## Preface and Executive Summary — Kazakhstan Risk‑Based Supervision (1kazea2022006) ## Source details **Canonical URL:** [Preface and Executive Summary — Kazakhstan Risk‑Based Supervision (1kazea2022006)](https://www.imf.org/-/media/files/publications/cr/2022/english/1kazea2022006.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2022/english/1kazea2022006.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2022/english/1kazea2022006.pdf.json) --- ### Mission overview - Virtual TA mission by IMF MCM Department from April 19, 2021 to May 20, 2021 to assist the Agency for Regulation and Development of the Financial Market of the Republic of Kazakhstan with recovery plans and interest rate risk in the banking book. - Virtual meetings with Mr. Oleg Smolyakov, First Deputy Chairperson of the Agency, and senior and middle management; meetings with representatives of two large banks and one medium size bank. - Six training sessions held with bank supervisors and Agency staff. - Working Groups established to develop methodologies for assessing bank recovery plans and IRRBB. ### Executive Summary — key findings and recommendations - Mission supported Agency in strengthening elements of its risk-based supervisory framework, providing recommendations and training on assessment of banks’ recovery plans and IRRBB. - Priorities discussed for forthcoming TA: strengthening cybersecurity in financial institutions, and assessment of banks’ liquidity within the SREP framework. - Recent regulatory progress: - Legal framework for banking supervision revised in 2018 enabling the authority to apply risk-based supervision (RBS). - Regulatory framework for banks strengthened in 2019 with new regulations on corporate governance, risk management, business models, and the Internal Capital Adequacy Assessment Process (ICAAP). - Agency is rolling out RBS through implementation of its Supervisory Review and Evaluation Process (SREP), requiring development of internal methodologies and capacity building. - Recovery planning: - Recovery plans are essential to bank risk management and contingency planning; they enable timely intervention to remedy capital shortfalls, liquidity pressures, and other stresses and preserve continuity of critical economic functions via actionable recovery options. - Recommendation: Agency develop comprehensive regulatory requirements for banks’ recovery plans aligned with international standards and proportionate to Kazakhstan banks’ systemic risk profile. A short-term follow-up TA can be considered to ensure consistency with international standards. - Review existing agreements and relationships; where necessary, put in place cooperative agreements to support development and execution of recovery plans. - Develop supervisory procedures and processes to assess recovery plans, ensure deficiencies communicated to senior management and boards, and that remediation is timely and effective; develop internal criteria and analysis for identification of critical functions. - IRRBB: - Existing rules on IRRBB set out in Regulation 188 are not comprehensive and do not fully meet current international standards or best practice. - Recommendation: revise Regulation 188 to align with the relevant Basel Standard on IRRBB, taking into account proportionality. - Develop an internal supervisory methodology guiding supervisors on interest rate risk profiles, earnings-based and economic value calculation approaches, relevant shocks/scenarios, governance assessment, and integration into SREP. - Consider a regular IRRBB regulatory reporting framework; current data collection is limited. Review banks’ current IRRBB approaches before introducing new reporting. - Training: six training sessions delivered covering international standards, best practices, practical training on evaluating IRRBB exposures and recovery plans, and linking assessments to Agency’s SREP framework. ### Table 1 — Key Recommendations (summary) - 1. Amend legal framework to set clear and comprehensive recovery plan requirements referencing international standards and proportional to banks’ systemic profile; revise Regulation 188 to incorporate recovery planning requirements; conduct gap analysis. Priority: Hig h. Timeline: ST. - 2. Develop an internal methodology including supervisory procedures, internal documentation requirements and other processes to support supervisory assessment of recovery plans. Priority: Hig h. Timeline: ST. - 3. Integrate supervisory assessment of recovery plans into SREP. Priority: Hig h. Timeline: MT. - 4. Review information-sharing powers and processes to address gaps/obstacles to information-sharing and coordination necessary for recovery plans. Priority: Hig h. Timeline: MT. - 5. Revise Regulation 188 in respect of IRRBB to align more closely to international standards, taking into account proportionality. Priority: Hig h. Timeline: ST. - 6. Develop an internal supervisory methodology for assessing banks’ measurement and management of IRRBB exposures for use by onsite and offsite supervisors. Priority: Hig h. Timeline: ST. - 7. Consider introducing a requirement for banks to submit a regular supervisory report on IRRBB. Priority: Medium. Timeline: MT. - 8. Enhance review and assessment of IRRBB in banks’ ICAAP reports to inform SREP assessment and calculation of Pillar 2 capital add-ons. Priority: Medium. Timeline: MT. - Note: ST, short-term, with results in less than 12 months; MT, medium term, with results from 12 to 24 months. ### Banking sector overview — key statistics (as of March 1, 2021) - Number of commercial banks: 25 (of which 15 are affiliated to foreign banks, including 12 subsidiaries). - Total assets of the banking sector: US$ 76.5 billion (KZT 32.0 trillion), representing 41 percent of GDP. - Total loan portfolio: US$ 37 billion (KZT 15.4 trillion), an increase of 6 percent in 12 months, but a decrease from the beginning of the year of 2.7 percent. - Total volume of loans to corporates: US$ 8.9 billion (KZT 3.7 trillion), a decrease of 2.3 percent in 2021. - Loans to individuals: US$ 17 billion (KZT 7.1 trillion), a small increase of 0.2 percent in 2021. - Retail loans: US$ 11 billion (KZT 4.6 trillion), no change from March 2020, but an increase of 1.2 percent in 2021. - Reported average total capital ratio: 27.4 percent at March 1, 2021. - NPLs (loans over 90 days past due): fell from an average of 8.1 percent to 6.9 percent year-on-year. - Profitability: average return on assets (ROA) fell to 2.6 percent from 4.1 percent in March 2020; return on equity fell to 20.2 percent from 31.9 percent over the year. - Exchange rate as of March 1, 2021: US$1:417 Kazakhstani Tenge. - COVID-19 exceptional regulatory measures released more than 10 percent of regulatory capital and more than 16 percent of liquid assets; many measures extended until July 1, 2021, and some considered for extension until the end of 2021. ### Recovery plans — role, mandate, design principles, and supervisory expectations - Role and objectives: - Recovery plans provide early warning indicators and actionable recovery options to restore viability and protect critical economic functions. - Should be regularly and comprehensively assessed by supervisors for credibility and effectiveness. - Agency mandate and powers: - Responsibility for recovery plan requirements given to the Agency by Decree No. 203 (November 11, 2019). - Agency has broad supervisory authority and has been granted enforcement authority to take “limited enforcement actions” and apply supervisory measures; Banking Law Articles 45-47 and Article 61 provide escalating supervisory response measures and classification authority. - Interaction with existing framework: - Regulation 188 currently addresses risk management and internal controls; new recovery planning requirements will intersect with Regulation 188 and require consistency and communication. - New recovery plan requirements and design principles (standalone, comprehensive regulatory requirements should): - Set supervisory expectations for structure and content, filing, updating, review, remediation. - Assign responsibility to bank, senior management, and supervisory board. - Require recovery options that are actionable, credible, and adequate to keep the bank a going concern until point of non‑viability but before resolution. - Require a wide range of concrete and material options enabling response without extraordinary governmental support. - Integrate recovery plans into risk management, governance, capital, liquidity, and resolution planning. - Include clear governance, escalation, communication strategies, and action plans. - Proportionality: - At minimum, require recovery plans for designated, domestic systemically important institutions. - Recommend recovery planning for all banks subject to the financial safety net with allowance for tiered/staged development and tailoring by size, complexity, risk profile, business lines, critical functions, and operations. ### Guidance on gap analysis and enforcement powers - Conduct a gap analysis of existing laws/regulations to: - Clarify inter-relationships between standards and new recovery plan requirements. - Confirm supervisory powers/tools are adequate to develop, implement, and assess credible recovery plans. - Identify whether additional powers/tools should be established. - Gap analysis should confirm enforcement powers extend to (explicit list preserved): - Impose higher capital or liquidity requirements; - Require de‑risking actions, asset sales, divestiture or wind‑down; - Review and require changes to permissible activities and business strategies; - Require changes to governance over recovery plans and compel engagement by senior management and boards; - Require review of operating structure, organization change, legal entity rationalization; - Require improvements in management information systems; - Require testing/fire drills; - Require detailed action plans with timelines to remediate deficiencies; - Allow supervisory discretion to require conformity and waive/extend requirements or deadlines. ### Information sharing and cross‑border cooperation - Decree No. 203 authorizes interactions and information exchange with domestic and international counterparts; bilateral MoUs exist. - Recommend extending MoUs to firm‑specific information‑sharing and cooperation agreements across jurisdictions. - Review information‑sharing powers to identify legal constraints (e.g., bank secrecy) and address gaps. - Coordinate subsidiary recovery plans with group recovery plans; identify and mitigate cross‑border frictions. - Where supervisory or crisis management colleges are absent, develop formal and informal arrangements with key supervisory and resolution authorities. - Suggested elements for cooperation agreements include objectives, framework for cooperation, commitments by home/host authorities, cooperation mechanisms and information sharing framework, and cross‑border implementation of resolution measures. ### Supervisory assessment process and resourcing - Integrate recovery plan assessment into Agency’s SREP; plans to be submitted annually and reviews included in annual supervisory plan. - Reviews should focus on “completeness” and “credibility” across plan areas (strategy, options, triggers, governance, MIS). - Communicate expectations regarding “complete” plans; consider template plan elements or standard reporting requirements. - Consider resource needs and cross-department coordination; leverage onsite/offsite evaluations, stress-testing, macro‑prudential analysis, internal audit to maximize resources. - Adopt formal process for notifying boards and senior management of deficiencies with clear remediation expectations, timelines, and supervisory actions for non‑cure. - Use targeted and horizontal reviews for cross‑bank comparison; consider Q&A, workshops for supervisory communications. ### Information to be included in a recovery plan (BRRD example — required elements) - 1. Summary of key elements and overall recovery capacity. - 2. Summary of material changes since last filed plan. - 3. Communication and disclosure plan to manage negative market reactions. - 4. Range of capital and liquidity actions to maintain/restore viability. - 5. Estimated timeframe for executing each material aspect of the plan. - 6. Description of material impediments to timely execution, including group/customer/counterparty impact. - 7. Identification of critical functions. - 8. Description of processes for determining value and marketability of core business lines, operations and assets. - 9. Description of integration of recovery planning into corporate governance and identification of responsible persons. - 10. Arrangements to conserve or restore own funds. - 11. Arrangements to ensure access to contingency funding, collateral assessment, and transferability of liquidity across group. - 12. Measures to reduce risk and leverage. - 13. Measures to restructure liabilities. - 14. Measures to restructure business lines. - 15. Measures to maintain access to financial market infrastructures. - 16. Measures to maintain operational processes, infrastructure and IT services. - 17. Preparatory arrangements to facilitate sale of assets/business lines in appropriate timeframe. - 18. Other management actions/strategies to restore financial soundness and anticipated financial effect. - 19. Preparatory measures to enable timely recapitalization. - 20. A framework of indicators identifying points for action. ### Supervisory checklist — completeness and credibility (selected) - Completeness checks: required content, usability during stress, identification of critical functions/legal entities/core MIS, governance and board approval, internal/external audit review, scenarios and triggers, impact analysis of recovery capacity. - Credibility checks: scope appropriate to operations, scenario severity and types, trigger calibration and leading indicators, continuum of stress and escalation linkage, range and implementability of recovery options, intra‑group/external dependencies, assumptions and valuations realism, governance for execution and annual review, adequacy of MIS and reporting, communication/disclosure plan, testing/playbooks/fire drills. ### Training delivered - Six training sessions covering international standards, best practices, practical assessment of IRRBB exposures and recovery plans, and linking assessments to SREP. ### Update on prior TA and organizational progress - Good progress on implementing previous TA recommendations; action plan approved February 2021. - Draft MoU with NBK prepared and scheduled to be signed later in 2021. - Supervision of banks and non-banks within BRD separated. - Dedicated banking supervisory policy team established in Methodology Department. - Bank Analytics and Stress Testing Department (BASTD) established with central supervisory responsibilities: AQR, stress testing, supervisory reporting. - Coordination between BASTD and BRD being embedded. - Annual training plan designed; external assistance requested for staff development. - SREP process formalized by decree; SREP planned to be in place by end 2021. - Capital add-on process to be implemented from July 2022. - Capital add-ons from supervisory stress testing scheduled to be implemented from January 2023. - First ICAAP submissions from banks expected in the first quarter of 2022. ### ICAAP rollout and implementation - Agency planned to complete internal ICAAP methodology by end 2021, with implementation set for January 1, 2022. - Roll-out requirements include amendments to Regulation 188 and approval of an ICAAP standard reporting form for banks. - Internal methodology to guide supervisors on assessing a bank’s ICAAP and linkages with Agency’s RAS and SREP. ### Structure of the banking sector: April 1, 2021 — key figures (selected) - Total assets: 76.4 (US$ BN); Market share: 100.0 (percent). - Top banks by ASSETS (US$ BN) and MARKET SHARE (PERCENT): - HALYK SAVINGS BANK OF KAZAKHSTAN* — 23.4; 30.7; JSC - SBERBANK — 8.0; 10.5; subsidiary; Russia - KASPI BANK — 6.9; 9.0; JSC - Forte Bank — 5.5; 7.2; JSC - HOUSE CONSTRUCTION SAVINGS BANK — 5.1; 6.7; JSC - BANK CENTER CREDIT — 4.4; 5.8; JSC - FIRST HEARTLAND JÝSAN BANK — 3.9; 5.1; JSC - EURASIAN BANK — 3.1; 4.0; JSC - ATF BANK — 2.7; 3.5; JSC - BANK RBK — 2.5; 3.2; JSC - CITIBANK — 2.2; 2.9; JSC; USA - ALFA-BANK — 1.8; 2.3; subsidiary; Russia - ALTYN BANK — 1.5; 1.9; subsidiary; China - NURBANK — 1.0; 1.3; JSC - HOME CREDIT AND FINANCE BANK — 1.0; 1.3; subsidiary; Czech Republic - JSC BANK VTB (KAZAKHSTAN) — 0.8; 1.1; subsidiary; Russia - BANK OF CHINA — 0.8; 1.1; subsidiary; China - BANK FREEDOM FINANCE** — 0.5; 0.7; subsidiary; Russia - INDUSTRIAL AND COMMERCIAL BANK OF CHINA — 0.4; 0.6; subsidiary; China - AB "KAZAKHSTAN-ZIRAAT INTERNATIONAL BANK — 0.3; 0.4; subsidiary; Turkey - SHINHAN BANK KAZAKHSTAN — 0.2; 0.3; subsidiary; Korea - AL-HILAL ISLAMIC BANK — 0.1; 0.2; subsidiary; UAE - CAPITAL BANK KAZAKHSTAN — 0.1; 0.1; JSC - ZAMAN-BANK — 0.1; 0.1; JSC - NATIONAL BANK OF PAKISTAN — 0.0; 0.0; subsidiary; Pakistan - Notes: * 14 banks participated in AQR (in grey). ** Previously Bank Kassa Nova. ### IRRBB — regulatory framework, shortcomings, and recommended actions - Regulation 188: - Sets general risk management requirements for interest rate risk within broader market risk requirements. - Specific requirements: set a risk appetite for interest rate risk and include level of interest rate risk in internal management information. - Require measurement of interest rate risk separately for all financial instruments denominated in foreign currency that exceed 5 percent of assets or liabilities. - Shortcomings: - Regulation 188 does not distinguish trading and banking book IR risk; addresses “interest rate risk” generally. - No clear mention of measurement approaches for interest rate sensitive instruments in the banking book. - Recommended revisions to Regulation 188: - Specify measurement approaches for IRRBB. - Require banks to specify scope of IRRBB and define types of exposures (repricing risk, basis risk, other). - Include all interest rate sensitive items, on- and off-balance, in IRRBB measurement. - Require banks to specify IRRBB strategy and governance arrangements, including relevant limits. - Measurement approaches to be specified: - Require banks to calculate at least one earnings-based indicator (short-term impact on net income) and one economic value indicator (long-term impact on equity value). - Set high-level requirements for modelling assumptions, stress tests, and scenarios. - Consider requiring designated DSIBs to apply all six prescribed standardized interest rate shock scenarios in Annex 2 of the Basel Standard on Interest Rate in the Banking Book (April 2016). - Consider requiring banks to report outputs of these scenarios via regular supervisory reports. - Require banks to quantify behavioral and modelling assumptions (prepayment risk, non-maturing deposits, early redemption risk) and have procedures for defining other inputs (yield curves). - Integrate underlying assumptions fully into IRRBB measurement. ### IRRBB — proportionality, current supervisory approach, and reporting recommendations - Proportionality: - Minimum requirement for all banks: calculate at least one earnings-based indicator and one economic value indicator. - Apply other Basel Standard requirements proportionally by size, nature, complexity. - Current supervisory limitations: - Agency’s approach is very limited and does not conform to Principles 10–12 of the Basel Standard (April 2016). - Agency currently collects only: annual information for assessment of eight qualitative and two quantitative indicators on IRRBB. - No onsite IRRBB review has been conducted. - Ten-question supervisory assessment informs RAS and SREP but lacks depth and frequency. - Reporting and data collection recommendations: - Collect more granular and frequent information to enable comprehensive SREP assessment of IRRBB. - Review qualitative questions to target IRRBB risk management assessment. - Conduct an industry-wide survey on banks’ IRRBB approaches before introducing regular reporting. - Use survey analysis to design regular supervisory reporting and inform targeted onsite inspections. - Additional data would inform Pillar 2/SREP capital add-ons. ### IRRBB — internal supervisory methodology (minimum content and integration) - Develop internal supervisory methodology for onsite and offsite supervisors to: - Assess effectiveness of banks’ frameworks for identifying, measuring, monitoring, and controlling IRRBB. - Consider Pillar 2 capital for IRRBB exposures. - Enable supervisors to assess governance, risk management, internal controls, and to challenge model assumptions. - Suggested minimum assessment content: - a) IRRBB governance, strategy, risk appetite, and risk management framework; - b) Nature and composition of IRRBB profile (repricing of assets, liabilities, off-balance flows); - c) Behavioral assumptions (non-maturing deposits, prepayments); - d) Impact of interest rate scenarios on economic value as a portion of banḱ s own funds (EVE) and cross-currency aggregation if relevant; - e) Impact on earnings (NII) and cross-currency aggregation if relevant; - f) Peer analysis to identify market outliers in IRRBB. - Integration with ICAAP and SREP: - Ensure IRRBB integral to ICAAP review and SREP framework. - ICAAP submissions should include qualitative IRRBB information per Table A of Principle 8 of Basel Standard (April 2016); consider quantitative Table B inputs. - Use peer analysis to identify outliers and trigger onsite reviews or capital add-ons. - Supervisory enforcement tools to describe: - Onsite reviews; requirements for risk management enhancements; requirements to reduce IRRBB exposures; constraints on internal risk parameters; Pillar 2 capital add-ons or combinations thereof. - Capital assessment and calibration: - SREP output should assess sufficiency of capital for IRRBB exposures. - Draft ICAAP methodology proposes a matrix transforming standardized interest rate shock results into additional capital incorporating the bank’s internal rating. - Internal methodology should be consistent with ICAAP and SREP; capital add-on calibration should be regularly reviewed/validated. ### Appendices (standards, supervisory issues, modelling assumptions) - Appendix VII: BIS and EBA principles/assumptions on IRRBB (∆EVE and ∆NII rules; EBA common assumptions for outlier tests including maturity-dependent post-shock floor starting at -100 basis points, 5-year caps for non-maturity deposit repricing, currency materiality thresholds of 5 percent). - Appendix VIII: Supervisory issues for assessing IRRBB covering scope, strategy and risk appetite, risk management framework, policies and controls, IT systems and data quality, internal reporting, model governance, measurement methods, shock scenarios for ICAAP, and measurement assumptions (prepayments, duration of non-maturing deposits, no unexplained expert adjustments, back-testing requirements). *IMF | Kazakhstan Risk-Based Supervision — Preface and Executive Summary (content unit: 1kazea2022006).* ### Preface ................................................................................................................ ### Preface ### Mission overview - At the request of the Agency for Regulation and Development of the Financial Market of the Republic of Kazakhstan (the Agency), the Monetary and Capital Markets (MCM) Department conducted a virtual mission from April 19, 2021 to May 20, 2021 to assist the Agency with developing regulations and internal supervisory methodologies in line with international standards and best practices on recovery plans and interest rate risk in banking book. - The mission had virtual meetings with Mr. Oleg Smolyakov, First Deputy Chairperson of the Agency, and with senior and middle management of the Agency. - Six training sessions were held with bank supervisors and other Agency staff. - The mission also had virtual meetings with representatives of two large banks and one medium size bank. - The mission team expressed gratitude to Mr. Smolyakov, Mr. Daniyar Nurmanov, Ms. Anar Sadykova, Mr. Madi Burin and his team, and to members of the Working Groups established to develop methodologies for assessing bank recovery plans and interest rate risk. ### Executive Summary — key findings and recommendations - The TA mission supported the Agency in strengthening elements of its risk-based supervisory framework by providing recommendations and training on the assessment of banks’ recovery plans and interest rate risk in the banking book (IRRBB). - Priorities for forthcoming TA missions discussed with the Agency: strengthening cybersecurity in financial institutions, and assessment of banks’ liquidity within the SREP framework. - Recent regulatory progress: - Legal framework for banking supervision revised in 2018 enabling the authority to apply risk-based supervision (RBS). - Regulatory framework for banks strengthened in 2019 with new regulations on corporate governance, risk management, business models, and the Internal Capital Adequacy Assessment Process (ICAAP). - The Agency is rolling out a risk-based approach through implementation of its Supervisory Review and Evaluation Process (SREP), requiring development of internal methodologies and capacity building. - Previous missions (September 2020 and November 2020) focused on strengthening institutional setup and implementing Pillar 2 elements; recommendations included operational independence, accountability, transparency, organizational arrangements, inter-agency cooperation, capacity building, and development of internal supervisory methodologies for ICAAP and Pillar 2. An implementation plan has been approved and good progress made. - Recovery planning: - Supervisory expectations around banks’ recovery plans and an internal supervisory methodology to assess these plans are necessary. - Recovery plans are an essential component of a bank’s risk management and contingency planning framework and are required under long-established international standards. Recovery plans enable timely intervention to remedy capital shortfalls, liquidity pressures, and other stresses and aim to preserve continuity of critical economic functions via actionable recovery options. - Recommendation: Agency develop comprehensive regulatory requirements for banks’ recovery plans aligned with international standards and proportionate to Kazakhstan banks’ systemic risk profile. A short-term follow-up TA can be considered to ensure consistency with international standards. - To support cross-border coordination, existing agreements and relationships should be reviewed and, as necessary, cooperative agreements put in place to support development and execution of recovery plans. - The Agency should develop supervisory procedures and related processes to support assessment of recovery plans, ensure deficiencies are communicated to bank senior management and supervisory boards, and that remediation is timely and effective. Development of internal criteria and analysis related to the identification of critical functions is required. - IRRBB: - Existing rules on IRRBB are set out in Regulation 188 but are not comprehensive and do not fully meet current international standards or best practice. - Recommendation: revise Regulation 188 to align with the relevant Basel Standard on IRRBB, taking into account proportionality. - The Agency should develop an internal supervisory methodology guiding supervisors on banks’ interest rate risk profiles, earnings-based and economic value calculation approaches, relevant interest rate shocks and scenarios, assessment of IRRBB governance, and how IRRBB assessment fits into the wider SREP framework. - Consider developing a regular IRRBB regulatory reporting framework; current data collection is limited. Onsite visits and the ICAAP (when fully operational) should provide qualitative information, but additional quantitative reporting should be considered to capture nature, size, and trend of IRRBB exposures. A review of banks’ current approaches to IRRBB management and measurement should be conducted before introducing a new reporting regime. - Training: six training sessions were delivered for supervisors on IRRBB and recovery plans, covering international standards, best practices, and practical training on evaluating IRRBB exposures and recovery plans and linking assessments to the Agency’s SREP framework. ### Table 1. Kazakhstan: Key Recommendations (summary) - 1. Agency to amend the current legal framework to set clear and comprehensive recovery plan requirements that reference international standards and are proportional to banks’ systemic profile; revise Regulation 188 to incorporate and integrate recovery planning requirements; conduct a gap analysis of existing legal and regulatory structure to clarify inter-relationships and ensure supervisory powers and tools. Priority: Hig h. Timeline: ST. - 2. Agency to develop an internal methodology including supervisory procedures, internal documentation requirements and other processes to support the supervisory assessment of recovery plans consistent with the new regulatory requirements. Priority: Hig h. Timeline: ST. - 3. Agency to integrate the supervisory assessment of recovery plans into its supervisory review and evaluation process. Priority: Hig h. Timeline: MT. - 4. Agency to review its information-sharing powers and processes to identify and address gaps and obstacles to information-sharing and coordination necessary for the effective development and implementation of recovery plans. Priority: Hig h. Timeline: MT. - 5. Agency to revise Regulation 188 in respect of IRRBB to align it more closely to international standards, taking into account the principle of proportionality. Priority: Hig h. Timeline: ST. - 6. Agency to develop an internal supervisory methodology for assessing banks’ measurement and management of IRRBB exposures for use by both onsite and offsite supervisors. Priority: Hig h. Timeline: ST. - 7. Agency to consider introducing a requirement for banks to submit a regular supervisory report on IRRBB to enable supervisors to assess the amount and trend of a bank’s IRRBB exposure. Priority: Medium. Timeline: MT. - 8. Agency to enhance its review and assessment of IRRBB in banks’ ICAAP reports to inform its SREP assessment and calculation of Pillar 2 capital add-ons. Priority: Medium. Timeline: MT. - Note: ST, short-term, with results in less than 12 months; MT, medium term, with results from 12 to 24 months. ### Introduction — mission context and prior work - The MCM Department conducted a remote mission from April 19, 2021 to May 20, 2021 providing recommendations and training on banks’ recovery plans and IRRBB; meetings held with Working Groups and representatives of two D-SIBs and one medium size bank. - Developments in Kazakhstan regulatory and supervisory landscape: - In 2019, Kazakh authorities split monetary policy and financial sector supervisory responsibilities of the National Bank of Kazakhstan (NBK), and the new regulatory Agency was established in Almaty in early 2020. - NBK completed an asset quality review (AQR) of 14 banks in 2019. - In 2018, supervisory authorities were given legal authority to adopt a risk-based supervisory approach, and a regulation was issued in 2019 setting new requirements on banks relating to corporate governance, risk management, internal controls, business models, ICAAP, and recovery planning. - September 2020 remote TA mission assisted the Agency with institutional set up and supervisory capacity; November 2020 mission provided assistance and training on Pillar 2 elements to enhance risk-based supervision and development of SREP methodology. Appendix I sets out recommendations from previous missions and Section V summarizes implementation progress. ### Banking sector overview — key statistics (as of March 1, 2021) - Number of commercial banks: 25 (of which 15 are affiliated to foreign banks, including 12 subsidiaries). - Total assets of the banking sector: US$ 76.5 billion (KZT 32.0 trillion), representing 41 percent of GDP. - Total loan portfolio: US$ 37 billion (KZT 15.4 trillion), an increase of 6 percent in 12 months, but a decrease from the beginning of the year of 2.7 percent. - Total volume of loans to corporates: US$ 8.9 billion (KZT 3.7 trillion), a decrease of 2.3 percent in 2021. - Loans to individuals: US$ 17 billion (KZT 7.1 trillion), a small increase of 0.2 percent in 2021. - Retail loans: US$ 11 billion (KZT 4.6 trillion), no change from March 2020, but an increase of 1.2 percent in 2021. - Reported average total capital ratio for the banking sector: 27.4 percent at March 1, 2021. - NPLs (loans over 90 days past due): fell from an average of 8.1 percent to 6.9 percent year-on-year, though figures may be understated due to COVID-19-related relaxations in loan classification and provisioning rules. - Profitability: average return on assets (ROA) fell to 2.6 percent from 4.1 percent in March 2020; return on equity fell to 20.2 percent from 31.9 percent over the year. - Exchange rate as of March 1, 2021: US$1:417 Kazakhstani Tenge. - The Agency introduced exceptional regulatory measures in response to COVID-19 to increase liquidity and reduce capital pressure, relaxing certain capital, liquidity, loan classification, and provisioning requirements; these measures released more than 10 percent of regulatory capital and more than 16 percent of liquid assets. Many measures were extended until July 1, 2021, and some measures were being considered for extension until the end of 2021. The Agency is encouraged to monitor the impact of these exceptional measures and require banks to produce credible medium-term plans to restore capital and liquidity buffers where relevant. ### Recovery plans — regulatory framework (introductory) - Previous TA missions noted the necessity of developing supervisory expectations around banks’ recovery plans and an internal supervisory methodology to assess these plans. - Recovery planning is required under long-established international standards and should be integrated into the Agency’s prudential framework; further discussion of regulatory framework and new requirements follows in subsequent sections of the full report. *IMF | Kazakhstan Risk-Based Supervision — Preface and Executive Summary (content unit: 1kazea2022006).* ### 9. Recovery plans are an essential component of banks’ risk management and ### 9. Recovery plans are an essential component of banks’ risk management and ### Role and objectives of recovery plans - Recovery plans enhance bank resilience and protect financial stability by establishing quantitative and qualitative indicators that provide early warning of emerging risks and allow timely intervention to remedy capital shortfalls, liquidity pressures, and other stresses. - Intended to address continuity of critical economic functions at troubled banks through development of actionable recovery options that can restore long‑term viability and avoid negative impacts on financial stability. - Recovery plans should be regularly and comprehensively assessed by supervisors for credibility and effectiveness. - International standards adopted by the Financial Stability Board (FSB) have led to widespread adoption of recovery planning requirements by global regulators. ### Agency mandate, powers, and enforcement - Responsibility for developing and implementing recovery plan requirements has been given to the Agency (Regulation on the Agency of the Republic of Kazakhstan for the Regulation and Development of the Financial Market, Decree No. 203; November 11, 2019). - Decree No. 203 establishes the Agency’s mission to promote financial stability of banking institutions and provides broad supervisory authority to set standards and monitor banks’ condition to maintain financial stability. - Under Decree No. 203 the Agency has powers to take “other tasks in accordance with the Law of the Republic of Kazakhstan ‘On state regulation, control over and supervision of the financial market and financial institutions’ [Decree 203] as well as ‘other laws’ of the Republic of Kazakhstan and acts of the President of the Republic of Kazakhstan.” - The Agency has been granted enforcement authority to take “limited enforcement actions” and apply supervisory measures; these authorities are further delineated in the Banking Law and have been used to conduct financial stability analyses and impose recovery-type actions on higher risk banks. - The Banking Law provides an escalating set of supervisory response measures (Articles 45-47) and classification authority (Article 61) when a bank approaches resolution or poses “a threat to the stability of the financial system.” ### Interaction with existing regulatory framework - Regulation 188 approved certain rules for formation of risk management and internal control systems for second-tier banks; new recovery planning requirements will intersect with Regulation 188 and require consistency and communication with supervised banks. - The Agency should ensure recovery planning requirements align with risk management, governance, capital and liquidity adequacy management, and other prudential processes. ### New recovery plan requirements and design principles - The Agency should amend the legal framework to set clear and comprehensive recovery plan requirements after reviewing existing laws and regulations to identify gaps in authority. - The new framework should provide standalone, comprehensive regulatory requirements that: - Set supervisory expectations for structure and content of recovery plans, filing, updating, review, and remediation requirements. - Clearly assign responsibility to the bank, its senior management, and supervisory board to develop a credible recovery plan. - Require recovery options and actions that are actionable, credible, and adequate to keep the bank a going concern during periods of considerable financial or operational stress, extending to a period where the bank has approached the point of non‑viability but not yet immediate liquidation or resolution. - Require a wide range of concrete and material options enabling a firm to respond to a range of internal and external stresses without extraordinary governmental support. - Integrate recovery plans into risk management and corporate governance, coordinated with strategic, operations, contingency, capital, liquidity, and resolution planning. - Include clear governance structures, escalation requirements, communication strategies, and action plans. - Incorporate principles of risk‑based supervision (RBS) and proportionality: - At minimum, require recovery plans for designated, domestic systemically important institutions. - Recommend recovery planning for all banks subject to the financial safety net, with allowance for tiered or staged development of standards. - Allow tailoring of plans to reflect size, complexity, risk profile, business lines, critical functions, and operations; permit less-complex firms to submit tailored, less burdensome plans. ### Guidance on international alignment and gap analysis - The Agency should reference international standards and comparable jurisdictions to guide regulation development, deciding degree of prescriptiveness and acknowledging supervisory judgment in assessing credibility. - Before issuing standards, conduct a gap analysis of existing legal and regulatory structure to: - Clarify inter-relationships between existing standards and new recovery plan requirements. - Confirm supervisory powers and tools are adequate to develop, implement, and assess credible recovery plans. - Identify whether additional powers/tools should be established (e.g., fixed remediation requirements, supervisory actions for non‑cure, power to compel divestitures). - The gap analysis should confirm enforcement powers extend to (explicit list preserved): - Impose higher capital or liquidity requirements to reflect banks’ lack of resilience; - Require de‑risking actions, reducing the order and magnitude of risk exposures by asset sales, divestiture or wind‑down; - Review and require changes to a bank’s permissible activities; - Require the bank to review and change its business strategy(ies); - Require the bank to review and change its governance process over recovery plans and their execution; - Compel effective engagement by senior management and supervisory boards; - Require banks to review their operating structure to reduce complexity and remove obstacles to recovery plan implementation; - Compel organization change, change in business operations; rationalize legal entity structure; - Require improvements in management information systems; - Require testing/fire drills; - Require detailed action plans with timelines to remediate deficiencies; and, - Allow for the application of supervisory discretion to require banks to conform with supervisory requirements; and the supervisory flexibility to waive or extend fixed requirements or deadlines. ### Information sharing and cross‑border cooperation - Under Decree No. 203 the Agency’s functions include carrying out interactions and exchanging information with domestic and international counterparts; this authority appears adequate to support information sharing and coordination with home and host authorities. - Existing bilateral Memorandum of Understanding (MoU) arrangements exist, but recovery and resolution planning benefit from extending bilateral MOUs to firm‑specific information‑sharing and cooperation agreements that may include multiple jurisdictions. - The Agency should review implementation of its information‑sharing power to identify gaps and obstacles, ensuring adequate agreements between home and host authorities to support recovery plan development and execution. - Individual subsidiary recovery plans need coordination with group recovery plans; scenarios, triggers and recovery options should be consistent and internal or cross‑border frictions identified and mitigated. - Legal constraints (e.g., bank secrecy provisions) should be identified and addressed to ensure timely and effective sharing of information. - Where needed, information‑sharing and cooperation agreements should meet international standards and include elements such as: - Objectives, nature, and scope; - General framework for cooperation; - Commitments to cooperate; - Home authority commitments; - Host authority commitments; - Cooperation mechanisms and information sharing framework; - Cross‑border implementation of resolution measures. - In absence of supervisory or crisis management colleges, the Agency should develop formal and informal arrangements with key supervisory and resolution authorities. ### Supervisory assessment process and resourcing - Recovery plan supervisory assessment should be integrated into the Agency’s overall SREP; plans would be submitted on an annual basis and reviews should be part of the annual supervisory plan. - Reviews should focus on “completeness” and “credibility” across plan areas (strategy, options, triggers, governance, etc.) and coordinate with risk management, governance, information systems, capital, and liquidity assessments. - Expectations regarding “complete” plans should be communicated to banks; template plan elements or standard reporting requirements can be employed. - The Agency should consider resource needs for effective review; coordination across departments is important. - The review should follow the Agency’s risk‑based approach and coordinate with onsite/offsite evaluations, stress‑testing and macro‑prudential analysis; incorporate banks’ internal assessments and audit functions to leverage resources. - Targeted and horizontal reviews enabling cross‑bank comparison of weaknesses should be considered. - The Agency should adopt a formal and transparent process for notifying boards and senior management of plan deficiencies, including clear remediation expectations, timelines, and supervisory actions authorized if deficiencies are not addressed. - Uniformity and consistency in supervisory communications are necessary; methods such as Q and A or workshops should be considered. *Source: IMF | Kazakhstan Risk‑Based Supervision (chapter content provided in the supplied PDF).* ### 26. Supervisory procedures, internal documentation requirements, and other processes ### 26. Supervisory procedures, internal documentation requirements, and other processes ### Supervisory procedures and documentation - Supervisory procedures, internal analysis, and documentation requirements should be developed consistent with the new regulatory requirements and the standards set forth in the new regulation. - Procedures could be developed simultaneously with the regulation and should: - Guide supervisory staff in their assessment of banks’ recovery plans. - Focus analysis on key issues included within the scope of review. - Types of questions to address “completeness” and “credibility” were discussed during the mission; suggestions and examples are set forth in Appendix VI. ### Identification of critical functions and systemic designation - The Agency should develop an internal approach to identification of critical functions and ensure consistency in application of “systemic” criteria. - Under the current framework, the NBK is solely responsible for designating banks as systemically important. - Decree No. 240 considers factors including size, complexity, inter-connectedness, and substitutability when determining systemic importance. - The determination of systemic importance is strongly related to identifying whether a bank activity is a critical function for recovery plans. - Core objective of recovery planning: demonstrate that critical functions and critical shared services can be supported and continuity maintained during financial stress. - The Agency will need independent authority to review banks’ analysis and identification of critical functions when assessing recovery plans for credibility. - Criteria for designating critical functions should not be inconsistent with NBK criteria; some coordination is suggested. ### IV. IRRBB — A. Regulatory framework for IRRBB in Kazakhstan - Existing requirements on interest rate risk are set out in Regulation 188. - Regulation 188 sets general risk management requirements for interest rate risk within broader market risk requirements. - Specific requirements include: setting a risk appetite for interest rate risk and including the level of interest rate risk in internal management information. - Specific requirement to measure interest rate risk separately for all financial instruments denominated in foreign currency that exceed 5 percent of assets or liabilities. - Shortcomings and recommended revisions to Regulation 188: - Regulation 188 does not distinguish between trading and banking book interest rate risk requirements; it addresses “interest rate risk” generally. - While procedures for dividing instruments into trading and banking books are required, there is no clear mention of measurement approaches for interest rate sensitive instruments in the banking book. - Revised Regulation should: - Specify measurement approaches for IRRBB. - Require banks to specify the scope of their IRRBB and define types of IRRBB exposures (e.g., repricing risk, basis risk, or other). - Include all interest rate sensitive items, both on- and off-balance, in the banking book within IRRBB measurement. - Require banks to specify IRRBB strategy and governance arrangements, including relevant limits. - Measurement approaches to be specified: - Require banks to calculate at least one earnings-based indicator (for short-term impact on net income) and one economic value indicator (for long-term impact on equity value). - Set high-level requirements for modelling assumptions, stress tests, and scenarios. - Consider requiring designated DSIBs to apply all six prescribed standardized interest rate shock scenarios set out in Annex 2 of the Basel Standard on Interest Rate in the Banking Book (April 2016) that capture non-parallel gap risks for economic value of equity (EVE). - Consider requiring banks to report outputs of these scenarios via regular supervisory reports. - Require banks to quantify behavioral and modelling assumptions relevant for their business model (e.g., prepayment risk, modelling of non-maturing deposits, early redemption risk) and have procedures for defining other inputs (e.g., yield curves). - Integrate underlying assumptions fully into banks’ IRRBB measurement. ### IV. IRRBB — B. Application of proportionality and current supervisory approach - Proportionality principle: - Calculating at least one earnings-based indicator and one economic value indicator is a minimum requirement for all banks. - The Agency should consider size, nature and complexity of banks when applying other Basel Standard (April 2016) requirements, including: - Granularity of maturity gaps and limits. - Balance sheet mapping of less significant portfolios versus cash flow mapping. - Assessment, validation, and incorporation of underlying assumptions. - Application of less/more complex measurement methods and calculation software. - Range and number of interest rate scenarios and shocks required should reflect size, nature, complexity, and scale of IRRBB. - Current supervisory approach limitations: - Agency’s current approach to supervising IRRBB is very limited and does not conform to Principles 10–12 of the Basel Standard (April 2016). - Principle 10 requires supervisors to collect sufficient information regularly to monitor trends, assess soundness, and identify outlier banks for review or additional capital. - Agency currently collects only: - Annual information for assessment of eight qualitative and two quantitative indicators on IRRBB. - No onsite IRRBB review of a bank has been conducted. - The ten-question supervisory assessment informs the Agency’s Risk Assessment System (RAS) and SREP. - The limited scope of qualitative questions and annual frequency of quantitative data do not enable comprehensive assessment or trend/outlier identification. - Recommendations on reporting and data collection: - Collect more granular and frequent information to enable comprehensive SREP assessment of IRRBB. - Review the content of qualitative questions to provide a suitably targeted set of information to inform IRRBB risk management assessment. - Consider conducting an industry-wide survey on banks’ approaches to managing and measuring IRRBB before introducing regular reporting: - Survey to assess level of preparedness to implement new IRRBB requirements. - Analysis of survey results would inform design of regular supervisory reporting. - A revised/expanded IRRBB reporting regime and greater use of targeted onsite inspections would broaden Agency understanding of level and trend of IRRBB exposures and quality of risk management. - Additional data would inform Agency approach to setting IRRBB Pillar 2/SREP capital add-ons. - Mission observation: a medium-sized bank demonstrated familiarity with the Basel IRRBB framework and internal use of its measurement approaches. ### IV. IRRBB — C. Internal supervisory methodology for IRRBB - The Agency should develop an internal supervisory methodology for assessing IRRBB for both onsite and offsite supervisors to: - Assess effectiveness of banks’ frameworks for identifying, measuring, monitoring, and controlling IRRBB. - Consider whether banks should be required to hold additional capital against IRRBB (Pillar 2). - Enable onsite supervisors to assess governance, risk management, and internal controls around IRRBB. - Enable supervisory staff to understand sources of interest rate risk in a bank’s balance sheet and to challenge scenario and model assumptions. - Current status: - Agency has a list of issues to review in its draft ICAAP review methodology, but this does not constitute a detailed internal supervisory methodology for IRRBB. - TA provided in November 2020–January 2021 on assessing IRRBB as part of ICAAP; draft ICAAP methodology is a useful basis but lacks practical supervisory guidance for onsite and offsite assessments. - Suggested minimum content of internal methodology (Basel Standard, April 2016 provides template): - Assess: a) a bank’s IRRBB governance, strategy, risk appetite, and risk management framework; b) the nature and composition of a bank’s IRRBB profile (in terms of repricing of assets, liabilities, and off-balance sheet items/cash flows); c) behavioral assumptions in IRRBB measurement (non-maturing deposits, prepayments etc.); d) impact of different interest rate scenarios on economic value as a portion of the banḱ s own funds (EVE) and aggregation across currencies if relevant; e) impact of different interest rate scenarios on earnings (NII), and aggregation across currencies if relevant; f) peer analysis to identify market outliers in respect of IRRBB. - Appendix VIII sets out a more detailed set of issues for supervisory assessment to be considered for inclusion. - Integration with ICAAP and SREP: - Ensure IRRBB is an integral part of ICAAP review and SREP framework. - ICAAP submissions should include significant qualitative information on IRRBB policies and risk management procedures. - Subject to proportionality, ICAAP submissions should include, at minimum, the qualitative data in Table A of Principle 8 of the Basel Standard (April 2016). - Agency should consider requesting quantitative information in Table B via ICAAP submissions or regular supervisory reporting. - Analysis of qualitative documentation and quantitative data should enable better understanding of nature and scale of IRRBB exposures and governance/risk management quality. - Peer analysis should identify outlier banks to prompt supervisory action (onsite review or capital add-ons). - Supervisory enforcement tools to describe in internal methodology: - Onsite reviews. - Requirements for enhancements to risk management processes and procedures. - Requirements to reduce overall level of IRRBB exposures. - Constraints on specific internal risk parameters (e.g., reduced limits). - Pillar 2 capital add-ons or combinations of these actions. - Capital assessment and calibration: - SREP output should assess whether a bank holds sufficient capital for scale of IRRBB exposures. - Draft ICAAP methodology includes an approach for assessing additional Pillar 2 capital for IRRBB exposures: - Proposal contains a matrix transforming results of a standardized interest rate shock into an additional capital requirement, incorporating the bank’s internal rating. - Internal methodology should be consistent with and linked to ICAAP and SREP approaches. - Calibration of capital add-on should be regularly reviewed/validated within the SREP framework. ### V. Update on previous TA recommendations - Agency progress: - Good progress on implementing recommendations from two previous TA missions; action plan approved by Chairperson of the Agency in February 2021. - Draft MoU setting coordination/cooperation arrangements between the Agency and the NBK prepared and scheduled to be signed later in 2021. - Agency reviewed internal decision-making processes of other supervisory agencies before formalizing decision-making powers of its Supervisory Committee. - Organizational and capacity developments: - Supervision of banks and non-banks within Bank Regulation Department (BRD) has been separated. - Dedicated team established to focus on banking supervision policy within Methodology Department. - Bank Analytics and Stress Testing Department (BASTD) established with central supervisory responsibilities: AQR, stress testing, supervisory reporting. - Coordination between BASTD and BRD supervisory teams is being embedded. - Annual training plan designed; external assistance requested to assist in staff development. - Ongoing aim to build specialist risk expertise in onsite and offsite teams. - Key supervisory program timelines: - Development and roll out of SREP, AQR, and supervisory stress testing are key priorities in 2021. - SREP process has been formalized by a decree issued by the Chairperson and work continues on internal processes/manuals to ensure coordination across BRD and BASTD. - SREP process planned to be in place by end 2021. - Capital add-on process to be implemented from July 2022. - Capital add-ons arising from supervisory stress testing scheduled to be implemented from January 2023. - As SREP evolves, Agency should: - Incorporate periodic requests for internal risk and audit reports from banks. - Incorporate regular prudential meetings with banks’ senior and middle management into SREP to inform supervisors of ongoing changes to a bank’s risk profile. *Source: 1kazea2022006 - 26. Supervisory procedures, internal documentation requirements, and other processes* ### 44. The Agency has planned to complete its internal ICAAP methodology by end 2021, ### 1kazea2022006 - 44. The Agency has planned to complete its internal ICAAP methodology by end 2021, ### ICAAP rollout and implementation - The Agency planned to complete its internal ICAAP methodology by end 2021, with implementation set for January 1, 2022. - Roll-out requirements: - Amendments to Regulation 188. - Approval of an ICAAP standard reporting form for banks. - Purpose and linkages: - The internal methodology will provide guidance to supervisors on the process for assessing a bank’s ICAAP. - The methodology will set out the linkages between the ICAAP process and the Agency’s RAS and SREP. - Expected submissions: - The first ICAAP submissions from banks are expected to be received in the first quarter of 2022. ### Key recommendations — November 2020 TA Mission (selected, prioritized) - Priority: Hig h; Timeline: I (immediate) or M (medium) - Recommendations (selected highlights): - Develop and adopt an action plan to strengthen the Agency’s institutional set up, including operational independence, accountability and transparency, and overall banking supervisory capacity. (Hig h I) - Sign a MoU with the NBK to set out coordination and cooperation arrangements, responsibilities, accountability, and protocols for exchange of information. (Hig h ST) - Review and enhance organizational structure and staffing of the BRD to ensure effective prudential banking supervision. Specific measures include: - Restructure the BRD to transfer all non-critical to financial stability functions to other Departments of the Agency; - Establish a dedicated banking supervisory policy team for drafting supervisory procedures and operating manuals; - Embed the new Bank Analytics and Stress Testing Department into the SREP framework; - Prescribe the role and responsibilities of the Agency’s Supervisory Committee in legislation; - Build up specialist risk expertise among onsite and offsite teams; - Introduce a comprehensive training programme for offsite and onsite supervisors; consider seconding staff to foreign supervisory authorities. (Hig h M) - Develop or update offsite, onsite, and SREP processes and procedures. To include: - More frequent offsite qualitative risk and corporate governance reviews; - Regular prudential meetings with banks’ senior and middle management, including an annual meeting with Supervisory and Executive boards on strategic issues; - Enhance annual supervisory plans with high-level supervisory priorities, supervisory programmes for individual banks and more risk-focused onsite inspection plans; - Implement fully an ICAAP regime and capital-ons; - Update supervisory procedures, manuals, roles and responsibilities, including job descriptions, for conducting a SREP and fully integrating offsite and onsite supervision. (Hig h M) - Develop supervisory procedures for documenting and recording supervisory findings and supervisory judgements, arrangements for the approval of SREP results, including scores, and for communicating the outcomes of the SREP to the banks. - Amend legislation to include additional safeguards to enhance the Agency’s operational independence, including implementation of FSC recommendations, and prescribe the accountability framework; strengthen transparency by additional disclosures. (Medium M) - Require banks to produce credible medium-term capital and liquidity restoration plans to mitigate the impact of the exceptional COVID-19 measures. (Hig h I) ### Key recommendations — January 2021 TA Mission (ICAAP and Pillar 2 emphasis) - Priority: H (high); Timeline: ST (short-term) or MT (medium-term) - Agency actions to finalize ICAAP methodology (H ST): - Revise processes for requesting ICAAP documentation, supervisory evaluation, review of internal governance, risk management, and internal controls, and usability by supervisors. - Include review of a bank’s risk appetite statement; analysis of the Pillar 1 and 2 risks; linkages with the RAS and SREP; peer group analysis; governance of the ICAAP assessment. - Finalize draft methodology for setting individual Pillar2 supervisory capital requirements (H ST): - Agree methodologies for calculating capital requirements for Pillar 2 risks; - Identify material risks not fully captured by Pillar1 and draft methodologies for required capital; - Revise approach to determining capital add-ons for governance, business model or risk management weaknesses. - Review existing SREP methodology to enhance overall assessment of a bank’s risk profile (H ST): - Integrate ICAAP assessment processes and results; - Include peer group analysis; - Set individual Pillar 2 supervisory capital requirements aligned to each bank’s risk profile. - Integrate ICAAP assessment and Pillar2 capital setting into supervisory framework to tailor activities to each bank’s risk profile (H MT). - Supervisors to review and assess banks’ ICAAPs and include results in SREP reports (H MT). - Supervisors to set up additional individual capital requirements based on banks’ risks not fully covered in Pillar1 of Basel II (H MT). ### Structure of the banking sector: April 1, 2021 — key figures - Total assets: 76.4 (US$ BN); Market share: 100.0 (percent). - Top banks by ASSETS (US$ BN) and MARKET SHARE (PERCENT): - HALYK SAVINGS BANK OF KAZAKHSTAN* — 23.4; 30.7; JSC - SBERBANK — 8.0; 10.5; subsidiary; Russia - KASPI BANK — 6.9; 9.0; JSC - Forte Bank — 5.5; 7.2; JSC - HOUSE CONSTRUCTION SAVINGS BANK — 5.1; 6.7; JSC - BANK CENTER CREDIT — 4.4; 5.8; JSC - FIRST HEARTLAND JÝSAN BANK — 3.9; 5.1; JSC - EURASIAN BANK — 3.1; 4.0; JSC - ATF BANK — 2.7; 3.5; JSC - BANK RBK — 2.5; 3.2; JSC - CITIBANK — 2.2; 2.9; JSC; USA - ALFA-BANK — 1.8; 2.3; subsidiary; Russia - ALTYN BANK — 1.5; 1.9; subsidiary; China - NURBANK — 1.0; 1.3; JSC - HOME CREDIT AND FINANCE BANK — 1.0; 1.3; subsidiary; Czech Republic - JSC BANK VTB (KAZAKHSTAN) — 0.8; 1.1; subsidiary; Russia - BANK OF CHINA — 0.8; 1.1; subsidiary; China - BANK FREEDOM FINANCE** — 0.5; 0.7; subsidiary; Russia - INDUSTRIAL AND COMMERCIAL BANK OF CHINA — 0.4; 0.6; subsidiary; China - AB "KAZAKHSTAN-ZIRAAT INTERNATIONAL BANK — 0.3; 0.4; subsidiary; Turkey - SHINHAN BANK KAZAKHSTAN — 0.2; 0.3; subsidiary; Korea - AL-HILAL ISLAMIC BANK — 0.1; 0.2; subsidiary; UAE - CAPITAL BANK KAZAKHSTAN — 0.1; 0.1; JSC - ZAMAN-BANK — 0.1; 0.1; JSC - NATIONAL BANK OF PAKISTAN — 0.0; 0.0; subsidiary; Pakistan - Notes: - * 14 banks participated in AQR (in grey). - ** Previously Bank Kassa Nova. - TENGRI BANK — subsidiary; India; License Revoking on September 17, 2020. - ASIA CREDIT BANK — JSC; License Revoking on February 11, 2021. ### International standards and comparative regulatory approaches — Recovery planning - Standards and references provided during the mission include: - BIS - Basel Core Principles for Effective Bank Supervision (BCP). - FSB - Key Attributes of Effective Resolution Regimes and the related Key Attributes Assessment Methodology (updated 2014). - European Union - Bank Recovery and Resolution Directive (“BRRD”) (EU) 2016/1075 23 March 2016 supplementing Directive 2014/59/EU; and EBA Guidelines and Regulatory Technical Standards. - Georgia - Decree of the Governor of the National Bank of Georgia on the Rule on Developing and Assessment of Recovery Plan of a Commercial Bank. - Russia - Regulation “On the requirements for the content, procedure and timing of submission by credit institutions to the Bank of Russia of plans for restoring financial stability, amendments to plans for restoring financial stability, and the procedure for their assessment by the Bank of Russia.” - Ukraine - Regulation on Recovery Plans of the Banks of Ukraine and Banking Groups (RESOLUTION 18 July 2019; No. 95). - United Kingdom – Bank of England Supervisory Statement/Policy Statement on Recovery Planning. - USA – Office of the Comptroller of the Currency; CC Guidelines on Recovery Plans; Federal Reserve; SR 14-8 on Recovery Planning. ### Information to be included in a recovery plan (BRRD example) - Required elements include: 1. A summary of the key elements of the plan and a summary of overall recovery capacity; 2. A summary of the material changes to the institution since the most recently filed recovery plan; 3. A communication and disclosure plan outlining how the firm intends to manage any potentially negative market reactions; 4. A range of capital and liquidity actions required to maintain or restore the viability and financial position of the institution; 5. An estimation of the timeframe for executing each material aspect of the plan; 6. A detailed description of any material impediment to the effective and timely execution of the plan, including consideration of impact on the rest of the group, customers and counterparties; 7. Identification of critical functions; 8. A detailed description of the processes for determining the value and marketability of the core business lines, operations and assets of the institution; 9. A detailed description of how recovery planning is integrated into the corporate governance structure of the institution and the policies and procedures governing approval of the recovery plan and identification of responsible persons; 10. Arrangements and measures to conserve or restore the institution’s own funds; 11. Arrangements and measures to ensure adequate access to contingency funding sources, including potential liquidity sources, an assessment of available collateral and an assessment of the possibility to transfer liquidity across group entities and business lines; 12. Arrangements and measures to reduce risk and leverage; 13. Arrangements and measures to restructure liabilities; 14. Arrangements and measures to restructure business lines; 15. Arrangements and measures necessary to maintain continuous access to financial markets infrastructures; 16. Arrangements and measures necessary to maintain the continuous functioning of the institution’s operational processes, including infrastructure and IT services; 17. Preparatory arrangements to facilitate the sale of assets or business lines in a timeframe appropriate for the restoration of financial soundness; 18. Other management actions or strategies to restore financial soundness and the anticipated financial effect of those actions or strategies; 19. Preparatory measures to facilitate the implementation of the recovery plan, including those necessary to enable the timely recapitalization of the institution; 20. A framework of indicators which identifies the points at which appropriate actions referred to in the plan may be taken. ### Supervisory issues for assessing recovery plans — completeness and credibility checklist (selected) - Completeness questions include: - Does the plan provide required content as per rules/regulations (e.g., Annex A; BRRD (2014))? - Is the plan’s format and structure usable, especially during stress? - Does the plan identify required elements: critical functions/critical shared services, material legal entities, core business lines, inter-connectedness, mapping, core MIS? - Does the plan demonstrate clear and effective governance for approving the Plan, including required review and approval by senior management and supervisory board? - Has the plan been subject to internal audit or external third-party review? - Does the plan provide required number and type of stress scenarios and triggers? - Does the plan include an impact analysis that assesses recovery capacity? - Credibility questions include: - Is the scope and coverage of the Plan reasonable and appropriate given the bank’s operations? - Are scenarios firm-specific, adequately severe, and include idiosyncratic, system-wide, combination, fast and slow scenarios? - Are triggers appropriately selected and calibrated; do they include leading indicators and are they set early enough to restore viability prior to breaching regulatory minima? - Do triggers reflect a continuum of stress and relate to escalation procedures and governance for activating/executing the Plan? - Do plans provide a wide range of concrete and credible recovery options, including extraordinary options (e.g., divestiture), and do options generate adequate ‘recovery capacity’ and are implementable with reasonable timelines? - Are intra-group and external dependencies appropriately considered and mitigated? - Are assumptions and valuations acceptable and realistic? - Is governance over Plan execution adequate and effective; is the plan reviewed at least annually and is board engagement effective? - Is MIS and reporting timely and accurate to support recovery plan execution and reporting to board, senior management, domestic and foreign regulators? - Is there an adequate communication and disclosure plan with legal constraints identified, roles and channels described, and timelines and actions established? - Have preparatory actions been taken to allow prompt execution of recovery options; has the Plan been tested via playbooks, simulations or fire drills? ### International standards and comparative approaches — IRRBB - Relevant standards and references provided during the mission include: - BIS - BCBS Principles for the Management and Supervision of Interest Rate Risk (July 2004). - Revised by BCBS Standards - Interest rate risk in the banking book, April 2016. - Europe - EBA Guidelines on the management of the interest rate risk arising from non-trading book activities, EBA/GL/2018/02, (18 July 2018). - EBA Guidelines on the revised common procedures and methodologies for SREP and supervisory stress testing, EBA/GL/2018/03, section 6.5. - Other national examples: Hong Kong Monetary Authority Policy Manual (December 2018); Magyar Nemzeti Bank (December 2019); OSFI Canada (January 2020); Bank of Thailand (July 2018); Bangko Sentral ng Pilipinas (July 2019); Bank of Russia Methodology Recommendation No 8-MP (July 2020); Reserve Bank of India Draft Guidelines (2017). *Italic: IMF | Kazakhstan Risk-Based Supervision — Chapter content as provided in the source PDF.* ### APPENDIX VII. BIS and EBA Principles and Assumptions on IRRBB ### APPENDIX VII. BIS and EBA Principles and Assumptions on IRRBB ### BIS Principle 8, Paragraph 70 — ∆EVE - a) Banks should exclude their own equity from the computation of the exposure level. - b) Banks should include all cash f lows f rom all interest rate-sensitive assets, liabilities and off-balance sheet items in the banking book in the computation of their exposure. Banks should disclose whether they have excluded or included commercial margins and other spread components in their cash flows. - c) Cash flows should be discounted using either a risk-free rate or a risk-f ree rate including commercial margins and other spread components (only if the bank has included commercial margins and other spread components in its cash flows). Banks should disclose whether they have discounted their cash flows using a risk-free rate or a risk-free rate including commercial margins and other spread components. - d) ∆EVE should be computed with the assumption of a run-off balance sheet, where existing banking book positions amortize and are not replaced by any new business. ### BIS Principle 8, Paragraph 70 — ∆NII - a) Banks should include expected cash flows (including commercial margins and other spread components) arising f rom all interest rate-sensitive assets, liabilities and off-b alan ce sh eet items in the banking book. - b) ∆NII should be computed assuming a constant balance sheet, where maturing or repricing cash flows are replaced by new cash flows with identical features with regard to the amount, repricing period and spread components. - c) ∆NII should be disclosed as the difference in future interest income over a rolling 12-month period. ### EBA – common assumptions for calculating outlier test (EBA/GL/2018/02), paragraph 115 - a) All positions f rom interest rate sensitive instruments should be taken into account. - b) Small trading book business should be included unless its interest rate risk is captured in another risk measure. - c) All CET1 instruments and other perpetual own funds without any call dates should be excluded f rom the calculation of the standard EVE outlier test. - d) Institutions should reflect automatic and behavioral options in the calculation. Institutions should adjust key behavioral modelling assumptions to the features of different interest rate scenarios. - e) Pension obligations and pension plan assets should be included unless their interest rate risk is captured in another risk measure. - f) The cash flows from interest rate sensitive instruments should include any repayment of principal, any repricing of principal and any interest payments. - g) Institutions with an NPE ratio15 of 2 percent or more should include NPEs as general interest rate sensitive instruments whose modelling should reflect expected cash flows and their timing. NPEs should be included net of provisions. - h) Institutions should consider instrument-specif ic interest rate f loors. - i) The treatment of commercial margins and other spread components in interest payments in terms of their exclusion from or inclusion in the cash flows should be in accordance with the institutions’ internal management and measurement approach for interest rate risk in the non-trading book. Institutions should notify the competent authority whether they exclude commercial margins and other spread components from the calculation or not. If commercial margins and other spread components are excluded, institutions should use a transparent methodology for identifying the risk-f ree rate at inception of each instrument; (ii) use a methodology that is applied consistently across business units; and (iii) ensure that the exclusion of commercial margins and other spread components from the cash flows is consistent with how the institution manages and hedges IRRBB. - j) The change in EVE should be computed with the assumption of a run-off balance sheet. - k) A maturity-dependent post-shock interest rate floor should be applied for each currency starting with -100 basis points for immediate maturities. This floor should increase by 5 basis points per year, eventually reaching 0 percent for maturities of 20 years and more. If observed rates are lower than the current lower reference rate of -100 basis points, institutions should apply the lower observed rate16. - l) Institutions should calculate the change in EVE at least for each currency where the assets or liabilities denominated in that currency amount to 5 percent or more of the total non-trading book f inancial assets (excluding tangible assets) or liabilities, or less than 5 percent if the sum of assets or liabilities included in the calculation is lower than 90 percent of total non-trading book financial assets (excluding tangible assets) or liabilities (material positions). - m) When calculating the aggregate EVE change for each interest rate shock scenario, institutions should add together any negative and positive changes to EVE occurring in each currency. Positive changes should be weighted by a factor of 50 percent. - n) An appropriate general ‘risk-free’ yield curve per currency should be applied (e.g. swap rate curves). That curve should not include instrument-specific or entity-specif ic credit spreads or liquidity spreads. - o) The assumed behavioral repricing date for retail and non-financial wholesale deposits without any specific repricing dates (non-maturity deposits) should be constrained to a maximum average of 5 years. The 5-year cap applies individually for each currency. Non-maturity deposits f rom financial institutions should not be subject to behavioral modelling. *IMF | Kazakhstan Ris k-Based Supervision — APPENDIX VII. BIS and EBA Principles and Assumptions on IRRBB* --- ### APPENDIX VIII. SUPERVISORY ISSUES FOR ASSESSING IRRBB ### Overview The following items provide a guide to issues that the Agency should consider when assessing the IRRBB being run by a bank, taking into account the size, nature and complexity of the bank. The list is not exhaustive. ### A. Scope and Basic Specifications - The bank has a clear definition of its IRRBB and its components - gap risk/repricing risk, basis risk, option risk; - There is clear distinction between interest rate risk in the trading book and banking book, and a clear policy for the classif ication of instruments which are interest rate sensitive; - All interest rate sensitive banking book positions are subject to IRRBB measurement, including off-balance sheet items. ### B. IRRBB Strategy and Risk appetite - There is a Board-approved IRRBB strategy that is consistent with and f ully integrated into the bank’s overall strategy; - The governing body understands the implications of the bank ́s IRRBB strategies, limits and exposure, including the potential linkage with and on market, liquidity, credit and other risks; - The Board-approved Risk Appetite Statement includes reference to IRRBB; - The bank ́s risk appetite for IRRBB is expressed in terms of acceptable impact of the f luctuating interest rate on both earnings and economic value and is ref lected in limits (e.g. GAP limits, BPV limits, depending on measurement approach the bank chooses); - The bank’s hedging policy for IRRBB is clearly defined. ### C. Risk Management Framework and Responsibilities - Managing IRRBB is an integral part of bank ́s risk management activity, with all duties and responsibilities clearly defined; - There are no conf licts of duty (identif ication, measurement, monitoring and control functions are independent from the risk-taking f unctions on IRRBB); - All staff involved in the management of have sufficient expertise and knowledge; - Escalation procedures are clearly defined; - Appropriate actions are taken to rectify breaches in agreed IRRBB limits etc ### D. Risk policies, Processes, and Controls - Policies address all aspects of IRRBB (governance, measurement approaches, reporting and escalation procedures); - Limit approval process is documented; - Appropriate escalation process is in place (for any exceeded limits); - IRRBB framework is regularly updated and reviewed (self-assessment); - Banks have their IRRBB framework regularly reviewed by internal auditor (or hired external expert); - IRRBB is integral part of the ICAAP process. ### E. IT Systems and Data Quality - Data should be available f rom the institution ́s IT systems with adequate accuracy and in timely manner; - IT system should have the capability of recording of all transactions fully and clearly and deliver all calculations in timely manner; - IT system should deliver transparent and timely results of any interest rate shock/scenarios (f lexibility of shock modelling, reverse modelling); - Data applied (volumes, interest rates, maturity, repricing inf ormation, options etc.) shall be specified properly and in line with nature, size and complexity of the bank; - Yield curves used - discount rates and reinvestment rates must be clearly defined and specified. ### F. Internal Reporting - There is an appropriate and regular reporting to governing body – at relevant level of aggregation, with suf f icient level of detail and periodicity; - Contains comparison of actual position to limits, proposal of actions to be taken if relevant; - Key modelling assumptions are shortly described. ### G. Model Governance - Models are properly documented (including developmental evidence); - There is an ongoing model monitoring in place, including back-testing of key internal parameters (prepayments, stability of deposits, early redemption risk); - Banks may use models developed by third parties if they fully understand the model and are able to customize it to match bank ́s specific characteristics. ### H. Methods for Measuring IRRBB - Banks have at least one profit indicator measure (usually NII or NI) and one economic value measure (EVE); - Models should be able to measure the interest rate risks ́ short-term impact on income (via NII or NI) and long-term impact on equity value (via EVE); - Preferably all cash flows are included, principal and interest; - Procedure for mapping cash flows into the predefined set of time buckets is defined, - Calculation approach (for NI and EVE) is clearly specified and documented (GAP discounting, discounting on transactional basis, use of modified duration, BPV calculation approach); - No unexplained expert-judgement adjustments are allowed. ### I. Interest Rate Shock Scenarios, Interest Rate Stress Scenarios (for ICAAP) - Bank shall regularly perform calculation for interest rate shocks scenarios prescribed by the Agency (for both EVE and NI), for all material currencies; - Banks should quantify the impact of different interest rate scenarios on economic value as a portion of the bank ́s own funds (or EVE); - Banks should quantify the impact of different interest rate scenarios on earnings (net interest income (NII)); - Banks shall perform additional internal interest rate scenarios built f or the internal capital adequacy assessment process (ICAAP) and/or historical and hypothetical interest rate scenarios (all commensurate with its nature, size and complexity). ### J. Measurement Assumptions - Banks should model at least prepayments, duration of non-maturing deposits and term deposits with early redemption option; - No unexplained expert-judgement adjustments are allowed; - Underlying assumptions should be valid, properly documented, prudent, back-tested and suf f iciently consistent over time (model governance); - Assumptions must be subject to regular update and revisions and to approval by management body; - Banks should be aware of automatic options and include them into the calculation; - Banks should have clear approach to NPL assessment in respect to IRRBB; - Banks should have clear approach to mapping pipeline transactions and commitments. *IMF | Kazakhstan Ris k-Based Supervision — APPENDIX VIII. SUPERVISORY ISSUES FOR ASSESSING IRRBB* --- _Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1kazea2022006.pdf_