Article 216 — 120 — No. 20-21 (468-469)

DECISION OF THE BOARD OF THE CENTRAL BANK OF THE REPUBLIC OF UZBEKISTAN

On Approval of the Regulation on Requirements for Commercial Banks' Bank Risk Management

Registered by the Ministry of Justice of the Republic of Uzbekistan on May 25, 2011, Registration No. 2229

(Enters into force on June 4, 2011)

In accordance with the Laws of the Republic of Uzbekistan "On the Central Bank of the Republic of Uzbekistan" (Information Bulletin of the Oliy Majlis of the Republic of Uzbekistan, 1995, No. 12, Article 247), "On Banks and Banking Activity" (Information Bulletin of the Oliy Majlis of the Republic of Uzbekistan, 1996, No. 5-6, Article 54), and the Decision of the President of the Republic of Uzbekistan No. PK-1438 dated November 26, 2010 "On Priority Directions for Further Reforming and Increasing the Stability of the Republic's Financial and Banking System in 2011–2015 and Achieving High International Rating Indicators" (Collection of Legislation of the Republic of Uzbekistan, 2010, No. 48, Article 442), the Board of the Central Bank of the Republic of Uzbekistan decides:

1. Approve the Regulation on Requirements for Commercial Banks' Bank Risk Management in accordance with the Appendix.

2. This decision enters into force ten days after the day of its state registration by the Ministry of Justice of the Republic of Uzbekistan.

Chairman of the Central Bank
F. MULLAJONOV

Tashkent,
May 7, 2011,
No. 14/2

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No. 20-21 (468-469) — 121 — Article 216

APPENDIX

to the Decision of the Board of the Central Bank of the Republic of Uzbekistan No. 14/2 dated May 7, 2011

REGULATION

On Requirements for Commercial Banks' Bank Risk Management

This Regulation, in accordance with the Laws of the Republic of Uzbekistan "On the Central Bank of the Republic of Uzbekistan" (Information Bulletin of the Oliy Majlis of the Republic of Uzbekistan, 1995, No. 12, Article 247), "On Banks and Banking Activity" (Information Bulletin of the Oliy Majlis of the Republic of Uzbekistan, 1996, No. 5-6, Article 54), and the Decision of the President of the Republic of Uzbekistan No. PK-1438 dated November 26, 2010 "On Priority Directions for Further Reforming and Increasing the Stability of the Republic's Financial and Banking System in 2011–2015 and Achieving High International Rating Indicators" (Collection of Legislation of the Republic of Uzbekistan, 2010, No. 48, Article 442), establishes requirements for the management of bank risks by commercial banks (hereinafter referred to as "banks") of the Republic of Uzbekistan.

I. General Provisions

1. Bank risk is understood as the existence of the risk of incurring financial losses characteristic of banking activity and (or) the risk of complete or partial loss of bank liquidity (the ability of the bank to fulfill its obligations on time) as a result of situations dependent on economic, financial, social, political, technological internal and (or) external factors affecting banking activity.

2. In banking activity, the following bank risks may arise:

a) credit risk — a risk associated with financial losses arising in the bank as a result of the borrower's inability to partially or fully fulfill its financial obligations to the bank in accordance with the conditions specified in the contract;

b) market risk — a risk associated with financial losses arising in the bank as a result of adverse changes in the prices of instruments in the bank's securities portfolio, as well as exchange rates of foreign currencies and prices of precious metals. Market risk includes fund, currency, and interest rate risks, where:

fund risk — a risk associated with financial losses arising in the bank as a result of adverse changes in the market prices of instruments in the securities portfolio;

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Article 216 — 122 — No. 20-21 (468-469)

currency risk — a risk associated with financial losses arising in the bank as a result of changes in the exchange rates of foreign currencies and prices of precious metals on open positions in foreign currencies and precious metals;

interest rate risk — a risk associated with financial losses arising in the bank as a result of adverse changes in interest rates on assets, liabilities, and off-balance sheet instruments;

c) liquidity risk — a risk associated with financial losses arising in the bank as a result of the bank's inability to fully or partially fulfill its financial obligations. Bank liquidity risk primarily arises as a consequence of mismatches in the maturity dates of assets and liabilities. The management of bank liquidity risk is carried out on the basis of the requirements of the Regulation "On Requirements for the Management of Liquidity of a Commercial Bank" (Registration No. 559, December 2, 1998);

d) operational risk — a risk associated with financial losses arising in the bank as a result of errors made in the bank's internal systems, processes, information technologies, employee characteristics, or external natural processes, including natural disasters;

e) country risk — a risk associated with financial losses arising in the bank as a result of the inability of the bank's foreign partners to fulfill their financial obligations due to economic, political, and social changes;

f) legal risk — a risk associated with financial losses arising in the bank as a result of non-compliance with normative legal documents and concluded contracts by the bank, legal errors in the work process (incorrect legal advice or incorrect drafting of documents), shortcomings in the legal system, and violations of normative legal documents by partners;

g) reputation risk — a risk of losses arising in the bank due to the emergence of a negative perception among the public regarding the bank's financial stability, resulting in a decrease in the number of clients and a decline in the quality of services provided;

h) fraud risk — the risk of incurring financial losses in the bank as a result of fraudulent or other criminal actions by employees, clients, and other partners. This includes the theft of cash and other valuables from the bank and the intentional concealment by bank employees of losses in financial accounting and reporting (temporarily or until discovered through inspection), resulting in financial damage to the bank.

3. Management of bank risks is understood as a set of actions carried out by the bank to identify risks that may arise in the course of its activity and the conduct of banking operations, prevent, eliminate, reduce them, and cover potential losses through other financial instruments.

4. The management of risks in banking activity is organized for the following main purposes:

• protection of the interests of bank depositors and creditors, and shareholders;
• reduction, elimination, and prevention of bank risks;
• ensuring a sufficient level of stability of banking activity.

II. Requirements for Bank Risk Management

5. Banks are required to do the following in the management of bank risks:

• develop a clearly expressed and documented risk management policy that takes into account the specific features of banking activity and its surrounding environment;
• organize a structural subdivision responsible for the tasks of bank risk management;
• ensure the subdivision for bank risk management is staffed with experienced and qualified specialists;
• obtain agreement from the bank risk management subdivision regarding the emergence and elimination, prevention, and reduction of bank risks from the perspective of bank risk management when introducing new services, concluding major deals, establishing relations with foreign financial institutions, making investments, placing funds in foreign currency into assets, hiring new employees, and conducting other banking operations where bank risks may arise.

6. Employees of the bank risk management subdivision must meet the following requirements:

• have higher education appropriate to the nature of their duties;
• have at least two years of work experience and professional qualifications in the bank's credit, currency, deposit, and securities operations, accounting and reporting, legal, and information departments (for the head of the subdivision, it is required to have at least two years of experience in a managerial position in the aforementioned departments of the bank or at least four years of work experience in the subdivision, along with professional qualifications);
• have knowledge of the rules for applying national and international accounting standards, principles and standards of the Basel Committee on Banking Supervision, and methodologies for evaluating banking activity by international rating agencies, and undergo specialized courses to improve their qualifications in bank risks.

7. The following are considered the duties of the bank risk management subdivision:

• maintain a list of all risks that may occur in banking activity, study and monitor the factors of their occurrence, and take all measures for risk management;
• assess bank risks;
• submit to the Bank Board body for discussion the measures, requirements, and norms that should be adopted in the field of bank risk management in banking activity;
• take measures to form reserves for covering bank risks in accordance with the requirements of normative legal documents;
• participate in the development of draft internal documents of the bank regarding the provision of banking services and conduct of operations, and in establishing the official duties of bank employees;
• prepare proposals regarding newly introduced banking services and operations, and deals;
• improve the procedures for providing banking services and conducting operations;
• establish separate monitoring and analyze the bank's credit (investment) portfolio by credit (investment) type, the economic sector of the debtor (issuer), region, credit collateral, purpose, interest rate, and repayment terms;
• study problematic loans, their relevance to which sector of the economy, the reasons for becoming problematic, and the processes of writing off and monitoring these loans, draw relevant conclusions, and prepare proposals;
• generalize information on persons who have taken loans and draw relevant conclusions for the purpose of identifying and preventing credit risk;
• participate in the development and improvement of programs that ensure reliable protection of the bank's information base from unauthorized access;
• take measures to ensure strict compliance by bank employees with their official duties and responsibilities, as well as normative legal documents, in the provision of banking services and conduct of operations;
• develop methods for stress-testing the bank's financial condition and liquidity, and screen analysis of clients, and ensure their application;
• maintain a list of all types of services (deposits and credits) and operations that the bank may carry out;
• study and monitor changes occurring in the global financial and economic spheres, including the national economy, and prepare proposals if necessary;
• study and prepare proposals on international and foreign bank practices and innovations in the field of bank management and technologies, including bank risk management;

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• submit reports every half-year on the results of work carried out in the field of bank risk management for discussion at meetings of the Bank Board and the Risk Control Committee of the Bank Council.

III. Final Provisions

8. Banks may establish additional measures for risk management based on their activities.

9. The bank risk management subdivision is directly accountable to the Chairman of the Bank Board and is independent of other subdivisions of the bank.

10. Banks may, at their own expense, establish funds for covering losses arising as a result of bank risks in the manner established by legislation.

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