Resolution of the Board of the National Bank

of the Kyrgyz Republic

of 8 June 2017
No. 2017-П-12\23-9-(НПА)

On approval of the Regulation "On criteria for the systemic nature of commercial banks and non-bank financial and credit organizations"

In accordance with Articles 7 and 43 of the Law "On the National Bank of the Kyrgyz Republic", the Board of the National Bank of the Kyrgyz Republic resolves:

• 1. To approve the Regulation "On criteria for the systemic nature of commercial banks and non-bank financial and credit organizations" (attached).

• 2. To the Legal Department:

  • publish this resolution on the official website of the National Bank of the Kyrgyz Republic;

  • after official publication, send this resolution to the Ministry of Justice of the Kyrgyz Republic for inclusion in the State Register of Normative Legal Acts of the Kyrgyz Republic.

• 4. This resolution enters into force on 22 June 2017.

• 5. To the Supervision and Licensing Methodology Department to bring this resolution to the attention of commercial banks, the State Development Bank of the Kyrgyz Republic, the Legal Entity Union "Union of Banks of Kyrgyzstan", the specialized financial and credit institution Open Joint-Stock Company "Financial Company of Credit Unions", microfinance organizations, credit unions, regional departments and the representative office of the National Bank of the Kyrgyz Republic in Batken Oblast.

• 6. To assign control over the execution of this resolution to the member of the Board of the National Bank of the Kyrgyz Republic Dzhusupov T.Dzh.

Chairman T. Abdygulov

Annex
to the resolution of the Board of the National Bank of the Kyrgyz Republic of 8 June 2017 No. 2017-П-12\23-9-(НПА)

Regulation

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

Chapter 1. General provisions

1. The Regulation "On criteria for the systemic nature of commercial banks and non-bank financial and 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 and credit organizations (hereinafter - NFCO).

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

• Systemic/Systemically important bank - is a bank that meets the criteria of systemic nature for the banking and payment systems, whose failure may lead to serious consequences for the financial system and economy of the Kyrgyz Republic, to a negative impact on other participants of the banking and payment systems, to an outflow of deposits, to a weakening or crisis of the banking system, to a deterioration of macroeconomic conditions.

• Systemic/Systemically important NFCO - is an NFCO that meets the criteria of systemic importance for the banking system and the system of non-bank financial and credit organizations (systemic NFCO), whose failure (bankruptcy) and/or deterioration of financial indicators may lead to a disruption or crisis of the banking system and the system of non-bank financial and credit organizations.

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

• Systemic risk - the risk of disruption of the process of providing financial services, which is caused by damage to all or part of the banking system and poses a threat of negative consequences for the real sector of the economy, due to, among other things, the interdependence of banks (the risk of "contagion").

• SPK - the packet clearing system

• GSRRV - the Gross Settlement System in Real Time mode.

3. The rating by systemic importance of banks/NFCO - is a descriptive assessment of the potential adverse consequences as a result of the failure/bankruptcy of a bank/NFCO, which is not subject to disclosure.

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

• 1) the 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, since they are connected with systemically important banks (through interaction with the systemically important bank through payment systems, etc.);

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

• 3) in combination with a 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 the suspension/reduction of the provision of other financial services (such as payment and settlement services);

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

5. The systemic importance of a bank/NFCO 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 a failure may occur.

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

• 1) the sizes of certain indicators;

• 2) interconnectedness with participants of the financial system of the Kyrgyz Republic;

• 3) the level of substitutability.

7. When classifying banks/NFCO, 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/NFCO is classified into three categories:

• 1) Systemically important - the consequences of the failure of the bank/NFCO will be significant;

• 2) Significant - the consequences of the failure of the bank/NFCO will be moderate;

• 3) Limited significance - the consequences of the failure of the bank/NFCO will be limited.

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

The assessment of the systemic importance of a bank/NFCO shall be conducted annually by the National Bank, and in the presence of changes in the banking system/in the activities of a specific bank/NFCO.

The list of systemically important banks/NFCOs shall not be subject to official publication.

Chapter 2. Criteria for the systemic nature of banks

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

The assessment of the systemic importance of banks shall be conducted annually. The quantitative indicators used to assess the systemic importance of banks in the banking system are calculated on the basis of 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) The sizes of certain indicators of the bank (weighting share is 50 %).

  • a) Indicator of the amount of assets (P1). The share of the bank's assets in the specific weight of the total assets of the banking system. This criterion must be considered from the point of view of the impact on the economy of the republic. Weight – 10%.

  • b) Indicator of the amount of deposits of individuals (P2). The share of the bank's deposits of individuals in the specific weight of the total volume of deposits of individuals of the banking system. This criterion must be considered from the point of view of criticality for undermining public confidence in the banking system. Weight – 10%.

  • c) Indicator of the amount of deposits of legal entities (P3). The share of the bank's deposits of legal entities in the specific weight of the total volume of deposits of legal entities of the banking system. This criterion must be considered from the point of view of protecting the interests of consumers of financial services. Weight – 10%.

  • d) Indicator of the number of depositors – individuals and legal entities of the bank in the specific weight of the total number of depositors – individuals and legal entities of the banking system. Weight – 10% (P4)

  • e) Indicator of the amount of the loan portfolio (P5). The share of the loan portfolio (gross value) in the total volume of the loan 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 of 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 specific 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 of liabilities attracted from banks (P7). The volume of aggregate debt (loans, deposits and other liabilities) of the bank to other banks of the Kyrgyz Republic in the specific weight of liabilities attracted from banks of the banking system. Weight – 7%.

• 3) Level of substitution (weighting share is 36 %).

  • a) The indicator of concentration of lending in sectors of the economy reflects the volume of the bank's loans by sectors of the economy exceeding the threshold value (more than 15 %) in the specific weight of the volume of loans of the banking system by sectors of the economy. Weight – 7%. (P8).

  • b) Indicator of the territorial network. The number of branches of the bank to the total number of branches of the banking system. Weight – 5% (P9).

  • c) Indicator of the share of incoming and outgoing payments in the SPK of the bank in the volume of incoming and outgoing payments in the SPK of the banking system. Weight – 8% (P10).

  • d) Indicator of the share of incoming and outgoing payments in the GSRRV of the bank in the volume of incoming and outgoing payments in the GSRRV of the banking system. Weight – 8% (P11).

  • e) Indicator of the 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).

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

• specifics of the bank's position at the current moment;

• trends in economic development and the position of other banks according to the same criteria of systemic nature and importance;

• availability of opportunities for applying measures and instruments in order to distribute and/or reduce systemic risks;

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

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

• 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 up and a generalizing (weighted average) result assessed.

The generalizing indicator of the bank (GI) is calculated by the formula:

,

where:

• GI - generalizing indicator of the bank;

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

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

• n – number of indicators.

• if the overall indicator (OI) is 10% or higher, the bank is systemically important;

• if the OI is from 3% to 10%, the bank is significant (medium bank);

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

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

To determine a systemically important bank based on quantitative indicators, the bank's overall indicator must be at least 10% during the last or subsequent three reporting periods. 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.

Chapter 3. Criteria for the systemic nature of NFCOs

14. To determine the category of an NFCO by systemic importance, the following criteria are used:

• 1) Size of the NFCO

  • a) Indicator: asset value. The share of the NFCO's assets in the total assets of the NFCO system – the average value over the last two reporting periods from the date of the NFCO's assessment. This criterion must be considered from the point of view of its impact on the economy of the republic. Weight – 15%.

  • b) Indicator: the value of deposits or the number of depositors of the NFCO, out of the total volume of deposits and depositors of the NFCO system, respectively, the average value over the last two reporting periods from the date of the NFCO's assessment. This criterion must be considered from the point of view of criticality for the stability of the system and public trust in NFCOs, as well as the protection of the rights of consumers of services. Weights – 20%.

  • c) The share of the NFCO's loan portfolio in the total loan portfolio of NFCOs, the average value over the last two reporting periods from the date of the NFCO's assessment. This criterion must be considered from the point of view of the impact of placed assets and the protection of the rights of consumers of services. Weight – 15%.

• 2) Interconnectedness with other participants of the financial market.

  • a) Assets placed in banks and in other NFCOs. The share of placed assets (loans, deposits, investments and other assets) of the NFCO in banks and NFCOs in the total amount of placed assets of NFCOs in banks and NFCOs. This criterion characterizes the possibility of spreading the risk of insolvency of an NFCO to other financial and credit institutions, that is, the possibility of a 'domino effect'. Weight – 10%.

  • b) Liabilities attracted from NFCOs. The share of the total debt (loans, deposits and other liabilities) of the NFCO in the capital of the NFCO system. Weight – 10%

  • c) Liabilities attracted from banks. The share of the total debt (loans and other liabilities) of the NFCO in the capital of the banking system. Weight – 30%.

15. The assessment of an NFCO's compliance is carried out according to all criteria, as well as taking into account the following factors:

• the specifics of the NFCO's current position;

• trends in economic development and the position of other NFCOs according to the same systemic criteria;

• the availability of opportunities for applying measures and institutions for the purpose of distributing and/or reducing systemic risks;

• the possibility of the NFCO's indicators influencing the stability of commercial banks and other NFCOs;

• and other factors.

To determine a systemically important NFCO based on quantitative indicators, the total value of the indicators weighted by their weights must be at least 10%.

Chapter 4. Requirements for systemically important banks/NFCOs

16. The National Bank, in relation to banks and non-bank financial and credit organizations that, based on quantitative indicators, meet the requirements of a systemically important bank/NFCO, may establish:

• 1) other sizes of economic standards, requirements and restrictions;

• 2) higher requirements for information disclosure within annual and quarterly reports regarding individual indicators characterizing the bank's compliance with safe functioning standards:

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

  • on the results of stress testing;

  • on the quality of assets of the bank/NFCO.