Regulation on Criteria for Systemic Importance of Commercial Banks and Non-Bank Financial Credit Organizations

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Date of creation: 2025-01-27

Appendix to the Resolution of the Board of the National Bank of the Kyrgyz Republic of June 8, 2017 No. 2017-P-12/23-9-(NPA)

REGULATION

on the criteria for the systemic importance of commercial banks and non-bank financial credit organizations

(As amended by Resolutions of the Board of the National Bank of the Kyrgyz Republic of December 23, 2020 No. 2020-P-12/73-10, April 12, 2024 No. 2024-P-12/17-2, January 22, 2025 No. 2025-P-12/2-3-(NFCC))

Chapter 1. General Provisions

1. The Regulation "On the Criteria for the Systemic Importance of Commercial Banks and Non-Bank Financial Credit Organizations" (hereinafter - the Regulation) is aimed at implementing adequate banking supervision, preventing changes in the banking system, protecting the interests of depositors and creditors, and defines approaches and criteria for the systemic importance of commercial banks (hereinafter - Bank) and non-bank financial credit organizations (hereinafter - NBFC).

2. For the purposes of this Regulation, the following terms are used:

Systemic/Systemically Important Bank - a bank that meets the systemic criteria for the banking and payment systems, the insolvency of which could lead to serious consequences for the financial system and the economy of the Kyrgyz Republic, negative impact on other participants of the banking and payment systems, outflow of deposits, weakening or crisis of the banking system, and deterioration of macroeconomic conditions.

Systemic/Systemically Important NBFC - an NBFC that meets the criteria for systemic importance for the banking system and the system of non-bank financial credit organizations (systemic NBFC), the insolvency (bankruptcy) and/or deterioration of financial indicators of which could lead to a failure or crisis of the banking system and the system of non-bank financial credit organizations.

Potential adverse consequences include not only direct financial damage to bank depositors, but also potential indirect damage to the banking system, as well as the financial system and the economy of the Kyrgyz Republic.

Systemic risk - the risk of disruption of the financial services process, caused by damage to all or part of the banking system, posing a threat of negative consequences for the real sector of the economy, due in particular to the interdependence of banks (contagion risk);

SPK - Package Clearing System;

GSRRV - Gross Real-Time Settlement System.

3. Rating of systemic importance of banks/NBFCs - a descriptive assessment of potential adverse consequences resulting from the insolvency/bankruptcy of a bank/NBFC, which is not subject to disclosure.

4. The insolvency of a systemically important bank may have the following negative consequences:

1. problems faced by systemically important banks may have a negative impact on other participants of the banking system of the republic and the financial system as a whole, as they are connected with systemically important banks (through interaction with the systemically important bank via payment systems, etc.);

2. undermine public trust in the domestic banking system and lead to an outflow of deposits, and ultimately, possibly, to a banking crisis;

3. combined with the weakening or crisis of the banking system or the financial system as a whole, will have negative consequences for the national economy due to a sharp reduction in lending volumes and suspension/reduction of other financial services (such as payment and settlement services);

4. deterioration of macroeconomic conditions, in turn, may have a negative impact on the stability of the financial system.

5. The systemic importance of a bank/NBFC is determined taking into account the consequences that may affect the banking and/or financial system of the Kyrgyz Republic and the economy as a whole, and not the risk (probability) that such insolvency may occur.

6. The consequences of the insolvency of systemic banks/NBFCs for the national economy are assessed taking into account the specifics of each bank/NBFC separately and taking into account the following criteria:

1. size of certain indicators;

2. interconnectedness with participants of the financial system of the Kyrgyz Republic;

3. level of substitutability.

7. When classifying banks/NBFCs, in addition to the criteria listed in paragraph 6 of this Regulation, information on qualitative and quantitative indicators may additionally be taken into account.

8. The determination of the systemic nature of banks/NBFCs is classified into three categories:

1. Systemically Important - the consequences of the insolvency of the bank/NBFC will be significant;

2. Important - the consequences of the insolvency of the bank/NBFC will be moderate;

3. Limitedly Important - the consequences of the insolvency of the bank/NBFC will be limited.

9. The National Bank of the Kyrgyz Republic (hereinafter - National Bank) determines the compliance of a systemically important bank/NBFC based on quantitative and qualitative indicators.

The assessment of the systemic importance of a bank/NBFC is conducted annually by the National Bank, and in the event of changes in the banking system/in the activities of a specific bank/NBFC.

The list of systemically important banks/NBFCs is not subject to official publication.

At the same time, the National Bank individually informs each systemically important bank/NBFC determined by quantitative indicators in accordance with this Regulation.

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

Chapter 2. Criteria for the Systemic Importance of Banks

10. The criteria for systemically important banks must be determined based on quantitative indicators, as well as qualitative information about commercial banks, which will supplement the quantitative information and allow for a more accurate determination of the systemic importance of banks.

The assessment of the systemic importance of banks is conducted annually. Quantitative indicators used to assess the systemic importance of banks in the banking system are calculated based on their financial indicators after the last assessment (data as of the end of the year), and then grouped into the following three categories (with corresponding weighting):

1. Size of certain bank indicators (weighting share is 50%).

a) Indicator: Asset Size (P1). The share of the bank's assets in the total weight of the total assets of the banking system. This criterion must be considered from the perspective of its impact on the economy of the republic. Weight - 10%.

b) Indicator: Size of Individual Deposits (P2). The share of the bank's individual deposits in the total weight of the total volume of individual deposits of the banking system. This criterion must be considered from the perspective of its criticality to undermining public trust in the banking system. Weight - 10%.

c) Indicator: Size of Corporate Deposits (P3). The share of the bank's corporate deposits in the total weight of the total volume of corporate deposits of the banking system. This criterion must be considered from the perspective of protecting the interests of financial service consumers. Weight - 10%.

d) Indicator: Number of Depositors - Individuals and Legal Entities. The share of the bank's depositors - individuals and legal entities in the total number of depositors - individuals and legal entities of the banking system. Weight - 10% (P4).

e) Indicator: Size of Credit Portfolio (P5). The share of the credit portfolio (gross value) in the total volume of the credit portfolio (gross value) of the banking system. Weight - 10%.

2. Interconnectedness with participants of the banking and/or financial system of the Kyrgyz Republic (weighting share is 14%).

a) Indicator: Assets Placed in Banks (P6). The volume of placed assets (loans, deposits, and other assets) of the bank in other banks of the Kyrgyz Republic in the total weight of assets placed in banks of the banking system. This criterion characterizes the possibility of spreading the risk of the bank's insolvency to other banks, i.e., the possibility of a "domino effect". Weight - 7%.

b) Indicator: Liabilities Attracted from Banks (P7). The volume of total debt (loans, deposits, and other liabilities) of the bank to other banks of the Kyrgyz Republic in the total weight of liabilities attracted from banks of the banking system. Weight - 7%.

3. Level of Substitutability (weighting share is 36%).

a) Indicator: Concentration of Lending in Economic Sectors. This reflects the volume of the bank's loans by economic sectors exceeding the threshold value (more than 15%) in the total weight of the volume of loans of the banking system by economic sectors. Weight - 7% (P8).

b) Indicator: Territorial Network. The number of the bank's branches to the total number of branches of the banking system. Weight - 5% (P9).

c) Indicator: Share of Incoming and Outgoing Payments in the Bank's SPK in the volume of incoming and outgoing payments in the SPK of the banking system. Weight - 8% (P10).

d) Indicator: Share of Incoming and Outgoing Payments in the Bank's GSRRV in the volume of incoming and outgoing payments in the GSRRV of the banking system. Weight - 8% (P11).

e) Indicator: Share of Cross-Border Transfers (incoming and outgoing) of the bank in the volume of cross-border transfers of the banking system. Weight - 8% (P12).

Qualitative characteristics used to assess the systemic importance of banks in the banking system are determined based on the following information:

a) number of correspondent accounts and turnover on them;

b) number of cards issued/circulating and volume of transactions;

c) presence of mobile wallets/apps, internet banking, and fast payment systems;

d) participation in the implementation of state programs;

e) share of non-interest income in the bank's income structure;

f) share of state funds in the bank and the bank's connection with the state;

g) share of foreign funds in the bank's capital;

h) availability and extent of the ATM and terminal network.

(As amended by Resolution of the Board of the National Bank of the Kyrgyz Republic of April 12, 2024 No. 2024-P-12/17-2)

11. The assessment of the bank's compliance with the criteria is carried out for all criteria in aggregate, as well as taking into account the following factors:

• features of the bank's position at the current time;

• trends in economic development and the position of other banks on similar criteria for systemic importance;

• availability of opportunities to apply measures and instruments for the distribution and/or reduction of systemic risks;

• consequences for the banking and/or financial system in the event of the bank's exclusion from the system at the current time;

• possibility of replacing the niche of the excluded bank in the market by other banks in a short period;

• other factors.

12. The systemic importance of a bank is determined by the criteria described in paragraph 10 of this Regulation. These criteria must then be summed and the aggregate (weighted average) result evaluated.

The Aggregate Indicator of the Bank (AI) is calculated by the formula:

where:

AI - Aggregate Indicator of the Bank;

Pij - value of the j-th indicator (P1-P12) in percent;

Bnj - weight of the j-th indicator (P1-P12) in percent;

n - number of indicators;

• if AI turns out to be 10% or higher, the bank is systemically important;

• if AI is from 3% to 10%, the bank is important (medium-sized bank);

• if AI is from 0% to 3%, the bank has limited importance (small bank).

13. The value of quantitative indicators and the aggregate indicator for a bank must be calculated for each reporting period separately.

To determine a systemically important bank by quantitative indicators, the aggregate indicator of the bank must be at a level of not less than 10% during the last or subsequent three reporting periods (quarterly). Changes in the quantitative indicators of a systemically important bank may affect the result of the assessment of its systemic importance conducted by the National Bank.

(As amended by Resolution of the Board of the National Bank of the Kyrgyz Republic of April 12, 2024 No. 2024-P-12/17-2)

Chapter 3. Criteria for the Systemic Importance of NBFCs

14. The following criteria are used to determine the category of NBFC by systemic importance:

1. Size of NBFC.

a) Indicator: Asset Size. The share of the NBFC's assets in the total assets of the NBFC system - average value for the last two reporting periods from the time of NBFC assessment. This criterion must be considered from the perspective of its impact on the economy of the republic. Weight - 15%.

b) Indicator: Size of Deposits or Number of Depositors of the NBFC, from the total volume of deposits and depositors of the NBFC system, respectively - average value for the last two reporting periods from the time of NBFC assessment. This criterion must be considered from the perspective of its criticality to the stability of the system and public trust in the NBFC, as well as the protection of consumer rights. Weight - 20%.

c) Share of the NBFC's credit portfolio in the total credit portfolio of NBFCs, average value for the last two reporting periods from the time of NBFC assessment. This criterion must be considered from the perspective of the impact of placed assets and protection of consumer rights. Weight - 15%.

2. Interconnectedness with other participants of the financial market.

a) Assets Placed in Banks and Other NBFCs. The share of placed assets (loans, deposits, investments, and other assets) of the NBFC in banks and NBFCs in the total sum of placed assets of the NBFC in banks and NBFCs. This criterion characterizes the possibility of spreading the risk of the NBFC's insolvency to other financial and credit organizations, i.e., the possibility of a "domino effect". Weight - 10%.

b) Liabilities Attracted from NBFCs. The share of total debt (loans, deposits, and other liabilities) of the NBFC in the capital of the NBFC system. Weight - 10%.

c) Liabilities Attracted from Banks. The share of total debt (loans and other liabilities) of the NBFC in the capital of the banking system. Weight - 30%.

(As amended by Resolution of the Board of the National Bank of the Kyrgyz Republic of January 22, 2025 No. 2025-P-12/2-3-(NFCC))

15. The assessment of the NBFC's compliance is carried out for all criteria, as well as taking into account the following factors:

• features of the NBFC's position at the current time;

• trends in economic development and the position of other NBFCs on similar criteria for systemic importance;

• availability of opportunities to apply measures and institutions for the distribution and/or reduction of systemic risks;

• possibility of the NBFC's indicators affecting the stability of commercial banks and other NBFCs;

• and other factors.

To determine a systemically important NBFC by quantitative indicators, the total value of indicators, weighted by weights, must be at a level of not less than 10%.

Chapter 4. Requirements for Systemically Important Banks/NBFCs

16. The National Bank, with respect to banks and non-bank financial credit organizations that meet the requirements of a systemically important bank/NBFC by quantitative indicators, may establish:

1. other sizes of economic standards, requirements, and restrictions;

2. higher requirements for information disclosure within annual and quarterly reports regarding specific indicators characterizing the bank's compliance with safe operation standards:

• on the risk management system and risks taken by the bank;

• on the results of stress testing conducted;

• on the quality of the bank's/NBFC's assets.

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