Montenegro: Technical Assistance Report-Stress Testing the Central Bank Balance Sheet

The report outlines a comprehensive Central Bank Balance Sheet Stress Testing (CBST) framework tailored to the Central Bank of Montenegro (CBCG) to assess policy solvency. Operating in a euroized economy without seigniorage, the CBCG faces solvency and liquidity constraints similar to commercial banks and relies heavily on service fees, while being limited in risk taking and price setting. Policy solvency is therefore critical for its independence. A key structural challenge is the expected decline in payment system fee income following Montenegro’s accession to Single Euro Payments Area (SEPA), the impact of which has not been fully assessed. The CBST model projects the CBCG’s balance sheet and income using macro financial scenarios and satellite models for fee income and expenses. Under the baseline—where ECB policy rates converge to around 2 percent and bank payment fees fall to zero—the equity to GDP ratio increases only marginally, leaving the CBCG vulnerable to adverse shocks. Low European interest rates pose the most significant macroeconomic risk by depressing returns on the international bond portfolio, while domestic inflation and growth have limited impact. Extending portfolio duration could raise returns if term premia are positive but increases fair value risks, underscoring the need for strong risk management. The report recommends quantifying capital buffers for fair value losses using Value at Risk methods and integrating SEPA and EU related operating costs into the CBST. Non macroeconomic scenarios point to potentially sizeable equity losses, particularly from reduced government payment fees. Institutionalizing the CBST and better aligning government deposit remuneration with market rates are also advised.