NATIONAL BANK OF THE KYRGYZ REPUBLIC

RESOLUTION

of June 20, 2018 No. 2018-P-12/24-1-(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 regulatory legal acts of the National Bank of the Kyrgyz Republic (attached):

• resolution of the Board of the National Bank of the Kyrgyz Republic "On Approval of the Regulation "On Minimum Requirements for Risk Management in Banks of the Kyrgyz Republic" dated June 15, 2017 No. 2017-P-12/25-8-(NPA);

• 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;

• resolution of the Board of the National Bank of the Kyrgyz Republic "On Approval of the Regulation "On Minimum Requirements for Country 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. 19/3;

• 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;

• resolution of the Board of the National Bank of the Kyrgyz Republic "On Approval of the Regulation "On Classification of Assets and Corresponding Provisions for Potential Losses and Write-offs" dated July 21, 2004 No. 18/3.

2. Recognize as having lost force the resolution of the Board of the National Bank of the Kyrgyz Republic "On Interpretation (Clarification) of Paragraph 3.1 of the Regulation on Pre-trial Regulation of Disputes between the National Bank of the Kyrgyz Republic and Commercial Banks, Organizations Carrying Out Certain Types of Banking Operations, and Their Founders (Participants), Legal and Natural Persons, Approved by Resolution of the Board of the National Bank of the Kyrgyz Republic dated March 18, 2005 No. 5/5" dated February 1, 2012 No. 6/1.

3. This resolution enters into force upon the expiration of fifteen days from the date of official publication, except for paragraph 27 of the Regulation "On Minimum Requirements for Risk Management in Banks of the Kyrgyz Republic", which enters into force on October 1, 2018.

4. Paragraph 4.1.2 of the Regulation on Classification of Assets and Corresponding Provisions for Potential Losses and Write-offs remains in force until July 1, 2019, and applies only to loans issued by commercial banks in the regions of the republic, excluding the city of Bishkek.

5. 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.

6. The Department of Supervision and Licensing Methodology of Banks shall bring this resolution to the attention of commercial banks, corresponding structural subdivisions, regional departments, and the representation of the National Bank of the Kyrgyz Republic in the Batken region.

7. Control over the implementation of this resolution is entrusted to Board Member of the National Bank of the Kyrgyz Republic T.D. Jusupov.

Chairman of the Board of the National Bank of the Kyrgyz Republic		T. Abdygulov

		Appendix to the Resolution of the Board of the National Bank of the Kyrgyz Republic No. 2018-P-12/24-1-(NPA)

AMENDMENTS AND ADDITIONS in certain regulatory legal acts of the National Bank of the Kyrgyz Republic

1. 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 Risk Management in Banks of the Kyrgyz Republic" dated June 15, 2017 No. 2017-P-12/25-8-(NPA):

in the Regulation "On Minimum Requirements for Risk Management in Banks of the Kyrgyz Republic", approved by the aforementioned resolution:

in paragraph 3:

• rewrite the twenty-seventh paragraph as follows:

"Risk appetite is the aggregate level and types of risks that a bank is willing to accept to achieve its strategic goals and business plan, taking into account hard-to-measure risks, such as the bank's reputation and unethical practices. Risk appetite is taken into account when developing the bank's development strategy and business plan.";

• supplement the paragraph with paragraphs twenty-eighth, twenty-ninth, and thirtieth as follows:

"Internal document on risk appetite level is a document in which the aggregate level and types of risks that the bank is willing to accept or avoid to achieve its strategic goals and business plan must be defined/set (definition of qualitative and quantitative indicators on profitability, capital, liquidity, and other relevant measures, e.g., growth, volatility), while it is necessary to take into account hard-to-measure risks, such as the risk of loss of the bank's reputation and unethical practices. At the same time, this document may be part of the bank's business plan.

Risk limits are the distribution of the bank's aggregate risk appetite (quantitative restriction imposed on certain indicators) across business areas, branches, subsidiary companies of the bank, certain categories of risks, concentrations, products, and other necessary levels. The bank is responsible for the correct distribution of authority for the implementation of various types of limits.

Bank risk profile is the summary information of all current types of risks and their levels, which reflect all key issues in the bank's activities and conclusions from the current (last updated) assessment of available information on these risks.";

• rewrite the second paragraph of paragraph 5 as follows:

"For the disclosure of the bank's strategy and scope of activities, the bank must prepare a business plan in accordance with the requirements of legislation and the bank's internal documents. The internal document on risk appetite level with indication of risk limits levels may also be reflected in the bank's business plan.";

• rewrite paragraph 12 as follows:

"12. The Risk Management Service, at least on a monthly basis, submits reports to the Risk Committee, and on a quarterly basis provides reports to the Board of Directors. At the same time, the Board of Directors and/or the Risk Committee may additionally establish other frequencies for providing such reports, but not less frequently than the frequency established in this paragraph.

In carrying out current activities and for the expediency of decision-making, the Risk Management Service closely cooperates with members of the Bank's Board, structural subdivisions, and bank employees.";

• supplement the Regulation with paragraphs 14-1 to 14-5 as follows:

"14-1. The internal document on risk appetite level must clearly define cases when established limits may be exceeded with mandatory approval by the Board of Directors. At the same time, the Board of Directors independently determines the established/approved limits, who approves the limit exceedance, to which body the report on the risk appetite level is provided and with what frequency, the procedure and deadlines for notification in case of violations, as well as the delegation of authority to authorized bank bodies for establishing/approving risk limits.

At the same time, measures to reduce the level of risk limits may be provided.

14-2. For the management of the bank's current risk profile, the bank must clearly formulate the risk appetite, in particular, all types of risks and their levels acceptable to the bank (that is, levels that will not expose the bank to risk and will ensure the safety of deposits and the bank's profitability). At the same time, the risk appetite must be linked to the bank's short-term and long-term strategy, and not contradict the business plan of the bank, as well as be agreed at the level of the corresponding collegiate bodies of the bank. For this, it is necessary:

1) develop and approve an internal document on risk appetite according to the definition specified in paragraph 28 of paragraph 3 of this Regulation, which will be linked to the short-term and long-term strategy, the bank's business plan, its capital, and financial plans;

2) develop a policy containing the process of determining the bank's risk appetite, and on a constant basis monitor the compliance of the bank's activities with the risk appetite level. At the same time, this document defining the bank's risk appetite must be reviewed at least once a year;

3) develop procedures for assessment, approval, notification (awareness within the bank), as well as processes for monitoring, auditing of risk limits and principles defined and approved by the Board of Directors of the bank;

4) measure, set, control, and manage risk limits, which must not exceed the risk appetite approved by the Board of Directors of the bank.

14-3. The Board of Directors monitors and is responsible for the bank's risk profile for the purpose of monitoring limits and values implemented by the Bank's Board.

It is necessary to establish a set of limits to control the bank's impact on various measurable risks related to the bank's operational activities (e.g., credit risk, market risk, interest rate risk, liquidity risk, etc.). Risk limits are usually expressed in terms of profitability, capital, liquidity, or other relevant indicators (e.g., growth and volatility). Risk limits should be set in accordance with the bank's risk appetite.

14-4. Risk limits approved by the Board of Directors apply to persons/employees, departments, or structural subdivisions of the bank carrying out a certain activity of the bank.

14-5. Authorized structural subdivisions, persons/employees involved in the processes of the bank's operational activities must be informed about the established risk limits, and the bank must ensure their understanding of these limits. Careful monitoring of the use of limits is carried out, and the Bank's Board must be informed about limits that have been violated in order to take appropriate measures immediately.";

• in paragraph 17:

rewrite the fifth paragraph of sub-paragraph 1 as follows:

"- approval of the work plan of the risk management service and control over its implementation;";

rewrite the third paragraph of sub-paragraph 2 as follows:

"- regular reports on types of risks provided by the risk management service, as well as the state of risk limits, gap and stress-testing results;";

rewrite sub-paragraph 3 as follows:

"3) interaction with the head of the risk management service, the head of the compliance control service, internal and external audit on issues of risk management in the bank, as well as, if necessary, with other structural subdivisions of the bank;";

in sub-paragraph 5, replace the words "risk statements" with "internal document on risk appetite";

• rewrite paragraph 18 as follows:

"18. The quantitative and personal composition of the Risk Committee is determined and approved by the Board of Directors of the bank and cannot be less than 3 (three) members of the Board of Directors. At least two members of the Risk Committee must be elected from among the independent members of the Board of Directors, one of whom is the Chairman of the Risk Committee and does not head the Audit Committee.

All members of the Risk Committee have the right to vote, invitees - without the right to vote.";

• exclude the second sentence of paragraph 19;

• in the first paragraph of paragraph 20, replace the words "once in 3 (three) months" with the words "once a month";

• rewrite sub-paragraph 2 of paragraph 27 as follows:

"2) consideration and approval of the bank's risk appetite, developed jointly with the Board and the head of the risk management service, as well as monitoring the bank's compliance with requirements for risk appetite, risk policy, and risk limits and promoting the development of a sustainable risk culture in the bank.";

• in paragraph 28:

exclude the words "duties and";

supplement the paragraph with a second paragraph as follows:

"A candidate for the position of head of the bank's risk management service is agreed with the National Bank in the manner established by the regulatory legal acts of the National Bank";

• in sub-paragraph 3 of paragraph 31, replace the words "once a month" with the words "once a quarter";

• supplement paragraph 38 with sub-paragraph 11 as follows:

"11) determination of the bank's risk appetite and risk limits, which are approved by the Board of Directors.";

• in the first paragraph of paragraph 65, replace the words "in terms of management" with the word "management";

• in paragraph 66, replace the words "Internal document" with the words "Internal documents";

• in the first sentence of paragraph 67, replace the words "Internal document" with the words "Internal documents";

• rewrite paragraph 90 as follows:

"90. The bank must have an internal document (policy) on the management of the risk of legalization (money laundering) of criminal proceeds and financing of terrorist or extremist activities (hereinafter - AML/CFT), approved by the Board of Directors. Internal documents must provide for procedures for determining, identifying, assessing, controlling, and reducing the risk of AML/CFT depending on the size and complexity of the bank's activities, however, the minimum requirements established by the legislation of the Kyrgyz Republic must be observed by all banks.";

• in the first sentence of paragraph 93, exclude the word "its".

2. Make the following change 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:

• rewrite the fifth paragraph of paragraph 19 as follows:

"- the procedure for holding meetings, which may be in person (with the presence of committee members) or in absentia (without the presence of committee members, e.g., via video, audio conference, etc.), including the voting procedure of committee members;."

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 Country 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. 19/3:

in the Regulation "On Minimum Requirements for Country 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:

• rewrite paragraph 2.2 as follows:

"2.2. The bank should take into account the presence of indirect country risk, including when working with clients - residents of the Kyrgyz Republic.";

• supplement paragraph 2.3 with sub-paragraphs 2.3.5 and 2.3.6 as follows:

"2.3.5. Macroeconomic risk - the risk of incurring expenses (losses) as a result of significant changes in macroeconomic conditions in the state or in a foreign state, which will affect the borrower's ability to fulfill its obligations (for example, the decision of the Central Bank of a foreign state to raise/reduce the refinancing rate, which is aimed at preventing the devaluation/strengthening of its own currency, which may subsequently negatively affect borrowers having business relations with this country).

2.3.6. Indirect country risk - the risk that the borrower's ability to repay debt may deteriorate due to changes in economic, political, or social conditions in a foreign country where the borrower has significant business ties and interests (see note 2). Indirect country risk must be taken into account when assessing the client's creditworthiness.".

4. 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 paragraph 3.1 after the words "scale of activities" with the words ", risk appetite";

• rewrite paragraph 3.4 as follows:

"3.4. The policy on market risk management, approved by the Board of Directors of the bank, must take into account the level and complexity of the risk to which the bank is exposed, and cover those types of market risk that are associated with the bank's activities, as well as the level of risk from the introduction of new banking products and services.

Banks must take into account the general and macroeconomic conditions in which they carry out their activities when assessing, managing their risks, and their ability to lead the bank to significant losses.

Note: Sources of macroeconomic data may be the Bulletin of the National Bank or other sources.

If the bank decides to hedge risks, then the policy on market risk management must define methods and criteria for risk hedging, including, among other things, criteria for efficiency (optimality) and cost of hedging.";

• supplement the Regulation with paragraph 3.11 as follows:

"3.11. The bank's internal audit must regularly check the integrity, accuracy, and effectiveness of the bank's management of its market risk. Information on the follow-up execution of corrective measures for deficiencies identified as a result of internal audit must be periodically reported to the Board of Directors of the bank, but not less than once every six months, and at least once a quarter to the Audit Committee.

The market risk assessment conducted by the bank's internal audit must include at least the following factors:

• adequacy of the scale of market risk management processes (taking into account the type, content, and level of complexity of positions that cause market risk, it must also be checked whether they were adequately considered in the process of the bank's market risk management);

• adequacy of the bank's market risk management system used;

• reliability, completeness, integrity, and consistency of all data and sources of such data, as well as assessment methods used in the assessment of market risk;

• adequacy of the bank's market risk management system used;

• reliability, completeness, integrity, and consistency of all data and sources of such data, as well as assessment methods used in the assessment of market risk.";

• in paragraph 4.1:

in the first paragraph, replace the words "integral part" with the words "integral element";

rewrite the second sentence of the second paragraph as follows:

"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;";

supplement the paragraph with a seventh paragraph as follows:

"- definition of processes and principles related to new products.";

• supplement the Regulation with paragraph 4.3 as follows:

"4.3. Interest rate risk measurement must cover revaluation risk, basis risk, option risk, and yield curve risk.

The Board of Directors and the Bank's Board must regularly, but not 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 policy on market risk management. Taking into account potential losses forecasted 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.".

5. Make the following change to the resolution of the Board of the National Bank of the Kyrgyz Republic "On Approval of the Regulation "On Classification of Assets and Corresponding Provisions for Potential Losses and Write-offs" dated July 21, 2004 No. 18/3:

in the Regulation on Classification of Assets and Corresponding Provisions for Potential Losses and Write-offs, approved by the aforementioned resolution:

• rewrite paragraph 4.1.2 as follows:

"4.1.2. The bank may classify part of the asset secured by the guarantee of JSC "Guarantee Fund" as a "normal" asset, in case if a deposit of JSC "Guarantee Fund" is placed in this bank.

At the same time, the deposit and guarantee agreements concluded between JSC "Guarantee Fund" and the commercial bank must provide, at a minimum, the following conditions:

• the volume of assets secured by the guarantee of JSC "Guarantee Fund" must not exceed the amount of the deposit by more than two times;

• the condition of irrevocability and the presence of a deposit of JSC "Guarantee Fund" until the full repayment of assets secured by JSC "Guarantee Fund".".