FINANCIAL INTERMEDIATION IN SERBIA: ALTERNATIVES FOR ECONOMIC GROWTH ACCELERATION

Cilj ovog rada je da odgovori na pitanje da li postoji fundamentalna alternativa postojećem načinu finansijskog posredovanja koja može da ubrza privredni rast Srbije. Osnovni nalazi od kojih se polazi jesu: (1) da je nivo razvijenosti finansijskog posredovanja u Srbiji još uvek je veoma nizak, još jako daleko od onog nivoa na kome eventualno mogu da se jave njegovi opadajući ili negativni prinosi na privredni rast, (2) da je domaći finansijski sistem u velikoj meri integrisan u međunarodni, što omogućava da se prevaziđe niska stopa domaće štednje, kao jedan od glavnih ograničavajućih faktora privrednom rastu i (3) da je regulacija tog sistema u osnovi kompatibilna sa regulacijom finansijskih sistema u evropskim zemljama. Razmotrene su četiri alternative postojećem sistemu. Prva alternativa, ubrzana izgradnja nebankarskog finansijskog sistema, nezavisno od toga da li je poželjna, jednostavno nije dostupna. Druge dve, povlačenje domaćeg finansijskog sistema iz međunarodnog i njegova snažna ex post regulacija nisu poželjne zbog brojnih negativnih posledica po privredni rast. Ono što preostaje kao poželjno rešenje jeste evolucija postojećeg finansijskog sistema, zasnovana na umerenoj ex ante regulaciji i postepenom jačanju nebankarskog finansijskog posredovanja.


Uvod
Cilj ovog rada je da razmotri odnos finansijskog posredovanja i privrednog rasta iz specifičnog ugla, tako da odgovori na pitanje da li postoji fundamentalna a l t e r n a t i v a p o s t o j e ć e m n a č i n u f i n a n s i j s k o g posredovanja, imajući u vidu Srbiju početkom XXI veka i njen privredni rast.Ovakav cilj rada je uslovio i njegovu s t r u k t u r u .Najpre se definiše okvir za razmatranje a l t e r n a t i v a , z a s n o v a n uvidima o o s n o v n i m ograničenjima privrednom rastu u Srbiji, a imajući u vidu opšte nalaze u pogledu odnosa finansijskog posredovanja i privrednog rasta (Begović, 2017).Sledi centralni deo rada posvećen razmatranju mogućnosti za alternativno ustrojstvo finansijskog posredovanja u Srbiji, pri čemu su identifikovane četiri osnovne alternative, što uključuje i sagledavanju posledica pojedinih alternativa po privredni rast.Slede zaključna razmatranja.

Introduction
The aim of the paper is to review the relations between financial intermediation and economic growth from the specific viewpoint answering the question whether there is a fundamental alternative to the existing pattern of f i n a n c i a l intermediation, taking into account Serbia and its economic growth at the beginning of the 21 st century.This aim determines the structure of the paper.
First, c o n c e p t u a l framework for considering the alternatives is specified, and it is founded on the basic insights about the major constraints to Serbia's economic growth and also taking into account the general findings regarding the relations between financial intermediation and economic growth (Begović, 2017).This is followed by the central segment of the paper, examining the options for alternative arrangements of financial intermediation in Serbia, identifying the four basic alternatives, and including the consideration of consequences that these alternatives might have on the economic growth.The paper ends in concluding remarks.

Framework for Consideration of Alternatives
Consideration of alternatives to the current pattern of financial intermediation in Serbia should be started by establishing the level of financial intermediation development in the country.Comparing the two common indicators of financial development (total credits to GDP and credits to private sector to GDP), a straightforward conclusion is made that Serbia is on the bottom of the list of countries according to the financial development (Table 1).
It is evident that the achieved level of financial development in Serbia is rather low, definitely lower that the one at which one can expect the diminishing returns of the financial intermediation to affect the economic growth.Furthermore, taking into account that financial intermediation in Serbia is dominated by the banking sector, i.e. that non-banking financial intermediation is underdeveloped, especially the financial instruments related to variable income, the results of the comparison are biased, meaning that the actual level of financial development in Serbia as presented in the table above has been overestimated.Therefore, there is no fear that Serbia has reached or is approaching the level of financial development at which the further expansion of the financial sector and its development could possibly generate the diminishing or even negative consequences for the economic growth.Serbia  Nadalje, bitno je uočiti da je stopa bruto domaće štednje u Srbiji bila nedovoljna za finansiranje nivoa investicija koji je zabeležen u poslednjih petnaest godina, tako da je veći deo investicija finansiran uvozom štednje (Tabela 2).Zabeležene stope investicije, pa time posledično i stope privrednog rasta, ne bi bile dostupne u uslovima u kojima bi investicije bile finansirane isključivo iz domaće štednje -uvoz štednje je u proteklih 15 godina bio presudan za privredni rast.Investicije su, naravno, ključne za privredni rast, bez njih privrednog rasta ne bi ni bilo, budući da se ne bi širili kapaciteti, tj.ne bi se akumulirali proizvodni faktori.
Furthermore, it is important to notice that the gross domestic savings in Serbia have been insufficient for the level of investments recorded in the last 15 years, so the majority of investments have been financed by the import of savings (Table 2).The observed investments rates, hence the consequent economic growth rates, would not have been available had the investments been funded only by the domestic savings -the savings import in the last 15 years has been decisive for the economic growth.Investments are, naturally, crucial for economic growth; without them there would be no growth, since the capacities would not be enlarging and the production factors would not be accumulating.
Given that the investments in Serbia are funded by imported savings, taking into account that the biggest banks in Serbia are subsidiaries of the foreign (international) banks, and due to the public deficit funded by the issuance of bonds on the international financial market, it is evident that Serbia is well integrated into the international financial system.This insight is relevant for the consideration of alternatives, taking into account that the possibility of applying the alternatives, especially bearing in mind the costs of that application, depends on the current situation and the way it has been achieved (path dependency).

Alternative 1: Exposition of Non-Banking Financial Intermediation
Taking into account that the Serbian system of financial intermediation is predominantly based on banks and their activities, a possible alternative could be the development of non-banking financial intermediation and corresponding financial instruments, both of the fixed and variable income type.Though the literature has not provided an unambiguous conclusion that the financial intermediation based on the variable income financial instruments (predominantly shares), a substantial segment of the non-banking financial sector, is superior to the banking one (Begović, 2017), the balancing of the Serbian financial system, so dominated by the banks, could be beneficial.Indeed, the achieved level of development of the non-banking financial system is rather modest: stock market capitalization and daily turnovers are very low, the borrowing of capital by issuing corporate bonds is at its early stage, life insurance as the financial service is in its infancy, capitalization of the funded funds of private pension insurance is virtually negligible, etc.Such a state of affairs is not surprising -it is a consequence of the Serbian business environment featuring high information asymmetry, poor protection of minority shareholders, inefficient protection of contractual rights, in addition to the inherently high risk aversion of the population.The level of information asymmetry is so high that only big, specialized organizations like banks can mitigate it.As to the legal framework, it is not only about the existence of relevant regulations, but also about their unbiased and efficient enforcement.It was demonstrated (La Porta et al., 2008) that a high level of the rule of law is one of the basic preconditions for the development of financial intermediation, especially in the case of the non-banking financial sector.When it comes to the rule of law, Serbia is not among the top countries according to the international rankings.When we add the informal institutions like anti-market and anti-capitalistic culture, with the elements of hysteria in contemporary Serbia, there is enough evidence about the obstacles hindering the development of the non-banking financial sector.
Since all the factors of the non-banking financial sector development are long-term and very difficult to influence, especially in the short term, the conclusion is that the materialization of this alternative in the existing system of financial intermediation in Serbia, which basically represents the deepening of the financial market (bringing more, not less market) is not probable in the foreseeable future.

Alternative 2: Decreasing the International Financial Integration (Autarchy)
If the relatively high level of international financial integration of Serbia is considered as a problem, primarily as the source of volatility of the domestic financial system, then the prima facie logical recommendation would be to decrease the level of the integration, reaching financial autarchy as the ultimate solution.Such reasoning includes the following insight: had Serbia not been integrated to such a degree into the international financial system, the global financial crisis that started at the end of 2008 would have not created the instabilities on the domestic financial markets, no matter how substantial they were.
It seems prima facie that this is a dilemma of small and open economies, especially those who can provide a small number of primary products to the world market.In such circumstances, the dilemma is whether to completely exploit the comparative advantage, that will increase the level of GDP or to diversify domestic economy to some degree, by also producing the products that the country does not have a comparative advantage for.The rational for such a diversification is to diminish the volatility of GDP due to the volatility of the world market prices of the export products and avoid the long-time recession that a drop in these prices usually generates (McLean, 2013).Nonetheless, this is not a proper analogy.Decreasing the level of integration of the domestic financial system into the international one does not Begović B. Financial intermediation in Serbia: alternatives for economic growth acceleration na primer) ili isključivo u realnom sektoru (povećanje tražnje za kreditima za obrtna sredstva, na primer).Štaviše, svetska finansijska kriza prenosi se indirektno, preko domaćeg realnog sektora, i na domaći finansijski sektor.Na primer, svetska finansijska kriza dovodi do recesije, do pada privredne aktivnosti u svetu, barem u zemljama u koje domaći realni sektor najviše izvozi, što neminovno dovodi do pada ukupnog prihoda domaćeg realnog sektora i do promene tražnje tog sektora za kreditima za obrtna sredstva.Ukratko, sa stanovišta stabilnosti domaćeg finansijskog sektora, njegovo isključenje iz svetskih finansijskih tokova bi bilo kontraproduktivno.
No, pretpostavimo, analize radi, da to sve nije tako i da se Srbija odluči na izlazak iz svetskog finansijskog sistema.Postavlja se pitanje koje bi se sve mere morale preduzeti.Neke bi, tehnički posmatrano, bilo lako sprovesti, na primer prestanak emitovanja državnih obveznica na međunarodnom tržištu kapitala.Daleko je teže pitanje načina (prisilnog) odlaska banaka koje su u vlasništvu stranih banaka.Sve te banke imaju plasmane koji još uvek nisu dospeli, isto kao i obaveze prema poveriocima.Zbog toga se one ne mogu jednostavno ugasiti, već je potrebno da budu preuzete.Samim tim se kao jedina opcija pojavljuje njihova nacionalizacija, što dovodi do nekoliko negativnih posledica.reduce, but rather increases the instabilities on the domestic financial market.This is due to a simple reason: Serbia's financial system is so small that there are almost no reserves at all to deal with the sudden changes, shocks, whatever their character may be.These shocks can be generated within the financial sector (failure of some of the banks, for example), on the interface of the financial and real sector (increase in the non-performing loans, for example), or exclusively within the real sector (increase in the demand for working capital loans, for example).Furthermore, the global financial crisis is transferred to the domestic financial sector indirectly, via the domestic real sector.For example, a global financial crisis produces a recession, i.e. a drop in the level of economic activity worldwide, at least in the countries into which the domestic real sector mostly exports, which inevitably generates a drop in the total domestic real sector revenues and an increase its demand for the working capital loans.In short, from the perspective of the domestic financial sector stability, its exclusion from the international financial flows would be counterproductive.
Regardless from the search for stability of the domestic financial system, the exclusion from the global financial flows would generate very adverse consequences to the investment rate, since, as demonstrated in Table 2, gross domestic savings were not sufficient to fund even the low investment rates in Serbia in the last 15 years, recording the gap that was in almost all these years closer to the investment rate than to the savings rate.To put it differently, it is evident that the exclusion of the country from the international financial flows would generate a substantial deceleration of the economic growth.There are three things that should be kept in mind regarding this issue.The first is that a segment of domestic savings would inevitably have to be used for funding the fiscal deficit, since the foreign savings would not be available any more for that funding.Fiscal surpluses, which would not only remove this pressure from the domestic savings, but also increase the gross domestic savings (since the fiscal surplus represents the savings of the public sector), should not be expected in the foreseeable future.Secondly, a segment of foreign savings could be used for funding the investments in Serbia via the channel of foreign direct investments (FDIs), as they are not based, at least not directly, on the financial intermediation.Of course, it is quite uncertain whether the FDIs level would increase as to compensate the drop in the import of the savings due to the exclusion of the country from the international financial flows.Furthermore, in that case it is very probable that there would be a drop in the absolute level of the FDIs.The third remark concerns the prospects for increasing the domestic private savings.An empirical investigation of the factors of households' savings (Begović et al., 2012) demonstrated, using the five-year pool data, that practically the only statistically significant factor is income -it was demonstrated that there is the increasing marginal propensity to save, while almost none of the other explanatory variables' parameters were statistically significant.Taking into account the growth rates that have recently been recorded in Serbia, and consequently the income growth rates, a substantial increase of domestic private savings in Serbia should not be expected in the foreseeable future.Accordingly, the exclusion of Serbia from the global financial flows would inevitably generate a much lower level of financial intermediation and a much lower level of capital for funding the investments, as well as the much worse conditions under which that capital can be acquired (reduced supply inevitably generates a price increase), followed by the increased instability of the financial system.In short, the consequences would be a lower growth rate and possibly even a decrease of the level of GDP and social welfare.Now, for the sake of the argument, let us assume that the previous analysis is wrong and that Serbia decides to leave the global financial system.The question is which measures must be undertaken for that to be accomplished.Some of them would be, from a technical standpoint, easy for implementation, like, for example, stopping the issuance of the government bonds on the international financial markets.Much more difficulty would cause the issue of (compulsory) eviction of the banks that are subsidiaries of the foreign banks.All these banks have outstanding assets that are still not due, as Financial intermediation in Serbia: alternatives for economic growth acceleration zbog malog iznosa domaće privatne štednje, zbog neodgovarajućeg funkcionisanja tržišta kapitala i slabe zaštite manjinskih vlasnika.Čak i ukoliko bi se postigla takva struktura vlasništva, ona ne bi bila povoljna sa stanovišta korporativnog upravljanja.Alternativno, prodaja domaćim vlasnicima dovela bi do toga da te banke preuzmu vodeći domaći poslovni ljudi, uglavnom iz realnog sektora, što bi čak moglo da dovede do njihovog ukrupnjavanja i narušavanja konkurentne strukture tržišta.Četvrto, izgubilo bi se neprestano prelivanje unapređenih praktičnih znanja (know how) iz centrala sadašnjih podružnica, što bi značilo zaostajanje domaćih banaka u savremenim metodama upravljanja.Peto, sama nacionalizacija bankarskog sektora dovela bi do veoma snažnog signala stranim investitorima u realnom sektoru da njihova svojinska prava nisu zaštićena, pa se stoga može očekivati njihovo povlačenje, uz umanjenje realizacije novih stranih direktnih investicija.Očigledno je da ova alternativa, uz nepovoljne osnovne posledice stvara još veoma veliki broj uzgrednih nepovoljnih posledica po privredni rast zemlje.
Ovakvom regulacijom se stvara znatan regulatorni rizik, budući da banka ne može da očekuje da će se određeni poslovni poduhvat realizovati pod uslovima po kojima je započeo, što svakako otežava uslove poslovanja i uvećava zahtevanu premiju na rizik.U zavisnosti od konkretnih mera, odnosno sadržaja i stepena regulacije ove vrste, treba sagledavati i ozbiljnost njenih posledica, ali je izvesno da bi ona neminovno dovela do nekoliko ishoda.Prvi je taj da se pogoršavanje uslova poslovanja banaka prelije na pogoršanje uslova pozajmljivanja kapitala, odnosno usluga koje banke nude svojim klijentima.Na primer, podizanje kamatne stope, budući da su veći rizici kojima je banka izložena, pa tu izloženost banka naplaćuje putem povećane premije na rizik.Drugo, u uslovima povećanih rizika od ex post regulacije, razborita strategija banke jeste skraćenje ročnosti kredita, kako bi se umanjila verovatnoća da dođe do primene neke ex post regulatorne mere.Time bi se sa stanovišta finansiranja u nepovoljan položaj stavili oni poslovni poduhvati sa dugim rokom povraćaja sredstava, koji su često ključni za privredni rast i njegovo ubrzavanje.Nadalje, zaštita dužnika ex post neminovno dovodi i do negativne selekcije i do moralnog hazarda, budući da regulatorna vlast šalje jasan signal da će doći do neke vrste finansijskog izbavljenja, odnosno do umanjenja obaveza dužnika.Dok se u slučaju finansijskog izbavljenja velikih finansijskih institucija ("Too big to fail") ovakvo postupanje pravda zaštitom stabilnosti finansijskog sistema, u slučaju ex post zaštite dužnika u realnom sektoru, takvog opravdanja nema.Zaštita velikih dužnika u realnom sektoru može biti posledica mehanizmima koji su objašnjeni u teoriji javnog izbora, dok se zaštita malih Begović B. Finansijsko posredovanje u Srbiji: alternative za ubrzanje privrednog rasta Bankarstvo, 2017, vol. 46, br. 2 well as the outstanding liabilities towards their creditors.Accordingly, shutting them down is not an option; they have to be taken over.Taking that into account, the only feasible policy option is nationalization, creating a few adverse effects.The first one is that the compensation of the owners of the nationalized banks would create substantial one-off budgetary expenditures.According to the accounting value of equity, the compensation would not be lower than 4.1 billion EUR or almost 12% of the GDP.Secondly, state-owned banks are not a good solution, as it was demonstrated that the agency problem is considerable (Agrobanka, Development Bank of Vojvodina, Privredna banka Beograd, etc.).Thirdly, if those banks are subsequently privatized, it is unlikely that the dispersed ownership would be established, due to the low level of domestic savings, as well as the poor operations on the domestic capital market and inappropriate protection of small shareholders.Even if that structure were established, it would not be desirable from the viewpoint of corporate governance.Alternatively, selling the banks to the domestic owners would mean that that the banks are taken over by the leading domestic business people, mostly from the real sector, which could lead to the excessive consolidation of banks and undermined the competitive market structure.Fourthly, the continuous inflow of modern know-how from the incumbent owners (international banking groups) would cease to exist.Fifthly, the banking sector's nationalization would convey a very strong signal to the foreign investors in the real sector that their property rights are not protected, so it should be expected that they would be ready to leave, resulting in a decrease of the new foreign direct investments.It is obvious that this alternative, apart from the adverse basic effects, creates the numerous additional negative side effects to the economic growth.

Alternative 3: Radical Increase in Ex Post Regulation
Increased ex post regulation refers to the various forms of government intervention and law enforcement which, after launching certain transactions on the financial market, worsen the banking business conditions in such a way as to aggravate the results of the business endeavors undertaken in the different environment.A typical case of ex post regulation is an intervention by imposing to the banks an alternative solution, less favorable for them, in respect of the loans indexed in Swiss francs.In addition, the subject of such regulation could be the non-performing loans and imposition of some solution for them.Such regulation could also refer to the systematically biased court decisions in litigations between the banks and debtors in favor of the debtors and their general extensive protection.For example, the decision of the Court of Appeals in Belgrade from December 2015 (Gž 5059/14), in the case of a loan contract that contains both the foreign currency clause and variable interest rate according to the LIBOR+, concluded that "the principle of equality of the values exchanged has been violated, because the bank cannot simultaneously use two or more protective clauses for the preservation of the value of the capital…" It is evident that the court does not distinguish among the different types of credit risks and does not recognize the different mechanisms of their mitigations used by the bank, so it unjustifiably supports the claims of the debtor, which is effectively a form of biased ex post regulation (Begović, 2016).
Such a regulation creates substantial regulatory risk, since a bank cannot expect that a given business endeavor will materialize in the conditions at which it started, which certainly increases the risk the bank faces and increases the requested risk premium.Depending on the specific measures, i.e. the content and the degree of such a regulation, the seriousness of the consequences should be evaluated.Nonetheless, a few consequences would be inevitable.The first is that the worsened conditions for the banks operations would inevitably cause the worsened conditions for the borrowers, i.e. the worsened conditions for the services offered to the banks' clients.For example, the increased interest rates, given that the bank is exposed to the higher risks and that exposure is charged through the higher risk premium.Secondly, in the environment of increased risk of ex post regulation, a reasonable strategy of the bank is to shorten the maturity of the loan, in order to Begović B. Financial intermediation in Serbia: alternatives for economic growth acceleration dužnika može objasniti isključivo političkim motivima -uvećanju političke popularnosti vlasti u nekim segmentima biračkog tela, onima koji su pogođeni svojim dužničkim obavezama.
Nadalje, regulacija ne treba da toleriše mehanizme obezbeđenja od rizika ukoliko ne postoji rizik.Tipičan mehanizam obezbeđenja te vrste bila je ugovorna klauzula o varijabilnoj kamatnoj stopi prema kojoj banka kamatnu stopu jednostrano usklađuje sa "promenama uslova tržištu, regulatorne politike NBS i Begović B. Finansijsko posredovanje u Srbiji: alternative za ubrzanje privrednog rasta Bankarstvo, 2017, vol. 46, br. 2 decrease the probability of enforcement of some of the ex post regulation measures.In that way, the business endeavors with longer term of the return of the investment would be discriminated regarding the possibilities of funding, and these long-term investment projects are often crucial for economic growth and its acceleration.Furthermore, the protection of the debtor inevitably creates both adverse selection and moral hazard, since the regulatory government sends a clear signal that some kind of financial bail-out will be provided or a reduction of the debtor's liabilities.While in the case of bailing out the big financial institutions ("Too big to fail") such a policy can be justified as protecting the stability of the financial system, there is no such justification in the ex post protection of the debtors in the real sector.The protection of the big debtors in the real sector is the consequence of the mechanisms explained in the theory of public choice, while the protection of small debtors can be explained only by political motives -increasing the political popularity of the government among some voters, especially those affected by their debtor obligations.
Furthermore, not only does the deterioration of the business conditions for the banks aggravate the lending conditions for the customers, by increasing the interest rates for instance, but it also inevitably generates a lower demand for such services, which, together with the other adverse effects of ex post regulation, affects the banks' business results.This, in turn, raises the question of their survival on the market, and poses a threat of these banks exiting that market.As to the "foreign" banks, i.e. domestic banks with foreign ownership, this also opens the issue of their foreign owners leaving the market.The introduction of this kind of regulation increases the probability of their exit, with all adverse effects that have been identified in the consideration of the previous alternative, or at least the decrease of the capital inflow from the parent countries of the "foreign" banks.
It is evident that this alternative, though prima facie not as radical as the previous one, generates substantial adverse effects to the economic growth, since many of its outcomes are identical as in the previous one.

Alternative 4: Balanced Ex Ante Regulation and its Evolution
This alternative -an evolution -is based on the continuity of the existing system of regulation and its slight and gradual change, followed by the gradual and continuous strengthening of the non-banking financial sector.This system should be based on the ex ante regulation, by setting the clear regulatory rules and enabling their consistent enforcement by the central bank.The fundamental regulatory mechanism should be the capital adequacy control, probably with a simpler and more precise specification of the assets classification according to the risk level, with all the requirements regarding the reporting of the banks on their activities, enabling everyone concerned to get the basic information.The domestic financial system would continue to be fully integrated into the international one.
As to the regulatory regime innovations, it would be reasonable to follow all the worldwide regulatory innovations and to accept only those innovations that proved to be desirable in the practice of the countries of the similar size, structure, and level of financial development.The momentous innovations regarding the financial regulations can be a huge risk for the financial system like the Serbian one.Especially since Serbia is not a specific case in the financial world -the structure of its financial system is very similar to the structure of the systems in almost all Central and Eastern European countries.Furthermore, it is necessary to achieve compatibility with the dominant pattern of regulation in the international financial system, especially in the countries of origin of the equity of foreign-owned domestic banks.There is a specific "dual" regulation in the case of "foreign" banks.On the one hand, there is the regulation of the assets of the mother banks, which is enforced by the regulatory bodies in the country of origin, and on the other hand, there is the regulation of the operations of the foreign-owned domestic banks, which is under the jurisdiction of the National bank of Serbia.Most counties of origin of the domestic banks' equity are the EU member states, i.e. the Eurozone countries, hence there are three regulatory levels, since the highest one is Begović B. Financial intermediation in Serbia: alternatives for economic growth acceleration poslovne politike banke".Neprihvatljivo je da se banka obezbeđuje od rizika sopstvene poslovne politike, budući da takav rizik ne postoji -poslovna politika banke je u potpunosti endogena.Sudovi u Srbiji su, s pravom, u većini slučajeva ovakvu klauzulu proglasili nedozvoljenom, budući da se krši odredba Zakona o obligacionim odnosima prema kojoj ugovorna obaveze mora biti "određena ili odrediva".Pokazalo se Begović (2016) da je navedena klauzula činila da obaveza više nije bila odrediva.

Begović B.
Finansijsko posredovanje u Srbiji: alternative za ubrzanje privrednog rasta Bankarstvo, 2017, vol.46, br. 2 included, the so-called supranational level, enforced by the European Central Bank in the form of the Single Supervisory Mechanism.
Within the framework of such an environment all the participants on the financial market should bear the consequences of their business decisions.For example, it is the banks that should sort out their NPLs.There are at least two good reasons.First, it is the banks which made their own decisions regarding the loans, based on all the acquired information.If they missed to obtain a relevant piece of information, that is their failure, not anyone else's.Accordingly, they should bear the consequences of their bad business decisions, not anyone else, like, for example, the tax payers.Secondly, they are best equipped to deal with the issue and to choose by themselves what should be done to reduce the damage they suffer.No one should interfere in this process.
Furthermore, the regulation should not tolerate the mechanism of risk mitigation if the risk does not exist.A typical mechanism of this kind of risk mitigation was the contract clause on variable interest rate according to which the banks unilaterally change the interest rate with the "changes of the market conditions, regulatory policy of the NBS and business policy of the bank".It is not acceptable for the bank to protect itself from the risk of its own business policy, since such a risk does not exist at all -the business policy of the bank is entirely endogenous.The courts in Serbia have, rightly so, in most of the cases declared this clause illegal, since it violates the provisions of the Law on Obligations by which the contract obligation must be "specified or specifiable".It was demonstrated (Begović, 2016) that the mentioned clause made the obligation nonspecifiable.
Finally, the development of the non-banking financial sector is a painstaking endeavor.The preconditions for its development is the rule of law, especially the protection of small investors (enabling those who invest only to get the returns, not for the sake of governance, to emerge on the financial markets), as well as the transformation of the numerous informal institutions that still provide obstacles to this activity.One way or the other, the crucial issue would be the confidence that the investors, especially small ones, should gain in the financial sector.Accordingly, it would be of great significance that the participants now involved in this industry, such as investment funds or private pension funds, survive without any substantial losses till the new generation of investors arrives.

Conclusion
Alternatives always exist.The only question is what their consequences are, since the reasonable collective decision should be based exactly on the consideration of these consequences.Such a decision should by no means be founded either on emotions or ideology.A reasonable decision requires the thinking of an adult and acceptance of the reality of market economy.Yes, banks really "earn on their clients"!That is not disputable, as this is the motive of their behavior.The only question is whether the clients benefit from their business relations with the banks, and an affirmative answer can be given because the establishment of this relation is voluntary.Yes, "foreign" banks really came to Serbia to earn profit -why else would they have come for -that is the same motive they have in all the countries in the world, but the crucial question is how many investments which the domestic economic growth is based on they have financed in the process of earning their profit.Therefore, the debate about the domestic financial sector should not be an ideological debate, but the one about the future of market economy of Serbia and its integration into the world economy.
The consideration of the alternatives to the existing system of financial intermediation in Serbia should be based on a few very simple insights.The achieved level of development of financial intermediation in Serbia is still very low, still very far from the level at which the decreasing and even negative effects of financial intermediation on economic growth may possibly emerge.The Serbian system is well integrated into the international financial system and that enables overcoming the low rate of gross domestic savings, as one of the major obstacles to economic growth.The existing regulation of the financial system is compatible with the regulation in the European countries.

Begović B.
Financial intermediation in Serbia: alternatives for economic growth acceleration Four alternatives to the existing system have been considered.The first alternative, i.e. the fast development of the non-banking financial system, regardless of whether it is desirable, is not feasible.The following two, i.e. the retreat of the domestic financial system from the international one and its strong ex post regulation are simply not desirable because of the numerous adverse effects to the economic growth.The only remaining desirable solution is the evolution of the existing financial system, based on the moderate ex ante regulation and gradual development and strengthening of the non-banking financial intermediation.

Table 2 -
Gross domestic savings rate and gross investments rate in Serbia Source: World Bank Open Data, http://data.worldbank.org/