Regulation on Direct Banking 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 May 28, 2008 No. 22/4

REGULATION

on direct banking supervision

(In the edition of the Resolutions of the Board of the National Bank of the Kyrgyz Republic of April 25, 2012 No. 18/9, July 11, 2012 No. 29/6, November 16, 2012 No. 43/1, September 25, 2013 No. 35/16, April 27, 2016 No. 19/5, June 15, 2017 No. 2017-P-12/25-12, August 15, 2018 No. 2018-P-33/33-8, August 14, 2019 No. 2019-P-12/42-1, March 27, 2020 No. 2020-P-14/17-3, December 23, 2020 No. 2020-P-33/73-13-(NFKU), July 14, 2021 No. 2021-P-12/38-3-(NPA), December 28, 2022 No. 2022-P-12/83-6-(NPA))

1. General Provisions

1.1. This Regulation applies to commercial banks licensed by the National Bank and to the Development Bank of the Kyrgyz Republic (hereinafter referred to as the bank(s)).

(In the edition of the Resolution of the Board of the National Bank of the Kyrgyz Republic of June 15, 2017 No. 2017-P-12/25-12, December 28, 2022 No. 2022-P-12/83-6-(NPA))

1.2. This Regulation also applies to JSC "Financial Company of Credit Unions" (hereinafter referred to as FKKS), credit bureaus, guarantee funds, microfinance organizations attracting deposits, and credit unions attracting deposits from participants and/or having indebtedness to FKKS (hereinafter referred to as bank(s)), in part not conflicting with regulatory legal acts regulating the activities of these organizations, as well as taking into account their specifics, in accordance with the Law of the Kyrgyz Republic "On Credit Unions".

This Regulation also applies to payment system operators (hereinafter referred to as PSO) and payment organizations (hereinafter referred to as PO), licensed by the National Bank, in part not conflicting with regulatory legal acts regulating the activities of these organizations, as well as taking into account their specifics, in accordance with the Law of the Kyrgyz Republic "On the Payment System of the Kyrgyz Republic".

(In the edition of the Resolutions of the Board of the National Bank of the Kyrgyz Republic of November 16, 2012 No. 43/1, June 15, 2017 No. 2017-P-12/25-12, March 27, 2020 No. 2020-P-14/17-3, December 23, 2020 No. 2020-P-33/73-13-(NFKU), December 28, 2022 No. 2022-P-12/83-6-(NPA))

1.3. Direct banking supervision is a measure of influence applied in conditions where there is a threat to the stable and reliable operation of a bank, for the timely adoption of necessary measures to improve its financial condition, early detection and prevention of aggravation of problems that may lead to deterioration and instability of the bank's position, as well as for better study of the financial condition, accounting and reporting status, and for other purposes determined by the National Bank.

Direct banking supervision is also a measure of influence applied to PSOs/POs to ensure effective and uninterrupted functioning of the payment system and control over the conduct of PO operations in fulfillment of their current financial obligations.

(In the edition of the Resolution of the Board of the National Bank of the Kyrgyz Republic of March 27, 2020 No. 2020-P-14/17-3)

1.4. The main tasks of direct banking supervision are closer study and analysis of the solvency of the bank/PO, the quality of management of the bank/activities of the PSO/PO, and any other areas of activity that carry potential risk of deterioration of the position; targeted and operational monitoring and control of operations on the premises, in accordance with the powers established by the Supervisory Committee of the National Bank (hereinafter referred to as SC) and the Payment System Committee (hereinafter referred to as PSC), control of the execution of all measures prescribed by the National Bank and developed by the bank/PSO/PO themselves to improve the financial condition and position, as well as to ensure stable and uninterrupted operation of the system.

(In the edition of the Resolution of the Board of the National Bank of the Kyrgyz Republic of March 27, 2020 No. 2020-P-14/17-3)

2. Procedure for introducing direct banking supervision

2.1. The decision to introduce direct banking supervision in a bank is made by the SC; for PSOs/POs, the decision is made by the PSC.

(In the edition of the Resolution of the Board of the National Bank of the Kyrgyz Republic of March 27, 2020 No. 2020-P-14/17-3)

2.2. To perform the tasks of direct banking supervision, the SC/PSC sends an authorized employee/authorized employees of the National Bank to the bank/PSO/PO. In case several authorized employees (hereinafter referred to as the controller group) are sent to the bank/PSO/PO, a leader is appointed (hereinafter referred to as the leader of the controller group). In case a single authorized employee (hereinafter referred to as the controller) is sent to the bank/PSO/PO, he performs the functions of the leader of the controller group (if applicable).

(In the edition of the Resolution of the Board of the National Bank of the Kyrgyz Republic of March 27, 2020 No. 2020-P-14/17-3)

2.2.1. Depending on the grounds for introducing direct banking supervision, the number and composition of the controller group are determined.

In accordance with the goals and reasons for introducing direct banking supervision, the scope of tasks and direct responsibilities for which the controllers/controller group are responsible are determined.

(In the edition of the Resolutions of the Board of the National Bank of the Kyrgyz Republic of July 11, 2012 No. 29/6, April 27, 2016 No. 19/5)

2.2.2. When carrying out direct banking supervision, for control over the conduct of payment operations of the bank/PSO/PO, authorized employees of structural subdivisions, regional departments/representative offices of the National Bank in the Batken region, and employees of the bank/PSO/PO possessing sufficient experience and knowledge of the operations conducted in banks/PSOs/POs may be involved if necessary.

(In the edition of the Resolutions of the Board of the National Bank of the Kyrgyz Republic of March 27, 2020 No. 2020-P-14/17-3, July 14, 2021 No. 2021-P-12/38-3-(NPA))

2.3. The resolution of the SC/PSC on introducing direct banking supervision must indicate:

• grounds for introducing direct banking supervision;
• term of application of this measure of influence;
• types and frequency of submission of reports by the bank/PSO/PO and the controller/controller group;
• special conditions/work regime of the bank/PSO/PO (including branches/representative offices/agency network and other separate subdivisions) and the controller/controller group (including its powers);
• sample(s) of signature(s) of the controller(s);
• obligations of the bank/PSO/PO towards the National Bank and the controller/controller group.

(In the edition of the Resolutions of the Board of the National Bank of the Kyrgyz Republic of March 27, 2020 No. 2020-P-14/17-3, July 14, 2021 No. 2021-P-12/38-3-(NPA))

2.4. On the day of introducing direct banking supervision, the responsible structural subdivision of the National Bank sends to the Board of the bank/Head of the PSO/PO or the person acting in their place, an extract from the resolution of the SC/PSC on introducing direct banking supervision, containing the full preamble and operative part of the resolution of the SC/PSC.

(In the edition of the Resolution of the Board of the National Bank of the Kyrgyz Republic of March 27, 2020 No. 2020-P-14/17-3)

2.5. (Lost force in accordance with the Resolution of the Board of the National Bank of the Kyrgyz Republic of July 14, 2021 No. 2021-P-12/38-3-(NPA))

(In the edition of the Resolution of the Board of the National Bank of the Kyrgyz Republic of March 27, 2020 No. 2020-P-14/17-3)

2.5.1. The leader of the controller group is responsible for:

• execution of the resolution of the SC/PSC on carrying out direct banking supervision;
• management of the activities of the controller group;
• distribution of duties among members of the controller group.

(In the edition of the Resolution of the Board of the National Bank of the Kyrgyz Republic of March 27, 2020 No. 2020-P-14/17-3)

2.5.2. The leader of the controller group, with the agreement of the SC, may delegate powers to control the activities of a bank branch to a bank employee possessing sufficient experience and knowledge in banking activities.

(In the edition of the Resolution of the Board of the National Bank of the Kyrgyz Republic of July 11, 2012 No. 29/6)

2.6. When carrying out direct banking supervision involving control over the settlement and cash operations of the bank, the SC has the right to establish:

• a requirement that the bank conduct settlement and cash operations (all or specific ones) only after coordination with the controller and upon presence of the controller's signature, the sample of which is in the resolution of the SC;
• powers of the controller/controller group to temporarily suspend certain settlement and cash operations of the bank and the procedure for coordinating the decision on them with the management of the National Bank;
• maximum amounts for settlement and cash operations, above which the bank is not entitled to conduct operations without coordination with the controller and without the controller's signature, the sample of which is in the resolution of the SC;
• regime for conducting settlement and cash operations by branches (savings and mobile cash desks) of the bank, in which no controller is appointed, indicating the procedure for coordination and/or informing them by the controller conducting direct banking supervision in the bank.

(In the edition of the Resolutions of the Board of the National Bank of the Kyrgyz Republic of July 11, 2012 No. 29/6, July 14, 2021 No. 2021-P-12/38-3-(NPA))

2.6-1. When carrying out direct banking supervision involving control over the activities of PSOs/POs, the PSC has the right:

• to establish a requirement that PSOs/POs conduct settlements with service providers/agents/counterparties and other organizations only after coordination with the leader of the controller group and upon presence of his signature;
• to initiate suspension of certain types of operations/payments in the presence of risks, up to termination of contracts with service providers, taking into account the terms of the contract and the legislation of the Kyrgyz Republic, with coordination with the management of the National Bank;
• to establish maximum amounts for sums, above which PSOs/POs are not entitled to conduct operations without coordination with the leader of the controller group and without his signature.

(In the edition of the Resolution of the Board of the National Bank of the Kyrgyz Republic of March 27, 2020 No. 2020-P-14/17-3)

2.6-2. The controller/controller group may, if necessary, coordinate a decision on temporary suspension of certain settlement and cash operations of the bank with an authorized person of the National Bank within 3 (three) working days. The specified term may be extended additionally by 3 (three) working days if necessary.

This requirement does not apply to cases of suspension of operations (transactions) in accordance with the norms of legislation on AML/CFT.

In case of suspension of an operation (transaction) due to suspicion that the operation (transaction) is related to legalization (laundering) of criminal proceeds, suspension of such operation (transaction) is carried out in the manner established by legislation on AML/CFT.

The bank is obliged to provide comprehensive assistance to the controller/controller group for the purpose of taking operational and correct decisions on the conduct of settlement and cash operations.

In case of suspension by the controller/controller group of certain settlement and cash operations of the bank, the costs/losses incurred in connection with such suspension are borne by the bank.

(In the edition of the Resolution of the Board of the National Bank of the Kyrgyz Republic of July 14, 2021 No. 2021-P-12/38-3-(NPA))

2.7. No later than the day of introducing direct banking supervision and appointment of the controller/controller group who will control the operations of the bank/PSO/PO on the premises, an authorized employee of the National Bank provides to the organization regarding which direct banking supervision is introduced, samples of signatures of controllers recorded in the resolution of the SC/PSC. When conducting settlements through the remote service system, the PO must provide the controller/leader of the controller group with the function of approver in the remote service system for conducted settlements. In case of absence of such possibility, the bank servicing the PO must inform the controller/leader of the controller group about conducted operations through remote service systems during the introduction of direct banking supervision (this clause must be included in the contract signed between the PO and the bank). Signatures of officials of the bank/PSO/PO are considered invalid in the absence of the controller's signature, the sample of which is in the resolution of the SC/PSC.

Presence of the controller's signature on a document for a coordinated operation means familiarization of the latter with the intention of the bank/PSO/PO to conduct the operation and consent to its conduct in accordance with the requirements established by the corresponding resolution of the SC/PSC.

Responsibility for compliance of conducted operations with the requirements of the legislation of the Kyrgyz Republic, including regulatory legal acts of the National Bank, is fully borne by the bank/PSO/PO.

(In the edition of the Resolutions of the Board of the National Bank of the Kyrgyz Republic of March 27, 2020 No. 2020-P-14/17-3, July 14, 2021 No. 2021-P-12/38-3-(NPA))

2.8. The SC/PSC establishes the term during which direct banking supervision is carried out in the bank/PSO/PO, and also determines the frequency of reports submitted by the board of the bank/head of the PSO/PO and the leader of the controller group to the corresponding structural subdivision of the National Bank and the SC/PSC. Based on the results of consideration of reports and/or information of the corresponding structural subdivision of the National Bank, the SC/PSC has the right to extend or cancel (early) the action of direct banking supervision.

(In the edition of the Resolutions of the Board of the National Bank of the Kyrgyz Republic of March 27, 2020 No. 2020-P-14/17-3, July 14, 2021 No. 2021-P-12/38-3-(NPA))

2.9. The board of the bank/head of the PSO/PO or the person acting in their place is obliged to notify all shareholders (founders) of the bank/PSO/PO of the introduction of direct banking supervision within 10 days from the moment of its introduction.

(In the edition of the Resolution of the Board of the National Bank of the Kyrgyz Republic of March 27, 2020 No. 2020-P-14/17-3)

2.10. The management of the bank/PSO/PO upon introduction of direct banking supervision bears full responsibility for execution of the resolution of the SC/PSC, including requirements for coordination of operations with the controller/controller group. In case of non-fulfillment of the requirements of the resolution of the SC/PSC, measures of influence may be applied to the management of the bank/PSO/PO in accordance with the regulatory legal acts of the National Bank.

(In the edition of the Resolutions of the Board of the National Bank of the Kyrgyz Republic of March 27, 2020 No. 2020-P-14/17-3, July 14, 2021 No. 2021-P-12/38-3-(NPA))

3. Grounds for introducing direct banking supervision

3.1. The National Bank has the right to introduce direct banking supervision in cases where there are no sufficient grounds for appointing a temporary administration to the bank or revoking the license for conducting banking operations.

Grounds for introducing direct banking supervision are:

• presence of financial problems that were not eliminated by the bank within the prescribed time;
• actions of the bank and/or its officials, which are considered risky and may negatively affect the stable and reliable state of the bank;
• emergence of a threat to the interests of depositors and other creditors;
• discovery of facts of violations of legislation, regulatory acts and prescriptions of the National Bank, which were not eliminated by the bank within the prescribed time.
• presence in the composition of shareholders of the bank owning or controlling, both collectively and individually, ten or more percent of the shares of the bank, persons registered in states regarding which decisions (resolutions) of the UN Security Council have been adopted, to which the Kyrgyz Republic has acceded, providing for prohibition and/or restrictions on cooperation with physical and legal persons from these states. The authorized state body in the sphere of foreign affairs and other state bodies of the Kyrgyz Republic provide upon request of the National Bank available information on international sanctions;
• presence in the composition of shareholders of the bank owning or controlling, both collectively and individually, ten or more percent of the shares of the bank, persons registered on the territory of states that do not apply recommendations of an intergovernmental organization (group) on development and implementation of international standards on combating money laundering, terrorist financing and financing of proliferation of weapons of mass destruction (FATF) and do not participate in international cooperation in the sphere of combating terrorist financing and legalization (laundering) of criminal proceeds, and regarding which FATF calls on member states to apply countermeasures. The list of these countries is established by the financial intelligence body.

(In the edition of the Resolutions of the Board of the National Bank of the Kyrgyz Republic of April 27, 2016 No. 19/5, June 15, 2017 No. 2017-P-12/25-12, August 14, 2019 No. 2019-P-12/42-1)

3.1-1. The National Bank has the right to introduce direct banking supervision over the activities of PSOs/POs in cases:

• emergence of emergency situations that may lead to disruption of uninterrupted functioning of the payment system, systemic risk and/or non-fulfillment of obligations to users within the established term;
• non-fulfillment of financial obligations to participants and users of the payment system, which may create a threat to further activity of the payment system operator/payment organization, and inability to repay obligations within the established term;
• presence of information from law enforcement and other bodies and persons confirming illegal activity of the payment system operator/payment organization;
• actions or inaction of officials and/or management/executive bodies of payment system operators/payment organizations, which entail suspension/revocation of license, forced liquidation or bankruptcy of the payment system operator/payment organization;
• discovery of facts of violation of legislation of the Kyrgyz Republic, prescriptions of the National Bank, which were not eliminated within the time prescribed by the National Bank.

Grounds for introducing direct banking supervision in PSOs/POs may also serve:

• systematic non-fulfillment of obligations to service providers/agents/counterparties and other participants within the established term;
• emergence of failures of hardware and/or software of the system, as well as impossibility of switching to backup and/or alternative channels, consequences of which may affect other participants of payment systems;
• action and inaction of PSOs/POs and their officials, which may negatively affect the uninterrupted functioning of PSOs/POs;
• unlawful actions (action, inaction, abuse of position), which serve the interests of shareholders (founders)/participants, officials, affiliated persons and persons connected with them by common interests, which carry the risk of deterioration of the financial condition of PSOs/POs, as well as destruction, theft, forgery of documents;
• presence of conflict between shareholders (founders)/participants, affecting the activity of PSOs/POs;
• initiation of criminal case against shareholders (founders)/participants;
• change of head, members of the Board of Directors (change of entire composition) more than twice over consecutive 12 months (excluding election of the Board of Directors at the annual meeting of shareholders);
• mass dismissal/reduction of officials, key personnel and/or duplicate staff (more than 15 percent of employees within 2 months);
• non-compliance with requirements of banking and payment legislation, legislation on combating terrorist financing and legalization (laundering) of criminal proceeds.

(In the edition of the Resolution of the Board of the National Bank of the Kyrgyz Republic of March 27, 2020 No. 2020-P-14/17-3)

3.2. Actions of the bank and/or its officials, which are considered risky and may negatively affect the stable and reliable state of the bank, as well as create potential threat to interests of depositors and other creditors, in particular, include:

• conduct of unhealthy and unsafe banking practice;
• actions or inaction of the bank and officials, which resulted and/or may result in untimely fulfillment or non-fulfillment by the bank of its obligations;
• actions or inaction of shareholders, bank and officials, which serve the interests of shareholders, officials, affiliated persons and persons connected with them by common interests, but harm the financial condition of the bank or interests of depositors and other creditors of the bank;
• inaction (or inability to take measures) of bank officials regarding ensuring proper assessment and control of risks in conducting risky operations;
• submission of unreliable, incomplete information about the activities of the bank, shareholders, officials;
• actions or inaction of the bank and officials, which led to loss, destruction, theft, forgery of documents (in paper and electronic form), as a result of which the activities of the bank are exposed to high risk of financial losses, legal risk, risk of loss of reputation;
• loss of bank assets and collateral property stored in the bank; fraud; financial manipulations; abuse of powers, as a result of which the bank incurred significant losses and damages.

(In the edition of the Resolution of the Board of the National Bank of the Kyrgyz Republic of July 11, 2012 No. 29/6, December 28, 2022 No. 2022-P-12/83-6-(NPA))

3.3. In case of potential threat to interests of depositors and other creditors, direct banking supervision is introduced for the purpose of preventing possible negative consequences for the financial condition of the bank. In addition to cases indicated in clause 3.2 of this Regulation, potential threat to interests of depositors and other creditors arises, for example, when:

• frequent change (1) of management of the bank (chairman, members of the Board of Directors) occurs, while there is non-fulfillment/improper fulfillment of prescriptions and other requirements of the National Bank, inability of bank management to properly ensure work of the bank in accordance with banking legislation and legislation on combating terrorist financing and legalization (laundering) of criminal proceeds, loss of continuity and weakening of the internal control system;
• there is a conflict between shareholders, as a result of which a threat to the safety of bank assets is created;
• a criminal case is initiated against shareholders controlling the bank;
• there are events and circumstances, the result of which may be a significant increase in liquidity risk, outflow of deposits and other attracted funds from the bank.

(In the edition of the Resolutions of the Board of the National Bank of the Kyrgyz Republic of April 27, 2016 No. 19/5, August 14, 2019 No. 2019-P-12/42-1, December 28, 2022 No. 2022-P-12/83-6-(NPA))

4. Carrying out direct banking supervision

4.1. The SC of the National Bank, taking into account the grounds for introducing direct banking supervision, the financial condition and specifics of the bank, as well as other factors and circumstances that influence or may influence the position of the bank, has the right to establish upon introduction and at any moment during the process of carrying out direct banking supervision:

• restrictions (and/or requirement for temporary cessation) of bank operations associated with high risk of losses;
• requirements for capitalization of the bank;
• requirement for change of bank officials, whose actions or inaction create a threat of deterioration of the bank's position;
• restrictions and/or requirement for temporary cessation of operations for attracting deposits;
• other requirements and restrictions aimed at reducing risks threatening the position of the bank, improving its financial condition and protecting interests of depositors and other creditors of the bank.

4.1-1. The PSC, taking into account the grounds for introducing direct banking supervision, the financial condition and specifics of PSOs/POs, as well as other factors and circumstances that influence or may influence the efficiency and reliability of the payment system, has the right to establish upon introduction and at any moment during the process of carrying out direct banking supervision:

• restrictions (suspension) of conducted operations towards suppliers of goods/services, which are associated with high risks;
• requirements for terms of repayment of indebtedness to suppliers of goods/services;
• requirements for change of officials of PSOs/POs, whose actions or inaction create a threat of deterioration of the position of PSOs/POs or emergence of systemic risk;
• restrictions and/or requirements for termination of contracts with suppliers of goods