Resolution of the Board of the National Bank of the Kyrgyz Republic dated October 30, 2019 No. 2019-P-12\54-3-(NPA) on Amendments and Additions to Certain Regulatory Legal Acts of the National Bank of the Kyrgyz Republic

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Creation date: 2019-11-12

Resolution of the Board

National Bank

of the Kyrgyz Republic

of October 30, 2019

No. 2019-P-12\54-3-(NPA)

On Amendments and Additions to Certain Regulatory Legal Acts

of the National Bank of the Kyrgyz Republic

In accordance with Articles 20 and 68 of the Law of the Kyrgyz Republic

"On the National Bank of the Kyrgyz Republic, Banks and Banking Activity", the Board of the National Bank of the Kyrgyz Republic resolves:

1. Make amendments and additions to the following resolutions of the Board of the National Bank of the Kyrgyz Republic (attached):

• "On Approval of the Regulation "On Economic Norms and Requirements Mandatory for Commercial Banks of the Kyrgyz Republic" dated July 21, 2004 No. 18/1";

• "On Approval of the Regulation "On Corporate Governance in Commercial Banks of the Kyrgyz Republic" dated May 17, 2017 No. 19/12";

• "On Approval of the Regulation "On Minimum Requirements for Market Risk Management in Commercial Banks and Other Financial and Credit Organizations Licensed by the National Bank of the Kyrgyz Republic" dated June 28, 2006

No. 19/2".

2. This resolution enters into force on January 1, 2020.

3. 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 Regulatory Legal Acts of the Kyrgyz Republic.

4. The Banking Supervision and Licensing Methodology Department to bring this resolution to the attention of the Non-Commercial Partnership "Union of Banks of Kyrgyzstan", commercial banks, the State Development Bank of the Kyrgyz Republic, all structural subdivisions, regional departments, and the representative office of the National Bank in the Batken region.

5. Control over the execution of this resolution is entrusted to the Board member overseeing the Banking Supervision and Licensing Methodology Department.

Acting Chairman N. Zhenish

Appendix

to the Resolution of the Board

of the National Bank

of the Kyrgyz Republic

of October 30, 2019

No. 2019-P-12\54-3-(NPA)

Amendments and Additions to Certain Regulatory Legal Acts

of the National Bank of the Kyrgyz Republic

1. Make the following amendment to the Resolution of the Board of the National Bank of the Kyrgyz Republic "On Approval of the Regulation "On Economic Norms and Requirements Mandatory for Commercial Banks of the Kyrgyz Republic"

dated July 21, 2004 No. 18/1:

in the Regulation "On Economic Norms and Requirements Mandatory for Commercial Banks of the Kyrgyz Republic", approved by the aforementioned resolution:

• paragraph 13.3 is to be worded as follows:

"13.3. Reporting on the fulfillment of economic norms must be published at least on the bank's official website, as well as, if necessary, in other media of republican significance in the state and/or official languages according to the form of Appendix 2 to this Regulation.

This requirement does not apply to banks of the Kyrgyz Republic that are required to disclose information on the fulfillment of economic norms in accordance with the Regulation "On Requirements for Disclosure of Information on the Activities of a Commercial Bank".

2. Make the following amendments to the Resolution of the Board of the National Bank of the Kyrgyz Republic "On Approval of the Regulation "On Corporate Governance in Commercial Banks of the Kyrgyz Republic" dated May 17, 2017 No. 19/12:

in the Regulation "On Corporate Governance in Commercial Banks of the Kyrgyz Republic",

approved by the aforementioned resolution:

• paragraph 63 is to be worded as follows:

"63. To ensure transparency of corporate governance, a bank may disclose on its official website or publish in annual and periodic reports information defined in the Regulation "On Requirements for Disclosure of Information on the Activities of a Commercial Bank" in part of corporate governance.

Disclosure of information on corporate governance is mandatory for banks of the Kyrgyz Republic guided by the Regulation "On Requirements for Disclosure of Information on the Activities of a Commercial Bank".

A bank may disclose any additional information on corporate governance that it considers appropriate for informing market participants.";

• paragraph 64 is recognized as having lost its force.

3. Make the following amendments and additions to the Resolution of the Board of the National Bank of the Kyrgyz Republic "On Approval of the Regulation "On Minimum Requirements for Market Risk Management in Commercial Banks and Other Financial and Credit Organizations Licensed by the National Bank of the Kyrgyz Republic" dated June 28, 2006 No. 19/2":

in the Regulation "On Minimum Requirements for Market Risk Management in Commercial Banks and Other Financial and Credit Organizations Licensed by the National Bank of the Kyrgyz Republic", approved by the aforementioned resolution:

• supplement Chapter 2 with paragraphs 2.5, 2.6, 2.7, 2.8 of the following content:

"2.5. The trading portfolio includes all financial instruments intended either for trading or for hedging other elements of the trading portfolio. These financial instruments are held in the portfolio with the aim of obtaining income from their sale in the short term and/or for obtaining income as a result of actual or expected short-term fluctuations in the market. In case of uncertainty in the classification of financial instruments, the bank must follow the standards of the Basel Committee on Banking Supervision.

2.6. The banking portfolio includes all on-balance sheet and off-balance sheet items that are not included in the bank's trading portfolio. These items are not intended for active trading and are classified as held to maturity. Banking portfolio items are usually not revalued at market value, but are accounted for at amortized cost.

2.7. The economic value of a financial instrument or portfolio of instruments represents the current (present) value of expected net cash flows of the instrument or portfolio, discounted at the market interest rate. As the discount rate within this Regulation, a risk-free rate must be applied.

As a risk-free rate, the yield on government securities is often taken. Depending on the currency and distribution of the financial instrument to a certain time range, the yield rate on foreign government securities may be taken, as well as with different maturity dates. For example, for financial instruments denominated in som, the weighted average yield on tradable Treasury Bills of the Ministry of Finance of the Kyrgyz Republic with maturity dates of 2 years, 3 years, 5 years, 7 years, and 10 years may be used. For financial instruments denominated in US dollars, US Treasury bills, Treasury notes, and Treasury bonds may be used.

2.8. A significant currency within the framework of this Regulation is a currency whose share in total on-balance sheet and off-balance sheet assets or total on-balance sheet and off-balance sheet liabilities is not lower than 5%.";

• reword Chapter 4 as follows:

"4. Requirements for Interest Rate Risk Management

4.1. In managing interest rate risk, the bank must take into account risks arising from conducting banking operations, both with the trading and banking portfolios.

Interest rate risk management must cover revaluation risk, basis risk, option risk, and yield curve risk.

The bank must have a policy for managing interest rate risk, which may be a component of the market risk management policy. The interest rate risk management policy must at least contain:

• a description of the interest rate risk assessment process, which also includes determining limits on interest rate risk in conducting banking and trading operations. These limits are taken into account in the management of the bank's assets and liabilities, and also correspond to the bank's risk appetite and capital;

• a clear definition of the powers and responsibilities of the Bank's Board and/or the relevant body appointed by the Bank's Board of Directors for making decisions on interest rate risk management, including approval of relevant limits;

• separation of powers and responsibilities of the bank's structural subdivisions/employees for implementing policies and procedures for managing interest rate risk. Persons responsible for monitoring and controlling risk must be independent of persons performing operations carrying interest rate risks;

• requirements for the management information system (MIS) collecting data on interest rate risks across all areas of the bank's activities. The MIS must ensure timely provision of information to the Bank's Board and Board of Directors on the level of interest rate risk;

• requirements for the bank's reporting, which must include information sufficient for timely management decisions and control by the Board of Directors;

• definition of processes and principles related to new products.

4.2. Methods for measuring interest rate risk may vary depending on the origin and complexity of the risk arising from the bank's activities. Banks may apply different methods, but at a minimum must conduct gap analysis and stress testing, and must determine the degree of exposure of the banking portfolio to interest rate risk (Appendix 1).

4.2.1. Gap analysis involves determining the gap between assets and liabilities sensitive to changes in interest rates.

4.2.2. The main task of stress testing is to assess the sensitivity of the bank's balance sheet to the impact of banking risks, as well as to assess the bank's capital ability to compensate for possible large losses under various scenarios of further events.

4.2.3. Determining the degree of exposure of the banking portfolio to interest rate risk is carried out based on gap analysis by applying a assumed change in interest rates (standardized interest rate shock).

4.2.4. Additionally, the bank must:

• calculate and monitor net interest margin;
• assess risks associated with early repayment and withdrawal of loans/deposits;
• assess risks associated with attracting/placing funds at floating interest rates.

4.3. The Board of Directors and the Bank's Board must regularly, but no less than once every six months, analyze the results of stress testing, including the main assumptions underlying them. The results of such work should be taken into account when creating and revising the market risk management policy. Taking into account potential losses forecast by stress tests and the probability of such losses occurring, the Board of Directors and the Bank's Board may take additional measures to strengthen risk management.

Establishing limits on the absolute size of a specific gap or the ratio of the gap to income-generating assets (or capital) is a generally accepted means of limiting overall exposure to interest rate risk.

The bank may provide limits limiting the vulnerability of net interest income as a result of changes in interest rates. The Bank's Board, in agreement with the Board of Directors, may set internal risk limits that the bank is willing to accept (for example, 15% of the size of capital or 10-30% of the size of net interest income).

Also, the bank must set internal limits on the coefficient of exposure of the economic value of the banking portfolio to interest rate risk in accordance with part 3 of Appendix 1 to this Regulation.";

• reword Appendix 1 as follows:

"Appendix 1

to the Regulation on minimum

requirements for market

risk management in commercial

banks and other financial-credit

organizations licensed by

the National Bank

of the Kyrgyz Republic

1. Gap Analysis

Gap analysis is the most common tool for assessing interest rate risk. This report classifies assets and liabilities (both on and off balance sheet) depending on the time remaining until revaluation into separate time periods. The time periods used vary depending on the bank's practice.

Within the framework of this Regulation, the bank must distribute assets, liabilities, and off-balance sheet items sensitive to changes in interest rates, which are part of the banking portfolio, into 14 (fourteen) time ranges specified in part 3 of this Appendix.

When conducting gap analysis, all bank assets, liabilities, and off-balance sheet instruments are placed into time ranges based on the following revaluation or maturity date of the instrument. Then, balances available for time ranges are summed (amounts for assets are shown with a plus sign and amounts for liabilities are shown with a minus sign) to determine the net gap position for each time range.

Risk assessment is carried out by the size of the gap (sum of the net difference within the time range) and the duration of time for which the gap position is open. Using gap reports, the bank can identify and assess short-term and long-term differences arising from revaluation. Having such information, the bank can assess its profitability and economic risks within certain constraints. Gap analysis can in particular be used to identify revaluation risk of the current structure of the bank's balance sheet before decisions are made on new types of activity or on how to effectively reinvest amounts maturing.

For the purposes of this Regulation, the bank must group positions in assets and liabilities sensitive to interest rates, as well as off-balance sheet instruments, in the national currency, including grouping for each significant currency on an individual basis and for other currencies on an aggregate basis, expressed in the equivalent of the national currency, for each time range, and calculate the net position for each range.

Fixed-rate positions are distributed in the corresponding time range taking into account the remaining term to maturity. Any interest payments and components of the spread of interest payments on the principal debt tranche, which have not yet been repaid and which have not been revalued, must be distributed over time intervals until the end of their maturity in accordance with the contract.

For example, if a bank has government bonds with a maturity of 2 years, a nominal value of 1000 som, and a coupon rate of 10% per annum (coupon payments every 6 months), then the bank will distribute 50 som to time ranges of 6 months, 12 months, and 18 months. In the time range "2 years", an amount of 1050 som will be allocated, which includes the nominal value and the amount of interest.

Variable-rate positions are distributed in the corresponding time range taking into account the period until the next pricing date. It is considered that floating-rate instruments must be fully revalued on the first date of change. Consequently, the entire principal amount is distributed into time ranges into which this date falls, without additional distribution of conditionally revalued cash flows to later time baskets.

For example, in the case where a bank issues a loan in the amount of 100,000 som for a term of 2 years with semi-annual interest payments and a revaluation date of 6 months, then the principal amount of the loan and the amount of interest payments must be indicated in the time range "6 months".

The interest rate may change based on the decision of the relevant body of the bank, and positions without a maturity date, or for which the maturity date or revaluation date cannot be precisely determined (for example, current accounts, demand deposits, positions with the possibility of early repayment or withdrawal, etc.) are distributed in the corresponding time ranges by determining the possibility and frequency of changing interest rates on these positions, at least based on the following elements:

• previous experience of changing interest rates;
• the impact of changes in market interest rates on the change in interest rates on these positions;
• the average characteristic maturity of these positions (demand deposits, mortgage loans, or other claims with the possibility of early repayment);
• movements and other internal (for example, net interest margin, bank strategy) and external factors (reputational risk, competitiveness) that affect interest rates and maturity.

Depending on the above elements, the bank assesses demand deposits and distributes them into the corresponding time ranges, with the maximum time range not exceeding a three-year range. The remaining demand deposits must be placed in the first time range. At the request of the National Bank, the bank must provide details of its assessment of its deposits.

If it is not possible for the bank to assess and distribute demand deposits, then all demand deposits must be attributed to the first time range.

The net amount of classified loans should be distributed depending on the bank's expectations regarding the term of their repayment, which initially should not be less than 6 (six) months.

Gap analysis is a basic measure of interest rate risk. Gap analysis has several advantages, in particular:

• does not require complex technology;
• can be relatively simple to develop and use;
• can provide clear, easily interpretable results.

At the same time, this method has some disadvantages, in particular:

• in general, reflects only revaluation risk;
• does not reflect basis risk;
• assumes that the current balance remains constant over time.

2. Stress Testing

Stress testing is an analytical tool for assessing potential bank losses in the event of adverse changes both in the external environment (for example, economic downturns, changes in interest rates, exchange rates, changes in legislation, etc.), and in the activities of the bank's clients and counterparties (for example, bankruptcy of large bank clients, deposit outflows, impact of exchange rate changes on client creditworthiness, interest rates, etc.).

Stress testing is carried out by modeling a scenario of events that are based on the occurrence of an economic, political and/or other event (for example, an event related to the deterioration of the bank's image, change of leadership, etc.), and can bring losses to the bank, affecting, respectively, the size of capital.

At the initial stage of stress testing, it is necessary to check the reliability and relevance of the information on the basis of which the scenario is modeled. At the same time, it is necessary to ensure that the reporting used meets the criteria of consistency (continuous series of reporting data) and comparability (unchanged methodology for calculating indicators), as well as to ensure the reliability, objectivity and expediency of sources of other information used (for example, information from the media).

The scenario of an adverse event must be sufficiently realistic, relevant and justified. The reality of the scenario means that it must have a high probability of such an event occurring.

Scenario modeling may include changes in both internal and external factors and can be conducted in two versions:

• historical scenario – a stress test scenario based on observations of the consequences of an event that occurred in the past;
• hypothetical scenario – a stress test scenario based on a probable event that has not yet occurred.

When modeling a historical scenario, the analysis is carried out taking into account events that occurred in the past and caused negative changes in the bank's financial condition.

In stress testing by the historical scenario method, special attention must be paid to the precise definition of the conditions and circumstances of past crises that are used when testing the bank's balance sheet.

Modeling a hypothetical scenario involves analyzing a situation that has not yet occurred but has a high probability of occurrence. The hypothesis may contain both the impact of a certain event on the bank's capital (for example, when the current exchange rate increases or decreases), and an assessment of the maximum change in indicators that can lead to a critical value of capital (how the exchange rate should change for the bank's capital to decrease to the minimum allowable level).

When conducting stress testing, several trial calculations must be carried out. The stress test scenario will be considered final when the analysis conducted using a combination of the impact of various risks shows the first signs of insolvency for the bank.

3. Determination of the Degree of Exposure of the Economic Value

of the Banking Portfolio to Interest Rate Risk

1. Based on the results of gap analysis, the net position for each time range is multiplied by the weight coefficients indicated in the table below, in the national currency, including in breakdown for each significant currency on an individual basis and for all other currencies in aggregate, expressed in the equivalent of the national currency:

Time Range (including upper limit)

Average Value of Time Range

Proxy Modified Duration (years)

Assumed Change in Interest Rate (Standardized Interest Rate Shock)

Weight Coefficient (%)

Next day or earlier

1 day

0.0028

200 bps

0.0056

from 2 to 7 days

4.5 days

0.0125

200 bps

0.0250

from 8 days to one month

19 days

0.0528

200 bps

0.1056

from 1 to 3 months

2 months

0.1667

200 bps

0.3334

from 3 to 6 months

4.5 months

0.375

200 bps

0.75

from 6 to 9 months

7.5 months

0.625

200 bps

1.25

from 9 to 12 months

10.5 months

0.875

200 bps

1.75

from 1 to 2 years

1.5 years

1.38

200 bps

2.77

from 2 to 3 years

2.5 years

2.25

200 bps

4.5

from 3 to 4 years

3.5 years

3.07

200 bps

6.14

from 4 to 5 years

4.5 years

3.85

200 bps

7.71

from 5 to 7 years

6 years

5.08

200 bps

10.15

from 7 to 10 years

8.5 years

6.63

200 bps

13.26

over 10 years

12.5 years

8.92

200 bps

17.84

2. Next, weighted positions are discounted at the risk-free yield rate for each significant currency. The risk-free interest rate for US dollars must be used for all other currencies taken in aggregate. As the period for discounting the net positions of each time range, the average value of the time range specified in the table above is taken.

3. All weighted and discounted net positions of each time interval are summed, and the total weighted net position of the banking portfolio in som equivalent is calculated, including in breakdown for each significant currency on an individual basis and for all other currencies in aggregate, expressed in the equivalent of the national currency.

The weighted total net position of the banking portfolio, calculated by the above method, is expressed in absolute value and represents the exposure of the economic value of the banking portfolio to risk as a result of applying a standardized interest rate shock.

Based on the indicator of the weighted aggregate net position of the banking portfolio, banks calculate the coefficient of sensitivity of the economic value of the banking portfolio to interest rate changes (hereinafter – the sensitivity coefficient) using the following formula:

Sensitivity Coefficient =

Weighted Aggregate Net Position of the Banking Portfolio

*100%;

Capital Level 1

• The Regulation is supplemented with Appendix 2 of the following content:

"Appendix 2 to the Regulation "On Minimum Requirements for Managing Market Risk in Commercial Banks and Other Financial and Credit Organizations Licensed by the National Bank of the Kyrgyz Republic"

Example of Calculation of the Sensitivity Coefficient of the Economic Value of the Banking Portfolio to Interest Rate Changes

Time Range	Next day or earlier	From 2 to 7 days	From 8 days to 1 month	From 1 to 3 months	From 3 to 6 months	From 6 to 9 months	From 9 to 12 months	From 1 to 2 years	From 2 years to 3 years	From 3 to 4 years	From 4 to 5 years	From 5 to 7 years	From 7 to 10 years	Over 10 years	Total
Net Position*
Total, including
som	125,00	-150,00	250,00	170,00	-230,00	370,00	330,00	-310,00	-310,00	370,00	490,00	250,00	135,00	125,00	1 615,00
dollar	100,00	-200,00	200,00	200,00	-300,00	300,00	300,00	-400,00	-400,00	400,00	400,00	200,00	100,00	100,00	1 000,00
other currency	30,00	40,00	40,00	-40,00	50,00	50,00	50,00	60,00	60,00	-60,00	60,00	40,00	30,00	30,00	440,00
Weight Coefficient	-5,00	10,00	10,00	10,00	20,00	20,00	-20,00	30,00	30,00	30,00	30,00	10,00	5,00	-5,00	175,00
	0,0056	0,0250	0,1056	0,3334	0,75	1,25	1,75	2,77	4,50	6,14	7,71	10,15	13,26	17,84	-
Weighted Position
Total, including
som	0,70	-3,75	26,40	56,68	-172,50	462,50	577,50	-858,70	-1 395,00	2 271,80	3 777,90	2 537,50	1 790,10	2 230,00	11 301,13
dollar	0,56	-5,00	21,12	66,68	-225,00	375,00	525,00	-1 108,00	-1 800,00	2 456,00	3 084,00	2 030,00	1 326,00	1 784,00	8 530,36
other currency	0,17	1,00	4,22	-13,34	37,50	62,50	87,50	166,20	270,00	-368,40	462,60	406,00	397,80	535,20	2 048,96
Weighted Position at Present Value*
som	-0,03	0,25	1,06	3,33	15,00	25,00	-35,00	83,10	135,00	184,20	231,30	101,50	66,30	-89,20	721,81
dollar	0,56	-5,00	21,08	66,22	-221,32	364,82	503,94	-1 020,89	-1 593,31	2 070,46	2 476,07	1 431,07	746,07	681,71	5 521,49
other currency	0,17	1,00	4,22	-13,28	37,18	61,59	85,72	159,66	256,08	-342,09	420,56	358,82	333,94	403,77	1 767,33
Total	-0,03	0,25	1,05	3,32	14,87	24,64	-34,29	79,83	128,04	171,04	210,28	89,71	55,66	-67,29	677,08
	0,70	-3,75	26,36	56,26	-169,27	451,05	555,37	-781,40	-1 209,19	1 899,41	3 106,90	1 879,60	1 135,67	1 018,18	7 965,89

Sensitivity Coefficient =

7 965,89

*100% = 2,66 %

300 000

• Values of positions and Level 1 Capital are conditional.

Within the significant currency, items of the banking portfolio in som, dollars, and other currencies in aggregate are identified.

• When calculating the present value of weighted positions, the following yield rates were applied as of the last available date in accordance with the distribution by time ranges (calculation as of May 28, 2019):

• in som: notes of the National Bank of the Kyrgyz Republic (7-day, 14-day, 28-day, 91-day, 182-day), GKVs of the Ministry of Finance of the Kyrgyz Republic (12-month), GKOs of the Ministry of Finance of the Kyrgyz Republic (2-year, 3-year, 5-year, 7-year, 10-year) (source – official website of the National Bank of the Kyrgyz Republic);

• in dollars: US government securities with maturity terms of 3 months, 6 months, 12 months, 2 years, 5 years, 10 years, 30 years (source - https://www.bloomberg.com)."

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