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### Executive summary — macrofinancial context and outlook
- Azerbaijan’s economy recovered from downturns in 2015 and 2020; foreign exchange reserves doubled over the last decade.
- Medium-term growth projection: around 2½ percent.
- Inflation: projected to remain within official target range of 4±2 percent in the medium term.
- Oil and gas sector: 50 percent of GDP.
- International reserves at the CBA: 8.5 months of projected 2024 imports.
- Combined CBA and SOFAZ reserves: $66 billion (about 53 months of projected 2024 imports).
- Key risks: regional conflicts; uneven global growth; sharp decline in oil and gas prices; procyclical fiscal policies; weak SOEs; extreme climate events.

### Financial sector vulnerabilities and structural risks
- Main structural risks in the banking sector:
  - Substantial reliance on wholesale corporate deposits related to oil revenues.
  - Continued high levels of financial dollarization.
  - High credit concentration.
  - Rapid growth in unsecured consumer lending as a source of cyclical risk.
- Financial dollarization (as of July 2024):
  - Overall deposits dollarization: 39 percent.
  - Business loans dollarization: 31 percent.
  - Unhedged foreign currency business loans: 36 percent of foreign currency business loans.
- Funding and liquidity structure (as of July 2024):
  - 88 percent of banks’ total nonfinancial customer deposits have a maturity of less than one year.
  - About 60 percent of these short-maturity deposits are volatile wholesale deposits from large businesses.
  - Average loan maturity: 2.2 years.
  - Banks hold liquid asset buffer equal to ⅓ of total assets.
  - Tax incentive: 3 years of tax free interest on deposits with maturities of 18 months or longer.

### Banking system soundness — aggregate indicators (selected)
- Banks’ capital adequacy ratio: 17.5 percent (as of July 2024 / Table 3).
- LCR requirement: being phased in starting December 2023; currently at 128 percent (aggregate reported).
  - Transitional minimums for June 2024: 80 percent for D-SIBs and 70 percent for non-D-SIBs; increases of 10 percentage points every six months until 100 percent.
  - For June 2024, 18 out of 22 banks reported levels above 100 percent in July 2024.
- Aggregate NPL ratio: declined from a peak of 21 percent at end-2016 to 2.7 percent in July 2024.
- Total provisions exceed 100 percent of NPLs across all sectors.
- As of July 2024, household debt: 9 percent of GDP; household credit comprises more than 50 percent of private sector credit.
- NBFI share: nonbank financial intermediation accounts for ⅓ of financial system assets.
- Five D-SIBs hold ¾ of total banking sector assets.
- Total financial system assets: 61 percent of GDP in 2023.

### Solvency stress test — design and key results
- Coverage: all 23 commercial banks; cutoff date End-March 2024; horizon: three years.
- Adverse scenario assumptions: abrupt global recession; oil and gas prices plunge by about 50 percent below baseline by 2025; manat devalued by 30 percent against the US dollar; average interbank rate increases by 480 basis points relative to initial level at its peak.
- Adverse scenario results:
  - Systemwide total regulatory capital ratio could decline by 4.5 percentage points to 13.7 percent by Year-2.
  - NPL ratio could rise from 2.7 to 11.5 percent.
  - Systemwide leverage ratio decreases from 10.6 to 8.1 percent by Year-2.
  - Eight banks out of 23 (35 percent of total banking sector assets) could breach hurdle rates; two of these are D-SIBs.
  - Collective capital shortfalls: AZN657 million (0.5 percent of GDP).
- Baseline scenario: systemwide capital ratios remain strong; one small bank breached hurdle rates (comprises less than 1 percent of total banking assets).
- Sensitivity analyses:
  - Worst-case where all restructured loans default: systemwide total regulatory capital ratio declines by 1.4 percentage points.
  - Simultaneous default of each bank's five largest credit exposures: could cause 10 banks to breach hurdle rates; capital ratios of 12 banks would drop by more than 5 percentage points.

### Liquidity analysis and stress tests
- Liquidity stress tests: separate analyses for manat and foreign currency; scenarios consider required reserves (RR) not released, half released, fully released.
- Manat liquidity (RR not released): eight banks (35 percent of total banking assets) faced shortfalls; manat shortfall amount AZN674 million (0.5 percent of GDP).
  - Releasing half of RR reduces banks with shortfalls to four.
  - If RR fully released, two medium-sized banks would have shortfalls totaling AZN74 million (0.06 percent of GDP).
- Foreign currency liquidity (RR not released): three medium-sized banks (5 percent of total banking assets) had insufficient CBC; combined shortfall AZN69 million (0.06 percent of GDP).
  - If RR fully released, all banks would have surpluses over a three-month horizon.
- Reverse liquidity tests (assuming RR fully released):
  - Banking sector could withstand up to 48 percent cumulative deposit outflows in manat and 64 percent in foreign currency over 12 months.
- Deposit concentration sensitivity:
  - Simultaneous sudden withdrawals of each bank’s five largest deposits led to liquidity shortfalls in 10 banks (39 percent of total banking assets); combined liquidity shortfalls AZN2.1 billion (1.7 percent of GDP).
  - For these banks, the five largest deposits constituted between 22 and 87 percent of their total customer deposits.

### Credit concentration, consumer lending, and corporate sector vulnerabilities
- Five largest bank credit exposures: 63 percent of aggregate Tier 1 capital (2024).
  - Individual banks’ exposures ranged from 13 percent to more than twice their Tier 1 capital.
  - Some banks breach large exposure and related-party limits, though cases declined over five years.
- Consumer credit:
  - Average annual growth: 21 percent over 2018–2023.
  - NPL ratio for consumer loans: peak 28 percent in 2017; declined to 2.8 percent in 2023; 3.1 percent in July 2024.
  - Borrower profile: half of consumer loans to public sector employees; 30 percent of total consumer loans to borrowers with debt-to-income ratio exceeding 60 percent.
  - Risk-weighting and borrower-based measures: RWA: 100% for DTI≤45%; 200% for 45%<DTI≤60%; 230% for 60%<DTI≤70%. Cap on DTI at 70 percent. LTV for residential property loans (primary residence) 85%; other mortgages LTV 70%.
  - Recommendation: implement sectoral buffers to complement borrower-based measures.
- Corporate sector (selected):
  - Aggregate debt-to-equity in non-oil and gas sector: 85.6 percent in 2020; 96.8 percent in 2022; tapered slightly in 2023.
  - Foreign currency debt: 42 percent of total corporate debt in 2023.
  - About 60 percent of firms’ FX risks are hedged on average as of March 2024.
  - Severe market shock (30 percent manat depreciation plus 20 percent decline in earnings and 30 percent increase in borrowing costs) could reduce firms’ median ICR below 1 and potentially increase banking sector gross NPL ratio to 18 percent.

### Contagion and interconnectedness
- Distress of a D-SIB could reduce regulatory capital of affected FIs by 10.4 percent on average and distress 11 institutions.
- Insurance companies: almost half had deposits in banks exceeding the amount of their regulatory capital.
- Interlinkages: NBCI exposures to D-SIBs amounted to a median of 40 percent and up to five times the capital of individual NBCIs, while representing only 0.8 to 7.2 percent of the D-SIBs’ respective capital.

### Progress since the 2015 FSAP and institutional developments
- Transfer of financial sector regulation back to the CBA in 2019; 2022 LCBA amendments gave CBA financial stability mandate and macroprudential powers.
- Regulatory reforms and actions:
  - Implemented BCBS international standards adjusted for domestic settings.
  - Strengthened prudential requirements, corporate governance, and risk management standards.
  - Implementing Basel III prudential standards in line with the FSDS 2024–26.
  - Developed a new Risk-based Supervision (RBS) model with first pilot starting in early 2025.
  - Institutional framework and instruments for macroprudential policy considerably enhanced.
  - Lender of last resort (LoLR) function strengthened; legal, policy, and procedural framework for bank resolution overhauled.
- Remaining long-standing issues:
  - Implementing a consolidated supervision framework.
  - Establishing an interagency body for crisis preparedness and management.
  - Safeguarding CBA’s independence, accountability and governance.
  - Fortifying CBA’s legal resolution powers and enhancing resolution tools.

### Financial safety net, crisis preparedness and resolution
- Resolution regime gaps:
  - Scope does not yet cover bank holding companies and significant non-regulated operational entities within groups.
  - Specific resolution powers are subject to court approval.
  - Resolution planning framework not finalized.
- Emergency Liquidity Assistance (ELA):
  - Legal provisions exist for lender of last resort/ELA but operational enhancements needed: eligibility criteria, collateralization, collateral valuation, government indemnity.
  - Recommendation: establish comprehensive ELA framework with eligibility criteria; collateralization and valuation strategy; governance, reporting, termination provisions; modalities for national coordination and cross-border cooperation; contingency planning and exit strategies.
- Deposit Insurance Fund (ADIF) reforms recommended:
  - Remove requirement for coordination with the President (IADI CP3 alignment).
  - Empower ADIF to conduct on-site examinations and adopt a paybox-plus mandate.
  - Enable ADIF to increase industry contributions and permit borrowing from CBA under government indemnity; empower MOF to provide clear back-up emergency funding.
- Recommended resolution law amendments (align with FSB Key Attributes):
  - Extend scope to bank holding companies and significant non-regulated operational entities.
  - Clarify resolution objectives and triggers; empower CBA to apply resolution powers without court approval; reflect NCWO principle; protect insured depositors; make temporary public ownership exceptional.

### Macroprudential framework and supervisory recommendations
- Toolkit developments and calibration:
  - Borrower-based measures established; CCyB and additional capital requirement for D-SIBs implemented.
  - Limits on large exposures; limits on open FX positions; higher reserve requirements for FX deposits; LCR implemented in 2023.
  - CCyB: 0.5 percent imposed starting March 1, 2025.
  - Risk weight on unhedged FX business loans increased from 120 to 200 percent since 2022.
- Priority actions recommended (selected, with authority and timing where provided):
  - Systemic risk monitoring: enhance forward-looking risk assessment, top-down stress testing, and early warning indicators. Authority: CBA. Timing: ST.
  - Macroprudential strategy: develop and publish a macroprudential policy strategy. Authority: CBA. Timing: I.
  - Capital buffer: raise capital buffer requirements consistent with Basel III, including capital conservation buffer, countercyclical capital buffer, differentiated higher loss absorbency buffer for D-SIBs. Authority: CBA. Timing: ST.
  - Systemic risk buffer: adopt and activate capital buffers for exposures (consumer lending, FX, concentration risks). Authority: CBA. Timing: ST.
  - Liquidity measures: finalize NSFR implementation; regularly publish aggregate LCR and NSFR data once implementation completed. Authority: CBA. Timing: ST.
  - De-dollarization: widen wedge between required reserves on manat and FX deposits. Authority: CBA. Timing: ST.
  - Central bank governance and powers: amend LCBA to strengthen CBA independence, accountability, governance; clarify corrective and sanctioning powers; enhance early intervention framework. Authorities: CBA / Parliament. Timing: MT/ST.
  - Consolidated supervision: expedite legal amendments and prudential requirements for full adoption. Authority: CBA. Timing: ST.
  - Recovery planning: integrate bank recovery plans into Supervisory Review Process and early intervention; require recovery plans at bank holding company/conglomerate level. Authority: CBA. Timing: ST.
  - Resolution planning: prepare resolution plans for D-SIBs and banks providing critical economic functions. Authority: CBA. Timing: I.
  - Deposit insurance and funding: amend Law on Deposit Insurance to empower ADIF, enable emergency funding arrangements. Authorities: ADIF, CBA, MOF, Parliament. Timing: ST.
  - AML/CFT: strengthen risk-based supervision and address MONEYVAL deficiencies. Authority: CBA. Timing: ST.
  - Money market development: promote interbank repo, unsecured market, and government securities development. Authorities: CBA, MOF. Timing: ST.

### IBA rehabilitation and legacy actions (Box 1 summary)
- Measures totaling 37 percent of GDP included:
  - Transfer of about AZN15 billion of distressed assets at face value to Aqrarkredit (pursuant to the July 15, 2015 Presidential Decree), financed through sale of Aqrarkredit’s government guaranteed bonds to CBA.
  - Restructuring of USD3.3 billion of foreign currency liabilities, including exchanging USD1 billion in deposits of SOFAZ with bonds issued by IBA.
  - Capital injection of AZN600 million by the government.
- Aqrarkredit:
  - Issued AZN10 billion in government-guaranteed bonds subscribed by the CBA to acquire and manage distressed assets.
  - In 2017, repurchased AZN518 million of its bonds from the CBA and has been timely in repayments.
  - Guarantee on these bonds is officially recognized in general government debt.
  - Despite resolving only about one-third of the assets, Aqrarkredit remained profitable.
- IBA performance: share of total banking sector assets declined from 38 percent in 2015 to 26 percent as of July 2024; financial soundness indicators improved since the 2015 crisis.

### Key macroeconomic projections (selected from Table 2)
- GDP at constant prices (annual percent change): 4.1 (2024); 3.5 (2025); 2.5 (2026); 2.4 (2027); 2.4 (2028); 2.5 (2029); 2.5 (2030).
- Consumer price index (period average): 2.2 (2024); 5.7 (2025); 4.5 (2026); 4.0 (2027–2030).
- Gross official international reserves (millions of U.S. dollars): 10,960 (2024); 10,760 (2025); 10,560 (2026).
- Consolidated government: total revenue and grants (percent of GDP): 37.1 (2024); 34.4 (2025); 32.8 (2026).
- Overall fiscal balance (percent of GDP): 3.2 (2024); -1.3 (2025); -1.7 (2026).
- Current account (percent of GDP): 7.8 (2024–2025); 4.1 (2026); 0.5 (2027); -2.4 (2028).
- Oil Fund Assets (millions of U.S. dollars): 60,031 (2024); 60,911 (2025); 61,797 (2026).
- Assumed oil price (USD per barrel): 81.27 (2024); 78.67 (2025); 73.57 (2026).
- Exchange rate (manat/dollar, end of period): 1.7 (2024).

*Source: EXECUTIVE SUMMARY and selected sections, FSAP for the Republic of Azerbaijan (contents as provided).*

### EXECUTIVE SUMMARY __________________________________________________________________________ 7

### EXECUTIVE SUMMARY

### Background and recent macrofinancial context
- Azerbaijan’s economy has recovered from two downturns driven by a global oil price collapse in 2015 and COVID-19 in 2020.
- Over the last decade, foreign exchange reserves have doubled.
- The transfer of financial sector regulation back to the central bank in 2019 reinforced the regulatory reform agenda.
- New financial sector regulations and macroprudential policies were introduced to enhance prudential requirements, corporate governance, and risk management standards.
- Banks have increased capital adequacy and significantly reduced net open position in foreign exchange after lessons from the 2015-16 economic crisis.

### Financial sector vulnerabilities and structural risks
- Main structural risks in the banking sector:
  - Substantial reliance on wholesale corporate deposits related to oil revenues, which may be volatile at times.
  - Continued high levels of financial dollarization.
  - High credit concentration.
  - Rapid growth in unsecured consumer lending as a source of cyclical risk.

### Solvency and stress test findings
- The banking system appears resilient to severe adverse shocks but some pockets of weakness exist.
- In a hypothetical, extreme yet plausible adverse scenario (severe global and domestic recessions coupled with a manat devaluation):
  - The systemwide total regulatory capital ratio could decline by 4.5 percentage points.
  - Credit risk is the main driver of losses.
  - Eight banks out of 23, which collectively account for 35 percent of total banking sector assets, could breach the hurdle rates.
  - Their capital shortfalls are contained at 0.5 percent of GDP.

### Liquidity analysis and stress tests
- Banking sector liquidity buffers appear sufficient to withstand a severe adverse shock overall, though certain banks would need support.
- Reverse liquidity tests:
  - The banking sector could withstand manat deposit withdrawals comparable to the largest peak-to-trough outflows observed during the currency devaluations in 2015.
  - For foreign currency, the sector could endure more than double the outflows seen in 2016.
- Bottlenecks and vulnerabilities:
  - High proportion of corporate deposits in some banks increases vulnerability to wholesale funding shocks, which could be aggravated by significant deposit concentration.

### Progress since the 2015 FSAP
- Commendable progress achieved on banking oversight, macroprudential policies, and the financial safety net.
- CBA actions and reforms:
  - Implemented BCBS international standards adjusted for domestic settings.
  - Strengthened prudential requirements, corporate governance, and risk management standards.
  - Implementing the Basel III prudential standards in accordance with the Financial Sector Development Strategy (FSDS) 2024-26.
  - Developed a new Risk-based Supervision (RBS) model with the first pilot starting in early 2025.
  - Institutional framework and instruments for macroprudential policy have been considerably enhanced.
  - Lender of last resort (LoLR) function was strengthened.
  - Legal, policy, and procedural framework for bank resolution were overhauled.

### Remaining long-standing issues
- Key issues repeatedly discussed in past FSAPs remain unaddressed:
  - Implementing a consolidated supervision framework.
  - Establishing an interagency body for crisis preparedness and management.
  - Safeguarding CBA’s independence, accountability and governance.
  - Fortifying CBA’s legal resolution powers and enhancing resolution tools.

### Policy priorities and recommended measures
- Regulatory oversight
  - Strengthen the CBA’s legal framework and enhance governance, independence, accountability, resourcing, and supervisory approach.
  - Improve oversight of banks’ corporate governance, risk management, transactions with related parties, and ownership structures.
  - Establish a comprehensive supervision cycle and early warning indicators.
  - Improve disclosure and transparency requirements for banks.
- Macroprudential measures
  - Address data gaps and establish an early warning system for systemic risk monitoring.
  - Expand the macroprudential toolkit.
  - Publish a macroprudential strategy to clarify financial stability objectives and guide policy tool activation.
- Financial safety net, crisis preparedness and resolution
  - Enhance institutional and interagency arrangements, early intervention triggers, resolution planning, deposit insurance, and ELA framework.
  - Grant the CBA legal authority to perform resolvability assessments and develop comprehensive policies.
  - Extend the resolution framework to include bank holding companies and non-regulated operational entities within groups that are significant to group business.

### FSAP Main Recommendations (selected, with authorities and timelines)
- Systemic risk monitoring: Enhance the CBA’s forward-looking risk assessment framework, including top-down stress testing and early warning indicators. Integrate results into prudential policy formulation and supervisory review of banks’ ICAAP and ILAAP. Authority: CBA. Timing: ST.
- Macroprudential strategy: Develop and publish a macroprudential policy strategy. Authority: CBA. Timing: I.
- Capital buffer: Raise capital buffer requirements consistent with Basel III, including capital conservation buffer, countercyclical capital buffer, and differentiated high loss absorbency buffer for D-SIBs. Authority: CBA. Timing: ST.
- Systemic risk buffer: Adopt and activate capital buffers for exposures (e.g., consumer lending, FX, concentration risks). Authority: CBA. Timing: ST.
- Liquidity measures: Finalize Basel III liquidity requirements including the NSFR; regularly publish aggregate LCR and NSFR data once implementation completed. Authority: CBA. Timing: ST.
- De-dollarization measures: Widen the wedge between required reserves on manat and FX deposits to strengthen FX liquidity buffers and limit intermediation of FX deposits. Authority: CBA. Timing: ST.
- Central bank powers, independence, accountability and governance: Amend the Law on Central Bank of Azerbaijan in line with international best practices (BCP CP1 and CP2) to make explicit the primary objective of banking supervision and reinforce institutional framework. Authority: CBA / Parliament. Timing: MT.
- Corrective and sanctioning powers: Enhance clarity of corrective actions and sanctions powers to allow early action. Authority: CBA. Timing: ST.
- Early intervention: Develop a rigorous internal framework and guidelines for consistent and early supervisory intervention and clear escalation of corrective actions. Authority: CBA. Timing: ST.
- Transactions with related parties: Enhance enforcement measures (including sanctioning and other prudential requirements) for material shortcomings on related-party transactions. Authority: CBA. Timing: ST.
- Disclosure and transparency: Require banks to disclose group affiliation, ownership structure (and beneficial owners), and structured information on related-party exposures. Authority: CBA. Timing: ST.
- Consolidated supervision: Expedite implementation of legal amendments and prudential requirements for full adoption of a consolidated supervision framework. Authority: CBA. Timing: ST.
- Integration of risk assessment: Require integration of ICAAP and ILAAP into banks’ risk management and supervisory review. Authority: CBA. Timing: ST.
- Recovery planning: Integrate bank recovery plans into CBA’s Supervisory Review Process and early intervention framework; enhance Methodological Guidance on Recovery Plans. Authority: CBA. Timing: ST.
- Insolvency, resolution planning, and bank resolution: Amend the Law on Banks in line with FSB Key Attributes to extend scope of resolution framework, clarify resolution objectives and triggers, empower CBA to apply resolution powers without court approval, reflect NCWO principle, protect insured depositors in resolution, and make temporary public ownership exceptional. Authorities: CBA, MOF, Parliament. Timing: ST.
- Resolution plans: Prepare resolution plans for D-SIBs and banks that provide critical economic functions. Authority: CBA. Timing: I.
- Emergency Liquidity Assistance (ELA): Establish a comprehensive ELA framework including eligibility criteria and collateralization requirements. Authority: CBA. Timing: I.
- Deposit Insurance, resolution funding and temporary public funding: Amend the Law on Deposit Insurance to remove requirement for coordination with the President (IADI CP3 alignment); empower ADIF to conduct on-site examinations and paybox-plus mandate; enable ADIF to increase industry contributions; permit ADIF borrowing from CBA under government indemnity; empower MOF to provide ADIF clear back-up emergency funding. Authorities: ADIF, CBA, MOF, Parliament. Timing: ST.
- AML/CFT: Strengthen the AML/CFT risk-based supervision framework and address deficiencies identified by MONEYVAL. Authority: CBA. Timing: ST.
- Money market development: Promote interbank repo, unsecured market, and government securities to boost market capacity to withstand shocks. Authorities: CBA, MOF. Timing: ST.
- Short-term liquidity management: Adjust payment timeframes for lending and deposit facilities to support smoother operation. Authority: CBA. Timing: ST.

*Source: EXECUTIVE SUMMARY, FSAP for the Republic of Azerbaijan (contents as provided).*

### 1.      Azerbaijan’s economic growth rebounded in 2024 (Figure 1).

### 1azeea2025002-print-pdf - 1.      Azerbaijan’s economic growth rebounded in 2024 (Figure 1).

### Macro outlook and growth
- Growth picked up in 2024 after moderating in 2023, driven by non-hydrocarbon construction and services.
- Medium-term growth projection: around 2½ percent.
- Inflation: rose slightly following a recent increase in some energy and regulated prices but is projected to remain within the official target range (4±2 percent) in the medium term.
- External and fiscal context:
  - High oil prices boosted government revenues.
  - Moderate fiscal spending growth will underpin higher fiscal and current account surpluses, and international reserves.
- Reserves and hydrocarbon sector:
  - Oil and gas sector: 50 percent of GDP.
  - International reserves at the CBA account for 8.5 months of the projected 2024 imports.
  - Combined CBA and the State Oil Fund of Azerbaijan (SOFAZ) reserves reached $66 billion (about 53 months of projected 2024 imports).
- Key risks to the outlook:
  - Regional conflicts and uneven global growth.
  - Sharp decline in oil and gas prices or an intensification of regional conflicts could adversely impact the domestic economy, including banks’ asset quality and liquidity.
  - Domestic risks: procyclical fiscal policies, weak state-owned enterprises, and extreme climate events.

### Credit, debt, and real estate dynamics
- Total domestic credit growth:
  - Grew by around 24 percent (y/y) in July 2024.
  - Three-year average annual rate: 18 percent (y/y).
- Bank vs nonbank credit:
  - Bank credit growth has tapered and has been overtaken by nonbank credit institutions.
  - Nonbank financial intermediation (NBFI) accounts for ⅓ of financial system assets.
- Household and corporate debt:
  - Household debt: 9 percent of total GDP (noted as still low) but higher than pandemic levels.
  - Household debt comprised more than 50 percent of private sector credit.
  - More than half of consumer loans are attributable to public sector employees and pensioners.
  - Elevated household debt-to-income ratio, indicating potential buildup of imbalances.
  - Leverage in the nonfinancial corporate sector (excluding oil and gas) has risen post-pandemic.
- Real estate:
  - Growth in residential property prices resumed after falling in 2023.

### Banking sector soundness and performance
- Aggregate indicators (as of July 2024 unless noted):
  - Banks’ capital adequacy ratio: 17.5 percent (Table 3).
  - Liquidity Coverage Ratio (LCR) requirement: being phased in starting December 2023; currently at 128 percent.
    - Transitional minimum requirements for June 2024—for aggregate and foreign currency—are 80 percent for D-SIBs and 70 percent for non-D-SIBs; with increases of 10 percentage points every six months until they reach 100 percent.
    - For June 2024, 18 out of 22 banks already reported levels above 100 percent in July 2024.
  - Aggregate nonperforming loan (NPL) ratio: declined from its peak of 21 percent at end-2016 to 2.7 percent in July 2024.
- Profitability and margins:
  - Banking sector remains profitable, supported by wide interest margins.
  - Profitability is relatively higher compared with regional peers; interest margins wider than most regional peers.
- Asset quality and provisioning:
  - Asset quality improved as legacy risks subside.
  - Loan-loss provisioning remains high; specific provisions to NPLs are also high.
  - Total provisions exceed 100 percent of NPLs across all sectors.
  - NPL ratios show significant variation across individual banks; some banks, including some D-SIBs, have thin capital buffers.
- Liquidity and funding structure:
  - As of July 2024, 88 percent of banks’ total nonfinancial customer deposits have a maturity of less than one year.
  - About 60 percent of these short-maturity deposits are volatile wholesale deposits from large businesses.
  - Average loan maturity: 2.2 years.
  - Banks hold a sizeable liquid asset buffer equal to ⅓ of total assets.
  - To encourage longer deposits, a recent tax incentive grants 3 years of tax free interest on deposits with maturities of 18 months or longer.

### Financial sector landscape and intermediation
- Size and composition:
  - Total financial system assets represented 61 percent of GDP in 2023.
  - Commercial banks account for two-thirds of the financial system.
  - Five D-SIBs collectively hold ¾ of total banking sector assets.
  - Foreign-controlled banks are small; banks’ activities are domestically oriented with limited cross-border exposures.
- Nonbank institutions:
  - NBFI dominated by state-owned specialized institutions.
  - About 40 percent of total NBFI assets comprised distressed assets—mostly from International Bank of Azerbaijan (IBA)—transferred to Aqrarkredit.
  - The State Social Protection Fund holds ¼ of total NBFI assets.
  - Three state-owned development funds collectively represent 20 percent of NBFI assets.
  - Mortgage and Credit Guarantee Fund (MCGF) is profitable with strong operating performance.
  - Other private NBCIs are relatively small (1 percent of financial system assets) and exposed to FX risks; prudential regulations were tightened (including minimum capital of AZN1 million from AZN0.3 million; minimum leverage ratio of 10 percent; lending limits; and loan-loss provision).
- Cross-sector exposures and nexus:
  - Nonfinancial corporations (NFCs) and households are main net suppliers of funds to banks through deposits.
  - Nexus between government and financial institutions primarily stems from FIs’ investments in government debt securities and state ownership.
  - Vulnerability of NFCs to FX shocks—especially unhedged exposures—poses credit and liquidity risks to banks.
  - Banks have limited net claims on nonresidents; claims on foreign countries are largely nostro accounts and deposit placements; liabilities to foreign countries are mainly to Russia.
- Correspondent banking:
  - Sanctions have reduced correspondent banking relationships with Russian banks.
  - A few banks have correspondent accounts with US banks; some have accounts with banks from Austria, Türkiye, Georgia, China, and Kazakhstan.
  - Recently, a D-SIB started a correspondent banking relationship with a large US custodian bank.

### Systemic vulnerabilities and policy options
- Identified financial sector vulnerabilities:
  - Funding risks are high due to substantial share of wholesale, volatile deposits and thin domestic financial markets.
    - FSAP funding concentration analysis: 10 banks—including three D-SIBs—could face liquidity strains in a hypothetical adverse scenario where their five largest deposits were withdrawn simultaneously.
    - Suggested mitigation: CBA could impose Pillar 2 liquidity “add-on” to complement the LCR.
    - CBA standing facilities and ELA could provide cushion; ELA framework operational aspects remain untested and require enhancements.
  - Elevated financial dollarization:
    - Overall deposits dollarization: 39 percent as of July 2024.
    - Business loans dollarization: 31 percent as of July 2024.
    - As of July 2024, 36 percent of foreign currency business loans were attributable to unhedged borrowers.
    - Policy options: strengthen communication and recalibrate macroprudential tools to promote use of domestic currency and support further de-dollarization.
    - Risk weight on unhedged FX business loans increased from 120 to 200 percent since 2022.
  - High credit concentration:
    - Banks’ large exposures comprised 76 percent of Tier 1 capital in July (text truncated in source; figure reported).
- Structural and prudential measures noted in the source:
  - Tightening of prudential regulations on consumer loans and inclusion of market and operational risks in risk-weighted asset calculations contributed to retreat in capital ratios from 2020 peak; pandemic-related regulatory forbearance has been completely phased out.
  - Measures to mitigate NBCI risks: requirements to establish audit and supervisory committees to strengthen corporate governance.

### Rehabilitation of the International Bank of Azerbaijan (IBA) — Box 1 summary
- Background:
  - IBA was bailed out following the 2015-2016 downturn; high NPLs and large FX valuation losses.
  - In 2015, IBA held 38 percent of total banking sector assets; this share declined to 26 percent as of July 2024.
- Measures totaling 37 percent of GDP included:
  - Transfer of about AZN15 billion of distressed assets at face value to Aqrarkredit (pursuant to the July 15, 2015 Presidential Decree), financed through the sale of Aqrarkredit’s government guaranteed bonds to CBA.
  - Restructuring of USD3.3 billion of foreign currency liabilities, including exchanging USD1 billion in deposits of SOFAZ with bonds issued by IBA.
  - Capital injection of AZN600 million by the government.
- Aqrarkredit operations:
  - To acquire and manage distressed assets, Aqrarkredit issued a total of AZN10 billion in bonds guaranteed by the government and subscribed by the CBA.
  - In 2017, Aqrarkredit repurchased AZN518 million of its bonds from the CBA and has been timely in its repayments.
  - The guarantee on these bonds is officially recognized in the general government debt.
  - Despite resolving only about one-third of the assets, Aqrarkredit managed to remain profitable.
- IBA performance since crisis:
  - IBA’s financial soundness indicators have improved since the 2015 crisis.

*Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1azeea2025002-print-pdf.pdf*

### 2024. The five largest bank credit exposures amounted to 63 percent of aggregate Tier 1 capital,

### 1azeea2025002-print-pdf - 2024. The five largest bank credit exposures amounted to 63 percent of aggregate Tier 1 capital,

### Credit concentration and related-party exposures
- The five largest bank credit exposures amounted to 63 percent of aggregate Tier 1 capital.
- Individual banks’ exposures ranged from 13 percent to more than twice their Tier 1 capital.
- Some banks are in breach of the large exposure and related party transaction limits, though the number of cases has declined over the past five years.
- CBA remedial actions:
  - Amended relevant regulations to refine the definition of a related party.
  - Established collateral requirements.
  - Improved prudential reporting.
  - Imposed deadlines for addressing existing violations.

### Rapid growth in unsecured consumer lending
- Consumer credit average annual growth: 21 percent over the 2018-2023 period.
- Growth driven primarily by unsecured personal loans.
- CBA prudential tightening in 2022 to moderate growth and increase banks’ buffers.
- NPL ratio for consumer loans:
  - Peak of 28 percent in 2017.
  - Declined to 2.8 percent in 2023.
  - Picked up slightly to 3.1 percent in July 2024.
- Borrower profile:
  - Half of consumer loans originated from public sector employees.
  - 30 percent of total consumer loans came from vulnerable borrowers with debt-to-income ratio exceeding 60 percent.
- CBA risk-weighting and borrower-based measures:
  - RWA: 100% for DTI≤45%; 200% for 45%<DTI ≤60%; and 230% for 60%<DTI ≤70%.
  - Cap on debt-to-income (DTI) ratio at 70 percent.
  - LTV for residential property loans (secured by the same property) for borrowers that do not own any other residential property is 85%.
  - LTV on any other type of mortgage loans is 70%.
- Recommendation: Implementing sectoral buffers would complement borrower-based measures.

### Risk analysis framework and macrofinancial scenarios
- Analyses conducted: top-down bank solvency and liquidity stress tests, and domestic contagion simulation (Appendix I).
- Data: supervisory data as of March 2024.
- Findings: banking system remained adequately capitalized in baseline and adverse scenarios though some banks—including D-SIBs—could face solvency pressures in the adverse scenario.
- Liquidity tests: overall sector sufficient to withstand severe liquidity shocks, but certain banks need reinforcement.
- Solvency stress-test horizon: three years.
- Baseline scenario assumptions:
  - Aligned with IMF’s April 2024 WEO and Article IV’s projections of GDP and inflation in May 2024.
  - Domestic economic growth projected at 2.3 percent in the medium term.
  - Inflation expected to remain within CBA’s target range of 4±2 percent.
  - De facto peg to the US dollar assumed maintained.
- Adverse scenario assumptions:
  - Abrupt global recession; oil and gas prices plunge by about 50 percent below the baseline by 2025.
  - Manat devalued by 30 percent against the US dollar.
  - Average interbank rate increases by 480 basis points relative to the initial level at its peak.

### Bank solvency stress test: key results
- Baseline scenario:
  - Systemwide capital ratios remained strong.
  - One small bank breached hurdle rates; this small bank comprises less than 1 percent of total banking assets.
- Adverse scenario:
  - Eight banks (35 percent of total banking sector assets) breached one of the hurdle rates; two of these are D-SIBs.
  - Collective capital shortfalls contained at AZN657 million (0.5 percent of GDP).
  - Systemwide total regulatory capital ratio declined by 4.5 percentage points to 13.7 percent by Year-2.
  - NPL ratio surged from 2.7 to 11.5 percent.
  - Business loans constituted 55 percent of the overall credit portfolio.
  - Systemwide leverage ratio decreased from 10.6 to 8.1 percent by Year-2.
- Definitions and thresholds:
  - A bank is deemed undercapitalized if any projected total regulatory capital, Tier 1 capital, or leverage ratios fall below 10, 5, or 4 percent (12, 6, and 5 percent for D-SIBs), respectively, or if total regulatory capital breaches the minimum requirement of AZN50 million.
  - CCyB requirement set at zero until March 1, 2025, assumed unchanged. Capital conservation buffer not implemented.
- Additional factors:
  - Impact of mark-to-market valuation was limited due to small held-for-trading and available-for-sale portfolios.
  - Hypothetical 30 percent deposit withdrawal could reduce the capital ratio of several banks by up to 2.5 percentage points.

### Sensitivity analyses (solvency)
- Restructured loans:
  - Share of restructured loans has trended lower.
  - Worst-case (all restructured loans default): systemwide total regulatory capital ratio declines by 1.4 percentage points.
- Credit concentration:
  - Hypothetical simultaneous default of each bank's five largest credit exposures could cause 10 banks to breach the hurdle rates.
  - The capital ratios of 12 banks would drop by more than 5 percentage points if their five largest exposures defaulted.

### Bank liquidity stress test: design and results
- Horizon: up to 12 months; analyses separate for manat and foreign currency.
- Scenarios reflect potential release of required reserves (RR): RR not released; half of RR released; all RR fully released.
- Manat liquidity results:
  - Assuming RR were not released, eight banks—including two D-SIBs—faced liquidity shortfalls; these banks account for 35 percent of total banking assets.
  - Manat shortfall amount: AZN674 million (0.5 percent of GDP).
  - Releasing half of RR reduces banks facing shortfalls to four.
  - If RR fully released, two medium-sized banks would experience shortfalls totaling AZN74 million (0.06 percent of GDP).
- Foreign currency liquidity results:
  - Most banks maintained comfortable foreign currency liquidity buffers.
  - Assuming RR not released, three medium-sized banks (5 percent of total banking assets) had insufficient CBC; combined shortfall AZN69 million (0.06 percent of GDP).
  - Releasing at least half of RR reduces banks facing shortfalls to two.
  - If RR fully released, all banks would have surpluses over a three-month horizon.
- Reverse liquidity tests:
  - Banking sector could withstand up to 48 percent cumulative deposit outflows in manat and 64 percent in foreign currency over 12 months (assumes RR fully released).
- Deposit concentration sensitivity:
  - Simultaneous sudden withdrawals of each bank’s five largest deposits led to liquidity shortfalls in 10 banks, including three D-SIBs.
  - These 10 banks account for 39 percent of total banking assets.
  - Combined liquidity shortfalls amounted to AZN2.1 billion (1.7 percent of GDP).
  - For these banks, the five largest deposits constituted between 22 and 87 percent of their total customer deposits.

### Contagion analysis
- Contagion from direct exposures among domestic financial institutions is significant.
- Distress of a D-SIB, on average, could reduce regulatory capital of affected FIs by 10.4 percent and result in the distress of 11 institutions.
- Insurance companies are particularly vulnerable:
  - Almost half of insurance companies had deposits in banks exceeding the amount of their regulatory capital.
- Interlinkages between NBCIs and banks have grown; exposures represent a significant share of NBCIs’ capital.
  - These exposures amounted to a median of 40 percent and up to five times the capital of individual NBCIs, while representing only 0.8 to 7.2 percent of the D-SIBs’ respective capital.

### Corporate vulnerability analysis
- Corporate sector trends:
  - Corporate profitability recovered and doubled during 2020-23.
  - Aggregate debt-to-equity in the non-oil and gas sector increased from 85.6 percent in 2020 to 96.8 percent in 2022, tapering slightly in 2023.
  - Foreign currency debt comprised 42 percent of total corporate debt in 2023.
  - About 60 percent of firms’ FX risks are hedged, on average, as of March 2024.
- Market risk sensitivity on 50 largest firms:
  - A hypothetical currency depreciation is the most severe shock.
  - Under the most severe scenario (Scenario 2: shocks similar to Scenario 1 plus a 30% hypothetical exchange rate depreciation; Scenario 1 assumes 20% decline in earnings and 30% increase in borrowing costs), defaults could raise banks’ NPLs to levels seen during the 2016 downturn.
  - A hypothetical 30 percent depreciation in manat—along with 20 percent decline in corporate earnings and 30 percent increase in borrowing costs—could reduce firms’ median interest coverage ratio (ICR) below 1 and potentially increase the banking sector’s gross NPL ratio to 18 percent.
- Policy implication: FX hedging is important to mitigate exchange-rate-driven corporate vulnerabilities.

*Source: Content as presented in the supplied IMF PDF chapter/section.*

### 24.      The CBA is responsible for financial sector oversight, including macroprudential

### 24. The CBA is responsible for financial sector oversight, including macroprudential

### Systemic Risk Oversight and Macroprudential Framework
- Institutional changes and mandate
  - In 2019, the CBA replaced the Financial Market Supervisory Authority of Azerbaijan (FIMSA) as the primary regulator of the financial sector.
  - The 2022 amendments to the Law on Central Bank of Azerbaijan (LCBA) gave CBA the financial stability mandate and power for financial market and macroprudential oversight.
  - Since then, progress has been achieved in implementing the 2015 FSAP recommendations and some 2022 World Bank development module FSAP recommendations.
- Assessment of the macroprudential framework
  - Framework broadly meets principles of good design but could be enhanced by publishing a macroprudential strategy to guide activation timing, communication, and accountability.
  - Current framework places all macroprudential powers within the CBA, underpinned by the LCBA.
- Key stress-test and scenario metrics (notes from figures)
  - Assumes 6.6% of the corporate debt-at-risk in each scenario will default, based on S&P average annual default rate for EMs (2.98%) plus one standard deviation (3.59%) over the 1981 to 2023 period.
  - Solvency stress test on business loan portfolio shows the NPL ratio in this sector could increase to 14.6% under the adverse scenario.
- Macroprudential toolkit developments
  - Since the 2015 FSAP the CBA has established borrower-based measures; capital buffers including CCyB and additional capital requirement for D-SIBs; restrictions on large exposures; limits on open FX positions; higher reserve requirements for FX deposits; liquidity measures including LCR implementation in 2023 in line with Basel III.
  - A 0.5 percent CCyB is imposed on banks starting March 1, 2025.
- Recommendations to strengthen systemic risk oversight
  - Address data gaps: strengthen forward-looking monitoring and early warning systems; fill data gaps in households and nonfinancial corporate sectors; develop analytical capacity for climate change-related risks.
  - Strengthen communication: utilize the Financial Stability Report (FSR) to explain rationales and effects of macroprudential decisions.
  - Expand the policy toolkit: extend capital buffer requirements (capital conservation buffer, positive neutral CCyB), differentiated higher loss absorbency buffers for D-SIBs, implement Net Stable Funding Ratio in addition to LCR, and establish sectoral buffers (e.g., consumer lending, FX and concentration risks).
  - Support de-dollarization measures: widen the wedge between required reserves on manat and FX deposits; collect more granular data on unhedged exchange rate exposures; regularly issue benchmark local currency bonds.

### Banking Supervision and Regulation
- Regulatory and supervisory progress
  - CBA implemented BCBS international standards adjusted for domestic setting and is implementing Basel III prudential standards.
  - A new RBS model was developed with the first pilot commencing in early-2025.
- Compliance and enforcement outcomes
  - The 2015 FSAP identified 10 banks breaching multiple prudential requirements; breaches on related-party exposure limits declined from 4 at end-2018 to 1 in March 2024, while two banks did not comply with the limit on large exposures.
  - Six insolvent banks had licenses revoked in past years.
  - Enhancing enforcement—including sanctioning—would improve compliance for material shortcomings in related-party transactions.
- Consolidated supervision
  - Lack of consolidated supervision hinders control of related-party transactions and other prudential aspects, critical for two D-SIBs that are part of banking groups.
  - As part of the FSDS, the CBA is working on implementing a consolidated supervision framework, including setting prudential requirements on a consolidated basis.
- Further supervisory improvements recommended
  - Strengthen LCBA, CBA governance, independence, resourcing, and supervisory approach (supported by IMF technical assistance).
  - Improve disclosure and transparency: current “Corporate Governance Standards” vary in ownership disclosure; related-party disclosure required only as “general information” without defined scope or structure. Consider a standardized template with segmentation by collateralization, type of relationship, and size of loan (as a percentage of regulatory capital).
  - Prudential treatment of certain loans: same risk weights applied to performing and nonperforming mortgages (contrary to Basel); mortgages accounted for 16 percent of banks’ loan portfolio as of December 2023. MCGF-funded mortgages amounted to 56 percent of banks’ mortgage loans; they are assigned a lower risk weight of 35 percent (or 0 percent if they have a public guarantee) compared to 50 percent for those funded by banks’ own funds. Only 3 percent of MCGF-funded mortgages are guaranteed by the MCGF.
  - Address exemptions: certain agricultural loans exempted from around 10 percent additional provisions for business loans; close regulatory gaps so capital and provisioning requirements align with international standards.
- Reporting and provisioning differences
  - Banks follow IFRS for financial reporting but regulatory standardized approach for prudential reporting and asset classification.
  - Regulatory approach gives higher prudential loan-loss provisioning than IFRS 9 for consumer loans for borrowers with DTI ratio above 45 percent.
  - As of December 2022, CBA reported that the total loan-loss provision for prudential purposes exceeded IFRS 9 provision by around 80 percent for the top 10 banks.
  - CBA is evaluating feasibility of applying the highest loan-loss provision from both approaches.

### Financial Integrity
- Legal and institutional AML/CFT advances
  - Azerbaijan has considerably strengthened its AML/CFT legal and institutional framework; main proceeds-generating offences identified as corruption, tax evasion, drug trafficking, and smuggling.
  - Authorities made notable progress including requiring compliance by financial institutions.
- Remaining gaps and effectiveness concerns
  - Remaining gaps in financial sector risk-based AML/CFT supervision, wire transfers, and transparency of legal entities should be addressed, including ensuring multiple sources of beneficial ownership information.
  - MONEYVAL’s 2023 AML/CFT assessment found a low level of effectiveness on AML/CFT financial sector supervision; moderate effectiveness on implementation of preventive measures by the sector and on transparency of beneficial ownership of legal entities.
- Priority actions
  - Implement system for risk-based AML/CFT supervision of banks; strengthen supervisory resources and enforcement; address gaps in fit and proper measures in bank ownership including verification of beneficial owners.
  - Strengthen preventive measures for politically-exposed persons and beneficial owners; improve transaction monitoring and suspicious transaction reporting.

### Systemic Liquidity, Financial Crisis Management and Resolution
- Systemic liquidity management improvements
  - Since the 2015 FSAP, CBA modernized its operational framework: introduced refinancing facilities, implemented Basel III LCR, and developed benchmark interest rates for secured and unsecured transactions with the Baku Stock Exchange.
  - Despite high deposit dollarization, FX liquidity risks are well managed with sufficient FX liquidity provision in coordination with SOFAZ.
- Market depth and collateral framework recommendations
  - Improve government bond market, interbank repo, and collateral framework to enhance market depth; reduce bureaucratic settlement delays.
  - Develop a database of daily indicative market prices for government securities to support fair valuation of collaterals.
  - Introduce haircuts that rise with residual maturity to enhance collateral framework and support repo market development.
  - Move return and repayment of funds deposited/borrowed in central bank standing facilities to the beginning of the day to incentivize better liquidity forecasting and interbank market use.
- Financial safety net and crisis management enhancements
  - CBA established a separate Resolution Department and amendments to laws introduced additional resolution powers, established conditions for the deposit insurance fund to borrow from the CBA with government guarantee, and prevented the CBA from providing subordinated loans to insolvent banks.
- Recommended reforms to strengthen safety net
  - Institutional and interagency arrangements: strengthen cooperation across financial safety net agencies (including foreign supervisors) through MOUs; establish an interagency committee (e.g., Financial Stability Committee) comprising CBA, MOF and ADIF with Governor chairing; formalize committee coordination role without preempting CBA resolution powers.
  - Early intervention triggers: establish forward-looking triggers and early warning indicators to escalate supervision before regulatory breaches.
  - Resolution framework: extend resolution powers to bank holding companies/conglomerates and significant non-regulated operational entities; empower CBA to use resolution powers without court approval; prepare and regularly update resolution plans and resolvability assessments for D-SIBs and other systemically important banks.
  - Emergency Liquidity Assistance (ELA): CBA can provide ELA to banks with short-term liquidity shortages up to six months maturity, extendable once for another six-month period. ELA should be last resort after exhaustion of alternatives; conform to strict conditionality including short maturity (e.g., two weeks) with extensions based on reassessments; be at a sufficiently high interest rate and reasonable premium over the Standing Lending Facility rate; be against eligible and adequate collateral; be available only to solvent and viable banks with temporary liquidity shortages; require adequate safeguards for CBA’s balance sheet and government indemnity.
  - Establish comprehensive ELA framework including eligibility criteria; ELA terms and conditions; collateralization and valuation strategy; ELA master agreement and funding templates; governance, reporting, termination provisions; modalities for national coordination and cross-border cooperation; and CBA contingency planning, communication and exit strategies.

*Source: 1azeea2025002-print-pdf - 24. The CBA is responsible for financial sector oversight, including macroprudential (PDF chapter).*

### 40.      The CBA’s Supervisory Review Process and early intervention framework should

### 40.      The CBA’s Supervisory Review Process and early intervention framework should integrate bank recovery plans

### Integration of bank recovery plans into supervisory framework
- The CBA drafted a “Methodological Guidance for Banks’ Recovery Plans” as part of the Financial Sector Modernization Project supported by the World Bank and planned to integrate it into the RBS framework.
- The CBA should provide guidance on:
  - the assessment of critical functions and shared critical services;
  - integration of banks’ recovery plans with their risk management framework;
  - recovery options;
  - a robust communication strategy to ensure that internal and external stakeholders are suitably informed during recovery.
- The CBA should eventually require the preparation of recovery plans at bank holding company/conglomerate level to address the recovery of financial subsidiaries that are not subsidiaries of a bank but whose financial deterioration would adversely affect the bank.

### Temporary public funding and conditionality
- Temporary public funding should be subject to strict conditionality to minimize the risk of moral hazard.
- Conditions on the use of temporary public funding:
  - Provided only when necessary to safeguard financial stability and enable implementing the most orderly resolution option to prevent any costly alternatives.
  - Private resources should first be exhausted.
  - Public funds should only be used after the allocation of all estimated losses in the failed bank to shareholders and—to the extent possible—unsecured creditors.
  - There should be pre-defined mechanisms for loss recovery, such as ex-post levies from the banking sector.
  - Under strict conditionality, temporary public funding could be extended to non-systemically important banks whose failure could derail financial stability.

### Authorities' views (paragraphs 42–45)
- General reaction:
  - The authorities welcomed the FSAP’s comprehensive assessment of Azerbaijan’s financial sector and noted commendable progress in financial policy frameworks.
  - They concurred that the shift in financial sector regulation back to the central bank in 2019 has helped reinvigorate the regulatory reform agenda and underpinned resilience, especially during the COVID-19-driven global economic downturn in 2020.
- Identified vulnerabilities and supervisory responses:
  - High dependency on oil and gas sector and substantial wholesale corporate deposits continue to be the main sources of vulnerabilities in the banking sector.
  - Numerous policy measures have been taken to moderate the recent rapid growth in unsecured consumer lending.
  - The authorities would consider a Pillar 2 supervisory approach to address bank-specific risks.
- Systemic risk analysis and preparedness:
  - The authorities broadly agreed with the conclusions of the systemic risk analysis.
  - They concurred that while the overall banking sector would remain adequately capitalized and liquid under adverse conditions, some banks could face pressures and may need to reinforce their capital and liquidity buffers.
  - They are committed to addressing data gaps, expanding their systemic risk analysis and stress testing frameworks to capture a wider spectrum of vulnerabilities across a broader range of financial players, and effectively utilizing their toolkits by integrating the findings into preemptive policy and supervisory actions.
  - The high level of dollarization is attributed to dollar deposits held mostly for investment purposes by large corporations in the hydrocarbon sector and a small group of individuals.
- Implementation and policy priorities:
  - The authorities noted that the implementation of the FSAP’s recommendations on macroprudential policies and banking regulation-supervision is already ongoing.
  - They welcomed the recommendations on adopting Basel III capital and liquidity requirements, and implementing RBS and consolidated supervision.
  - They have published a macroprudential policy framework and implemented a CCyB requirement of 0.5 percent of total regulatory capital and Tier 1 capital starting March 1, 2025.
  - While expressing interest in positive cycle-neutral CCyB, they noted that its activation should be aligned with prevailing macroeconomic and financial conditions.
  - In principle, they concurred with the recommendation to widen the wedge between required reserves on manat and FX deposits, but noted that further analysis is needed first to determine the level of natural dollarization.
  - Regarding AML/CFT, they emphasized that Azerbaijan has an existing 2023–25 National Action Plan and that short-term plans have been developed to address deficiencies identified in MONEYVAL’s assessment. The National Action Plan includes proposals for establishing a database on beneficial owners.
  - The authorities will prioritize recommendations to strengthen regulatory-supervisory oversight based on resource constraints; priorities include enhancing the CBA’s institutional framework, developing the RBS framework, and expediting consolidated supervision.

*Source: Excerpts from the IMF Financial Sector Assessment (Azerbaijan) — paragraphs 40–45.*

### 46.      The authorities broadly concurred with the recommendations on strengthening

### The authorities broadly concurred with the recommendations on strengthening financial safety nets and systemic liquidity.

### Authorities’ agreement, planned follow-up, and policy priorities
- Agreed to further enhance the crisis management and resolution frameworks, noting that the resolution plan design should consider country circumstances and current coverage of the resolution framework.
- Requested follow-up technical assistance covering legal aspects to incorporate bank holding companies and significant non-regulated operational affiliated entities within the resolution framework.
- Agreed on the need to foster the development of the government bond market to enhance market’s ability to withstand liquidity shocks.

### Key macroeconomic projections and external sector indicators (selected from Table 2: Azerbaijan: Selected Economic Indicators, 2022–30)
- GDP at constant prices (annual percent change): 4.7 (2022); 1.4 (2023); 4.1 (2024); 3.5 (2025); 2.5 (2026); 2.4 (2027); 2.4 (2028); 2.5 (2029); 2.5 (2030).
- Oil sector growth (annual percent change): 1/-2.4 (2022); -2.0 (2023); 0.3 (2024); 0.2 (2025); -0.5 (2026); -0.5 (2027); -0.5 (2028); -0.5 (2029); -0.5 (2030).
- Non-oil sector growth (annual percent change): 9.1 (2022); 4.5 (2023); 6.2 (2024); 4.5 (2025); 3.7 (2026); 3.5 (2027); 3.5 (2028); 3.5 (2029); 3.5 (2030).
- Consumer price index (period average): 13.9 (2022); 8.8 (2023); 2.2 (2024); 5.7 (2025); 4.5 (2026); 4.0 (2027); 4.0 (2028); 4.0 (2029); 4.0 (2030).
- Consumer price index (end of period): 14.4 (2022); 2.1 (2023); 4.9 (2024); 5.2 (2025); 4.0 (2026); 4.0 (2027); 4.0 (2028); 4.0 (2029); 4.0 (2030).
- Gross official international reserves (in millions of U.S. dollars): 8,996 (2022); 11,281 (2023); 10,960 (2024); 10,760 (2025); 10,560 (2026); 10,360 (2027); 10,160 (2028); 9,960 (2029); 9,760 (2030).
- Gross Investment (percent of GDP): 12.1 (2022); 18.3 (2023); 17.8 (2024); 18.3 (2025); 16.2 (2026); 14.6 (2027); 13.7 (2028); 13.7 (2029); 13.7 (2030).
- Consolidated government: total revenue and grants (percent of GDP): 32.1 (2022); 40.6 (2023); 37.1 (2024); 34.4 (2025); 32.8 (2026); 31.0 (2027); 29.8 (2028); 29.5 (2029); 29.2 (2030).
- Consolidated government: total expenditure (percent of GDP): 26.2 (2022); 32.7 (2023); 33.8 (2024); 35.6 (2025); 34.5 (2026); 33.4 (2027); 32.5 (2028); 31.7 (2029); 31.0 (2030).
- Overall fiscal balance (percent of GDP): 6.0 (2022); 7.9 (2023); 3.2 (2024); -1.3 (2025); -1.7 (2026); -2.4 (2027); -2.8 (2028); -2.1 (2029); -1.8 (2030).
- Non-oil primary balance, in percent of non-oil GDP: -22.4 (2022); -22.1 (2023); -20.5 (2024); -22.1 (2025); -18.6 (2026); -16.3 (2027); -14.5 (2028); -12.7 (2029); -11.3 (2030).
- General government debt (percent of GDP) 3/: 17.3 (2022); 21.8 (2023); 20.9 (2024); 21.0 (2025); 22.2 (2026); 22.7 (2027); 23.1 (2028); 23.8 (2029); 23.8 (2030).
- Current account (- deficit) (percent of GDP): 29.8 (2022); 11.5 (2023); 7.8 (2024); 7.8 (2025); 4.1 (2026); 0.5 (2027); -2.4 (2028); -3.3 (2029); -4.2 (2030).
- Oil Fund Assets (in millions of U.S. dollars): 49,034 (2022); 56,070 (2023); 60,031 (2024); 60,911 (2025); 61,797 (2026); 61,864 (2027); 61,594 (2028); 62,222 (2029); 62,949 (2030).
- Assumed oil price, WEO plus $2-$3 premium (in U.S. dollars per barrel): 98.48 (2022); 82.68 (2023); 81.27 (2024); 78.67 (2025); 73.57 (2026); 71.67 (2027); 70.67 (2028); 72.07 (2029); 73.4 (2030).
- Assumed natural gas price, WEO plus a premium (in U.S. dollars per thousands of cubic meter): 1340.0 (2022); 460.1 (2023); 389.0 (2024); 517.4 (2025); 424.7 (2026); 342.2 (2027); 290.2 (2028); 290.2 (2029); 290.2 (2030).
- Exchange rate (manat/dollar, end of period): 1.7 (2022); 1.7 (2023); 1.7 (2024).

### Financial soundness indicators and financial system structure (selected highlights)
- Total regulatory capital to risk-weighted assets: 16.8 (2015); 9.1 (2016); 14.4 (2017); 21.1 (2018); 22.2 (2019); 25.1 (2020); 19.1 (2021); 19.3 (2022); 17.5 (2023); 17.5 (Jul-24).
- Nonperforming loans to total customer loans: 13.9 (2015); 21.0 (2016); 18.7 (2017); 14.5 (2018); 8.3 (2019); 6.2 (2020); 4.5 (2021); 3.8 (2022); 2.6 (2023); 2.7 (Jul-24).
- Return on assets: -1.2 (2015); -5.3 (2016); 3.1 (2017); 1.0 (2018); 1.8 (2019); 1.8 (2020); 1.8 (2021); 2.2 (2022); 2.3 (2023); 2.3 (Jul-24).
- Liquid assets to total assets: 14.6 (2015); 16.4 (2016); 19.9 (2017); 24.2 (2018); 28.6 (2019); 32.9 (2020); 36.1 (2021); 36.6 (2022); 26.7 (2023); 23.3 (Jul-24).
- Customer loans to customer deposits: 122.9 (2015); 97.1 (2016); 67.1 (2017); 67.1 (2018); 67.9 (2019); 69.9 (2020); 68.3 (2021); 61.8 (2022); 67.1 (2023); 74.7 (Jul-24).

- Structure of the financial system (selected 2023 levels):
  - Total financial system assets (millions of AZN): 74,835.
  - Commercial banks assets (millions of AZN): 49,178; percent of total financial system assets: 66; percent of nominal GDP: 40.
  - Nonbank financial institutions assets (millions of AZN): 25,657; percent of total financial system assets: 34; percent of nominal GDP: 21.

### Financial safety net, resolution framework, and systemic liquidity — assessment and implementation status
- Resolution powers and coverage:
  - Partially implemented: The scope of the resolution regime does not cover bank holding companies and significant non-regulated operational entities within the group.
  - Specific resolution powers are subject to court approval.
  - The regulatory framework for resolution planning has not been finalized.
  - Authorities note new articles added to the "Law on Banks" and three regulations related to resolution adopted in 2018, and that a Resolution Department was established in the Central Bank of the Republic of Azerbaijan (CBA) developing the regulatory framework for resolution planning.
- Deposit Insurance Fund (DIF) and Central Bank operational arrangements:
  - Partially implemented: ADIF’s borrowing arrangements with the CBA need additional safeguards; procedures for documentation, preconditions, amounts, timing, and terms of borrowing require clarification.
  - Deposit insurance funds cannot be applied for resolution procedures on a least-cost basis under current arrangements.
  - Authorities note legal provisions for CBA lending to the Deposit Insurance Fund (new Article 54.3-1 to the Law on the Central Bank and new article 17.2 to the Law on Deposit Insurance).
- Memorandum of Understanding (MOU) between DIF and CBA for automatic exchange of information and risk-differentiated premia:
  - Not implemented: project is on-going; authorities note a project has been prepared and discussions are underway on the final version.
- Emergency Liquidity Assistance (ELA) and preconditions:
  - Partially implemented: The Regulation for Issuing Loans to Banks by the Central Bank covers lender of last resort/emergency liquidity assistance provisions, but enhancements are needed on eligibility criteria, collateralization, collateral valuation, and government indemnity.
  - Authorities view this recommendation as not implemented operationally, noting that while lender of last resort is provided for in law, emergency liquidity assistance facilities are not available in practice.
- For systemic banks: bank-specific resolution plans and resolvability assessments
  - Not implemented: project is ongoing; authorities concur.
- Financial Stability mandate and institutional arrangements:
  - CBA explicit financial stability mandate is prescribed in Article 4.2 of the Law on the Central Bank; CBA established a Financial Stability Department with a defined charter.
  - Interagency body: Financial Stability Board was replaced by the Economic Board (headed by the Prime Minister) — partially implemented as an interagency body; ADIF is not included among members; authorities indicate the Board includes Central Bank, Ministries of Finance, Economy, Labor and Social Protection, State Oil Fund, and meets regularly.

### FSAP recommendations progress (selected)
- Banking oversight and supervision:
  - Consolidated supervision: Planned. CBA plans to develop a regulatory framework for consolidated supervision by mid-2025.
  - Strengthen supervisory intervention framework and step-up enforcement: Partially implemented / Planned. The development of a risk-based supervision (RBS) model is in progress with pilots scheduled for beginning of 2025; a formal supervisory intervention framework remains to be completed.
  - Corporate governance standards: Partially implemented. New Corporate Governance Standards in Banks issued September 2023 introduce requirements (e.g., Supervisory Board composition, independent external members, CRO requirements), but full implementation by banks remained ongoing with compliance deadlines into 2024.
  - CBA governance: Not implemented. Vacant positions remain on the CBA Management Board and an Audit Committee is not yet established.
- AML/CFT:
  - Partially implemented. MONEYVAL 2023 assessment shows considerable improvements but technical gaps remain (adequate criminalization of money laundering, related sanctions, preventive measures). Authorities have a National Action Plan 2023-2025 and additional short-term plan; regulators introduced suspicious case reporting requirements and FIU methodologies for beneficial ownership.
- NPL management and insolvency:
  - Strengthen credit risk management and NPL workout units: Partially implemented. New credit risk management standards are recent; focused credit risk on-site examinations are in progress; CBA has not required NPL resolution strategies from banks with high NPLs.
  - Reform enforcement and insolvency procedures: Partially implemented. Work is underway to centralize electronic auction mechanism and redraft Insolvency Act; institutional capacity strengthening via a working group with Ministry of Justice and CBA is ongoing.

### Risk assessment — main threats to financial stability (selected)
- Commodity price volatility: Overall level of concern High; Likelihood of realization in next 1–3 years High; Expected impact on financial stability if realized High. Key channels: worsening external and fiscal positions from a sharp decline in oil and gas prices, potential strain on FX reserves, manat devaluation, asset quality and capital pressures, possible reversal of de-dollarization.
- Escalation of regional conflicts: Overall Level of Concern High; Likelihood Medium; Expected impact Medium. Key channels: trade disruptions, remittances and FDI impacts, operational disruptions for services outside affected countries.
- Abrupt global slowdown or recession: Overall Level of Concern Medium; Likelihood Medium; Expected impact Medium.
- Extreme climate events: Overall Level of Concern Medium; Likelihood Medium/Low; Expected impact Medium/Low.
- Loss of spending discipline (procyclical fiscal policy): Overall Level of Concern Medium; Likelihood Medium; Expected impact Medium.
- Weak SOE performance: Overall Level of Concern Medium; Likelihood Low; Expected impact Low.

*Source: Excerpts and tables from the IMF mission documents and staff estimates contained in the provided content.*

### Appendix I. Stress Testing Matrix

### Appendix I. Stress Testing Matrix

### Bank Solvency Stress Test
- Institutional perimeter
  - All 23 commercial banks.
- Data and starting position
  - Bank-by-bank regulatory and supervisory data on a solo basis, supplemented by additional data surveyed from banks by the authorities.
  - Cutoff date: End-March 2024.
- Methodology and risk factors
  - Main components of the balance sheet, income statement, and capitalization of individual banks were projected using satellite models involving econometric and structural approaches, linking macrofinancial variables with drivers of each component.
  - No intervention by the government or the CBA, nor management actions by the banks to mitigate the impact of the adverse scenario. For conservatism, hedges were assumed to be ineffective.
- Balance sheet assumptions
  - A proportion of outstanding undrawn guarantees and credit lines was assumed to be drawn down under the adverse scenario. Other than the new credit exposures arising from such drawdowns, banks were assumed not to issue additional loans.
  - Asset growth influenced by valuation gains/losses on foreign-currency-denominated assets due to changes in exchange rates.
  - Deposits were assumed to grow at a rate necessary to equate assets to the sum of liabilities and equities.
  - Liability growth influenced by exchange rate changes on foreign-currency-denominated liabilities.
- Credit risk
  - Credit loss calculations accounted for additional provisions for newly defaulted loans, evolving provision stocks for existing loans, and the impact of write-offs.
  - Write-offs were assumed to equal any reduction in NPLs over the stress test horizon.
  - NPL ratios used for credit risk modeling due to unavailability of data on PDs and quality issues with data on write-off and cure flows.
  - Panel regression models estimated for five segments: consumer loans and business loans, each in manat and foreign currency, and mortgages in manat.
  - NPL ratios for mortgages in foreign currency were not modeled due to the negligible portfolio size; assumed to remain constant under the baseline scenario and increase to 100 percent under the adverse scenario.
  - FX-induced credit risk captured by including exchange rate variables as regressors of the satellite models.
  - LGDs for the mortgage segment projected as a function of the LTV ratios and expected recovery rates of the collaterals following Gross et al. (2020).
  - LGDs for consumer and business loan segments projected by judgmentally setting the haircuts on collateral pledged on NPL at 50 percent for the baseline scenario and 100 percent for the adverse scenario.
  - LGD for uncollateralized exposures set at 100 percent under both scenarios.
  - Bank-segment-specific provision coverage ratios were subject to floors, guided by provisioning requirements under the national regulation.
- Interest rate risk
  - Interest income and expense projected by applying scenario-dependent interest rate paths to interest-bearing assets and liabilities.
  - Effective interest rates modeled as a function of their autoregressive lags and macrofinancial variables, including average interbank rates.
  - Nonperforming exposures assumed not to generate interest income.
  - Under both baseline and adverse scenarios, a proportion of manat demand deposits assumed to shift from non-interest-bearing to interest-bearing accounts.
- Market risk
  - Mark-to-market valuation gains/losses on HfT and AfS debt securities projected using a modified duration approach; reflected in trading income and other comprehensive income, respectively.
  - Valuation gains/losses on FX positions—predominantly in US dollar—calculated by applying the projected USD/AZN exchange rate paths to the overall net open FX position.
  - Equity risk excluded due to small size of banks’ equity exposures.
- Other non-interest income and expense
  - Fee and commission income and expense projected separately as a function of their autoregressive lags and macrofinancial variables.
  - Remaining income statement items—mostly operating expense—assumed to grow proportionately with the balance sheet, adjusting for any one-off income or expense.
- Taxes and dividends
  - Income taxes calculated using historical effective tax rates. Loss-making banks assumed not to pay taxes.
  - Banks assumed to pay out dividends only if they record a net profit, their total comprehensive income is positive, and they would continue meeting capital requirements.
- RWA
  - Credit RWA projected by applying constant densities, calculated at the cutoff date, to the projected loans, net of provisions for NPLs.
  - Credit RWA for off-balance-sheet exposures adjusted to reflect changes in the outstanding undrawn guarantees and credit lines.
  - Credit RWA for other asset segments assumed to remain unchanged.
  - Market RWA determined by the evolution of the net open FX position, consistent with the national regulation.
  - Operational RWA assumed to grow in tandem with the balance sheet.
- Scenarios
  - Baseline scenario is aligned with the April 2024 World Economic Outlook and Article IV team’s projections of GDP and inflation as of May 2024.
  - One bespoke adverse scenario produced using a two-country empirical IPF model, featuring an abrupt global recession triggering a plunge in oil and gas prices, deterioration in external and fiscal positions, contraction in the domestic economy, manat devaluation against the US dollar, higher domestic prices, and monetary policy tightening.
  - Bridge regressions employed to derive more severe projections of CPI inflation and interest rates.
  - Horizon: Three years.
- Sensitivity analyses
  - Higher FX risk from potential shifts in deposits from manat to US dollars simulated; all banks assumed to experience the same proportion of shifts during Year 2 of the adverse scenario.
  - Potential losses from liquidity-solvency interaction considered by projecting additional funding costs from pledging HtM bonds to access central bank standing facilities after exhausting other liquid assets; applied at the end of Year 2 of the adverse scenario.
  - Costs of accessing the standing facilities and ELA set at 100 basis points above the short-term interest rates.
  - Credit concentration risk assessed by simulating hypothetical simultaneous defaults of the five largest credit exposures for each bank; exposures assumed fully uncollateralized and banks assumed to provision 75 percent of the defaulted amount.
  - Deterioration in credit quality of restructured loans simulated through downgrades in asset classification; additional provisions assumed to reduce banks' capital and RWA.
- Hurdle rates
  - National regulations on total regulatory capital, Tier 1 capital, and leverage ratios—differentiated between D-SIBs and other banks—and minimum amount of total regulatory capital.
  - Countercyclical capital buffer requirement—currently set at zero—assumed to remain unchanged. No capital conservation buffer requirement in place.
- Output presentation
  - Evolution of aggregate capital ratios and key drivers.
  - Number and market share of banks below the hurdle rates.
  - Aggregate capital shortfall.

### Bank liquidity stress test
- Institutional perimeter
  - All 23 commercial banks.
- Data and starting position
  - Bank-by-bank regulatory and supervisory data on a solo basis.
  - Cutoff date: End-March 2024.
- Methodology and risk factors
  - LCR- and cash flow-based analyses, separately for manat and foreign currency, capturing funding and market liquidity risks.
- LCR-based approach
  - Parameters stipulated in the national regulation adopted as a starting point.
  - Six scenarios: three outflow scenarios (higher run-off rates for retail funding, unsecured wholesale funding, and both) while keeping all other parameters fixed; repeated with additional haircuts on unencumbered debt securities.
- Cash flow-based approach
  - Horizons: 1-week, 2-week, 1-month, 2-month, 3-month, 6-month, and 12-month.
  - Run-off rates for the 30-day time bucket at least as high as those under the LCR.
  - Calibration for other time buckets followed a rule of thumb such that the cumulative outflows over a six-month horizon amounted to at least 25 percent of the initial stock of liabilities.
  - Undrawn guarantees and credit lines assumed to be drawn down.
  - Banks assumed to roll over at least 50 percent of maturing loans to households and businesses.
  - Haircuts on unencumbered debt securities judgmentally set at 20 percent across all types of instruments.
  - No extraordinary intervention by the government or the CBA, nor new borrowings by the banks.
  - Analysis performed under three scenarios regarding required reserves held at the CBA: not released; half released; fully released.
- Sensitivity analyses
  - Reverse liquidity test by applying progressively higher run-off rates on deposits; results measured as the cumulative deposit outflow rate at the point when the CBC was fully depleted at the banking sector level.
  - Deposit concentration risk assessed by simulating hypothetical simultaneous and sudden withdrawals of the five largest deposits of each bank, assuming no inflows or other outflows, and compared against the CBC.
  - Liquidity capacity to withstand a sudden increase in deposit dollarization assessed by applying several shifts in customer deposits from manat to US dollars; banks assumed to liquidate their CBC in manat to purchase US dollars, applying haircuts of 20 to 60 percent on unencumbered debt securities.
- Hurdle rates
  - LCR-based: transitional minimum requirements as of June 2024—differentiated between D-SIBs and other banks. Same hurdle rates used for manat LCR analysis despite no minimum requirements being imposed on the manat LCR under the regulation.
  - Cash flow-based: insufficient CBC to offset cumulative negative liquidity gaps.
- Output presentation
  - Evolution of aggregate liquidity indicators and key drivers.
  - Number and market share of banks below the hurdle rates.
  - Aggregate liquidity shortfall.

### Interconnectedness analysis
- Institutional perimeter
  - All 23 commercial banks, all 18 insurance companies, and all 54 nonbank credit institutions.
- Data
  - Supervisory data on bilateral exposures—without a breakdown by type of instrument and currency—among institutions on a solo basis.
- Methodology and risk factors
  - Network model based on Espinosa-Vega and Solé (2010), capturing credit and funding risks.
- Hurdle rates
  - National regulations on total regulatory capital ratio.
- Output presentation
  - Network charts.
  - Contagion and vulnerability indices.

### Appendix II. Banking Regulation and Supervision: Governance, Independence, Resourcing, and Supervisory Approach
- Key recommended enhancements to reinforce CBA effectiveness
  - Amending the LCBA to ensure robust governance, accountability and independence of the CBA, addressing FSAP recommendations on: professional expertise criteria for the Management Board; legal provisions on cooling-off periods for MB members; transparency on appointing and removing MB members, including setting limited reasons for dismissal and public disclosure of reasons for removal.
  - Enhancing legal provisions on CBA accountability in line with transparency and public disclosure standards to prioritize public accountability and/or apply robust disclosure policies while safeguarding independence.
  - Improving commercial banks’ corporate governance and risk culture: prompt transition to RBS assessments, including early and intrusive supervisory intervention; development of a structured escalation framework (early intervention, sanctioning, resolution tools) and supervisors’ ability and willingness to apply it.
  - Improving supervisory procedures and criteria to assess compliance with related parties transactions: develop a comprehensive ad-hoc methodology with detailed steps, information sources, off-site and on-site criteria, and early warnings or "red flags" (e.g., disbursement of new loans with concessional conditions).
  - Integrating bottom-up stress-tests into supervision process: banks required to conduct bottom-up stress tests twice a year; CBA to provide macro projections and assess banks’ stress test models and results to support ICAAP and supervisory review of capital adequacy (Pillar 2).
  - Developing inherent risk assessment and ICAAP benchmarking approaches, using stress test results to evaluate IRRBB management and prioritizing oversight using BCBS IRRBB standards; incorporate IRRBB and other material additional risks into ICAAP and supervisory capital assessments in line with Pillar 2.
  - Strengthening CBA resources to support effective implementation of new RBS model: enhance human resources in numbers, specialization and skills; design and execute recruitment and training programs, and secure adequate financial resources.

### Appendix III. Financial Safety Net, Bank Resolution, and Crisis Management
- Progress since the 2015 FSAP
  - 2017 LB amendment introduced additional resolution powers broadly following the FSB Key Attributes, including appointment/powers/responsibilities of the temporary administrator; temporary public funding; liquidation and appointment of ADIF as the liquidator.
  - Amendments in the Law on Deposit Insurance (LDI) cover ADIF’s borrowing from the CBA against government indemnity.
  - CBA no longer authorized to provide subordinated loans to banks with capital adequacy problems (2016 LCBA amendments).
  - CBA regulations (2016, 2018) cover bridge banks; resolution actions for insolvent banks and holding auctions; substantiation and comparative analysis of costs for selecting resolution measures.
- Recommended amendments to ensure compliance with FSB Key Attributes and IADI Core Principles
  - LB: recommended inclusions/changes include extending scope to bank holding companies and significant non-regulated operational entities within the group; including resolution objectives; forward-looking resolution triggers and governance trigger; explicit empowerment for immediate application of resolution powers and preparation in run-up to resolution; empowering CBA to use resolution powers without court approval; empowering CBA/temporary administrator to raise capital by issuing new shares; enhancing bridge bank tool with safeguards; empowering CBA—subject to safeguards—to impose a moratorium without court approval; sufficiently reflecting the "no creditor worse off than in liquidation" (NCWL) principle; including liquidation options that protect insured depositors; making explicit that temporary public ownership should be an exceptional last-resort mechanism.
  - LDI: recommended changes include absolving requirement for coordination with the President to enhance ADIF’s operational efficiency, response time, and independence; empowering ADIF to conduct on-site examinations to ascertain integrity of deposits and depositors’ data; giving ADIF the paybox-plus mandate; enabling ADIF to increase industry contributions—including via extraordinary premiums—rather than borrowing from the CBA or Government when funds may run low; making borrowing from the CBA under government indemnity a source of emergency funding for ADIF; empowering the MOF to provide ADIF a clear back-up emergency funding when resources are insufficient.

*REPUBLIC OF AZERBAIJAN — INTERNATIONAL MONETARY FUND*

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_Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1azeea2025002-print-pdf.pdf_