Regulation on Consolidated Supervision

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Date of creation: 2023-02-09

Approved

by the Resolution of the Board

of the National Bank

of the Kyrgyz Republic

of June 28, 2019

No. 2019-P-12/34-4-(NPA)

REGULATION

"On Consolidated Supervision"

(As amended by the Resolutions of the Board of the National Bank of the Kyrgyz Republic of July 8, 2020 No. 2020-P-12/39-1-(NPA), of December 23, 2020 No. 2020-P-12/73-10-(NPA), of April 6, 2022 No. 2022-P-12/20-1-(NPA), of December 14, 2022

No. 2022-P-12/78-9-(NPA))

CHAPTER 1. General Provisions

1. This Regulation is developed for the purpose of exercising consolidated supervision over the activities of banking groups and their affiliated persons.

2. For the purposes of this Regulation, the following definitions apply:

Banking group:

• a group consisting of a bank operating within the territory of the Kyrgyz Republic and its subsidiaries and/or dependent companies, as well as their affiliated persons;

• a group consisting of a banking holding company, one of whose subsidiaries and/or dependent companies is a bank established within the territory of the Kyrgyz Republic;

• a group of legal entities engaged in banking and/or financial activities, which includes a bank, over which control is exercised by the same legal or natural person, either alone or jointly with other persons.

(As amended by the Resolution of the Board of the National Bank of the Kyrgyz Republic of December 14, 2022 No. 2022-P-12/78-9-(NPA))

Banking holding company

– a parent company, the subsidiary or one of the subsidiaries and/or dependent companies of which is a bank, as well as a company created by the main parent company exclusively for the purpose of managing subsidiaries and/or dependent companies (participants) included in the banking group (management company). Banking holding companies created in the Kyrgyz Republic and included in the banking group must be in the form of a joint-stock company.

(As amended by the Resolution of the Board of the National Bank of the Kyrgyz Republic of December 23, 2020 No. 2020-P-12/73-10-(NPA))

Subsidiary bank

– a bank controlled by another bank or any other legal entity (parent company). A subsidiary bank of a subsidiary bank is also considered a subsidiary bank of the parent company.

Dependent bank

– a bank in which any person, alone or jointly with another person, exercises direct or indirect control over more than twenty percent of the voting shares.

Participant of a banking group

– a legal entity included in the composition of a banking group.

Branch of a bank – a separate subdivision of a bank located outside the location of the bank, not being a legal entity, carrying out all or part of the banking operations on behalf of the bank, and acting within the powers granted to it by the bank (with the exception of a branch of a foreign bank).

Subsidiary company of a bank

– a legal entity controlled by a bank (parent company). A subsidiary company of a subsidiary bank is also considered a subsidiary company of the parent company.

Control – sole or jointly with other persons:

1. direct or indirect ownership or control of more than fifty percent of the voting shares of a joint-stock company or the charter capital of a legal entity that is not a joint-stock company; or

2. the ability to elect at least half of the members of the Board of Directors of a legal entity; or

3. regardless of participation in the capital of a legal entity, the ability to directly or indirectly exercise decisive influence on the management or policy of such legal entity.

Persons associated with a bank are understood in the meaning specified in the Law of the Kyrgyz Republic "On Banks and Banking Activities."

(As amended by the Resolution of the Board of the National Bank of the Kyrgyz Republic of December 14, 2022 No. 2022-P-12/78-9-(NPA))

Dependent company of a bank

– a legal entity in which a bank, alone or jointly with another person, exercises direct or indirect ownership or control of twenty or more percent of the voting shares or shares in the capital of the legal entity.

3. For the purposes of determining a significant participant, dependent company, and control:

1. shares held by companies that are dependent companies of one person or controlled by one person are considered to be held indirectly by that person and are combined with shares held directly by that person when determining the total number of shares owned by that person;

2. shares owned by a person and their close relatives (heirs of the first and second order, according to civil legislation) are considered to be directly owned by that person.

4. Banking groups may have different structures depending on the participants of the banking group, as well as the location of the head bank/holding company or the bank included in the banking group within or outside the territory of the Kyrgyz Republic.

5. Consolidated supervision is carried out depending on the structure of the banking group. The National Bank has the right to establish cases where the requirements of consolidated supervision do not apply.

6. The National Bank exercises consolidated supervision over banking groups having the following structures:

1. Structure No. 1: A group consisting of a bank/non-bank financial-credit organization operating within the territory of the Kyrgyz Republic and its subsidiaries and/or dependent companies (non-banking/financial) and banks (Appendix 1).

Consolidated supervision over groups with Structure No. 1 is carried out by applying all the requirements and restrictions specified in this Regulation (on the capital of the banking group, on economic standards established for the banking group), as well as qualitative assessment factors (risk management and internal control of the banking group, corporate governance of the banking group, etc.).

2. Structure No. 2: A group consisting of a bank/non-bank financial-credit organization/banking holding company of a non-resident of the Kyrgyz Republic, one of whose subsidiaries and/or dependent companies is a bank operating within the territory of the Kyrgyz Republic. This structure is characterized by the composition of an international banking group (Appendix 2).

For the purpose of ensuring effective banking supervision at the level of the parent bank/holding company, the National Bank ensures proper supervision over the activities of the banking group by establishing supervisory contacts with the relevant banking supervision authorities of the country of origin of the participants of the banking group.

For the purpose of comprehensive regulation and supervision over the banking group on a consolidated basis, agreements on cooperation are concluded between the supervisory authorities of the country of origin and the host country.

In the framework of cooperation with foreign supervisory authorities on consolidated supervision, the National Bank has the right to exchange necessary information, including information containing banking secrecy, conduct targeted inspections upon request (including joint) and mutual consultations, as well as notify about applied enforcement measures.

Requirements for disclosure of information (information about parent companies, their balance sheets, income statements, information about persons associated with the bank, etc.) are imposed on groups with Structure No. 2.

3. Structure No. 3: A group consisting of a bank/non-bank financial-credit organization and legal entities headed by a holding company/legal entity/natural person (Appendix 3).

In the framework of implementing its powers, the National Bank exercises supervision over groups whose participants are a bank and participants involved in a wider range of financial activities or other non-financial activities (groups whose participants transformed from a microfinance company into a bank as part of the transformation process), as well as over groups headed by a holding company/legal entity/natural person that controls other companies involved in a wider range of financial activities or other non-financial activities. Requirements for the specified groups are imposed depending on the composition of the group and their attribution to the corresponding structure of the banking group (No. 2 or No. 3).

For the purpose of understanding and analyzing a wider range of activities, as well as determining the nature and potential impact on the banking group, the National Bank may establish requirements, including for obtaining necessary information from groups of a wider composition, which may consist not only of financial-credit organizations but also of other persons carrying out non-banking and/or non-financial activities.

For these purposes, other persons who exert significant (direct or indirect) influence on the banking group or its participants are obliged to submit reports on their activities for the purpose of preparing consolidated reporting. The National Bank may request any information determining the impact on the financial condition of financial-credit organizations (on the structure and participants of the group, including information on the main activities of the group participants, financial reports of the group participants, information on intra-group operations).

(As amended by the Resolution of the Board of the National Bank of the Kyrgyz Republic of April 6, 2022 No. 2022-P-12/20-1-(NPA))

7. The requirements of this Regulation apply to all types of structures of banking groups, except for specific requirements specifically indicating the structure of the group.

8. In the event that there is no parent company in a group of legal entities engaged in banking and/or financial activities, the authorized person by the corresponding decision of the controlling person, agreed with the National Bank (engaged in banking and/or financial activities), performs the duties of providing consolidated reporting and information to the National Bank.

9. A banking group is obliged to disclose and submit to the National Bank consolidated reporting and information about its activities according to the list, in the form, volume, order, and deadlines established by the National Bank in this Regulation, the Regulation "On Periodic Regulatory Consolidated Reporting", including with respect to participants of the banking group who are non-residents of the Kyrgyz Republic, as well as other information upon the request of the National Bank.

10. Requirements for providing consolidated reporting do not apply to state bodies participating in commercial banks with 100% state share, as well as to the National Bank in cases of its participation in banking groups.

11. The National Bank also has the right to require the submission of information from a banking group and its participants not included in the reports specified in this Regulation, for additional assessment of the financial condition, risk management system, quality of corporate governance, and other supervision purposes, including on grounds of providing unreliable/incomplete information.

12. Consolidated financial reporting of a banking group is prepared in accordance with the regulatory legal acts of the National Bank and international financial reporting standards. The bank at the head of the banking group, or the banking holding company, including the parent/management company – a non-resident of the Kyrgyz Republic (management company of the banking holding), annually publish their consolidated balance sheets and consolidated income statements after confirmation of their reliability by an audit firm (auditor) and approval in the manner established by legislation.

(As amended by the Resolution of the Board of the National Bank of the Kyrgyz Republic of December 14, 2022 No. 2022-P-12/78-9-(NPA))

13. Annual consolidated financial reporting is subject to annual publication. An audit opinion is published together with the annual consolidated financial reporting. Annual consolidated financial reporting is placed on the official website of the bank and in mass media ensuring its availability for all interested persons regardless of the purposes of obtaining this reporting according to a procedure guaranteeing its finding and receipt.

The bank at the head of the banking group, or the banking holding company (resident) places the reporting on the website in chronological order by periods and indicates the name of the reporting, the reporting period for which it was prepared, the date of its submission to the National Bank, the date, number, and name of the publication in which the reporting was published, as well as the date of its placement on the bank's website and the date until which it is available to interested persons. Reporting placed on the bank's website must be available to interested persons for at least three years from the date of its placement.

The bank at the head of the banking group, or the banking holding company – a non-resident of the Kyrgyz Republic (management company of the banking holding) places the reporting on the official website of the bank and/or another internet resource ensuring its availability for all interested persons regardless of the purposes of obtaining this reporting according to a procedure guaranteeing its finding and receipt.

14. In the event that the bank at the head of the banking group, or the banking holding company, takes other actions regarding reporting ensuring its availability for all interested persons, they may implement them, for example, by providing such persons with booklets, brochures, and other publications. When publishing reporting in booklets, brochures, and other publications at a later date than the placement of such reporting on the bank's website or publication in mass media, the bank indicates in the booklets, brochures, and other publications the date of submission of the reporting to the National Bank, as well as the address of the bank's website, the date of its placement on the bank's website, and the date until which this reporting will be available to interested persons, or the date of publication in mass media.

CHAPTER 2. Activities of Banking Groups

§ 1. Transparency of the activities of the banking group

15. Companies included in the banking group may carry out only banking and/or financial activities, as well as activities related to banking and/or financial activities, including ownership of shares of group participants in the case of banking holding companies (with the exception of banking groups whose participants transformed from a microfinance company into a bank as part of the transformation process).

16. The National Bank has the right at any time to require necessary information from controlling persons and significant participants of the bank, any other participant of the banking group, and persons having common interests with the bank to determine:

• the financial condition, level of the risk management system, and quality of corporate governance of the bank at the head of the banking group or the banking holding company, including the parent/management company and participants of the banking group;

• the degree of influence of the banking holding company, including the parent/management company, on the subsidiary bank;

• the controlling person and/or persons (natural and legal);

• the activities carried out by the banking group and its participants;

• the financial condition of the banking group and its participants;

• the types of risks inherent in the banking group and its participants;

• the risk management system of the banking group;

• business, financial, and other relationships between participants of the banking group.

The National Bank may require the provision of additional information from the banking holding company, including the parent/management company, or from any participant of the banking group. In this case, all necessary information is requested by the National Bank through the bank/non-bank financial-credit organization and/or directly from the banking holding company, or from any participant of the banking group.

17. Any natural or legal person is obliged to obtain prior permission from the National Bank if it intends to acquire or dispose of a threshold participation in the capital of a bank, according to legislation, either alone or jointly with other persons.

Legal entities not engaged in banking and/or financial activities, as well as activities related to banking and/or financial activities, cannot, either alone or jointly with other persons, carry out:

• direct or indirect ownership, or control of more than twenty percent of the voting shares (of any type) of a bank;

• or, regardless of participation in the charter capital of the bank, exercise significant influence on the management and/or policy of this bank based on an agreement or otherwise.

18. Permission from the National Bank is also required in the event that as a result of additional acquisition of shares of a bank or otherwise any natural or legal person becomes directly or indirectly a significant participant of the bank, will exercise direct or indirect ownership, or control of a threshold participation, or becomes a controlling person of the bank.

19. When submitting an application for the acquisition of shares of a bank to the National Bank, information must be provided in accordance with the requirements of the Law of the Kyrgyz Republic "On Banks and Banking Activities", the Regulation "On Licensing of Banking Activities".

(As amended by the Resolution of the Board of the National Bank of the Kyrgyz Republic of December 14, 2022 No. 2022-P-12/78-9-(NPA))

20. A bank that is a participant of a banking group carries out its activities independently of the other participants of the banking group.

21. The bank at the head of the banking group, the banking holding company, or the parent/management company controlling the group of legal entities are responsible for the compliance of the activities of the entire banking group with the requirements of legislation.

22. The supervisory body and executive body of the bank at the head of the banking group, the banking holding company, or the parent/management company controlling the group of legal entities must ensure proper exchange of necessary information among all participants of the banking group.

23. The parent company (including a non-resident of the Kyrgyz Republic) in the presence of facts or circumstances that may negatively/significantly affect the activities of its subsidiary and/or dependent bank licensed by the National Bank, within 5 (five) working days from the moment of identification of such facts or circumstances, sends a written notification to the National Bank about this, indicating measures taken to prevent such influence.

Note: Negative and/or significant influence refers to facts or circumstances that may lead to a violation of the legislation of the Kyrgyz Republic or changes in the activities of the bank licensed by the National Bank.

24. In the event of failure to notify by the parent company or notification with a violation of the established deadline, the National Bank has the right to apply enforcement measures provided for by the legislation of the Kyrgyz Republic to the subsidiary and/or dependent bank located within the territory of the Kyrgyz Republic and its parent company (resident of the Kyrgyz Republic).

The parent company, in the presence of facts or circumstances that may negatively and/or significantly affect the activities of its subsidiary and/or dependent bank licensed by the National Bank, for the purpose of preventing such influence, timely informs the subsidiary and/or dependent bank located within the territory of the Kyrgyz Republic about this.

The subsidiary and/or dependent bank licensed by the National Bank, upon receiving the above information from the parent company, notifies the National Bank in writing within 2 (two) working days after receiving this information.

25. In the event of a threat to the financial condition of the bank licensed by the National Bank arising as a result of participation in the banking group, the bank within 2 (two) working days from the moment the threat arises, notifies the National Bank in writing about this, indicating measures taken to prevent such impact.

§ 2. Risk management and internal control of the banking group

26. Participants of the banking group in their activities must not take on risks that may endanger the financial stability of any participant of the banking group or the banking group as a whole.

27. Banking groups must have risk management and internal control systems corresponding to the activities of the banking group. The bank at the head of the banking group, the banking holding company, or the parent/management company controlling the group of legal entities registered within the territory of the Kyrgyz Republic must have internal documents approved by the board of directors regulating issues of the procedure for implementing the rights of shareholders provided by legislation, including the procedure for issuing a power of attorney to participate in shareholders' meetings, the procedure for making decisions on nominating candidates to supervisory bodies and on other issues within the competence of the general meeting of shareholders.

(As amended by the Resolution of the Board of the National Bank of the Kyrgyz Republic of July 8, 2020 No. 2020-P-12/39-1-(NPA))

28. The banking group (with Structure No. 1) must comply with the National Bank's restrictions on large risks, investment sizes on a consolidated basis, as well as fulfill other requirements for risk minimization and limitation of activities.

29. The risk management policy of the banking group must include:

1. adequate management of risks taken by the banking group in accordance with policies approved by the governing body of the banking group;

2. norms ensuring the maintenance of a capital level sufficient to cover the risks taken by the banking group;

3. provisions according to which risk management systems cover the entire banking group.

30. The internal control system must include:

1. adequate mechanisms for significant risks determining the assessment of capital adequacy in relation to risks taken by the banking group;

2. reliable reporting and accounting procedures for determining, assessing, monitoring, and controlling intra-group operations and concentration risk.

31. The bank at the head of the banking group, the banking holding company, or the parent/management company controlling the group of legal entities is responsible for the banking group's compliance with the National Bank's requirements for the risk management system.

32. The banking group, the participants of which carry out financial activities (non-banking), must have policies and procedures for limiting large credit risks, liquidity risk, investment, currency, and other risks characteristic of their activities and protecting banks within the group.

33. Participants of the banking group carrying out financial activities (non-banking) must include a description of policies and procedures in the annual report of the banking holding company or the bank at the head of the banking group.

34. The National Bank may require adjustments to the policies and procedures of participants of the banking group carrying out financial (non-banking) activities for the purpose of risk minimization and prevention of violation of the legislation of the Kyrgyz Republic by the bank(s) included in the group.

35. In the event of raising funds by a bank, a participant of the banking group, the corresponding contract for raising funds from the parent company, a participant of the banking group, or any other foreign company/participant of the banking group must contain a condition on the mandatory notification of the National Bank about the early termination of the contract 30 (thirty) working days before its termination. At the same time, the initiator of the notification must be the participant of the banking group that is subject to supervision by the National Bank.

§ 3. Corporate governance of the banking group

36. Officials, members of the supervisory and executive bodies of the bank at the head of the banking group, the banking holding company, or the parent/management company controlling the group of legal entities must ensure...