Our Analytics 3 november — 14:45

What did Chamber propose to Government? (Our notes)

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BY MAMMAD EFENDIYEV, ECONOMY SECTION

A whole range of measures is being taken in Azerbaijan to diversify the economy, further increase its transparency and expand financial intermediation. Against this background, the Financial Markets Supervision Chamber has amended the 'Rules for calculating bank capital and its adequacy.' These amendments are aimed at implementing the appeal of President Ilham Aliyev to increase lending to the real sector. What kind of changes are these, and how will they affect the growth of the country's economy?

One of the main changes involves reducing the degree of credit risks issued to small and medium-sized enterprises (SMEs) to finance exports in the non-oil sector. Reducing the degree of risk not only enables banks to give them more business loans (within the framework of cash capital), but also increases interest in allocating funds raised in this direction. And this, in turn, will increase the availability of financing for business structures and diversify the economy at the macro level.

The draft submitted by the Chamber also highlighted the issues of more efficient organisation of macroprudential policies implemented in connection with responsible lending and elimination of speculative cases.

Macroprudential policy is a set of proactive measures aimed at minimising the systemic risk of the financial sector as a whole or in its individual sectors. If realised, such a risk can lead to a significant number of participants in the financial sector becoming insolvent.

Thus, in determining the degree of risk for consumer loans, a differentiated and more stringent approach is applied depending on the ratio of debt to income, interest, term and issued currency. Regulation in this form will reduce the attractiveness of consumer loans for banks compared to business loans. As a result, the growth rate of consumer loans will fall, which will lead to the limitation of excessive borrowing by the population.

At the same time, the Rules also provide for changes related to bringing the regulatory framework in line with international standards. For example, with regard to credit risks, a complete transition to the new standard Basel III approach has been carried out, including classification according to the degree of risk of sovereign and corporate securities based on ratings given by international rating agencies. At the same time, with the aim of introducing the principles of Basel II and III, the Rules added a requirement to form buffer capital against market and operational risks. This requirement is an indicator of bringing prudential regulation to the international level, the growth of the banking sector's stability not only against credit risks, but also against market and operational risks.

But that is not all. One more requirement has been included into the Rules. In order to bring the prudential framework in line with the principles of Basel II, the counter-cyclical capital buffer should be taken into account when calculating the capital adequacy ratio. The counter-cyclical capital buffer is a macro-prudential tool that provides for the prevention of systemic risks arising from excessive lending and sensitivity to the cyclical processes of the banking sector. In general, providing the regulatory authorities with the function of using a counter-cyclical capital buffer makes it possible to lower lending growth rates during periods of excessive lending.

As a matter of fact, taking into account the new proposals of the Basel Committee, the purpose of the counter-cyclical capital buffer is to protect the banking sector from periods of excessive credit growth by making higher capital adequacy requirements. And national supervisors are given ample opportunity to develop their own requirements for a counter-cyclical capital buffer. True, the Chamber did not indicate the maximum size of the counter-cyclical capital buffer, that is, how many per cent it will be from risk-weighted assets. Although it is clear that the requirements for capital adequacy, taking into account the new proposals of the Basel Committee, will increase. The dates when these requirements will come into force or will be fully applied are also not indicated. But these are purely technical details, which, one thinks, will be solved according to internal orders. In addition, they were discussed during a recent meeting at the Chamber with bankers.

Yes, it's time to bring our banking system to the advanced level. The regulator in the person of the Financial Markets Supervision Chamber has recently taken certain steps in this direction. Of course, this is difficult, the banking system is perhaps the most conservative sphere in the economy, where it takes a long time to break down established principles, overcoming the resistance of people who cannot keep up with the times. But it is necessary to be able to do so, otherwise the system, and behind it the whole economy, will begin to limp. And new changes to the Rules, one thinks, will be a good help for solving the tasks set by the head of state.

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