Decision on Capital Adequacy of Credit Institutions

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Pursuant to Article 44 paragraph 2 item 3 of the Central Bank of Montenegro Law (OGM 40/10, 06/13, 70/17, 125/23), and Article 115a paragraph (3) and Article 134 paragraph (9) of the Law on Credit Institutions (OGM 72/19, 82/20, 8/21, 24/25), the Council of the Central Bank of Montenegro, at its meeting held on 9 June 2025, passed the following DECISION ON CAPITAL ADEQUACY OF CREDIT INSTITUTIONS
PART ONE
BASIC PROVISIONS
Subject matter
Article 1
This Decision governs:

types and features of financial instruments and other elements to be included
in own funds and eligible liabilities of credit institution;
the method of calculating own funds, total exposure to risk, and capital
adequacy ratios of credit institutions;
the methods and approaches for calculating capital requirements relating to
entirely quantifiable, uniform and standardised elements of credit risk, market risk, operational risk, settlement risk; and
leverage.
Application of stricter requirements
Article 2
(1) A credit institution may hold own funds and its components in excess of, or undertake measures that are stricter than those required by this Decision. (2) Where a credit institution decides to apply higher amount of own funds than required or stricter criteria for recognising instruments of capital, within the meaning of paragraph (1) of this Article, it shall define those higher levels and stricter criteria in its internal acts and apply them consistently, and those criteria shall not be contrary to the provisions of this Decision. (3) Where a credit institution decides to apply stricter measures referred to in paragraph (1) of this Article in determining risk weighted exposure amount using Standardised Approach, it may define stricter risk weights for certain risk categories in its internal acts, but it may not use other risk categories than those prescribed by this Decision.

investment firm means any legal person whose regular occupation or
business is the provision of one or more investment services to third parties and/or the performance of one or more investment activities on a professional basis;
collective investment undertaking (hereinafter: CIU) means an undertaking
for collective investment in transferable securities (UCITS) or an alternative investment fund (AIF) managed by the manager of an alternative investment fund (AIFM) established in Montenegro, the European Union or a third country, which is subject to regulations applicable in Montenegro, the European Union or a third country that applies prudential regulation equivalent to the regulation in Montenegro or the European Union;
undertaking for collective investment in transferable securities
(hereinafter: UCITS) means an open-ended investment fund with a public offering:
with the sole object of collective investment of assets raised from the public bid of capital in the fund in transferable securities or in other liquid financial assets referred to in the law governing the investment funds, and which operates on the principle of risk-spreading; with investment units which are, at the request of holders, repurchased or redeemed, directly or indirectly, out of those fund’s assets, and actions taken by the UCITS management company to ensure that the market value of an investment unit does not vary significantly from their net asset value of its units shall be equivalent to such repurchase or redemption;
alternative investment fund (hereinafter: AIF) means an investment fund
established in accordance with the law governing the alternative investment funds, which raise capital from a number of investors, with a view to investing it in accordance with a defined investment policy for the benefit of those investors and which does not require authorisation within the meaning of the law governing the organisation and operations of open-ended investment funds with a public offering;
public sector entity means a non-profit body responsible to central
government, regional government or local self-government, or to authorities that exercise the same responsibilities as regional government or local selfgovernment, or a non-profit undertaking that is owned by or set up and sponsored by central government or regional government or local selfgovernment, and that has explicit guarantee arrangements, and may include self-administered bodies governed by law that are under public supervision;
third-country insurance undertaking means a third-country insurance
undertaking which would require a license issued by the competent authority if its head office were located in Montenegro or at the territory of the European Union;
third-country reinsurance undertaking means a third-country reinsurance
undertaking which would require a license issued by competent authority if its head office were located in Montenegro or at the territory of the European Union;

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_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 3
8) parent investment firm means an investment firm with a head office in a
specific state that has an investment firm as a subsidiary undertaking, where that subsidiary undertaking is not the sole subsidiary undertaking;
9) EU parent investment firm means a parent investment firm licensed in a
Member State, which is not a subsidiary undertaking of another investment firm; 10)recognised third-country investment firm means an investment firm which:
would be covered by a definition of investment firm if it were established in Montenegro or the European Union; has authorisation in third-country; and is subject to and complies with prudential rules of or administered by that third country that are at least as stringent as those laid down by the Capital Market Authority in Montenegro and the European Union; 11)dilution risk means the risk that an amount of purchased receivables is reduced through cash or non-cash receivables of the debtor to the creditor who has sold receivable to a credit institution, and of which a credit institution, as a buyer of purchased receivables was not aware; 12)probability of default (PD) means the probability of default of a debtor or, where applicable, of a credit facility over a one-year period, and, in the context of dilution risk, the probability of dilution of purchased receivables over a oneyear period; 13)loss given default (LGD) means the ratio of the loss on an exposure related to a single facility due to the default of a debtor or, where applicable, of a credit facility to the amount outstanding at default or at a given reference date after the date of default, and, in the context of dilution risk, the loss given dilution meaning the ratio of the loss on an exposure related to a purchased receivable due to dilution, to the amount outstanding of the purchased receivable; 14)conversion factor or credit conversion factor means the ratio of the undrawn amount of a commitment from a single facility that could be drawn from that single facility from a certain point in time before default and therefore outstanding at default to the undrawn amount of the commitment from that facility, the extent of the commitment being determined by the advised limit, unless the unadvised limit is higher; 15)credit risk mitigation means a technique used by a credit institution to reduce the credit risk associated with an exposure or exposures which that credit institution continues to hold; 16)funded credit protection means a technique of credit risk mitigation where the reduction of the credit risk on the exposure of a credit institution is derived from the right of that credit institution, in the event of the default of the debtor or credit facility or on the occurrence of other specified credit events relating to the debtor, to liquidate, or to obtain transfer or appropriation of, or to retain certain assets or amounts, or to reduce the amount of the exposure to, or to replace it with, the amount of the difference between the amount of the exposure and the amount of a claim on the credit institution; 17)unfunded credit protection means a technique of credit risk mitigation where the reduction of the credit risk on the exposure of a credit institution is derived from the obligation of a third party to pay an amount in the event of the default of the debtor or the credit facility or the occurrence of other specified credit events; 18)cash assimilated instrument means a
certificate of deposit, a bond, including a covered bond, or any other non-subordinated instrument, which has been

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_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 4 issued by a lending credit institution, for which the lending credit institution has already received full payment and which shall be unconditionally reimbursed by the credit institution at its nominal value; 19)gold bullion means gold in the form of a commodity, including gold bars, ingots and coins, commonly accepted by the bullion market, where liquid markets for bullion exist, and the value of which is determined by the value of the gold content, defined by purity and mass, rather than by its interest to numismatists; 20)securitisation means a transaction or a scheme that has the meaning as established in Article 11 paragraph (3) of the Law on Credit Institutions (OGM 72/19, 8/21, 24/25), (hereinafter: the Law); 21)securitisation position means an exposure to a securitisation; 22)resecuritisation means securitisation where at least one of the underlying exposures is a securitisation position; 23)resecuritisation position means an exposure to a resecuritisation; 24)originator means a credit institution which:
itself or through connected persons, directly or indirectly, was involved in the original agreement which created direct or contingent liabilities of the debtor or potential debtor giving rise to the exposures being securitised; or purchases a third party's exposures on its own account and then securitises them; 25)sponsor means a credit institution other than an originator that establishes and manages an asset-backed commercial paper programme or other securitisation scheme that purchases exposures from third-parties other securitisation that purchases exposures from third-party entities and which transfers active management of the portfolio included in such securitisation to an entity authorised to perform such activities; 26)original lender means an entity which, itself or through related entities, directly or indirectly, concluded the original agreement which created the obligations or potential obligations of the debtor or potential debtor giving rise to the exposures being securitised; 27)credit enhancement means a contractual arrangement whereby the credit quality of a position in a securitisation is improved in relation to what it would have been if the credit enhancement had not been provided, including the credit enhancement provided by more junior tranches in the securitisation and other types of credit protection; 28)securitisation special purpose entity (hereinafter: SSPE) means a business undertaking, trust or other entity, other than an originator or sponsor, established for the purpose of carrying out one or more securitisations, the activities of which are limited to those appropriate to accomplishing that objective, the structure of which is intended to isolate the obligations of the SSPE from those of the originator; 29)tranche means a contractually established segment of the credit risk associated with an exposure or a pool of exposures, where a position in the segment entails a risk of credit loss greater than or less than a position of the same amount in another segment, without taking account of credit protection provided by third parties directly to the holders of positions in the segment or in other segments; 30)marking to market means the valuation of positions at readily available close out prices that are sourced independently, including exchange prices, screen prices or quotes from several reputable brokers;

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_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 5 31)marking to model means any valuation which has to be benchmarked, extrapolated or otherwise calculated from one or more market inputs; 32)independent price verification means a process by which market prices or marking to model inputs are regularly verified for accuracy and independence; 33)recognised exchange means a regulated market or a third-country market that is considered to be equivalent to a regulated market and it has a clearing mechanism whereby contracts listed in Article 148 paragraph (8) of this Decision are subject to daily margin requirements which, in the opinion of the Central Bank of Montenegro (hereinafter: the Central Bank) provide appropriate protection; 34)property value means the value of a residential property or commercial immovable property determined in accordance with Article 256 paragraph (1) of this Decision; 35)residential property means:
an immovable property which has the nature of a dwelling and meets the requirements of regulations enabling the property to be occupied for housing purposes; an immovable property which has the nature of a dwelling and is still under construction, provided that there is the expectation that the property will meet the requirements of regulations enabling the property to be occupied for housing purposes; the right to inhabit an apartment in housing cooperatives located in Sweden; land accessory to a property referred to in indent 1, 2, or 3 of this item; 36)commercial immovable property means any immovable property that is not residential property; 37)income producing real estate exposure or IPRE exposure means an exposure secured by one or more residential properties or commercial immovable properties where the fulfilment of the credit obligations related to the exposure materially depends on the cash flows generated by those immovable properties securing that exposure, rather than on the capacity of the debtor to fulfil the credit obligations from other sources; the primary source of such cash flows being lease or rental payments, or proceeds from the sale of the residential property or commercial immovable property; 38)non-income-producing real estate exposure or non-IPRE exposure means any exposure secured by one or more residential properties or commercial immovable properties that is not an IPRE exposure; 39)exposure secured by residential property or exposure secured by a mortgage on residential property means an exposure secured by residential property or an exposure regarded as such in accordance with Article 142 paragraph (4) of this Decision; 40)exposure secured by commercial immovable property or exposure secured by a mortgage on commercial immovable property means an exposure secured by a commercial immovable property; 41)exposure secured by immovable property or exposure secured by a mortgage on immovable property, or exposure secured by immovable property collateral means an exposure secured by a residential property or commercial immovable property or an exposure regarded as such in accordance with Article 142 paragraph (4) of this Decision; 42)market value for the purposes of immovable property means the estimated amount for which the property should exchange on the date of valuation

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_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 6 between a willing buyer and a willing seller in an arm's-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion; 43)applicable accounting framework means the accounting standards to which the credit institution is subject under the regulations governing the accounting of credit institutions; 44)one-year default rate means the ratio between the number of debtors or, where the definition of default is applied at credit facility level pursuant to Article 218 paragraph (2) of this Decision, credit facilities in respect of which a default is considered to have occurred during a period that starts from one year prior to a date of observation T, and the number of debtors, or where the definition of default is applied at credit facility level pursuant to Article 218 paragraph (2) of this Decision, credit facilities assigned to this grade or pool one year prior to that date of observation T; 45)land acquisition, development and construction exposures or ADC exposures means exposures to corporates or special purpose entities financing any land acquisition for development and construction purposes, or financing the development and construction of any residential property or commercial immovable property; 46)non-ADC exposure means any exposure secured by one or more residential properties or commercial immovable properties that is not an ADC exposure; 47)trade finance means financing, including also issuing guarantees, connected to the exchange of goods and services through financial products of fixed shortterm maturity, generally of less than one year, without automatic rollover, whereby such finance is generally uncommitted and requires satisfactory supporting transactional documentation for each drawdown request enabling refusal of the finance in the event of any doubt about creditworthiness or the supporting transactional documentation; repayment of trade finance exposures is usually independent of the borrower, the funds instead are coming from cash received from importers or resulting from proceeds of the sales of the underlying goods; 48)officially supported export credits means loans or non-banking loans to finance the export of goods or services for which an official export credit agency provides guarantees, insurance or direct financing; 49)repurchase agreement and reverse repurchase agreement mean any agreement in which a credit institution or its counterparty transfers securities or commodities or guaranteed rights relating to the title to securities or commodities where that guarantee is issued by a recognised exchange which holds the rights to the securities or commodities and the agreement does not allow a credit institution to transfer or pledge a particular security or commodity to more than one counterparty at one
time, subject to a commitment to repurchase them, or substituted securities or commodities of the same description at a specified price on a future date specified, or to be specified, by the transferor, being a repurchase agreement for the credit institution selling the securities or commodities and a reverse repurchase agreement for the credit institution buying them; 50)repurchase transaction means any transaction governed by a repurchase agreement or a reverse repurchase agreement; 51)simple repurchase agreement means a repurchase transaction of a single asset, or of similar, non-complex assets, as opposed to a basket of assets;

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_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 7 52)positions held with trading intent means any of the following:
proprietary positions and positions arising from client servicing and market making; positions intended to be resold short term; positions intended to benefit from actual or expected short-term price differences between buying and selling prices or from other price or interest rate variations; 53)multilateral trading facility (MTF) means a multilateral system, organised or operated by an investment firm or a market operator, which brings together multiple third-party buying and selling interests in financial instruments in accordance with the rules of that system; 54)qualifying central counterparty (QCCP) means a central counterparty that has been either authorised by the competent authority in Montenegro or European Union or established in third country and recognised by ESMA; 55)default fund means a fund established by a central counterparty and collects margins from its clearing members to cover losses of the clearing members that exceed the losses to be covered by margin lending requirements arising from the default, including the opening of a bankruptcy proceedings, of one or more clearing members; the central counterparty shall use contributions to the default fund of the non-defaulting clearing members and any other financial resources only after having exhausted the contributions of the defaulting clearing member; 56)pre-funded contribution to the default fund means a contribution to the default fund of a central counterparty that is paid in by a credit institution; 57)trade exposure means a current exposure, including a variation margin due to the clearing member but not yet received, and any potential future exposure of a clearing member or a client, to a central counterparty arising from contracts and transactions listed in Article 388 paragraph (1) of this Decision, as well as initial margin; 58)credit risk adjustment means the amount of specific and general loan loss impairments that have been recognised in the financial statements of the credit institution in accordance with the applicable accounting framework; 59)internal hedge means a position that materially offsets the component risk elements between a trading book position and one or more non-trading book positions or between two trading desks; 60)reference obligation means an obligation used for the purposes of determining the cash settlement value of a credit derivative; 61)nominated external credit assessment institution (ECAI) means an ECAI nominated for credit risk assessment by a credit institution; 62)accumulated other comprehensive income has the same meaning as under IAS 1 applied by a credit institution in accordance with the Law; 63)basic own funds mean the excess of assets over liabilities (reduced by the amount of own shares held by the insurance or reinsurance undertaking), increased by subordinate liabilities of insurance or reinsurance undertaking; 64)Tier 1 own-fund insurance items mean basic own-fund items of undertakings that are available or can be called
up on demand to fully absorb losses on a going concern basis, or in the case of winding-up the total amount of the item is available to absorb losses and the repayment of the item is refused to its holder until all other obligations including insurance and reinsurance obligations towards policy holders and beneficiaries of insurance and reinsurance

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_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 8 contracts have been met (subordination), the items are not dated, and if they are dated, the relative duration of the items as compared to the duration of the insurance and reinsurance obligations of the undertaking shall be considered, the item is clear of encumbrances, it is free from mandatory fixed charges, it is free from requirements to redeem; 65)Additional Tier 1 own-fund insurance items mean basic own-fund items subject to the requirements to be classified into Tier 1 own-funs insurance items and their exclusion is laid down in the regulation governing this area; 66)Tier 2 own-fund insurance items means basic own-fund items which in case of winding-up the total amount of the item is available to absorb losses and the repayment of the item is refused to its holder until all other obligations including insurance and reinsurance obligations towards policy holders and beneficiaries of insurance and reinsurance contracts have been met (subordination), the items are not dated, and if they are dated, the relative duration of the items as compared to the duration of the insurance and reinsurance obligations of the undertaking shall be considered, the item is clear of encumbrances, it is free from mandatory fixed charges, it is free from requirements to redeem; 67)Tier 3 own-fund insurance items mean any basic or ancillary own-fund items which are not classified as Tier 1 and Tier 2 own-fund insurance items; 68)deferred tax assets have the same meaning as under the applicable accounting framework; 69)deferred tax assets that rely on future profitability means deferred tax assets the future value of which may be realised only in the event the credit institution generates taxable profit in the future; 70)deferred tax liabilities have the same meaning as under the applicable accounting framework; 71)defined benefit pension fund assets mean the assets of a defined pension fund or plan, as applicable, calculated after they have been reduced by the amount of obligations under the same fund or plan; 72)financial undertaking means insurance undertaking, reinsurance undertaking, insurance holding company and mixed financial holding company; 73)insurance holding company means a parent undertaking which is not a mixed financial holding company and the main business of which is to acquire and hold participations in subsidiary undertakings, where those subsidiary undertakings are exclusively or mainly insurance or reinsurance undertakings, or non-EU third-country insurance or reinsurance undertakings, at least one of such subsidiary undertakings being an insurance or reinsurance undertaking; 74)reserves for general banking risks mean the amount which a credit institution decides to put aside to cover such risks where that is required by the particular risks associated with banking; 75)goodwill has the same
meaning as under the applicable accounting framework; 76)indirect holding means any exposure to an intermediate entity that has an exposure to capital instruments issued by a financial sector entity or to liabilities issued by a credit institution where, in the event the capital instruments issued by the financial sector entity or the liabilities issued by the credit institution were permanently written off, the loss that the credit institution would incur as a result would not be materially different from the loss the credit institution would incur from a direct holding of those capital instruments issued by the financial sector entity or of those liabilities issued by the credit institution;

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_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 9 77)intangible assets have the same meaning as under the applicable accounting framework and includes goodwill; 78)other capital instruments mean capital instruments issued by financial sector entities that do not qualify as Common Equity Tier 1, Additional Tier 1 or Tier 2 instruments or Tier 1 own-fund insurance items, additional Tier 1 own-fund insurance items, Tier 2 own-fund insurance items or Tier 3 own-fund insurance items; 79)other reserves mean reserves within the meaning of the applicable accounting framework that are required to be disclosed under the applicable accounting standard, excluding any amounts already included in accumulated other comprehensive income or retained earnings; 80)minority interest means the amount of Common Equity Tier 1 capital of a subsidiary undertaking of a credit institution that is attributable to natural or legal persons other than those included in the prudential scope of consolidation of the credit institution; 81)profit has the same meaning as under the applicable accounting framework; 82)reciprocal cross holding means a holding by a credit institution of the own funds instruments or other capital instruments issued by financial sector entities where those entities also hold own funds instruments issued by the credit institution; 83)retained earnings means profits and losses brought forward as a result of the final application of profit or loss under the applicable accounting framework; 84)share premium account has the same meaning as under the applicable accounting framework; 85)temporary differences have the same meaning as under the applicable accounting framework; 86)synthetic holding means an investment by a credit institution in a financial instrument the value of which is directly linked to the value of the capital instruments issued by a financial sector entity; 87)distributable items means the amount of the profits at the end of the last financial year plus any profits brought forward and reserves available for that purpose, before distributions to holders of own funds instruments, less any losses brought forward, any profits which are non-distributable pursuant to applicable regulations or the credit institution's internal acts and any sums placed in non-distributable reserves in accordance with applicable regulations or the articles of association of the credit institution, in each case with respect to the specific category of own funds instruments to which applicable regulations, credit institutions' internal act, or articles of association relate; such profits, losses and reserves being determined on the basis of the individual accounts of the credit institution and not on the basis of the consolidated accounts; 88)servicer means an entity that manages a pool of purchased receivables or the underlying credit exposures on a day-to-day
basis; 89)relevant third-country authority means a government or another authority which is, in accordance with the third-country regulations, officially recognised and authorised for exercising the supervision of credit institutions within the supervisory framework enforced in that country; 90)resolution entity has the same meaning as defined in the law governing the resolution of credit institutions;

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_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 10 91)resolution group means a credit institution that is subject to resolution and its subsidiary undertakings other than:
credit institutions themselves that are subject to resolution; subsidiary undertakings of other credit institutions that are subject to resolution; credit institutions which have their head offices in third country that are not included in the resolution group in accordance with resolution plan and their subsidiary undertakings; or credit institutions permanently affiliated to a central body and the central body itself when at least one of those credit institutions or the central body is a resolution entity, and their respective subsidiary undertakings; 92)global systemically important credit institution (G-SICI) means a credit institution that has been identified in accordance with Articles 158 and 159 of the Law; 93)material subsidiary undertaking means a subsidiary that on an individual or consolidated basis meets any of the following conditions:
the subsidiary undertaking holds more than 5% of the consolidated riskweighted assets of its original parent undertaking; the subsidiary undertaking generates more than 5% of the total operating income of its original parent undertaking; the total exposure measure, referred to in Article 563 paragraphs (4) to (7) of this Decision, of the subsidiary undertaking is more than 5% of the consolidated total exposure measure of its original parent undertaking; 94)G-SII entity means an entity with legal personality that is a G-SICI or is a part of a G-SICI; 95)bail-in tool has a meaning as defined in the law governing the resolution of credit institutions; 96)group means a group of undertakings of which at least one is a credit institution and which consists of a parent undertaking and its subsidiary undertakings; 97)securities financing transaction (SFT) means a repurchase transaction, a securities or commodities lending or borrowing transaction, or a margin lending transaction; 98)initial margin means any collateral, other than variation margin, collected from or posted to an entity to cover the current and potential future exposure of a transaction or of a portfolio of transactions in the period needed to liquidate those transactions, or to re-hedge their market risk, following the default of the counterparty to the transaction or portfolio of transactions; 99)trading desk means a well-identified group of dealers set up by the credit institution in accordance with Article 124 paragraph (1) of this Decision to jointly manage a portfolio of trading book positions or the non-trading book positions referred to in paragraphs (7) and (8) of this Article in accordance with a welldefined and consistent business strategy and operating under the same risk management structure;
100) non-listed credit institution means a credit institution that has not issued
securities that are admitted to trading on a regulated market;
101) commodity and emission allowance dealer means an undertaking the
main business of which consists exclusively of the provision of investment services or activities in relation to:
commodity derivatives or commodity derivative contracts which may be settled in cash or physically, provided that they are traded on a regulated

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_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 11 market, a multilateral trading facility or an organised trading facility, unless otherwise determined or unless they are sold for commercial purposes; financial contracts for differences; derivatives and any other derivative contracts relating to climatic variables, freight rates, emission allowances, inflation rates or other official economic statistics that must be settled in cash at the option of one of the parties other than by reason of default or other termination event, as well as any other derivative contracts relating to assets, rights, obligations, indices and measures, which have the characteristics of other derivative financial instruments, having regard to whether, inter alia, they are traded on a regulated market, a multilateral trading facility or an organised trading facility; rules on emission allowances,
102) revolving exposure means any exposure whereby the borrower’s
outstanding balance is permitted to fluctuate based on its decisions to borrow and repay, up to an agreed limit;
103) transactor exposure means any revolving exposure that has at least 12
months of repayment history and that is one of the following:
an exposure for which, on a regular basis of at least every 12 months, the balance to be repaid at the next scheduled repayment date is determined as the drawn amount at a predefined reference date, with a scheduled repayment date not later than after 12 months, provided that the balance has been repaid in full at each scheduled repayment date for the previous 12 months; an overdraft facility where there have been no drawdowns over the previous 12 months;
104) fossil fuel sector entity means a company, enterprise or undertaking
statistically classified as having its principal economic activity in the coal, oil or gas sector of economic activities;
105) exposures subject to the impact of environmental or social factors
means exposures hindering the ambition of Montenegro, European Union or third country to achieve its regulatory objectives relating to ESG factors, in a way that could have a negative financial impact on institutions in Montenegro, European Union or third country;
106) interim profits means profits as laid down in the applicable accounting
framework, computed for a reference period shorter than a full financial year, and before the credit institution has taken a formal decision confirming such a profit or loss of the credit institution;
107) year-end profits means profits as defined in the applicable accounting
framework, computed for a reference period equal to a full financial year, and before the credit institution has taken a formal decision confirming such a profit or loss of the credit institution.
108) pay-out ratio at consolidated level means the ratio between the amount of
dividends referred to in indent 1 and the amount of profit referred to in indent 2 of this item, whereat if for a given year the ratio is negative or above 100%, the pay-out ratio shall be deemed to be 100%, and if for a given year the amount referred to in indent 2 of this item is zero, the pay-out ratio shall be deemed to be 0 % if the amount referred to in indent 1 of this item is zero, and 100 % if the amount referred to in indent 1 of this item is above zero:

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_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 12 dividends, other than those paid in a form that does not reduce CET1 capital (e.g. scrip-dividends), distributed to owners of the consolidating entity; and profit after tax attributable to owners of the consolidating entity;
109) pay-out ratio at solo level means the ratio between the amount of dividends
referred to in indent 1 and the amount of profit referred to in indent 2 of this item, whereat if for a given year the ratio is negative or above 100%, the payout ratio shall be deemed to be 100%, and if for a given year the amount referred to in indent 2 of this item is zero, the pay-out ratio shall be deemed to be 0 % if the amount referred to in indent 1 of this item is zero, and 100 % if the amount referred to in indent 1 of this item is above zero:
dividends, other than those paid in a form that does not reduce CET1 capital (e.g. scrip-dividends), distributed to owners of the entity; and profit after tax;
110) delivery option means the possibility to redeem the mortgage loan by
buying back the covered bond at market or at nominal value;
111) retail exposure means the exposure which, for a credit institution that
applies the standardised approach referred to in Part Three Title II Subtitle 3 of this Decision when calculating capital requirements for credit risk, meets the requirements referred to in Article 161 paragraph (1) of this Decision, or for a credit institution that applies the internal ratings based approach referred to in
Part Two Title II Subtitle 3 of this Decision when calculating capital
requirements for credit risk, meets the requirements referred to in Article 189 paragraph (6) of this Decision;
112) non-trading book means all positions of a credit institution other than those
included in the trading book;
113) equivalent third country means a third country that applies prudential
regulation equivalent to the regulation applied in Montenegro or the European Union if it is listed as the third country with equivalent regulations which are published by the Central Bank or the European Commission;
114) covered bonds mean bonds that meet the eligibility requirements for
covered bonds and which are issued by the credit institution which has their head office in Montenegro or EU Member State and is subject to special public supervision designed to protect bond-holder;
115) intermediate entity means any of the following entities that hold capital
instruments of financial sector entities:
a collective investment undertaking (CIU); a pension fund other than a defined benefit pension fund; a defined benefit pension fund, where the credit institution is supporting the investment risk and where the defined benefit pension fund is not independent from its sponsoring institution; entities that are directly or indirectly under the control or under significant influence of one of the following:
a) the credit institution or its subsidiary undertakings; b) the parent undertaking of the credit institution or the subsidiary undertaking of that parent undertaking; c) the parent financial holding company of the credit institution or the subsidiary undertaking of that parent financial holding company; d) the parent mixed activity holding company of the credit institution or the subsidiary undertaking of the parent mixed activity holding company; or

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_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 13 e) the parent mixed financial holding company of the credit institution or the subsidiary undertaking of the parent mixed financial holding company; entities that are jointly, directly or indirectly, under the control or under significant influence of one credit institution, several credit institutions, or a network of credit institutions, which are members of the same institutional protection scheme, or of the institutional protection scheme or the network of credit institutions affiliated to a central body that are not organised as a group to which the credit institution belongs; special purpose entities; entities whose activity is to hold financial instruments of financial sector entities; any entity that the Central Bank considers to be used with the intention of circumventing the rules relating to the deduction of indirect and synthetic holdings, other than the following entities that are not considered intermediate entity:
a) mixed activity holding company, credit institution, insurance undertaking and reinsurance undertaking; b) entities subject to the provisions of the Law and the provisions of this Decision; c) financial sector entities not listed under a) of this indent, which are supervised by a relevant authority in the manner that requirements for own funds deductions are applied by the amount of direct and indirect holdings in own instruments of capital and holdings of capital instruments of financial sector entities; (2) Terms used in Part Two Subtitle 3 of this Decision shall have the following meaning:

exposure means an asset or off-balance sheet item;
loss means economic loss, including material discount effects, and material
direct and indirect costs associated with collecting on the instrument;
expected loss (EL) means the ratio, related to a single facility, of the amount
expected to be lost on an exposure from any of the following:
a potential default of a debtor over a one-year period to the amount outstanding at default; a potential dilution event of purchased receivable over a one-year period to the amount outstanding at the date of occurrence of the dilution event;
credit obligation means any obligation arising from a credit contract, including
principal, accrued interest and fees, owed by a debtor;
credit exposure means any on- or off -balance-sheet item, that results, or may
result, in a credit obligation;
facility or credit facility means a credit exposure arising from a contract or a
set of contracts between a debtor and a credit institution;
margin of conservatism means an add-on incorporated in risk parameter
estimates to account for the expected range of estimation errors stemming from identified deficiencies in data, methods, models, and changes to underwriting standards, risk appetite, collection and recovery policies and any other source of additional uncertainty, as well as from general estimation error;
appropriate adjustment means the impact on risk parameter estimates
resulting from the application of methodologies within the estimation of risk parameters to correct the identified deficiencies in data and in estimation methods, and to account for changes to underwriting standards, risk appetite,

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 14 collection and recovery policies and any other source of additional uncertainty, to the extent possible in order to avoid biases in risk parameter estimates;
9) micro, small and medium-sized enterprise (SME) has the same meaning as
under the law governing the accounting;
10)commitment means any contractual arrangement that a credit institution offers to a client, and is accepted by that client, to extend credit, purchase assets or issue credit substitutes; and any such arrangement that can be unconditionally cancelled by a credit institution at any time without prior notice to a debtor or any arrangement that can be cancelled by a credit institution where a debtor fails to meet the conditions set out in the facility documentation, including conditions that are required to be met by the debtor prior to any initial or subsequent drawdown under the arrangement, unless contractual arrangements meet all of the following conditions:
contractual arrangements where the credit institution receives no fees or commissions to establish or maintain those contractual arrangements; contractual arrangements where the client is required to apply to the credit institution for the initial and each subsequent drawdown under those contractual arrangements; contractual arrangements where the credit institution has full authority, regardless of the fulfilment by the client of the conditions set out in the contractual arrangement documentation, over the execution of each drawdown; the contractual arrangements allow the credit institution to assess the creditworthiness of the client immediately prior to deciding on the execution of each drawdown and the credit institution has implemented and applies internal procedures that ensure that such an assessment is being made before the execution of each drawdown; contractual arrangements that are offered to a business undertaking, including an SME, that is closely monitored on an ongoing basis; 11)unconditionally cancellable commitment means any commitment the terms of which permit the credit institution to cancel that commitment to the full extent allowable under consumer protection and related legal acts, where applicable, at any time without prior notice to the debtor or that effectively provide for automatic cancellation due to a deterioration in a borrower’s creditworthiness.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 15
PART TWO
OWN FUNDS AND ELIGIBLE LIABILITIES
TITLE I - OWN FUNDS ITEMS
SUBTITLE 1 – Tier 1 Capital
Tier 1 Capital
Article 4
Tier 1 capital of a credit institution shall be the sum of Common Equity Tier 1 capital (CET1) and Additional Tier 1 capital (AT1) of a credit institution. SUBTITLE 2 – Common Equity Tier 1 capital
Section 1 - Common Equity Tier 1 items and instruments
Common Equity Tier 1 items
Article 5
(1) Common Equity Tier 1 capital of a credit institution shall consist of the following items:

capital instruments, where the conditions referred to in Article 8 of this Decision
are met;
share premium accounts related to instruments referred to in item 1) of this
paragraph;
retained earnings;
accumulated other comprehensive income;
other reserves;
reserves for general banking risks;
(2) The items referred to in paragraph (1) items 3) to 6) of this Article shall be recognised as Common Equity Tier 1 capital only where they are available to the credit institution for unrestricted and immediate use to cover risks or losses as soon as these occur. (3) For the purpose of paragraph (1) item 3) of this Article, a credit institution may, only with the prior authorisation of the Central Bank, include interim or year-end profits in the Common Equity Tier 1 capital before taking a formal decision confirming the final profit or loss of the credit institution. (4) The Central Bank shall grant authorisation referred to in paragraph (3) of this Article where the following conditions are met:
those profits have been verified by persons independent of the credit institution
that are responsible for the auditing of financial accounts of that credit institution;

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 16
2) credit institution has demonstrated to the satisfaction of the Central Bank that
any foreseeable charge or dividend has been deducted from the amount of those profits. (5) The conditions set out in paragraph (4) of this Article shall be met before the submission date of the prescribed reports on own funds to be submitted to the Central Bank in accordance with the regulation governing the reporting of credit institutions. (6) A verification of the interim or year-end profits of the credit institution shall provide an adequate level of assurance that those profits have been evaluated in accordance with the principles set out in the applicable accounting framework. (7) The verification referred to in paragraph (6) of this Article shall include:

for year-end profits, audit report or a comfort letter stating that the audit has not
been completed and nothing has come to the attention of the auditors that causes them to believe that the final report will include a qualified opinion;
for interim profits, an audit report or a review report as defined by the
International Standard on Review Engagements 2410.
(8) The fulfilment of the conditions referred to in paragraph (4) item 2) of this Article shall be demonstrated by:
a declaration of the credit institution that those profits have been recorded in
accordance with the applicable accounting framework and that the scope of prudential consolidation is not materially wider than the scope of verification referred to in the external auditor's document referred to in paragraph (7) of this
Article;
the report on the main components of those interim or year-end profits,
including deductions for any foreseeable charges or dividends, which is signed by a responsible person who has been duly authorised by the management body to sign on its behalf on the format prescribed by the Central Bank in the regulation governing the documentation supporting the application for granting authorisations. (9) The foreseeable dividends shall be the amount formally proposed or decided by the management body of the credit institution, whereat if such formal proposal or decision has not yet been taken, the dividend to be deducted shall be the highest of the following:
the maximum dividend calculated in accordance with credit institution’s internal
dividend policy;
the dividend calculated on the basis of the average pay-out ratio over the last
three years;
the dividend calculated on the basis of the previous year's pay-out ratio.
(10) The amount of dividends established otherwise that deviates from the method referred to in paragraph (9) of this Article shall not be recognised. (11) A credit institution may classify capital instrument as Common Equity Tier 1 instruments only with the prior authorisation of the Central Bank.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 17 (12) The Central Bank shall grant authorisation referred to in paragraph (11) of this
Article if it evaluates that the issuance of Common Equity Tier 1 capital instruments
meets the criteria set out in Article 8 of this Decision.
(13) By way of derogation from paragraph (11) of this Article, a credit institution may classify Common Equity Tier 1 instruments that have been subsequently issued as Common Equity Tier 1 instruments for which they have already received that authorisation from the Central Bank, where the following conditions are met:

the provisions governing those subsequent issuances of capital instruments are
substantially the same as the provisions governing those issuances of capital instruments for which the credit institutions have already received authorisation; and
credit institution has notified the Central Bank of those subsequent issuances
of capital instruments sufficiently in advance of their classification as Common Equity Tier 1 instruments. (14) Other reserves referred to in paragraph (1) item 5) of this Article shall be the reserves for acquired treasury shares, other reserves established in the previous period and provisions for estimated losses under regulatory requirement. Foreseeable dividends
Article 6
(1) The amount of foreseeable dividends referred to in Article 5 paragraph (4) item 2) of this Decision to be deducted by ia credit institution from the interim or year-end profits shall be determined in accordance with paragraphs (2) to (4) of this Article. (2) Where a credit institution’s management body has formally taken a decision or proposed a decision to the credit institution’s relevant management body regarding the amount of dividends to be distributed, this amount shall be deducted from the corresponding interim or year-end profits. (3) Where interim dividends are paid, the residual amount of interim profit resulting from the calculation laid down in paragraph (2) of this Article which is to be added to Common Equity Tier 1 items shall be reduced, taking into account the rules laid down in paragraphs (2) and (4) of this Article, by the amount of any foreseeable dividend which can be expected to be paid out from that residual interim profit with the final dividends for the full business year. (4) Before the credit institution's management body has formally taken or proposed a decision to the relevant management body on the distribution of dividends, the amount of foreseeable dividends to be deducted by the credit institution from the interim or year-end profits shall equal the amount of interim or year-end profits multiplied by the dividend payout ratio. (5) The dividend pay-out ratio shall be determined on the basis of the dividend policy approved for the relevant period by the competent body of the credit institution. (6) Where the dividend policy contains a pay-out range instead of a fixed value, the upper end of the range is to be used for the purpose of paragraph (2) of this Article

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 18 (7) In the absence of an approved dividend policy, or when, in the opinion of the Central Bank, it is likely that the credit institution will not apply its dividend policy or this policy is not a prudent basis upon which to determine the amount of deduction, the dividend pay-out ratio shall be based on the highest of the following:

the average dividend pay-out ratio over the three years prior to the year under
consideration;
the dividend pay-out ratio of the year preceding the year under consideration.
(8) The Central Bank may permit the credit institution to adjust the calculation of the dividend pay-out ratio as described in paragraph (7) of this Article to exclude exceptional dividends paid during the period. (9) A credit institution shall determine the amount of foreseeable dividends to be deducted taking into account any regulatory restrictions on distributions referred to in Articles 166 to 169 of the Law, whereby, in the case of the application of those restrictions, the foreseeable dividends to be deducted shall be based on the capital conservation plan agreed by the Central Bank pursuant to Article 170 of the Law, by including the amount of profit after deduction of foreseeable charges subject to such restrictions fully in Common Equity Tier 1 items where the condition referred to in
Article 5 paragraph (4) item 1) of this Decision is met.
(10) The amount of foreseeable dividends to be paid in a form that does not reduce the amount of Common Equity Tier 1 items, such as dividends in the form of shares, known as scrip-dividends, shall not be deducted from interim or year-end profits to be included in Common Equity Tier 1 items. (11) The Central Bank has received reasonable assurances from the credit institution that all necessary deductions to the interim or year-end profits and all those related to foreseeable dividends have been made, either under applicable accounting framework or under any other adjustments laid down in regulations of the Central Bank, before permitting the credit institution to include interim or year-end profits in Common Equity Tier 1 items. Foreseeable charges
Article 7
(1) The amount of foreseeable charges, within the meaning of Article 5 paragraph (4) item 2) of this Decision, shall comprise the following:
the amount of taxes; and
the amount of any obligations or circumstances arising during the related
reporting period which are likely to reduce the profits of the credit institution and for which the Central Bank deems that all necessary value adjustments, such as additional value adjustments according to Article 16 of this Decision, or provisions have not been made. (2) Foreseeable charges that have not already been taken into account in the profit and loss account shall be assigned to the interim period during which they have incurred so that each interim period bears a reasonable amount of these charges. Material or non-recurrent events shall be considered in full and without delay in the interim period during which they arise.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 19 (3) The Central Bank deems that all necessary deductions to the interim or year-end profits and all those related to foreseeable charges have been made, either under applicable accounting framework or under any other adjustments, before permitting credit institution to include interim or year-end profits in Common Equity Tier 1 items. Common Equity Tier 1 instruments
Article 8
(1) Capital instrument shall qualify as Common Equity Tier 1 instrument only if the following conditions are met:

the instrument is issued directly by the credit institution with the prior approval
of the shareholders' assembly or, where permitted under applicable regulations, pursuant to the decision of the management body of the credit institution;
the instrument is fully paid up and the acquisition of ownership of that
instrument is not funded directly or indirectly by the credit institution;
the instrument meets the conditions for capital and it is classified as share
capital in accordance with the accounting framework and pursuant to the law governing bankruptcy and winding-up of banks;
the instrument is clearly and separately disclosed on the balance sheet of the
credit institution;
the instrument is perpetual;
the principal amount of the instrument may not be reduced or repaid, except in
the following cases:
the winding-up of the credit institution; or discretionary repurchases of the instrument or other discretionary means of reducing capital, where the credit institution has received the prior authorisation of the Central Bank in accordance with Article 87 of this Decision;
the provisions governing the instrument do not indicate expressly or implicitly
that the principal amount of the instrument would be reduced or repaid other than in the winding-up of the credit institution, and the credit institution does not otherwise provide such an indication prior to or at issuance of the instrument;
the instrument meets the following conditions as regards distributions:
there is no preferential distribution treatment regarding the order of distribution payments, including in relation to other Common Equity Tier 1 instruments, and the provisions governing the instrument do not provide preferential rights to payment of distributions; distributions to holder of the instrument may be paid only out of distributable items; the conditions governing the instruments do not include a cap or other restriction on the maximum level of distributions; the level of distributions is not determined on the basis of the amount for which the instruments were purchased at issuance; the conditions governing the instruments do not include any obligation for the credit institution to make distributions to their holders and the credit institution is not otherwise subject to such an obligation; non-payment of distributions does not constitute an event of default of the credit institution;

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 20 the cancellation of distributions imposes no restrictions on the credit institution;
9) compared to all the capital instruments issued by the credit institution, the
instruments absorb the first and proportionately greatest share of losses as they occur, and each instrument absorbs losses to the same degree as all other Common Equity Tier 1 instruments; 10)the instrument ranks below all other claims in the event of bankruptcy or winding-up of the credit institution; 11)the instrument entitles their owners to a claim on the residual assets of the credit institution, which, in the event of its winding-up and after the payment of all senior claims, is proportionate to the amount of such instruments issued and is not fixed or subject to a cap; 12)the instrument is neither secured nor subject to a guarantee that enhances the seniority of the claim by any of the following entities:
the credit institution or its subsidiary undertakings; the parent undertaking of the credit institution or its subsidiary undertakings; the parent financial holding company or its subsidiary undertakings; the mixed activity holding company or its subsidiary undertakings; the mixed financial holding company and its subsidiary undertakings; any undertaking that has close links with the entities referred to in indents 1 to 5 of this item; 13)the instrument that is not subject to any arrangement, contractual or otherwise, that enhances the seniority of claims under the instruments in bankruptcy or winding-up of the credit institution. (2) For the purposes of paragraph (1) item 2) of this Article, only the part of a capital instrument that is fully paid up shall be eligible to qualify as a Common Equity Tier 1 instrument. (3) The conditions laid down in paragraph (1) item 9) of this Article shall be deemed to be met notwithstanding a write down on a permanent basis of the principal amount of Additional Tier 1 or Tier 2 instruments. (4) The condition laid down in paragraph (1) item 6) of this Article shall be deemed to be met notwithstanding the reduction of the principal amount of the capital instrument within a resolution proceedings or as a consequence of a write down of capital instruments required by the Central Bank as resolution authority. (5) The condition laid down in paragraph (1) item 7) of this Article shall be deemed to be met notwithstanding the provisions governing the capital instrument indicating expressly or implicitly that the principal amount of the instrument would or might be reduced within a resolution proceedings or as a consequence of a write down of capital instruments required by the Central Bank as the resolution authority. (6) The condition laid down in paragraph (1) item 8) indent 3 of this Article shall be deemed to be met notwithstanding the instrument paying a dividend multiple, provided that such a dividend multiple does not result in a distribution that causes a disproportionate drag on own funds.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 21 (7) The condition set out in paragraph (1) item 8) indent 5 of this Article shall be considered to be met notwithstanding a subsidiary undertaking being subject to a profit and loss transfer agreement with its parent undertaking, according to which the subsidiary undertaking is obliged to transfer, following the preparation of its annual financial statements, its annual result to the parent undertaking, where the following conditions are met:

the parent undertaking owns 90% or more of the voting rights and capital of the
subsidiary undertaking;
the parent undertaking and the subsidiary undertaking are located in the same
state;
the agreement was concluded for legitimate taxation purposes;
in preparing the annual financial statements, the subsidiary undertaking has
discretion to decrease the amount of distributions by allocating a part or all of its profits to its own reserves or reserves for general banking risk before making any payment to its parent undertaking;
the parent undertaking is obliged under the agreement to fully compensate the
subsidiary undertaking for all losses of the subsidiary undertaking;
the agreement is subject to a notice period according to which the agreement
can be terminated only by the end of an accounting year, with such termination taking effect no earlier than the beginning of the following accounting year, leaving the parent undertaking's obligation to fully compensate the subsidiary undertaking for all losses incurred during the current accounting year unchanged. (8) Where a credit institution has entered into a profit and loss transfer agreement, it shall notify the Central Bank without delay and provide the Central Bank with a copy of the agreement. (9) The credit institution shall also notify the Central Bank without delay of any changes to the profit and loss transfer agreement and the termination thereof. (10) A credit institution may not enter into more than one profit and loss transfer agreement. (11) For the purposes of paragraph (1) item 8) indent 1 of this Article, the differentiated distribution shall only reflect differentiated voting rights and in this respect, higher distributions shall only apply to Common Equity Tier 1 instruments with fewer or no voting rights. Multiple distributions constituting a disproportionate drag on own funds
Article 9
(1) Distributions on Common Equity Tier 1 instruments referred to in Article 8 of this Decision shall be deemed not to constitute a disproportionate drag on capital where the following conditions are met:
the dividend multiple is a multiple of the distribution paid on the voting
instruments and not a predetermined fixed amount;
the dividend multiple is set contractually or under the articles of association of
the credit institution;
the dividend multiple is not revisable;

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 22
4) the same dividend multiple applies to all instruments with a dividend multiple;
5) the amount of the distribution on one instrument with a dividend multiple does
not represent more than 125% of the amount of the distribution on one voting Common Equity Tier 1 instrument, which is expressed using the following formula:
𝑙𝑙 ≤ 1,25 × 𝑘𝑘 where:
𝑘𝑘 – shall represent the amount of the distribution on one instrument without a dividend multiple; 𝑙𝑙 – shall represent the amount of the distribution on one instrument with a dividend multiple;
6) total amount of the distributions paid on all Common Equity Tier 1 instruments
during a one-year period does not exceed 105% of the amount that would have been paid if instruments with fewer or no voting rights received the same distributions as voting instruments, which shall be expressed using the following formula that shall be applied on a one-year basis:
𝑘𝑘𝑘𝑘 + 𝑙𝑙𝑙𝑙 ≤ (1,05) × 𝑘𝑘 × ( + ) where:
𝑘𝑘 – shall represent the amount of the distribution on one instrument without a dividend multiple; 𝑙𝑙 – shall represent the amount of the distribution on one instrument with a dividend multiple; – shall represent the number of voting instruments; – shall represent the number of non-voting instruments; (2) Where the condition referred to in paragraph (1) item 6) of this Article is not met, only the amount of the instruments with a dividend multiple that exceeds the threshold defined therein shall be deemed to cause a disproportionate drag on capital. (3) Where any of the conditions referred to in paragraph (1) items 1) to 5) of this Article are not met, all outstanding instruments with a dividend multiple shall be deemed to cause a disproportionate drag on capital. Preferential distributions regarding preferential rights to payments of distributions
Article 10
(1) For the purposes of Article 8 of this Decision, a distribution on a Common Equity Tier 1 instrument shall be deemed to be preferential relative to other Common Equity Tier 1 instruments and regarding the order of distribution payments where at least one of the following conditions is met:

distributions are decided at different times;
distributions are paid at different times;
the issuer shall pay the distributions on one type of Common Equity Tier 1
instruments before paying the distributions on another type of Common Equity Tier 1 instruments;

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 23
4) a distribution is paid on some Common Equity Tier 1 instruments but not on
others.
(2) A distribution on a Common Equity Tier 1 instrument shall also be deemed to be preferential relative to other Common Equity Tier 1 instruments where there are differentiated levels of distribution, unless the conditions referred to in Article 9 paragraphs (1) to (3) of this Article are met. Indirect funding
Article 11
(1) Indirect funding of capital instruments for the purposes of Article 8 paragraph (1) item 2), Article 42 paragraph (1) item 3) and Article 55 item 3) of this Decision or indirect funding of liabilities for the purpose of Article 65 paragraph (2) item 3) of this Decision shall be deemed funding that is not direct. (2) Direct funding shall refer to situations where a credit institution has granted a loan or other funding in any form to an investor that is used for the acquisition of ownership of the credit institution’s capital instruments or liabilities. (3) Direct funding shall also include funding granted for other purposes than acquiring ownership of the capital instruments or liabilities of a credit institution, to any natural or legal person who has a qualifying holding in the credit institution, or who is deemed to be a connected person, if the credit institution is not able to demonstrate that the transaction is realised at similar conditions as other transactions with third parties and the natural or legal person or the connected person does not have to rely on the distributions or on the sale of the capital instruments or liabilities held to support the payment of interest and the repayment of the funding. Applicable forms and nature of indirect funding of capital instruments and liabilities
Article 12
(1) The applicable forms and nature of indirect funding of the acquisition of ownership of the capital instruments and liabilities of a credit institution shall include the following:

funding of an investor’s acquisition of ownership, at issuance or thereafter, of
the capital instruments or liabilities of a credit institution by any entities on which the credit institution has a direct or indirect control or by entities included in the scope of:
accounting or prudential consolidation of the credit institution; or the consolidated balance sheet; or the supplementary supervision of the credit institution;
funding of an investor’s acquisition of ownership, at issuance or thereafter, of
the capital instruments or liabilities of a credit institution by external entities that are protected by a guarantee or by the use of a credit derivative or are secured in some other way so that the credit risk is transferred to the credit institution, or to any entities on which the credit institution has a direct or indirect control or any entities included in the scope of:
accounting or prudential consolidation of the credit institution; or the consolidated balance sheet; or

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 24 the supplementary supervision of the credit institution;
3) funding of a borrower that passes the funding on to the ultimate investor for the
acquisition of ownership, at issuance or thereafter, of the capital instruments or liabilities of a credit institution. (2) The funding shall be deemed indirect funding, for the purposes of paragraph (1) of this Article, where the following conditions are also met, where applicable:

the investor is not included in the scope of:
accounting or prudential consolidation of the credit institution; the consolidated balance sheet; or the supplementary supervision of the credit institution;
the external entity is not included in the scope of:
accounting or prudential consolidation of the credit institution; the consolidated balance sheet; or the supplementary supervision of the credit institution; (3) For the purposes of paragraph (2) item 1) indent 2 of this Article, an investor shall be deemed to be included in the scope of the extended aggregated calculation where the relevant capital instrument or liability is subject to consolidation or extended aggregated calculation in a way that the multiple use of own funds or eligible liabilities items and any creation of own funds or eligible liabilities between members of the institutional protection scheme is eliminated. (4) The applicable forms and nature of indirect funding of the acquisition of ownership of the capital instruments and liabilities of a credit institution shall include intragroup circular funding, which means any of the following:
situations where a credit institution has granted a loan or other funding in any
form to one of the entities referred to in paragraph (1) item 1) of this Article through another entity referred to in paragraph (1) item 1) of this Article, that is used for the acquisition of ownership of the credit institution’s capital instrument or liabilities;
funding granted to one of the entities referred to in paragraph (1) item 1) of this
Article, for other purposes than acquiring ownership of the capital instrument or
liabilities of a credit institution through another entity referred to in paragraph (1) item 1) of this Article, provided that, taking into account any additional guidance as provided by the Central Bank for capital instruments, or its supervisory function, or with regard to liabilities, resolution function in consultation with the supervisory function, the credit institution is not able to demonstrate the following:
the transaction is realised at similar conditions as other transactions with third parties; the investor does not have to rely on the distributions or on the sale of the capital instruments or liabilities held to support the payment of interest and the repayment of the funding. (5) When establishing whether the acquisition of ownership of a capital instrument or liability involves direct or indirect funding, the amount to be considered shall be net of any individually assessed impairment allowance made.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 25 (6) In order to avoid a qualification of direct or indirect funding and where the loan or other form of funding or guarantees is granted to any natural or legal person who has a qualifying holding in the credit institution or who is deemed to be a connected person, the credit institution shall ensure on an on-going basis that it has not provided the loan or other form of funding or guarantees for the purposes of acquiring ownership directly or indirectly of capital instruments or liabilities of that credit institution, and where the loan or other form of funding or guarantees is granted to other types of party, the credit institution shall make this control on a best effort basis. Consequences of the conditions for Common Equity Tier 1 instruments ceasing to be met
Article 13
In the case where a Common Equity Tier 1 instrument ceases to meet the conditions laid down in Article 8 of this Decision, the following shall apply:

that instrument shall immediately cease to qualify as a Common Equity Tier 1
instrument;
the share premium accounts that relate to that instrument shall immediately
cease to qualify as Common Equity Tier 1 items.
Capital instruments subscribed by government authorities in emergency situations
Article 14
A credit institution may, in emergency situations, include in Common Equity Tier 1 capital instruments that at least comply with the conditions referred to in Article 8 paragraph (1) items 2) to 5) of this Decision where the following conditions are met:
the capital instruments are considered State aid, and is assured that they are
issued within the context of recapitalisation measures pursuant to State aid rules existing at that time;
the capital instruments are fully subscribed and held by the State or a relevant
state administration body or state-owned entity;
the capital instruments are able to absorb losses;
in the event of winding-up, the capital instruments entitle their owners to a claim
on the residual assets of the credit institution after the payment of all senior claims;
there are adequate exit mechanisms of the State or, where applicable, a
relevant state administration body or state-owned entity; and
the Central Bank has granted its prior authorisation to the credit institution to
include these instruments in Common Equity Tier 1 capital.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 26
Section 2 - Prudential filters
Securitised assets
Article 15
(1) A credit institution shall exclude from any element of own funds any increase in its capital under the applicable accounting framework that results from securitised assets, including the following:

such an increase associated with future margin income that results in a gain on
sale for the credit institution; and
where the credit institution is the originator of a securitisation, net gains that
arise from the capitalisation of future income from the securitised assets that provide credit enhancement to positions in the securitisation. (2) The gain on sale referred to in paragraph (1) item 1) of this Article means any recognised gain on sale for the credit institution that is recorded as an increase in any element of own funds and is associated with future margin income arising from a sale of securitised assets when they are removed from the credit institution’s balance sheet in the context of a securitisation transaction. (3) The recognised gain on sale shall be determined as the difference between the following two items, as determined by applying the accounting framework:
the net value of the assets that the credit institution has received including any
new asset acquired less any other asset that the credit institution has given or any new liability assumed; and
the carrying amount of the securitised assets or of the part derecognised.
(4) The recognised gain on sale which is associated with the future margin income, for the purposes of this Article, shall refer to the expected future ‘excess spread’ defined as the finance charge collections and other fee income received in respect of the securitised exposures net of costs and expenses. Cash flow hedges and changes in the value of own liabilities
Article 16
(1) A credit institution shall not include the following items in any element of own funds:
the fair value reserves related to gains or losses on cash flow hedges of
financial instruments that are not valued at fair value, including projected cash flows;
gains or losses on liabilities of the credit institution that are valued at fair value
that result from changes in the own credit standing of the credit institution;
fair value gains and losses on derivative liabilities of the credit institution that
result from changes in the own credit risk of the credit institution. (2) For the purposes of paragraph (1) item 3) of this Article, credit institution shall not offset the fair value gains and losses arising from the credit institution’s own credit risk with those arising from its counterparty credit risk.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 27 (3) Without prejudice to paragraph (1) item 2) of this Article, a credit institution may include the amount of gains and losses on their liabilities in own funds where all the following conditions are met:

the liabilities are in the form of bonds issued by a credit institution established
in Montenegro and meet the conditions to be eligible as covered bonds;
the changes in the value of the credit institution's assets and liabilities are due
to the same changes in the credit institution's own credit standing;
there is a close correspondence between the value of the bonds referred to in
item 1) of this paragraph and the value of the credit institution's assets; and
it is possible to redeem the mortgage loans by buying back the bonds financing
the mortgage loans at market or nominal value.
(4) For the purposes of paragraph (3) item 3) of this Article, a close correspondence between the value of a covered bond and the value of a credit institution's assets shall be deemed to exist when the following conditions are met:
any changes in the fair value of the covered bonds issued by the credit
institution results at all times in equal changes in the fair value of the assets underlying the covered bonds and the fair value shall be determined according to the applicable accounting framework;
the mortgage loans underlying the covered bonds issued by the credit institution
to finance the loans may be at any time redeemed by buying back the covered bonds at market or nominal value through the exercise of the delivery option;
the transparent mechanism applies for determining the fair value of the
mortgage loans and of the covered bonds.
(5) Determining the value of the mortgage loans shall include calculating the fair value of the delivery option. (6) A close correspondence shall not be deemed to exist where, in accordance with paragraph (4) of this Article, a net profit or loss arises from changes in the value of the covered bonds or of the underlying mortgage loans with the embedded delivery option. Additional value adjustments
Article 17
(1) When calculating the amount of their own funds, a credit institution shall apply prudent valuation requirements referred to in Article 126 of this Decision to all fairvalued assets, and shall deduct from Common Equity Tier 1 capital the amount of any additional value adjustments (AVA) necessary. (2) The requirements referred to in paragraph (1) of this Article shall refer to all fairvalued positions of the credit institution regardless of whether they are held in the trading book or not, and the term “position” shall solely refer to financial instruments and commodities or fair-valued portfolio of financial instruments or commodities. (3) A credit institution shall use AVA) solely for the calculation of Common Equity Tier 1 capital and shall not be included in the calculation of capital requirements for the positions in trading book.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 28 (4) The total AVA necessary to adjust fair values to the prudent value shall be calculated using core approach as laid down in Article 128 of this Decision, unless they meet the conditions for applying simplified approach referred to in Article 127 of this Decision. (5) Where the application of prudent valuation leads to a lower absolute carrying value for assets or higher absolute carrying value for liabilities than recognised in accounting, an AVA shall be calculated as the absolute value of the difference between the two, as the prudent value shall always be equal to or lower than the fair value for assets and equal to or higher than the fair value for liabilities. (6) For valuation positions that include the positions subject to hedge accounting, available-for-sale positions to the extent their valuation changes are subject to a prudential filter and exactly matching, offsetting positions, for which a change in accounting valuation has only a partial or zero impact on Common Equity Tier 1 capital, AVAs shall only be applied based on the proportion of the accounting valuation change that impacts Common Equity Tier 1 capital. (7) Where a credit institution calculates AVA based on market data, it shall consider the same range of market data as the data used in the independent price verification process in the manner laid down in Article 126 paragraphs (10) to (12) of this Decision. (8) A credit institution shall consider a full range of available and reliable market data sources to determine a prudent value including each of the following, where relevant:

exchange prices in a liquid market;
trades in the exact same or very similar instrument, either from the credit
institution's own records or, where available, trades from across the market;
tradable quotes from brokers and other market participants;
consensus service data;
indicative broker quotes; and
counterparty collateral valuations.
(9) Where a credit institution applies an expert-based approach, it shall consider alternative methods and sources of information, including each of the following, where relevant:
the use of proxy data based on similar instruments for which sufficient data is
available;
the application of prudent shifts to valuation inputs;
the identification of natural bounds to the value of an instrument.
Unrealised gains and losses measured at fair value
Article 18
A credit institution shall not make adjustments to remove from their own funds unrealised gains or losses on their assets or liabilities measured at fair value, except in the case of items referred to in Article 16 of this Decision.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 29
Section 3 - Deductions from Common Equity Tier 1 items, exemptions and
alternatives
Subsection 1 - Deductions from Common Equity Tier 1 items Deductions from Common Equity Tier 1 items
Article 19
A credit institution shall deduct from Common Equity Tier 1 the following items:

losses for the current financial year;
intangible assets with the exception of prudently valued software assets the
value of which is not negatively affected by resolution, bankruptcy or windingup of the credit institution;
deferred tax assets that rely on future profitability;
for a credit institution calculating risk-weighted exposure amounts using the
Internal Ratings Based Approach (the IRB Approach), the IRB shortfall calculated in accordance with Article 200 of this Decision;
defined benefit pension fund assets on the balance sheet of the credit
institution;
direct, indirect and synthetic holdings by a credit institution of own Common
Equity Tier 1 instruments, including own Common Equity Tier 1 instruments that a credit institution is under an actual or contingent obligation to purchase by virtue of an existing contractual obligation;
direct, indirect and synthetic holdings of the Common Equity Tier 1 instruments
of financial sector entities where those entities have a reciprocal cross holding with the credit institution that the Central Bank considers to have been designed to inflate artificially the own funds of the credit institution;
the applicable amount of direct, indirect and synthetic holdings by the credit
institution of Common Equity Tier 1 instruments of financial sector entities where the credit institution does not have a significant investment in those entities;
the applicable amount of direct, indirect and synthetic holdings by the credit
institution of the Common Equity Tier 1 instruments of financial sector entities where the credit institution has a significant investment in those entities; 10)the amount of items required to be deducted from Additional Tier 1 items pursuant to Article 54 of this Decision that exceeds the Additional Tier 1 items of the credit institution; 11)the amount of qualifying holdings in persons engaged in non-financial business activity that exceeds the limits prescribed in Article 175 paragraphs (1) and (2) of the Law; 12)the exposure amount of the following items which qualify for a risk weight of 1.250%, where the credit institution deducts that exposure amount from the amount of Common Equity Tier 1 items as an alternative to applying a risk weight of 1.250%:
securitisation positions in accordance with Article 280 paragraph (1) item 2), Article 281 paragraph (1) item 2) and Article 289 of this Decision; free deliveries, in accordance with Article 527 paragraph (6) of this Decision;

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 30 positions in a basket for which a credit institution cannot determine the risk weight under the IRB approach, in accordance with Article 195 paragraphs (11) and (12) of this Decision; exposures in the form of units or shares in a CIU that are assigned a risk weight of 1.250% in accordance with Article 175 paragraph (2) of this Decision. 13)any tax charge relating to Common Equity Tier 1 items foreseeable at the moment of its calculation, except where the credit institution suitably adjusts the amount of Common Equity Tier 1 items insofar as such tax charges reduce the amount up to which those items may be used to cover risks or losses; 14)the applicable amount of insufficient coverage for non-performing exposures; 15)for a minimum value commitment referred to in Article 175 paragraph (2) of this Decision, any amount by which the current market value of the units or shares in CIUs underlying the minimum value commitment falls short of the present value of the minimum value commitment and for which the credit institution has not already recognised a reduction of Common Equity Tier 1 items; 16)required provisions for estimated and potential losses for balance sheet and off-balance sheet items that are not deemed to be non-performing assets, as established in accordance with the Central Bank’s regulation governing asset classification and calculation of provisions for potential loan losses of a credit institution; 17)required provisions for estimated and potential losses for balance sheet and off-balance sheet items that are deemed to be non-performing assets, as established in accordance with the Central Bank’s regulation governing asset classification and calculation of provisions for potential loan losses of a credit institution; 18)applicable amount of excess in investment in immovable property calculated in accordance with the regulation governing the treatment of investments in immovable property and fixed assets. Deduction of losses for the current financial year
Article 20
(1) For the purpose of calculating its Common Equity Tier 1 capital during the year, and irrespective of whether the credit institution closes its financial accounts at the end of each interim period, the credit institution shall determine its profit and loss accounts and deduct any resulting losses from Common Equity Tier 1 items as they arise. (2) for the purpose of calculation referred to in paragraph (1) of this Article, profit and loss accounts shall be determined in the same manner as for the purposes of compiling year-end financial reports. (3) Income and expenses shall be prudently estimated and shall be assigned to the interim period in which they incurred so that each interim period bears a reasonable amount of the anticipated annual income and expenses, whereat material or nonrecurrent events shall be considered in full and without delay in the interim period during which they arise.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 31 (4) Where losses for the current financial year have already reduced Common Equity Tier 1 items as a result of an interim or a year-end financial report, a deduction is not needed. (5) For the purpose of this Article, the financial report means that the profit and losses have been determined after a closing of the interim or the annual accounts in accordance with the prevailing accounting framework. (6) The provisions of paragraphs (1) to (5) of this Article shall apply in the same manner to gains and losses included in accumulated other comprehensive income. Deduction of intangible assets
Article 21
A credit institution shall determine the amount of intangible assets to be deducted in accordance with the following:

the amount to be deducted shall be reduced by the amount of associated
deferred tax liabilities that would be extinguished if the intangible assets became impaired or were derecognised under the applicable accounting framework;
the amount to be deducted shall include goodwill included in the valuation of
significant investments of the credit institution;
the amount to be deducted shall be reduced by the amount of the accounting
revaluation of the subsidiary undertakings' intangible assets derived from the consolidation of subsidiary undertakings attributable to persons other than the undertakings included in the consolidation. Deduction of software assets that are classified as intangible assets for accounting purposes
Article 22
(1) A credit institution shall deduct software assets that are intangible assets as defined in Article 19 item 2) of this Decision from Common Equity Tier 1 items in accordance with paragraphs (5) to (10) of this Article, and it shall determine the amount to be deducted on the basis of the prudential accumulated amortisation calculated in accordance with paragraphs (2) to (4) of this Article. (2) A credit institution shall calculate the amount of the prudential accumulated amortisation of the software assets referred to in paragraph (1) of this Article by multiplying the amount obtained from the calculation referred in item 1) of this paragraph by the number of days referred to in item 2) of this paragraph:
the amount at which the software asset has been initially recognised on the
balance sheet of the credit institution under the applicable accounting framework, divided by the lower of:
the number of days of useful life of the software asset, as estimated for accounting purposes; three years, expressed in days, starting from the date referred to in paragraph (3) of this Article;

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 32
2) the number of days elapsed since the date referred to in paragraph (3) of this
Article, provided that this does not exceed the period referred in item 1) of this
paragraph.
(3) The prudential accumulated amortisation referred to in paragraph (1) of this Article shall be calculated starting from the date on which the software asset is available for use and begins to be amortised for accounting purposes. (4) By way of derogation from paragraph (3) of this Article, where a software asset has been acquired from any business undertaking, including a non-financial sector entity, that is part of the same group as the credit institution, the prudential accumulated amortisation referred to in paragraph (1) of this Article shall be calculated from the date on which that software asset began to be amortised under the applicable accounting framework on that business undertaking’s balance sheet. (5) A credit institution shall deduct from Common Equity Tier 1 items the amount resulting from the difference, if positive, between the amount referred to in item 1) of this paragraph and the amount referred to in item 2) of this paragraph:

the prudential accumulated amortisation of a software asset calculated in
accordance with paragraphs (2) to (4) of this Article;
the sum of the accumulated amortisation and any accumulated impairment
losses of that software asset recognised on that credit institution’s balance sheet under the applicable accounting framework. (6) By way of derogation from paragraph (5) of this Article, until the date on which the software asset is available for use and begins to be amortised for accounting purposes, a credit institution shall deduct from Common Equity Tier 1 items the full amount at which the software asset is recognised on that credit institution’s balance sheet under the applicable accounting framework. (7) The prudential amortisations and deductions set out in this Article shall be made separately for each software asset. (8) A credit institution's investments in maintaining, enhancing or upgrading existing software assets shall be treated as assets other than the related software assets, provided that those investments are recognised as an intangible asset on that credit institution’s balance sheet under the applicable accounting framework. (9) Without prejudice to paragraph (6) of this Article, the prudential accumulated amortisation of those investments of credit institution in maintaining, enhancing or upgrading existing software assets shall be calculated from the date on which they begin to be amortised under the applicable accounting framework. (10) The prudential accumulated amortisation of related existing software assets shall continue to be calculated from the date of their own initial amortisation for accounting purposes and until the end of the period of the prudential amortisation determined in accordance with paragraph (2) item 1) of this Article.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 33 Deduction of deferred tax assets that rely on future profitability
Article 23
(1) A credit institution shall determine, for the purposes of Article 19 item 3) of this Decision, the amount of deferred tax assets that rely on future profitability that require deduction from Common Equity Tier 1 capital in accordance with this Article. (2) Except where the conditions laid down in paragraph (3) of this Article are met, a credit institution shall calculate the amount of deferred tax assets that rely on future profitability without reducing it by the amount of the associated deferred tax liabilities of the credit institution. (3) The amount of deferred tax assets that rely on future profitability may be reduced by the amount of the associated deferred tax liabilities of the credit institution, where the following conditions are met:

the entity has a legally enforceable right under applicable regulations to set off
those current tax assets against current tax liabilities;
the deferred tax assets and the deferred tax liabilities relate to taxes levied by
the same tax authority and on the same taxable entity.
(4) The associated deferred tax liabilities of the credit institution, for the purposes of paragraph (3) of this Article. may not include deferred tax liabilities that reduce the amount of intangible assets or defined benefit pension fund assets required to be deducted. (5) The amount of associated deferred tax liabilities referred to in paragraph (4) of this
Article shall be allocated between the following:
deferred tax assets that rely on future profitability and arise from temporary
differences that are not deducted in accordance with Article 43 paragraph (1) of this Decision; and
all other deferred tax assets that rely on future profitability.
(6) A credit institution shall allocate the associated deferred tax liabilities according to the proportion of deferred tax assets that rely on future profitability that the items referred to in paragraph (5) of this Article represent. (7) The offsetting between deferred tax assets and associated deferred tax liabilities shall be done separately for each taxable entity. (8) Associated deferred tax liabilities shall be limited to those that arise from the tax law of the same jurisdiction as the deferred tax assets. (9) For the calculation of deferred tax assets and liabilities at consolidated level, a taxable entity includes any number of entities which are members of the same tax group, fiscal consolidation, fiscal unity or consolidated tax return under applicable national law. (10) The amount of associated deferred tax liabilities which are eligible for offsetting deferred tax assets that rely on future profitability is equal to the difference between the amount of deferred tax liabilities as recognised under the applicable accounting

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 34 framework and the amount of associated deferred tax liabilities arising from intangible assets and from defined benefit pension fund assets. Tax overpayments, tax loss carry backs and deferred tax assets that do not rely on future profitability
Article 24
A credit institution shall not deduct the following items from own funds, instead, they shall be subject to a risk weight in accordance with the provisions of this Decision that relate to credit risk by applying Standardised Approach or IRB approach:

overpayments of tax by the credit institution for the current year; and
current year tax losses of the credit institution carried back to previous years
that give rise to a claim on, or a receivable from, Government of Montenegro, local self-governments or local tax authority, where applicable. Deductions of foreseeable tax charges
Article 25
(1) A credit institution may, for the purposes of Article 19 item 13) and Article 54 paragraph (1) item 6) of this Decision, may consider that foreseeable tax charges have been already taken into account where it applies the accounting framework and accounting policies that provide for the full recognition of current and deferred tax liabilities related to transactions and other events recognised in the balance sheet or the profit and loss account. (2) For the purposes of paragraph (1) of this Article, the Central Bank shall be satisfied that all necessary deductions have been made, either under applicable accounting standards or under any other value adjustments. (3) When the credit institution is calculating its Common Equity Tier 1 capital on the basis of financial statements made in accordance with the International Accounting Standards and International Financial Reporting Standards, the condition of paragraph (1) of this Article shall be deemed to be fulfilled. (4) Where the condition referred to in paragraph (1) of this Article is not fulfilled, the credit institution shall decrease its Common Equity Tier 1 items by the estimated amount of current and deferred tax charges not yet recognised in the balance sheet and profit and loss account related to transactions and other events recognised in the balance sheet or the profit and loss account, which have been determined using the approach equivalent to International Accounting Standards and International Financial Reporting Standards. (5) The estimated amount of deferred tax charges may not be netted against deferred tax assets that are not recognised in the financial statements.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 35 Deduction of negative amounts resulting from the calculation of expected loss amounts
Article 26
The amount to be deducted from Common Equity Tier 1 capital in accordance with Article 19 item 4) of this Decision shall not be reduced by a rise in the level of deferred tax assets that rely on future profitability, or other additional tax effects, that could occur if provisions were to rise to the level of expected losses referred to in Articles 199 and 200 of this Decision. Deduction of defined benefit pension fund assets
Article 27
(1) For the purposes of Article 19 item 5) of this Decision, the amount of defined benefit pension fund assets to be deducted from Common Equity Tier 1 capital shall be reduced by the following:

the amount of any associated deferred tax liability which could be extinguished
if the assets became impaired or were derecognised under the applicable accounting framework;
the amount of assets in the defined benefit pension fund which the credit
institution has an unrestricted ability to use, provided that the credit institution has received the prior authorisation of the Central Bank. (2) Assets referred to in paragraph (1) item 2) of this Article which is used to reduce the amount to be deducted from Common Equity Tier 1 capital shall receive a risk weight in accordance with the provisions of this Decision that relate to credit risk by applying Standardised Approach or IRB Approach, whichever is applied by the credit institution. (3) The Central Bank shall only grant the authorisation referred to in paragraph (1) item 2) of this Article where the unrestricted ability to use the respective defined benefit pension fund assets entails immediate and unfettered access to the assets such as when the use of the assets is not barred by a restriction of any kind and there are no claims of any kind from third parties on these assets. (4) Unfettered access to the assets, within the meaning referred to in paragraph (3) of this Article, is likely to exist when the credit institution is not required to request and receive specific authorisation from the manager of the pension funds or the pension beneficiaries each time it would access excess funds in the plan. (5) A defined benefit pension fund shall be deemed to be independent from its sponsoring credit institution where the following conditions are met:
the defined benefit pension fund is legally separate from the sponsoring credit
institution and its governance is independent;
the articles of association, the articles of incorporation and the internal rules of
the specific pension fund, as applicable, have been approved by an independent regulatory authority or the rules governing the incorporation and functioning of the defined benefit pension fund, as applicable, are established in the applicable law of Montenegro, EU Member States or a third country;

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 36
3) the trustees or administrators of the defined pension fund have an obligation
under applicable law to act impartially in the best interests of the scheme beneficiaries instead of those of the sponsor, to manage assets of the defined pension fund prudently and to conform to the restrictions set out in the articles of association, the articles of incorporation and the internal rules of the specific pension fund, as applicable, or statutory or regulatory framework described in item 2) of this paragraph; and
4) the articles of association or the articles of incorporation or the rules governing
the incorporation and functioning of the defined benefit pension fund referred to in item 2) of this paragraph include restrictions on investments that the defined pension scheme can make in own funds instruments issued by the sponsoring credit institution. (6) Where a defined benefit pension fund holds own funds instruments of the sponsoring credit institution, the sponsoring credit institution shall treat that holding as an indirect holding of own Common Equity Tier 1 instruments, own Additional Tier 1 instruments or own Tier 2 instruments, as applicable. (7) The amount to be deducted from the Common Equity Tier 1 items, Additional Tier 1 items or Tier 2 items of the sponsoring credit institution, shall be calculated in accordance with Article 33 of this Decision. Deduction of holdings of own Common Equity Tier 1 instruments
Article 28
(1) For the purposes of Article 19 item 6) of this Decision, a credit institution shall calculate holdings of own Common Equity Tier 1 instruments on the basis of gross long positions. (2) By way of derogation from paragraph (1) of this Article:

a credit institution may calculate the amount of holdings of own Common Equity
Tier 1 instruments on the basis of the net long position provided that both the following conditions are met:
the long and short positions are in the same underlying exposure and the short positions involve no counterparty risk; and either both the long and the short positions are held in the trading book or both are held in the non-trading book;
a credit institution shall determine the amount to be deducted for direct, indirect
and synthetic holdings of index securities by calculating the underlying exposure to own Common Equity Tier 1 instruments included in those indices;
a credit institution may net gross long positions in own Common Equity Tier 1
instruments resulting from holdings of index securities against short positions in own Common Equity Tier 1 instruments resulting from short positions in the underlying indices, including where those short positions involve counterparty risk, provided that both the following conditions are met:
the long and short positions are in the same underlying indices; either both the long and the short positions are held in the trading book or both are held in the non-trading book.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 37 Significant investment in a financial sector entity
Article 29
(1) For the purposes of determining deductions from Common Equity Tier 1 instruments, it shall be deemed that a credit institution has a significant investment in a financial sector entity where any of the following conditions is met:

the credit institution owns more than 10% of the Common Equity Tier 1
instruments issued by that entity;
the credit institution has close links with that entity and owns Common Equity
Tier 1 instruments issued by that entity;
the credit institution owns Common Equity Tier 1 instruments issued by that
entity and the entity is not included in consolidation pursuant to the Law but is included in the same accounting consolidation as the credit institution for the purposes of financial reporting under the applicable accounting framework. (2) For the purposes of Article 19 item 9) of this Decision, in order to assess whether a credit institution owns more than 10% of the Common Equity Tier 1 instruments issued by a financial sector entity, in accordance with paragraph (1) item 1) of this
Article, the credit institution shall add the amounts of their gross long positions in direct
holdings, as well as indirect holdings of Common Equity Tier 1 instruments of this financial sector entity referred to in Article 3 paragraph (1) item 115) indents 4 to 8 of this Decision. (3) The Central Bank shall take into account indirect and synthetic holdings in order to assess whether the conditions referred to in paragraph (1) items 2) and 3) of this Article are met. Deduction of holdings of Common Equity Tier 1 instruments of financial sector entities and where a credit institution has a reciprocal cross holding designed artificially to inflate own funds
Article 30
A credit institution shall make the deductions referred to in Article 19 items 7),
and 9) of this Decision in accordance with the following:
holdings of Common Equity Tier 1 instruments and other capital instruments of financial sector entities shall be calculated on the basis of the gross long positions; for the purposes of deduction, Tier 1 own-fund insurance items shall be treated as holdings of Common Equity Tier 1 instruments. Deduction of holdings of Common Equity Tier 1 instruments of financial sector entities
Article 31
A credit institution shall apply the deductions referred to in Article 19 items 8) and 9) of this Decision in accordance with the following provisions:
a credit institution may calculate direct, indirect and synthetic holdings of
Common Equity Tier 1 instruments of the financial sector entities on the basis of the net long position in the same underlying exposure provided that both the following conditions are met:

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 38 the maturity date of the short position is either the same as, or later than the maturity date of the long position or the residual maturity of the short position is at least one year; and either both the long position and the short position are held in the trading book or both are held in the non-trading book;
2) a credit institution shall determine the amount to be deducted for direct, indirect
and synthetic holdings of index securities by calculating the underlying exposure to the capital instruments of the financial sector entities in those indices. Synthetic holdings of capital instruments
Article 32
(1) For the purposes of Article 19 items 6), 8) and 9) of this Decision, the following financial products shall be considered synthetic holdings of capital instruments:

derivative instruments that have capital instruments of a financial sector entity
as their underlying or have the financial sector entity as their reference entity; and
guarantees or credit protection provided to a third party in respect of the third
party's investments in a capital instrument of a financial sector entity. (2) The financial products provided for in paragraph (1) of this Article shall include the following:
investments in total return swaps (TRS) on a capital instrument of a financial
sector entity;
call options purchased by the credit institution on a capital instrument of a
financial sector entity;
put options sold by the credit institution on a capital instrument of a financial
sector entity or any other actual or contingent contractual obligation of the credit institution to purchase its own funds instruments;
investments in forward purchase agreements on a capital instrument of a
financial sector entity.
(3) The amount of synthetic holdings to be deducted from Common Equity Tier 1 items as required by Article 19 items 6), 8) and 9) of this Decision shall be as follows:
for holdings in the trading book:
for options, the delta equivalent amount of the relevant instruments calculated in accordance with the provisions of this Decision governing the calculation of capital requirements for market risk; for any other synthetic holdings, the nominal or notional amount, as applicable;
for holdings in the non-trading book:
for call options, the current market value; for any other synthetic holdings, the nominal or notional amount, as applicable. (4) A credit institution shall deduct the synthetic holdings referred to in paragraph (3) of this Article from the date of signature of the contract between the credit institution and the counterparty.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 39 Deductions of indirect holdings of capital instruments
Article 33
(1) The amount of indirect holdings of Common Equity Tier 1 instruments to be deducted as required by Article 19 items 6), 8) and 9) of this Decision, shall be calculated in one of the following ways:

according to the default approach set out in Article 34 of this Decision; or
where the credit institution demonstrates to the satisfaction of the Central Bank
that the approach described in item 1) of this paragraph is excessively burdensome, according to the structure-based approach described in Article 35 of this Decision. (2) By way of derogation from paragraph (1) item 2) of this Article, a credit institution shall not use the structure-based approach for calculating the amount of those deductions in relation to investments in intermediate entities referred to in Article 3 paragraph (1) item 115) indents 4 and 5 of this Decision. Default approach for the calculation of indirect holdings of capital instruments
Article 34
(1) For the purposes of Article 33 paragraph (1) item 1) of this Decision, the amount of indirect holdings of Common Equity Tier 1 instruments to be deducted as required by Article 19 items 6), 8) and 9) of this Decision, using the default approach, shall be calculated as follows:
where the exposures of all investors to the intermediate entity rank pari passu,
the amount shall be equal to the percentage of funding multiplied by the amount of Common Equity Tier 1 instruments of the financial sector entity held by the intermediate entity;
where the exposures of all investors to the intermediate entity do not rank pari
passu, the amount shall be equal to the percentage of funding multiplied with the lower of the following amounts:
the amount of Common Equity Tier 1 instruments of the financial sector entity held by the intermediate entity; the credit institution's exposure to the intermediate entity together with all other funding provided to the intermediate entity that rank pari passu with the credit institution's exposure. (2) The calculation method set out in paragraph (1) item 2) of this Article shall be made for each tranche of funding that ranks pari passu with the funding provided by the credit institution. (3) The percentage of funding for the purposes of paragraph (1) of this Article shall be the credit institution's exposure to the intermediate entity divided by the sum of the credit institution's exposure to the intermediate entity and of all other exposures to this intermediate entity that rank pari passu with the credit institution's exposure. (4) The calculation laid down in paragraph (1) of this Article shall be made separately for each holding in a financial sector entity held by each intermediate entity.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 40 (5) Where investments in Common Equity Tier 1 instruments of a financial sector entity are held indirectly through subsequent or several intermediate entities, the percentage of funding set out in paragraph (1) of this Article shall be determined by dividing the amount referred to in item 1) of this paragraph by the amount referred to in 2) of this paragraph:

the result of the multiplication of amounts of funding provided by the credit
institution to intermediate entities, by the amounts of funding provided by these intermediate entities to subsequent intermediate entities, and by amounts of funding provided by these subsequent intermediate entities to the financial sector entity;
the result of the multiplication of amounts of capital instruments or other
instruments as relevant, issued by each intermediate entity.
(6) The percentage of funding referred to in paragraph (5) of this Article shall be calculated separately for each holding in a financial sector entity held by intermediate entities and for each tranche of funding that ranks pari passu with the funding provided by the credit institution and the subsequent intermediate entities. Structure-based approach for the calculation of indirect holdings of capital instruments
Article 35
(1) For the purposes of Article 33 paragraph (1) item 2) of this Decision, using the structure-based approach, the amount to be deducted from Common Equity Tier 1 items referred to in Article 19 item 6) of this Decision shall be equal to the percentage of funding, as defined in Article 34 paragraph (3) of this Decision, multiplied by the amount of Common Equity Tier 1 instruments of the institution held by the intermediate entity. (2) The amount to be deducted from Common Equity Tier 1 items referred to in Article 19 items 8) and 9) of this Decision shall be equal to the percentage of funding, as defined in Article 34 paragraph (3) of this Decision, multiplied by the aggregate amount of Common Equity Tier 1 instruments of financial sector entities held by the intermediate entity. (3) For the purposes of paragraphs (1) and (2) of this Article, a credit institution shall calculate separately per intermediate entity the aggregate amount of Common Equity Tier 1 instruments of the credit institution that the intermediary entity holds and the aggregate amount of Common Equity Tier 1 instrument of other financial sector entities that the intermediate entity holds. (4) The credit institution shall consider the amount of holdings in Common Equity Tier 1 instruments of financial sector entities calculated in accordance with paragraph (2) of this Article as a significant investment referred to in Article 29 of this Decision and shall deduct the amount in accordance with Article 19 item 9) of this Decision. (5) Where the investments in Common Equity Tier 1 instruments are held indirectly through subsequent or several intermediate entities, Article 34 paragraphs (5) and (6) of this Decision shall apply.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 41 (6) Where a credit institution is not able to identify the aggregate amounts that the intermediate entity holds in Common Equity Tier 1 instruments of the credit institution or in Common Equity Tier 1 instruments of financial sector entities, the credit institution shall estimate the amounts it cannot identify by using the maximum amounts that the intermediate entity is able to hold on the basis of its investment mandates. (7) Where a credit institution is not able to determine, on the basis of the investment mandate, the maximum amount that the intermediate entity holds in Common Equity Tier 1 instruments of the credit institution or in Common Equity Tier 1 instruments of financial sector entities, the credit institution shall treat the amount of funding that it holds in the intermediate entity as an investment in its own Common Equity Tier 1 instruments and shall deduct them in accordance with Article 19 item 6) of this Decision. (8) By way of derogation from paragraph 7 of this Article, a credit institution shall treat the amount of funding that it holds in the intermediate entity as a non-significant investment and shall deduct them in accordance with Article 19 item 8) of this Decision, where the following conditions are met:

the amounts of funding are less than 0,25% of the credit institution's Common
Equity Tier 1 capital;
the amounts of funding are less than EUR 10 million; and
the credit institution cannot reasonably determine the amounts of its own
Common Equity Tier 1 instruments that the intermediate entity holds. (9) Where funding to the intermediate entity is in the form of units or shares of a CIU, the credit institution may rely on the third parties referred to in Article 172 paragraph (12) of this Decision, and under the conditions set by that Article, calculate and report the aggregate amounts referred to in paragraph (6) of this Article. Order and maximum amount of deductions of indirect holdings of own funds instruments of financial sector entities
Article 36
(1) Subject to the limits laid down in paragraphs (2) or (3) of this Article, as applicable, where the intermediate entity holds Common Equity Tier 1 instruments, Additional Tier 1 instruments and Tier 2 instruments of financial sector entities, the Common Equity Tier 1 instruments shall be deducted first, the Additional Tier 1 instruments shall be deducted second, and the Tier 2 instruments last. (2) Where the intermediate entity holds own funds instruments of credit institutions, when applying paragraph (1) of this Article to each type of holding, a credit institution shall deduct the holdings of their own funds instruments first. (3) Where a credit institution holds capital instruments of financial sector entities indirectly, the amount to be deducted from the credit institution's own funds shall not be higher than the lower of the following amounts:
the total funding provided by the credit institution to the intermediate entity;
the amount of own funds instruments held by the intermediate entity in the
financial sector entity.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 42 Deduction of holdings of Common Equity Tier 1 instruments where a credit institution does not have a significant investment in a financial sector entity
Article 37
(1) For the purposes of Article 19 item 8) of this Decision, a credit institution shall calculate the applicable amount to be deducted by multiplying the amount referred to in item 1) of this paragraph by the factor derived from the calculation referred to in item
2) of this paragraph:

the aggregate amount by which the direct, indirect and synthetic holdings by
the credit institution of the Common Equity Tier 1 instruments, Additional Tier 1 instruments and Tier 2 instruments of financial sector entities in which the credit institution does not have a significant investment exceeds 10 % of the aggregate amount of Common Equity Tier 1 items of the credit institution calculated after applying the following to Common Equity Tier 1 items:
Articles 15 to 18 of this Decision; the deductions referred to in Article 19 paragraph (1) items 1) to 7), items
to 15) of this Decision, excluding the amount to be deducted for deferred
tax assets that rely on future profitability and arise from temporary differences; and Articles 30 and 31 of this Decision;
the amount of direct, indirect and synthetic holdings by the credit institution of
the Common Equity Tier 1 instruments of those financial sector entities in which the credit institution does not have a significant investment divided by the aggregate amount of direct, indirect and synthetic holdings by the credit institution of the Common Equity Tier 1 instruments, Additional Tier 1 instruments and Tier 2 instruments of those financial sector entities. (2) A credit institution shall exclude underwriting positions held for five working days or fewer from the amount referred to in paragraph (1) items 1) of this Article and from the calculation of the factor referred to in paragraph (1) item 2) of this Article. (3) The amount to be deducted pursuant to paragraph (1) of this Article shall be apportioned across all Common Equity Tier 1 instruments held and the credit institution shall determine the amount of each Common Equity Tier 1 instrument that is deducted pursuant to paragraph (1) of this Article by multiplying the amount specified in item 1) of this paragraph by the proportion specified in item 2) of this paragraph:
the amount of holdings required to be deducted pursuant to paragraph (1) of
this Article;
the proportion of the aggregate amount of direct, indirect and synthetic holdings
by the credit institution of the Common Equity Tier 1 instruments of financial sector entities in which the credit institution does not have a significant investment represented by each Common Equity Tier 1 instrument held. (4) The amount of holdings referred to Article 19 item 8) of this Decision that is equal to or less than 10% of the Common Equity Tier 1 items of the credit institution after applying the provisions laid down in paragraph (1) item 1) indents 1 to 3 of this Article shall not be deducted and shall be subject to the applicable risk weights in accordance with the provisions of this Decision relating to the credit risk by applying Standardised

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 43 Approach or IRB Approach and the requirements laid down in the provisions related to market risk. (5) A credit institution shall determine the amount of each Common Equity Tier 1 instrument that is risk weighted pursuant to paragraph (4) of this Article by multiplying the amount specified in item 1) of this paragraph by the amount specified in item 2) of this paragraph:

the amount of holdings required to be risk weighted pursuant to paragraph (4)
of this Article;
the proportion resulting from the calculation referred to in paragraph (3) item 2)
of this Article.
(6) For the purposes of calculation of the amount referred to in paragraph (1) of this
Article, a credit institution may choose not to identify goodwill separately.
Deduction of holdings of Common Equity Tier 1 instruments where a credit institution has a significant investment in a financial sector entity
Article 38
For the purposes of Article 19 item 9) of this Decision, the applicable amount to be deducted from Common Equity Tier 1 items shall exclude underwriting positions held for five working days or fewer and shall be determined in accordance with Articles 30 and31 and Articles 43 and 44 of this Decision. Other deductions for capital instruments of financial institutions
Article 39
(1) Holdings of capital instruments of financial institutions shall be deducted as follows:
all instruments qualifying as capital in accordance with regulations applicable
to the financial institution that issued them and, where the financial institution is subject to solvency requirements, which are included in the highest quality Tier of regulatory own funds without any limits shall be deducted from Common Equity Tier 1 items;
all instruments which qualify as capital in accordance with regulations
applicable to the issuer and, where the financial institution is not subject to solvency requirements, which are perpetual, absorb the first and proportionately greatest share of losses as they occur, rank below all other claims in the event of bankruptcy and winding-up and have no preferential or predetermined distributions shall be deducted from Common Equity Tier 1 items;
any subordinated instruments absorbing losses on a going-concern basis,
including the discretion to cancel coupon payments, shall be deducted from Additional Tier 1 items, and where the amount of these subordinated instruments exceeds the amount of Additional Tier 1 capital, and where the amount of subordinated instruments exceeds the amount of Additional Tier 1 capital, the difference shall be deducted from Common Equity Tier 1 capital;
any other subordinated instruments shall be deducted from Tier 2 items, and
where the amount of these subordinated instruments exceeds the amount of Tier 2 capital, the difference shall be deducted from Additional Tier 1 items, and

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 44 where the amount of Additional Tier 1 capital is insufficient, the remaining difference shall be deducted from Common Equity Tier 1 items;
5) any other instruments included in the financial institution’s own funds pursuant
to the relevant applicable prudential framework or any other instruments for which the credit institution is not able to demonstrate that the conditions referred to in items 1), 2), 3) or 4) of this paragraph apply shall be deducted from Common Equity Tier 1 items. (2) In the cases referred to in paragraph (3) of this Article, a credit institution shall apply the deductions for the same component of capital for which the capital would qualify if it was issued by the credit institution itself. (3) The deductions referred to in paragraph (1) of this Article shall not apply to financial institution which is:

authorised and supervised by the Central Bank or relevant competent authority
and subject to prudential requirements equivalent to the provisions of this Decision and EU regulation; this approach shall also be applied to third country financial institutions where it has been concluded that the prudential regime of the third country concerned is equivalent;
an electronic money institution;
a payment institution; or
an alternative investment fund manager.
Capital instruments of third country insurance and reinsurance undertakings
Article 40
(1) Holdings of capital instruments of third country insurance and reinsurance undertakings that are subject to a solvency regime that either has been assessed as non-equivalent to the solvency regime in Montenegro and the European Union, or that has not been assessed, shall be deducted as follows:
all instruments which qualify as capital pursuant to regulations applicable to the
third country insurance and reinsurance undertakings that issued them, and which are included in the highest quality Tier of regulatory own funds without any limits under the third-country regime shall be deducted from Common Equity Tier 1 items;
any subordinated instruments absorbing losses on a going-concern basis,
including the discretion to cancel coupon payments, shall be deducted from Additional Tier 1 items and where the amount of these subordinated instruments exceeds the amount of Additional Tier 1 capital, the difference shall be deducted from Common Equity Tier 1 items;
any other subordinated instruments shall be deducted from Tier 2 items, and
where the amount of these subordinated instruments exceeds the amount of Tier 2 capital, the difference shall be deducted from Additional Tier 1 items, and where this excess amount exceeds the amount of Additional Tier 1 capital, the remaining difference shall be deducted from Common Equity Tier 1 items;
for third country insurance and reinsurance undertakings that are subject to
prudential solvency requirements, any other instruments included in the third country insurance and reinsurance undertakings’ own funds pursuant to the relevant applicable solvency regime or any other instruments for which the credit institution is not able to demonstrate that conditions referred to in items

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 45 1), 2) or 3) of this paragraph apply shall be deducted from Common Equity Tier 1 items. (2) Where the solvency regime of the third country including rules on own funds, has been assessed as equivalent to the solvency regime in Montenegro and the European Union, holdings of capital instrument of the third-country insurance or reinsurance undertakings shall be treated as holdings of capital instruments of insurance or reinsurance undertakings authorised by competent authority in Montenegro or the European Union. (3) In the cases referred to in paragraph (2) of this Article, a credit institution shall apply the deductions in accordance with Article 30 item 2), Article 56 item 2) and Article 66 item 2) of this Decision. Capital instruments of undertakings excluded from the scope of application of regulations for insurance and reinsurance activities
Article 41
Holdings of capital instruments of undertakings excluded from the scope of application of regulations for insurance and reinsurance activities shall be deducted as follows:

all instruments qualifying as capital on the basis of the regulations applicable to
the undertaking that issued them and that are included in the highest quality Tier of regulatory own funds without any limits shall be deducted from Common Equity Tier 1 capital;
any subordinated instruments absorbing losses on a going-concern basis,
including the discretion to cancel coupon payments, shall be deducted from Additional Tier 1 items, and where the amount of these subordinated instruments exceeds the amount of Additional Tier 1 capital, the difference shall be deducted from Common Equity Tier 1 items;
any other subordinated instruments shall be deducted from Tier 2 items. If the
amount of these subordinated instruments exceeds the amount of Tier 2 capital, the difference shall be deducted from Additional Tier 1 items and where this amount exceeds the amount of Additional Tier 1 capital, the remaining difference shall be deducted from Common Equity Tier 1 items;
any other instruments included in the undertaking’s own funds pursuant to the
relevant applicable solvency regime or any other instruments for which the institution is not able to demonstrate that conditions referred to in items 1), 2) or 3) of this paragraph apply shall be deducted from Common Equity Tier 1 capital. Non-performing exposures
Article 42
(1) For the purposes of Article 19 paragraph (1) item 14) of this Decision, an exposure shall include any of the following items, provided that they are not included in the trading book of the credit institution:
a debt instrument, including a debt security, a loan, an advance and a demand
deposit;

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 46
2) a loan commitment given, a financial guarantee given or any other surety or
commitment given, irrespective of whether it is revocable or irrevocable, with the exception of undrawn credit facilities that may be cancelled unconditionally at any time and without notice, or that provide for automatic cancellation due to deterioration in the borrower's creditworthiness. (2) For the purposes of Article 19 item 14) of this Decision, the exposure value of a debt instrument shall be equal to its accounting value measured without taking into account any specific credit risk adjustments, AVA determined in accordance with Articles 17 and 126 of this Decision, amounts deducted in accordance with Article 19 item 14) of this Decision, other own funds reductions related to the exposure or partial write-offs made by the credit institution since the last time the exposure was classified as non- performing. (3) For the purposes of Article 19 item 14) of this Decision, the exposure value of a debt instrument that was purchased at a price lower than the amount owed by the debtor shall include the difference between the purchase price and the amount owed by the debtor. (4) For the purposes of Article 19 item 14) of this Decision, the exposure value of a loan commitment given, a financial guarantee given or any other commitment given as referred to in paragraph (1) item 2) of this Article shall be its nominal value, which shall represent the credit institution's maximum exposure to credit risk without taking account of any funded or unfunded credit protection, whereat the nominal value of a loan commitment given shall be the undrawn amount that the credit institution has committed to lend and the nominal value of a financial guarantee given shall be the maximum amount the entity could have to pay if the guarantee is called on. (5) The nominal value referred to in the paragraph (4) of this Article shall not take into account any specific credit risk adjustment, AVA in accordance with Articles 16 and 126 of this Decision, amounts deducted in accordance with Article 19 item 14) of this Decision or other own funds reductions related to the exposure. (6) For the purposes of Article 19 item 14) of this Decision, a credit institution shall determine the applicable amount of insufficient coverage separately for each nonperforming exposure to be deducted from Common Equity Tier 1 items by subtracting the amount determined in item 2) of this paragraph from the amount determined in item 1) of this paragraph, where the amount referred to in item 1) exceeds the amount referred to in item 2) of this paragraph:

the sum of:
the unsecured part of each non-performing exposure, if any, multiplied by the applicable factor as determined in the regulation of the Central Bank governing the classification of assets and calculation of provisions for potential losses of a credit institution; and the secured part of each non-performing exposure, if any, multiplied by the applicable factor as determined in the regulation of the Central Bank governing the classification of assets and calculation of provisions for potential losses of a credit institution;
the sum of the following items provided they relate to the same non-performing
exposure:

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 47 specific credit risk adjustments; AVA in accordance with Articles 16 and 126 of this Decision; other own funds reductions; for credit institutions calculating risk-weighted exposure amounts using the Internal Ratings Based Approach, the absolute value of the amounts deducted pursuant to Article 19 item 4) of this Decision which relate to nonperforming exposures, where the absolute value attributable to each nonperforming exposure is determined by multiplying the amounts deducted pursuant to Article 19 item 4) of this Decision by the contribution of the expected loss amount for the non-performing exposure to total expected loss amounts for defaulted or non-defaulted exposures, as applicable; where a non-performing exposure is purchased at a price lower than the amount owed by the debtor, the difference between the purchase price and the amount owed by the debtor; and amounts written-off by the credit institution since the exposure was classified as non-performing. Subsection 2 - Exemptions from and alternatives to deduction from Common Equity Tier 1 items Threshold exemptions from deduction from Common Equity Tier 1 items
Article 43
(1) A credit institution, when making the deductions required pursuant to Article 19 paragraph (1) items 3) and 9) of this Decision, shall not be required to deduct the amounts of the items referred to in items 1) and 2) of this paragraph, which in aggregate are equal to or less than the threshold amount referred to in paragraph (2) of this Article:

deferred tax assets that are dependent on future profitability and arise from
temporary differences, and in aggregate are equal to or less than 10% of the Common Equity Tier 1 items of the credit institution calculated after applying the following:
Articles 15 to 18 of this Decision;
Article 19 paragraph (1) items 1) to 8), items 12) to 15) of this Decision,
excluding deferred tax assets that rely on future profitability and arise from temporary differences.
where a credit institution has a significant holding in a financial sector entity, the
direct, indirect and synthetic holdings of that credit institution of the Common Equity Tier 1 instruments of those entities that in aggregate are equal to or less than 10% of the Common Equity Tier 1 items of the credit institution calculated after applying the following:
Articles 15 to 18 of this Decision;
Article 19 paragraph (1) items 1) to 8), items 12) to 15) of this Decision
excluding deferred tax assets that rely on future profitability and arise from temporary differences. (2) For the purposes of paragraph (1) of this Article, the threshold amount shall be equal to the amount referred to in item 1) of this paragraph multiplied by the percentage referred to in item 2) of this paragraph:

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 48

the residual amount of Common Equity Tier 1 items after applying the
adjustments and deductions in Articles 15 to 19 of this Decision in full and without applying the threshold exemptions specified in this Article;
17.65%.
(3) For the purposes of paragraph (1) of this Article, a credit institution shall determine the portion of deferred tax assets in the total amount of items that is not required to be deducted by dividing the amount specified in item 1) of this paragraph by the amount specified in item 2) of this paragraph:
the amount of deferred tax assets that are dependent on future profitability and
arise from temporary differences, and in aggregate are equal to or less than 10% of the Common Equity Tier 1 items of the credit institution;
the sum of the following:
the amount referred to in item 1) of this paragraph, and the amount of direct, indirect and synthetic holdings by the credit institution of the own funds instruments of financial sector entities in which the credit institution has a significant holding, and in aggregate are equal to or less than 10% of the Common Equity Tier 1 items of the credit institution. (4) The proportion of significant holdings in the total amount of items that is not required to be deducted is equal to 1 minus the proportion referred to in the paragraph (3) of this Article. (5) The amounts of the items that are not deducted pursuant to paragraph (1) of this
Article shall be risk weighted at 250%.
Requirement for deduction where consolidation and supplementary supervision are applied
Article 44
(1) For the purposes of calculating own funds on an individual basis, a subconsolidated and a consolidated basis, where the Central Bank requires or authorises a credit institution to apply accounting consolidation method, deduction and aggregation method or book value/requirement deduction method referred to in regulations governing the supplementary supervision of financial conglomerates, the Central Bank may authorise credit institution not to deduct the holdings of own funds instruments of a financial sector entity in which the parent credit institution, parent financial holding company or parent mixed financial holding company or credit institution has a significant investment, provided that the following conditions are met:
the financial sector entity is an insurance undertaking, a re-insurance
undertaking or an insurance holding company;
the insurance undertaking, re-insurance undertaking or insurance holding
company is included in the same supplementary supervision in accordance with regulations governing the supplementary supervision of financial conglomerates as the parent credit institution, parent financial holding company or parent mixed financial holding company or credit institution that has the holding;
the credit institution has received the prior authorisation from the Central Bank;
prior to granting authorisation referred to in item 3) of this paragraph, and on a
continuing basis, the Central Bank is satisfied that the level of integrated

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 49 management, risk management and internal controls regarding the entities that would be included in the scope of determined consolidation methods is adequate;
5) the holdings in the entity belong to one of the following:
the parent credit institution; the parent financial holding company; the parent mixed financial holding company; the credit institution; a subsidiary undertaking of one of the entities referred to in indents 1 to 4 of this item that is included in the scope of consolidation pursuant to the Law. (2) The chosen method referred to in paragraph (1) of this Article shall be applied in a consistent manner over time. (3) For the purposes of calculating own funds on an individual basis and a subconsolidated basis, a credit institution subject to supervision on a consolidated basis in accordance with the Law shall not deduct holdings of own funds instruments issued by financial sector entities included in the scope of consolidated supervision, unless the Central Bank determines those deductions to be required for specific purposes, in particular structural separation of banking activities and resolution planning. (4) The provisions of paragraph (3) of this Article shall not apply with regard to the deductions in accordance with Article 75 paragraph (7) of this Decision. (5) The holdings in respect of which deduction is not made in accordance with paragraph (1) of this Article shall qualify as exposures and shall be risk weighted in accordance with the provisions of this Decision that relate to the application of the Standardised Approach for the calculation capital requirements for credit risk. (6) The holdings in respect of which deduction is not made in accordance with paragraphs (3) and ($) of this Article qualify as exposures and shall be risk weighted at 100%. (7) Where a credit institution applies accounting consolidation method or deduction and aggregation method, the credit institution shall disclose the supplementary capital requirements and capital adequacy ratio of the financial conglomerate as calculated in accordance with the provisions of the law governing financial conglomerates.
Section 4 - Common Equity Tier 1 capital
Common Equity Tier 1 capital
Article 45
The Common Equity Tier 1 capital of a credit institution shall consist of Common Equity Tier 1 items after the application of the adjustments required by Articles 15 to 18 of this Decision, the deductions pursuant to Article 19 and the exemptions and alternatives laid down in Articles 43, 44 and 104 of this Decision.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 50 SUBTITLE 3 - Additional Tier 1 capital
Section 1 - Additional Tier 1 items and instruments
Additional Tier 1 items
Article 46
(1) Additional Tier 1 items shall consist of the following:

capital instruments, where the conditions laid down in Article 47 paragraph (1)
of this Decision are met;
the share premium accounts related to the instruments referred to in item 1) of
this paragraph.
(2) Instruments referred to in paragraph (1) item 1) of this Article shall not qualify as Common Equity Tier 1 or Tier 2 items of the credit institution. Additional Tier 1 instruments
Article 47
(1) Capital instruments shall qualify as Additional Tier 1 instruments only if the following conditions are met:
a credit institution has directly issued the instruments and they are fully paid up;
the instruments are not owned by any of the following:
the credit institution or its subsidiary undertakings; an undertaking in which the credit institution has a participation in the form of ownership, direct or by way of control, of 20% or more of the voting rights or capital of that undertaking;
the acquisition of the instruments is not funded directly or indirectly by the credit
institution;
the instruments rank below Tier 2 instruments in the event of the bankruptcy of
the credit institution;
the instruments are neither secured nor subject to a guarantee that enhances
the seniority of the claims by any of the following:
the credit institution or its subsidiary undertakings; the parent undertaking of the credit institution or its subsidiary undertakings; the parent financial holding company or its subsidiary undertakings; the mixed activity holding company or its subsidiary undertakings; the mixed financial holding company or its subsidiary undertakings; or any undertaking that has close links with entities referred to in indents 1 to 5 of this item;
the instruments are not subject to any arrangement, contractual or otherwise,
that enhances the seniority of the claim under the instruments in the case of bankruptcy or winding-up;
the instruments are perpetual and the provisions governing them include no
incentive for the credit institution to redeem them;
where the provisions governing the instruments include one or more call
options, the option to call may be exercised at the sole discretion of the issuer;
the instruments may be called, redeemed or repurchased only where the
conditions laid down in Article 87 of this Decision are met, and not before five

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 51 years after the date of issuance except where the conditions laid down in Article 88 paragraph (9) of this Decision are met; 10)the provisions governing the instruments do not indicate explicitly or implicitly that the instruments would or might be called, redeemed or repurchased by the credit institution, and the credit institution does not otherwise provide such an indication, except in the case of bankruptcy or winding-up of the credit institution; 11)the credit institution does not indicate explicitly or implicitly that the Central Bank would consent to a request to call, redeem or repurchase the instruments; 12)distributions under the instruments meet the following conditions:
they are paid out of distributable items; the level of distributions made on the instruments will not be amended on the basis of the credit standing of the credit institution or its parent undertaking; the provisions governing the instruments give the credit institution full discretion at all times to cancel the distributions on the instruments for an unlimited period and on a non-cumulative basis, and the credit institution may use such cancelled payments without restriction to meet its obligations as they fall due; cancellation of distributions does not constitute an event of default of the credit institution; the cancellation of distributions imposes no restrictions on the credit institution; 13)the instruments do not contribute to a determination that the liabilities of a credit institution exceed its assets, where such a determination is performed in accordance with the regulations governing the bankruptcy proceedings; 14)the provisions governing the instruments require that, upon the occurrence of a trigger event, the principal amount of the instruments be written down on a permanent or temporary basis or the instruments be converted to Common Equity Tier 1 instruments; 15)the provisions governing the instruments include no feature that could hinder the recapitalisation of the credit institution; 16)where the issuer is established in a third country and has been a part of a resolution group the resolution entity of which is established in Montenegro or the European Union or where the issuer is established in Montenegro or the European Union, the law or contractual provisions governing the instruments require that, upon a decision by the Central Bank as the resolution authority to exercise the write-down and conversion powers, the principal amount of the instruments is to be written down on a permanent basis or the instruments are to be converted to Common Equity Tier 1 instruments in accordance with the law governing the resolution of credit institutions; 17)where the issuer is established in third country and has not been a part of a resolution group the resolution entity of which is established in Montenegro or European Union, the law or contractual provisions governing the instruments require that, upon a decision by the relevant third-country authority, the principal amount of the instruments is to be written down on a permanent basis or the instruments are to be converted into Common Equity Tier 1 instruments; 18)where the issuer is established in a third country and has been a part of a resolution group the resolution entity of which is established in Montenegro or the European Union or where the issuer is established in Montenegro or

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 52 European Union, the instruments may only be issued under, or be otherwise subject to the laws of a third country where, under those laws, the exercise of the write-down and conversion powers is effective and enforceable on the basis of statutory provisions or legally enforceable contractual provisions that recognise resolution or other write-down or conversion actions; 19)the instruments are not subject to set-off or netting arrangements that would undermine their capacity to absorb losses. (2) For the purposes of paragraph (1) item 1) of this Article only the part of a capital instrument that is fully paid up shall be eligible to qualify as an Additional Tier 1 instrument. (3) For the purposes of paragraph (1) item 7) of this Article incentives to redeem shall mean all features that provide, at the date of issuance, an expectation that the capital instrument is likely to be redeemed. (4) The incentives to redeem referred to in paragraph (3) of this Article shall include the following forms:

a call option combined with an increase in the credit spread of the instrument
or the liability if the call is not exercised;
a call option combined with a requirement or an investor option to convert the
instrument into a Common Equity Tier 1 instrument where the call is not exercised;
a call option combined with a change in reference rate where the credit spread
over the second reference rate is greater than the initial payment rate minus the swap rate;
a call option combined with an increase of the redemption amount in the future;
a remarketing option combined with an increase in the credit spread of the
instrument or a change in reference rate where the credit spread over the second reference rate is greater than the initial payment rate minus the swap rate where the instrument is not remarketed;
a marketing of the instrument in a way which suggests to investors that the
instrument will be called.
Restrictions on the cancellation of distributions on Additional Tier 1 instruments and features that could hinder the recapitalisation of the institution
Article 48
(1) For the purposes of Article 47 paragraph (1) item 12) indent 5 and item 15) of this Decision, the provisions governing Additional Tier 1 instruments shall not include in particular the following:
a requirement for distributions on the instruments to be made in the event of a
distribution being made on an instrument issued by the credit institution that ranks to the same degree as, or more junior than, an Additional Tier 1 instrument, including a Common Equity Tier 1 instrument;
a requirement for the payment of distributions on Common Equity Tier 1,
Additional Tier 1 or Tier 2 instruments to be cancelled in the event that distributions are not made on those Additional Tier 1 instruments;

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 53
3) an obligation to substitute the payment of interest or dividend by a payment in
any other form.
(2) The credit institution shall not otherwise be subject to an obligation referred to in paragraph (1) item 3) of this Article. (3) Features that could hinder the recapitalisation of a credit institution, within the meaning of Article 47 paragraph (1) item 15) of this Decision, shall include provisions that require the credit institution to compensate existing holders of capital instruments where a new capital instrument is issued. Write down or conversion of Additional Tier 1 instruments
Article 49
(1) For the purposes of Article 47 paragraph (1) item 14) of this Decision, the following provisions shall apply to Additional Tier 1 instruments:

a trigger event occurs when the Common Equity Tier 1 capital ratio of the credit
institution referred to Article 134 paragraph (2) item 1) of this Decision falls below either of the following:
5,125 %; a level higher than 5,125%, where determined by the credit institution and specified in the provisions governing the instrument;
credit institution may specify in the provisions governing the instrument one or
more trigger events in addition to that referred to in item 1) of this paragraph;
where the provisions governing the instruments require them to be converted
into Common Equity Tier 1 instruments upon the occurrence of a trigger event, those provisions shall specify either of the following:
the rate of such conversion and a limit on the permitted amount of conversion; a range within which the instruments will convert into Common Equity Tier 1 instruments;
where the provisions governing the instruments require their principal amount
to be written down upon the occurrence of a trigger event, the write down shall reduce all the following:
the claim of the holder of the instrument in the bankruptcy or winding-up of the credit institution; the amount required to be paid in the event of the call or redemption of the instrument; and the distributions made on the instrument.
where the Additional Tier 1 instruments have been issued by a subsidiary
undertaking established in a third country, the 5.125% or higher trigger referred to in item 1) of this paragraph shall be calculated in accordance with the applicable regulations of that third country or contractual provisions governing the instruments, provided that the Central Bank is satisfied that those provisions are at least equivalent to the requirements set out in this Article. (2) Write down or conversion of an Additional Tier 1 instrument shall, under the applicable accounting framework, generate items that qualify as Common Equity Tier 1 items.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 54 (3) The amount of Additional Tier 1 instruments recognised in Additional Tier 1 items is limited to the minimum amount of Common Equity Tier 1 items that would be generated if the principal amount of the Additional Tier 1 instruments were fully written down or converted into Common Equity Tier 1 instruments. (4) The aggregate amount of Additional Tier 1 instruments that is required to be written down or converted upon the occurrence of a trigger event may be no less than the lower of the following:

the amount required to restore fully the Common Equity Tier 1 ratio of the credit
institution to 5.125%;
the full principal amount of the instrument.
(5) When a trigger event occurs, credit institution shall do the following:
immediately notify the Central Bank thereof;
notify the holders of the Additional Tier 1 instruments; and
write down the principal amount of the instruments, or convert the instruments
into Common Equity Tier 1 instruments without delay, but no later than within one month, in accordance with the requirement laid down in this Article. (6) A credit institution issuing Additional Tier 1 instruments to be converted to Common Equity Tier 1 on the occurrence of a trigger event shall ensure that its authorised share capital is at all times sufficient for converting all such convertible Additional Tier 1 instruments into shares if a trigger event occurs. (7) A credit institution shall obtain all necessary authorisations at the date of issuance of convertible Additional Tier 1 instruments referred to in paragraph (6) of this Article and the credit institution shall maintain at all times the necessary prior authorisation to issue the Common Equity Tier 1 instruments into which such Additional Tier 1 instruments would convert upon occurrence of a trigger event. (8) A credit institution issuing Additional Tier 1 instruments to be converted to Common Equity Tier 1 on the occurrence of a trigger event shall ensure that there are no procedural impediments to that conversion by virtue of its articles of incorporation or articles of association or contractual arrangements. Procedures and timing for determining the event triggering the write-down or conversion of Additional Tier 1 instruments
Article 50
(1) Where the credit institution has established that the Common Equity Tier 1 ratio has fallen below the level specified in Article 49 paragraph (1) item 1) of this Decision that activates conversion or write- down of the instrument, the management body or any other relevant body of the credit institution shall without delay determine that a trigger event has occurred and there shall be an irrevocable obligation to write-down or convert the instrument. (2) The amount to be written-down or converted shall be determined as soon as possible and within a maximum period of one month from the time it is determined that the trigger event has occurred pursuant to paragraph (2) of this Article.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 55 (3) The Central Bank may require that the maximum period of one month referred to in paragraph (2) of this Article is reduced in cases where it assesses that sufficient certainty on the amount to be converted or written down is established or in cases where it assesses that an immediate conversion or write-down is needed. (4) Where an independent review of the amount to be written down or converted is required according to the provisions governing the Additional Tier 1 instrument, or where the Central Bank requires an independent review for the determination of the amount to be written down or converted, the management body or any other relevant body of the credit institution shall see that this is done immediately. (5) The independent review shall be completed as soon as possible and shall not create impediments for the credit institution to write-down or convert the Additional Tier 1 instrument and to meet the requirements laid down in paragraphs (2) and (3) of this Article. Write-up of the principal amount following a write-down
Article 51
(1) The write-down of the principal amount shall apply on a pro rata basis to all holders of Additional Tier 1 instruments that include a similar write-down mechanism and an identical trigger level. (2) The write-down shall be considered to be temporary, within the meaning of Article 47 paragraph (1) item 14) of this Decision, where the following conditions are met:

any distributions payable after a write-down shall be based on the reduced
amount of the principal;
write-ups shall be based on profits after the credit institution has taken a formal
decision confirming the final profits;
any write-up of the instrument or payment of coupons on the reduced amount
of the principal shall be operated at the full discretion of the credit institution subject to the constraints arising from items 4) to 6) of this paragraph and there shall be no obligation for the credit institution to operate or accelerate a writeup under specific circumstances;
a write-up shall be operated on a pro rata basis among similar Additional Tier
1 instruments that have been subject to a write-down;
the maximum amount to be attributed to the sum of the write-up of the
instrument together with the payment of coupons on the reduced amount of the principal shall be equal to the profit of the credit institution multiplied by the amount obtained by dividing the amount determined in indent 1 of this item by the amount determined in indent 2 of this item:
the sum of the nominal amount of all Additional Tier 1 instruments of the credit institution before write-down that have been subject to a write-down; the total Tier 1 capital of the credit institution;
the sum of any write-up amounts and payments of coupons on the reduced
amount of the principal shall be treated as a payment that results in a reduction of Common Equity Tier 1 and shall be subject, together with other distributions on Common Equity Tier 1 instruments, to the restrictions relating to the maximum distributable amount as referred to in Article 167 of the Law.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 56 (3) For the purposes of paragraph (2) item 5) of this Article, the calculation shall be made at the moment when the write-up is operated. Use of special purpose entities for indirect issuance of own funds instruments
Article 52
(1) For the purposes of Article 47 paragraph (1) item 16) and Article 61 item 16) paragraph (1) item 14) of this Decision, where the credit institution or an entity within the consolidation issues a capital instrument that is subscribed by a special purpose entity, this capital instrument shall not, at the level of the credit institution or of that entity included in consolidation, receive recognition as capital of a higher quality than the lowest quality of the capital issued to the special purpose entity and the capital issued to third parties by the special purpose entity. (2) The requirement referred to in paragraph (1) of this Article shall apply at the consolidated, sub-consolidated and individual levels of application of prudential requirements. (3) The rights of the holders of the instruments issued by a special purpose entity shall be no more favourable than if the instrument was issued directly by the credit institution or an entity within the consolidation. Consequences of the conditions for Additional Tier 1 instruments ceasing to be met
Article 53
In the case an Additional Tier 1 instrument ceases meet the conditions laid down in Article 47 paragraph (1) of this Decision, the following shall apply:

that instrument shall immediately cease to qualify as an Additional Tier 1
instrument; and
the part of the share premium accounts that relates to that instrument shall
immediately cease to qualify as an Additional Tier 1 item.
Section 2 - Deductions from Additional Tier 1 items
Deductions from Additional Tier 1 items
Article 48
(1) A credit institution shall deduct the following from Additional Tier 1 items:
direct, indirect and synthetic holdings by a credit institution of own Additional
Tier 1 instruments, including own Additional Tier 1 instruments that a credit institution could be obliged to purchase as a result of existing contractual obligations;
direct, indirect and synthetic holdings of the Additional Tier 1 instruments of
financial sector entities with which the credit institution has reciprocal cross holdings that the Central Bank considers to have been designed to inflate artificially the own funds of the credit institution;
the applicable amount of direct, indirect and synthetic holdings of the Additional
Tier 1 instruments of financial sector entities determined in accordance with

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 57
Article 58 of this Decision, where a credit institution does not have a significant
investment in those entities;
4) direct, indirect and synthetic holdings by the credit institution of the Additional
Tier 1 instruments of financial sector entities where the credit institution has a significant investment in those entities, excluding underwriting positions held for five working days or fewer;
5) the amount of items required to be deducted from Tier 2 items pursuant to
Article 64 of this Decision that exceeds the Tier 2 items of the credit institution;
and
6) any tax charge relating to Additional Tier 1 items foreseeable at the moment of
its calculation, except where the credit institution suitably adjusts the amount of Additional Tier 1 items insofar as such tax charges reduce the amount up to which those items may be applied to cover risks or losses. (2) For the purposes of paragraph (1) items 1), 3) and 4) of this Article, the provisions of Article 27 paragraphs (5) to (7) and Articles 32 to 35 of this Decision shall apply mutatis mutandis or with necessary corresponding changes, whereat references to Common Equity Tier 1 capital shall be read as references to Additional Tier 1 capital. Deductions of holdings of own Additional Tier 1 instruments
Article 55
(1) For the purposes of Article 54 paragraph (1) item 1) of this Decision, a credit institution shall calculate holdings of own Additional Tier 1 instruments on the basis of gross long positions. (2) By way of derogation from paragraph (1) of this Article:

a credit institution may calculate the amount of holdings of own Additional Tier
1 instruments on the basis of the net long position provided that both the following conditions are met:
the long and short positions are in the same underlying exposure and the short positions involve no counterparty risk; either both the long and the short positions are held in the trading book or both are held in the non-trading book;
a credit institution shall determine the amount to be deducted for direct, indirect
or synthetic holdings of index securities by calculating the underlying exposure to own Additional Tier 1 instruments in those indices;
a credit institution may net gross long positions in own Additional Tier 1
instruments resulting from holdings of index securities against short positions in own Additional Tier 1 instruments resulting from short positions in the underlying indices, including where those short positions involve counterparty risk, provided that both the following conditions are met:
the long and short positions are in the same underlying indices; either both the long and the short positions are held in the trading book or both are held in the non-trading book.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 58 Deduction of holdings of Additional Tier 1 instruments of financial sector entities and where a credit institution has a reciprocal cross holding designed artificially to inflate own funds
Article 56
A credit institution shall make the deductions referred to in Article 54 paragraph (1) items 2), 3) and 4) of this Decision as follows:

holdings of Additional Tier 1 instruments shall be calculated on the basis of the
gross long positions;
Additional Tier 1 own-fund insurance items shall be treated as holdings of
Additional Tier 1 instruments for the purposes of deduction.
Deduction of holdings of Additional Tier 1 instruments of financial sector entities
Article 57
A credit institution shall make the deductions referred to in Article 54 paragraph (1) items 3) and 4) of this Decision as follows:
they may calculate direct, indirect and synthetic holdings of Additional Tier 1
instruments of the financial sector entities on the basis of the net long position in the same underlying exposure provided that the following conditions are met:
the maturity date of the short position is either the same as, or later than the maturity date of the long position or the residual maturity of the short position is at least one year; either both the short position and the long position are held in the trading book or both are held in the non-trading book.
they shall determine the amount to be deducted for direct, indirect and synthetic
holdings of index securities by calculating the underlying exposure to the capital instruments of the financial sector entities in those indices. Deduction of holdings of Additional Tier 1 instruments where a credit institution does not have a significant investment in a financial sector entity
Article 58
(1) For the purposes of Article 54 paragraph (1) item 3) of this Decision, a credit institution shall calculate the applicable amount to be deducted by multiplying the amount referred to in item 1) of this paragraph by the factor derived from the calculation referred to in item 2) of this paragraph:
the aggregate amount by which the direct, indirect and synthetic holdings by
the credit institution of the Common Equity Tier 1, Additional Tier 1 and Tier 2 instruments of financial sector entities in which the credit institution does not have a significant investment exceeds 10% of the Common Equity Tier 1 items of the credit institution calculated after applying the following:
Articles 15 to 18 of this Decision;
Article 19 paragraph (1) items 1) to 7), items 12) to 15) of this Decision,
excluding deferred tax assets that rely on future profitability and arise from temporary differences; and Articles 30 and 31 of this Decision;

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 59
2) the amount of direct, indirect and synthetic holdings by the credit institution of
the Additional Tier 1 instruments of those financial sector entities in which the credit institution does not have a significant investment divided by the aggregate amount of all direct, indirect and synthetic holdings by the credit institution of the Common Equity Tier 1, Additional Tier 1 and Tier 2 instruments of those financial sector entities. (2) A credit institution shall exclude underwriting positions held for five working days or fewer from the amount referred to in paragraph (1) item 1) of this Article and from the calculation of the factor referred to in paragraph (1) item 2) of this Article. (3) The amount to be deducted pursuant to paragraph (1) of this Article shall be apportioned across all Additional Tier 1 instruments held and the credit institution shall determine the amount of each Additional Tier 1 instrument to be deducted pursuant to paragraph (1) of this Article by multiplying the amount specified in item 1) of this paragraph by the proportion specified in item 2) of this paragraph:

the amount of holdings required to be deducted pursuant to paragraph (1) of
this Article;
the proportion of the aggregate amount of direct, indirect and synthetic holdings
by the credit institution of the Additional Tier 1 instruments of financial sector entities in which the institution does not have a significant investment represented by each Additional Tier 1 instrument held. (4) The amount of holdings referred to in Article 54 paragraph (1) item 3) of this Decision that is equal to or less than 10% of the Common Equity Tier 1 items of the credit institution after applying the provisions laid down in paragraph (1) item 1) indents 1, 2 and 3 of this Article shall not be deducted and shall be subject to the applicable risk weights for credit risk by applying Standardised Approach or IRB Approach and the requirements laid down in the provisions relating to market risk, as applicable. (5) A credit institution shall determine the amount of each Additional Tier 1 instrument that is risk weighted pursuant to paragraph (4) of this Article by multiplying the amount specified in item 1) of this paragraph by the amount specified in item 2) of this paragraph:
the amount of holdings required to be risk weighted pursuant to paragraph (4)
of this Article;
the proportion resulting from the calculation in paragraph (3) item 2) of this
Article.
Section 3 - Additional Tier 1 capital
Additional Tier 1 capital
Article 59
The Additional Tier 1 capital of a credit institution shall consist of Additional Tier 1 items after the deduction of the items referred to in Article 54 and the application of
Article 104 of this Decision.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 60 SUBTITLE 4 - Tier 2 capital
Section 1 - Tier 2 items and instruments
Tier 2 items
Article 60
(1) Tier 2 capital items shall consist of the following:

capital instruments where the conditions set out in Article 61 of this Decision
are met, and to the extent specified in Article 62 of this Decision;
the share premium accounts related to instruments referred to in item 1) of this
paragraph;
for credit institutions calculating risk-weighted exposure amounts in accordance
with the Standardised Approach, general credit risk adjustments, gross of tax effects, of up to 1.25% of risk-weighted exposure amounts calculated in accordance with the Standardised Approach; and
for credit institutions calculating risk-weighted exposure amounts in accordance
with the IRB Approach, the IRB excess, where applicable, gross of tax effects, resulting from the calculation laid down in Article 200 of this Decision up to 0.6% of risk-weighted exposure amounts calculated under IRB Approach. (2) Items included under paragraph (1) item 1) of this Article shall not qualify as Common Equity Tier 1 or Additional Tier 1 items. Tier 2 instruments
Article 61
(1) Capital instruments shall qualify as Tier 2 instruments, provided that the following conditions are met:
the instruments are directly issued by a credit institution and they are fully paid
up;
the instruments are not owned by any of the following:
the credit institution or its subsidiary undertakings; an undertaking in which the credit institution has participation in the form of ownership, direct or by way of control, of 20% or more of the voting rights or capital of that undertaking;
the acquisition of ownership of the instruments is not funded directly or indirectly
by the credit institution;
the claim on the principal amount of the instruments under the provisions
governing the instruments ranks below any claim from eligible liabilities instruments;
the instruments are not secured or are not subject to a guarantee or other surety
that enhances the seniority of the claim by any of the following entities:
the credit institution or its subsidiary undertakings; the parent undertaking of the credit institution or its subsidiary undertakings; the parent financial holding company or its subsidiary undertakings; the mixed activity holding company or its subsidiary undertakings; the mixed financial holding company or its subsidiary undertakings;

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 61 any undertaking that has close links with entities referred to in indents 1 to 5 of this item;
6) the instruments are not subject to any arrangement that otherwise enhances
the seniority of the claim under the instruments;
7) the instruments have an original maturity of at least five years;
8) the provisions governing the instruments do not include any incentive for their
principal amount to be redeemed or repaid, as applicable by the credit institution prior to their maturity;
9) where the instruments include one or more early repayment options, including
call options, the options are exercisable at the sole discretion of the issuer; 10)the instruments may be called, redeemed, repaid or repurchased early only where the conditions set out in Article 87 of this Decision are met, and not before five years after the date of issuance, except where the conditions set out in Article 88 paragraph 9) of this Decision are met; 11)the provisions governing the instruments do not indicate explicitly or implicitly that the instruments would be called, redeemed, repaid or repurchased early, as applicable, by the credit institution other than in the case of the bankruptcy or winding-up of the credit institution and the credit institution does not otherwise provide such an indication; 12)the provisions governing the instruments do not give the holder the right to accelerate the future scheduled payment of interest or principal, other than in the case of the bankruptcy or winding-up of the credit institution; 13)the level of interest or dividends payments, as applicable, due on the instruments will not be amended on the basis of the credit standing of the credit institution or its parent undertaking; 14)where the issuer is established in a third country and has been designated as
part of a resolution group the resolution entity of which is established in
Montenegro or the European Union or where the issuer has its head office in Montenegro or the European Union, the law or contractual provisions governing the instruments require that, upon a decision passed by the Central Bank as the resolution authority for credit institutions, to exercise the write-down and conversion powers that refer to the principal amount of the instruments is to be written down on a permanent basis or the instruments are to be converted to Common Equity Tier 1 instruments specified by the law governing the resolution of credit institutions; 15)where the issuer is established in a third country and has not been designated as a part of a resolution group the resolution entity of which has its head office in Montenegro or the European Union, the law or contractual provisions governing the instruments require that, upon a decision by the relevant thirdcountry authority, the principal amount of the instruments is to be written down on a permanent basis or the instruments are to be converted into Common Equity Tier 1 instruments; 16)where the issuer is established in a third country and has been designated as
part of a resolution group the resolution entity of which is established in
Montenegro or the European Union or where the issuer has its head office in Montenegro or the European Union, the instruments may only be issued under, or be otherwise subject to the laws of a third country where, under those laws, the exercise of the write-down and conversion powers is effective and enforceable on the basis of statutory provisions or legally enforceable

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 62 contractual provisions that recognise resolution or other write-down or conversion actions; 17)the instruments are not subject to set-off or netting arrangements that would undermine their capacity to absorb losses. (2) For the purposes of paragraph (1) item 1) of this Article, only the part of the capital instrument that is fully paid up shall be eligible to qualify as a Tier 2 instrument. Amortisation of Tier 2 instruments
Article 62
(1) The full amount of Tier 2 instruments with a residual maturity of more than five years shall qualify as Tier 2 items. (2) The extent to which Tier 2 instruments qualify as Tier 2 items during the final five years of maturity of the instruments is calculated by multiplying the result derived from the calculation referred to in item 1) of this paragraph by the amount referred to in item
2) of this paragraph as follows:

the carrying amount of the instruments on the first day of the final five-year
period of their contractual maturity divided by the number of days in that period;
the number of remaining days of contractual maturity of the instruments.
Consequences of the conditions for Tier 2 instruments ceasing to be met
Article 63
Where in the case of a Tier 2 instrument the conditions laid down in Article 61 of this Decision cease to be met, the following shall apply:
that instrument shall immediately cease to qualify as a Tier 2 instrument;
the part of the share premium accounts that relate to that instrument shall
immediately cease to qualify as Tier 2 items.
Section 2 - Deductions from Tier 2 items
Deductions from Tier 2 items
Article 64
(1) The following shall be deducted from Tier 2 items:
direct, indirect and synthetic holdings by a credit institution of own Tier 2
instruments, including own Tier 2 instruments that a credit institution could be obliged to purchase as a result of existing contractual obligations;
direct, indirect and synthetic holdings of the Tier 2 instruments of financial
sector entities with which the credit institution has reciprocal cross holdings that the Central Bank considers to have been designed to inflate artificially the own funds of the credit institution;
the applicable amount determined in accordance with Article 68 of this Decision
of direct, indirect and synthetic holdings of the Tier 2 instruments of financial sector entities, where a credit institution does not have a significant investment in those entities;
direct, indirect and synthetic holdings by the credit institution of the Tier 2
instruments of financial sector entities where the credit institution has a

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 63 significant investment in those entities, excluding underwriting positions held for fewer than five working days;
5) the amount of items required to be deducted from eligible liabilities items
pursuant to Article 75 of this Decision that exceeds the eligible liabilities items of the credit institution. (2) For the purposes of paragraph (1) items 1), 3) and 4) of this Article, the provisions of Article 27 paragraphs (5) to (7) and Articles 32 to 35 of this Decision shall apply mutatis mutandis or with necessary corresponding changes, whereat references to Common Equity Tier 1 capital shall be read as references to Tier 2 capital. Deductions of holdings of own Tier 2 instruments
Article 65
(1) For the purposes of Article 64 item 1) of this Decision, a credit institution shall calculate holdings on the basis of the gross long positions. (2) By way of derogation from paragraph (1) of this Article:

a credit institution may calculate the amount of holdings on the basis of the net
long position provided that both the following conditions are met:
the long and short positions are in the same underlying exposure and the short positions involve no counterparty risk; either both the long and the short positions are held in the trading book or both are held in the non-trading book;
a credit institution shall determine the amount to be deducted for direct, indirect
and synthetic holdings of index securities by calculating the underlying exposure to own Tier 2 instruments in those indices;
a credit institution may net gross long positions in own Tier 2 instruments
resulting from holdings of index securities against short positions in own Tier 2 instruments resulting from short positions in the underlying indices, including where those short positions involve counterparty risk, provided that both the following conditions are met:
the long and short positions are in the same underlying indices; either both the long and the short positions are held in the trading book or both are held in the non-trading book. Deduction of holdings of Tier 2 instruments of financial sector entities and where a credit institution has a reciprocal cross holding designed artificially to inflate own funds
Article 66
A credit institution shall make the deductions referred to in Article 64 items 2),
and 4) of this Decision in the following manner:
holdings of Tier 2 instruments shall be calculated on the basis of the gross long
positions;
holdings of Tier 2 own-fund insurance items and Tier 3 own-fund insurance
items shall be treated as holdings of Tier 2 instruments for the purposes of deduction.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 64 Deduction of holdings of Tier 2 instruments of financial sector entities
Article 67
A credit institution shall make the deductions referred to in Article 64 items 3) and 4) of this Decision in accordance with the following:

a credit institution may calculate direct, indirect and synthetic holdings of Tier 2
instruments of the financial sector entities on the basis of the net long position in the same underlying exposure where the following conditions are met:
the maturity date of the short position is either the same as, or later than the maturity date of the long position or the residual maturity of the short position is at least one year; either both the long position and the short position are held in the trading book or both are held in the non-trading book;
a credit institution shall determine the amount to be deducted for direct, indirect
and synthetic holdings of index securities by looking through to the underlying exposure to the capital instruments of the financial sector entities in those indices. Deduction of Tier 2 instruments where a credit institution does not have a significant investment in a relevant entity
Article 68
(1) For the purposes of Article 64 item 3) of this Decision, a credit institution shall calculate the applicable amount to be deducted by multiplying the amount referred to in item 1) of this paragraph by the factor derived from the calculation referred to in item
of this paragraph:
the aggregate amount by which the direct, indirect and synthetic holdings by
the credit institution of the Common Equity Tier 1, Additional Tier 1 and Tier 2 instruments of financial sector entities in which the credit institution does not have a significant investment exceeds 10% of the Common Equity Tier 1 items of the credit institution calculated after applying the following:
Articles 15 to 18 of this Decision;
Article 19 paragraph (1) items 1) to 7), items 12) to 15) of this Decision,
excluding the amount to be deducted for deferred tax assets that rely on future profitability and arise from temporary differences; Articles 30 and 31 of this Decision;
the amount of direct, indirect and synthetic holdings by the credit institution of
the Tier 2 instruments of financial sector entities in which the credit institution does not have a significant investment divided by the aggregate amount of all direct, indirect and synthetic holdings by the institution of the Common Equity Tier 1, Additional Tier 1 and Tier 2 instruments of those financial sector entities. (2) A credit Institution shall exclude underwriting positions held for five working days or fewer from the amount referred to in paragraph (1) item 1) of this Article and from the calculation of the factor referred to in paragraph (1) item 2) of this Article. (3) The amount to be deducted pursuant to paragraph (1) of this Article shall be apportioned across each Tier 2 instrument held, and a credit institution shall determine the amount to be deducted from each Tier 2 instrument that is deducted pursuant to

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 65 paragraph (1) of this Article by multiplying the amount specified in item 1) of this paragraph by the proportion specified in point item 2) of this paragraph:

the total amount of holdings required to be deducted pursuant to paragraph (1)
of this Article;
the proportion of the aggregate amount of direct, indirect and synthetic holdings
by the credit institution of the Tier 2 instruments of financial sector entities in which the credit institution does not have a significant investment represented by each Tier 2 instrument held. (4) The amount of holdings referred to in Article 64 paragraph (1) item 3) of this Decision that is equal to or less than 10% of the Common Equity Tier 1 items of the credit institution after applying the provisions laid down in paragraph (1) item 1) indents 1 to 3 of this Article shall not be deducted and shall be subject to the applicable risk weights by applying Standardised Approach or IRB Approach and the requirements laid down in the provisions relating to market risk, as applicable. (5) A credit institution shall determine the amount of each Tier 2 instrument that is risk weighted pursuant to paragraph (4) of this Decision by multiplying the amount specified in item 1) of this paragraph by the amount specified in item 2) of this paragraph:
the amount of holdings required to be risk weighted pursuant to paragraph (4)
of this Article;
the proportion resulting from the calculation in paragraph (3) item 2) of this
Article.
Section 3 - Tier 2 capital
Tier 2 capital
Article 69
The Tier 2 capital of a credit institution shall consist of the Tier 2 items of the credit institution after the deductions referred to in Article 64 and the application of
Article 88 of this Decision.
SUBTITLE 5 - Own funds
Own funds
Article 70
The own funds of a credit institution shall consist of the sum of its Tier 1 capital and Tier 2 capital.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 66 SUBTITLE 6 - Eligible liabilities
Section 1 - Eligible liabilities items and instruments
Eligible liabilities items
Article 71
(1) Eligible liabilities shall consist of the following items, unless they fall into any of the categories of excluded liabilities laid down in paragraph (2) of this Article, and to the extent specified in Article 73 of this Decision:

eligible liabilities instruments where the conditions set out in Article 72 of this
Decision are met, to the extent that they do not qualify as Common Equity Tier 1, Additional Tier 1 or Tier 2 items;
Tier 2 instruments with a residual maturity of at least one year, to the extent
that they do not qualify as Tier 2 items in accordance with Article 62 of this Decision. (2) The following liabilities shall be excluded from eligible liabilities items:
covered deposits;
sight deposits and short-term deposits with an original maturity of less than one
year;
the part of eligible deposits from natural persons and micro, small and mediumsized enterprises which exceeds the coverage level specified by the law
governing the deposit protection;
deposits that would be eligible deposits from natural persons, micro, small and
medium–sized enterprises if they were not made through branches located outside Montenegro of credit institutions with their head offices in Montenegro;
secured liabilities, including covered bonds and liabilities in the form of financial
instruments used for hedging purposes that form an integral part of the cover pool and that in accordance with applicable regulations are secured in a manner similar to covered bonds, provided that all secured assets relating to a covered bond cover pool remain unaffected, segregated and with enough funding and excluding any part of a secured liability or a liability for which collateral has been pledged that exceeds the value of the assets, pledge, lien or collateral against which it is secured;
any liability that arises by virtue of the holding of client assets or client money
including client assets or client money held on behalf of collective investment undertakings, provided that such a client is protected under the applicable regulations governing bankruptcy;
any liability that arises by virtue of a fiduciary relationship between the
resolution entity or any of its subsidiary undertakings (as fiduciary) and another person (as beneficiary), provided that such a beneficiary is protected under the applicable regulations governing bankruptcy or other applicable regulation;
liabilities to credit institutions, excluding liabilities to entities that are part of the
same group, with an original maturity of less than seven days;
liabilities with a remaining maturity of less than seven days and which are owed
to recognised central counterparty of a third-country; 10)a liability to any of the following persons:
an employee in relation to accrued salary, pension benefits or other fixed remuneration, except for the variable component of the remuneration that

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 67 is not regulated by a collective agreement, and except for the variable component of the remuneration of persons referred to in Article 124 paragraph (2) of the Law whose performance of assignments and activities within their powers may significantly impact the risk profile of a credit institution; a commercial partner or trade creditor where the liability arises from the provision to the credit institution or the parent undertaking of goods or services that are critical to the daily functioning of the credit institution's or parent undertaking's operations, including IT services, utilities and the rental (leasing), servicing and upkeep of premises; tax and social security authorities, provided that those liabilities are preferred under the applicable law; deposit guarantee schemes where the liability arises from contributions due in accordance with the law governing the deposit protection; 11)liabilities arising from derivatives; 12)liabilities arising from debt instruments with embedded derivatives. (3) For the purposes of paragraph (2) item 12) of this Article, debt instruments containing early redemption options exercisable at the discretion of the issuer or of the holder, and debt instruments with variable interests derived from a broadly used reference rate such as Euribor or Libor, shall not be considered as debt instruments with embedded derivatives solely because of such features. Eligible liabilities instruments
Article 72
(1) Liabilities of a credit institution shall qualify as eligible liabilities instruments, provided that they comply with the conditions set out in this Article and only to the extent specified in this Article. (2) Liabilities shall qualify as eligible liabilities instruments, where the following conditions are met:

the liabilities are directly issued or raised, as applicable, by a credit institution
and are fully paid up;
the liabilities are not owned by any of the following entities:
the credit institution or an entity included in the same resolution group; an undertaking in which the credit institution has a direct or indirect participation in the form of ownership, direct or by way of control, of 20% or more of the voting rights or capital of that undertaking;
the acquisition of ownership of the liabilities is not funded directly or indirectly
by the resolution entity;
the claim on the principal amount of the liabilities under the provisions
governing the instruments is fully subordinated to claims arising from the excluded liabilities referred to in Article 71 paragraph (2) of this Decision, and subordination requirement shall be considered to be met if:
the contractual provisions governing the liabilities specify that in the event of normal bankruptcy proceedings, the claim on the principal amount of the instruments ranks below claims arising from any of the excluded liabilities referred to in Article 71 paragraph (2) of this Decision;

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 68 the applicable law specifies that in the event of normal bankruptcy proceedings, the claim on the principal amount of the instruments ranks below claims arising from any of the excluded liabilities referred to in
Article 71 paragraph (2) of this Decision; or
the instruments are issued by a resolution entity which does not have on its balance sheet any excluded liabilities as referred to in Article 71 paragraph (2) of this Decision that rank pari passu or junior to eligible liabilities instruments;
5) the liabilities are neither secured, nor subject to a guarantee or surety or any
other arrangement that enhances the seniority of the claim by any of the following:
the credit institution or its subsidiary undertakings; the parent undertaking of the credit institution or its subsidiary undertakings; or any undertaking that has close links with entities referred to in indents 1 and 2 of this item;
6) the liabilities are not subject to set-off or netting arrangements that would
undermine their capacity to absorb losses in resolution;
7) the provisions governing the liabilities do not include any incentive for their
principal amount to be called, redeemed or repurchased prior to their maturity or repaid early by the credit institution, as applicable, except in the cases referred to in Article 73 paragraph (3) of this Decision;
8) the liabilities are not redeemable by the holders of the instruments prior to their
maturity, except in the cases referred to in Article 71 paragraph (2) of this Decision;
9) subject to Article 73 paragraphs (3) and (4) of this Decision, where the liabilities
include one or more early repayment options, including call options, the options are exercisable at the sole discretion of the issuer, except in the cases referred to in Article 73 paragraph (2) of this Decision; 10)the liabilities may only be called, redeemed, repaid or repurchased early where the conditions set out in Articles 87 and 95 of this Decision are met; 11)the provisions governing the liabilities do not indicate explicitly or implicitly that the liabilities would be called, redeemed, repaid or repurchased early, as applicable by the resolution entity other than in the case of the bankruptcy or winding-up of the credit institution and the credit institution does not otherwise provide such an indication; 12)the provisions governing the liabilities do not give the holder the right to accelerate the future scheduled payment of interest or principal, other than in the case of the bankruptcy or winding-up of the resolution entity; 13)the level of interest or dividend payments, as applicable, due on the liabilities is not amended on the basis of the credit standing of the resolution entity or its parent undertaking; 14)for instruments issued after 1 January 2022, the relevant contractual documentation and, where applicable, the prospectus related to the issuance explicitly refer to the possible exercise of the write-down and conversion powers in accordance with the law governing the resolution of credit institutions. (3) For the purposes of paragraph (2) item 1) of this Article, only the parts of liabilities that are fully paid up shall be eligible to qualify as eligible liabilities instruments.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 69 (4) For the purposes of paragraph (2) item 4) of this Article, where some of the excluded liabilities referred to in Article 71 paragraph (2) of this Decision are subordinated to ordinary unsecured claims under applicable regulations governing bankruptcy proceedings, inter alia, due to being held by a creditor who has close links with the debtor, by being or having been a shareholder, in a control or group relationship, a member of the management body or related to any of those persons, subordination shall not be assessed by reference to claims arising from such excluded liabilities. (5) In addition to the liabilities referred to in paragraph (2) of this Article, the Central Bank as the resolution authority may authorise liabilities to qualify as eligible liabilities instruments up to an aggregate amount that does not exceed 3.5% of the total risk exposure amount calculated in accordance with Article 114 paragraph (3) of this Decision, where:

all the conditions set out in paragraphs (2) to (4) of this Article are met, except
for the condition set out in paragraph (2) item 4) of this Article;
the liabilities rank pari passu with the lowest ranking excluded liabilities referred
to in Article 71 paragraph (2) of this Article with the exception of the excluded liabilities that are subordinated to ordinary unsecured claims under applicable regulations governing bankruptcy proceedings referred to in paragraph (4) of this Article; and
the inclusion of those liabilities in eligible liabilities items would not give rise to
a material risk of a successful legal challenge or of valid compensation claims as assessed by the Central Bank as the resolution authority. (6) The Central Bank may, as the resolution authority, authorise liabilities to qualify as eligible liabilities instruments in addition to the liabilities referred to in paragraph (2) of this Article, where:
the credit institution is not authorised to include in eligible liabilities items the
liabilities referred to in paragraph (5) of this Article;
all the conditions set out in paragraphs (2) to (4) of this Article are met, except
for the condition set out in paragraph (2) item 4) of this Article;
the liabilities rank pari passu or are senior to the lowest ranking excluded
liabilities referred to in Article 71 paragraph (2) of this Decision, with the exception of the excluded liabilities subordinated to ordinary unsecured claims under applicable regulations governing bankruptcy proceedings referred to in paragraph (4) of this Article;
on the balance sheet of the credit institution, the amount of the excluded
liabilities referred to in Article 71 paragraph (2) of this Decision which rank pari passu or below those liabilities in bankruptcy proceedings does not exceed 5% of the amount of the own funds and eligible liabilities of the credit institution;
the inclusion of those liabilities in eligible liabilities items would not give rise to
a material risk of a successful legal challenge or of valid compensation claims as assessed by the Central Bank as the resolution authority. (7) The Central Bank may, as a resolution authority, only authorise a credit institution to include liabilities referred to either in paragraph (5) or (6) of this Article as eligible liabilities items.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 70 (8) The resolution function of the Central Bank organised in accordance with the law governing the resolution of credit institutions shall consult the supervisory function of the Central Bank when examining whether the conditions set out in this Article are fulfilled. Amortisation of eligible liabilities instruments
Article 73
(1) Eligible liabilities instruments with a residual maturity of at least one year shall fully qualify as eligible liabilities items. (2) Eligible liabilities instruments with a residual maturity of less than one year shall not qualify as eligible liabilities items. (3) For the purposes of paragraph (1) of this Article, where an eligible liabilities instrument includes a holder redemption option exercisable prior to the stated original maturity of the instrument, the maturity of the instrument shall be defined as the earliest possible date on which the holder can exercise the redemption option and request redemption or repayment of the instrument. (4) For the purposes of paragraph (1) of this Article, where an eligible liabilities instrument includes an incentive for the issuer to call, redeem, repay or repurchase the instrument prior to the stated original maturity of the instrument, the maturity of the instrument shall be defined as the earliest possible date on which the issuer can exercise that option and request redemption or repayment of the instrument. (5) For the purposes of paragraph (1) of this Article, where an eligible liabilities instrument includes early redemption options that are exercisable at the sole discretion of the issuer prior to the stated original maturity of the instrument, but where the provisions governing the instrument do not include any incentive for the instrument to be called, redeemed, repaid or repurchased prior to its maturity and do not include any option for redemption or repayment at the discretion of the holders, the maturity of the instrument shall be defined as the stated original maturity. Consequences of the eligibility conditions ceasing to be met
Article 74
(1) Where an eligible liabilities instrument ceases to meet the applicable conditions set out in Article 72 of this Decision, the liabilities shall immediately cease to qualify as eligible liabilities instruments. (2) Liabilities referred to in Article 72 paragraph (2) of this Decision may continue to count as eligible liabilities instruments as long as they qualify as eligible liabilities instruments under Article 72 paragraph (5) or (6) of this Decision.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 71
Section 2 - Deductions from eligible liabilities items
Deductions from eligible liabilities items
Article 75
(1) A credit institution that is subject to Article 117 of this Decision shall deduct the following from eligible liabilities items:

direct, indirect and synthetic holdings by the credit institution of own eligible
liabilities instruments, including own liabilities that that credit institution could be obliged to purchase as a result of existing contractual obligations;
direct, indirect and synthetic holdings by the credit institution of eligible liabilities
instruments of G-SII entities with which the credit institution has reciprocal cross holdings that the Central Bank considers to have been designed to artificially inflate the loss absorption and recapitalisation capacity of the resolution entity;
the applicable amount determined in accordance with Article 79 of this Decision
of direct, indirect and synthetic holdings of eligible liabilities instruments of GSII entities, where the credit institution does not have a significant investment in those entities; and
direct, indirect and synthetic holdings by the credit institution of eligible liabilities
instruments of G-SII entities, where the credit institution has a significant investment in those entities, excluding underwriting positions held for five business days or fewer. (2) For the purposes of this Section, all instruments ranking pari passu with eligible liabilities instruments shall be treated as eligible liabilities instruments, with the exception of instruments ranking pari passu with instruments recognised as eligible liabilities pursuant to Article 72 paragraphs (5) and (6) of this Decision. (3) For the purposes of this Section, a credit institution may calculate the amount of holdings of the eligible liabilities instruments referred to in Article 72 paragraph (5) of this Decision as follows:
ℎ = �(𝐻𝐻𝑖𝑖 ∙
𝑙𝑙𝑖𝑖
𝐿𝐿𝑖𝑖
)
𝑖𝑖 where:
ℎ = the amount of holdings of the eligible liabilities instruments referred to in
Article 72 paragraph (5) of this Decision;
𝑖𝑖 = the index denoting the issuing credit institution; 𝐻𝐻𝑖𝑖 = the total amount of holdings of eligible liabilities of the issuing credit institution i referred to in 72 paragraph (5) of this Decision; 𝑙𝑙𝑖𝑖 = the amount of liabilities included in eligible liabilities items by the issuing credit institution i within the limits specified in Article 72 paragraph (5) of this Decision according to the latest disclosures by the issuing credit institution; and

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 72 𝐿𝐿 = the total amount of the outstanding liabilities of the issuing credit institution i referred to in Article 72 paragraph (5) of this Decision according to the latest disclosures by the issuer. (4) Where a parent institution in Montenegro that is subject to Article 117 of this Decision has direct, indirect or synthetic holdings of own funds instruments or eligible liabilities instruments of one or more subsidiary undertakings which do not belong to the same resolution group as the credit institution which is a parent undertaking, the Central Bank, as the resolution authority of that parent credit institution, after duly considering the opinion of the resolution authorities or relevant third-country authorities of any subsidiary undertakings concerned, may permit the credit institution which is a parent undertaking to deduct such holdings by deducting a lower amount specified by the Central Bank as the resolution authority of that credit institution which is a parent undertaking. (5) The adjusted amount shall be at least equal to the amount (m) calculated as follows:
mi = max�0; OPi + LPi − max{0; β ∙ [Oi + Li − max{ri ∙ aRWAi; wi ∙ aLREi}]}�, where:
i = the index denoting the subsidiary;
OPi = the amount of own funds instruments issued by subsidiary undertaking and held by the credit institution which is a parent undertaking; LPi = the amount of eligible liabilities instruments issued by subsidiary undertaking and held by the credit institution which is a parent undertaking; β = percentage of own funds instruments and eligible liabilities instruments issued by subsidiary undertaking and held by credit institution which is a parent undertaking, calculated as follows:
β = OPi + LPi the amount of all own funds instruments and eligible liabilities instruments issued by subsidiary i Oi = the amount of own funds of subsidiary undertaking i, not taking into account the deduction calculated in accordance with this paragraph; Li = the amount of eligible liabilities of subsidiary undertaking i, not taking into account the deduction calculated in accordance with this paragraph; ri = the ratio applicable to subsidiary undertaking i at the level of its resolution group in accordance with Article 117 paragraph (1) item 1) of this Article and regulation governing the method for determining minimum requirement for own funds and eligible liabilities of credit institutions and the reporting method or for third-country subsidiary undertaking, an equivalent resolution requirement applicable to subsidiary undertaking i in the third country where it has its head office, insofar as that requirement is met with instruments that would be considered own funds or eligible liabilities under this Decision;

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 73 aRWAi = the total risk exposure amount of the G-SII entity i calculated in accordance with Article 114 paragraph (3) of this Decision and Article 117 applied to each resolution entity and parent undertaking on a consolidated basis; wi = the ratio applicable to subsidiary undertaking i at the level of its resolution group in accordance with Article 117 paragraph (1) item 2) of this Decision and regulation governing the method for determining minimum requirement for own funds and eligible liabilities of credit institutions and the reporting method or for third-country subsidiary undertaking, an equivalent resolution requirement applicable to subsidiary undertaking i in the third country where it has its head office, insofar as that requirement is met with instruments that would be considered own funds or eligible liabilities under this Decision; aLREi = the total exposure measure of the G-SII entity i calculated in accordance with
Article 563 paragraph (4) of this Decision or, for third-country subsidiaries, calculated
in accordance with the applicable local regulations.
(6) Where the credit institution which is a parent undertaking is allowed to deduct the adjusted amount in accordance with paragraphs (4) and (5) of this Article, the subsidiary undertaking shall deduct the difference between the amount of holdings of own funds instruments and eligible liabilities instruments referred to in paragraphs (4) and (5) of this Article and that adjusted amount. (7) A credit institution shall deduct from eligible liabilities items their holdings of own funds instruments and eligible liabilities instruments where the following conditions are met:

the own funds instruments and eligible liabilities instruments are held by a credit
institution or entity that is not itself a resolution entity but that is a subsidiary undertaking of a resolution entity or of a third-country entity that would be a resolution entity if it were established in Montenegro or the EU;
the credit institution or entity referred to in item 1) of this paragraph is required
to comply with the requirements laid down in Article 118 of this Decision and
Article 32 of the Law on Resolution of Credit Institutions;
the own funds instruments and eligible liabilities instruments held by the credit
institution or entity referred to in item 1) of this paragraph were issued by a credit institution or entity referred to in Article 118 of this Decision and Article 32 of the Law on Resolution of Credit Institutions that is not itself a resolution entity and that belongs to the same resolution group as the credit institution or entity referred to in item 1) of this paragraph. (8) By way of derogation from paragraph (7) of this Article, holdings of own funds instruments and eligible liabilities instruments shall not be deducted where the credit institution or entity referred to in paragraph (7) item 1) of this Article is required to comply with the requirement referred to in paragraph (7) item 2) of this Article on a consolidated basis and the credit institution or entity referred to in paragraph (7) item
of this Article is included in the consolidation of the credit institution or entity referred
to in paragraph (7) item 1) of this Article.
(9) For the purposes of paragraphs (7) and (8) of this Article, the reference to eligible liabilities items shall be understood as a reference to any of the following:

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 74 eligible liabilities items taken into account for the purposes of complying with the requirement laid down in Article 118 of this Decision; liabilities that meet the conditions set out in Article 7 paragraph (2) of the Decision on more detailed method for determining minimum requirements for own funds and eligible liabilities of credit institutions and the reporting method. (10) For the purposes of paragraphs (7) and (8) of this Article, the reference to own funds instruments and eligible liabilities instruments shall be understood as a reference to any of the following:

own funds instruments and eligible liabilities instruments that meet the
conditions set out in Article 118 paragraphs (2) and (3) of this Decision;
own funds and liabilities that meet the conditions set out in Article 7 paragraphs
(2) and (3) of Decision on more detailed method for determining minimum requirements for own funds and eligible liabilities of credit institutions and the reporting method. Deduction of holdings of own eligible liabilities instruments
Article 76
(1) For the purposes of Article 75 paragraph (1) item 1) of this Decision, a credit institution shall calculate holdings on the basis of the gross long positions. (2) By way of derogation from paragraph (1) of this Article:
credit institution may calculate the amount of holdings on the basis of the net
long position, provided that both the following conditions are met:
the long and short positions are in the same underlying exposure and the short positions involve no counterparty risk; either both the long and the short positions are held in the trading book or both are held in the non-trading book;
credit institution shall determine the amount to be deducted for direct, indirect
and synthetic holdings of index securities by calculating the underlying exposure to own eligible liabilities instruments in those indices; credit institution may net gross long positions in own eligible liabilities instruments resulting from holdings of index securities against short positions in own eligible liabilities instruments resulting from short positions in underlying indices, including where those short positions involve counterparty risk, provided that both the following conditions are met:
the long and short positions are in the same underlying indices; and either both the long and the short positions are held in the trading book or both are held in the non-trading book. Deduction base for eligible liabilities items
Article 77
For the purposes of Article 75 paragraph (1) items 2), 3) and 4) of this Decision, a credit institution shall deduct the gross long positions subject to the exceptions laid down in Articles 78 and 79 of this Decision.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 75 Deduction of holdings of eligible liabilities of other G-SII entities
Article 78
A credit institution that does not apply the exception set out in Article 80 of this Decision shall make the deductions referred to in Article 75 paragraph (1) items 3) and
4) of this Decision in accordance with the following:

they may calculate direct, indirect and synthetic holdings of eligible liabilities
instruments on the basis of the net long position in the same underlying exposure, provided that the following conditions are met:
the maturity date of the short position is either the same as, or later than the maturity date of the long position or the residual maturity of the short position is at least one year; and either both the long position and the short position are held in the trading book or both are held in the non-trading book;
they shall determine the amount to be deducted for direct, indirect and synthetic
holdings of index securities by looking through to the underlying exposure to the eligible liabilities instruments in those indices. Deduction of eligible liabilities where the credit institution does not have a significant investment in G-SII entities
Article 79
(1) For the purposes of Article 75 paragraph (1) item 3) of this Decision, a credit institution shall calculate the applicable amount to be deducted by multiplying the amount referred to in item 1) of this paragraph by the factor derived from the calculation referred to in item 2) of this paragraph:
the aggregate amount by which the direct, indirect and synthetic holdings by
the credit institution of the Common Equity Tier 1, Additional Tier 1, Tier 2 instruments of financial sector entities and eligible liabilities instruments of GSII entities in none of which the credit institution has a significant investment exceeds 10% of the Common Equity Tier 1 items of the credit institution calculated after applying the following:
Articles 15 to 18 of this Decision;
Article 19 paragraph (1) items 1) to 7), items 12) to 15) of this Decision,
excluding the amount to be deducted for deferred tax assets that rely on future profitability and arise from temporary differences; Articles 30 and 31 of this Decision;
the amount of direct, indirect and synthetic holdings by the credit institution of
the eligible liabilities instruments of G-SII entities in which the credit institution does not have a significant investment divided by the aggregate amount of the direct, indirect and synthetic holdings by the credit institution of the Common Equity Tier 1, Additional Tier 1, Tier 2 instruments of financial sector entities and eligible liabilities instruments of G-SII entities in none of which the resolution entity has a significant investment. (2) A credit institution shall exclude underwriting positions held for five business days or fewer from the amounts referred to in paragraph (1) item 1) of this Article and from the calculation of the factor in accordance with paragraph (1) item 2) of this Article.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 76 (3) The amount to be deducted pursuant to paragraph (1) of this Article shall be apportioned across each eligible liabilities instrument of a G-SII entity held by the credit institution, and the amount of each eligible liabilities instrument that is deducted pursuant to paragraph (1) of this Article shall be determined by multiplying the amount specified in item 1) of this paragraph by the proportion specified in item 2) of this paragraph:

the amount of holdings required to be deducted pursuant to paragraph (1) of
this Article;
the proportion of the aggregate amount of direct, indirect and synthetic holdings
by the credit institution of the eligible liabilities instruments of G-SII entities in which the credit institution does not have a significant investment represented by each eligible liabilities instrument held by the credit institution. (4) The amount of holdings referred to in Article 75 paragraph (1) item 3) of this Decision that is equal to or less than 10% of the Common Equity Tier 1 items of the credit institution after applying the provisions laid down paragraph (1) item 1) indents 1 to 3 of this Article shall not be deducted and shall be subject to the applicable risk weights for credit risk by applying the Standardised Approach or IRB Approach and the requirements laid down in the provisions that relate to market risk, as applicable. (5) A credit institution shall determine the amount of each eligible liabilities instrument that is risk weighted pursuant to paragraph (4) of this Article by multiplying the amount of holdings required to be risk weighted pursuant to paragraph (4) of this Article by the proportion resulting from the calculation specified in paragraph (3) item 2) of this
Article.
Trading book exception from deductions from eligible liabilities items
Article 80
(1) A credit institution may decide not to deduct a designated part of their direct, indirect and synthetic holdings of eligible liabilities instruments, that in aggregate and measured on a gross long position basis is equal to or less than 5% of the Common Equity Tier 1 items of the credit institution after applying Articles 15 to 19 of this Decision, provided that all the following conditions are met:
the holdings are in the trading book; and
the eligible liabilities instruments are held for no longer than 30 business days.
(2) The amounts of the items that are not deducted pursuant to paragraph (1) of this
Article shall be subject to own funds requirements for items in the trading book.
(3) Where, in the case of holdings not deducted in accordance with paragraph (1) of this Article, the conditions set out in that paragraph cease to be met, the holdings shall be deducted in accordance with Article 77 of this Decision without applying the exceptions laid down in Articles 78 and 79 of this Decision.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 77
Section 3 - Own funds and eligible liabilities
Eligible liabilities
Article 81
The eligible liabilities of a credit institution shall consist of the eligible liabilities items of the credit institution after the deductions referred to in Article 75 of this Decision. Own funds and eligible liabilities
Article 82
The own funds and eligible liabilities of a credit institution shall consist of the sum of its own funds and its eligible liabilities. SUBTITLE 7 - General requirements for own funds and eligible liabilities Distributions on instruments
Article 83
(1) Capital instruments and liabilities for which a credit institution has the sole discretion to decide to pay distributions in a form other than cash or own funds instruments shall not be eligible to qualify as Common Equity Tier 1, Additional Tier 1, Tier 2 or eligible liabilities instruments, unless the credit institution has received the prior authorisation of the Central Bank. (2) The Central Bank shall grant the prior authorisation referred to in paragraph (1) of this Article only where they consider all the following conditions to be met:

the ability of the credit institution to cancel payments under the instrument
would not be adversely affected by the discretion referred to in paragraph (1) of this Article, or by the form in which distributions could be made;
the ability of the capital instrument or of the liability to absorb losses would not
be adversely affected by the discretion referred to in paragraph (1) of this
Article, or by the form in which distributions could be made;
the quality of the capital instrument or liability would not otherwise be reduced
by the discretion referred to in paragraph (1) of this Article, or by the form in which distributions could be made. (3) The supervisory function of the Central Bank shall consult the resolution function of the Central Bank regarding a credit institution's compliance with the conditions referred to in paragraph (2) of this Article before granting the prior authorisation referred to in paragraph (1) of this Article. (4) Capital instruments and liabilities for which a legal person other than the credit institution issuing them has the discretion to decide or require that the payment of distributions on those instruments or liabilities shall be made in a form other than cash or own funds instruments shall not be eligible to qualify as Common Equity Tier 1, Additional Tier 1, Tier 2 or eligible liabilities instruments.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 78 (5) A credit institution may use a broad market index as one of the bases for determining the level of distributions on Additional Tier 1, Tier 2 and eligible liabilities instruments. (6) Provision of paragraph (5) of this Article shall not apply where the credit institution is a reference entity in that broad market index unless the following conditions are met:

the credit institution considers movements in that broad market index not to be
significantly correlated to the credit standing of the credit institution, its parent credit institution or parent financial holding company or parent mixed financial holding company or parent mixed activity holding company; and
the Central Bank has not reached a different determination from that referred
to in item 1) of this paragraph.
(7) Credit institution shall report and disclose the broad market indices on which their capital instruments and eligible liabilities instruments rely. (8) An interest rate index shall be deemed to be a broad market index if it fulfils all of the following conditions:
it is used to set interbank lending rates in one or more currencies;
it is used as a reference rate for floating rate debt issued by the credit institution
in the same currency, where applicable;
it is calculated as an average rate by a body independent of the credit
institutions that are contributing to the index (‘panel’);
each of the rates set under the index is based on quotes submitted by a panel
of institutions active in that interbank market;
the composition of the panel referred to in item 3) of this paragraph ensures a
sufficient level of representativeness of institutions present in Montenegro or the EU. (9) For the purposes of paragraph (8) item 5) of this Article, a sufficient level of representativeness shall be deemed to be achieved in either of the following cases:
where the panel referred to in paragraph (8) item 3) of this Article includes at
least 6 different contributors before any discount of quotes is applied for the purposes of setting the rate; or
where all of the following conditions are met:
the panel referred to in paragraph (8) item 3) of this Article includes at least 4 different contributors before any discount of quotes is applied for the purposes of setting the rate; the contributors to the panel referred to in paragraph (8) item 3) of this
Article represent at least 60% of the related market.
(10) The related market referred to in paragraph (9) item 2) indent 2 of this Article shall be the sum of assets and liabilities of the effective contributors to the panel in the domestic currency divided by the sum of assets and liabilities in the domestic currency of credit institutions and money market funds. (11) A stock index shall be deemed to be a broad market index where it is appropriately diversified in accordance with Article 508 of this Decision.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 79 Holdings of capital instruments issued by regulated financial sector entities that do not qualify as own funds
Article 84
A credit institution shall not deduct from any element of own funds direct, indirect or synthetic holdings of capital instruments issued by a regulated financial sector entity that do not qualify as own funds of that entity and it shall apply risk weights to such holdings for credit risk by applying Standardised Approach. Deduction and maturity requirements for short positions
Article 85
The maturity requirements for short positions referred to in Article 31 paragraph (1) item 1), Article 57 paragraph (1) item 1), Article 671 item 1) and Article 78 item 1) of this Decision shall be considered to be met in respect of positions held where all the following conditions are met:

the credit institution has the contractual right to sell on a specific future date to
the counterparty providing the hedge the long position that is being hedged; and
the counterparty providing the hedge to the credit institution is contractually
obliged to purchase from the credit institution on that specific future date the long position referred to in item 1) of this paragraph. Index holdings of capital instruments
Article 86
(1) For the purposes of Article 28 paragraph (1) item 1), Article 31 paragraph (1) item 1), Article 55 paragraph (1) item 1), Article 57 item 1), Article 65 paragraph (2) item 1),
Article 76 paragraph (2) item 1) and Article 78 item 1) of this Decision, a credit
institution may reduce the amount of a long position in a capital instrument by the portion of an index that is made up of the same underlying exposure that is being hedged, where the following conditions are met:
either both the long position being hedged and the short position in an index
used to hedge that long position are held in the trading book or both are held in the non-trading book;
the positions referred to in item 1) of this paragraph are held at fair value on the
balance sheet of the credit institution;
the short position referred to in item 1) of this paragraph qualifies as an effective
hedge under the internal control processes of the credit institution; and
the Central Bank assess the adequacy of the internal control processes referred
to in item 3) of this paragraph on at least an annual basis.
(2) Where the Central Bank has granted its prior authorisation, a credit institution may use a conservative estimate of the underlying exposure of the credit institution to instruments included in indices as an alternative to a credit institution calculating its exposure to the items referred to in one or more of the following points:
own Common Equity Tier 1, Additional Tier 1, Tier 2 and eligible liabilities
instruments included in indices;
Common Equity Tier 1, Additional Tier 1 and Tier 2 instruments of financial
sector entities, included in indices;

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 80
3) eligible liabilities instruments of credit institution, included in indices.
(3) The Central Bank shall grant the prior authorisation referred to in paragraph (2) of this Article only where the credit institution has demonstrated to their satisfaction that it would be operationally burdensome for the credit institution to monitor its underlying exposure to the items referred to in one or more of the items of paragraph (2) of this
Article, as applicable.
(4) An estimate is sufficiently conservative when either of the following conditions is met:

where the investment mandate (investment policy) of the index specifies that a
capital instrument of a financial sector entity an eligible liabilities instrument of a credit institution which is part of the index cannot exceed a maximum percentage of the index, the credit institution uses that percentage as an estimate for the value of the holdings that is deducted from its Common Equity Tier 1, Additional Tier 1 or Tier 2 items, as applicable in accordance with Article 39 paragraph (2) of this Decision or from Common Equity Tier 1 capital in situations where the credit institution cannot determine the precise nature of the holding; or, for a credit institution subject to the requirements of Article 117 of this Decision, its eligible liabilities items; or
where the credit institution is unable to determine the maximum percentage
referred to in item 1) of this paragraph and where the index, as evidenced by its investment policy or other relevant information, includes capital instruments of financial sector entities or eligible liabilities instruments of credit institution, the credit institution deducts the full amount of the index holdings from its Common Equity Tier 1, Additional Tier 1 or Tier 2 items, as applicable in accordance with Article 39 paragraph (2) of this Decision or from Common Equity Tier 1 capital in situations where the credit institution cannot determine the precise nature of the holding or, for a credit institution subject to the requirements of Article 117 of this Decision, its eligible liabilities items. (5) For the purposes of paragraph (4) of this Article, the following rules shall apply:
an indirect holding arising from an index holding comprises the proportion of
the index invested in the Common Equity Tier 1, Additional Tier 1 and Tier 2 instruments of financial sector entities or eligible liabilities instruments of credit institution included in the index;
an index includes index funds, equity or bond indices or any other scheme
where the underlying instrument is an own funds instrument issued by a financial sector entity or an eligible liabilities instrument issued by a credit institution. (6) Operationally burdensome, within the meaning of paragraph (3) of this Article, shall be situations under which look-through approaches to capital holdings in financial sector entities on an ongoing basis are unjustified, as assessed by the Central Bank. (7) When assessing the nature of operationally burdensome situations, the Central Bank shall take into account the low materiality and short holding period of such positions.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 81 (8) A holding period of short duration shall require the strong liquidity of the index to be evidenced by the credit institution. (9) For the purpose of paragraph (7) of this Article, a position shall be deemed to be of low materiality where all of the following conditions are met:

the individual net exposure arising from index holdings measured before any
look-through is performed does not exceed 2% of Common Equity Tier 1 items as calculated in Article 37 paragraph (1) item 1) of this Decision;
the aggregated net exposure arising from index holdings measured before any
look-through is performed does not exceed 5% of Common Equity Tier 1 items as calculated in Article 37 paragraph (1) item 1) of this Decision;
the sum of the aggregated net exposure arising from index holdings measured
before any look-through is performed and of any other holdings that shall be deducted pursuant to Article 19 paragraph (1) item 1) of this Decision does not exceed 10% of Common Equity Tier 1 items as calculated in Article 37 paragraph (1) item 1) of this Decision. Conditions for reducing own funds and eligible liabilities
Article 87
(1) A credit institution shall obtain the prior authorisation of the Central Bank to do any of the following:
reduce, redeem or repurchase Common Equity Tier 1 instruments issued by
the credit institution in accordance with applicable regulations;
reduce, distribute or reclassify as another own funds item the share premium
accounts related to own funds instruments;
effect the call, redemption, repayment or repurchase of Additional Tier 1 or Tier
2 instruments prior to the date of their contractual maturity.
(2) A credit institution shall obtain the prior authorisation of the Central Bank as the resolution authority for credit institutions to effect the call, redemption, repayment or repurchase of eligible liabilities instruments that are not covered by paragraph (1) of this Article, prior to the date of their contractual maturity. (3) A credit institution shall obtain the prior authorisation of the Central Bank for reducing own funds that it obtained by acquiring own shares pursuant to Article 178 of the Law. Authorisation to reduce own funds
Article 88
(1) The Central Bank shall grant authorisation to a credit institution to reduce, call, redeem, repay or repurchase Common Equity Tier 1, Additional Tier 1 or Tier 2 instruments, or to reduce, distribute or reclassify related share premium accounts, where:
before or at the same time as any of the actions referred to in Article 87
paragraph (1) this Decision, the credit institution replaces the instruments or the related share premium accounts referred to in Article 87 paragraph (1) of this Decision with own funds instruments of equal or higher quality at terms that are sustainable for the income capacity of the credit institution; or

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 82
2) the credit institution has demonstrated to the satisfaction of the Central Bank
that the own funds and eligible liabilities of the credit institution would, following the action referred to in Article 87paragraph (1) of this Decision, exceed the requirements laid down in this Decision, the Law and the law governing the resolution of credit institutions by a margin that the Central Bank considers necessary. (2) Where a credit institution provides sufficient safeguards as to its capacity to operate with own funds above the amounts required in the Law and this Decision, the Central Bank may grant that credit institution a general prior authorisation to take any of the actions set out in Article 87 paragraph (1) of this Decision, subject to criteria that ensure that any such future action will be in accordance with the conditions set out in paragraph (1) items 1) and 2) of this Article. (3) That general prior authorisation referred to in paragraph (2) of this Article shall be granted only for a specified period, which shall not exceed one year, after which it may be renewed. (4) The general prior authorisation referred to in paragraph (2) of this Article shall be granted for a certain predetermined amount, which shall be set by the Central bank. (5) In the case of Common Equity Tier 1 instruments, that predetermined amount referred to in paragraph (4) of this Article shall not exceed 3% of the relevant issue and shall not exceed 10% of the amount by which Common Equity Tier 1 capital exceeds the sum of the Common Equity Tier 1 capital requirements laid down in the Law, the law governing the resolution of credit institutions and this Decision and a margin that the Central Bank considers necessary. (6) In the case of Additional Tier 1 or Tier 2 instruments, that predetermined amount referred to in paragraph (4) of this Article shall not exceed 10% of the relevant issue and shall not exceed 3% of the total amount of outstanding Additional Tier 1 or Tier 2 instruments, as applicable. (7) The Central Bank shall withdraw the general prior authorisation where a credit institution breaches any of the criteria provided for the purposes of that authorisation. (8) When assessing the sustainability of the replacement instruments for the income capacity of the credit institution referred to in paragraph (1) item 1) of this Article, the Central Bank shall consider the extent to which those replacement capital instruments would be more costly for the credit institution than those capital instruments or share premium accounts they would replace. (9) The Central Bank may allow the credit institution to call, redeem, repay or repurchase Additional Tier 1 or Tier 2 instruments or related share premium accounts during the five years following their date of issuance where the conditions set out in paragraph (1) of this Article and one of the following conditions is met:

there is a change in the regulatory classification of those instruments that would
be likely to result in their exclusion from own funds or reclassification as own funds of lower quality, and both the following conditions are met:
the Central Bank considers such a change to be sufficiently certain;

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 83 the credit institution demonstrates to the satisfaction of the Central Bank that the regulatory reclassification of those instruments was not reasonably foreseeable at the time of their issuance;
2) there is a change in the applicable tax treatment of those instruments which the
credit institution demonstrates to the satisfaction of the Central Bank is material and was not reasonably foreseeable at the time of their issuance;
3) before or at the same time as the action referred to in Article 87 paragraph (1)
of this Decision, the credit institution replaces the instruments or related share premium accounts referred to in Article 87 paragraph (1) of this Decision with own funds instruments of equal or higher quality at terms that are sustainable for the income capacity of the credit institution and the Central Bank has permitted that action on the basis of the determination that it would be beneficial from a prudential point of view and justified by exceptional circumstances; or
4) the Additional Tier 1 or Tier 2 instruments are repurchased for market making
purposes.
(10) Sustainable for the income capacity of the credit institution within the meaning of paragraph (1) item 1) and paragraph (9) item 3) of this Article shall mean that the profitability of the credit institution, as assessed by the Central Bank, continues to be sound or does not see any negative change after the replacement of the instruments or the related share premium accounts referred to in Article 87 paragraph (1) of this Decision with own funds instruments of equal or higher quality, at that date and for the foreseeable future. (11) When assessing the profitability referred to in paragraph (10) of this Article, the Central Bank shall take into account the credit institution’s profitability in stress situations. Process and data requirements for an application by a credit institution to carry out redemptions, reductions and repurchases of own funds instruments
Article 89
(1) A credit institution may not announce redemptions, reductions and repurchases of own funds instruments to holders of the instruments before it has obtained the prior authorisation of the Central Bank. (2) Where the actions listed in Article 87 paragraph (1) of this Decision are expected to take place with sufficient certainty, and once the prior authorisation of the Central Bank has been obtained, the credit institution shall deduct the corresponding amounts of own funds instruments to be redeemed, reduced or repurchased or the amounts of the related share premium accounts to be reduced or distributed, as applicable, from corresponding elements of its own funds before the effective redemptions, reductions, repurchases or distributions occur. (3) Sufficient certainty referred to in paragraph (2) of this Article shall in particular be deemed to exist where the credit institution has publicly announced its intention to redeem, reduce or repurchase an own funds instrument.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 84 (4) A credit institution shall deduct, from the moment the Central Bank has granted authorisation referred to in Article 88 paragraph (2) of this Decision, the predetermined amount from corresponding elements of the credit institution’s own funds. (5) When applying for a prior authorisation of the Central Bank, including a general prior authorisation referred to in Article 88 paragraph (2) of this Decision, for actions listed in Article 87 paragraph (1) of this Decision, and where the related own funds instruments are purchased for passing them on to employees of the credit institution as part of their remuneration, the credit institution shall notify the Central Bank that those instruments are purchased for that specific purpose. (6) By way of derogation from paragraphs (2) to (4) of this Article, a credit institution shall deduct instruments from corresponding elements of the own funds, for the time they are held by the credit institution. (7) A credit institution shall not be required to make the deductions where the expenses related to any action in accordance with paragraphs (2) to (4) of this Article are already included in own funds as a result of an interim or a year-end financial report. (8) The Central Bank shall grant a prior authorisation, other than the general prior authorisation referred to in Article 88 paragraph (2) of this Decision, for a specified period of time, necessary to perform any of the actions listed in Article 87 paragraph (1) of this Decision, which shall not exceed one year. (9) The provisions of paragraphs (1) to (8) of this Article shall apply at the consolidated, sub-consolidated and individual levels of application of prudential requirements, as applicable. Submission of application by the credit institution to carry out redemptions, reductions and repurchases of own funds instruments
Article 90
(1) A credit institution shall submit an application for prior authorisation, including the general prior authorisation referred to in Article 88 paragraph (2) of this Decision, to the Central Bank before taking any of the actions referred to in Article 87 paragraph (1) of this Decision. (2) The provisions of paragraph (1) of this Article shall apply at consolidated, subconsolidated and individual levels of application of prudential requirements, as applicable. Content of the application to be submitted by the credit institution to carry out redemptions, reductions and repurchases of own funds instruments
Article 91
(1) A credit institution shall submit the following information accompanying the application referred to in Article 91 of this Decision:

a well-founded explanation of the rationale for performing one of the actions
referred to in Article 87 paragraph (1) of this Decision;

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 85
2) information about whether the authorisation sought is based on Article 88
paragraph (1) items 1) and 2) or paragraph 2) of the same Article of this Decision;
3) where a credit institution seeks to call, redeem or repurchase Additional Tier 1
or Tier 2 instruments or related share premium accounts during the five years following their date of issuance pursuant to Article 88 paragraph (9) of this Decision, how the conditions of that Article are met;
4) present and forward-looking information that shall cover at least a three year
period, on the amounts and percentages corresponding to the following requirements for own funds and eligible liabilities:
the Common Equity Tier 1 capital requirement, the Tier 1 capital requirement, and the own funds requirement laid down in Article 134 paragraph (2) items 1) to 3) of the Law; to address risks other than the risk of excessive leverage, the additional Common Equity Tier 1 capital requirement, the Additional Tier 1 capital requirement, and the additional own funds requirement laid down in Article 281 of the Law, whichever is applicable; the combined buffer requirement referred to in Article 165 of the Law; the leverage ratio requirement laid down in Article 115a of the Law, and where applicable any adjustment in accordance with Article 550 paragraph (7) of this Decision; to address the risk of excessive leverage, the additional Common Equity Tier 1 capital requirement, and the additional Tier 1 capital requirement referred to in Article 281 of the Law, whichever is applicable; the Tier 1 G-SICI leverage ratio buffer requirement laid down in Article 134 paragraph (2) item 1) of the Law, whichever is applicable; the risk-based requirement for own funds and eligible liabilities laid down in
Article 117 paragraph (1) item 1) or Article 118 of this Decision, where
applicable, and the non-risk based requirement for own funds and eligible liabilities laid down in Article 117 paragraph (1) item 2) or Article 118 of this Decision, where applicable; the minimum requirement for own funds and eligible liabilities referred to in
Article 29 of the Law on Resolution of Credit Institutions as required in
accordance with Articles 30 and 31 of that Law, as applicable, and calculated as the amount of own funds and eligible liabilities, and expressed as percentages of the total risk exposure amount of the credit institution, calculated in accordance with Article 114 paragraph (3) of this Decision, and the amount of own funds and eligible liabilities expressed as percentages of the total exposure measure of the relevant entity, calculated in accordance with Article 563 paragraph (4) and Article 564 of this Decision;
5) present and forward-looking information on the level and composition of own
funds and the level and composition of own funds and eligible liabilities held to ensure compliance with the requirements referred to in item 4) indents 1 to 8 of this paragraph before and after performing any of the actions listed in Article 87 paragraph (1) of this Decision;
6) the credit institution’s summary assessment on the impact of the action that the
credit institution has planned to take in accordance with Article 87paragraph (1) of this Decision, and any such action that the credit institution additionally envisages to undertake within a three year period, on compliance with the requirements referred to in item 4) indents 1 to 8 of this paragraph;

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 86
7) where the credit institution seeks to replace own funds instruments or the
related share premium accounts pursuant to Article 88 paragraph (1) item 1) or
Article 88 paragraph (9) item 3) of this Decision:
information on the residual maturity of the replaced own funds instruments, if any, and the maturity of the own funds instruments replacing them; the ranking in bankruptcy hierarchy of the replaced own funds instruments and of the own funds instruments replacing them; the cost of the own funds instruments replacing the instruments or the shared premium accounts referred to in Article 87 paragraph (1) of this Decision; the planned timing of the issuance of the own funds instruments replacing the instruments or share premium accounts referred to in Article 87 paragraph (1) of this Decision; the impact on the profitability of the credit institution pursuant to Article 88 paragraph (1) item 1) or Article 88 paragraph (9) item 3) of this Decision;
8) an evaluation of the risks to which the credit institution is or might be exposed
and whether the level of own funds and eligible liabilities ensures an appropriate coverage of such risks, including outcomes of stress tests on main risks evidencing potential losses;
9) coverage in terms of own funds of the applicable guidance on the proposed
level and composition of additional own funds communicated by the Central Bank pursuant to Article 281b of the Law before and after performing any of the actions listed in Article 87 paragraph (1) of this Decision, covering a three year period; 10)any other information considered necessary by the Central Bank for evaluating the appropriateness of granting an authorisation in accordance with Article 88 of this Decision. (2) For the purposes of paragraph (1) item 5) of this Article, the information shall cover at least a three year period and, with regard to liabilities, shall include specifications of the following amounts, as applicable:

liabilities which qualify as eligible liabilities instruments pursuant to Article 72
paragraph (2) of this Decision;
liabilities which the Central Bank as the resolution authority of credit institutions
has permitted to qualify as eligible liabilities instruments pursuant to Article 72 paragraphs (5) or (6) of this Decision;
liabilities which are included in the amount of own funds and eligible liabilities
of resolution entities pursuant to Article 6 of the Decision on more detailed method for determining minimum requirements for own funds and eligible liabilities of credit institutions and the reporting method;
liabilities that arise from debt instruments with embedded derivatives included
in the amount of own funds and eligible liabilities pursuant to Article 6 of the Decision on more detailed method for determining minimum requirements for own funds and eligible liabilities of credit institutions and the reporting method;
liabilities issued by a subsidiary undertakings which qualify for inclusion in the
consolidated eligible liabilities instruments of a credit institution subject to Article 117 in accordance with Article 113 of this Decision or of a resolution entity pursuant to Article 6 of the Decision on more detailed method for determining minimum requirements for own funds and eligible liabilities of credit institutions and the reporting method;

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 87
6) eligible liabilities instruments taken into account for the purpose of complying
with the requirement for own funds and eligible liabilities for credit institutions that are material subsidiary undertakings of non-EU G-SIIs pursuant to Article 118 paragraph (3) of this Decision and for the purpose of complying with the minimum requirement for own funds and eligible liabilities for entities that are not themselves resolution entities, pursuant to Article 7 of the Decision on more detailed method for determining minimum requirements for own funds and eligible liabilities of credit institutions and the reporting method. (3) The Central Bank shall waive the submission of some of the information listed in paragraph (1) of this Article where it is satisfied that this information is already available to it. (4) The provisions of paragraphs (1) to (3) of this Article shall apply at the individual, consolidated and sub-consolidated levels of application of prudential requirements, where applicable. Additional information to be submitted with an application for a general prior authorisation to carry out redemptions, reductions and repurchases of own funds instruments
Article 92
(1) Where a credit institution applies for a general prior authorisation as referred to in
Article 88 paragraph (2) of this Decision for an action referred to in Article 87 paragraph
(1) item 1) of this Decision, it shall specify the amount of each relevant Common Equity Tier 1 issue that is subject to that application. (2) Where a credit institution applies for a general prior authorisation in accordance with Article 87 paragraph (1) item 3) of this Decision, it shall specify in the application all of the following:

the amount of each relevant outstanding issue subject to the application;
the total carrying amount of outstanding instruments in each relevant tier of
capital.
(3) A credit institution may include in an application for a general prior authorisation for an action under Article 87 paragraph (1) items 1) and 3) of this Decision own funds instruments still to be issued, subject to specification of the information referred to in paragraph (2) items 1) and 2) of this Article, as applicable, to be provided to the Central Bank following the relevant issuance. (4) The provisions of paragraphs (1) to (3) of this Article shall apply at the consolidated, sub-consolidated and individual levels of application of prudential requirements, as applicable.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 88 Information to be submitted with an application for a renewal of a general prior authorisation to carry out redemptions, reductions and repurchases of own funds instruments
Article 93
(1) Before the expiry of a general prior authorisation as referred to in Article 88 paragraph (2) of this Decision, a credit institution may submit an application for its renewal for a period of up to one additional year each time, provided that the credit institution does not request an increase in the predetermined amount set when the general prior authorisation was granted and does not change the rationale as referred to in Article 91 paragraph (1), item 1) , when the original general prior authorisation was requested. (2) When applying for the renewal of the general prior authorisation referred to in paragraph (1) of this Article, the credit institution shall be exempted from the obligation to provide the information referred to in Article 91 paragraph (1) items 1) to 4) and items 6), 7) and 9) of this Decision. Timing of the application to be submitted by the credit institution and processing of the application to carry out redemptions, reductions and repurchases of own funds instruments
Article 94
(1) A credit institution shall, other than a general prior authorisation as referred to in
Article 88 paragraph (2) of this Decision, transmit to the Central Bank a complete
application and the information referred to in Article 91 of this Decision at least four months in advance of the date where one of the actions listed in Article 87 paragraph (1) of this Decision will be announced to the holders of the instruments. (2) A credit institution shall, for obtaining a general prior authorisation as referred to in
Article 88 paragraph (2) of this Decision, transmit a complete application and the
information referred to in Articles 91 and 92 of this Decision to the Central Bank at least four months before the date on which any of the actions listed in Article 87 paragraph (1) of this Decision will be carried out. (3) By way of derogation from paragraph (2), where a credit institution submits to the Central Bank an application for a renewal of a general prior authorisation pursuant to
Article 88 paragraph (2) of this Decision and Article 93 of this Decision, it shall transmit
the application and the information required under Articles 90, 91 and 93 of this Decision to the Central Bank at least three months before the expiration of the period for which the original general prior authorisation was granted. (4) The Central Bank may allow credit institution on a case-by-case basis and under exceptional circumstances to transmit the application referred to in paragraphs (1) and (3) of this Article within a time frame shorter than the three months period. (5) The Central Bank shall process an application of the credit institution during either the period of time referred to in paragraphs (1), (2) and (3) of this Article or during the period of time referred to in paragraph (4) of this Article.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 89 (6) The Central Bank shall take into account new information, where any is available and where they consider this information to be material, received during the period of processing referred to in paragraph (5) of this Article. (7) The Central Bank shall begin processing the application only when they are satisfied that the information required under Articles 92 and 93 of this Decision has been received from the credit institution. Authorisation to reduce eligible liabilities instruments
Article 95
(1) The Central Bank, as the credit institutions’ resolution authority, shall grant authorisation to a credit institution to call, redeem, repay or repurchase eligible liabilities instruments where one of the following conditions is met:

before or at the same time as any of the actions referred to in Article 87
paragraph (2) of this Decision, the credit institution replaces the eligible liabilities instruments with own funds or eligible liabilities instruments of equal or higher quality at terms that are sustainable for the income capacity of the credit institution;
the credit institution has demonstrated to the satisfaction of the Central Bank,
as the credit institutions’ resolution authority, that the own funds and eligible liabilities of the credit institution would, following the action referred to in Article 87 paragraph (2) of this Decision, exceed the requirements for own funds and eligible liabilities laid down in the Law, the law governing the resolution of credit institutions and this Decision by an account that the Central Bank, as the credit institutions’ resolution authority, in agreement with the supervisory function of the Central Bank, considers necessary;
the credit institution has demonstrated to the satisfaction of the Central Bank,
as the credit institutions’ resolution authority, that the partial or full replacement of the eligible liabilities with own funds instruments is necessary to ensure compliance with the own funds requirements laid down in the Law and this Decision for continuing authorisation. (2) Where a credit institution provides sufficient safeguards as to its capacity to operate with own funds and eligible liabilities above the amount of the requirements laid down in the Law, the law governing the resolution of credit institutions and this Decision, the Central Bank may, based on the proposal of the resolution function of the Central Bank determined after consulting the supervisory function of the Central Bank, grant that credit institution a general prior authorisation to effect calls, redemptions, repayments or repurchases of eligible liabilities instruments, subject to criteria that ensure that any such future action will be in accordance with the conditions set out in paragraph (1) items 1) and 2) of this Article. (3) General prior authorisation referred to in paragraph (2) of this Article shall be granted only for a specified period, which shall not exceed one year, after which it may be renewed.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 90 (4) The general prior authorisation referred to in paragraph (2) of this Article shall be granted for a certain predetermined amount, which shall be set by the Central Bank as the credit institutions’ resolution authority. (5) The resolution function of the Central Bank shall inform the supervisory function of the Central Bank on each granted general prior authorisation referred to in paragraph (2) of this Article. (6) The Central Bank, as the resolution authority, shall withdraw the general prior authorisation referred to in paragraph (2) of this Article where a credit institution breaches any of the criteria provided for the purposes of that authorisation. (7) When assessing the sustainability of the replacement instruments for the income capacity of the credit institution referred to in paragraph (1) item (1) of this Article, the Central Bank, as the resolution authority, shall consider the extent to which those replacement capital instruments or replacement eligible liabilities would be more costly for the credit institution than those they would replace. (8) Sustainable for the income capacity of the credit institution within the meaning of paragraph (1) item 1) of this Article shall mean that the profitability of the credit institution, as assessed by the Central Bank as the credit institutions' resolution authority, continues to be sound or does not see any negative change after the replacement of the eligible liabilities instruments with own funds or eligible liabilities instruments of equal or higher quality, at that date and for the foreseeable future. (9) When assessing the profitability referred to in paragraph (8) of this Article, the Central Bank, as the credit institutions' resolution authority, shall take into account the credit institution’s profitability in stress situations. Requirements, limits and procedures for submitting application by a credit institution to reduce eligible liabilities instruments
Article 96
(1) A credit institution may not announce calls, redemptions, repayments and repurchases of eligible liabilities instruments to holders of those instruments before the credit institution has obtained the prior authorisation of the Central Bank as the credit institutions’ resolution authority. (2) Where the actions listed in Article 87 paragraph (2) of this Decision are expected to take place with sufficient certainty, and once the prior authorisation of the Central Bank as the credit institutions’ resolution authority has been obtained, the credit institution shall deduct the amounts to be called, redeemed, repaid or repurchased from the credit institution’s eligible liabilities instruments before the effective calls, redemptions, repayments or repurchases occur. (3) Sufficient certainty referred to in paragraph (2) of this Article shall in particular be deemed to exist where the credit institution has publicly announced its intention to call, redeem, repay or repurchase an eligible liabilities instrument.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 91 (4) A credit institution shall, from the moment Central Bank as a credit institutions’ resolution authority has granted the general prior authorisation as referred to in Article 95 paragraph (2) of this Decision, deduct the predetermined amount from its eligible liabilities instruments. (5) The Central Bank, as the credit institutions’ resolution authority, shall grant a prior authorisation, other than the general prior authorisation referred to in Article 95 paragraph (2) of this Decision, for a specified period of time, necessary to perform any of the actions listed in Article 87 paragraph (2) of this Decision, which shall not exceed one year. (6) Where a credit institution applies for a general prior authorisation as referred to in
Article 95 paragraph (2) of this Decision, the predetermined amount for which the
Central Bank as the credit institutions’ resolution authority has granted the general prior authorisation shall not exceed 10% of the total amount of outstanding eligible liabilities instruments. (7) The provisions of paragraphs (1) to (6) of this Article shall apply at consolidated, sub-consolidated and individual levels of application of requirements for own funds and eligible liabilities, as applicable. Submission by the credit institution of an application to reduce eligible liabilities instruments
Article 97
(1) A credit institution shall submit to the Central Bank, as the credit institutions’ resolution authority, an application for prior authorisation, including the general prior authorisation as referred to in Article 95 paragraph (2) of this Decision, before taking an action as referred to in Article 87 paragraph (2) of this Decision. (2) The provisions of paragraph (1) of this Article shall apply at individual, consolidated and sub- consolidated levels of application of requirements for own funds and eligible liabilities, as applicable. Content of the application to be submitted by the credit institution to call, redeem, repay or repurchase eligible liabilities instruments
Article 98
(1) A credit institution shall submit the following information accompanying the application referred to in Article 97 of this Decision shall be accompanied by all of the following:

a well-founded explanation of the rationale for performing any of the actions
referred to in Article 87 paragraph (2) of this Decision;
information about whether the authorisation sought is based on Article 95
paragraph (1) items 1), 2) or 3) or paragraph (2) of the same Article of this Decision;
present and forward-looking information that shall cover at least a three year
period, on the following requirements for own funds and eligible liabilities:
the risk-based requirement for own funds and eligible liabilities laid down in
Article 117 paragraph (1) item 1) or Article 118 of this Decision, where
applicable, and the non-risk based requirement for own funds and eligible

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 92 liabilities laid down in Article 117 paragraph (1) item 2) or Article 118 of this Decision, where applicable; the minimum requirement for own funds and eligible liabilities laid down in
Article 29 of the Law on Resolution of Credit Institutions calculated in
accordance with Articles 30 and 31 of that Law, as applicable, the amount of own funds and eligible liabilities expressed as percentages of the total risk exposure amount of the credit institution, calculated in accordance with
Article 114 paragraph (3) of this Decision, and the amount of own funds and
eligible liabilities expressed as percentages of the total exposure measure of the relevant entity, calculated in accordance with Article 563 paragraphs (4) to (7) of this Decision and Article 564 of this Decision; the combined buffer requirement referred to in Article 165 of the Law;
4) present and forward-looking information on the level and composition of own
funds and eligible liabilities held to ensure compliance, respectively, with the requirements referred to in paragraph item 3) indents 1 to 3 of this paragraph, before and after performing the action referred to in Article 87 paragraph (2) of this Decision, whereat the information shall cover at least a three year period and shall, with regard to eligible liabilities, include specifications of the following amounts, as applicable:
liabilities which qualify as eligible liabilities instruments pursuant to Article 72 paragraph (2) of this Decision; liabilities which the Central Bank, as credit institutions’ resolution authority, has permitted to qualify as eligible liabilities instruments pursuant to Article 72 paragraphs (5) or (6) of this Decision; liabilities which are included in the amount of own funds and eligible liabilities of resolution entities pursuant to Article 6 of the Decision on more detailed method for determining minimum requirements for own funds and eligible liabilities of credit institutions and the reporting method; liabilities that arise from debt instruments with embedded derivatives included in the amount of own funds and eligible liabilities pursuant to
Article 6 of the Decision on more detailed method for determining minimum
requirements for own funds and eligible liabilities of credit institutions and the reporting method; liabilities issued by a subsidiary undertaking which qualify for inclusion in the consolidated eligible liabilities instruments of a credit institution subject to Article 117 pursuant to Article 113 of this Decision or of a resolution entity pursuant to Article 6 of the Decision on more detailed method for determining minimum requirements for own funds and eligible liabilities of credit institutions and the reporting method; eligible liabilities instruments taken into account for the purposes of complying with the requirement for own funds and eligible liabilities for credit institutions that are material subsidiary undertakings of non-EU GSIIs pursuant to Article 118 paragraph (3) of this Decision and for the purpose of complying with the minimum requirement for own funds and eligible liabilities for entities that are not themselves resolution entities, pursuant to Article 7 of the Decision on more detailed method for determining minimum requirements for own funds and eligible liabilities of credit institutions and the reporting method;
5) the credit institution’s summary assessment on the impact of the action that the
credit institution has planned to take in accordance with Article 87 paragraph

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 93 (2) of this Decision, and any such action that the credit institution additionally envisages to undertake within a three year period, on compliance with the requirements referred to in item 3) indents 1 to 3 of this paragraph;
6) where the credit institution seeks to replace eligible liabilities instruments
pursuant to Article 95 paragraph (1) item 1) of this Decision:
information on the residual maturity of the replaced eligible liabilities instruments and the maturity of the own funds or eligible liabilities instruments replacing them; the ranking in bankruptcy of the replaced eligible liabilities instruments and of the own funds or eligible liabilities instruments replacing them; the cost of the own funds or eligible liabilities instruments replacing the eligible liabilities instruments; the planned timing of the issuance of the own funds or eligible liabilities instruments replacing the eligible liabilities instruments referred to in Article 87 paragraph (2) of this Decision; the impact on the profitability of the credit institution pursuant to Article 95 paragraph (1) item 1);
7) an evaluation of the risks to which the credit institution is or might be exposed,
in particular whether the level of own funds and eligible liabilities ensures an appropriate coverage of such risks, including outcomes of stress tests on main risks evidencing potential losses;
8) where a credit institution applies Article 95 paragraph (1) item 3) of this
Decision, demonstration that the partial or full replacement of the eligible liabilities instruments with own funds instruments is necessary to ensure compliance with the own funds requirements;
9) any other information considered necessary by the Central Bank as the credit
institutions’ resolution authority for evaluating the appropriateness of granting a authorisation in accordance with Article 95 of this Decision. (2) The Central Bank may waive the submission of some of the information listed in paragraph (1) of this Article where it is satisfied that it already has that information. (3) The provisions of paragraphs (1) and (2) of this Article shall apply at individual, consolidated and sub-consolidated levels of application of requirements for own funds and eligible liabilities, as applicable. Additional information to be submitted by a credit institution with the application for a general prior authorisation to call, redeem, repay or repurchase eligible liabilities instruments
Article 99
(1) Where a credit institution submits an application for a general prior authorisation referred to in Article 95 paragraph (2) of this Decision for an action under Article 87 paragraph (2) of this Decision, the credit institution shall specify in the application the total amount of outstanding eligible liabilities instruments, including the total amount of outstanding eligible liabilities instruments that meet the conditions referred to in
Article 95 of this Decision or Article 6 of the Decision on more detailed method for
determining minimum requirements for own funds and eligible liabilities of credit institutions and the reporting method.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 94 (2) Where a credit institution submits an application for a general prior authorisation for an action under Article 87 paragraph (2) of this Decision, it may include in its application own fund instruments still to be issued, subject to specification of the final amount referred to in paragraph (1) of this Article, to be provided to the Central Bank as the credit institutions’ resolution authority following the issuance concerned. Information to be submitted by a credit institution with an application for a renewal of a general prior authorisation to call, redeem, repay or repurchase eligible liabilities instruments
Article 100
(1) Before the expiry of the general prior authorisation granted pursuant to Article 95 paragraph (2) of this Decision, a credit institution may submit an application for its renewal for a period of up to one additional year each time, provided that the credit institution does not request an increase in the predetermined amount set when the original general prior authorisation was granted and does not change the rationale referred to in Article 98 paragraph (1) item 1), when the original general prior authorisation was requested. (2) When applying for the renewal of a general prior authorisation referred to in paragraph (1) of this Article, the credit institution shall not be obliged to provide the information referred to in Article 98 paragraph (1) items 1) to 3) and items 5), 6), 7) and 9 ) of this Decision. Timing of the application to be submitted by the credit institution and processing of the application of the credit institution to call, redeem, repay or repurchase eligible liabilities instruments
Article 101
(1) A credit institution shall submit, for a prior authorisation, other than the general prior authorisation referred to in Article 95 paragraph (2) of this Decision, a complete application and the information referred to in Article 95 of this Decision to the Central Bank as the credit institutions’ resolution authority at least four months before the date on which one of the actions listed in Article 87 paragraph (2) of this Decision. (2) A credit institution shall submit, for the general prior authorisation referred to in
Article 95 paragraph (2) of this Decision, a complete application and the information
referred to in Articles 98 and 99 of this Decision to the Central Bank as the credit institutions’ resolution authority at least four months before the date on which one of the actions listed in Article 87 of this Decision will be carried out. (3) By way of derogation from paragraph (2), where a credit institution submits to the Central Bank, as the credit institutions’ resolution authority, an application for the renewal of the general prior authorisation pursuant to Article 95 paragraph (2) of this Decision and Article 100, the institution shall submit application and the information required under Articles 98, 99 and 100 of this Decision to the Central Bank, as the credit institutions’ resolution authority, at least three months before the expiration of the period for which the original general prior authorisation was granted.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 95 (4) The Central Bank as the credit institutions’ resolution authority may allow credit institution, on a case-by-case basis and under exceptional circumstances, to submit the application referred to in paragraphs (1), and (3) of this Article within a time frame shorter than the periods set out in those paragraphs. (5) The Central Bank as the credit institutions’ resolution authority shall process an application during either the period of time referred to in paragraphs (1), (2) and (3) of this Article or during the period of time referred to in paragraph (4) of this Article. (6) The Central Bank as the credit institutions’ resolution authority shall take into account new information received during the processing of application referred to in paragraph (5) of this Article, where any such new information is available and where they consider that information to be material. (7) The Central Bank as the credit institutions’ resolution authority shall process the application only where they are satisfied that the credit institution has provided them with all the information required under Article 98 and, where applicable, Articles 99 and 100 of this Decision. Simplified requirements for credit institutions subject to the minimum requirement for own funds and eligible liabilities at a level that does not exceed an amount sufficient to absorb losses
Article 102
(1) By way of derogation from Articles 98, 99 and 100, a credit institution for which the Central Bank as the credit institutions’ resolution authority has set the minimum requirement for own funds and eligible liabilities laid down in Article 29 of the Law on Resolution of Credit Institutions at a level that does not exceed an amount sufficient to absorb losses in accordance with Article 3 of the Decision on more detailed method for determining minimum requirements for own funds and eligible liabilities of credit institutions and the reporting method, shall submit with the application referred to in
Article 97of this Decision the following:

a well-founded explanation of the rationale for performing any of the actions
referred to in Article 87 paragraph (2) of this Decision;
information about whether the authorisation sought is based on Article 95
paragraph (1) items 1), 2) or 3) or paragraph (2) of the same Article of this Decision. (2) A general prior authorisation referred to in Article 95 paragraph (2) of this Decision, granted following an application made in accordance with paragraph (1) of this Article, shall not be subject to the restriction set out in Article 96 paragraph (6) of this Decision. (3) By way of derogation from Article 101 of this Decision, the credit institution referred to in paragraph (1) of this Article shall submit the application referred to in Article 97 of this Decision to the Central Bank as the credit institutions’ resolution authority at least three months before the date on which one of the actions listed in Article 87 of this Decision will be announced to the holders of the instruments or, in the case of an application for a general prior authorisation referred to in Article 95 of this Decision, at least three months before the date on which one of the actions listed in Article 87 paragraph (2) of this Decision will be carried out.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 96 (4) Where the Central Bank as the credit institutions’ resolution authority does not oppose in writing the application referred to in Article 97 of this Decision within the periods specified in paragraph (3) of this Article, the authorisation shall be deemed granted. (5) The provisions of this Article shall apply at individual, consolidated and subconsolidated levels of application of requirements for own funds and eligible liabilities, as applicable. Cooperation between the Central Bank supervisory function and resolution function when granting the authorisation to reduce eligible liabilities instruments
Article 103
(1) Where credit institution submits a complete application for a prior authorisation, including the general prior authorisation referred to in Article 95 paragraph (2) of this Decision, the Central Bank’s resolution function shall submit without delay that application to the Central Bank’s supervisory function, including the information referred to in Article 98 of this Decision and, where applicable, Article 99, Article 100 or Article 102. (2) At the same time of the submission of the information referred to in paragraph (1) of this Article, the Central Bank’s resolution function shall make a request for consultation to the Central Bank’s supervisory function on the application received, which shall include the reciprocal exchange of any other relevant information for the assessment of the application by both functions of the Central Bank. (3) Both functions of the Central Bank – the supervisory function and the resolution function shall agree on an adequate time limit for providing a response to the consultation referred to in paragraph (2), which shall not exceed three months from the moment of receipt of the request for consultation and that shall be reduced to two months where the consultation concerns the renewal of a general prior authorisation pursuant to Article 100 of this Decision or a general prior authorisation pursuant to
Article 102 of this Decision.
(4) The Central Bank, as the credit institutions’ resolution authority, shall consider the views received from the supervisory function before taking a decision on the authorisation. (5) Where the Central Bank as the credit institutions’ resolution authority, for granting authorisation to a credit institution, in accordance with Article 95 paragraph (1) item 2) of this Decision, requires prior consent of the supervisory function, it shall ensure that the resolution function, within two months from the request for consultation referred to in paragraph (2), or within one month where the consultation concerns the renewal of a general prior authorisation pursuant to Article 100 of this Decision or a general prior authorisation pursuant to Article 102 of this Decision, communicate to the supervisory function the proposed margin by which, following the action referred to in Article 78 paragraph (2) of this Decision, it considers necessary that the own funds and eligible liabilities of the credit institution must exceed its requirements.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 97 (6) The Central Bank’s supervisory function shall, within three weeks or, where the consultation concerns the renewal of a general prior authorisation pursuant to Article 100 of this Decision or a general prior authorisation pursuant to Article 102 of this Decision, within two weeks, after receiving the communication referred to in paragraph (5) of this Article, submit in writing to the resolution function its written agreement, and in the event that it disagrees or partially disagrees with the resolution function, it shall inform the resolution function within that period, stating its reasons. (7) By way of derogation from paragraph (3) of this Article, where the agreement of the supervisory function of the Central Bank is required in accordance with Article 95 paragraph (1) item 2) of this Decision, the supervisory function of the Central Bank shall provide the resolution function of the Central Bank with a response to the consultation referred to in paragraph (2) of this Article at the same time as the its written agreement referred to in paragraph (6) of this Article. (8) By way of derogation from paragraphs (3) to (7) of this Article, where the maximum time period for processing the application referred to in paragraph (1) is shorter than four months in accordance with Article 102 paragraphs (3) or (4), the periods of time referred to in paragraphs (3), (5) and (6) of this Article shall be agreed between both functions of the Central Bank – the resolution function and supervisory function taking into account the relevant maximum time period. (9) Both functions of the Central Bank – the resolution function and supervisory function shall endeavour to reach the agreement referred to in paragraph (6) of this
Article in order to ensure that the application referred to in paragraph (1) is processed
in any event within the period of time referred to in Article 102 paragraphs (1), (2), (3) or (4) of this Decision. (10) The resolution function of the Central Bank shall communicate to the supervisory function the decision taken on the authorisation without undue delay. (11) The resolution authority shall also inform the supervisory function in case of withdrawal of the general prior authorisation where a credit institution breaches any of the criteria provided for the purposes of that authorisation. Temporary waiver from deduction from own funds and eligible liabilities
Article 104
(1) Where a credit institution holds capital instruments or liabilities that qualify as own funds instruments in a financial sector entity or as eligible liabilities instruments in credit institution and where the Central Bank considers those holdings to be for the purposes of a financial assistance operation designed to reorganise and restore the viability of that entity or that credit institution, the Central Bank may waive on a temporary basis the provisions on deduction from own funds that would otherwise apply to those instruments. (2) A temporary waiver referred to in paragraph (1) of this Article shall be of a duration that does not exceed the timeframe envisaged under the financial assistance operation plan.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 98 (3) The waiver referred to in paragraph (1) of this Article shall not be granted for a period longer than 5 years. (4) The waiver shall apply only in relation to new holdings of own funds instruments in the financial sector entity or eligible liabilities instruments in the credit institution subject to the financial assistance operation. (5) For the purposes of providing a temporary waiver for deduction from own funds and eligible liabilities, the Central Bank may deem the temporary holdings referred to in paragraph (1) of this Article to be held for the purposes of a financial assistance operation designed to reorganise and save a financial sector entity where the operation is carried out under a plan and approved by the Central Bank, and where the plan clearly states phases, timing and objectives and specifies the interaction between the temporary holdings and the financial assistance operation Assessment of compliance with the conditions for own funds instruments and eligible liabilities instruments
Article 105
(1) A credit institution shall have regard to the substantial features of instruments and not only their legal form when assessing compliance with the requirements for own funds and eligible liabilities. (2) The assessment of the substantial features of instruments referred to in paragraph (1) of this Article shall take into account all arrangements related to the instruments, even where those are not explicitly set out in the terms and conditions of the instruments themselves, for the purpose of determining that the combined economic effects of such arrangements are compliant with the objective of the relevant provisions. TITLE II - MINORITY INTEREST AND ADDITIONAL TIER 1 AND TIER 2 INSTRUMENTS ISSUED BY SUBSIDIARY UNDERTAKINGS OF CREDIT INSTITUTION Minority interests that qualify for inclusion in consolidated Common Equity Tier 1 capital
Article 106
(1) Minority interests shall comprise the sum of Common Equity Tier 1 items of a subsidiary undertakings where the following conditions are met:
3) the subsidiary undertaking is one of the following:
a credit institution; an undertaking that is subject to the requirements of the Law and this Decision; or an intermediate financial holding company or intermediate mixed financial holding company that is subject to the requirements of this Decision on a sub-consolidated basis, or an intermediate investment holding company that is on a consolidated basis subject to the requirements of Capital Market

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 99 Authority governing the operations of investment firms and equivalent EU regulations; an investment firm; an intermediate financial holding company in a third country, provided that it is subject to prudential requirements as stringent as those applied to credit institutions of that third country, whereat, in the European Commission assessment, they are equivalent to those of this Decision and the EU regulation;
4) the subsidiary undertaking is included fully in the consolidation pursuant to the
Law;
5) the Common Equity Tier 1 items, referred to in the introductory part of this
paragraph, are owned by persons other than the undertakings included in the consolidation pursuant to the Law. (2) Minority interests that are funded directly or indirectly, through a special purpose entity or otherwise, by the parent undertaking of the credit institution, or its subsidiary undertakings shall not qualify as consolidated Common Equity Tier 1 capital. Qualifying Additional Tier 1, Tier 1, Tier 2 capital and qualifying own funds
Article 107
Qualifying Additional Tier 1, Tier 1, Tier 2 capital and qualifying own funds shall comprise the minority interest, Additional Tier 1 or Tier 2 instruments, as applicable, plus the related share premium accounts, of a subsidiary undertaking where the following conditions are met:

the subsidiary undertaking is:
a credit institution; an undertaking that is subject to the requirements of the Law and this Decision; an intermediate financial holding company or intermediate mixed financial holding company that is subject to the requirements of this Decision on a sub-consolidated basis, or an intermediate investment holding company that is on a consolidated basis subject to the requirements of Capital Market Authority governing the operations of investment firms and equivalent EU regulations; an investment firm; an intermediate financial holding company in a third country, provided that it is subject to prudential requirements as stringent as those applied to credit institutions of that third country, whereat, those prudential requirements are equivalent to those of this Decision and the EU regulation;
the subsidiary undertaking is included fully in the scope of consolidation
pursuant to the Law; and
the Common Equity Tier 1 items, referred to in the introductory part of this
paragraph, are owned by persons other than the undertakings included in the consolidation pursuant to the Law.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 100 Minority interests included in consolidated Common Equity Tier 1 capital
Article 108
(1) A credit institution shall determine the amount of minority interests of a subsidiary undertaking that is included in consolidated Common Equity Tier 1 capital by subtracting from the minority interests of that undertaking the result of multiplying the amount referred to in item 1) of this paragraph by the percentage referred to in item 2) of this paragraph:
3) the Common Equity Tier 1 capital of the subsidiary undertaking minus the lower
of the amounts referred to in indent 1 or 2 of this item:
the amount of Common Equity Tier 1 capital of that subsidiary undertaking required to meet the following:
a) where the subsidiary undertaking is one of those listed in Article 106 paragraph (1) item 1) of this Decision, but not an investment firm or an intermediate investment holding company, the amount of Common Equity Tier 1 capital required to meet the sum of the requirement laid down in Article 134 paragraph (2) of the Law, the specific own funds requirements referred to in Article 279 paragraph (1) item 1) of the Law, the combined buffer requirement defined in Article 166 of the Law, more stringent prudential requirements when identifying increased macroprudential risks and any additional local supervisory regulations in third countries; b) where the subsidiary undertaking is an investment firm or an intermediate investment holding company, the amount of Common Equity Tier 1 capital required to meet the sum of the own funds requirements, additional capital requirements laid down in regulations governing the operations of investment firms, and any local supervisory regulations in third countries that relate to operations of investment firms;

the amount of consolidated Common Equity Tier 1 capital that relates to that
subsidiary undertaking that is required on a consolidated basis to meet the sum of the requirement laid down in Article 134 paragraph (2) of the Law, the specific own funds requirements referred to in Article 279 paragraph (1) item 1) of the Law, the combined buffer requirement defined in Article 166 of the Law, more stringent prudential requirements when identifying increased macroprudential risks and any additional local supervisory regulations in third countries insofar as those requirements are to be met by Common Equity Tier 1 capital;

the minority interests of the subsidiary undertaking expressed as a percentage of
all Common Equity Tier 1 instruments of that undertaking.
(2) By way of derogation from paragraph (1) item 1) of this Article, the Central Bank may allow a credit institution to subtract either of the amounts referred to in item 1) indent 1 or 2 of that paragraph, once the credit institution has demonstrated to the satisfaction of the Central Bank that the additional amount of minority interest is available to absorb losses at consolidated level. (3) The calculation referred to in paragraph (1) of this Article shall be undertaken on a sub-consolidated basis for each subsidiary undertaking referred to in Article 106 paragraph (1) of this Decision.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 101 (4) By way of derogation from paragraph (1) of this Article, a credit institution may choose not to undertake this calculation for a subsidiary undertaking referred to in
Article 106 paragraph (1) of this Article and in that case the minority interest of that
subsidiary undertaking may not be included in consolidated Common Equity Tier 1 capital. (5) Where the Central Bank derogates from the application of prudential requirements on an individual basis, as laid down in Article 309 paragraph (4) of the Law, the minority interest within the subsidiary undertaking to which the waiver is applied shall not be recognised in own funds at the sub-consolidated or at the consolidated level, as applicable. (6) The Central Bank may grant a waiver from the application of this Article to a parent financial holding company where:

its principal activity is to acquire holdings;
it is subject to prudential supervision on a consolidated basis;
it consolidates a subsidiary credit institution in which it has only a minority
holding by virtue of the control relationship;
more than 90% of the consolidated required Common Equity Tier 1 capital of
that holding arises from the subsidiary credit institution referred to in item 3) of this paragraph calculated on a sub-consolidated basis. (7) For the purpose of specifying the sub-consolidation calculation required in accordance with paragraph (3) of this Article, Article 109 paragraphs (3) and (4), and
Article 11 paragraph (3) of this Decision, the qualifying minority interests of a
subsidiary undertaking referred to in Article 106 of this Decision that is itself a parent undertaking of an entity referred to in Article 106 paragraph (1) of this Decision shall be calculated in accordance with paragraphs (8) to (10) of this Article. (8) Where the Central Bank has exercised the discretion that allows parent credit institutions on an individual basis to include subsidiary undertakings in the calculation of their requirements, the calculation to be undertaken in accordance with paragraphs (9) and (10) of this Article shall be made on the basis of the situation of the credit institution as if the discretion had not been exercised. (9) Where the subsidiary undertaking complies with the capital requirements of this Decision on consolidated basis, it shall apply the following:
the Common Equity Tier 1 capital of that subsidiary undertaking on its
consolidated basis referred to in paragraph (1) item 1) of this Article shall include the eligible minority interests that arise from its own subsidiary undertakings calculated in accordance with this Article and the provisions of this Decision;
for the purpose of the sub-consolidation calculation, the amount of Common
Equity Tier 1 capital required according to paragraph (1) item 1) indent 1 of this
Article shall be the amount required to meet the Common Equity Tier 1
requirements of that subsidiary undertaking at its consolidated level calculated in accordance with paragraph (1) item 1) of this Article, and the Central Bank shall determine specific requirements referred to in Article 279 of the Law;
the amount of consolidated Common Equity Tier 1 capital required, according
to paragraph (1) item 1) indent 2 of this Article, shall be the contribution of the

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 102 subsidiary undertaking on the basis of its consolidated situation to the Common Equity Tier 1 own funds requirements of the credit institution for which the eligible minority interests are calculated on a consolidated basis, whereat, for the purpose of calculating the contribution of subsidiary undertaking, all intragroup transactions between undertakings included in the prudential scope of consolidation of the credit institution shall be eliminated. (10) When performing the consolidation referred to in paragraph (9) item 3) of this
Article, the subsidiary undertaking shall not include capital requirements arising from
its subsidiary undertakings which are not included in the prudential scope of consolidation of the credit institution for which the eligible minority interests are calculated. (11) Where the waiver referred to in paragraph (45) of this Article applies to a subsidiary undertaking, any parent undertaking of the subsidiary undertaking benefiting from the waiver may include in its Common Equity Tier 1 capital minority interests arising from subsidiary undertakings of the subsidiary undertaking itself benefiting from the waiver, provided that the calculations referred to in paragraph (1) of this Article have been made for each of those subsidiary undertakings. (12) The amount of Common Equity Tier 1 included in the own funds at the level of the parent undertaking shall not exceed the amount that would be included if no waiver had been granted to the subsidiary undertaking. (13) Where a parent credit institution has an intermediate subsidiary undertaking, which is not referred to in Article 106 paragraph (1) of this Decision and where this intermediate subsidiary undertaking itself has subsidiary undertakings which are referred to in Article 106 paragraph (1) of this Decision, the parent credit institution may include in its Common Equity Tier 1 capital the amount of minority interest arising from those subsidiary undertakings calculated according to paragraph (1) of this Decision. (14) The parent credit institution referred to in paragraph (12) of this Article may not include in its Common Equity Tier 1 capital any minority interests arising from an intermediate subsidiary undertaking which is not referred to in Article 106 paragraph (1) of this Decision. (15) The methodology set out in paragraphs (8) to (10) of this Article shall also apply mutatis mutandis to the calculation of the amount of qualifying Tier 1 instruments under
Article 109 of this Decision and the amount of qualifying own funds under Article 111
of this Decision.
Qualifying Tier 1 instruments included in consolidated Tier 1 capital
Article 109
(1) A credit institution shall determine the amount of qualifying Tier 1 capital of a subsidiary undertaking that is included in consolidated own funds by subtracting from the qualifying Tier 1 capital of that undertaking the result of multiplying the amount referred to in item 1) by the percentage referred to in item 2) of this paragraph:

the Tier 1 capital of the subsidiary undertaking minus the lower of the following:

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 103

the amount of Tier 1 capital of the subsidiary undertaking that meets the
following:
a) where a subsidiary undertakings is one of the undertakings referred to in Article 106 paragraph (1) item 1) of this Decision, but not an investment firm or an intermediary investment company, the amount of Tier 1 capital required to meet the sum of the requirement laid down in
Article 134 paragraph (2) of the Law, the specific own funds
requirements referred to in Article 279 paragraph (1) item 1) of the Law, the combined buffer requirement defined in Article 166 of the Law, more stringent prudential requirements when identifying increased macroprudential risks and any additional local supervisory regulations in third countries; b) where a subsidiary undertaking is an investment firm or an intermediate investment holding company, the amount of Tier 1 capital required to meet the own funds requirements, additional capital requirements laid down in regulations governing the operations of investment firms, and any local supervisory regulations in third countries that relate to operations of investment firms;
the amount of consolidated Tier 1 capital that relates to the subsidiary
undertaking that is required on a consolidated basis to meet the sum of the requirement laid down in Article 134 paragraph (2) of the Law, the specific own funds requirements referred to in Article 279 paragraph (1) item 1) of the Law, the combined buffer requirement defined in Article 166 of the Law, more stringent prudential requirements when identifying increased macroprudential risks and any additional local supervisory regulations in third countries insofar as those requirements are to be met by Tier 1 capital;

the qualifying Tier 1 capital of the subsidiary undertaking expressed as a
percentage of all Common Equity Tier 1 items and Additional Tier 1 items of that undertaking. (2) By way of derogation from paragraph (1) item 1) of this Article, the Central Bank may allow a credit institution to subtract either of the amounts referred to in item 1) indent 1 or 2 of that paragraph, once the credit institution has demonstrated to the satisfaction of the Central Bank that the additional amount of Tier 1 capital is available to absorb losses at consolidated level. (3) The calculation referred to in paragraph (1) of this Article shall be undertaken on a sub-consolidated basis for each subsidiary undertaking referred to in Article 106 paragraph (1) of this Decision. (4) By way of derogation from paragraph (1) of this Decision, a credit institution may choose not to undertake this calculation for a subsidiary undertaking referred to in
Article 106 paragraph (1) of this Decision and in that case, the qualifying Tier 1 capital
of that subsidiary undertaking may not be included in consolidated Tier 1 capital. (5) Where the Central Bank derogates from the application of prudential requirements on an individual basis, as laid down in Article 309 paragraph (4) of the Law, Tier 1 instruments within the subsidiary undertaking to which the waiver is applied shall not be recognised as own funds at the sub-consolidated or at the consolidated level, as applicable.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 104 Qualifying Tier 1 capital included in consolidated Additional Tier 1 capital
Article 110
Without prejudice to Article 108 paragraph (6) of this Decision, a credit institution shall determine the amount of qualifying Tier 1 capital of a subsidiary undertaking that is included in consolidated Additional Tier 1 capital by subtracting from the qualifying Tier 1 capital of that undertaking included in consolidated Tier 1 capital the minority interests of that undertaking that are included in consolidated Common Equity Tier 1 capital. Qualifying own funds included in consolidated own funds
Article 111
(1) A credit institution shall determine the amount of qualifying own funds of a subsidiary undertaking that is included in consolidated own funds by subtracting from the qualifying own funds of that undertaking the result of multiplying the amount referred to in item 1) by the percentage referred to in item 2) of this paragraph:

the own funds of the subsidiary undertaking minus the lower of the following:

the amount of own funds of the subsidiary undertaking required to meet the
following:
a) where the subsidiary undertaking is one of the undertakings referred to in
Article 106 paragraph (1) item 1) of this Decision, but not an investment
firm or an intermediary investment holding company, the amount of own funds reguired to meet the sum of the requirement laid down in Article 134 paragraph (2) of the Law, the specific own funds requirements referred to in Article 279 paragraph (1) item 1) of the Law, the combined buffer requirement defined in Article 166 of the Law, more stringent prudential requirements when identifying increased macroprudential risks and any additional local supervisory regulations in third countries; b) where a subsidiary undertaking is an investment firm or an intermediate investment holding company, the amount of own funds required to meet the own funds requirements, additional capital requirements laid down in regulations governing the operations of investment firms, and any local supervisory regulations in third countries that relate to operations of investment firms;
the amount of consolidated own funds that relates to the subsidiary
undertaking that is required on a consolidated basis to meet the sum of the requirement laid down in Article 134 paragraph (2) item 2) of the Law, the specific own funds requirements referred to in Article 279 paragraph (1) item

of the Law, the combined buffer requirement defined in Article 166 of the
Law, more stringent prudential requirements when identifying increased macroprudential risks and any additional local supervisory regulations in third countries insofar as those requirements are to be met by own funds;
the qualifying own funds of the subsidiary undertaking, expressed as a
percentage of the sum of all the Common Equity Tier 1 items, Additional Tier 1 items and Tier 2 items, excluding the amounts referred to in Article 60 paragraph (1) items 3) and 4) of that undertaking.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 105 (2) By way of derogation from paragraph (1) item 1) of this Article, the Central Bank may allow a credit institution to subtract either of the amounts referred to in indent 1 or 2 of that item, once the credit institution has demonstrated to the satisfaction of the Central Bank that the amount of own funds is available to absorb losses at consolidated level. (3) The calculation referred to in paragraph (1) of this Article shall be undertaken on a sub-consolidated basis for each subsidiary undertaking referred to in Article 106 paragraph (1) of this Decision. (4) By way of derogation from paragraph (1) of this Article, a credit institution may choose not to undertake this calculation for a subsidiary undertaking referred to in
Article 106 paragraph (1) of this Decision and in that case, the qualifying own funds of
that subsidiary undertaking may not be included in consolidated own funds. (5) Where the Central Bank derogates from the application of prudential requirements on an individual basis, as laid down in Article 309 paragraph (4) of the Law, own funds instruments within the subsidiary undertakings to which the waiver is applied shall not be recognised as own funds at the sub-consolidated or at the consolidated level, as applicable. Qualifying own funds instruments included in consolidated Tier 2 capital
Article 112
Without prejudice to the provision of Article 108 paragraph (6) of this Decision, a credit institution shall determine the amount of qualifying own funds of a subsidiary undertaking that is included in consolidated Tier 2 capital by subtracting from the qualifying own funds of that undertaking that are included in consolidated own funds the qualifying Tier 1 capital of that undertaking that is included in consolidated Tier 1 capital. Qualifying eligible liabilities instruments
Article 113
Liabilities issued by a subsidiary undertaking established in Montenegro that belongs to the same resolution group as the resolution entity shall qualify for inclusion in the consolidated eligible liabilities instruments of a credit institution subject to Article 117 of this Decision, where the following conditions are met:

they are issued in accordance with Article 7 of the Decision on more detailed
method for determining minimum requirements for own funds and eligible liabilities of credit institutions and the reporting method;
they are bought by an existing shareholder that is not part of the same
resolution group as long as the exercise of the write-down or conversion powers in accordance with the law governing the resolution of credit institutions does not affect the control of the subsidiary undertaking by the resolution entity;
they do not exceed the amount determined by subtracting the amount referred
to in indent 1 from the amount referred to in indent 2 of this item:

the sum of the liabilities issued to and bought by the resolution entity either
directly or indirectly through other entities in the same resolution group and the amount of own funds instruments that are issued in accordance with

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 106
Article 7 paragraph (2) of the Decision on more detailed method for
determining minimum requirements for own funds and eligible liabilities of credit institutions and the reporting method;

the amount determined in accordance with Articles 31 and 32 of the Law on
Resolution of Credit Institutions.
PART THREE - CAPITAL REQUIREMENTS
TITLE I - GENERAL REQUIREMENTS AND VALUATION
SUBTITLE 1 - Required level of own funds
Own funds requirements
Article 114
(1) Own funds requirements of a credit institution shall include the maintenance of the following capital adequacy ratios in accordance with Article 134 and 134a of the Law:

Common Equity Tier 1 capital adequacy ratio;
Tier 1 capital adequacy ratio;
total capital adequacy ratio; and
leverage ratio.
(2) A credit institution shall calculate their capital adequacy ratios referred to in paragraph (1) items 1) to 3) of this Article as follows:
the Common Equity Tier 1 capital adequacy ratio shall be calculated as the ratio
between the Common Equity Tier 1 capital of the credit institution and the total risk exposure amount, expressed as a percentage;
the Tier 1 capital adequacy ratio shall be calculated as the ratio between the
Tier 1 capital and the total risk exposure amount, expressed as a percentage;
the total capital adequacy ratio shall be calculated as the ratio between the own
funds and the total risk exposure amount, expressed as a percentage;
leverage ratio shall be calculated in accordance with Articles 563 to 570 of this
Decision.
(3) The total risk exposure amount (TREA) shall be calculated as follows:
TREA = max {U − TREA; x ∙ S − TREA} where:
TREA = the total risk exposure amount of an entity; U − TREA = the un-floored total risk exposure amount of the entity calculated in accordance with paragraph (4) of this Article; S − TREA = the standardised total risk exposure amount of the entity calculated in accordance with paragraph (5) of this Article; X = 72,5%.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 107 (4) The un-floored total risk exposure amount shall be calculated as the sum of the amounts referred to in items 1) to 7) of this paragraph after having taken into account provisions of paragraph (6) of this Article:

the risk-weighted exposure amounts for credit risk, including counterparty credit
risk, and dilution risk, calculated in accordance with Title II of this Part of the Decision and Article 527 of this Decision, in respect of all business activities of a credit institution, excluding risk-weighted exposure amounts from the tradingbook business of the credit institution;
the own funds requirements for the trading-book business of a credit institution
for the following:
market risk, calculated in accordance with Title IV of this Part of the Decision; large exposures exceeding the limits specified in Article 172 of the Law, to the extent that a credit institution is permitted to exceed those limits, as determined in accordance with the provisions of Article 561 of this Decision;
the own funds requirements for market risk, calculated in accordance with Title
IV of this Part of the Decision for all non-trading book business activities that are subject to foreign exchange risk or commodity risk;
the own funds requirements for settlement risk, calculated in accordance with
Articles 526 and 528 of this Decision;
the own funds requirements for credit valuation adjustment risk (CVA risk),
calculated in accordance with Title VI of this Part of the Decision;
the own funds requirements for operational risk, calculated in accordance with
Title III of this Part of the Decision;
the risk-weighted exposure amounts for counterparty credit risk arising from the
trading book business of the credit institution for the following types of transactions and agreements, calculated in accordance with Title II of this Part of the Decision:

contracts listed in Article 148 paragraph (8) of this Decision and credit
derivatives;
repurchase transactions, securities or commodities lending or borrowing
transactions based on securities or commodities;
margin lending transactions;
long settlement transactions.
(5) The standardised total risk exposure amount shall be calculated as the sum of paragraph (4) items 1) to 7) of this Article, after having taken into account paragraph (6) of this Article and the following requirements:

the risk-weighted exposure amounts for credit risk, including counterparty credit
risk, and dilution risk, referred to in paragraph (4) item 1) of this Article, and for counterparty credit risk arising from the trading book business of the credit institution as referred to in item 7) of that paragraph shall be calculated without using any of the following approaches:

the internal model approach for master netting agreements set out in Article
258 of this Decision;
the IRB Approach set out in Title II, Chapter 3 of this Decision;
the Securitisation IRB Approach set out in Articles 302, 303 and 304 and
the Internal Assessment Approach set out in Article 309 of this Decision;
the Internal Model Method set out in Title II, Chapter 6, Section 6 of this
Decision;

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_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 108
2) the own funds requirements for market risk for the trading book business
referred to in paragraph (4) item 2) indent 1 of this Article shall be calculated without using:

the alternative internal model approach set out in Title IV, Chapter 3 of this
Decision; or
any approach listed under item 1) of this paragraph, where applicable;

the own funds requirements for all non-trading book business activities of a
credit institution that are subject to foreign exchange risk or commodity risk referred to in paragraph (4) item 3) of this Article shall be calculated without using the alternative internal model approach set out in Title IV, Chapter 3 of this Decision. (6) The following provisions shall apply to the calculations of the un-floored total risk exposure amount referred to in paragraph (4) of this Article and of the standardised total risk exposure amount referred to in paragraph (5) of this Article:
the own funds requirements referred to in paragraph (4) items 4), 5) and 6) of
this Article, shall include those arising from all business activities of a credit institution;
the own funds requirements set out in paragraph (4) items 2) to 6) of this Article
shall be multiplied by 12.5.
Adjustment of risk-weighted exposures to non-defaulted SMEs
Article 115
(1) A credit institution shall, for the purpose of calculating risk-weighted exposure amounts for credit risk referred to in Article 114 paragraph (4) item 1) and paragraph (5) item 1) of this Decision, adjust the risk-weighted exposure amounts to small and medium-sized enterprises – (hereinafter: the exposure to SME) that are not in default, calculated by applying Standardised Approach or IRB Approach, applying on the previously obtained amount the following factors:
a risk-weight of 0,7619 to exposures or a part of the exposure to SME in total
amount of EUR 1 million;
a risk-weight of 0,85 to a part of the exposure exceeding EUR 1 million;
(2) The calculation referred to in paragraph (1) of this Article shall be made by applying the following formula:
𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅∗ = 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 ∙
𝑚𝑚 𝑚𝑚{ ∗; 1.000.000 𝐸𝐸 } ∙ 0,7619 + 𝑚𝑚𝑚𝑚𝑚𝑚{ ∗ − 1.000.000 𝐸𝐸 } ∙ 0,85 ∗ where:
𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅∗ = 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 adjusted by an SME supporting factor; ∗ = the total amount owed to the credit institution, its subsidiary undertakings, its parent undertakings and other subsidiary undertakings of those parent undertakings, including any exposure in default, but excluding claims or contingent claims secured on residential property collateral, by the SME or the group of connected clients of the SME.

an exposure to an SME shall have the meaning laid down in Article 4 paragraph
(2) item 9) of this Decision;
the exposure to an SME shall be included in one of the following exposure
classes:

retail exposures,
corporate exposures, or
exposures secured by mortgages on immovable property excluding ADC
exposures;

a credit institution shall take reasonable steps to correctly determine E*.
Adjustment of risk-weighted exposures to entities funding infrastructure projects of public interest
Article 116
(1) Risk-weighted exposures for credit risk calculated in accordance with Title II of this
Part of the Decision shall be multiplied by a factor of 0,75, provided that the exposure
complies with all the following criteria:
the exposure is included in the corporate exposure class referred to in Article
114 item 7) of this Decision or Article 189 paragraph (2) item 4) of this Decision, with the exclusion of exposures in default;
the exposure is to an entity which was created specifically to finance or operate
physical structures or facilities, systems and networks that provide or support essential public services;
the source of repayment of the obligation of a debtor is represented for not less
than two thirds of its amount by the income generated by the assets being financed, rather than the following:

independent capacity of a broader commercial enterprise;
subsidies;
grants; or
funding provided by one or more of the entities listed in paragraph (2) item

indents 1 and 2 of this Article;
the debtor can meet its financial obligations even under severely stressed
conditions that are relevant for the risk of the project;
the cash flows that the debtor generates are predictable and cover all future
loan repayments during the duration of the loan;
the re-financing risk of the exposure is low or adequately mitigated, taking into
account any:

subsidies;
grants; or
funding provided by one or more of the entities listed in paragraph (2) item

indents 1 or 2 of this Article;
the contractual arrangements provide lenders with a high degree of protection
including the following:

where the revenues of the debtor are not funded by payments from a large
number of users, the contractual arrangements shall include provisions that effectively protect lenders against losses resulting from the termination of the project by the party which agrees to purchase the goods or services provided by the debtor;

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_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 110

the debtor has sufficient reserve funds fully funded in cash or other financial
arrangements with highly rated guarantors to cover the contingency funding and working capital requirements over the lifetime of the assets referred to in item 2) of this paragraph;
the lenders have a substantial degree of control over the assets and the
income generated by the debtor;
the lenders have the benefit of security to the extent permitted by applicable
law in assets and contracts critical to the infrastructure business or have alternative mechanisms in place to secure their position;
equity instruments are pledged to lenders such that they are able to take
control of the entity upon default;
the use of net operating cash flows after mandatory payments from the
project for purposes other than servicing debt obligations is restricted;
there are contractual restrictions on the ability of the debtor to perform
activities that may be detrimental to lenders, including the restriction that new debt cannot be issued without the consent of existing creditors or investors;

the obligation is senior to all other claims other than statutory claims and claims
from derivatives counterparties;
where the debtor is in the construction phase, the following criteria shall be
fulfilled by the equity investor, or where there is more than one equity investor, the following criteria shall be fulfilled by a group of equity investors as a whole:

the equity investors have a history of successfully overseeing infrastructure
projects, the financial strength and the relevant expertise;
the equity investors have a low risk of default, or there is a low risk of
material losses for the debtor as a result of their default;
there are adequate mechanisms in place to align the interest of the equity
investors with the interests of lenders;
10)the debtor has adequate safeguards to ensure completion of the project according to the agreed specification, budget or completion date; including strong completion guarantees or the involvement of an experienced constructor and adequate contract provisions for liquidated damages; 11)where operating risks are material, they are properly managed; 12)the debtor uses tested technology and design; 13)all necessary permits and authorisations have been obtained; 14)the debtor uses derivatives only for risk-mitigation purposes; and 15)the debtor has carried out an assessment whether the assets being financed contribute to the following environmental objectives:
climate change mitigation;
climate change adaptation;
sustainable use and protection of water and marine resources;
transition to a circular economy, waste prevention and recycling;
pollution prevention and control;
protection of healthy ecosystems.
(2) For the purposes of paragraph (1) item 5) of this Article, the cash flows generated shall not be considered predictable unless a substantial part of the revenues satisfies the following conditions:

one of the following criteria is met:

the revenues are availability-based;

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_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 111

the revenues are subject to a rate-of-return regulation;
the revenues are subject to a take-or-pay contract;
the level of output or the usage and the price shall independently meet one
of the following criteria:
a) it is regulated, b) it is contractually fixed, c) it is sufficiently predictable as a result of low demand risk;

where the revenues of the debtor are not funded by payments from a large
number of users, the party which agrees to purchase the goods or services provided by the debtor shall be one of the following:

a central bank, a central government, a regional government or a local selfgovernment, provided that they are assigned a risk weight of 0% in accordance
with Articles 151 and 152 of this Decision or are assigned an ECAI rating with a credit quality step of at least 3;
a public sector entity, provided that it is assigned a risk weight of 20% or below
in accordance with Article 153 of this Decision or is assigned an ECAI rating with a credit quality step of at least 3;
a multilateral development bank referred to in Article 154 paragraph (4) of this
Decision;
an international organisation referred to in Article 155 of this Decision;
a corporate entity which has been assigned an ECAI rating with a credit quality
step of at least 3; or
an entity that is replaceable without a significant change in the level and timing
of revenues.
(3) A credit institution shall notify the Central Bank of exposures to infrastructure projects calculated in accordance with paragraph (1) of this Article. Requirements for own funds and eligible liabilities for G-SICIs
Article 117
(1) A credit institution identified as resolution entity and that is a G-SICI or part of a GSICI shall, in accordance with Article 119 of this Decision and exceptions set out in paragraph (2) of this Article, meet the following requirements for own funds and eligible liabilities:

a risk-based ratio of 18%, representing the own funds and eligible liabilities of
the credit institution expressed as a percentage of the total risk exposure amount calculated in accordance with Article 114 paragraph (3) of this Decision;
a non-risk-based ratio of 6,75%, representing the own funds and eligible
liabilities of the credit institution expressed as a percentage of the total exposure measure referred to in Article 563 paragraphs (4) to (7) of this Decision. (2) The requirements laid down in paragraph (1) of this Article shall not apply in the following cases:
within the three years following the date on which the credit institution or the
group of which the credit institution is part has been identified as a G-SICI;
within the two years following the date on which the Central Bank, in pursuing
its mandate as the resolution authority, has applied the bail-in tool in accordance with the law governing the resolution of credit institutions;

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_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 112
3) within the two years following the date on which the resolution entity has put in
place an alternative private sector measure referred to in Article 35 paragraph (1) item 2) the Law on Resolution of Credit Institutions by which capital instruments and other liabilities have been written down or converted into Common Equity Tier 1 items in order to recapitalise the resolution entity without the application of resolution tools. Requirement for own funds and eligible liabilities for non-EU G-SICI
Article 118
(1) Where a credit institution is a material subsidiary undertaking of non-EU G-SICI and which is not a resolution entity, it shall at all times meet the requirements for own funds and eligible liabilities equal to 90% of the requirements for own funds and eligible liabilities laid down in Article 117 of this Decision. (2) A credit institution shall, for the purpose of complying with paragraph (1) of this
Article, take into account Additional Tier 1, Tier 2 and eligible liabilities instruments
only where those instruments are owned by the ultimate parent undertaking of the non-EU G-SICI and have been issued directly or indirectly through other entities within the same group, provided that all such entities are established in the same third country as that ultimate parent undertaking or in Montenegro or in the EU. (3) A credit institution may, for the purpose of complying with paragraph (1) of this
Article, take into amount eligible liabilities instrument only where it fulfils the following
additional conditions:

in the event of normal bankruptcy proceedings, the claim resulting from the liability
ranks below claims resulting from liabilities that do not fulfil the conditions set out in paragraph (2) of this Article and that do not qualify as own funds;
it is subject to the write-down or conversion powers in accordance with Articles
48, 49 and 52 of the Law on Resolution of Credit Institutions.
Derogation for small trading book business
Article 119
(1) By way of derogation from Article 114 paragraph (4) item 2) and paragraph (5) item
of this Decision, a credit institution may calculate the own funds requirement for
their trading-book business in accordance with paragraph (2) of this Article, provided that the size of the credit institution's on- and off-balance-sheet trading-book business is equal to or less than both of the following thresholds on the basis of an assessment carried out on a monthly basis using the data as of the last day of the month:
5% of the credit institution's total assets;
EUR 50 million.
(2) Where both conditions set out in paragraph (1) of this Article are met, the credit institution may calculate the own funds requirement for their trading-book business as follows:
for the contracts listed in Article 148 paragraph (8) item 1) of this Decision,
contracts relating to equities which are referred to in Article 148 paragraph (8) item 3) of this Decision and credit derivatives, credit institution may exempt

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 113 those positions from the own funds requirement referred to in Article 114 paragraph (4) item 2) and paragraph (5) item 2) of this Decision;
2) for trading book positions other than those referred to in item 1) of this
paragraph, credit institution may replace the own funds requirement referred to in Article 114 paragraph (4) item 2) and paragraph (5) item 2) of this Decision with the requirement calculated in accordance with Article 114 paragraph (4) item 1) and paragraph (5) item 1) of this Decision. (3) A credit institution shall calculate, for the purposes of paragraph (1) of this Article, the size of their on- and off-balance-sheet trading book business on the basis of data as of the last day of each month in accordance with the following requirements:

all the positions assigned to the trading book in accordance with Article 122 of
this Decision shall be included in the calculation except for the following:

positions concerning foreign exchange and commodities;
positions in credit derivatives that are recognised as internal hedges
against non-trading book credit risk exposures or counterparty risk exposures and the credit derivate transactions that perfectly offset the market risk of those internal hedges as referred to in Article 140 paragraphs (3) and (5) of this Decision;

all positions included in the calculation in accordance with item1) of this
paragraph shall be valued at their market value on that given date, whereby where the market value of a position is not available on a given date, credit institution shall take a fair value for the position on that date; where the market value and fair value of a position are not available on a given date, credit institution shall take the most recent of the market value or fair value for that position;
the absolute value of total long positions shall be summed with the absolute
value of short positions.
(4) For the purposes of paragraph (3) of this Article, a long position shall be the one where the market value of the position increases when the value of its main risk driver increases, and a short position shall be the one where the market value of the position decreases when the value of its main risk driver increases. (5) For the purposes of paragraph (3) of this Article, the value of the aggregated long (short) position shall be equal to the sum of the values of the individual long (short) positions included in the calculation in accordance with item 1) of that paragraph. (6) Where both conditions set out in paragraph (1) of this Article are met, irrespective of the obligations set out in Article 104 paragraph (1) and Article 111 paragraphs (5) to (8) of the Law, the credit institution shall not apply Articles 112 paragraphs (3) and (4), Article 121 and Article 124 of this Decision. (7) A credit institution shall notify the Central Bank when it calculates, or ceases to calculate, the own funds requirements of their trading-book business in accordance with paragraph (2) of this Article. (8) A credit institution that no longer meets one or more of the conditions set out in paragraph (1) of this Article shall immediately notify the Central Bank thereof.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 114 (9) A credit institution shall cease to calculate the own funds requirements of its trading-book business in accordance with paragraph (2) of this Article within three months of one of the following occurring:

the credit institution does not meet the conditions set out in paragraph (1) items

or 2) of this Article for three consecutive months;

the credit institution does not meet the conditions set out in paragraph (1) items

or 2) of this Article during more than 6 out of the last 12 months.
(10) Where a credit institution has ceased to calculate the own funds requirements of its trading-book business in accordance with this Article, Central Bank shall only permit the credit institution to calculate the own funds requirements of its trading- book business in accordance with this Article where it demonstrates to the Central Bank that all the conditions set out in paragraph (1) of this Article have been met for an uninterrupted full-year period. (11) A credit institution shall not enter into, buy or sell a trading-book position for the sole purpose of complying with any of the conditions set out in paragraph (1) of this
Article during the monthly assessment.
SUBTITLE 2 - Trading book
Requirements for the trading book
Article 120
(1) Positions in the trading book shall be either free of restrictions on their tradability or able to be hedged. (2) Trading intent shall be evidenced on the basis of the strategies, policies and procedures set up by the credit institution to manage the position or portfolio in accordance with Articles 121, 122 and 123 of this Decision. (3) A credit institution shall establish and maintain systems and controls to manage their trading book in accordance with Articles 121 of this Decision. (4) For the purpose of calculating the own funds requirements for market risk in accordance with the approach referred to in Article 413 paragraph (1) item 2) of this Decision, trading book positions shall be assigned to trading desks. (5) Positions in the trading book shall be subject to the requirements for prudent valuation specified in Article 126 of this Decision. (6) A credit institution may shall treat internal hedges in accordance with Article 140 of this Decision. Management of the trading book
Article 121
(1) A credit institution shall have in place clearly defined policies and procedures for the overall management of the trading book, which address in particular the following:

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_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 115

the activities which the credit institution considers to be trading business and
as constituting part of the trading book for own funds requirement purposes;
the extent to which a position can be marked-to-market daily by reference to an
active, liquid two-way market;
for positions that are marked-to-model, the extent to which the credit institution
can:

identify all material risks of the position;
hedge all material risks of the position with instruments for which an active,
liquid two-way market exists;
derive reliable estimates for the key assumptions and parameters used in
the model;

the extent to which the credit institution can, and is required to, generate
valuations for the position that can be validated externally in a consistent manner;
the extent to which legal restrictions or other operational requirements would
impede the credit institution's ability to effect a liquidation or hedge of the position in the short term;
the extent to which the credit institution can, and is required to, actively manage
the risks of positions within its trading operation;
the extent to which the credit institution may reclassify risk or positions between
the non-trading and trading books and the requirements for such reclassifications as referred to in Article 123 of this Decision. (2) In managing its positions or portfolios of positions in the trading book, the credit institution shall have in place the following:
a clearly documented trading strategy for the position or portfolios in the trading
book, which shall be approved by senior management and include the expected holding period;
clearly defined policies and procedures for the active management of positions
or portfolios in the trading book, which include the following:

which positions or portfolios of positions may be entered into by each
trading desk or, as the case may be, by designated dealers;
the setting of position limits and monitoring them for appropriateness;
ensuring that dealers have the autonomy to enter into and manage the
position within agreed limits and according to the approved strategy;
ensuring that positions are reported to senior management as an integral
part of the credit institution's risk management process; and
ensuring that positions are actively monitored with reference to market
information sources and an assessment is made of the marketability or hedgeability of the position or its component risks, including the assessment, the quality and availability of market inputs to the valuation process, level of market turnover, sizes of positions traded in the market;
active anti-fraud procedures and controls; and

clearly defined policies and procedures to monitor the positions against the
credit institution's trading strategy, including the monitoring of turnover and positions for which the originally intended holding period has been exceeded.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 116 Inclusion in the trading book
Article 122
(1) A credit institution shall have in place clearly defined policies and procedures for determining which position to include in the trading book for the purposes of calculating their capital requirements, in accordance with Article 112 and this Article taking into account the credit institution's risk management capabilities and practices. (2) A credit institution shall fully document its compliance with those policies and procedures referred to in paragraph (1) of this Article, and shall subject them to an internal audit on at least a yearly basis and shall make the results of that audit available to the Central Bank. (3) A credit institution shall have in place an independent risk control function which shall evaluate, on an ongoing basis, whether its instruments are being properly assigned to the trading book or the non-trading book. (4) A credit institution shall assign positions in the following instruments to the trading book:

instruments that meet the criteria set out in Article 413 paragraphs (10) to (13)
of this Decision, for the inclusion in the alternative correlation trading portfolio (ACTP);
instruments that would give rise to a net short credit or net short equity position
in the non-trading book, with the exception of the own liabilities of the institution, unless such positions meet the criteria referred to in item 5) of this paragraph
instruments resulting from securities underwriting commitments, where those
underwriting commitments relate only to securities that are expected to be purchased by the credit institution on the settlement date;
instruments classified unambiguously as having a trading purpose under the
accounting framework applicable to the credit institution;
instruments resulting from market-making activities;
positions held with trading intent in CIUs, provided that those CIUs meet at least
one of the conditions set out in paragraph (15) of this Article;
listed equity instruments;
trading-related securities financing transactions;
options, or other derivatives, embedded in the own liabilities of the credit
institution in the non-trading book that relate to credit risk or equity risk. (5) For the purposes of paragraph (4) of this Acrticle, a credit institution shall have a net short equity position where a decrease in the equity’s price results in a profit for the credit institution or it shall have a net short credit position where the credit spread increase, or the deterioration in the creditworthiness of the issuer or group of issuers, results in a profit for the credit institution. (6) A credit institution shall continuously monitor whether instruments give rise to a net short credit or net short equity position in the non-trading book. (7) For the purposes of paragraph (4) item 9) of this Article, a credit institution shall split the embedded option, or other derivative, from its own liability in the non-trading book that relates to credit risk or equity risk. It shall assign the embedded option, or

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 117 other derivative, to the trading book and shall leave the own liability in the non-trading book, whereat, due to its nature, it is not possible to split the instrument, a credit institution shall assign the whole instrument to the trading book and shall duly document the reason for applying that treatment. (8) A credit institution shall not assign positions in the following instruments to the trading book:

instruments designated for securitisation warehousing;
real estate holdings-related instruments;
unlisted equities;
instruments related to retail and SME credit;
positions in other CIUs than those referred to in paragraph (4) item 6) of this
Article;
derivative contracts and CIUs with one or more of the underlying instruments
referred to in items 1) to 4) of this paragraph;
instruments held for hedging a particular risk of one or more positions in an
instrument referred to in items 1) to 6) and items 8) and 9) of this paragraph;
own liabilities of the credit institution, unless such instruments meet the criteria
referred to in paragraph (4) item 5), or the criteria referred to in paragraph (7) of this Article;
instruments in hedge funds.
(9) By way of derogation from paragraph (4) of this Article, a credit institution may assign to the non-trading book a position in an instrument referred to in items 4) to 9) of that paragraph, subject to the authorisation of the Central Bank. (10) The Central Bank shall give authorisation referred to in paragraph (9) of this Article to a credit institution where it has demonstrated to the satisfaction of the Central Bank that the position is not held with trading intent or does not hedge positions held with trading intent. (11) By way of derogation from paragraph (8) of this Article, a credit institution may assign to the trading book a position in an instrument referred to in item 9) of that paragraph, subject to the authorisation of the Central Bank. (12) The Central Bank shall give authorisation referred to in paragraph (11) of this
Article to a credit institution where it has demonstrated to the satisfaction of the Central
Bank that the position is held with trading intent, or hedges positions held with trading intent, and that the credit institution meets at least one of the conditions set out in paragraph (8) of this Article for that position. (13) Where a credit institution has assigned to the trading book a position in an instrument other than the instruments referred to in paragraph (4) items 1), 2) or 3) of this Article, the Central Bank may ask the credit institution to provide evidence to justify such assignment, and where the credit institution fails to provide suitable evidence, the Central Bank may require the credit institution to reassign that position to the nontrading book. (14) Where a credit institution has assigned to the non-trading book a position in an instrument other than the instruments referred to in paragraph (8) of this Article, the Central Bank may ask the credit institution to provide evidence to justify such

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 118 assignment and where the credit institution fails to provide suitable evidence, the Central Bank may require the credit institution to reassign that position to the trading book. (15) A credit institution shall assign to the trading book a position in a CIU, other than the positions referred to in paragraph (8) item 6) of this Article that is held with trading intent, where the credit institution meets any of the following conditions:

the credit institution is able to obtain sufficient information about the individual
underlying exposures of the CIU;
the credit institution is not able to obtain sufficient information about the
individual underlying exposures of the CIU, but the credit institution has knowledge of the content of the mandate of the CIU and is able to obtain daily price quotes for the CIU. Reclassification of a position
Article 123
(1) A credit institution shall have in place clearly defined policies for identifying the exceptional circumstances which justify the reclassification of a trading book position as a non-trading book position or, conversely, the reclassification of a non-trading book position as a trading book position, for the purpose of determining their own funds requirements to the satisfaction of the Central Bank. (2) The credit institution shall review those policies referred to in paragraph (1) of this
Article at least once a year.
(3) The Central Bank shall grant authorisation to a credit institution to reclassify a trading book position as a non-trading book position or conversely a non-trading book position as a trading book position for the purpose of determining their own funds requirements only where the credit institution has provided the written evidence that its decision to reclassify that position is the result of an exceptional circumstance that is consistent with the policies the credit institution has in place in accordance with paragraph (1) of this Article. (4) For the purposes of paragraph (3) of this Article, the credit institution shall provide sufficient evidence to the Central Bank that the position no longer meets the condition to be classified as a trading book or non-trading book position pursuant to Article 122 of this Decision. (5) The management board of a credit institution shall approve the decision on reclassification referred to in paragraph (3) of this Article. (6) Where the Central Bank has granted authorisation for the reclassification referred to in paragraph (3) of this Article, the credit institution which received that authorisation shall:
disclose, without delay,
information that its position has been reclassified, and where the effect of that reclassification is a reduction in the credit institution's own funds requirements, the size of that reduction; and

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_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 119
2) where the effect of that reclassification is a reduction in the credit institution's
own funds requirements, not recognise that effect until the position matures, unless the Central Bank authorises it to recognise that effect at an earlier date. (7) The credit institution shall calculate the net change in the amount of its own funds requirements arising from the reclassification of the position as the difference between the own funds requirements immediately after the reclassification and the own funds requirements immediately before the reclassification, each calculated in accordance with Article 114 of this Decision. (8) The calculation referred to in paragraph (7) of this Article shall not take into account the effects of any factors other than the reclassification. (9) The reclassification of a position in accordance with this Article shall be irrevocable, except in the exceptional circumstances referred to in paragraph (1) of this Article. (10) By way of derogation from paragraph (1) of this Article, a credit institution may reclassify a non-trading book position as a trading book position pursuant to Article 122 paragraph (4) item 4) of this Decision without seeking authorisation from the Central Bank, and the requirements laid down in paragraphs (6) to (8) of this Article shall continue to apply to the credit institution. (11) The credit institution shall immediately notify the Central Bank where the reclassification referred to in paragraph (10) of this Article has occurred. Requirements for trading desk
Article 124
(1) For the purpose of calculating the own funds requirements for market risk in accordance with the approach referred to in Article 413 paragraph (1) item 2) of this Decision, a credit institution shall establish trading desks and shall assign each of their trading book positions and their non-trading book positions referred to in paragraphs (7), (8) and (9) of this Article to one of those trading desks. (2) Trading book positions shall be attributed to the same trading desk only where those positions are in compliance with the agreed business strategy for that trading desk and are consistently managed and monitored in accordance with paragraph (3) of this Article. (3) A credit institution's trading desks shall at all times meet the following requirements:

each trading desk shall have a clear and distinctive business strategy and a risk
management structure that is adequate for its business strategy;
each trading desk shall have a clear organisational structure; positions in a
given trading desk shall be managed by dealers that the credit institution has assigned to one trading desk only, where at each dealer shall have dedicated functions in the trading desk;
position limits shall be set within each trading desk according to the business
strategy of that trading desk;

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_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 120
4) reports on the activities, profitability, risk management and regulatory
requirements at the trading desk level shall be produced at least on a weekly basis and communicated to the management board on a regular basis;
5) each trading desk shall have a clear annual business plan including a welldefined remuneration policy on the basis of sound criteria used for performance
measurement; and
6) reports on maturing positions, intra-day trading limit breaches, daily trading limit
breaches and actions taken by the credit institution to address those breaches, as well as assessments of market liquidity, shall be prepared for each trading desk on a monthly basis and made available to the Central Bank. (4) By way of derogation from paragraph (3) item 2) of this Article, a credit institution may assign a dealer to more than one trading desk, provided that the credit institution demonstrates to the satisfaction of the Central Bank that the assignment has been made due to business or resource considerations and the assignment preserves the other qualitative requirements set out in this Article applicable to dealers and trading desks. (5) A credit institution shall notify the Central Bank of the manner in which it complies with paragraph (3) of this Article. (6) The Central Bank may require a credit institution to change the structure or organisation of its trading desks to comply with this Article. (7) A credit institution shall, for the purpose of calculating their own funds requirements for market risk, assign each of their non-trading book positions that are subject to foreign exchange risk or commodity risk to trading desks established in accordance with paragraph (1) of this Article that manage risks that are similar to the risks of those positions. (8) By way of derogation from paragraph (7) of this Article, a credit institution may, when calculating their own funds requirements for market risk, establish one or more trading desks to which they assign exclusively non-trading book positions that are subject to foreign exchange risk or commodity risk. (9) The trading desks referred to in paragraph (8) of this Article shall not be subject to the requirements set out in paragraphs (1) to (4) of this Article. Treatment of foreign exchange risk hedges of capital ratios
Article 125
(1) A credit institution which has deliberately taken a risk position in order to hedge, at least partially, against adverse movements in foreign exchange rates on any of its capital ratios as referred to in Article 134 paragraph (2) items 1), 2) and 3) of the Law, may, subject to the authorisation of the Central Bank, exclude that risk position from the own funds requirements for foreign exchange risk referred to in Article 413 paragraph (1) of this Decision, provided that the following conditions are met:

the maximum amount of the risk position that is excluded from the own funds
requirements for market risk is limited to the amount of the risk position that

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 121 neutralises the sensitivity of any of the capital ratios to the adverse movements in foreign exchange rates;
2) the risk position is excluded from the own funds requirements for market risk
for at least six months;
3) the credit institution has established an appropriate risk management
framework for hedging the adverse movements in foreign exchange rates on any of its capital ratios, including a clear hedging strategy and governance structure;
4) the credit institution has provided to the Central Bank a justification for
excluding a risk position from the own funds requirements for market risk, the details of that risk position and the amount to be excluded. (2) Any exclusion of risk positions from the own funds requirements for market risk in accordance with paragraph (1) of this Article shall be applied consistently. (3) The Central Bank shall approve any changes by the credit institution to the risk management framework referred to in paragraph (1) item 3) of this Article and to the details of the risk positions referred to in paragraph (1) item 4) of this Article. Requirements for prudent valuation
Article 126
(1) All trading book positions and non-trading book positions measured at fair value shall be subject to the standards for prudent valuation specified in this Article. (2) A credit institution shall in particular ensure that the prudent valuation of their trading book positions achieves an appropriate degree of certainty having regard to the dynamic nature of trading book positions and non-trading book positions measured at fair value, the demands of prudential soundness and the mode of operation and purpose of capital requirements in respect of trading book positions and non-trading book positions measured at fair value. (3) A credit institution shall establish and maintain systems and controls sufficient to provide prudent and reliable valuation estimates and those systems and controls shall include at least the following elements:

documented policies and procedures for the process of valuation, including
clearly defined responsibilities of the various areas involved in the determination of the valuation, sources of market information and review of their appropriateness, guidelines for the use of unobservable inputs reflecting the credit institution's assumptions of what market participants would use in pricing the position, frequency of independent valuation, timing of closing prices, procedures for adjusting valuations, month end and ad-hoc verification procedures;
reporting lines for the department accountable for the valuation process that
are clear and independent of the front office, which shall be submitted to the management board. (4) A credit institution shall revalue trading book positions at fair value at least on a daily basis, and report those changes in the value of those positions in the profit and loss account of the credit institution.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 122 (5) A credit institution shall mark their trading book positions and non-trading book positions measured at fair value to market whenever possible, including when applying the relevant capital treatment to those positions. (6) When marking to market, a credit institution shall use the more prudent side of bid and offer unless the credit institution can close out at mid-market, and where credit institution makes use of this derogation, it shall inform the Central Bank every six months of the positions concerned and furnish evidence that it can close out at midmarket. (7) Where marking to market is not possible, the credit institution shall conservatively mark to model their positions and portfolios, including when calculating own funds requirements for positions in the trading book and positions measured at fair value in the non-trading book. (8) A credit institution shall comply with the following requirements when marking to model:

senior management shall be aware of the elements of the trading book or of
other fair-valued positions which are subject to mark to model and shall understand the materiality of the uncertainty thereby created in the reporting of the risk/performance of the business;
credit institution shall source market inputs, where possible, in line with market
prices, and shall assess the appropriateness of the market inputs of the particular position being valued and the parameters of the model on a frequent basis;
where available, a credit institution shall use valuation methodologies which are
accepted market practice for particular financial instruments or commodities;
where the model is developed by the credit institution itself, it shall be based on
appropriate assumptions, which have been assessed and challenged by suitably qualified parties independent of the development process;
a credit institution shall have in place formal change control procedures and
shall hold a secure copy of the model and use it periodically to check valuations;
persons responsible for risk management in a credit institution shall be aware
of the weaknesses of the models used and how best to reflect those in the valuation output; and
credit institution's models shall be subject to periodic review to determine the
accuracy of their performance, which shall include assessing the continued appropriateness of assumptions, analysis of profit and loss versus risk factors, and comparison of actual close out values to model outputs. (9) For the purposes of paragraph (8) item 4) of this Article, the model shall be developed or approved independently of the trading desk and shall be independently tested, including validation of the mathematics, assumptions and software implementation. (10) A credit institution shall perform independent price verification in addition to daily marking to market or marking to model.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 123 (11) Verification of market prices and model inputs shall be performed by a person or unit independent from persons or units that benefit from the trading book, at least monthly, or more frequently depending on the nature of the market or trading activity. (12) Where independent pricing sources are not available to a credit institution or pricing sources are more subjective, prudent measures such as valuation adjustments may be appropriate. (13) A credit Institution shall establish and develop procedures for considering valuation adjustments. (14) A credit institution shall formally consider the following valuation adjustments:

unearned credit spreads;
close-out costs;
operational risks;
market price uncertainty:
early termination;
investing and funding costs;
future administrative costs; and,
where relevant, model risk.
(15) A credit institution shall establish and maintain procedures for calculating an adjustment to the current valuation of any less liquid positions, which can in particular arise from market events or credit institution-related situations such as concentrated positions and/or positions for which the originally intended holding period has been exceeded. (16) A credit institution shall, where necessary, make such adjustments in addition to any changes to the value of the position required for financial reporting purposes and shall design such adjustments to reflect the illiquidity of the position. (17) A credit institution shall, within the procedure referred to in paragraph (16) of this
Article, consider several factors when determining whether a valuation adjustment is
necessary for less liquid positions and those factors shall include the following:
the additional amount of time it would take to hedge out the position or the risks
within the position beyond the liquidity horizons that have been assigned to the risk factors of the position in accordance with Article 469 of this Decision;
the volatility and average of bid/offer spreads;
the availability of market quotes (number and identity of market makers) and
the volatility and average of trading volumes including trading volumes during periods of market stress;
market concentrations;
the ageing of positions;
the extent to which valuation relies on marking-to-model; and
the impact of other model risks.
(18) When using third party valuations or marking to model, a credit institution shall consider whether to apply a valuation adjustment, and consider the need to establish adjustments for less liquid positions and on an ongoing basis review their continued

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 124 suitability, as well as it shall also explicitly assess the need for valuation adjustments relating to the uncertainty of parameter inputs used by models. (19) With regard to complex products, including securitisation exposures and n-th-todefault credit derivatives, a credit institution shall explicitly assess the need for valuation adjustments to reflect the model risk associated with using a possibly incorrect valuation methodology and the model risk associated with using unobservable (and possibly incorrect) calibration parameters in the valuation model. Simplified approach for determining AVA
Article 127
(1) A credit institution may apply the simplified approach for the determination of AVAs only if the sum of the absolute value of fair-valued assets and liabilities, as stated in the credit institution's financial statements under the applicable accounting framework, is less than EUR 15 billion. (2) Exactly matching, offsetting fair-valued assets and liabilities shall be excluded from the calculation of paragraph (1) of this Article. (3) For fair-valued assets and liabilities for which a change in accounting valuation has a partial or zero impact on Common Equity Tier 1 capital, their values shall only be included in the calculation referred to in paragraph (1) of this Article in proportion to the impact of the relevant valuation change on Common Equity Tier 1 capital. (4) A credit institution shall calculate AVA under the simplified approach as 0,1 % of the sum of the absolute value of fair-valued assets and liabilities laid down in paragraph (1) of this Article. (5) The threshold referred to in paragraph (1) of this Article shall apply on an individual and consolidated basis. (6) Where the threshold is breached on a consolidated basis, the core approach as defined in Article 128 of this Decision shall be applied to all entities included in the consolidation. (7) Where the credit institution applying the simplified approach fails to meet the condition of paragraph (1) of this Article for two consecutive quarters, it shall immediately notify the Central Bank and shall agree on a plan to implement the core approach referred to in Article 128 of this Decision within the following two quarters. Core approach for determining AVA
Article 128
(1) A credit institution shall determine AVA under the core approach as the sum of all AVAs determined for each of the category level referred to in Article 126 paragraphs (14) to (17) of this Decision, in accordance with paragraph (2) of this Article. (2) For the purposes of paragraph (1) of this Article, AVA shall be determined at the category level in accordance with the provisions of Articles 129 to 137 of this Decision.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 125 (3) By way of derogation from paragraph (2) of this Article, where a credit institution cannot apply Articles 129 to 1137 of this Decision, a “fall-back approach” shall apply, whereby the related financial instruments shall be identified and an AVA shall be calculated as the sum of the following:

100% of the net unrealised profit on the related financial instruments;
10% of the notional value of the related financial instruments in the case of
derivatives;
25% of the absolute value of the difference between the fair value and the
unrealised profit, as determined in item 1) of this paragraph, of the related financial instruments in the case of non-derivatives. (4) For the purposes of paragraph (3) item 1) of this Article, unrealised profit shall mean the change, where positive, in fair value since trade inception, determined on a first-in-first-out basis. (5) Fair-valued assets and liabilities for which a change in accounting valuation has a partial or zero impact on CET1 capital, shall be included in the calculation referred to in paragraph (1) of this Article only based on the proportion of the accounting valuation change that impacts Common Equity Tier 1 capital. (6) Additional valuation adjustment shall be considered to be the excess of valuation adjustments required to achieve the identified prudent value, over any adjustment applied in the credit institution's fair value that can be identified as addressing the same source of valuation uncertainty as the AVA. (7) Where an adjustment applied in the credit institution's fair value cannot be identified as addressing a specific AVA category at the level at which the relevant AVA is calculated, that adjustment shall not be included in the calculation of AVA. (8) Additional value adjustment shall always be positive, including at valuation exposure level, category level, both pre and post aggregation. Calculation of unearned credit spreads AVA
Article 129
(1) A credit institution shall calculate the unearned credit spreads AVA to reflect the valuation uncertainty in the adjustment necessary according to the applicable accounting framework to include the current value of expected losses due to counterparty default on derivative positions. (2) A credit institution shall include the element of the AVA relating to market price uncertainty within the market price uncertainty AVA category. (3) The element of the AVA relating to close-out cost uncertainty shall be included within the close-out costs AVA category. (4) The element of the AVA relating to model risk shall be included within the model risk AVA category.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 126 Calculation of close-out costs AVA
Article 130
(1) A credit institution shall calculate close-out costs AVA at valuation exposure level (‘individual close-out costs AVAs’). (2) Where a credit institution has calculated a market price uncertainty AVA for a valuation exposure based on an exit price, the individual close-out costs AVAs may be assessed to have zero value. (3) Where a credit institution applies the derogation referred to in Article 126 paragraph (6) of this Decision, the individual close-out costs AVA may be assessed to have zero value, on the condition that the credit institution provides evidence that it is 90 % confident that sufficient liquidity exists to support the exit of the related valuation exposures at mid-price. (4) Where a valuation exposure cannot be shown to have a zero close-out costs AVA, a credit institution shall use the data sources defined in Article 17 paragraphs of this Decision and the close-out costs AVA shall be calculated as described in paragraphs (5) and (6) of this Article. (6) A credit institution shall calculate close-out costs AVA on valuation exposures related to each valuation input used in the relevant valuation model at one of the following levels of granularity:

where decomposed, all valuation inputs required to calculate an exit price for
the valuation position; or
the price of the instrument.
(6) Each of the valuation inputs referred to in paragraph (5) item 1) of this Article shall be treated separately. (7) Where a valuation input consists of a matrix of parameters, the close-out cost AVA shall be calculated based on the valuation exposures related to each parameter within that matrix. (8) Where a valuation input does not refer to tradable instruments, a credit institution shall explicitly map the valuation input and the related valuation exposure to a set of market tradable instruments. (9) A credit institution may reduce the number of parameters of the valuation input for the purpose of calculating AVA using any appropriate methodology provided the reduced parameters satisfy all the following requirements:
the total value of the reduced valuation exposure is the same as the total value
of the original valuation exposure;
the reduced set of parameters can be mapped to a set of market tradable
instruments; and
the ratio of variance measure 2 over variance measure 1, based on historical
data from the most recent 100 trading days, is less than 0,1.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 127 (10) For the purposes of paragraph (9) item 3) of this Article, variance measure 1 shall mean profit and loss variance of the valuation exposure based on the unreduced valuation input and variance measure 2 shall mean profit and loss variance of the valuation exposure based on the unreduced valuation input minus the valuation exposure based on the reduced valuation input. (11) Where a reduced number of parameters is used for the purpose of calculating AVA, the determination that the criteria set out in paragraph (9) of this Article are met shall be subject to competent control function review and internal validation on at least an annual basis. (12) A credit institution shall determine close-out costs AVA as follows:

where sufficient data exists to construct a range of plausible bid-offer spreads
for a valuation input, credit institution shall estimate a point within the range where they are 90% confident that the spread they could achieve in exiting the valuation exposure would be at that price or better;
where insufficient data exists to construct a plausible range of bid-offer spreads,
credit institution shall use an expert-based approach using qualitative and quantitative information available to achieve a level of certainty in the prudent value that is equivalent to that targeted where a range of plausible values is available and in that case, the credit institution shall notify the Central Bank of the valuation exposures for which this approach is applied, and the methodology used to determine the AVA;
credit institution shall calculate the close-out costs AVA by applying 50% of the
estimated bid-offer spread calculated in accordance with either item 1) or item
to the valuation exposures related to the valuation inputs defined in
paragraphs (5) to (11) of this Article.
(13) A credit institution shall calculate the total category level AVA for close-out costs by applying to the individual close-out costs AVAs the formulae for either Method 1 or Method 2:
Method 1
APVA = (FV – PV) – α · (FV – PV)
= (1- α) · (FV – PV)
AVA = Σ APVA
Method 2
APVA = max {0, (FV – PV) – α · (EV – PV)}
= max {0, FV – α · EV –(1- α) · PV}
AVA = Σ APVA
Where:
FV = the valuation exposure-level fair value after any accounting adjustment applied in the credit institution's fair value that can

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 128 be identified as addressing the same source of valuation uncertainty as the relevant AVA; PV = the valuation exposure-level prudent value determined in accordance with this Decision; EV = the expected value at a valuation exposure level taken from a range of possible values; α = the aggregation factor of 50% APVA = the valuation exposure-level AVA after adjusting for aggregation; AVA = the total category-level AVA after adjusting for aggregation. Calculation of operational risk AVA
Article 131
(1) A credit institution shall estimate an operational risk AVA by assessing the potential losses that may be incurred as a result of operational risk related to valuation processes, whereat the estimate shall include an assessment of valuation positions judged to be at-risk during the balance sheet substantiation process, including those due to legal disputes. (2) A credit institution shall calculate an operational risk AVA of 10% of the sum of the aggregated category level AVA for market price uncertainty and close-out costs. Calculation of market price uncertainty AVA
Article 132
(1) A credit institution shall calculate market price uncertainty AVAs at valuation exposure level (‘individual market price uncertainty AVAs’). (2) The market price uncertainty AVA shall only be assessed to have zero value only where the following conditions are met:

the credit institution has firm evidence of a tradable price for a valuation
exposure or a price can be determined from reliable data based on a liquid twoway market as described in Article 502 paragraph (2) of this Decision;
the sources of market data set out in Article 17 paragraph (8) of this Decision
do not indicate any material valuation uncertainty.
(3) Where a valuation exposure cannot be shown to have a zero AVA, a credit institution shall, when assessing the market price uncertainty AVA, use the data sources defined in Article 17 7 of this Decision 7 and, in this case, it shall determine the market price uncertainty AVA in accordance with paragraphs (4) to (8) of this
Article.
(4) A credit institution shall calculate AVA on valuation exposures related to each valuation input used in the relevant valuation model at one of the following granularity levels:
where decomposed, all the valuation inputs required to calculate an exit price
for the valuation position; or

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 129
2) the price of the instrument.
(5) Each of the valuation inputs referred to in paragraph (4) item 1) of this Article shall be treated separately. (6) Where a valuation input consists of a matrix of parameters, a credit institution shall calculate AVA based on the valuation exposures related to each parameter within that matrix. (7) Where a valuation input does not refer to tradable instruments, a credit institution shall map the valuation input and the related valuation exposure to a set of market tradable instruments. (8) A credit institution may reduce the number of parameters of the valuation input for the purpose of calculating AVA using any appropriate methodology provided the reduced parameters satisfy the following requirements:

the total value of the reduced valuation exposure is the same as the total value
of the original valuation exposure;
the reduced set of parameters can be mapped to a set of market tradable
instruments;
the ratio of variance measure 2 over variance measure 1, based on historical
data from the most recent 100 trading days, is less than 0,1.
(9) Variance measure 1 referred to in paragraph (8) item 3) of this Article shall mean profit and loss variance of the valuation exposure based on the unreduced valuation input and ‘variance measure 2’ shall mean profit and loss variance of the valuation exposure based on the unreduced valuation input minus the valuation exposure based on the reduced valuation input. (10) Where a reduced number of parameters is used for the purpose of calculating AVA, the determination that the criteria set out in paragraph (9) of this Article are met shall be subject to competent control function review of the netting methodology and internal validation on at least an annual basis. (11) Market price uncertainty AVA shall be determined as follows:
where sufficient data exists to construct a range of plausible values for a
valuation input:
for a valuation input where the range of plausible values is based on exit prices, credit institution shall estimate a point within the range where they are 90% confident they could exit the valuation exposure at that price or better; for a valuation input where the range of plausible values is created from mid prices, credit institution shall estimate a point within the range where they are 90% confident that the mid value they could achieve in exiting the valuation exposure would be at that price or better;
where insufficient data exists to construct a plausible range of values for a
valuation input, credit institution shall use an expert-based approach using qualitative and quantitative information available to achieve a level of certainty in the prudent value of the valuation input that is equivalent to that targeted under item 1) of this paragraph and in that case, the credit institution shall notify

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 130 the Central Bank of the valuation exposures for which this approach is applied, and the methodology used to determine the AVA;
3) a credit institution shall calculate the market price uncertainty AVA based on
one of the following approaches:
it shall apply the difference between the valuation input values estimated according to item 1) or 2) of this paragraph, and the valuation input values used for calculating fair value to the valuation exposure of each valuation position; it shall combine the valuation input values estimated according to item 1) or
2) of this paragraph and they shall revalue valuation positions based on
those values and the credit institution shall then take the difference between the revalued positions and fair-valued positions. (12) A credit institution shall calculate the total category level AVA for market price uncertainty by applying to individual market price uncertainty AVA the formulae for either Method 1 or Method 2 laid down in Article 130 paragraph (13) of this Decision. Calculation of early termination AVA
Article 133
(1) A credit institution shall estimate an early termination AVA considering the potential losses arising from non-contractual early terminations of client trades. (2) A credit institution shall calculate the early termination AVA taking into account the percentage of client trades that have historically terminated early and the losses that arise in those cases. Calculation of investing and funding costs AVA
Article 134
(1) A credit institution shall calculate the investing and funding costs AVA to reflect the valuation uncertainty in the funding costs used when assessing the exit price according to the applicable accounting framework. (2) The element of the AVA relating to market price uncertainty shall be included within the market price uncertainty AVA category. (3) The element of the AVA relating to close-out cost uncertainty shall be included within the close-out costs AVA category. (4) The element of the AVA relating to model risk shall be included within the model risk AVA category. Calculation of future administrative costs AVA
Article 135
(1) Where a credit institution calculates market price uncertainty and close-out cost AVAs for a valuation exposure, which imply fully exiting the exposure, a credit institution may assess a zero AVA for future administrative costs.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 131 (2) Where a valuation exposure cannot be shown to have a zero AVA according to paragraph (1) of this Article, a credit institution shall calculate the future administrative cost AVA (‘individual future administrative costs AVA’) considering the administrative costs and future hedging costs over the expected life of the valuation exposures for which a direct exit price is not applied for the close-out costs AVA, discounted using a rate which approximates the risk-free rate. (3) For the purposes of paragraph (2) of this Article, future administrative costs shall include all incremental staffing and fixed costs that are likely to be incurred in managing the portfolio but a reduction in these costs may be assumed as the size of the portfolio reduces. (4) A credit institution shall calculate the total category level AVA for future administrative costs AVA as the sum of individual future administrative costs AVAs. Calculation of model risk AVA
Article 136
(1) A credit institution shall estimate a model risk AVA for each valuation model (‘individual model risk AVA’) by considering valuation model risk which arises due to the potential existence of a range of different models or model calibrations, which are used by market participants, and the lack of a firm exit price for the specific product being valued. (2) A credit institution shall not consider valuation model risk which arises due to calibrations from market derived parameters, which shall be captured according to
Article 132 of this Decision.
(3) A credit institution shall calculate model risk AVA using one of the approaches defined in paragraphs (4) and (5) of this Article. (4) Where possible, a credit institution shall calculate the model risk AVA by determining a range of plausible valuations produced from alternative appropriate modelling and calibration approaches, and in this case, a credit institution shall estimate a point within the resulting range of valuations where they are 90% confident they could exit the valuation exposure at that price or better. (5) Where a credit institution is unable to use the approach defined in paragraph (4) of this Article, it shall apply an expert-based approach to estimate the model risk AVA, which shall consider all of the following:

complexity of products relevant to the model;
diversity of possible mathematical approaches and model parameters, where
those model parameters are not related to market variables;
the degree to which the market for relevant products is ‘one way’;
the existence of unhedgeable risks in relevant products; and
the adequacy of the model in capturing the behaviour of the pay-off of the
products in the portfolio.
(6) A credit institution that uses models based on the approach referred to in paragraph (5) of this Article shall notify the Central Bank thereof, and the methodology used to determine the AVA.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 132 (7) Where a credit institution applies the approach described in paragraph (5) of this
Article, the prudence of the approach shall be confirmed annually by comparing the
following:

the AVAs calculated using the expert-based approach referred to in paragraph
(5) of this Article, if it were applied to a material sample of the valuation models for which the credit institution applies the approach referred to in paragraph (4) of this Article; and
the AVAs produced by the approach referred to in paragraph (4) of this Article
for the same sample of valuation models as referred to in item1) of this paragraph. (8) A credit institution shall calculate the total category level AVA for model risk by applying to individual model risk AVAs the formulae for either Method 1 or Method 2 laid down in the Article 130 paragraph (13) of this Decision. Calculation of concentrated positions AVA
Article 137
(1) A credit institution shall estimate a concentrated position AVA for concentrated valuation positions (‘individual concentrated positions AVA’) by applying the following:
they shall identify concentrated valuation positions;
for each identified concentrated valuation position, where a market price
applicable for the size of the valuation position is unavailable, they shall estimate a prudent exit period;
where the prudent exit period exceeds 10 days, they shall estimate an AVA
taking into account:
the volatility of the valuation input; the volatility of the bid offer spread; and the impact of the hypothetical exit strategy on market prices. (2) For the purposes of paragraph (1) item 1) of this Article, the identification of concentrated valuation positions shall consider all of the following:
the size of all valuation positions relative to the liquidity of the related market;
the credit institution's ability to trade in that market;
the average daily market volume and typical daily trading volume of the credit
institution.
(3) A credit institution shall establish and document the methodology applied to determine concentrated valuation positions for which a concentrated positions AVA shall be calculated. (4) The total category level AVA for concentrated positions AVA shall be calculated as the sum of individual concentrated positions AVAs. Documentation requirements
Article 138
(1) A credit institution shall document appropriately the prudent valuation methodology, which should include internal policies providing guidance on:

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 133

the range of methodologies for quantifying AVAs for each valuation position;
the hierarchy of methodologies for each asset class, product, or valuation
position;
the hierarchy of market data sources used in the AVA methodology;
the required characteristics of market data to justify a zero AVA for each asset
class, product, or valuation position;
the methodology applied where an expert-based approach is used to determine
an AVA;
the methodology for determining whether a valuation position requires a
concentrated position AVA;
the assumed exit horizon for the purpose of calculating AVAs for concentrated
positions, where relevant; and
the fair-valued assets and liabilities for which a change in accounting valuation
has a partial or zero impact on Common Equity Tier 1 capital according to
Article 127 paragraphs (2) and (3) and Article 128 paragraph (5) of this
Decision.
(2) A credit institution shall also maintain records to allow the calculation of AVA at valuation exposure level to be analysed, and information from the AVA calculation process shall be provided to senior management to allow an understanding of the level of valuation uncertainty on the credit institution's portfolio of fair-valued positions. (3) The documentation specified in paragraph (1) of this Article shall be reviewed at least annually and approved by senior management. Systems and controls requirements
Article 139
(1) An independent control unit of the credit institution shall authorise initially AVA, and monitor subsequently. (2) A credit institution shall have effective controls related to the governance of all fairvalued positions, and adequate resources to implement those controls and ensure robust valuation processes even during a stressed period, which shall include:
review and assessment of valuation model performance at least once a year;
management approval on all significant changes to valuation policies;
a clear statement of the credit institution's risk appetite for exposure to positions
subject to valuation uncertainty which is monitored at an aggregate credit institution-wide level;
independence in the valuation process between risk taking and control units;
a comprehensive internal audit process related to valuation processes and
controls.
(3) A credit institution shall ensure there are effective and consistently applied controls related to the valuation process for fair-valued positions, which shall be subject to regular internal audit review and they shall include:
a precisely defined credit institution-wide product inventory, ensuring that every
valuation position is uniquely mapped to a product definition;
valuation methodologies, for each product in the inventory covering choice and
calibration of model, fair value adjustments, AVA, independent price verification

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 134 methodologies applicable to the product, and the measurement of valuation uncertainty;
3) validation process ensuring that, for each product, both the risk-taking and
relevant control departments approve the product-level methodologies described in item 2) of this paragraph and certify that they reflect the actual practice for every valuation position mapped to the product;
4) defined thresholds based on observed market data for determining when
valuation models are no longer sufficiently robust;
5) a formal internal price valuation process based on prices independent from the
relevant trading desk;
6) a new product approval processes referencing the product inventory and
involving all internal stakeholders relevant to risk measurement, risk control, financial reporting and the assignment and verification of valuations of financial instruments;
7) a new deal review process to ensure that pricing data from new trades are used
to assess whether valuations of similar valuation exposures remain appropriately prudent. Internal hedges
Article 140
(1) An internal hedge shall in particular meet the following requirements:

it shall not be primarily intended to avoid or reduce own funds requirements;
it shall be properly documented and subject to particular internal approval and
audit procedures;
it shall be dealt with at market conditions;
the market risk that is generated by the internal hedge shall be dynamically
managed in the trading book within the authorised limits;
it shall be carefully monitored in accordance with adequate procedures.
(2) The requirements set out in paragraph (1) of this Article shall apply without prejudice to the requirements applicable to the hedged position in the non-trading book or in the trading book, where relevant. (3) Where a credit institution hedges a non-trading book credit risk exposure or counterparty risk exposure using a credit derivative booked in its trading book, that credit derivative position shall be recognised as an internal hedge of the non-trading book credit risk exposure or counterparty risk exposure for the purpose of calculating the risk-weighted exposure amounts referred to in Article 114 paragraph (4) item 1) of this Decision where the credit institution enters into another credit derivative transaction with an eligible third party protection provider that meets the requirements for unfunded credit protection in the non-trading book and perfectly offsets the market risk of the internal hedge. (4) Internal hedge recognised in accordance with the paragraph (1) of this Article and the credit derivative entered into with the third party shall be included in the trading book for the purpose of calculating the own funds requirements for market risk.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 135 (5) A credit institution shall, for calculating the own funds requirements for market risk using the approach referred to in Article 413 paragraph (1) item 2) of this Decision, assign both positions to the same trading desk that manages similar risks. (6) Where a credit institution hedges a non-trading book equity risk exposure using an equity derivative booked in its trading book, that equity derivative position shall be recognised as an internal hedge of the non-trading book equity risk exposure for the purpose of calculating the risk-weighted exposure amounts referred to in Article 114 paragraph (4) item 1) of this Decision where the credit institution enters into another equity derivative transaction with an eligible third party protection provider that meets the requirements for unfunded credit protection in the non-trading book and perfectly offsets the market risk of the internal hedge. (7) Internal hedge recognised in accordance with paragraph (6) of this Article and the equity derivative entered into with the eligible third-party protection provider shall be included in the trading book for the purpose of calculating the own funds requirements for market risk. (8) A credit institution shall, for calculating the own funds requirements for market risk using the approach referred to in Article 413 paragraph (1) item 1) of this Decision, assign both positions to the same trading desk that manages similar risks. (9) For the purposes of paragraphs (3) to (8) of this Article, the credit or equity derivative transaction entered into by a credit institution may be composed of multiple transactions with multiple eligible third party protection providers, provided that the resulting aggregated transaction meets the conditions set out in those paragraphs. (10) Where a credit institution hedges non-trading book interest rate risk exposures using an interest rate risk position booked in its trading book, that interest rate risk position shall be considered to be an internal hedge for the purpose of assessing the interest rate risk arising from non-trading positions in accordance with Articles 109 and 264 of the Law where the following conditions are met:

for the purpose of calculating capital requirement for market risk using the
approach referred to in Article 413 paragraph (1) items 1), 2) and 3) of this Decision, the position has been assigned to a separate portfolio from the other trading book position, the business strategy of which is solely dedicated to manage and mitigate the market risk of internal hedges of interest rate risk exposure;
for the purpose of calculating capital requirement for market risk using the
approach referred to in Article 413 paragraph (1) item 2) of this Decision, the position has been assigned to a trading desk, the business strategy of which is solely dedicated to manage and mitigate the market risk of internal hedges of interest rate risk exposure;
the credit institution has fully documented how the position mitigates the interest
rate risk arising from non-trading book positions for the purposes of the requirements laid down in Articles 109 and 246 of the Law. (11) For the purposes of paragraph (10) item 1) of this Article, the credit institution may assign to that portfolio other interest rate risk positions entered into with third parties, or with its own trading book, as long as the credit institution perfectly offsets the market

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 136 risk of those interest rate risk positions entered into with its own trading book by entering into opposite interest rate risk positions with third parties. (12) For the purposes of paragraph (10) item 2) of this Article, the following requirements shall apply to the trading desk:

that trading desk may enter into other interest rate risk positions with third
parties or with other trading desks of the credit institution, as long as those positions meet the requirements for inclusion in the trading book referred to in
Article 122 of this Decision and those other trading desks perfectly offset the
market risk of those other interest rate risk positions by entering into opposite interest rate risk positions with third parties;
no trading book positions other than those referred to in item 1) of this
paragraph are assigned to that trading desk;
by way of derogation from Article 124 of this Decision, that trading desk shall
not be subject to the requirements set out in paragraphs (1) to (4) of that Article. (13) The own funds requirements for the market risk of all the positions assigned to the separate portfolio as referred to in paragraph (10) item 1) of this Article or to the trading desk referred to in item 2) of that paragraph, shall be calculated on a standalone basis, in addition to the own funds requirements for the other trading book positions. (14) Where a credit institution hedges a credit valuation adjustment (CVA) risk exposure using a derivative instrument entered into with its trading book, the position in that derivative instrument shall be recognised as an internal hedge for the CVA risk exposure for the purpose of calculating the own funds requirements for CVA risk in accordance with the approaches set out in Article 532 or 558 of this Decision, where the following conditions are met:
the derivative position is recognised as an eligible hedge in accordance with
Article 560 of this Decision;
where the derivative position is subject to any of the requirements set out in
Article 416 paragraph (2) items 2) or 3) or in Article 418 paragraph (1) item 3)
of this Decision the credit institution perfectly offsets the market risk of that derivative position by entering into opposite positions with third parties. (15) The opposite trading book position of the internal hedge recognised in accordance with paragraph (14) of this Article shall be included in the institution’s trading book to calculate the own funds requirements for market risk. TITLE II OWN FUNDS REQUIREMENTS FOR CREDIT RISK SUBTITLE 1 - General principles Approaches to credit risk
Article 141
(1) When calculating risk-weighted exposure amounts for the purposes of Article 114 paragraph (4) items 1) and 7) of this Decision, a credit institution shall apply the Standardised Approach provided for in Subtitle 2 or, the Internal Ratings Based

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 137 Approach (IRB Approach) provided for in Subtitle 3 of this Title, if the Central Bank authorised the application of IRB Approach, in accordance with Article 185 of this Decision. (2) When calculating risk-weighted exposure amounts for the purposes of Article 114 paragraph (4) items 1) and 7) of this Decision, a credit institution shall, for trade exposures and for default fund contributions to a central counterparty, apply the treatment set out in Subtitle 6 Section 9 of this Title, while, for all other types of exposures to a central counterparty, a credit institution shall treat those exposures as exposures to:

an institution for other types of exposures to a qualifying CCP; or
a corporate for other types of exposures to a non-qualifying CCP.
(3) The exposures investment firms, credit institutions and exchanges with head offices outside Montenegro, or in the EU Member States and third countries, as well as the exposures to financial institutions from those countries authorised and supervised by competent authorities from those countries and subject to prudential requirements comparable to those applied to credit institutions in terms of robustness, shall be treated as exposures to a credit institution only if the third country applies prudential and supervisory requirements to that entity that are at least equivalent to those applied in this Decision and in the EU. Use of credit risk mitigation technique under the Standardised Approach and the IRB Approach
Article 142
(1) For an exposure to which a credit institution applies the Standardised Approach under Subtitle 2 or the IRB Approach under Subtitle 3 of this Title, but without using its own estimates of LGD pursuant to Article 185 of this Decision, a credit institution may take into account the effects of funded credit protection in accordance with Subtitle 3 of this Title when calculating the risk-weighted exposure amounts for the purposes of Article 114 paragraph (4) items 1) to 7) of this Decision or, when calculating expected loss amounts for the purposes of Article 19 item 4) and Article 60 paragraph (1) item 4) of this Decision. (2) For an exposure to which a credit institution applies the IRB Approach by using their own estimates of LGD pursuant to Article 185 of this Decision, a credit institution may take into account the effects of funded credit protection in accordance with Subtitle 3 of this Title when calculating the risk-weighted exposure amounts for the purposes of Article 114 paragraph (4) items 1) to 7) of this Decision or, when calculating expected loss amounts for the purposes of Article 19 item 4) and Article 60 paragraph (1) item 4) of this Decision. (3) Where a credit institution applies the IRB Approach by using its own estimates of LGD pursuant to Article 185 of this Decision for both the original exposure and for comparable direct exposures to the protection provider, a credit institution may take into account the effect of unfunded credit protection in accordance with Subtitle 3 of this Title when calculating the risk-weighted exposure amounts for the purposes of
Article 114 paragraph (4) items 1) to 7) of this Decision, and, where relevant, expected
loss amounts for the purposes of the calculation referred to in Article 19 item 4) and

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 138
Article 60 paragraph (1) item 4) of this Decision, and in all other cases, the credit
institution may take into account the effect of unfunded credit protection when calculating risk-weighted exposure amounts and expected loss amounts in accordance with Subtitle 4 of this Title. (4) Where the conditions set out in paragraph (5) of this Article are met, a credit institution may regard loans to natural persons as exposures secured by a mortgage on residential property, instead of being treated as guaranteed exposures, for the purposes of Subtitles 2, 3 and 4 of this Title, as applicable, where the following conditions for those loans have been fulfilled:

the majority of loans to natural persons for the purchase of residential properties
in Montenegro are not provided as mortgages in legal form;
the majority of loans to natural persons for the purchase of residential properties
in Montenegro are guaranteed by a protection provider with a credit assessment by a nominated ECAI corresponding to credit quality step 1 or 2, that is required to repay the credit institution in full where the original borrower defaults;
the credit institution has the legal right to take a mortgage on the residential
property in the event that the protection provider referred to in item 2) of this paragraph does not meet or becomes unable to meet its obligations under the guarantee provided. (5) For the purposes of paragraph (4) of this Article, a credit institution may treat loans granted to natural persons as exposures secured by a mortgage on residential property, instead of being treated as guaranteed exposures, where the following conditions are met:
for an exposure that is treated under the Standardised Approach, the exposure
meets all of the requirements to be assigned to the exposure class ‘exposures secured by mortgages on immovable property’ pursuant to Articles 163 and 164 of this Decision, with the exception that the credit institution granting the loan does not hold a mortgage over the residential property;
for an exposure that is treated under the IRB Approach, the exposure meets all
of the requirements to be assigned to the IRB exposure class ‘retail exposures secured by residential property’ referred to in Article 189 paragraph (2) item 5) indent 2 of this Decision, with the exception that the credit institution granting the loan does not hold a mortgage over the residential property;
there is no mortgage lien on the residential property when the loan is granted
and the borrower is contractually committed not to grant any mortgage lien without the consent of the credit institution that originally granted the loan;
the protection provider is an eligible protection provider as referred to in Article
239 of this Decision, and has a credit assessment by a nominated ECAI corresponding to credit quality step 1 or 2;
the protection provider is a credit institution or a financial sector entity subject
to own funds requirements comparable to those applicable to credit institutions or insurance undertakings;
the protection provider has established a fully-funded mutual guarantee fund or
equivalent protection for insurance undertakings to absorb credit risk losses, the calibration of which is periodically reviewed by the Central Bank or Insurance Supervision Agency, whichever is applicable, and is subject to periodic stress testing, at least every two years;

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 139
7) the credit institution is contractually and legally empowered to take a mortgage
on the residential property in the event that the protection provider does not meet or becomes unable to meet its obligations under the guarantee provided. (6) A credit institution that uses the option provided for in paragraph (4) of this Article for a given eligible protection provider under the mechanism referred to in that paragraph shall do so for all its exposures to natural persons guaranteed by that protection provider under that mechanism. Treatment of securitisation positions
Article 143
A credit institution shall calculate the risk-weighted exposure amount for a position they hold in a securitisation in accordance with Subtitle 5 of this Title. Treatment of credit risk adjustment
Article 144
(1) A credit institution applying the Standardised Approach shall treat general credit risk adjustments in accordance with Article 60 paragraph (1) item 3) of this Decision. (2) A credit institution applying the IRB Approach shall treat general credit risk adjustments in accordance with Article 200, Article 60 paragraph (1) item 4) and
Article 19 item 4) of this Decision.
(4) For the purposes of this Article and Subtitles 2 and 3 of this Title, general and specific credit risk adjustments shall exclude funds for general banking risk. (4) A credit institution using the IRB Approach that apply the Standardised Approach for a part of their exposures on consolidated or individual basis, in accordance with Articles 167 and 169 of this Decision shall determine the part of general credit risk adjustment that shall be assigned to the treatment of general credit risk adjustment under the Standardised Approach and to the treatment of general credit risk adjustment under the IRB Approach as follows:

where applicable, when a credit institution included in the consolidation
exclusively applies the IRB Approach, general credit risk adjustments of this credit institution shall be assigned to the treatment set out in paragraph (2) of this Article;
where applicable, when a credit institution included in the consolidation
exclusively applies the Standardised Approach, general credit risk adjustment of this credit institution shall be assigned to the treatment set out in paragraph (1) of this Article;
the remainder of credit risk adjustment shall be assigned on a pro rata basis
according to the proportion of risk weighted exposure amounts subject to the Standardised Approach and subject to the IRB Approach. (5) A credit institution shall include, in the calculation of general and specific credit risk adjustments, all amounts by which a credit institution’s Common Equity Tier 1 capital has been reduced in order to reflect losses exclusively related to credit risk according to the applicable accounting framework and recognised as such in the profit or loss

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 140 account, irrespective of whether they result from impairments, value adjustments or provisions for off-balance sheet items. (6) All amounts referred to in paragraph (5) of this Article which have been recognised during the financial year, may only be included in the calculation of general and specific credit risk adjustments if the respective amounts have been deducted from a credit institution’s Common Equity Tier 1 capital, either in accordance with Article 19 of this Decision, or, in the event of interim profits or year-end profits that have not been approved in accordance with Article 5 paragraphs (3) and (4) of this Decision. (7) The adjustments referred to in paragraph (5) of this Article relating to general credit risk adjustments shall be the amount for which the criteria referred to in items 1) and
2) of this paragraph are met, while the remaining amounts of adjustments referred to
in paragraph (5) shall relate to specific credit risk adjustments:
criteria:

they are freely and fully available, as regards to timing and amount, to meet
credit risk losses that have not yet materialised;
they reflect credit risk losses for a group of exposures for which the credit
institution has currently no evidence that a loss event has occurred. (8) The calculation of general credit risk adjustments, provided that they meet the criteria referred to in paragraph (7) of this Article, shall include the following losses:
losses recognised to cover higher average portfolio loss experience over the
last years although there is currently no evidence of loss events supporting these loss level observed in the past;
losses for which the credit institution is not aware of a credit deterioration for a
group of exposures but where some degree of non-payment is statistically probable based on past experience. (9) Impairments determined by the credit institution in accordance with the IFRS 9 requirements (Stage 1, Stage 2, and Stage 3) shall be considered specific credit risk adjustments. Calculation specific adjustments for the purpose of determining the exposure value
Article 145
(1) For the purposes of determining the exposure value according to Articles 148, 207, 208, 282 and 310 of this Decision, a credit institution shall calculate specific adjustments related to an exposure as the amounts of specific adjustments for that single exposure, or as the amounts of specific adjustments that the credit institution has assigned to that exposure in accordance with paragraphs (2) to (5) of this Article. (2) Where a specific adjustment reflects losses related to the credit risk of a group of exposures, a credit institution shall assign that specific adjustment to all single exposures of that group proportionally to the risk-weighted exposure amounts, and the exposure values shall be determined without taking into account any specific credit risk adjustments.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 141 (3) For the treatment of expected loss amounts referred to in Article 200 of this Decision for a group of non- defaulted exposures a credit institution shall not be required to assign a specific credit risk adjustment to the single exposures of the group. (4) Where a specific credit risk adjustment relates to a group of exposures the credit risk own funds requirements of which are calculated partially under the Standardised Approach and partially under the IRB Approach, the credit institution shall assign that specific credit risk adjustment to the group of exposures covered by each of the Approaches proportionally to the risk weighted exposure amounts of the group before applying the actions referred to in paragraphs (2) and (3) of this Article, whereat, the exposure values shall be determined without taking into account any specific credit risk adjustments. (5) When assigning the specific credit risk adjustments to exposures, a credit institution shall ensure that the same portion is not assigned twice to different exposures. (6) A credit institution shall always include the following losses in the calculation of specific credit risk adjustments:

losses recognised in the profit or loss account for instruments measured at fair
value that represent credit risk impairment under the applicable accounting framework;
losses as a result of current or past events affecting a significant individual
exposure or exposures that are not individually significant which are individually or collectively assessed;
losses for which historical experience, adjusted on the basis of current
observable data, indicates that the loss has occurred but the credit institution is not yet aware which individual exposure has suffered these losses. Calculation of specific adjustments for own funds requirements for the purposes of the determination of default
Article 146
(1) Without prejudice to the provisions of Article 144 paragraph (5) of this Decision, when calculating the specific credit risk adjustments for the purposes of assigning the risk weights referred to in Article 167 paragraph (1) items 1) and 2) of this Decision to the unsecured part of a defaulted exposure, a credit institution shall include any positive difference between the amount owed by the debtor on that exposure and the sum of the following:
the additional own funds reduction if that exposure was written-off fully;
any already existing own funds reductions related to that exposure.
(2) For the purposes of determining default in accordance with Article 178 of this Decision, a credit institution shall calculate specific adjustments as the amounts of specific adjustments related to the credit risk of a single exposure or single debtor. Monitoring of contractual arrangements that are not commitments
Article 147
A credit institution shall monitor contractual arrangements that meet all of the conditions set out in Article 4 paragraph (2) item 10) indents 1 to 5 of this Decision,

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 142 and shall document to the satisfaction of the Central Bank their compliance with all those conditions. SUBTITLE 2 - Standardised approach
Section 1 - General principles
Exposure value
Article 148
(1) The exposure value of an asset item shall be its accounting value remaining after the following has been applied:

specific credit risk adjustments in accordance with Article 144 of this Decision;
additional value adjustments (AVA) in accordance with Articles 17 of this
Decision related to non-trading book activities of the credit institution;
insufficient coverage of non-performing exposures by impairments deducted
from Common Equity Tier 1 capital in accordance with Article 19 item 14) of this Decision;
reserve requirements for estimated and potential losses for on- and off- balance
sheet items in accordance with Article 19 items 16) and 17) of this Decision; and
other own funds reductions related to the asset item.
(2) The exposure value of an off-balance sheet item referred to in paragraph (3) of this
Article shall be the amount of its nominal value after reduction of specific credit risk
adjustments and amounts of insufficient coverage of non-performing exposures by impairments deducted from Common Equity Tier 1 capital in accordance with Article 19 items 16) and 17) of this Decision multiplied by the following percentage or conversion factor:
100% for items in bucket 1;
50% for items in bucket 2;
40% for items in bucket 3;
20% for items in bucket 4;
0% for items in bucket 5.
(3) The off-balance sheet items referred to in paragraph (2) of this Article shall be assigned to the following buckets:
bucket 1:

credit derivatives and general guarantees of indebtedness, including standby
letters of credit serving as financial guarantees for loans and securities, and acceptances, including endorsements with the character of acceptances, as well as any other direct credit substitutes;
sale and repurchase agreements and asset sales with recourse where the
credit risk remains with the credit institution;
securities lent by the credit institution or securities posted by the credit
institution as collateral, including instances where those arise out of repostyle transactions;
forward asset purchases, forward deposits and partly paid shares and
securities, which represent commitments with certain drawdown;

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 143

off-balance-sheet items constituting a credit substitute where not explicitly
included in any other category;
other off-balance-sheet items carrying similar risk.

bucket 2:

note issuance facilities (NIFs) and revolving underwriting facilities (RUFs)
regardless of the maturity of the underlying facility;
performance bonds, bid bonds, warranties and standby letters of credit
related to particular transactions and similar transaction-related contingent items, excluding trade finance off-balance-sheet items referred to in bucket 4; and
other off-balance-sheet items carrying similar risk.

bucket 3:

the undrawn amount of commitments, regardless of the maturity of the
underlying facility, unless they fall under another category; and
other off-balance-sheet items carrying similar risk.

bucket 4:

trade finance off-balance-sheet items:
a) warranties, including tender and performance bonds and associated advance payment and retention guarantees, and guarantees not having the character of credit substitutes; b) irrevocable standby letters of credit not having the character of credit substitutes; c) short-term, self-liquidating trade letters of credit arising from the movement of goods, in particular documentary credits collateralised by the underlying shipment, in case of an issuing institution or a confirming institution; and
other off-balance-sheet items carrying similar risk.

bucket 5:

the undrawn amount of unconditionally cancellable commitments;
the undrawn amount of retail credit lines for which the terms permit the credit
institution to cancel them to the full extent allowable under consumer protection and related legal acts;
undrawn credit facilities for tender and performance guarantees which may
be cancelled unconditionally at any time without prior notice, or that do effectively provide for automatic cancellation due to deterioration in a borrower’s creditworthiness; and
other off-balance-sheet items carrying similar risk.
(4) The exposure value of a commitment on an off-balance-sheet item as referred to in paragraph (2) of this Article shall be the lower of the following percentages of the commitment’s nominal value after the deduction of specific credit risk adjustments and amounts deducted in accordance with Article 19 item 14), 16) and 17) of this Decision:

the percentage referred to in paragraph (2) of this Article that is applicable to
the item on which the commitment is made;
the percentage referred to in paragraph (2) of this Article that is applicable to
the type of commitment.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 144 (5) Contractual arrangements offered by a credit institution, but not yet accepted by the client, that would become commitments if accepted by the client, shall be treated as commitments and the percentage applicable shall be the one provided for in accordance with paragraph (2) of this Article. (6) For contractual arrangements of the credit institution that meet the conditions set out in Article 4 paragraph (2) item 10) indents 1) to 5) of this Decision, the applicable percentage shall be 0%. (7) Where a credit institution is using the Financial Collateral Comprehensive Method under Article 260 of this Decision, the exposure value of securities or commodities sold, posted or lent under a securities financing transactions shall be increased by the volatility adjustment appropriate to such securities or commodities in accordance with Articles 260 and 261 of this Decision. (8) The exposure value of a derivative instrument referred to in items 1), 2) and 3) of this paragraph shall be determined in accordance with Subtitle 6 of this Title with the effects of contracts of novation and other netting agreements taken into account for the purposes of those methods in accordance with Subtitle 6 of this Title taking into account the effects of contracts of novation and other netting agreements as specified in that Subtitle:

interest-rate contracts:

single-currency interest rate swaps;
basis-swaps;
forward rate agreements;
interest-rate futures;
interest-rate options; and
other contracts of similar nature.

foreign-exchange contracts and contracts concerning gold:

cross-currency interest-rate swaps;
forward foreign-exchange contracts;
currency futures;
currency options;
other contracts of a similar nature; and
contracts of a nature similar to those referred to in indents 1 to 5 of this item
concerning gold.

contracts of a nature similar to those referred to in item 1) indents 1 to 5 and item
indents 1 to 4 of this paragraph concerning other reference items or indices and
which, as a minimum, include instruments not otherwise included in item 1) or 2) of this paragraph, such as:

options, futures, swaps, forward rate agreements and any other derivative
contracts relating to securities, commodities, financial indices or financial measures which may be settled physically or in cash, and
financial contracts for differences.
(9) A credit institution may determine the exposure value of securities financing transactions and long settlement transactions in accordance with Subtitles 4 or 6 of this Title.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 145 (10) Where an exposure is subject to funded credit protection, the exposure value applicable to that item may be amended in accordance with Subtitle 4 of this Title. Exposure classes
Article 149
Each exposure shall be assigned to one of the following exposure classes:

exposures to central governments or central banks;
exposures to regional governments or local authorities;
exposures to public sector entities;
exposures to multilateral development banks;
exposures to international organisations;
exposures to credit institutions;
exposures to corporates;
retail exposures;
exposures secured by mortgages on immovable property and ADC exposures;
10)exposures in default;
11)subordinated debt exposures;
12)exposures in the form of covered bonds;
13)items representing securitisation positions; 14)exposures to institutions and corporates with a short-term credit assessment; 15)exposures in the form of units or shares in collective investment undertakings (‘CIUs’); 16)equity exposures; 17)other items. Calculation of risk-weighted exposure amounts
Article 150
(1) When calculating risk-weighted exposure amounts, a credit institution shall apply risk weights to all exposures, unless those exposures are deducted from own funds or are subject to the treatments referred to in Article 75 paragraph (1) of this Decision, in accordance with the provisions of Section 2 of this Subtitle. (2) The risk weight shall be applied on the basis of the exposure class to which the exposure is assigned and, to the extent specified in Section 2 of this Subtitle, its credit quality. (3) Credit quality may be determined by reference to the credit assessments of external credit assessment institutions (ECAI) or the credit assessments of export credit agencies (ECA) in accordance with Section 3 of this Subtitle. (4) With the exception of exposures assigned to the exposure classes set out in Article 149 items 1), 2) and 3) of this Decision where the assessment in accordance with
Article 106 paragraph (6) of the Law reflects higher risk characteristics than those
implied by the credit quality step to which the exposure would be assigned based on the applicable credit assessment of the nominated ECAI or export credit agency, the credit institution shall assign a risk weight at least one credit quality step higher than the risk weight implied by the credit assessment of the nominated ECAI or export credit agency.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 146 (5) For the purposes of applying a risk weight, as referred to in paragraphs (1) to (4) of this Article, the exposure value shall be multiplied by the risk weight specified or determined in accordance with Section 2 of this Subtitle. (6) Where an exposure is subject to credit protection, the exposure value or the risk weight applicable to that exposure, as appropriate, may be amended in accordance with this Subtitle and Subtitle 4 of this Title. (7) Risk-weighted exposure amounts for securitised exposures shall be calculated in accordance with Subtitle 5 of this Title. (8) The exposure value of any item for which no risk weight is provided in Section 2 of this Subtitle shall be assigned a risk-weight of 100%. (9) With the exception of exposures giving rise to Common Equity Tier 1, Additional Tier 1 or Tier 2 items, a credit institution may, subject to the authorisation of the Central Bank, decide not to apply the requirements of paragraphs (1) to (4) of this Article to the exposures to a counterparty which is its parent undertaking, its subsidiary undertaking, a subsidiary undertaking of its parent undertaking or an undertaking that is managed by that credit institution on a unified basis pursuant to a contract concluded with that undertaking or provisions in the memorandum or articles of association of that undertaking, or the administrative, management or supervisory bodies of that undertaking consist for the major part of the same persons in the credit institution. (10) The Central Bank shall grant the authorisation referred to in paragraph (9) of this
Article if the following conditions are fulfilled:

the counterparty is a credit institution, a financial institution subject to
appropriate prudential requirements;
the counterparty is included in the same consolidation as the credit institution
on a full basis;
the counterparty is subject to the same risk evaluation, measurement and
control procedures as the credit institution;
the counterparty is established in Montenegro; and
there is no current or foreseen material practical or legal impediment to the
prompt transfer of own funds or repayment of liabilities from the counterparty to the credit institution. (11) Where the credit institution, in accordance with paragraphs (9) and (10) of this
Article, is authorised by the Central Bank not to apply the requirements referred to in
paragraph (1) of this Article, it may assign a risk weight of 0 % to those exposures.
Section 2 - Risk weights
Exposures to central governments or central banks
Article 151
(1) Exposures to central governments and central banks shall be assigned a 100% risk weight, except in the cases referred to in paragraphs (2) to (6) of this Article.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 147 (2) Exposures to central governments and central banks for which a credit assessment by a nominated ECAI is available shall be assigned a risk weight in accordance with
Table 1 referred to in this paragraph, which corresponds to the credit assessment of
the ECAI in accordance with Article 178 paragraph (3) of this Decision.
Table 1
Credit quality step 1 2 3 4 5 6
Risk weight 0% 20% 50% 100% 100% 150%
(3) Exposures to the European Central Bank (ECB) shall be assigned a 0% risk weight. (4) Exposures to EU Member States' central governments, and central banks denominated and funded in the domestic currency of that central government and central bank shall be assigned a risk weight of 0%. (5) Exposures to the Government of Montenegro and the Central Bank denominated and funded in EUR shall be assigned a risk weight of 0%. (6) Exposures to third countries' central governments and central banks denominated and funded in the domestic currency of those countries may be assigned a risk weight which is lower than that indicated in paragraphs (1) and (2) of this Article, if the following conditions are met:

those third countries are considered countries equivalent tin accordance with
Article 3 item 113) of this Decision;
competent authorities of those third countries assigned risk weights which are
lower than those referred to in paragraphs (1) and (2) of this Article. (7) A credit institution shall assign risk weights to the exposures referred to in paragraph (6) of this Article which are equal to those assigned by competent authorities of third countries. (8) Exposure to the central government, within the meaning of this Decision, shall be exposures to government units funded from the State Budget, as follows:
in Montenegro: exposures to the Parliament of Montenegro, the Government of
Montenegro, the President of Montenegro, the ministries, the Constitutional Court, basic courts, higher courts, the Supreme Court, the Administrative Court, commercial courts, the Appellate Court, the State Prosecutor's Office, the Police Administration, other spending units and independent spending units;
other spending units shall be: the Protector of Human Rights and Freedoms,
the State Audit Institution of Montenegro (hereinafter: the State Audit Institution), state funds, public institutions and other independent legal persons funded from the State Budget;
other independent spending units shall be: independent government bodies
and other legal persons that are not part of the ministries but are funded from the State Budget;
in other countries: exposures to government units funded from the budget and
which are treated as central government in accordance with regulations of those countries governing the operations of credit institutions.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 148 Exposures to regional governments or local authorities
Article 152
(1) Exposures to regional governments or local authorities for which a credit assessment by a nominated ECAI is available shall be assigned a risk weight in accordance with Table 1 of this paragraph, which corresponds to the credit assessment of the ECAI in accordance with Article 178 paragraph (3) of this Decision.
Table 1
Credit quality step 1 2 3 4 5 6
Risk weight 20% 50% 50% 100% 100% 150%
(2) Exposures to regional governments or local authorities for which a credit assessment by a nominated ECAI is not available shall be assigned a risk weight in accordance with Table 2 of this paragraph that corresponds to the credit quality step to which exposures to the central government of the jurisdiction in which regional governments or local authorities are incorporated are assigned.
Table 2
Credit quality step 1 2 3 4 5 6
Risk weight 20% 50% 100% 100% 100% 150%
(3) Exposures to regional governments or local authorities referred to in paragraph (2) of this Article shall be assigned a risk weight of 100% where the central government of the jurisdiction in which regional governments or local authorities are incorporated is unrated. (4) By way of derogation from paragraphs (1) to (3) of this Article, exposures to regional governments or local authorities shall be treated as exposures to the central government in whose jurisdiction they are established where there is no difference in risk between such exposures because of the specific revenue-raising powers of the regional governments or local authorities, and the existence of specific institutional arrangements the effect of which is to reduce their risk of default. (5) Exposures to churches or religious communities shall be treated as exposures to regional governments or local authorities where churches or religious communities are constituted in the form of a legal person and raise taxes in accordance with legal acts conferring on them the right to do so, whereat these exposures shall not be subject to the application of paragraph (4) of this Article. (6) By way of derogation from paragraphs (1) to (3) of this Article, where competent authorities of a third-country which applies supervisory and regulatory arrangements at least equivalent to those applied in the EU treat exposures to regional governments or local authorities as exposures to their central government and there is no difference in risk between such exposures because of the specific revenue-raising powers of regional government or local authorities and to specific institutional arrangements to reduce the risk of default, a credit institution may risk weight exposures to such regional governments and local authorities in the same manner.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 149 (7) By way of derogation from paragraphs (1) to (3) of this Article, exposures to regional government or local self-government units of the EU Member States that are not referred to in paragraphs (4), (5) and (6) of this Article and are denominated and funded in the domestic currency of that regional government or local self-government unit shall be assigned a risk weight of 20 %. (7) Exposures to local self-government units in Montenegro which are denominated and funded in EUR shall be assigned a risk weight 20%. Exposures to public sector entities
Article 153
(1) Exposures to public sector entities for which there is no credit assessment by a nominated ECAI shall be assigned a risk weight in accordance with Table 1 of this paragraph, which corresponds to the credit quality step assigned to exposures to the central government in which the public sector entity is incorporated.
Table 1
credit quality step assigned to the central government 1 2 3 4 5 6 risk weight 20% 50% 100% 100% 100% 150% (2) Exposures to public sector entities established in countries whose central government does not have an established credit assessment from an ECAI shall be assigned a risk weight of 100%. (3) Exposures to public sector entities for which a credit assessment by a nominated ECAI is available shall be treated in accordance with Article 152 paragraph (1) of this Decision. (4) Exposures to public sector entities with an original maturity of three months or less shall be assigned a risk weight of 20%. (5) In exceptional circumstances, a credit institution may treat exposures to public sector entities established in Montenegro as exposures to the Government of Montenegro, i.e. local self-government units, only if there are guarantees from the Government of Montenegro, i.e. local self-government units, so that, in the opinion of the Central Bank, there is no difference in risk between the mentioned exposures. (6) In exceptional circumstances, exposures to public sector entities from EU Member States may be treated as exposures to the central government, regional or local selfgovernment unit of that EU Member State under whose jurisdiction they are established, if, in the opinion of the competent authority of those EU Member States, there is no difference in risk between the said exposures due to the existence of a guarantee by the central government or regional or local self-government unit. (7) Exposures to public sector entities from third countries that are considered equivalent countries within the meaning of Article 3 paragraph (1) item 113 of this Decision, which are treated by the competent authorities of those third countries in

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 150 accordance with paragraphs (1) and (2) or paragraph (3) of this Article, may be treated by a credit institution in the same manner as those competent authorities, and if this is not the case, a risk weight of 100% shall be applied. Exposures to multilateral development banks
Article 154
(1) Exposures to multilateral development banks not listed in paragraph (4) of this
Article and for which a credit assessment by a nominated ECAI is available shall be
assigned a risk weight in accordance with Table 1 of this paragraph.
Table 1
credit quality step 1 2 3 4 5 6 risk weight 20% 30% 50% 100% 100% 150% (2) Exposures to multilateral development banks not listed in paragraph (4) of this
Article, for which there is no credit assessment by a nominated ECAI, shall be
assigned a risk weight of 50%.
3) Multilateral development banks are considered to be:

Inter-American Investment Corporation;
Black Sea Trade and Development Bank;
Central American Bank for Economic Integration and
CAF - Development Bank of Latin America.
(4) Exposures to the following multilateral development banks are assigned a risk weight of 0%:
International Bank for Reconstruction and Development;
International Finance Corporation;
Inter-American Development Bank;
Asian Development Bank;
African Development Bank;
Council of Europe Development Bank;
Nordic Investment Bank;
Caribbean Development Bank;
European Bank for Reconstruction and Development;
10)European Investment Bank;
11)European Investment Fund;
12)Multilateral Investment Guarantee Agency;
13)International Finance Facility for Immunisation; 14)Islamic Development Bank; 15)International Development Association; 16)The Asian Infrastructure Investment Bank. (5) The part of the unpaid subscribed capital of the European Investment Fund shall be assigned a risk weight of 20%.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 151 Exposures to international organisations
Article 155
A risk weight of 0% is assigned to exposures to the following international organisations:

the European Union and the European Atomic Energy Community;
the International Monetary Fund;
the Bank for International Settlement;
the European Financial Stability Facility;
the European Stability Mechanism;
an international financial institution established by two or more EU Member
States, whose aim is to provide financing and financial assistance to its members that are in serious financial difficulties or threatened with such difficulties. Exposures to credit institutions
Article 156
(1) Exposures to credit institutions for which a credit assessment by a nominated ECAI is available shall be risk-weighted in accordance with Article 157 of this Decision. (2) Exposures to credit institutions for which a credit assessment by a nominated ECAI is not available shall be risk-weighted in accordance with Article 158 of this Decision. (3) Exposure to a credit institution in the form of reserve requirement that a credit institution holds with another credit institution shall be risk weighted as an exposure to the Central Bank, the ECB or an EU Member State, if the following conditions are met:
the applicable regulations governing the reserve requirement of credit
institutions regulate holding of the reserve requirement with another credit institution;
in the event of the bankruptcy or winding-up of the credit institution where the
reserve requirements are held, the reserve requirements are fully repaid to the credit institution in a timely manner and are not made available to meet other liabilities of the credit institution. (4) Exposures to financial institutions authorised and supervised by the Central Bank and subject to prudential requirements comparable to those applied to credit institutions in terms of robustness shall be treated as exposures to credit institutions (5) For the purposes of paragraph (4) of this Article, a financial institution shall be a legal person other than the credit institution whose activity is defined in Article 16 item
of the Law and which performs financial services as laid down in Article 5 items 2)
to 6), 9) to 12) and items 14) and 15) of the Law.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 152 Exposures to rated credit institutions
Article 157
(1) Exposures to credit institutions for which a credit assessment by a nominated ECAI is available shall be assigned a risk weight in accordance with Table 1 of this paragraph, which corresponds to the credit assessment of the ECAI in accordance with Article 178 paragraph (3) of this Decision.
Table 1
Credit quality step 1 2 3 4 5 6
Risk weight 20% 30% 50% 100% 100% 150%
(2) Exposures to a credit institution with an original maturity of three months or less for which a credit assessment by a nominated ECAI is available and exposures which arise from the movement of goods across national borders with an original maturity of six months or less and for which a credit assessment by a nominated ECAI is available, shall be assigned a risk weight in accordance with Table 2 of this paragraph, which corresponds to the credit assessment of the ECAI in accordance with Article 178 paragraph (3) of this Decision.
Table 2
Credit quality step 1 2 3 4 5 6
Risk weight 20% 20% 20% 50% 50% 150%
(3) The interaction between the treatment of short-term credit assessment under
Article 171 of this Decision and the general preferential treatment for short-term
exposures set out in paragraph (2) of this Article shall be as follows:

if there is no short-term exposure assessment, the general preferential
treatment for short-term exposures as specified in paragraph (2) of this Article shall apply to all exposures to credit institutions of up to three months residual maturity;
if there is a short-term assessment and such an assessment determines the
application of a more favourable or identical risk weight than the use of the general preferential treatment for short-term exposures, as specified in paragraph (2) of this Article, then the short-term assessment shall be used for that specific exposure only, and other short-term exposures shall follow the general preferential treatment for short-term exposures, as specified in paragraph (2) of this Article;
if there is a short-term assessment and such an assessment determines a less
favourable risk weight than the use of the general preferential treatment for short-term exposures, as specified in paragraph (2) of this Article, then the general preferential treatment for short-term exposures shall not be used and all unrated short-term claims shall be assigned the same risk weight as that applied by the specific short-term assessment.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 153 Exposures to unrated credit institutions
Article 158
(1) Exposures to credit institutions for which a credit assessment by a nominated ECAI is not available shall be assigned to one of the following grades:

where all of the following conditions are met, exposures to credit institutions
shall be assigned to Group A:

the credit institution has adequate capacity to meet its financial
commitments, including repayments of principal and interest, in a timely manner, for the projected life of the assets or exposures and irrespective of economic cycles and business conditions;
the credit institution meets or exceeds the requirement laid down in Article
134 paragraph (1) of the Law, taking into account stricter macroprudential requirements when identifying increased macroprudential risks, where applicable, the specific own funds requirements referred to in Article 279 of the Law, the combined buffer requirement defined in Article 166 of the Law, or any equivalent and additional local supervisory or regulatory requirements in third countries insofar as those requirements are published and are to be met by Common Equity Tier 1 capital, Tier 1 capital or own funds, as applicable;
information about whether the requirements referred to in indent 2 of this
item are met or exceeded by the credit institution is publicly disclosed or otherwise made available to the lending credit institution;
the assessment performed by the lending credit institution in accordance
with Article 106 of the Law has not revealed that the credit institution does not meet the conditions set out in indents 1 and 2 of this item;

where all of the following conditions are met and at least one of the conditions
in item 1) of this paragraph is not met, exposures to credit institutions shall be assigned to Group B:

the credit institution is subject to substantial credit risk, including repayment
capacities that are dependent on stable or favourable economic or business conditions;
the credit institution meets or exceeds the requirement laid down in Article
134 paragraph (2) of the Law, taking into account stricter macroprudential requirements when identifying increased macroprudential risks, where applicable, the specific own funds requirements referred to in Article 279 of the Law, or any equivalent and additional local supervisory or regulatory requirements in third countries insofar as those requirements are published and are to be met by Common Equity Tier 1 capital, Tier 1 capital or own funds, as applicable;
information about whether the requirements referred to in indent 2 of this
item are met or exceeded by the credit institution is publicly disclosed or otherwise made available to the lending credit institution;
the assessment performed by the lending credit institution in accordance
with Article 106 of the Law has not revealed that the institution does not meet the conditions set out in indents 1 and 2 of this item.

where exposures to credit institutions are not assigned to Group A or B, or
where any of the following conditions is met, exposures to credit institutions shall be assigned to Group C:

the credit institution has material default risks and limited margins of safety;

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 154

adverse business, financial or economic conditions are very likely to lead,
or have led, to the credit institution’s inability to meet its financial commitments;
where audited financial statements are required by law for the credit
institution, the external auditor has issued an adverse audit opinion or has expressed substantial doubt about the credit institution’s ability to continue as a going concern in its audited financial statements or audited reports within the previous 12 months. (2) For the purposes of paragraph (1) item 2) indent 2 of this Article, equivalent and additional local supervisory or regulatory requirements shall not include capital buffers equivalent to those defined in Article 166 of the Law. (3) For exposures to financial institutions that are treated as exposures to credit institutions in accordance with Article 156 paragraph (4) of this Decision, for the purpose of assessing whether the conditions set out in paragraph (1) item 1) indent 2 and item 2) indent 2 of this Article, a credit institution shall assess whether those financial institutions meet or exceed any comparable prudential requirements. (4) Exposures assigned to Group A, B or C in accordance with paragraph (1) of this
article shall be assigned a risk weight as follows:

exposures assigned to Group A, B or C which meet any of the following
conditions shall be assigned a risk weight for short-term exposures in accordance with paragraph (1) of this Article:

the exposure has an original maturity of three months or less;
the exposure has an original maturity of six months or less and arises from
the movement of goods across national borders;

exposures assigned to Group A which are not short term shall be assigned a risk
weight of 30 % where all of the following conditions are met:

the exposure does not meet any of the conditions set out in item 1) of
this paragraph;
the credit institution’s Common Equity Tier 1 capital ratio is equal to or
higher than 14 %;
the credit institution’s leverage ratio is equal to or higher than 5 %;

exposures assigned to Group A, B or C that do not meet the conditions set out in
items 1) or 2) of this Article shall be assigned a risk weight in accordance with Table 1 referred to in this paragraph.
Table 1
Credit risk assessment Group A Group B Group C Risk weight for short-term exposures 20% 50% 150% Risk weight 40% 75% 150% (5) Where an exposure to a credit institution is not denominated in the domestic currency of the jurisdiction of incorporation of that credit institution, or where that credit institution has booked the credit obligation in a branch in a different jurisdiction and the exposure is not in the domestic currency of the jurisdiction in which the branch operates, the risk weight assigned in accordance with item 1), 2) or 3) of this Article to exposures other than those with a maturity of one year or less stemming from self-

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 155 liquidating, trade-related contingent items that arise from the movement of goods across national borders shall not be lower than the risk weight of an exposure to the central government of the country where the institution is incorporated. Exposures to corporates
Article 159
(1) Exposures for which a credit assessment by a nominated ECAI is available shall be assigned a risk weight in accordance with Table 1 of this paragraph which corresponds to the credit assessment of the ECAI in accordance with Article 178 paragraph (3) of this Decision.
Table 1
Credit quality step 1 2 3 4 5 6
Risk weight 20% 50% 75% 100% 150% 150%
(2) Exposures for which such a credit assessment is not available shall be assigned a 100% risk weight.

Specialised lending exposures
Article 160
(1) A credit institution shall, within the corporate exposure class referred to in Article 149 item 7) of this Decision, separately identify as specialised lending exposures, exposures with all of the following characteristics:

the exposure is to an entity which was created specifically to finance or operate
physical assets or is an exposure that is economically comparable to such an exposure;
the exposure is not related to the financing of residential property or commercial
immovable property and is within the definitions of object finance, project finance or commodity finance exposures laid down in paragraph (3) of this Article;
the contractual arrangements governing the obligation related to the exposure
give the credit institution a substantial degree of control over the assets and the income that they generate;
the primary source of repayment of the obligation related to the exposure is the
income generated by the assets being financed, rather than the independent capacity of a broader commercial enterprise. (2) Specialised lending exposures for which a directly applicable credit assessment by a nominated ECAI is available shall be assigned a risk weight in accordance with Table 1 referred to in this paragraph.
Table 1
Credit quality step 1 2 3 4 5 6
Risk weight 20% 50% 75% 100% 150% 150%
(3) Specialised lending exposures for which a directly applicable credit assessment by a nominated ECAI is not available shall be assigned a risk weight as follows:

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 156

100%, where the purpose of a specialised lending exposure is to finance the
acquisition of physical assets, including ships, aircraft, satellites, railcars, and fleets, and the income to be generated by those assets comes in the form of cash flows generated by the specific physical assets that have been financed and pledged or assigned to the lender (‘object finance exposures’);
100%, where the purpose of a specialised lending exposure is to provide for
short-term financing of reserves, inventories or receivables of exchange-traded commodities, including crude oil, metals or crops, and the income to be generated by those reserves, inventories or receivables is to be the proceeds from the sale of the commodity (‘commodity finance exposures’);
where the purpose of a specialised lending exposure is to finance an individual
project, either in the form of construction of a new capital installation or refinancing of an existing installation, with or without improvements, for the development or acquisition of large, complex and expensive installations, including power plants, chemical processing plants, mines, transportation infrastructure, environment, and telecommunications infrastructure, in which the lending credit institution looks primarily to the revenues generated by the financed project, both as the source of repayment and as security for the loan (‘project finance exposures’), a credit institution shall apply the following risk weights:

130% where the project to which the exposure is related is in the preoperational phase;
80%, provided that the adjustment to own funds requirements for credit risk
referred to in Article 116 of this Decision is not applied, where the project to which the exposure is related is in the operational phase and the exposure meets all of the following criteria referred to in paragraph (5) of this Article;
100% where the project to which the exposure is related is in the operational
phase and the exposure does not meet the conditions set out in paragraph (5) of this Article. (4) Operational phase, within the meaning of paragraph (3) item 3) of this Article, shall be the phase in which the entity that was specifically created to finance the project, or that is economically comparable, meets both of the following conditions:

the entity has a positive net cash flow that is sufficient to cover any remaining
contractual obligation;
the entity has a declining long term debt.
(5) Exposure for which weight referred to in paragraph (3) item 3) indent 2 is assigned shall meet the following conditions:
there are contractual restrictions on the ability of the debtor to perform activities
that might be detrimental to lending credit institution, including the restriction that new debt cannot be issued without the consent of existing debt providers;
the debtor has sufficient reserve funds fully funded in cash, or other financial
arrangements with an entity, to cover the contingency funding and working capital needs over the lifetime of the project being financed, provided that the entity is assigned an ECAI rating by a recognised ECAI with a credit quality step of at least 3 or, in the case of credit institution calculating risk-weighted exposure amounts and expected loss amounts by applying IRB Approach, where the entity does not have a credit assessment by a recognised ECAI, that entity is assigned with an internal credit rating equivalent to a credit quality step

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 157 of at least 3 by the credit institution, provided that that entity is internally rated by the credit institution in accordance with the provisions of Subtitle 3 Section 6 of this Title;
3) the project to which the exposure is related generates cash flows that are
predictable and cover all future loan repayments;
4) where the revenues of the debtor are not funded by payments from a large
number of users, the source of repayment of the obligation depends on one main counterparty and that main counterparty is one of the following:

a central bank, a central government, a regional or a local-self government
units, provided that they are assigned a risk weight of 0 % in accordance with Articles 151 and 152 of this Decision, or are assigned an ECAI rating with a credit quality step of at least 3 by a recognised ECAI; or, in the case of credit institution calculating risk-weighted exposure amounts and expected loss amounts by applying IRB Approach, where the central bank, central government, regional or local self-government units do not have a credit assessment by a recognised ECAI, they are assigned with an internal credit rating equivalent to a credit quality step of at least 3 by the credit institution, provided that they are internally rated by the institution in accordance with the provisions of Subtitle 3 Section 6 of this Title;
a public sector entity, provided that that entity is assigned a risk weight of
20% or below in accordance with Article 153 of this Decision, or is assigned an ECAI rating with a credit quality step of at least 3 by a recognised ECAI or, in the case of credit institution calculating risk-weighted exposure amounts and expected loss amounts by applying IRB Approach, where the public sector entity does not have a credit assessment by a recognised ECAI, that public sector entity is assigned with an internal credit rating equivalent to a credit quality step of at least 3 by the institution, provided that that public sector entity is internally rated by the credit institution in accordance with Subtitle 3 Section 6 of this Title;
a business undertaking (corporate entity) which has been assigned an
ECAI rating with a credit quality step of at least 3 by a recognised ECAI, or, in the case of credit institution calculating risk-weighted exposure amounts and expected loss amounts by applying IRB Approach, where the corporate entity does not have a credit assessment by a recognised ECAI, that corporate entity is assigned an internal credit rating equivalent to a credit quality step of at least 3 by the credit institution, provided that that corporate entity is internally rated by the institution in accordance with the provisions of Subtitle 3 Section 6 of this Title;

the contractual provisions governing the exposure to the debtor provide for a
high degree of protection for the lending credit institution in the case of a default of the debtor;
the main counterparty, or other counterparties which similarly comply with the
eligibility criteria for the main counterparty, effectively protect the lending credit institution against losses resulting from the termination of the project;
all assets and contracts necessary to operate the project have been pledged to
the lending credit institution to the extent permitted by applicable law;
the lending credit institution is able to take control of the debtor entity in the
case of a default event.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 158 (6) For the purposes of paragraph (5) item 3 of this Article, the cash flows generated shall not be considered predictable unless a substantial part of the revenues satisfies one or more of the following conditions:

the revenues are availability-based, meaning that, once construction is
completed, the debtor is entitled, as long as the contractual conditions are fulfilled, to payments from its contractual counterparties which cover operating and maintenance costs, debt service costs and equity returns as the debtor operates the project, and those payments are not subject to swings in demand, such as traffic levels, and are adjusted typically only for lack of performance or lack of availability of the asset to the public;
the revenues are subject to a rate-of-return regulation;
the revenues are subject to a take-or-pay contract.
Retail exposures
`Article 161
(1) Retail exposures mean exposures that meet the following criteria:
the exposure to one or more natural persons or to an SME (hereinafter: retail);
the total amount owed to the credit institution, its parent undertakings and its
subsidiary undertakings, by the debtor or group of connected persons, including any exposure in default but excluding exposures secured by residential property, up to the property value shall not, to the knowledge of the credit institution, which shall take reasonable steps to confirm the situation, exceed EUR 500,000;
the exposure represents one of a significant number of exposures with similar
characteristics, such that the risks associated with such exposure are substantially reduced;
the credit institution treats the exposure in its risk management framework and
manages the exposure internally as a retail exposure consistently over time and in a manner that is similar to the treatment by the credit institution of other retail exposures. (2) When determining whether the exposure value meets the threshold laid down in paragraph (1) item 3) of this Article, a credit institution shall not reduce the amount of total debt referred to in paragraph (1) item 3) of this Article by the value adjustments determined based on those exposures, but it shall take gross amount. (3) The present value of retail minimum lease payments shall be eligible for the retail exposure class. (4) Exposures that do not comply with the criteria referred to in paragraph (1) items 1) to 3) of this Article shall not be eligible for the retail exposures class. (5) The following exposures shall not be considered to be retail exposures:
non-debt exposures conveying a subordinated, residual claim on the assets
or income of the issuer;
debt exposures and other securities, partnerships, derivatives, or other
vehicles, the economic substance of which is similar to the exposures specified in item 1) of this paragraph;
all other exposures in the form of securities.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 159 (6) Retail exposures as referred to in paragraph (1) of this Article shall be assigned a risk weight of 75%, with the exception of transactor exposures, which shall be assigned a risk weight of 45%. (7) Where any of the criteria referred to in paragraph (1) of this Article are not met for an exposure to one or more natural persons, the exposure shall be considered a retail exposure and shall be assigned a risk weight of 100%. (8) By way of derogation from paragraph (1) of this Article, exposures due to loans granted by a credit institution to pensioners or employees with a permanent contract against the unconditional transfer of part of the borrower's pension or salary to that credit institution shall be assigned a risk weight of 35%, provided that the following conditions are met:

to repay the loan, the borrower unconditionally authorises the pension fund or
employer to make direct payments to the credit institution by deducting the monthly payments on the loan from the borrower's monthly pension or salary;
the risks of death, inability to work, unemployment or reduction of the net
monthly pension or salary of the borrower are properly covered through an insurance policy underwritten by the borrower to the benefit of the credit institution;
the monthly payments to be made by the borrower on all loans that meet the
conditions set out in items 1) and 2) of this paragraph do not in aggregate exceed 20% of the borrower's net monthly pension or salary;
the maximum original maturity of the loan is equal to or less than ten years.
Exposures to a currency mismatch
Article 162
(1) A credit institution shall, for exposures to natural persons that are assigned to the exposure class referred to in Article 149 item 8) of this Decision, or for exposures to natural persons that qualify as exposures secured by mortgages on residential property that are assigned to the exposure class referred to in this Section shall be multiplied by a factor of 1,5, whereby the resulting risk weight shall not be higher than 150%, where the following conditions are met:
the exposure is denominated in a currency which is different from the currency of
the debtor’s source of income;
the debtor does not have a hedge for its payment risk due to the currency
mismatch, either by a financial instrument or foreign currency income that matches the currency of the exposure, or the total of such hedges available to the borrower covers less than 90% of each instalment for this exposure. (2) Where a credit institution is unable to single out those exposures with a currency mismatch, the risk weight multiplier of 1,5 shall apply to all unhedged exposures where the currency of the exposures is different from the domestic currency of the country of residence of the debtor. (3) For the purposes of this Article, source of income refers to any source that generates cash flows to the debtor, including from remittances, rental incomes or salaries, whilst

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 160 excluding proceeds from selling assets or similar recourse actions by the credit institution. (4) By way of derogation from paragraph (1), where the pair of currencies referred to in paragraph (1) item 1) of this Article is composed of the euro and the currency of a Member State participating in the second stage of economic and monetary union (ERM II), the risk weight multiplier of 1,5 shall not apply. Exposures secured by mortgages on immovable property
Article 163
(1) A credit institution shall treat a non-ADC exposure that does not meet all of the conditions set out in paragraph (3) of this Article, or any part of a non-ADC exposure that exceeds the nominal amount of the lien on the property, as follows:

a non-IPRE exposure shall be risk weighted as an exposure to the counterparty
that is not secured by the immovable property concerned;
an IPRE exposure shall be assigned a risk weight of 150%.
(2) A credit institution shall treat a non-ADC exposure, up to the nominal amount of the lien on the property, where all of the conditions set out in paragraph (3) of this
Article are met, as follows:
where the exposure is secured by a residential property, a credit institution shall
treat:
a non-IPRE exposure in accordance with Article 164 paragraphs 1) to 5) of this Decision; an IPRE exposure in accordance with 164 paragraphs 1) to 5) of this Decision where it meets any of the following conditions:
a) the immovable property securing the exposure is the debtor’s primary residence, either where the immovable property as a whole constitutes a single housing unit or where the immovable property securing the exposure is a housing unit that is a separated part within the immovable property; b) the exposure is to a natural person and is secured by an incomeproducing residential housing unit, either where the immovable property as a whole constitutes a single housing unit or where the housing unit is a separated part within the immovable property, and total exposures of the credit institution to that natural person are not secured by more than four immovable properties, including those which are not residential properties or which do not meet any of the criteria set out in this item, or separate housing units within immovable properties; c) the exposure is to associations or cooperatives of natural persons that are regulated by national law and exist with the sole purpose of granting their members the use of a primary residence in the property securing the loan; d) the exposure is to public housing companies or not-for-profit associations that are regulated by law and exist to serve social purposes and to offer tenants long-term housing; (iii) an IPRE exposure which does not meet any of the conditions set out in indent 2 of this item, shall be treated in accordance with Article 164 paragraphs 6) and 7) of this Decision;

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 161
2) where the exposure is secured by commercial immovable property, it shall be
treated as follows:
a non-IPRE exposure shall be treated in accordance with 164 paragraphs

to 5) of this Decision;
an IPRE exposure shall be treated in accordance with Article 164 paragraphs 6) and 7) of this Decision. (3) In order to be eligible for the treatment referred to in paragraph (2) of this Article, an exposure secured by an immovable property shall fulfil all of the following conditions:
the immovable property securing the exposure meets any of the following
conditions:
the immovable property has been fully completed; the immovable property is forest or agricultural land; the lending is to a natural person and the immovable property is either a residential property under construction or it is land upon which a residential property is planned to be constructed where that plan has been legally approved by all relevant authorities, as applicable, and where any of the following conditions is met:
a) the immovable property does not have more than four residential housing units and will be the primary residence of the debtor and the lending to the natural person is not indirectly financing ADC exposures; b) a central government, regional government or local self-government unit or a public sector entity is involved, exposures to which are treated in accordance with Article 152 paragraph (4) or Article 153 paragraphs
and 6) of this Decision, and has the legal powers and ability to ensure
that the property under construction will be finished within a reasonable time frame and is required, or has committed in a legally binding manner, to ensure completion where the construction would otherwise not be finished within such reasonable time frame; alternatively, there is an equivalent legal mechanism in place to ensure that the property under construction is completed within a reasonable timeframe;
the exposure is secured by a first lien held by the institution on the immovable
property, or the credit institution holds the first lien and any sequentially lower ranking lien on that property;
the property value is not materially dependent upon the credit quality of the
debtor;
all information required at origination of the exposure and for monitoring
purposes is properly documented, including information on the ability of the debtor to repay and on the valuation of the property;
the requirements set out in Article 246 of this Decision are met and the valuation
rules set out in Article 265 paragraph (1) of this Decision are complied with. (4) For the purposes of paragraph (3) item 3) of this Article, a credit institution may exclude situations where purely macro-economic factors affect both the property value and the performance of the debtor. (5) For the purposes of paragraph (3) item 4) of this Article, a credit institution shall put in place underwriting policies with respect to the origination of exposures secured by

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 162 immovable property that include the assessment of the ability of the borrower to repay and relevant metrics for that assessment and their respective maximum levels. (6) By way of derogation from paragraph (3) item 2) of this Article, in jurisdictions where junior liens provide the holder with a claim on collateral that is legally enforceable and constitutes an effective credit risk mitigant, junior liens held by an institution other than the one holding the senior lien may also be recognised, including where the credit institution does not hold the senior lien or does not hold a lien ranking between a more senior lien and a more junior lien both held by the credit institution. (7) For the purposes of paragraph (6) of this Article, the rules governing the liens shall ensure all of the following:

each credit institution holding a lien on a property can initiate the sale of the
property independently from other entities holding a lien on the property;
where the sale of the property is not carried out by means of a public auction,
entities holding a senior lien take reasonable steps to obtain a fair market value or the best price that may be obtained in the circumstances when exercising any power of sale on their own. (8) For the purpose of calculating risk-weighted exposure amounts for undrawn facilities, liens that satisfy all eligibility requirements set out in paragraph (3) of this
Article and, where applicable, paragraphs (4) and (5) of this Article, may be recognised
where drawing under the facility is conditional on the prior or simultaneous filing of a lien to the extent of the credit institution’s interest in the lien once the facility is drawn, such that the credit institution does not have any interest in the lien to the extent that the facility is not drawn. (9) For the purposes of Article 164 paragraphs (6) and (7) and Article 165 paragraphs
and 7) of this Decision, the exposure-to-value (‘ETV’) ratio shall be calculated by
dividing the gross exposure amount by the property value subject to the following conditions:
the gross exposure amount shall be calculated as the accounting value of the
asset item related to the exposure secured by immovable property and any undrawn but committed amount that, once drawn, would increase the exposure value of the exposure which is secured by immovable property; that gross exposure amount shall be calculated without taking into account:
specific credit risk adjustments in accordance with Article 144 of this Decision; additional value adjustments in accordance with Article 17 of this Decision related to the non-trading book business of the credit institution; amounts deducted in accordance with Article 19 items 14), 16) and 17) of this Decision; and other own funds reductions related to the asset item;
the gross exposure amount shall be calculated without taking into account any
type of funded or unfunded credit protection, except for pledged deposits accounts with the lending credit institution that meet all requirements for onbalance-sheet netting, either under master netting agreements in accordance with Articles 234 and 244 of this Decision or under other on-balance-sheet netting agreements in accordance with Articles 233 and 243 of this Decision and have been unconditionally and irrevocably pledged for the sole purpose

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 163 of fulfilling the credit obligation related to the exposure secured by immovable property;
3) for exposures that are required to be treated in accordance with Article 164
paragraphs 6) and 7) or Article 165 paragraphs 6) and 7) of this Decision where a party other than the credit institution holds a senior lien and a junior lien held by the credit institution is recognised under paragraphs 6) and 7) of this Article, the gross exposure amount shall be calculated as the sum of the gross exposure amount of the lien held by the credit institution and of the gross exposure amounts for all other liens of equal or higher ranking seniority than the lien held by the credit institution. (10) For the purposes of paragraph (9) item 1) of this Article, where a credit institution has more than one exposure secured by the same immovable property and those exposures are secured by liens on that immovable property that are sequential in ranking order without any lien held by a third party ranking in-between, the exposures shall be treated as a single combined exposure and the gross exposure amounts for the individual exposures shall be summed up to calculate the gross exposure amount for the single combined exposure. (11) For the purposes of paragraph (9) item 3) of this Article, where there is insufficient information to be able to ascertain the ranking of the other liens, the credit institution shall treat those liens as ranking pari passu with the junior lien held by the credit institution, whereby the credit institution shall first determine the risk weight in accordance with Article 164 paragraphs 6) and 7) or Article 165 paragraphs 6) and 7) of this Decision (the ‘base risk weight’), as applicable, and it shall then adjust this risk weight by a multiplier of 1,25, for the purposes of calculating the risk-weighted amounts of junior liens, and the risk weight resulting from multiplying the base risk weight by 1,25 shall be capped at the risk weight that would be applied to the exposure if the requirements in paragraph (3) of this Article were not met. (12) Where the base risk weight corresponds to the lowest exposure-to-default bucket, the multiplier shall not be applied. (13) Where a credit institution leases immovable property (leasing transaction), its exposure to a tenant under an immovable property leasing transaction under which the credit institution is the lessor and the tenant has an option to purchase shall qualify as exposures secured by immovable property and shall be treated in accordance with the treatment set out in Article 164 or 165 of this Decision, if the applicable conditions set out in this Article are met, provided that the exposure of the credit institution is secured by its ownership of the property. (14) Where the Central Bank, on the basis of the analysis of data collected from credit institutions, in accordance with paragraph (16) of this Article, and on any other relevant indicators, assesses that the risk weights laid down in Articles 164 and 165 of this Decision, for exposures secured by immovable property located in the territory of Montenegro are not appropriately based on the loss experience of
exposures secured by immovable property and forward-looking immovable property market developments, or it concludes that the risk weights set out in Article 164 and 165 of this Decision do not adequately reflect the actual risks related to exposures to one or more property segments secured by mortgages on residential property or on

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 164 commercial immovable property located in one or more parts of the territory of Montenegro, and if it considers that the inadequacy of the risk weights could adversely affect current or future financial stability in Montenegro, it may increase the risk weights referred to in Article 164 paragraph (1), Article 164 paragraph (6), Article 165 paragraph (1) or Article 165 paragraph (6) of this Decision or impose stricter criteria than those set out in paragraph (3) of this Article for exposures to one or more property segments secured by mortgages on immovable property located in one or more parts of the territory of Montenegro, whilst those risk weights may not exceed 150%. (15) Where the Central Bank sets higher risk weights or stricter criteria pursuant to paragraph (14) of this Article, the credit institution shall have a six-month transitional period to apply them. (16) A credit institution shall report to the Central on an annual basis the following data:

losses stemming from exposures for which a credit institution has recognised
residential property as collateral, in each case up to the lower of the pledged amount or 55% of the property value of the residential property, unless otherwise decided under Article 14 of this Article, where applicable;
overall losses stemming from exposures for which a credit institution has
recognised residential property as collateral, in each case up to the lower of the pledged amount or 100% of the property value of the residential property;
the exposure value of all outstanding exposures for which an institution has
recognised residential property as collateral, in each case up to the lower of the pledged amount and 100 % of the property value of the residential property;
losses stemming from exposures for which a credit institution has recognised
commercial immovable property as collateral, in each case up to the lower of the pledged amount or 55% of the property value of the commercial immovable property, unless otherwise decided under Article 14 of this Article, where applicable;
overall losses stemming from exposures for which a credit institution has
recognised commercial immovable property as collateral in each case up to the lower of the pledged amount or 100% of the property value of the commercial immovable property;
the exposure value of all outstanding exposures for which a credit institution
has recognised commercial immovable property as collateral, in each case up to the lower of the pledged amount or 100% of the property value of the commercial immovable property. Exposures secured by mortgages on residential property
Article 164
(1) A credit institution shall assign a risk weight of 20% to an exposure secured by residential property as referred to in Article 163 paragraph (2) item 1) indents 1 and 2 of this Decision, the part of the exposure up to 55 % of the property value. (2) Where a credit institution holds a junior lien and there are more senior liens not held by that credit institution, to determine the part of the credit institution’s exposure that is eligible for the 20% risk weight, it shall reduce the amount of 55% of the property value by the amount of the more senior liens not held by the credit institution.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 165 (3) Where liens not held by the credit institution rank pari passu with the lien held by the credit institution, to determine the part of the credit institution’s exposure that is eligible for the 20% risk weight, it shall reduce the amount of 55% of the property value by the amount of any more senior liens not held by the credit institution, and then reduce the obtained amount by the product of the amount referred to in items 1) and
2) of this paragraph:

55% of the property value, reduced by the amount of more senior liens, if any,
both held by the credit institution and held by other credit institutions; and
the amount of liens not held by the credit institution that rank pari passu with the
lien held by the credit institution divided by the sum of all pari passu liens. (4) Where, in accordance with Article 163 paragraph (14) of this Decision, the Central Bank has set a higher risk weight or a lower percentage of the property value than those referred to in paragraph (1) of this Article, a credit institution shall use the risk weight or percentage set in accordance with 163 paragraph (14) of this Decision. (5) The remaining part of the exposure referred to in paragraph (1), if any, shall be risk weighted as an exposure to the counterparty that is not secured by residential property. (6) A credit institution shall assign to an exposure as referred to in Article 163 paragraph (2) item 1) indent 3 the risk weight set in accordance with the respective exposure-to-value risk weight bucket in Table 1.
Table 1
ETV ETV ≤ 50% 50% < ETV
≤ 60%
60% < ETV
≤ 80%
80% < ETV
≤ 90%
90% < ETV
≤ 100%
ETV >
100%
Risk weight 30% 35% 45% 60% 75% 105%
(7) For the purposes of paragraph (6) of this Article, where, in accordance with Article 163 paragraph (14) of this Decision, the Central Bank has set a higher risk weight or a lower exposure-to-value percentage than those referred to in this paragraph, a credit institution shall use the risk weight or percentage set in accordance with 163 paragraph (14) of this Decision. Exposures secured by mortgages on commercial immovable property
Article 165
(1) A credit institution shall assign a risk weight of 60% to an an exposure secured by commercial immovable property as referred to in Article 163 paragraph (2) item 2) indent 1 of this Decision, the part of the exposure up to 55% of the property value. (2) Where a credit institution holds a junior lien and there are more senior liens not held by that credit institution, to determine the part of the credit institution’s exposure that is eligible for the 60% risk weight, it shall reduce the amount of 55% of the property value by the amount of the more senior liens not held by the credit institution. (3) Where liens not held by the credit institution rank pari passu with the lien held by the credit institution, to determine the part of the credit institution’s exposure that is eligible for the 60 % risk weight, it shall reduce the amount of 55% of the property value by the amount of any more senior liens not held by the credit institution, and

55% of the property value, reduced by the amount of more senior liens, if any,
both held by the credit institution and held by other credit institutions; and
the amount of liens not held by the credit institution that rank pari passu with
the lien held by the credit institution divided by the sum of all pari passu liens. (4) Where, in accordance with Article163 paragraph (14) of this Decision, the Central Bank has set a higher risk weight or a lower percentage of the property value than those referred to in this paragraph, a credit institution shall use the risk weight or percentage set in accordance with Article 163 paragraph (14) of this Decision. (5) The remaining part of the exposure referred to in paragraph (1), if any, shall be risk weighted as an exposure to the counterparty that is not secured by commercial immovable property. (6) A credit institution shall assign to an exposure as referred to in Article 163 paragraph (2) item 1) indent 3 the risk weight set in accordance with the respective exposure-to-value risk weight bucket in Table 1.
Table 1
ETV ≤ 60% 60% < ETV ≤ 80% ETV > 80%
Risk weight 70% 90% 110%
(7) For the purposes of paragraph (6) of this Article, where, in accordance with Article 163 paragraph (14) of this Decision, the Central Bank has set a higher risk weight or a lower exposure-to-value percentage than those referred to in this paragraph, a credit institution shall use the risk weight or percentage set in accordance with Article 163 paragraph (14) of this Decision. Land acquisition, development and construction exposures
Article 166
(1) A credit institution shall assign a risk weight of 150% to an ADC exposure. (2) A credit institution may assigne to an ADC exposure to residential property a risk weight of 100%, provided that the credit institution applies sound origination and monitoring standards which meet the requirements laid down in Articles 104 and 106 of the Law and where at least one of the following conditions is met:
legally binding pre-sale or pre-lease contracts for which the purchaser or tenant
has made a substantial cash deposit which is subject to forfeiture if the contract is terminated or where the financing is ensured in an equivalent manner, or legally binding sale or lease contracts, including where the payment is made by instalments as the construction works progress, amount to a significant portion of total contracts;
the debtor has substantial equity at risk, which is represented as an appropriate
amount of debtor-contributed equity to the residential property value upon completion.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 167 Exposures in default
Article 167
(1) The unsecured part of any item where the debtor has defaulted in accordance with
Article 218 of this Decision, or in the case of retail exposures, the unsecured part of
any credit facility which has defaulted in accordance with Article 218 of this Decision shall be assigned a risk weight of:

150%, where the sum of specific credit risk adjustments and of the amounts
deducted in accordance with Article 19 item 14) of this Decision is less than 20% of the unsecured part of the exposure value if those specific credit risk adjustments and deductions were not applied;
100%, where the sum of the specific credit risk adjustments and of the amounts
deducted in accordance with Article 19 item 14) of this Decision is no less than 20% of the unsecured part of the exposure value if those specific credit risk adjustments and deductions were not applied. (2) For the purpose of calculating the specific credit risk adjustments referred to in paragraph (1) of this Article for an exposure that is purchased when already in default, a credit institution shall include in the calculation any positive difference between the amount owed by the debtor on that exposure and the sum of the additional own funds reduction if that exposure were fully written off and any already existing own funds reductions related to that exposure. (3) For the purpose of determining the secured part of the past due item, eligible collateral and guarantees shall be those eligible for credit risk mitigation purposes under Subtitle 4 of this title. (4) The exposure value remaining after specific credit risk adjustments of non-IPRE exposures secured by residential property or commercial immovable property in accordance with Articles 164 and 164 of this Decision, shall be assigned a risk weight of 100% if a default has occurred in accordance with Article 218 of this Decision. Subordinated debt exposures
Article 168
(1) A credit institution shall treat the following exposures as subordinated debt exposures:
debt exposures which are subordinated to claims of ordinary unsecured creditors;
own funds instruments to the extent that those instruments are not considered to
be equity exposures in accordance with Article 178 paragraph (1) of this Decision; and
exposures arising from the institution’s holding of eligible liabilities instruments
that meet the conditions set out in Article 72 of this Decision.
(2) A credit institution shall assign to subordinated debt exposures a risk weight of 150%, unless those subordinated debt exposures are deducted from own funds or subject to the treatment set out in Article 75 paragraph (7) of this Decision. Exposures in the form of covered bonds

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 168
Article 169
(1) To be eligible for the preferential treatment set out in paragraphs (14) and (15) of this Article, covered bonds, which are in accordance with the regulation governing covered bonds issued by credit institutions with registered office in Montenegro or an EU Member State and which are subject to a separate public oversight aimed at protecting bond holder, shall meet the requirements set out in paragraphs (8) to (13) of this Article and shall be collateralised by any of the following eligible assets:

exposures to or guaranteed by central governments, the Government of
Montenegro, the Central Bank of Montenegro, public sector entities or local selfgovernment units;
exposures to or guaranteed by central governments, the ESCB central banks,
public sector entities, regional governments or local authorities in the EU Member States;
exposures to or guaranteed by third country central governments, third-country
central banks, multilateral development banks, international organisations that qualify for the credit quality step 1 in accordance with this Subtitle, and exposures to or guaranteed by third-country public sector entities, third-country regional governments or third- country local authorities that are risk weighted as exposures to institutions or central governments and central banks in accordance with Article 152 paragraphs (2) and (3) or paragraph (4) or Article 153 paragraphs (1) to (3) or paragraphs (5) and (6) of this Decision respectively and that qualify for the credit quality step 1 as set out in this Subtitle, and exposures within the meaning of this item that qualify as a minimum for the credit quality step 1 as set out in this Subtitle, provided that they do not exceed 20% of the nominal amount of outstanding covered bonds of the issuing credit institutions;
exposures to credit institutions that qualify for credit quality step 1 or credit
quality step 2 or exposures to credit institutions that qualify for credit quality step 3 where those exposures are in the form of:

short-term deposits with an original maturity not exceeding 100 days, where
those deposits are used to meet the cover pool liquidity buffer requirement for investor’s protection, and are governed by a regulation governing covered bonds;
derivative contracts that are included in the cover pool exclusively for risk
hedging purposes, their volume is adjusted in the case of a reduction in the hedged risk and they are removed when the hedged risk ceases to exist; the derivative contracts are sufficiently documented; the derivative contracts are segregated in accordance with the regulation governing this issue; the derivative contracts cannot be terminated upon the bankruptcy or resolution of the credit institution that issued the covered bonds; the derivative contracts comply with the rules specifying the eligibility criteria for the hedging counterparties, and the necessary documentation to be provided in relation to derivative contracts;

loans secured by residential property up to the lesser of the principal amount of
the liens that are combined with any prior liens and 80% of the value of the pledged properties;
residential loans fully guaranteed by an eligible protection provider referred to
in Article 239 of this Decision qualifying for the credit quality step 2 or above as set out in this Subtitle, where the portion of each of the loans that is used to

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 169 meet the requirement set out in this paragraph for collateralisation of the covered bond does not represent more than 80% of the value of the corresponding residential property located in France, and where a loan-toincome ratio respects at most 33% when the loan has been granted and there shall be no mortgage liens on the residential property when the loan is granted; the loan-to-income ratio represents the share of the gross income of the borrower that covers the reimbursement of the loan, including the interests; the protection provider shall be either a financial institution authorised and supervised by the competent authorities and subject to prudential requirements comparable to those applied to credit institutions in terms of robustness or a credit institution or an insurance undertaking which shall establish a mutual guarantee fund or equivalent protection for insurance undertakings to absorb credit risk losses, whose calibration shall be periodically reviewed by the competent authority; both the credit institution and the protection provider shall carry out a creditworthiness assessment of the borrower;
7) loans secured by commercial immovable property up to the lesser of the
principal amount of the liens that are combined with any prior liens and 60% of the value of the pledged properties, whereat the loans secured by commercial immovable property are eligible where the loan-to-value ratio of 60% is exceeded up to a maximum level of 70% if the value of the total assets pledged as collateral for the covered bonds exceed the nominal amount outstanding on the covered bond by at least 10 %, and the bondholders’ claim meets the legal certainty requirements set out in Subtitle 4, and the bondholders’ claim shall take priority over all other claims on the collateral;
8) loans secured by maritime liens on ships up to the difference between 60% of
the value of the pledged ship and the value of any prior maritime liens. (2) For the purposes of paragraph (3) of this Article, exposures caused by the transmission and management of the payments of the debtors of loans secured by pledged properties of debt securities or by the transmission and management of liquidation proceeds in respect of such loans shall not be comprised in calculating the limits referred to in that paragraph. (3) For the purposes of paragraph (1) item 3) of this Article, the following shall apply:

for exposures to credit institutions that qualify for credit quality step 1, the
exposure shall not exceed 15% of the nominal amount of outstanding covered bonds of the issuing credit institution;
for exposures to credit institutions that qualify for credit quality step 2, the
exposure shall not exceed 10% of the nominal amount of outstanding covered bonds of the issuing credit institution;
for exposures to credit institutions that qualify for credit quality step 3 that take
the form of short-term deposits, as referred to in paragraph 1 item 3) indent 1 of this Article, or the form of derivative contracts, as referred to in paragraph 1 item 3) indent 2 of this Article, the total exposure shall not exceed 8% of the nominal amount of outstanding covered bonds of the issuing credit institution; the competent authorities designated for the supervision of covered bonds in accordance with the regulation governing this area may allow exposures to credit institutions that qualify for credit quality step 3 in the form of derivative contracts, provided that significant potential concentration problems in the EU

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 170 Member States concerned due to the application of credit quality step 1 and 2 requirements referred to in this paragraph can be documented;
4) the total exposure to credit institutions that qualify for credit quality step 1, 2
or 3 shall not exceed 15% of the nominal amount of outstanding covered bonds of the issuing credit institution and the total exposure to credit institutions that qualify for credit quality step 2 or 3 shall not exceed 10% of the nominal amount of outstanding covered bonds of the issuing credit institution. (4) Paragraph (3) of this Article shall not apply to the use of covered bonds as eligible collateral as permitted for Intragroup pooled covered bond structures in accordance with the regulation governing this area. (5) For the purposes of paragraph (1) of this Article, the limit of 80% shall apply on a loan-by-loan basis, shall determine the portion of the loan contributing to the coverage of liabilities attached to the covered bond, and shall apply throughout the entire maturity of the loan. (6) For the purposes of paragraph (1) items 6) and 7) of this Article, the limits of 60% or 70% shall apply on a loan-by-loan basis, shall determine the portion of the loan contributing to the coverage of liabilities attached to the covered bond, and shall apply throughout the entire maturity of the loan. (7) The situations referred to in paragraph (1) items 1) to 6) of this Article shall also include collateral that is exclusively restricted by legislation to the protection of the bond-holder against losses. (8) For immovable property and ships collateralising covered bonds that comply with this Decision, the requirements set out in Article 246 shall be met, and the monitoring of property values in accordance with Article 246 paragraph (3) of this Decision shall be carried out frequently and at least annually for all immovable property and ships. (9) For the purpose of valuing immovable property, the designated competent authorities may allow that property to be valued at or at less than the market value, or in those Member States that have laid down rigorous criteria for the assessment of the mortgage lending value in statutory or regulatory provisions, at the mortgage lending value of that property, without applying the limits set out in Article 265 paragraph (1) item 5) of this Decision. (10) In addition to being collateralised by the eligible assets listed in paragraph (1) of this Article, covered bonds shall be subject to a minimum level of 5% of overcollateralisation. (11) For the purposes of paragraph (11) of this Article, the total nominal amount of all cover assets as defined in point (4) of Article 3 of that Directive shall be at least of the same value as the total nominal amount of outstanding covered bonds (‘nominal principle’), and shall consist of eligible assets as set out in paragraph (1) of this Article. (12) The assets contributing to a minimum level of overcollateralisation shall not be subject to the limits on exposure size set out in paragraph (3) of this Article and shall not count towards those limits.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 171 (13) Eligible assets listed in paragraph (1) of this Article may be included in the cover pool as substitution assets as defined by regulation governing covered bonds, subject to the limits on credit quality and exposure size set out in paragraphs (1) and (3) of this Article. (14) Covered bonds for which a directly applicable credit assessment by a nominated ECAI is available shall be assigned a risk weight in accordance with Table 1 which corresponds to the credit assessment of the ECAI in accordance with Article 178 paragraph (3) of this Decision.
Table 1
Credit quality step 1 2 3 4 5 6
Risk weight 10% 20% 20% 50% 50% 100%
(15) Covered bonds for which a directly applicable credit assessment by a nominated ECAI is not available shall be assigned a risk weight on the basis of the risk weight assigned to senior unsecured exposures to the credit institution which issues them, by applying the following correspondence between risk weights:

if the exposures to the credit institution are assigned a risk weight of 20%, the
covered bond shall be assigned a risk weight of 10%;
if the exposures to the credit institution are assigned a risk weight of 30%, the
covered bond shall be assigned a risk weight of 15%;
if the exposures to the credit institution are assigned a risk weight of 40%, the
covered bond shall be assigned a risk weight of 20%;
if the exposures to the credit institution are assigned a risk weight of 50%, the
covered bond shall be assigned a risk weight of 20%;
if the exposures to the credit institution are assigned a risk weight of 75%, the
covered bond shall be assigned a risk weight of 35%;
if the exposures to the credit institution are assigned a risk weight of 100%, the
covered bond shall be assigned a risk weight of 50%;
if the exposures to the credit institution are assigned a risk weight of 150%, the
covered bond shall be assigned a risk weight of 100%.
Items representing securitisation positions
Article 170
Risk-weighted exposure amounts for securitisation positions shall be determined in accordance with Subtitle 5 of this Title. Exposures to credit institutions and business undertakings with a short-term credit assessment
Article 171
Exposures to credit institutions and exposures to business undertakings for which a short- term credit assessment by a nominated ECAI is available shall be assigned a risk weight in accordance with Table 1 which corresponds to the credit assessment of the ECAI in accordance with Article 178 paragraph (3) of this Decision.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 172
Table 1
Credit quality step 1 2 3 4 5 6
Risk weight 20% 50% 100% 150% 150% 150%
Own funds requirements for exposures in the form of units or shares in CIUs
Article 172
(1) A credit institution shall calculate the risk-weighted exposure amount for their exposures in the form of units or shares in a CIU by multiplying the risk-weighted exposure amount of the CIU's exposures, calculated in accordance with the approaches referred to in paragraph (2) of this Article, with the percentage of units or shares held by that credit institution. (2) Where the conditions set out in paragraphs (5) to (8) of this Article are met, a credit institution may apply the look-through approach in accordance with Article 173 paragraph (1) of this Decision or the mandate-based approach in accordance with
Article 173 paragraphs (2) and (3) of this Decision.
(3) Subject to Article 174 paragraph (2) of this Decision, a credit institution that do not apply the look-through approach or the mandate-based approach shall assign a risk weight of 1,250% (‘fall-back approach’) to their exposures in the form of units or shares in a CIU. (4) A credit institution may calculate the risk-weighted exposure amount for their exposures in the form of units or shares in a CIU by using a combination of the approaches referred to in paragraphs (2) and (3) of this Article, provided that the conditions for using those approaches are met. (5) A credit institution may determine the risk-weighted exposure amount of a CIU's exposures in accordance with the approaches set out in Article 173 of this Decision, where all the following conditions are met:

the CIU is as defined in Article 3 item 2) of this Decision;
the CIU's prospectus or equivalent document includes the following:

the categories of assets in which the CIU is authorised to invest;
where investment limits apply, the relative limits and the methodologies to
calculate them;

reporting by the CIU or the CIU management company to the credit institution
complies with the following requirements:

the exposures of the CIU are reported at least as frequently as those of the
credit institution;
the granularity of the financial information is sufficient to allow the credit
institution to calculate the CIU's risk-weighted exposure amount in accordance with the approach chosen by the credit institution; and
where the credit institution applies the look-through approach, information
about the underlying exposures is verified by an independent third party. (6) By way of derogation from paragraph (5) item 1) of this Article, multilateral and bilateral development banks and other credit institutions that co-invest in a CIU with multilateral or bilateral development banks may determine the risk-weighted exposure

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 173 amount of that CIU's exposures in accordance with the approaches set out in Article 173 of this Decision, provided that the conditions set out in paragraph (5) items 2) and
3) of this Article are met and that the CIU's investment mandate limits the types of
assets that the CIU can invest in to assets that promote sustainable development in developing countries. (7) A credit institution shall notify the Central Bank of the CIUs to which they apply the treatment referred to in paragraph (6) of this Article. (8) By way of derogation from paragraph (5) item 3) indent 1 of this Article, where the credit institution determines the risk-weighted exposure amount of a CIU's exposures in accordance with the mandate-based approach, the reporting by the CIU or the CIU management company to the credit institution may be limited to the investment mandate of the CIU and any changes thereof and may be done only when the credit institution incurs the exposure to the CIU for the first time and when there is a change in the investment mandate of the CIU. (9) A credit institution that does not have adequate data or information to calculate the risk-weighted exposure amount of a CIU's exposures in accordance with the approaches set out in Article 173 of this Decision may rely on the calculations of a third party, provided that all the following conditions are met:

the third party is one of the following:

the depository institution, which is a credit institution or a financial institution
of the CIU, provided that the CIU exclusively invests depository financial institution;
for CIUs not covered by indent 1 of this item, the CIU management
company, provided that the company meets the condition set out in paragraph (5) item 1) of this Article;

the third party carries out the calculation in accordance with the approaches set
out in Article 173 paragraph (1), (2) or (5) of this Decision, as applicable;
an external auditor has confirmed the correctness of the third party's
calculation.
(10) A credit institution that relies on third-party calculations shall multiply the riskweighted exposure amount of a CIU's exposures resulting from those calculations by a factor of 1,2. (11) By way of derogation from paragraph (10) of this Article, where the credit institution has unrestricted access to the detailed calculations carried out by the third party, the factor of 1,2 shall not apply and the credit institution shall provide those calculations to the Central Bank upon request. (12) Where a credit institution applies the approaches referred to in Article 173 of this Decision for the purpose of calculating the risk-weighted exposure amount of a CIU's exposures (‘level 1 CIU’), and any of the underlying exposures of the level 1 CIU is an exposure in the form of units or shares in another CIU (‘level 2 CIU’), the risk-weighted exposure amount of the level 2 CIU's exposures may be calculated by using any of the three approaches described in paragraphs (2), (3) and (4) of this Article, and the credit institution may use the look-through approach to calculate the risk-weighted exposure amounts of CIUs' exposures in level 3 and any subsequent level only where

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 174 it used that approach for the calculation in the preceding level. In any other scenario it shall use the fall-back approach. (13) The risk-weighted exposure amount of a CIU's exposures calculated in accordance with the look-through approach and the mandate-based approach shall be capped at the risk-weighted amount of that CIU's exposures calculated in accordance with the fall-back approach. (14) By way of derogation from paragraph (1) of this Article, the credit institution that applies the look-through approach in accordance with Article 173 paragraph (1) of this Decision may calculate the risk-weighted exposure amount for their exposures in the form of units or shares in a CIU by multiplying the exposure values of those exposures, calculated in accordance with Article 148 of this Decision, with the risk weight (𝑅𝑅 𝑖𝑖 ∗ ) calculated in accordance with the formula set out in Article 175 of this Article, provided that the following conditions are met:

the credit institution measures the value of their holdings of units or shares in a
CIU at historical cost but measure the value of the underlying assets of the CIU at fair value if they apply the look-through approach;
a change in the market value of the units or shares for which credit institution
measures the value at historical cost changes neither the amount of own funds of those institutions nor the exposure value associated with those holdings. Approaches for calculating risk-weighted exposure amounts of CIUs
Article 173
(1) Where the conditions set out in Article 172 paragraphs (5) to (8) of this Decision are met, credit institution that has sufficient information about the individual underlying exposures of a CIU shall look through to those exposures to calculate the riskweighted exposure amount of the CIU, risk weighting all underlying exposures of the CIU as if they were directly held by those credit institutions. (2) Where the conditions set out in Article 172 paragraph (5) and (8) of this Decision are met, credit institution that does not have sufficient information about the individual underlying exposures of a CIU to use the look-through approach may calculate the risk-weighted exposure amount of those exposures in accordance with the limits set in the CIU's mandate and relevant regulations. (3) A credit institution shall carry out the calculations referred to in paragraph (2) of this Article under the assumption that the CIU first incurs exposures to the maximum extent allowed under its mandate or relevant regulations in the exposures attracting the highest own funds requirement and then continues incurring exposures in descending order until the maximum total exposure limit is reached, and that the CIU applies leverage to the maximum extent allowed under its mandate or relevant regulations, where applicable. (4) A credit institution shall carry out the calculations referred to in paragraph (2) of this Article in accordance with the methods set out in this Subtitle, Subtitle 5, and Subtitle 6 Sections 3, 4 or 5 of this Title.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 175 (5) By way of derogation from Article 114 paragraph (4) item 5) of this Decision, a credit institution that calculates the risk-weighted exposure amount of a CIU's exposures in accordance with paragraphs (1) or paragraphs (2) to (4) of this Article may calculate the own funds requirement for the credit valuation adjustment risk of derivative exposures of that CIU as an amount equal to 50% of the own funds requirement for those derivative exposures calculated in accordance with Subtitle 6
Section 3, 4 or 5 of this Title, as applicable.
(6) By way of derogation from paragraph (5) of this Article, a credit institution may exclude from the calculation of the own funds requirement for credit valuation adjustment risk derivative exposures which would not be subject to that requirement if they were incurred directly by the credit institution. (7) When applying the mandate-based approach in accordance with paragraph (2) of this Article, where the CIU’s mandate does not exclude that the underlying of a CIU’s derivative position constitutes an on- or off-balance sheet exposure, but the exposure value or, in the case of off-balance sheet exposures, the applicable percentage pursuant to Article 148 of this Decision, is unknown, a credit institution shall use the full notional amount of the derivative position as the exposure value for the calculation of the risk-weighted exposure amounts. (8) For the purposes of determining the exposure value as set out in paragraph (7) of this Article, where the notional amount of the derivative positions is unknown, a credit institution shall use a conservative estimation based on the maximum notional amount of the derivatives allowed under a CIU’s mandate as the exposure value. Exclusions from the approaches for calculating risk-weighted exposure amounts of CIUs
Article 174
(1) A credit institution may exclude from the calculations referred to in Article 172 of this Decision Common Equity Tier 1, Additional Tier 1, Tier 2 instruments and eligible liabilities instruments held by a CIU which credit institution shall deduct in accordance with Articles 19, 54, 64 and 75 of this Decision. (2) A credit institution may exclude from the calculations referred to in Article 172 of this Decision equity exposures underlying exposures in the form of units or shares in CIUs to entities whose credit obligations are assigned a 0% risk weight under this Subtitle, including those publicly sponsored entities where a 0% risk weight can be applied, and equity exposures referred to in Article 176 paragraph (9) of this Decision, and instead apply the treatment set out in Article 176 of this Decision to those equity exposures. Treatment of off-balance-sheet exposures to CIUs
Article 175
(1) A credit institution shall calculate the risk-weighted exposure amount for their offbalance-sheet items with the potential to be converted into exposures in the form of units or shares in a CIU by multiplying the exposure values of those exposures

for all exposures for which credit institutions use one of the approaches set out
in Article 173 of this Decision:
𝑅𝑅 𝑖𝑖
∗ = 𝑅𝑅𝑅𝑅𝑅𝑅 𝑖𝑖
𝑖𝑖
∗ ∙ 𝑖𝑖
𝐸𝐸𝑖𝑖 where:
𝑅𝑅 𝑖𝑖
∗ = Risk weight;
𝑖𝑖 = the index denoting the CIU;
𝑅𝑅𝑅𝑅𝑅𝑅 𝑖𝑖 = the amount calculated in accordance with Article 150 of this Decision for a CIUi; 𝑖𝑖 ∗ = the exposure value of the exposures of CIUi; 𝑖𝑖 = the accounting value of assets of CIUi; and; 𝐸𝐸𝑖𝑖 = the accounting value of the equity of CIUi;
for all other exposures, 𝑅𝑅 𝑖𝑖
∗ = 1.250%.
(2) A credit institution shall calculate the exposure value of a minimum value commitment that meets the conditions set out in paragraph (5) of this Article as the discounted present value of the guaranteed amount using a default risk-free discount factor that is derived from a risk- free rate pursuant to Article 425 paragraphs (3) or (4) of this Decision, as applicable. (3) A credit institution may reduce the exposure value of the guaranteed minimum value commitment by any losses recognised with respect to the minimum value commitment under the applicable accounting standard. (4) A credit institution shall calculate the risk-weighted exposure amount for offbalance-sheet exposures arising from minimum value commitments that meet all the conditions set out in paragraph (5) of this Article by multiplying the exposure value of those exposures by a conversion factor of 20% and the risk weight derived under
Article 172 or 194 of this Decision.
(5) A credit institution shall determine the risk-weighted exposure amount for offbalance-sheet exposures arising from minimum value commitments in accordance with paragraphs (2) to (4) of this Article where all the following conditions are met:
the off-balance-sheet exposure of the credit institution is a guaranteed minimum
value commitment for an investment into units or shares of one or more CIUs under which the credit institution is only obliged to pay out under the minimum value commitment where the market value of the underlying exposures of the CIU or CIUs is below a predetermined threshold at one or more points in time, as specified in the contract;
the CIU is any of the following:

a UCITS as defined in Article 3 item 3) of this Decision; or
an AIF as defined in Article 3 item 4) of this Decision which solely invests in
transferable securities or in other liquid financial assets, where the mandate

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 177 of the AIF does not allow a leverage higher than its total net value of the portfolio;
3) the current market value of the underlying exposures of the CIU underlying the
minimum value commitment without considering the effect of the off-balancesheet minimum value commitments covers or exceeds the present value of the threshold specified in the minimum value commitment;
4) when the excess of the market value of the underlying exposures of the CIU or
CIUs over the present value of the minimum value commitment declines, the credit institution, or another undertaking in so far as it is covered by the supervision on a consolidated basis to which the credit institution itself is subject to the Law, can influence the composition of the underlying exposures of the CIU or CIUs or limit the potential for a further reduction of the excess in other ways;
5) the ultimate direct or indirect beneficiary of the minimum value commitment is
typically a natural person or an SME (hereinafter: a retail client). (6) For the purposes of paragraph (5) item 5) of this Article, a retail client shall be a client other than the professional client. (7) A professional client shall be a client having an experience, knowledge and qualifications for passing its own investment decisions and adequately assesses risks to which it is exposed. (8) A professional client shall be considered to be the following:

entities which are required to be authorised or regulated to operate in the
financial markets, such as:

credit institutions;
investment firms;
other authorised or regulated financial institutions;
insurance companies;
collective investment schemes and management companies of such
schemes;
pension funds and management companies of such funds;
commodity and commodity derivatives dealers;
local market participants;
other institutional investors;

large undertakings meeting two of the following size requirements on a
company basis:

balance sheet total: EUR 20 000 000
net turnover: EUR 40 000 000
own funds: EUR 2 000 000

national and regional governments, including public bodies that manage public
debt, central banks, international and supranational institutions such as

the World Bank,
the IMF,
the ECB,
the EIB, and
other similar international organisations.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 178
4) other institutional investors whose main activity is to invest in financial
instruments, including entities dedicated to the securitisation of assets or other financing transactions. Equity exposures
Article 176
(1) All of the following shall be considered equity exposures:

any exposure that meets all of the following conditions:

it is irredeemable in the sense that the return of invested funds can be
achieved only by the sale of the investment or sale of the rights to the investment or by the liquidation of the issuer;
it does not embody an obligation on the part of the issuer;
it conveys a residual claim on the assets or income of the issuer;

instruments that would qualify as Tier 1 items if issued by a credit institution;
instruments that embody an obligation on the part of the issuer and meet any
of the following conditions:
the issuer is able to defer the settlement of the obligation indefinitely; the obligation requires, or permits at the issuer’s discretion, settlement by issuance of a fixed number of the issuer’s equity shares; the obligation requires, or permits at the issuer’s discretion, settlement by issuance of a variable number of the issuer’s equity shares and, ceteris paribus, any change in the value of the obligation is attributable to, comparable to, and in the same direction as, the change in the value of a fixed number of the issuer’s equity shares; the holder of the instrument has the option of requiring that the obligation be settled in equity shares, unless one of the following conditions is met:
a) in the case of a traded instrument, the credit institution has demonstrated to the satisfaction of the Central Bank that the instrument is traded on the market more like the debt of the issuer than like its equity; b) in the case of non-traded instruments, the credit institution has demonstrated to the satisfaction of the Central Bank that the instrument should be treated as a debt position;
debt obligations and other securities, partnerships, derivatives or other vehicles
structured in such a way that the economic substance is similar to the exposures referred to in items 1), 2) and 3) of this paragraph, including liabilities from which the return is linked to that of equities;
equity exposures that are recorded as a loan but arise from a debt- equity swap
made as part of the orderly realisation or restructuring of the debt. (2) For the purposes of paragraph (1) item 3) indent 3 of this Article, obligations include those that require or permit settlement by issuance of a variable number of the issuer’s equity shares, for which the change in the monetary value of the obligation is equal to the change in the fair value of a fixed number of equity shares multiplied by a specified factor, where both the factor and the referenced number of shares are fixed. (3) For the purposes of paragraph (1) item 3) indent 4 of this Article, where one of the conditions laid down in that indent is met, the credit institution may decompose the risks for regulatory purposes, subject to the prior permission of the Central Bank.

the equity investments are structured in such a way that their economic
substance is similar to the economic substance of debt holdings which do not meet the criteria set out in paragraph (1) of this Article;
the equity investments constitute securitisation exposures.
(5) Equity exposures, other than those referred to in paragraphs (6) to (11) of this
Article, shall be assigned a risk weight of 250%, unless those exposures are required
to be deducted or risk weighted in accordance with Part Two of this Decision. (6) The following equity exposures to unlisted companies shall be assigned a risk weight of 400%, unless those exposures are required to be deducted or risk weighted in accordance with Part Two of this Decision:
investments for short-term resale purposes;
investments in venture capital firms or similar investments which are acquired
in anticipation of significant short-term capital gains.
(7) By way of derogation from paragraph (6) of this Article, a credit institution shall assign to long-term equity investments, including investments in equities of corporate clients with which the credit institution has or intends to establish a long-term business relationship and debt-equity swaps for corporate restructuring purposes a risk weight in accordance with paragraph (5) or (9) of this Article, as applicable. (8) For the purposes of this Article, a long-term equity investment is an equity investment that is held for three years or longer or incurred with the intention to be held for three years or longer as approved by the credit institution’s senior management. (9) A credit institution that has received the prior authorisation of the Central Bank may assign a risk weight of 100% to equity exposures incurred under legislative programmes to stimulate specified sectors of the economy, up to the part of such equity exposures that in aggregate does not exceed 10% of the credit institution’s own funds, that comply with all of the following conditions:
the legislative programmes provide significant subsidies or guarantees,
including by multilateral development banks, public development credit institutions as defined in Article 564 paragraph (2) of this Decision or international organisations, for the investment to the credit institution;
the legislative programmes involve some form of government oversight;
the legislative programmes involve restrictions on the equity investment, such
as limitations on the size and types of businesses in which the credit institution is investing, on allowable amounts of ownership interests, on the geographical location and on other relevant factors that limit the potential risk of the investment for the investing credit institution. (10) Equity exposures to central banks shall be assigned a risk weight of 0%. (11) An equity holding that is recorded as a loan but that has arisen from a debt-equity swap made as part of the orderly realisation or restructuring of the debt shall not be

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 180 assigned a risk weight lower than the risk weight that would apply if the equity holding were treated as a debt exposure. Other items
Article 177
(1) Tangible assets within the meaning of land and buildings occupied by a credit institution for its own activities shall be assigned a risk weight of 100%. (2) Prepayments and accrued income for which a credit institution is unable to determine the counterparty shall be assigned a risk weight of 100%. (3) Cash items in the process of collection shall be assigned a 20% risk weight. (4) Cash owned and held by the credit institution, or in transit, and equivalent cash items shall be assigned a 0 % risk weight. (5) Gold bullion held in own vaults or on an allocated basis to the extent backed by bullion liabilities shall be assigned a 0% risk weight. (6) In the case of asset sale and repurchase agreements and outright forward purchases, the risk weight shall be that assigned to the assets in question and not to the counterparties to the transactions. (7) Where a credit institution provides credit protection for a number of exposures subject to the condition that the nth default among the exposures shall trigger payment and that this credit event shall terminate the contract, the risk weights of the exposures included in the basket will be aggregated, excluding n-1 exposures, up to a maximum of 1 250 % and multiplied by the nominal amount of the protection provided by the credit derivative to obtain the risk-weighted exposure amount, whereat the n-1 exposures to be excluded from the aggregation shall be determined on the basis that they shall include those exposures each of which produces a lower risk-weighted exposure amount than the risk-weighted exposure amount of any of the exposures included in the aggregation. (8) The exposure value for leases shall be the discounted minimum lease payments. Minimum lease payments are the payments over the lease term that the lessee is or can be required to make and any bargain option the exercise of which is reasonably certain, and a party other than the lessee may be required to make a payment related to the residual value of a leased property and that payment obligation fulfils the set of conditions in Article 239 of this Decision regarding the eligibility of protection providers as well as the requirements for recognising other types of guarantees provided in Articles 251, 252 and 253 of this Decision, that payment obligation may be taken into account as unfunded credit protection under Subtitle 4 of this Title. (9) The exposures referred to in paragraph (8) of this Article shall be assigned to the relevant exposure class in accordance with Article 129 of this Decision, and when the exposure is a residual value of leased assets, the risk-weighted exposure amounts shall be calculated as follows:

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 181 𝑅𝑅 𝑅𝑅 𝑤𝑤𝑤𝑤 𝑤𝑤ℎ𝑡𝑡 𝑡𝑡 𝑒𝑒𝑒𝑒 𝑒𝑒𝑒𝑒 = 1 𝑡𝑡 ∙ 100% ∙ 𝑣𝑣 where t is the greater of 1 and the nearest number of whole years of the lease remaining.
Section 3 - Recognition and mapping of credit risk assessment
Subsection 1 - Recognition of ECAIs
Use of credit assessments by ECAIs
Article 178
(1) An external credit assessment may be used to determine the risk weight of an exposure under this Subtitle only if it has been issued by an ECAI or has been endorsed by an ECAI. (2) An ECAI shall be recognised provided that it is included in the list of recognised ECAIs published by the Central Bank on its website. (3) The Central Bank shall publish also the mapping of credit risk assessments of ECAIs on its website. Subsection 2 - Use of credit assessments by Export Credit Agencies Use of credit assessments by export credit agencies
Article 179
(1) For the purpose of Article 151 of this Decision, a credit institution may use credit assessments of an Export Credit Agency that the credit institution has nominated, if either of the following conditions is met:

it is a consensus risk score from export credit agencies participating in the
OECD ‘Arrangement on Guidelines for Officially Supported Export Credits’;
the Export Credit Agency publishes its credit assessments, and the Export
Credit Agency subscribes to the OECD agreed methodology, and the credit assessment is associated with one of the eight minimum export insurance premiums that the OECD agreed methodology establishes. (2) A credit institution may revoke its nomination of an Export Credit Agency and it shall substantiate the revocation if there are concrete indications that the intention underlying the revocation is to reduce the capital adequacy requirements. (3) Exposures for which a credit assessment by an Export Credit Agency is recognised for risk weighting purposes shall be assigned a risk weight in accordance with the following table:
Table 1
MPOIP 0 1 2 3 4 5 6 7
Risk weight 0% 0% 20% 50% 100% 100% 100% 150%

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 182
Section 4 - Use of the ECAI credit assessments for the determination of risk
weights
General requirements
Article 180
(1) A credit institution may nominate one or more ECAIs to be used for the determination of risk weights to be assigned to assets and off-balance sheet items. (2) A credit institution may revoke its nomination of an ECAI. (3) A credit institution shall substantiate the revocation if there are concrete indications that the intention underlying the revocation is to reduce the capital adequacy requirements. (4) A credit institution shall not use selectively credit assessments. (5) A credit institution shall use solicited credit assessments of the ECAI. (6) In using credit assessment, the credit institution shall comply with the following requirements:

a credit institution which decides to use the credit assessments produced by an
ECAI for a certain class of items shall use those credit assessments consistently for all exposures belonging to that class;
a credit institution which decides to use the credit assessments produced by an
ECAI shall use them in a continuous and consistent way over time;
credit institution shall only use ECAIs credit assessments that take into account
all amounts both in principal and in interest owed to it;
where only one credit assessment is available from a nominated ECAI for a
rated item, that credit assessment shall be used to determine the risk weight for that item;
where two credit assessments are available from nominated ECAIs and the two
correspond to different risk weights for a rated item, the higher risk weight shall be assigned;
where more than two credit assessments are available from nominated ECAIs
for a rated item, the two assessments generating the two lowest risk weights shall be referred to, whereby if the two lowest risk weights are different, the higher risk weight shall be assigned, and if the two lowest risk weights are the same, that risk weight shall be assigned;
for exposures to credit institutions, a credit institution shall not use an ECAI
credit assessment that incorporates assumptions of implicit government support, unless the respective ECAI credit assessment refers to a credit institution owned by or set up and sponsored by central governments, regional government units or local self-government units. (7) For the purposes of paragraph (6) item 7) of this Article, a credit institution, other than credit institutions owned by or set up and sponsored by central governments, regional government units or local self-government units, for which only ECAI credit

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 183 assessments exist which incorporate assumptions of implicit government support, exposures to such credit institutions shall be treated as exposures to unrated credit institutions in accordance with Article 158 of this Decision. (9) Implicit government support means that the central government, regional government units or local self-government units would act to prevent creditors of the credit institution from incurring losses in the event of the credit institution’s default or distress. Issuer and issue credit assessment
Article 181
(1) Where a credit assessment exists for a specific issuing programme or facility to which the item constituting the exposure belongs, this credit assessment shall be used to determine the risk weight to be assigned to that item. (2) Where no directly applicable credit assessment exists for a certain item, but a credit assessment exists for a specific issuing programme or facility to which the item constituting the exposure does not belong or a general credit assessment exists for the issuer, then that credit assessment shall be used in either of the following cases:

the credit assessment produces a higher risk weight than would be the case if
the exposure were treated as unrated and the exposure concerned:

is not a specialised lending exposure;
ranks pari passu or junior in all respects to the specific issuing
programme or facility or to senior unsecured exposures of that issuer, as relevant;

the credit assessment produces a lower risk weight than would be the case if
the exposure were treated as unrated and the exposure concerned:

is not a specialised lending exposure;
ranks pari passu or senior in all respects to the specific issuing
programme or facility or to senior unsecured exposures of that issuer, as relevant. (3) In all other cases, the exposure shall be treated as unrated. (4) Paragraphs (1) and (2) if this Article shall not prevent the application of Article 169 of this Decision that refer to covered bonds. (5) Credit assessments for issuers within a corporate group may not be used as credit assessment of another issuer within the same corporate group.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 184 Long-term and short-term credit assessments
Article 182
(1) Short-term credit assessments may only be used for short-term asset and offbalance sheet items constituting exposures to credit institutions and business undertakings. (2) Any short-term credit assessment shall only apply to the item the short-term credit assessment refers to, and it shall not be used to derive risk weights for any other item, except in the following cases:

if a short-term rated facility is assigned a 150% risk weight, then all unrated
unsecured exposures on that debtor whether short-term or long-term shall also be assigned a 150% risk weight;
if a short-term rated facility is assigned a 50% risk-weight, no unrated shortterm exposure shall be assigned a risk weight lower than 100%.
Domestic and foreign currency items
Article 183
(1) A credit assessment that refers to an item denominated in the debtor's domestic currency cannot be used to derive a risk weight for another exposure on that same debtor that is denominated in a foreign currency. (2) By way of derogation from paragraph (1) of this Article, where an exposure arises through a credit institution's participation in a loan that has been extended by, or has been guaranteed against convertibility and transfer risk by, a multilateral development bank referred to in Article 154 paragraph (4) of this Decision, whose preferred creditor status is recognised in the market, the credit assessment on the debtors' domestic currency item may be used to derive a risk weight for an exposure on that same debtor that is denominated in a foreign currency. (3) For the purposes of paragraph (2) of this Article, where the exposure denominated in a foreign currency is guaranteed against convertibility and transfer risk, the credit assessment on the debtor’s domestic currency item may only be used for risk weighting purposes on the guaranteed part of that exposure, and the part of that exposure that is not guaranteed shall be risk weighted based on a credit assessment on the debtor that refers to an item denominated in that foreign currency. SUBTITLE 3 - Internal Ratings Based Approach
Section 1 – Authorisation of the Central Bank to use the IRB Approach
Definitions
Article 184
(1) For the purposes of this Subtitle, the following definitions shall apply:
rating system means all of the methods, processes, controls, data collection
and IT systems that support the assessment of credit risk, the assignment of

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 185 exposures to rating grades or pools, and the quantification of default and loss estimates that have been developed for a certain type of exposures;
2) exposure class means any of the exposure classes referred to in Article 189
paragraph (2) of this Decision;
3) corporate exposure means an exposure assigned to any of the exposure
classes referred to in Article 189 paragraph (2) item 4) of this Decision;
4) retail exposure means an exposure assigned to any of the exposure classes
referred to in Article 189 paragraph (2) item 5) of this Decision;
5) regional government units, local self-government units and public sector
entities’ units exposure means an exposure assigned to any of the exposure classes referred to in Article189 paragraph (2) item 2) of this Decision;
6) type of exposures means a group of homogeneously managed exposures
which are formed by a certain type of facilities and which may be limited to a single entity or a single sub-set of entities within a group provided that the same type of exposures is managed differently in other entities of the group;
7) business unit means any separate organisational or legal entities, business
lines, geographical locations;
8) large regulated financial sector entity means a financial sector entity which
meets the following conditions:

the entity’s total assets, or the total assets of its parent company where the
entity has a parent company, calculated on an individual or consolidated basis, are greater than or equal to EUR 70,000,000,000, using the most recent audited financial statement or consolidated financial statement in order to determine asset size;
the entity is subject to prudential requirements, directly on an individual or
consolidated basis, or indirectly from the prudential consolidation of its parent undertaking, in accordance with the regulations in Montenegro or laws of other country applying the prudential supervisory or legal at least equivalent to those Montenegro or European Union acts;

unregulated financial sector entity means a financial sector entity that does
not fulfil the condition referred to in item 8) indent 2 of this Article;
large corporate shall have the meaning as laid down in the Law on
Accounting;
11)debtor grade means a risk category within the debtor rating scale of a rating system, to which debtors are assigned on the basis of a specified and distinct set of rating criteria, from which estimates of probability of default (PD) are derived; 12)facility grade means a risk category within a rating system's facility scale, to which exposures are assigned on the basis of a specified and distinct set of rating criteria, from which own estimates of LGD are derived; 13)PD/LGD modelling adjustment approach means an adjustment of the LGD or modelling an adjustment of both the PD and the LGD of the underlying exposure; 14)protection-provider-RW-floor means the risk weight applicable to a comparable, direct exposure to the protection provider;
recognised unfunded credit protection, for an exposure to which a credit
institution applies the IRB Approach by using its own estimates of LGD under
Article 185 of this Decision, means an unfunded credit protection whose effect
on the calculation of risk-weighted exposure amounts or expected loss amounts

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 186 of the underlying exposure is taken into account with one of the following methods, in accordance with Article 143 paragraph (3) of this Decision:

PD/LGD modelling adjustment approach;
substitution of risk parameters approach under A-IRB as defined in Article
230 item 5) of this Decision;
16)SA-CCF means the percentage applicable in accordance with Subtitle 2 and
Article 148 paragraph (2) of this Decision;
17)IRB-CCF means own estimates of credit conversion factor.
(2) For the purposes of paragraph (1) item 10) of this Article, in making the assessment for the sales threshold, the amounts shall be reported, as they are, in the audited financial statements of the corporates or, for corporates that are part of consolidated groups, their consolidated groups according to the accounting standard applicable to the ultimate parent undertaking of the consolidated group, whereas the figures shall be based on the average amounts calculated over the prior three years, or on the latest amounts updated every three years by the credit institution. Authorisation to use the IRB Approach
Article 185
(1) Where the conditions set out in this Subtitle are met, the Central Bank shall authorise a credit institution to calculate their risk-weighted exposure amounts using the IRB Approach. (2) A credit institution shall obtain prior authorisation to use the IRB Approach of the Central Bank, including own estimates of LGD and IRB-CCF for each exposure class and for each rating system and for each approach to estimating LGDs and CCFs used. (3) A credit institution shall obtain the prior authorisation of the Central Bank for the following:

material changes to the range of application of a rating system that the credit
institution has received authorisation to use; and
material changes to a rating system that the credit institution has received
authorisation to use.
(4) The range of application of a rating system referred to in paragraph (3) item 1) of this Article shall comprise all exposures of the relevant type of exposure for which that rating system was developed. (5) A credit institution shall notify the Central Bank of all changes to rating systems. Central Bank's assessment of an application to use an IRB Approach
Article 186
(1) The Central Bank shall grant authorisation pursuant to Article 185 of this Decision for a credit institution to use the IRB Approach, including, where applicable, to use own estimates of LGD and conversion factors, only if it is satisfied that requirements laid down in this Subtitle are met, in particular those laid down in Section 6 of this Subtitle, and that the systems of the credit institution for the management and rating of credit risk exposures are sound and implemented with integrity and, in particular,

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 187 that the credit institution has demonstrated to the satisfaction of the Central Bank that the following conditions are met:

the credit institution's rating systems provide for a meaningful assessment of
debtor and transaction characteristics, a meaningful differentiation of risk and accurate and consistent quantitative estimates of risk;
internal ratings and default and loss estimates used in the calculation of own
funds requirements and associated systems and processes play an essential role in the risk management and decision-making process, and in the credit approval, internal capital allocation and corporate governance functions of the credit institution;
the credit institution has a credit risk control unit responsible for its rating
systems that is appropriately independent and free from undue influence;
the credit institution collects and stores all relevant data to provide effective
support to its credit risk measurement and management process;
the credit institution documents its rating systems and the rationale for their
design and validates its rating systems;
the credit institution has validated each rating system during an appropriate
time period prior to the authorisation to use this rating system, has assessed during this time period whether the rating system is suited to the range of application of the rating system, and has made necessary changes to these rating system following from its assessment;
the credit institution has calculated under the IRB Approach the own funds
requirements resulting from its risk parameters estimates and is able to submit the reporting to the Central Bank;
the credit institution has assigned and continues with assigning each exposure
in the range of application of a rating system to a rating grade or pool of this rating system. (2) The requirements to use an IRB Approach, including own estimates of LGD and conversion factors, shall apply also where a credit institution has implemented a rating system, or model used within a rating system, that it has purchased from a third-party vendor. Prior experience of using IRB approaches
Article 187
(1) A credit institution applying to use the IRB Approach shall have been using for the IRB exposure classes in question rating systems that were broadly in line with the requirements set out in Section 6 of this Subtitle for internal risk measurement and management purposes for at least three years prior to its qualification to use the IRB Approach. (2) A credit institution applying for the use of own estimates of LGDs and conversion factors shall demonstrate to the satisfaction of the Central Bank that it has been estimating and employing own estimates of LGDs and conversion factors in a manner that is broadly consistent with the requirements for use of own estimates of those parameters set out in Section 6 of this Subtitle for at least three years prior to qualification to use own estimates of LGDs and conversion factors.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 188 (3) Where the credit institution extends the use of the IRB Approach subsequent to its initial authorisation, the experience of the credit institution shall be sufficient to satisfy the requirements of paragraphs (1) and (2) of this Article in respect of the additional exposures covered, and if the use of rating systems is extended to exposures that are significantly different from the scope of the existing coverage, such that the existing experience cannot be reasonably assumed to be sufficient to meet the requirements of these provisions in respect of the additional exposures, then the requirements of paragraphs (1) and (2) of this Article shall apply separately for the additional exposures. Measures to be taken where the credit institutions cease to meet the requirements of this Subtitle
Article 188
Where a credit institution ceases to comply with the requirements laid down in this Subtitle, it shall notify the Central Bank thereof and do one of the following:

present to the satisfaction of the Central Bank a plan for a timely return to
compliance and realise this plan within a period agreed with the Central bank; or
demonstrate to the satisfaction of the Central Bank that the effect of noncompliance is immaterial.
Methodology to assign exposures to exposure classes
Article 189
(1) The methodology used by a credit institution for assigning exposures to different exposure classes shall be appropriate and consistent over time. (2) Each exposure shall be assigned to one of the following exposure classes:
exposures to central governments and central banks;
exposures to regional government units, local self-government units and public
sector entities, to be assigned to the following exposure classes:

exposures to regional government units and local self-government units;
exposures to public sector entities;

exposures to credit institutions;
exposures to corporates to be assigned to the following exposure classes:

exposures to business undertakings in general;
exposures based on specialised lending;
exposures based on purchased receivables from business undertakings;

retail exposures to be assigned to the following exposure classes:

qualifying revolving retail exposures (QRREs);
retail exposures secured by residential property;
retail purchased receivables;
other retail exposures;

equity exposures;
exposures in the form of units or shares in a CIU;
items representing securitisation positions;
other non credit-obligation assets.

exposures to multilateral development banks referred to in Article 154
paragraph (4) of this Decision;
exposures to international organisations assigned a risk weight of 0% under
Article 155 of this Decision.
(4) By way of derogation from paragraph (2) of this Article, exposures to regional government units, local self-government units and public sector entities shall be assigned to the exposure class referred to in paragraph (2) item 1) of this Article where those exposures are treated as exposures to central governments in accordance with
Article 152 or Article 153 of this Decision.
(5) The following exposures shall be assigned to the class referred to in paragraph (2) item 5) of this Article:
exposures to multilateral development banks which are not assigned a 0% risk
weight under Article 154 of this Decision; and
exposures to financial institutions which are treated as exposures to credit
institutions in accordance with Article 156 paragraph (4) of this Decision. (6) To be eligible for the retail exposure class referred to in paragraph (2) item 4) of this Article, exposures shall meet the following criteria:
they shall be one of the following:

exposures to one or more natural persons;
exposures to an SME, provided that the total amount owed to the credit
institution and parent undertakings and its subsidiary undertakings, including any exposure in default, by the debtor client or group of connected persons, but excluding exposures secured by residential property, up to the property value does not, to the knowledge of the credit institution, which shall take reasonable steps to verify the amount of that exposure, exceed EUR 500,000;
exposures secured by residential property, including first and subsequent liens,
term loans, revolving home equity lines of credit, and exposures as referred to in Article 142 paragraphs (4) and (5) of this Decision, regardless of the exposure size, provided that the exposure is either of the following:
a) an exposure to a natural person; b) an exposure to associations or cooperatives of natural persons that are regulated under national law and exist with the sole purpose of granting their members the use of a primary residence in the property securing the loan;

they are treated by the credit institution in its risk management consistently over
time and in a similar manner;
they are not managed just as individually as exposures in the corporate
exposure class referred to in paragraph (2) item 4) of this Article;
they each represent one of a significant number of similarly managed
exposures.
(7) In addition to the exposures listed in paragraph (6) of this Article, the present value of retail minimum lease payments shall be included in the retail exposure class.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 190 (8) Exposures fulfilling the conditions set out in paragraph (6) item 1) indent 3 and items 2), 3) and 4) of this Article shall be assigned to the exposure class referred to in paragraph (2) item 5) indent 2 of this Article. (9) By way of derogation from paragraph (8) of this Article, the Central Bank may exclude from the exposure class referred to in paragraph (2) item 5) indent 2 of this
Article, loans to natural persons who have mortgaged more than four immovable
properties or housing units, including the loans to natural persons referred to in Article 142 paragraph (4) of this Decision, and assign those loans to one of the exposure classes referred to in paragraph (2) item 4) of this Article. (10) Retail exposures belonging to a type of exposures meeting all of the following conditions shall be assigned to the exposure class referred to in paragraph (2) item 5) indent 1 of this Article:

the exposures of that type of exposures are to one or more natural persons;
the exposures of that type of exposures are revolving, unsecured, and, to the
extent they are not drawn immediately and unconditionally, cancellable by the credit institution;
the maximum exposure in that type of exposure to a single natural person is
EUR 100 000 or less;
that type of exposures has exhibited low volatility of loss rates, relative to its
average level of loss rates, especially within the low PD bands;
the treatment of exposures assigned to that type of exposures as a qualifying
revolving retail exposure is consistent with the underlying risk characteristics of that type of exposures. (11) By way of derogation from paragraph (10) item 2) of this Article, the requirement to be unsecured shall not apply in respect of collateralised credit facilities linked to a wage account, and in that case, amounts recovered from the collateral shall not be taken into account in the LGD estimates. (12) A credit institution shall identify within the exposure class referred to in paragraph (2) item 5) indent 1 of this Article transactor exposures (‘QRRE transactors’) and exposures that are not transactor exposures (‘QRRE revolvers’), whereas QRREs with less than 12 months of repayment history shall be identified as QRRE revolvers. (13) Unless they are assigned to the exposure class referred to in paragraph (2) item
of this Article, the exposures referred to in Article 176 paragraph (1) of this Decision
shall be assigned to the exposure class referred to in paragraph (2) item 6) of this
Article.
(14) Any credit obligation not assigned to the exposure classes referred to in paragraph (2) items 1), 2), 3), 5), 6), 7) or 8) of this Article, shall be assigned to one of the exposure classes referred to in paragraph (2) item 4) indent 1, 2 or 3 of this Article. (15) Within the corporate exposure class laid down in paragraph (2) item 4) of this
Article, a credit institution shall separately identify as specialised lending exposures,
exposures which possess the following characteristics:
the exposure is to an entity which was created specifically to finance or operate
physical assets or is an economically comparable exposure;

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 191
2) the contractual arrangements give the lender a substantial degree of control
over the assets and the income that they generate; and
3) the primary source of repayment of the obligation is the income generated by
the assets being financed, rather than the independent capacity of a broader commercial enterprise. (16) Exposures referred to in paragraph (15) of this Article shall be assigned to the exposure class referred to in paragraph (2) item 4) of this Article, and shall be categorised as follows: ‘project finance’ (PF), ‘object finance’ (OF), ‘commodity finance’ (CF) and ‘income-producing real estate’ (IPRE). (17) The residual value of leased properties shall be assigned to the exposure class laid down in Article 207 paragraphs (6) to (8) of this Decision, except to the extent that residual value is already included in the lease exposure laid down in paragraphj (2) item
9) of this Article.
(18) The exposure from providing protection under an nth-to-default basket credit derivative shall be assigned to the same class laid down in paragraph (2) of this Article to which the exposures in the basket would be assigned, except if the individual exposures in the basket would be assigned to various exposure classes in which case the exposure shall be assigned to the corporates exposure class laid down in paragraph (2) item 4) of this Article. Conditions for implementing the IRB Approach across different classes of exposure and business units
Article 190
(1) A credit institution that is permitted to apply the IRB Approach in accordance with
Article 141 paragraph (1) of this Decision shall, together with any parent undertaking
and its subsidiary undertakings, implement the IRB Approach for at least one of the exposure classes referred to in Article 189 paragraph (2) items 1), 2), 3), 4), 5) or 9) of this Decision. (2) Once a credit institution has implemented the IRB Approach for a certain type of exposures within an exposure class, it shall do so for all exposures within that exposure class, unless it has received the authorisation of the Central Bank to use the Standardised Approach permanently in accordance with Article 92 of this Decision. (3) A credit institution may, subject to the prior authorisation of the Central Bank, implement the IRB Approach sequentially across the different types of exposures within a certain exposure class within the same business unit and across different business units in the same group, or for the use of own estimates of LGD or for the use of IRB-CCF. (4) The Central Bank shall determine the period over which a credit institution and any parent undertaking and its subsidiary undertakings shall be required to implement the IRB Approach for all exposures within a certain exposure class across different types of exposures within the same business unit and across different business units in the same group, or for the use of own estimates of LGD or for the use of IRB-CCF, whereat that period shall be one that the Central Bank considers to be appropriate on the basis

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 192 of the nature and scale of the activities of the credit institution concerned, or of any parent undertaking and its subsidiary undertakings, and the number and nature of rating systems to be implemented. (5) A credit institution carry out implementation of the IRB Approach in accordance with conditions determined by the Central Bank. (6) The Central Bank shall define conditions in a way that they ensure that the flexibility under paragraph (1) of this Article is not used selectively for the purpose of achieving reduced own funds requirements in respect of those types of exposures or business units that are yet to be included in the IRB Approach or in the use of own estimates of LGD or in the use of IRB-CCF. Conditions to revert to the use of less sophisticated approaches
Article 191
(1) A credit institution that uses the IRB Approach for a particular exposure class or type of exposure shall not stop using that approach and use instead the Standardised Approach for the calculation of risk-weighted exposure amounts unless the following conditions are met:

the credit institution has demonstrated to the satisfaction of the Central Bank
that the use of the Standardised Approach is not made with a view to engaging in regulatory arbitrage, including by unduly reducing the own funds requirements of the credit institution, is necessary on the basis of the nature and complexity of the credit institution’s total exposures of that type and would not have a material adverse impact on the solvency of the credit institution or its ability to manage risk effectively; and
the credit institution has received the prior authorisation of the Central Bank.
(2) A credit institution which has obtained the authorisation in accordance with Article 193 paragraphs (9) and (10) of this Decision to use own estimates of LGDs and conversion factors, shall not revert to the use of LGD values and conversion factors referred to in Article 193 paragraphs (9) and (10) of this Decision unless the following conditions are met:
the credit institution has demonstrated to the satisfaction of the Central Bank
that the use of LGDs and conversion factors laid down in Article 193 paragraphs (9) and (10) of this Decision for a certain exposure class or type of exposure is not proposed in order to reduce the own funds requirement of the credit institution,
the use of LGDs and conversion factors referred to in Article 193 paragraphs
(9) and (10) of this Decision is necessary on the basis of nature and complexity of the credit institution's total exposures of this type and would not have a material adverse impact on the solvency of the credit institution or its ability to manage risk effectively;
the credit institution has received the prior permission of the Central Bank.
(3) The application of paragraphs (1) and (2) of this Article is subject to the conditions for rolling out the IRB Approach determined by the Central Bank in accordance with
Article 190 of this Decision and the authorisation for permanent partial use of the IRB
Approach referred to in Article 192 of this Decision.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 193 Conditions for permanent partial use
Article 192
(1) A credit institution shall apply the Standardised Approach for all of the following exposures:

exposures assigned to the exposure class referred to in Article 189 paragraph
(2) item 6) of this Decision;
exposures assigned to exposure classes or belonging to types of exposures
within an exposure class, for which the credit institution has not received the prior authorisation of the Central Bank to use the IRB Approach for the calculation of the risk-weighted exposure amounts and expected loss amounts. (2) A credit institution that is permitted to use the IRB Approach for the calculation of risk-weighted exposure amounts and expected loss amounts for a given exposure class may, subject to the Central Bank’s prior authorisation, apply the Standardised Approach for some types of exposures within that exposure class, including exposures of foreign branches and different product groups, where those types of exposures are immaterial in terms of size and perceived risk profile. (3) In addition to the exposures referred to in paragraph (2) of this Article a credit institution may, subject to the Central Bank’s prior authorisation, apply the Standardised Approach for the following exposures where the IRB Approach is applied for other types of exposures within the same exposure class:
exposures to Government of Montenegro and the Central Bank of Montenegro;
exposures to central governments and central banks of the Member States and
their regional government units or local self-government units and public sector entities, provided that:
there is no difference in risk between the exposures to that central government and central bank and those other exposures because of specific public arrangements; and exposures to central governments and central banks are assigned a 0% risk weight under Article 151 paragraph (2) or (4) of this Decision;
exposures of a credit institution to a counterparty which is its parent undertaking,
its subsidiary undertaking or a subsidiary undertaking of its parent undertaking, provided that the counterparty is a credit institution or a financial holding company, mixed financial holding company, financial institution, asset management company or ancillary services undertaking subject to appropriate prudential requirements or an undertaking is managed by a credit institution on a unified basis in accordance with a contract concluded with that undertaking, or the memorandum or articles of association of those other undertakings; or if the administrative, management or supervisory bodies of that undertaking consist in the majority of the same persons in those bodies and in credit institution. (4) A credit institution that is permitted to use the IRB Approach for the calculation of risk-weighted exposure amounts for only some types of exposures within an exposure class shall apply the Standardised Approach for the remaining types of exposures within that exposure class.

[[unofficial translation]
_________________________________________________________________________________________ Decision on Capital Adequacy of Credit Institutions (OGM 65/25) 194 (5) A credit institution may, in addition to the exposures referred to in paragraphs (2), (3) and (4) of this Article, apply the Standardised Approach for exposures to churches and religious communities which meet the requirements set out in Article 152 paragraph (5) of this Decision.
Section 2 - Calculation of risk-weighted exposure amounts
Subsection 1 - Treatment by type of exposure class Treatment by exposure class
Article 193
(1) The risk-weighted exposure amounts for credit risk for exposures belonging to one of the exposure classes referred to in Article 189 paragraph (2) items 1), 2), 3), 4), 5) and 9) of this Decision shall be calculated in accordance with Subsection 2 of this
Section unless those exposures are deducted from own funds or are subject to the
treatment referred to in Article 75 paragraph (7) of this Decision. (2) The risk-weighted exposure amounts for dilution risk for purchased receivables shall be calculated in accordance with Article 198 of this Decision. (3) Where a credit institution has full recourse to the seller of purchased receivables for default risk and for dilution risk, the provisions of this Article and Article 194 and
Article 199 paragraphs (1) to (4) of this Decision in relation to purchased receivables
shall not apply and the exposure shall be treated as a collateralised exposure. (4) The calculation of risk-weighted exposure amounts for credit risk and dilution risk shall be based on the relevant parameters associated with the exposure in question and they shall include PD, LGD, maturity (hereinafter referred to as ‘M’) and exposure value of the exposure, whereat PD and LGD may be considered separately or jointly, in accordance with Section 4 of this Subtitle. (5) The calculation of risk weighted exposure amounts for credit risk for specialised lending exposures may be calculated in accordance with Article 195 paragraph (6) of this Decision. (6) For exposures belonging to the exposure classes referred to in Article 189 paragraph (2) items 1) to 5) of this Decision, credit institution shall provide their own estimates of PDs in accordance with Article 185 of this Decision and Section 6 of this Subtitle. (7) For retail exposures, a credit institution shall provide own estimates of LGD, and IRB-CCF where applicable pursuant to Article 207 paragraphs (14) to (17) and paragraphs (20) to (23) of this Decision, in accordance with Article 185 and Section 6 of this Subtitle. (8) A credit institution shall use SA-CCFs where Article 207 paragraphs (14) to (17) and paragraphs (20) to (23) of this Decision do not allow for the use of IRB-CCF.

Decision on Capital Adequacy of Credit Institutions

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