Decision on More Detailed Manner of Calculation of Ex-Ante Contributions Paid by Credit Institutions to the Resolution Fund

Pursuant to Article 44 paragraph (2) item 3) of the Central Bank of Montenegro Law (OGM 40/10, 06/13, 70/17) and Article 149 paragraphs (3) and (8) of the Law on Resolution of Credit Institutions (OGM 72/19), the Council of the Central Bank of Montenegro, at its meeting held on 28 December 2020, passed the following DECISION ON MORE DETAILED MANNER OF CALCULATION OF EX-ANTE CONTRIBUTIONS PAID BY CREDIT INSTITUTIONS TO THE RESOLUTION FUND I. BASIC PROVISIONS Subject matter Article 1 This decision shall prescribe in more detail the manner of calculation of ex-ante contributions paid by credit institutions to the Resolution Fund (hereinafter: the contributions), or the methodology for the calculation of contributions and for the adjustment of contributions to the risk profile of individual credit institutions in accordance with the criteria for determining their riskiness, and it shall establish the information that the credit institution are required to provide for the purposes of the calculation of the contributions and as regards the payment of the contributions. Definitions Article 2 The terms used in this Decision shall have the following meanings:

1. annual target level means the total amount of annual contributions determined for each calendar year by the Central Bank of Montenegro (hereinafter: the Central Bank) to reach the annual target level of the funds of the Resolution Fund referred to in Article 148 paragraph (1) of the Law on Resolution of Credit Institutions (OGM 72/19) – (hereinafter: the Law);
2. central counterparty means a legal person that interposes itself between the counterparties to the contracts traded on one or more financial markets, becoming the buyer to every seller and the seller to every buyer;
3. derivatives means derivatives referred to in Article 128 paragraph (5) of the Decision on Capital Adequacy of Credit Institutions (hereinafter: the Decision on Capital Adequacy);
4. promotional bank means any entity set up by the State of Montenegro, which grants promotional loans on a non-competitive, not for profit basis in order to promote public policy objectives, provided that the founder has an obligation to protect the economic basis of the entity and maintain its regular operations, or

2 to guarantee for at least 90% of its original funding or the promotional loan it grants directly or indirectly; 5) promotional loan means a loan granted by a promotional bank or through an intermediate bank on a non-competitive, non for profit basis, in order to promote the public policy objectives of the State of Montenegro; 6) intermediary bank means a credit institution which intermediates promotional loans, provided that it does not give them as credit to a final customer. II. METHODOLOGY FOR CALCULATION AND ADJUSTMENT OF CONTRIBUTIONS Determination of annual contributions Article 3 (1) The Central Bank shall determine the annual contributions to be paid by each credit institution in proportion to its risk profile on the basis of information provided by the credit institution in accordance with Article 10 of this Decision and by applying the methodology set out in this Chapter. (2) The Central Bank shall determine the annual contribution referred to in paragraph (1) of this Article by taking into account the annual target level of the Resolution Fund referred to in Article 148 paragraph (1) of the Law and the transitional period for reaching that target level referred to in Article 159 of the Law. Adjustment of the basic annual contribution to the credit institution’s risk profile Article 4 (1) When calculating the contributions in accordance with Article 149 paragraph (2) of the Law, the following liabilities shall be excluded:

1. the intragroup liabilities arising from transactions entered into by a credit institution with another credit institution which is part of the same group, provided that all the following conditions are met:

• both credit institutions from the group have their head offices in Montenegro;
• both credit institutions from the group are included in the same consolidated supervision in accordance with the Law on Credit Institutions (OGM 72/19) – (hereinafter: the Law on Credit Institutions) on a full basis and are subject to appropriate centralised risk evaluation, measurement and control procedures;
• there is no current or foreseen material practical or legal impediment to the prompt repayment of the liability when due;

2. the liabilities created by a credit institution, which is member of an Institutional Protection Scheme, through an agreement entered into with another credit institution which is a member of the same Institutional Protection Scheme, if that

3 Institutional Protection Scheme meets the requirements set out in Article 35 paragraph (2) of the Law; 3) in case of credit institutions operating promotional loans, the liabilities of the intermediary bank towards the originating or another promotional bank or another intermediary credit institution and the liabilities of the original promotional bank towards its funding parties in so far as the amount of these liabilities is matched by the promotional loans of that credit institution. (2) The liabilities referred to in paragraph (1) items 1) and 2) shall be evenly deducted on a transaction by transaction basis from the amount of total liabilities of credit institutions which are parties to the transactions or agreements referred to in these items. (3) For the purpose of calculating the liabilities of credit institutions, the annual average amount, calculated on a quarterly basis, of liabilities arising from derivative contracts shall be valued in accordance with Article 499 paragraphs (1), (2), and (5) of the Decision on Capital Adequacy. (4) The value of liabilities arising from derivative contracts may not be less than 75% of the value of the same liabilities resulting from the application of the accounting provisions applicable to the credit institution concerned for the purposes of financial reporting, and if there is no accounting measure of exposure for certain derivative instruments because they are held off-balance sheet, the credit institution shall report to the Central Bank the sum of positive fair values of those derivatives as the replacement cost and add them to its on-balance sheet accounting values. (5) For the purpose of calculating the liabilities of a credit institution, the total liabilities shall exclude the accounting value of liabilities arising from derivative contracts and include the corresponding value determined in accordance with paragraph (4) of this Article. (6) The Central Bank shall check the fulfilment of all conditions and requirements referred to in paragraphs (1) to (5) of this Article, using the assessments carried out by its supervisory function. Risk pillars and indicators Article 5 (1) The Central Bank shall assess the risk profile of a credit institution on the basis of the following four risk pillars:

1. risk exposure, which shall consist of the following risk indicators:

• own funds and eligible liabilities held by the credit institution in excess of minimum requirement for own funds and eligible liabilities (hereinafter: MREL);

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• leverage ratio;
• common equity Tier 1 capital ratio (CET1);
• total risk exposure divided by total assets;

2. stability and variety of funding, which shall consist of the following risk indicators:

• net stable funding ratio (NSFR); and
• liquidity coverage ratio (LCR);

3. importance of a credit institution to the stability of the financial system or economy, which shall consist of the indicator “share of interbank loans and deposits”, capturing the importance of the credit institution to the economy of Montenegro;
4. additional risk indicators to be determined by the Central Bank, which shall consist of the following indicators:

• trading activities, off-balance sheet exposures, derivatives, complexity and assessment of resolvability;
• membership in an Institutional Protection Scheme;
• extent of previous extraordinary public financial support. (2) When determining the various risk indicators referred to in paragraph (1) item 4) of this Article, the Central Bank shall take into account the importance of those indicators in the light of the probability that the credit institution concerned would enter resolution and of the consequent probability of making use of the resolution financing arrangement where the credit institution would be resolved. (3) When determining the indicators referred to in paragraph (1) item 4) indent 1 of this Article, the Central Bank shall take into account the following elements:

1. the increase in the risk profile of the credit institution due to:

• the importance of trading activities relative to the balance sheet size, the level of own funds, the riskiness of the exposures, and the overall business model;
• the importance of the off-balance sheet exposures relative to the balance sheet size, the level of own funds, and the riskiness of the exposures;
• the importance of the amount of derivatives relative to the balance sheet size, the level of own funds, the riskiness of the exposures, and the overall business model;
• the extent to which, in accordance with the Law, the business model and organizational structure of a credit institution are deemed complex;

2. the decrease in the risk profile of the credit institution due to:

• relative amount of derivatives which are cleared through a central counterparty (CCP);
• the extent to which, in accordance with the Law, a credit institution can be resolved promptly and without legal impediments.

5 (4) When determining the indicator referred to in paragraph (1) item 4) indent 2 of this Article, the Central Bank shall take into account the following elements:

1. whether the amount of funds, which are available without delay for both recapitalisation and liquidity funding purposes in order to support the affected credit institution in case of problems, is sufficiently large to allow for a credible and effective support of that credit institution;
2. the degree of legal or contractual certainty that the funds referred to in item 1) of this paragraph will be fully utilized before any extraordinary public support may be requested. (5) When determining the risk indicator referred to in paragraph (1) item 4) indent 3 of this Article, the Central Bank shall take into account:
3. the maximum value of the range referred to in Step 3 of Annex 1, which is attached to this Decision and makes an integral part thereof, for any credit institution that is part of a group that has been put under restructuring after receiving any State or equivalent funds (such as from a Resolution fund) and is still within the restructuring or bankruptcy period, except for the last two years of implementation of the restructuring plan;
4. the minimum value of the range referred to in Step 3 of Annex 1 to this Decision, for all other credit institutions. (6) Assessments for the purposes of paragraphs (3), (4), and (5) of this Article shall be made by the supervisory function of the Central Bank. Relative weight of each risk pillar and indicator Article 6 (1) When assessing the risk profile of each credit institution, the Central Bank shall apply the following weights:
5. 50% - for the pillar referred to in Article 5 paragraph (1) item 1) of this Decision;
6. 20% - for the pillar referred to in Article 5 paragraph (1) item 2) of this Decision;
7. 10% - for the pillar referred to in Article 5 paragraph (1) item 3) of this Decision;
8. 20% - for the pillar referred to in Article 5 paragraph (1) item 4) of this Decision. (2) The relative weight of the risk indicators that Central Bank shall assess to determine the pillar referred to in Article 5 paragraph (1) item 1) of this Decision shall be the following:
9. 25% - for own funds and eligible liabilities held by the credit institution in excess of MREL;
10. 25% - for leverage ratio;
11. 25% - for common equity Tier 1 capital ratio;
12. 25% - for total risk exposure divided by total assets.

6 (3) Each risk indicator in the pillar referred to in Article 5 paragraph (1) item 2) of this Decision shall have an equal weight. (4) The relative weight of each indicator that the Central Bank shall assess to determine the pillar referred to in Article 5 paragraph (1) item 4) of this Decision shall be the following:

1. 45% - for trading activities and off-balance sheet exposures, derivatives, complexity and resolvability;
2. 45% - for membership in an Institutional Protection Scheme;
3. 10% - for extent of previous extraordinary public financial support. (5) When applying the indicator referred to in paragraph (4) item 2) of this Article, the Central Bank shall take into account the relative weight of the indicator referred to in paragraph (4) item 1) of this Article. Application of risk indicators at consolidated level Article 7 Where the Central Bank has relieved a credit institution of the obligation to meet the liquidity requirement on an individual basis, in accordance with Article 309 paragraph (4) item 2) of the Law on Credit Institutions, the liquidity coverage ratio referred to in Article 5 paragraph (1) item 2) indent 2 of this Decision shall be assessed by the Central Bank at the group level, and the score obtained by that indicator at the group level shall be applied to each credit institution which is part of the group, for the purposes of calculating that credit institution's risk indicator. Risk adjusting multiplier Article 8 (1) The Central Bank shall determine the additional risk adjusting multiplier for each credit institution by combining the risk indicators referred to in Article 5 of this Decision, in accordance with the formula and the procedures set out in Annex 1 to this Decision. (2) The Central Bank shall determine the annual contribution of each credit institution for each calendar year, by multiplying the basic annual contribution by the additional risk adjusting multiplier, in accordance with the formula and the procedures set out in Annex 1 to this Decision. (3) The risk adjusting multiplier referred to in paragraph (2) of this Article shall range between 0.8 and 1.5.

7 New credit institutions or change of status Article 9 (1) Where a credit institution is a subject to supervision for only part of a calendar year, its partial annual contribution shall be collected together with the annual contribution due for the subsequent contribution period. (2) A change of status of a credit institution during the calendar year shall not have an effect on the annual contribution to be paid in that particular year. III. REPORTING TO THE CENTRAL BANK Reporting obligations of credit institutions Article 10 (1) A credit institution shall provide the Central Bank with the information referred to in Annex 2, which is attached to this Decision and makes an integral part thereof, at the latest by 28 February of the current year, as at 31 December of the previous year. (2) Where a credit institution does not submit all the information referred in paragraph (1) of this Article within the prescribed timeframe, the Central Bank shall use estimates or its own assumptions in order to calculate the annual contribution of the credit institution concerned. (3) Where the information submitted to the Central Bank in accordance with paragraph (1) of this Article requires updates or corrections after the audit of financial statements or for another reason, the credit institution shall submit such updates or corrections to the Central Bank without undue delay. (4) Where the credit institution fails to provide information referred to in paragraph (1) of this Article within the prescribed timeframe, the Central Bank may assign the credit institution concerned to the highest risk adjusting multiplier as referred to in Article 8 paragraph (3) of this Decision. Cooperation arrangements Article 11 (1) In order to ensure that the contributions are in fact paid, the supervisory function of the Central Bank shall assist the resolution function of the Central Bank in carrying out any obligation under this Decision if the latter so requests.

8 (3) The supervisory function of the Central Bank shall provide the resolution function of the Central Bank any data and information required to calculate the annual contributions, in particular any data and information related to the additional risk adjustment and any relevant waivers that the Central Bank has granted to credit institutions pursuant to the Law on Credit Institutions and the Decision on Capital Adequacy. Provision of data on deposit guarantee schemes Article 12 (1) By 31 January each year, the Deposit Protection Fund shall provide the Central bank with the calculation of the average amount of covered deposits in the previous year, for each credit institution. (2) The average amount of deposits referred to in paragraph (1) of this Article for each credit institution shall be calculated by dividing the sum of covered deposit amounts of a credit institution at the end of each quarter by four. IV. DETERMINING THE AMOUNT OF ANNUAL CONTRIBUTIONS Decision on determining the amount of annual contributions Article 13 (1) The Central Bank shall notify a credit institution of its decision determining the annual contribution due by that credit institution, at the latest by 15 May of current year. (2) The Central Bank shall deliver the decision referred to in paragraph (1) of this Article to credit institutions:

1. electronically or by other comparable means of communication allowing for an acknowledgment of receipt, or
2. by registered mail with a form of acknowledgment of receipt. (3) The decision referred to in paragraph (1) of this Article shall specify the conditions and the means by which the annual contribution of a credit institution shall be paid, as well as the share of irrevocable payment commitments that the Central Bank has granted to the credit institution concerned in accordance with Article 149 paragraph (5) of the Law, where applicable. (4) When deciding upon the granting of irrevocable payment commitments referred to in paragraph (3) of this Article, the Central Bank shall only accept collateral that can be realised swiftly, including in the event of a resolution decision over the weekend, and which have been conservatively valued.

9 (5) In the event of non-payment or partial payment of contributions, the credit institution concerned shall incur a default interest in accordance with the law governing default interest rate. Updates in the annual contribution Article 14 (1) Where the information submitted by the credit institution to the Central Bank is subject updates in accordance with Article 10 paragraph (3) of this Decision, the Central Bank shall adjust the annual contribution in accordance with the updated information upon the calculation of the annual contribution of that credit institution for the following calendar year. (2) Any difference between the annual contribution calculated and paid and the calculation of contribution on the basis of updated information shall be settled by adjusting the annual contribution due for the following calendar year, and that adjustment shall be made by decreasing or increasing the contribution due for the following calendar year. IV. TRANSITIONAL AND FINALPROVISIONS Entry into force Article 15 This Decision shall enter into force on the day following that of its publication in the Official Gazette of Montenegro, and it shall apply from the date of application of the Law on Resolution of Credit Institutions (OGM 72/19). THE COUNCIL OF THE CENTRAL BANK OF MONTENEGRO CHAIRMAN G O V E R N O R, Decision number: 0101-7725-3/2020 Podgorica, 28 December 2020 Radoje Žugić, m.p.

10 ANNEX 1 PROCEDURE FOR CALCULATING ANNUAL CONTRIBUTIONS OF CREDIT INSTITUTIONS The procedure for calculating annual contributions of a credit institution shall consist of the following six steps: STEP 1 Calculation of the raw indicators The Central Bank shall calculate the risk indicators by applying the following measures: Pillar Indicator Measures Risk exposure Own funds and eligible liabilities held by the credit institution in excess of MREL Own funds and eligible liabilities - MREL Total liabilities including own funds where, for the purpose of this indicator:

• own funds shall mean the sum of Tier 1 and Tier 2 Capital in accordance with the definition set out in Article 64 of the Decision on Capital Adequacy.
• eligible liabilities shall mean the liabilities and capital instruments referred to in Article 94 paragraphs (1) and (2) of the Law on Resolution of Credit Institutions.
• total liabilities shall mean the liabilities in the balance sheet of a credit institution.
• derivative liabilities shall be included in the total liabilities on the basis that full recognition is given to counterparty netting rights.
• MREL shall mean the minimum requirement for own funds and eligible liabilities as defined in Article 29 paragraph (1) of the Law on Resolution of Credit Institutions. Risk exposure Leverage Ratio Leverage Ratio shall mean the ratio as defined in Article 496 of the Decision on Capital Adequacy. Risk exposure Common Equity Tier 1 Capital Ratio (CET 1) Common Equity Tier 1 Capital Ratio shall mean the ratio as defined in Article 101 paragraph (2) item 1) of the Decision on Capital Adequacy. Risk exposure TRE / Total Assets where:
• the total risk exposure (TRE) shall mean the total risk exposure amount as defined in Article 101 paragraph (3) of the Decision on Capital Adequacy
• total assets shall mean the assets in the balance sheet of a credit institution. Stability and variety of funding Net Stable Funding Ratio (NSFR) Net Stable Funding Ratio (NSFR) shall mean the net stable funding the as prescribed in Article 48 of the Decision on Liquidity Risk Management in Credit Institutions. Stability and variety of funding Liquidity Coverage Ratio (LCR) Liquidity Coverage Ratio (LCR) shall mean the Liquidity Coverage Ratio referred to in Article 114 paragraph (4) of the Law on Credit Institutions. Importance of a credit institution to the stability of the financial system or economy Share of interbank loans and deposits Interbank loans + Interbank deposits Total interbank loans and deposits where: Interbank loans are defined as the sum of the carrying amounts of loans and advances to credit institutions and other business undertakings from the financial sector. Interbank deposits are defined as the carrying amount of the deposits of credit institutions and other business undertakings from the financial sector.

11 STEP 2 Discretization of the indicators

1. In the formula that follows, n indexes credit institutions, i indexes indicators within pillars and j indexes pillars.
2. For each raw indicator resulting from Step 1, xij, except for the indicator ‘extent of previous extraordinary public financial support’, the Central Bank shall calculate the number of bins, kij, as the nearest integer to: where:

• N is the number of credit institutions, contributing to the Resolution Fund, for which the indicator is calculated;

3. For each indicator, except for the indicator ‘extent of previous extraordinary public financial support’, the Central Bank shall assign the same number of credit institutions to each bin, starting by assigning credit institutions with the lowest values of the raw indicator to the first bin. In case the number of credit institutions cannot be exactly divided by the number of bins, each of the first r bins, starting from the bin containing the credit institutions with the lowest values of the raw indicator, where r is the remainder of the division of the number of institutions, N, by the number of bins, kij, is assigned one additional credit institution.
4. For each indicator, except for the indicator ‘extent of previous extraordinary public financial support’, the Central Bank shall assign to all the credit institutions contained in a given bin the value of the order of the bin, counting from the left to the right, so that the value of the discretized indicator is defined as Iij,n = 1, …, kij.

12 5. This Step shall apply to the indicators listed under Article 5 paragraph (1) item 4) indents 1 and 2 of this Decision only if the Central Bank determines them as continuous variables. STEP 3 Rescaling of the indicators The Central bank shall rescale each indicator resulting from Step 2, Iij, over the range 1- 1 000 by applying the following formula: where the arguments of the minimum and the maximum functions shall be the values of all credit institutions, contributing to the Resolution Fund, for which the indicator is calculated. STEP 4 Inclusion of the assigned sign

1. The Central Bank shall apply the following signs to the indicators: Pillar Indicator Sign Risk exposure Own funds and eligible liabilities held by the credit institution in excess of the MREL

Risk exposure Leverage Ratio - Risk exposure Common Equity Tier 1 Capital Ratio (CET 1) - Risk exposure TRE / Total assets + Stability and variety of funding Net Stable Funding Ratio (NSFR) - Stability and variety of funding Liquidity Coverage Ratio (LCR) - Importance of a credit institution to the stability of the financial system or economy Share of interbank loans and deposits + Additional risk indicators to be determined by the Central Bank Institutional Protection Scheme Membership - Additional risk indicators to be determined by the Central Bank Extent of previous extraordinary public financial support +

13 For indicators with positive sign, higher values correspond to higher riskiness of a credit institution. For indicators with negative sign, higher values correspond to lower riskiness of a credit institution. The Central Bank shall determine the indicators of trading activities, off-balance sheet exposures, derivatives, complexity and resolvability, and specify their sign accordingly. 2. The Central Bank shall apply the following transformation to each rescaled indicator resulting from Step 3, RIij,n, in order to include its sign: STEP 5 Calculation of the composite indicator

1. The Central Bank shall aggregate the indicators i within each pillar j through a weighted arithmetic average by applying the following formula: where: wij is the weight of indicator i in pillar j as defined in Article 6 of this Decision; Nj is the number of indicators within pillar j.
2. For the purposes of computing the composite indicator, the Central Bank shall aggregate the pillars j through a weighted geometric average by applying the following formula: where: wj is the weight of pillar j as defined in Article 6 of this Decision; J is the number of pillars.
3. The Central Bank shall apply the following transformation in order for the final composite indicator to be defined as taking higher values for credit institutions with higher risk profiles:

14 STEP 6 Calculation of the Annual Contributions

1. The Central Bank shall rescale the final composite indicator resulting from Step 5, FCIn, over the range defined in Article 8 of this Decision by applying the following formula: where the arguments of the minimum and the maximum functions shall be the values of all credit institutions, contributing to the Resolution Fund, for which the final composite indicator is calculated.
2. The Central Bank shall compute the annual contribution of each credit institution n, as: where: p, q index credit institutions. Target is the annual target level as determined by the Central Bank in accordance with Article 3 paragraph (2) of this Decision. Bn is the amount of liabilities (excluding own funds) less covered deposits of a credit institution n, as adjusted in accordance with Article 4 of this Decision.

15 ANNEX 2 Data to be submitted to the Central Bank by the credit institutions for the purposes of calculating the contributions to the Resolution Fund (financial data as at 31 December of the previous year)

1. Statement of financial position (balance sheet);
2. Statement of comprehensive income (profit and loss statement);
3. Liabilities covered by Article 4 paragraph (1) of this Decision;
4. Liabilities arising from derivatives contracts;
5. Liabilities arising from derivatives contracts valued in accordance with Article 4 paragraphs (3) and (4) of this Decision;
6. Total Risk Exposure;
7. Own funds;
8. Common Equity Tier 1 Capital Ratio (CET 1);
9. Eligible liabilities;
10. Leverage Ratio;
11. Liquidity Coverage Ratio (LCR);
12. Net Stable Funding Ratio (NSFR);
13. Interbank loans;
14. Interbank deposits.