Regulation on Determining Dominant Position in the Market for Banking Services

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Date of creation: 2024-03-14

Registered with the Ministry of Justice of the Kyrgyz Republic

April 26, 2007. Registration number 46-07

Approved

by the resolution of the Board of the National Bank of the Kyrgyz Republic

of March 28, 2007 No. 16/5

REGULATION

on determining the dominant position in the market for banking services

(In the edition of the resolutions of the Board of the National Bank of the Kyrgyz Republic of November 16, 2012 No. 43/1, February 19, 2014 No. 4/5, June 8, 2017 No. 2017-P-14/23-16, December 28, 2022 No. 2022-P-12/83-8, January 17, 2024 No. 2024-P-12/1-3)

I. General Provisions

1.1. (Lost force in accordance with the resolution of the Board of the National Bank of the Kyrgyz Republic of June 8, 2017 No. 2017-P-14/23-16)

1.2. This Regulation defines the actions applied by the National Bank of the Kyrgyz Republic (hereinafter - the National Bank) in the field of antimonopoly regulation, development of competition, and protection of consumer rights in the market for banking, microfinance, and payment services (hereinafter - banking services) and operations in the Kyrgyz Republic, provided by commercial banks, non-bank financial-credit organizations, payment system operators, payment organizations, and other legal entities under the supervision of the National Bank (hereinafter - entities providing banking services).

(In the edition of the resolution of the Board of the National Bank of the Kyrgyz Republic of January 17, 2024 No. 2024-P-12/1-3)

1.3. For the purposes of this Regulation, the concepts specified in the Policy and basic principles of antimonopoly regulation, development of competition, and protection of consumer rights in the market for banking services of the Kyrgyz Republic, provided by commercial banks, non-bank financial-credit organizations, payment system operators, payment organizations, and other legal entities licensed and regulated by the National Bank of the Kyrgyz Republic, are used.

(In the edition of the resolution of the Board of the National Bank of the Kyrgyz Republic of December 28, 2022 No. 2022-P-12/83-8)

II. Signs of Dominant Position in the Market for Banking Services

2.1. To establish the presence of a dominant position of an entity providing banking services in the market for banking services, as well as for any type of banking services, an analysis of factors is carried out, including:

a) determination of the share of the entity providing banking services in the market for banking services by types of services in order to identify the entity providing banking services with the largest share and the degree of its influence on the market as a whole and/or for individual types of services;

b) presence of competitors and potential competitors;

c) existing practice of setting prices (tariffs) in the market for banking services;

d) presence of barriers to market entry (determination of barriers to entry);

e) analysis of possible actions of competitors in response to anticompetitive behavior of an entity providing banking services holding a dominant position;

e-1) presence of affiliation;

f) other aspects that may have a significant impact on the market for banking services.

(In the edition of the resolution of the Board of the National Bank of the Kyrgyz Republic of June 8, 2017 No. 2017-P-14/23-16)

2.2. Characteristic signs of a dominant position of an entity providing banking services in the market for banking services (for any type of banking services) are:

a) the share of the entity providing banking services in the market for banking services exceeds 35% or the limit value (maximum share in the market) established by the Board of the National Bank;

b) use by the entity providing banking services of its dominant position to create conditions restricting competition in the markets for similar banking services;

c) presence of the ability to control prices for certain products and services in order to eliminate competitors, rivals, and/or increase prices;

d) absence/restriction of the possibility for another entity providing banking services to enter the market (presence of directive decisions restricting the possibility of entry into this market; high costs for obtaining the right to work in a specific market, costs to overcome "switching costs" for buyers (e.g., advertising expenses), etc.).

(In the edition of the resolution of the Board of the National Bank of the Kyrgyz Republic of June 8, 2017 No. 2017-P-14/23-16)

2.3. The dominant position of an entity providing banking services in the market for banking services is a violation of antimonopoly legislation if it was achieved by:

a) unjustified refusal to conclude a contract with consumers of banking services;

b) forcing the consumer to conclude a contract on unfavorable, unacceptable to the consumer, or unrelated to the subject of the contract terms;

c) setting unreasonably high (low) tariffs for the services provided;

d) creating obstacles to access to the market for banking services for another entity providing banking services;

e) exerting a negative influence on the competitive environment in the market for banking services through actions contradicting antimonopoly legislation.

2.4. The dominant position of an entity providing banking services may be the result of both external and internal factors, including:

• state policy, including a differentiated tax system, provision of subsidies and other benefits;
• mergers, acquisitions, as well as liquidation;
• activities of the entity providing banking services to eliminate competitors from the market by non-competitive methods;
• explicit and secret agreements between the entity providing banking services.

2.5. Exceeding by an entity providing banking services the limit value (maximum share in the market) established by the National Bank regarding the share in the market for banking services is not a violation of antimonopoly legislation. At the same time, the entity providing banking services must not abuse its dominant position in the market for banking services.

Abuse of dominant position are actions of entities providing banking services that have or may have as a result a significant restriction of competition and/or infringement of the interests of other entities providing banking services-competitors in the market for banking services.

(In the edition of the resolution of the Board of the National Bank of the Kyrgyz Republic of December 28, 2022 No. 2022-P-12/83-8)

III. Determination of Dominant Position in the Market for Banking Services

3.1. The National Bank determines the dominant position of an entity providing banking services in the market for banking services, as well as for any type of banking services provided by the entity providing banking services on the territory of the Kyrgyz Republic in cases of consideration of:

a) issues of antimonopoly regulation of the market for banking services;

b) issues regarding the acquisition of threshold participation in the capital of entities providing banking services, or increasing their charter capital to a size allowing abuse of this position in the market for banking services;

c) issues regarding the reorganization of an entity providing banking services in the form of merger, acquisition, division, separation;

d) statements of service consumers or other persons regarding abuse by an entity providing banking services of its dominant position and/or violation of consumer rights;

d-1) creation of banking groups by entities providing banking services registered in the Kyrgyz Republic;

e) and in other cases provided for by legislation.

(In the edition of the resolution of the Board of the National Bank of the Kyrgyz Republic of June 8, 2017 No. 2017-P-14/23-16)

3.2. When determining the dominant position of an entity providing banking services, the presence of common interests among the considered entities providing banking services is taken into account.

3.3. Determination of the dominant position of an entity providing banking services in the market for banking services is carried out by the National Bank based on information received by the National Bank from the entity providing banking services, official statistical data, data from sample surveys of clients of the entity providing banking services, data from independent experts, information agencies, and mass media. If necessary, the National Bank may request the entity providing banking services to provide additional information or explanations on issues arising during the analysis (strategic plans, information on service volumes, information on competitors (existing and potential), etc.).

3.4. When considering the issue of determining the dominant position in the market for banking services, a market analysis is carried out, including:

a) determination of the boundaries of the market for banking services;

b) determination of market participants;

c) determination of the share of the entity providing banking services in the market for banking services;

d) analysis of barriers to market entry;

e) determination of turnovers (volumes) of banking services and shares of the entity providing banking services in the market for banking services.

3.5. Determination of the boundaries of the market for banking services.

3.5.1. The boundaries of the market for banking services are determined based on research (analysis) of demand and supply for banking services, including the following:

• characteristics of services - determination of the type of banking service - banking operation (transaction) carried out by the entity providing banking services, and/or banking operations (transactions) in aggregate;

• system of service distribution and its features - (determination of the geographic market for banking services) - determination of the place of provision of banking services to consumers on the territory of the Kyrgyz Republic;

• composition of service consumers and their groups from the point of view: (1) possibility for consumers to acquire banking services in another part of the territory of the Kyrgyz Republic, including technical capabilities; (2) economic feasibility of acquiring banking services in this part of the territory of the Kyrgyz Republic, including the significance of additional expenses, including consumer transportation costs for obtaining banking services in another part of the territory of the Kyrgyz Republic; (3) possibility for consumers to use other types of banking services in case of price changes (consumer sensitivity to price changes);

• barriers to entry into the market for banking services - (1) any circumstances preventing a new entity providing banking services from competing on equal terms with existing entities providing banking services in the market; (2) factors complicating access to the market for banking services (e.g., natural, administrative, state regulation measures);

• determination of competitors and/or potential competitors - entities providing banking services providing similar services in the market for banking services and their possibilities for improving the quality of this type of services and/or increasing their share in the market;

• other factors affecting the provision of banking services and the activities of the entity providing banking services.

3.5.2. Determination of the boundaries of the market for banking services is carried out taking into account:

1. the volume of services provided by the entity providing banking services on a permanent basis;

2. the possibility for the entity providing banking services to exert significant influence on the market for banking services over a long period of time by determining price parameters or other terms of service provision;

3. the possibility of influencing competition by restricting (complicating) access to the market for banking services, including creating obstacles to the expansion of activities of other entities providing banking services.

3.5.3. Analysis of a specific type of services is carried out taking into account:

1. demand factors: which products and services consumers consider good substitutes;

2. data on consumer preference assessment: how consumers reacted to price increases in the past; own assessment by the entity providing banking services of the boundaries of the relevant market: how consumers reacted in the past to relative changes in prices of individual services of the entity providing banking services. At the same time, differences in the mechanisms and procedures of the entity providing banking services for carrying out (providing) banking operations are not taken into account.

3.5.4. To determine the boundaries of the banking market (product and geographic markets, market for banking services), the "hypothetical monopolist" test, provided in Appendix 1 to this Regulation, may be used.

(In the edition of the resolution of the Board of the National Bank of the Kyrgyz Republic of June 8, 2017 No. 2017-P-14/23-16)

3.6. Determination of market participants.

3.6.1. Market participants are determined based on data obtained during the analysis of market boundaries. If necessary, a survey of participants in the market for banking services is conducted. In this case, if during the analysis of market participants it is revealed that non-bank organizations not licensed and regulated by the National Bank (e.g., manufacturing, trading, etc.) constantly or periodically carry out certain operations carried out only by the entity providing banking services, data on the operations of these companies must be taken into account.

3.7. Determination of the share of the entity providing banking services in the market for banking services, including for any type of banking services.

(In the edition of the resolution of the Board of the National Bank of the Kyrgyz Republic of June 8, 2017 No. 2017-P-14/23-16)

3.7.1. When determining the dominant position of an entity providing banking services, it is necessary to take into account its share in the relevant market for banking services.

3.7.2. The share of the entity providing banking services in the market for banking services is determined based on the ratio of the sum of its turnover for a specific type of banking services (by volume of attracted deposits, placed assets, etc.) to the total sum of turnover of banking services of the entity providing banking services in the established boundaries of the market for banking services:

• volume of services provided by entities providing banking services - total volume of a specific type of banking operation (service) carried out (provided) by the entity providing banking services over a specific period of time (for a year, for a quarter, for a month, for a day). The volume of services is calculated based on analytical data from the turnover statement of accounts by the entity providing banking services for the considered (reporting) period;

• volume of services provided by the entity providing banking services outside the Kyrgyz Republic;

• sum of turnover of banking services - total turnover for this type of banking operations (services) carried out (provided) by all entities providing banking services on the territory of the Kyrgyz Republic.

(In the edition of the resolution of the Board of the National Bank of the Kyrgyz Republic of June 8, 2017 No. 2017-P-14/23-16)

3.7.3. When determining the share of the entity providing banking services in the market, it is necessary to take into account that the share in the market may change if the services in question are provided by other entities providing banking services that currently do not provide services but are ready to do so easily if prices in the relevant commodity market begin to rise.

3.7.4. In the event that the share of the entity providing banking services for a specific type of banking operation/service exceeds 35% and this operation/service is used by all layers of the population, the National Bank has the right to establish and apply restrictions in tariff policy for this type of operation/service or impose additional consumer protection conditions.

(In the edition of the resolution of the Board of the National Bank of the Kyrgyz Republic of June 8, 2017 No. 2017-P-14/23-16)

3.7.5. (Lost force in accordance with the resolution of the Board of the National Bank of the Kyrgyz Republic of June 8, 2017 No. 2017-P-14/23-16)

IV. Assessment of Competitiveness

4.1. To assess the level of competition in the market for banking services, the Herfindahl-Hirschman Index of market concentration may be used, which is taken into account in conjunction with other factors and indicators of the activities of the entity providing banking services. The Herfindahl-Hirschman Index is determined by the formula:

H = P 2 1 + P 2 2 + ... + P 2 i + ... P 2 n ,

where:

H - concentration indicator;

P i - percentage share of the entity providing banking services in the market.

4.2. The Herfindahl-Hirschman Index is used to assess market concentration when considering issues of reorganization of an entity providing banking services in the form of merger, acquisition, division, separation.

4.3. If the Herfindahl-Hirschman Index indicator exceeds 1800, this characterizes low competition intensity and high concentration of the market for banking services.

4.4. In cases of acquisition and/or merger of an entity providing banking services, when the financial condition of one of the parties is characterized as "close to bankruptcy," in order to protect the interests of depositors of the entity providing banking services, at the discretion of the National Bank, exceeding the value of 1800 of the Herfindahl-Hirschman Index is permitted.

4.5. In the event that the Herfindahl-Hirschman Index indicator fluctuates from 1000 to 1800, a transaction (on merger, acquisition) increasing the index by more than 200 points may be prohibited, if other factors are not established indicating that such a measure does not pose a threat to consumers and will not have a negative impact on the market for banking services.

4.6. In the event that the Herfindahl-Hirschman Index indicator for the market for banking services as a whole exceeds 1800, transactions (on merger, acquisition) increasing the Herfindahl-Hirschman Index by 100 or more points are considered a violation of antimonopoly legislation and are not permitted, if other factors are not established indicating that such a measure does not pose a threat to consumers and will not have a negative impact on the market for banking services.

V. Final Provisions

5.1. To make a decision on the issue of the dominant position of an entity providing banking services in the banking market, it is necessary to determine the influence of this entity providing banking services on the market for certain banking services taking into account all data obtained during the analysis, assess the existing facts of abuse of the occupied dominant position, and also determine:

a) whether this entity providing banking services can play a significant or decisive role in using its position under these circumstances and in this service market;

b) whether this entity providing banking services actually plays this role, taking into account the positions of competitors regarding this factor or other balancing competitive advantages possessed by competitors of this entity providing banking services whose dominant position is being determined;

c) what is the influence of market entry conditions;

d) benefits or other privileges available to the entity providing banking services (benefits provided by the state in the form of tax benefits, etc.);

e) decisions of the National Bank and other authorized state bodies on limiting or establishing any limits;

f) influence of existing entry (exit) restrictions on the market on the development of the considered type of services and on the development of the market as a whole;

g) possibility of entry into the market by other market participants or a new entity providing banking services within the next two years;

h) sufficiency of the number of participants in the market to maintain competition.

5.2. In the event that the dominant position of an entity providing banking services affects the quality of the service provided to the consumer, or increases its cost, or may lead to the emergence of financial risk and/or monopolistic position in the market for banking services and operations, the National Bank has the right to establish corresponding restrictions in accordance with the legislation of the Kyrgyz Republic.

Appendix 1

to the Regulation "On Determining the Dominant Position in the Market for Banking Services"

TEST

for determining the "hypothetical monopolist"

(In the edition of the resolution of the Board of the National Bank of the Kyrgyz Republic of June 8, 2017 No. 2017-P-14/23-16)

In accordance with the "hypothetical monopolist" test, the products and services of this entity providing banking services are determined, and the possibility is determined of what will happen if the entity providing banking services attempts a small but prolonged increase in price - SSNIP ("small but significant non-transitory increase in price" - "small but significant non-transitory increase in price"), and will "hold" the price increase in the range of 5 to 10 percent over a long period of time.

If such an increase can lead to a significant number of consumers switching to alternative services, these services must be included in the relevant product market.

A similar test should be conducted regarding the determination of the relevant geographic market. If this entity providing banking services decides to increase prices by 5 to 10 percent, from which geographic areas will other entities providing banking services attempt to supply this service to consumers?

In this case, the following three conditions must be taken into account:

First: It is possible that the results of the SSNIP test will show that consumers choose other products or services because the hypothetical monopolist is already charging a monopolistic price. For example, if the price for using the services of the hypothetical monopolist has increased sufficiently high, then individual consumers may refuse banking services and store savings in cash form outside the banking system, or make payments using other instruments. Thus, hypothetically, it can be assumed a higher increase in price (possibly from 20 to 25 percent) to evaluate the influence of one entity providing banking services (the assumed monopolist) on the market.

Second: use of market shares to determine monopolistic power - measurement of market power. In this case, market shares serve as evidence of the existence of dominance - does this entity providing banking services have the ability to raise prices above the hypothetical competitive level without incurring direct and significant losses in sales.

Third: application of competition policy to an entity providing banking services offering a "group" of financial services. It is assumed that consumers use a specific entity providing banking services because of the ability of the entity providing banking services to offer a "group" of services. For example, it is possible that a consumer wants to be a permanent client only of those entities providing banking services that offer services for current accounts, savings accounts, and mortgage lending or for making various payments. Thus, it is necessary to determine the relevant market among banking services regarding the provision of a group of services, and not just the possibility of the entity providing banking services to provide any single service.

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