every year, with the daily limit raised to $5500 from $1800. Even though many restrictions for foreign currency transactions have been loosened, the new regulations still require Ukrainian banks to verify most foreign currency transactions. This rule applies to a majority of cross-border payments by Ukrainian residents.
The NBU has abolished all restrictions related to the repatriation of dividends. As of July 2019, dividends can be paid to a foreign investor’s account in Ukraine or abroad without limits and for any year. The NBU also cancelled the mandatory sale of currency proceeds by businesses from June 2019. In addition, it removed the hryvnia reserve requirement banks had to keep for foreign currency purchases, and it now allows unlimited daily purchase of foreign currency by individuals through banks, financial institutions, and via online banking. In September 2019, the NBU cancelled a monthly EUR 5 million limit for the repatriation of proceeds received by a foreign investor from selling shares of a Ukrainian company, decreasing its charter capital or withdrawing investment from a Ukrainian company. A cap on the repatriation of the above-specified proceeds of foreign investment was introduced by the NBU back in 2014 in order to restrict the outflow of capital from Ukraine. The NBU has developed a road map for removing currency restrictions with the goal of reaching a full capital flow regime. The roadmap is publicly available on its website in both Ukrainian and English. Further liberalization is contingent on implementation of BEPS legislation and general macro-economic conditions.
The NBU has had a floating exchange rate policy for the last five years, though the NBU carries out currency interventions to meet two objectives: reducing excessive currency fluctuations and replenishment of international reserves.
Remittance Policies
In December 2019, the central bank of Ukraine doubled the e-limit for some retail foreign currency remittances, including for investment abroad or foreign deposits, to EUR 100,000 ($110,000) per year. As long as they comply with the e-limit, individuals are permitted to remit foreign currency (or the national currency hryvnia) abroad or to current accounts of corporate nonresidents in Ukraine opened in order to meet liabilities to nonresidents under health insurance agreements, invest abroad, deposit funds to their accounts outside Ukraine, or issue a foreign currency loan to a nonresident.
Sovereign Wealth Funds
Ukraine does not maintain or operate a sovereign wealth fund.