Exclusive interview of the Head of Financial System Regulation Department at the Central Bank of Armenia Mher Abrahamyan to ARKA Agency.
ARKA – Mr Abrahamyan, the transition to Basel III principles for Armenian banks is scheduled for 2014. What are the measures foreseen as part of introduction of Basel III requirements in Armenia’s banking system, particularly in terms of tightened structure and quality of the capital, two new capital buffers, introduction of short-term liquidity and limitations of leverage? What steps have been already taken for transition to Basel III?
Abrahamyan – Transition to Basel III started in Armenia back in 2011. We have already prepared and put into circulation new capital requirements that were discussed a lot with involvement of the Central Bank, the Union of Banks of Armenia and the banking community. We can say the adoption process is in its last stage now.
Basel III does not envisage changes in the required capital value for the banks (8%), which will be valid in our case as well (12%). At the same time, tightened requirements will be applied in order to improve the structure and the quality of the capital.
The main innovation in terms of capital under Basel III is the introduction of two new buffers – conservation capital and countercyclical capital. The main aim of these buffers is to provide banks with additional capital for absorbing possible losses on the one hand, and to restrict crediting amid economic upheaval and provide an extra crediting capacity in the event of a decline on the other hand. No sanctions are applied if banks fail to meet these requirements, but certain limitations will come into effect in that case, restrictions in dividend or bonus payments and in extra payments for bank staffs in particular.
At the same time, principles are currently being studied and developed to detect and regulate systemically important banks. The need for introduction of liquidity norms required by Basel III is being assessed.
As to the leverage limitations, capital reservations and introduction of countercyclical buffers, certain legislation changes are required to make it possible: the respective works are under way.
ARKA – According to the new Basel principles, systemically important banks are to be detected and regulated. What supervision measures the Central Bank of Armenia intends to use toward these banks?
Abrahamyan – The principles of detection and regulation of systemically important banks are still in development by the Central Bank of Armenia. Even the Basel Committee itself has not finalized yet the regulation and supervision approaches for these banks. Hence, it is premature to speak about specific steps for the Central Bank to take. Yet, let me mention, according to the new principles, requirements will be set for additional capital and stricter supervision will be carried out over these banks.
ARKA – The new Basel III standards include also risk management requirements. What requirements will be introduced by the Central Bank for Armenian banks in this respect?
Abrahamyan – Basel III does not cover the risk management issues directly. Yet, the Committee stresses the importance of efficient corporate management and the risk management tied up with it. As part of Basel III provisions, we have introduced minimum requirements to internal procedures for capital liquidity assessments. These requirements will come into force soon, and the aim is to ensure efficient internal risk management procedures in banks.
ARKA – When introduced, what impact will Basel III have on Armenia’s banking sector? Are there any risks for Armenian banks in this respect? What are their current levels of capital sufficiency, liquidity and leverage?
Abrahamyan – The level of adequacy and capital liquidity of Armenian banking system was satisfactory in 2013. Capital adequacy ratio of Armenian banks was 16.7% as of the end of 2013, as compared to minimum norm requirement of 12%.
As we know, the Central Bank has set stricter capital norms for Armenian banks compared to Basel II requirements, which makes transition to Basel III capital component for the banks smoother.
As of the end of the last year, total and current liquidity ratios of Armenian banks were 29% and 142% respectively, as compared to minimum requirements of 15% and 60% set by the Central Bank. This means the liquidity level of Armenia’s banking system is more than sufficient, which will ease transition to the new liquidity standards.
The leverage ratio of Armenian banking system (total capital/total assets) is about 16%, considerable higher than similar ratios in banking systems of CIS and a number of Eastern European countries, and four times as high as the minimum requirement of 3% under Basel III.
Numerous studies by the Central Bank showed that introduction of the new Basel III standards will have no significant impact on Armenia’s banking system both in terms of capital requirements and crediting volume. Our banking system, compared to those of other countries, is better prepared for transition to Basel III, as we have been guided by more efficient regulation tools from the beginning.–0–
