## _cr05216 — Executive Summary and Selected Findings

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### Overview and main assessment
- Reform of the Belarusian financial system has been slow; a centralized approach to managing the economy still dominates the financial system.
- Government’s Banking Concept states intention to move toward an efficient financial system with substantial private sector and foreign ownership; progress limited to a few areas.
- NBRB has stabilized the Belarusian rubel; technical infrastructure and regulatory and supervisory framework upgraded toward international standards.
- With one exception, major banks remain government owned or controlled and are frequently requested to lend to priority enterprises and sectors irrespective of borrower profitability.
- Directed/recommended lending and encouragement to lend at close to the official refinance rate have contributed to liquidity shortages and undermined profitability, especially in the two largest banks.
- Government has repeatedly recapitalized and injected liquidity into major banks; such support does not address structural issues and may increase fiscal contingent liabilities over time.
- Fundamental restructuring should commence sooner rather than later; cessation or significant phasing back of directed/recommended lending is essential.

### Key high-priority recommendations (excerpt)
- Stop, or at least wind back, the policy of recommended lending.
- Develop a plan for bank restructuring that includes:
  - removal of non-performing recommended loans from bank balance sheets;
  - changing the composition of government banks’ boards;
  - refrain from measures that create moral hazard and distort markets (e.g., directing deposits of state owned entities to government-owned banks); and
  - elimination of caps on lending rates and informal recommendations to lend at close to the refinance rate.
- Increase NBRB independence and provide banking supervision with greater autonomy.
- Enhance and enforce supervisory remedial measures.
- Increase awareness of bank borrowers of risks implied in unhedged foreign currency lending.

### Medium-term and developmental recommendations (excerpt)
- Accelerate transition to International Financial Reporting Standards (IFRS), especially in banking.
- Approve proposed new structure of the deposit insurance system.
- Phase out the golden share rule.
- Consolidate legal provisions in the Law on Securities and Stock Exchanges and remove inconsistencies with other laws.
- Open the insurance sector to domestic and foreign private competition in a phased way and strengthen insurance supervisory authority independence.

### Stability issues — banking system summary
- Financial system stability issues arise almost entirely in the banking system; capital market is nascent and insurance sector small.
- Recommended lending (flow terms) reached 3.4 percent of GDP in 2004 (about half of all new lending), with two thirds extended to agriculture.
- Aggregate ratio of liquid assets (maturity < 1 month) to short-term liabilities (maturity < 1 month) was 63 percent in December 2004, below prudential minimum of 70 percent; individual bank ratios ranged from 29 percent to 112 percent across the ten largest banks.
- Central Government guarantees on bank loans increased sharply in 2004: annual limit initially BYR 100 billion (0.3 percent of GDP), subsequently increased BYR 500 billion (1.1 percent of GDP) by Presidential Decree; 2005 budget includes limit of BYR 200 billion for central government guarantees.
- Significant proportion of bank loans and deposits are in foreign currency while official foreign reserves are low; a shock affecting confidence in the rubel could lead to a run on foreign exchange deposits.

### Selected Financial Soundness Indicators (Table 1 highlights)
- Capital Adequacy:
  - Regulatory capital to risk-weighted assets: Dec-00 24.4; Dec-01 20.7; Dec-02 24.2; Dec-03 26.0; Dec-04 25.2
  - Regulatory Tier I capital to risk-weighted assets: Dec-02 19.2; Dec-03 21.7; Dec-04 21.0
  - Capital (net worth) to total assets: Dec-01 15.1; Dec-02 18.7; Dec-03 20.4; Dec-04 20.0
- Asset composition (sectoral loans to total loans, Dec-00 to Dec-04):
  - Industry: 49.5 46.0 45.3 41.1 35.9
  - Agriculture: 9.9 11.1 11.3 11.3 12.6
  - Households: 9.8 11.2 13.6 18.1 21.2
- Foreign currency exposure and NPLs:
  - Foreign exchange loans to total loans: Dec-00 54.9; Dec-01 50.7; Dec-02 51.9; Dec-03 50.4; Dec-04 43.8
  - NPLs to gross loans: Dec-00 10.8; Dec-01 13.4; Dec-02 10.8; Dec-03 6.2; Dec-04 4.6
  - Required Provisions to NPLs: Dec-01 67.9; Dec-02 55.5; Dec-03 58.0; Dec-04 56.6
  - Actual Provisions to NPLs: Dec-01 37.7; Dec-02 15.8; Dec-03 29.1; Dec-04 32.4
  - Actual Provisions to Required Provisions: Dec-01 55.5; Dec-02 28.5; Dec-03 50.2; Dec-04 57.2
- Earnings and profitability (reported, 2004):
  - ROA (after tax): Dec-04 1.4
  - ROE (after tax): Dec-04 6.3
  - Noninterest income to gross income: Dec-04 40.8
  - Noninterest expenses to gross income: Dec-04 64.3
- Liquidity:
  - Liquid assets to total assets: Dec-04 27.7
  - Liquid assets to short-term liabilities: Dec-04 63.0
  - Loans to deposits: Dec-04 123.2
  - Foreign exchange loans to foreign exchange deposits: Dec-04 116.0
  - Foreign exchange deposits to total deposits: Dec-04 46.5
  - Foreign exchange liabilities to total liabilities: Dec-04 40.4

### Liquidity support and government injections
- Government repeatedly provided funds to the two largest banks; some injections were book transactions converting recommended-loan funds into capital or using proceeds of government securities placed in the same bank ("These approaches do not add liquidity in the system.").
- Deposits of state controlled insurance companies were directed to government-owned banks to alleviate liquidity.
- The two largest banks have at times received preferential supervisory treatment.
- Recapitalization costs have averaged close to 1 percent of GDP over the last five years.

### Foreign currency exposure, dollarization, and external liquidity
- Banking system highly dollarized; foreign currency deposits currently amount to close to 40 percent of broad money.
- Economy classified "highly dollarized" where ratio of foreign currency deposits to broad money exceeds 30 percent.
- Official foreign reserves relatively low: two weeks of imports.
- Net foreign assets of commercial banks are negative; sudden withdrawal of foreign currency liquidity could be disruptive.
- About three quarters of interbank FX market liquidity is provided by foreign banks, with Russian banks representing the majority.

### Credit and exchange risk from foreign-currency lending
- Foreign currency lending increases borrower credit risk due to foreign exchange risk for unhedged borrowers.
- Interest rates for foreign currency deposits and loans have been less volatile and lower than domestic currency interest rates.
- High dependence on nonresident banks for liquidity entails risks.

### Trade and sectoral lending concentration
- High trade concentration with Russia increases susceptibility to external shocks.
- End-2004 sectoral concentrations:
  - Belagroprombank: over 50 percent of loans for agriculture.
  - Belpromstroybank and Belvnesheconombank: about 70 percent of loans to industrial sector.
- Regulations restricting enterprises to BYR accounts at only one bank likely increase portfolio concentration.

### Interest rate restrictions and pricing opacity
- Administrative restrictions:
  - Interest rates on loans in foreign currency are capped.
  - General recommendation to lend at the refinance rate plus 3 percentage points limits rubel loan pricing.
- Banks compensate via fees and commissions, producing non-transparent pricing.
- Reported 2004 profitability ratios (low relative to peers): ROA 1.4 percent; ROE 6.3 percent.
- Several banks are under-provisioned, implying reported profitability may be overstated.

### Nonperforming loans (NPLs), reporting practices, and risks
- NBRB instruction required NPL ratio below 5 percent by end-2004; reported NPLs declined to 4.6 percent by end-2004.
- Reported decline contributed by:
  - Rapid loan growth (real loan growth > 40 percent in both 2003 and 2004).
  - Mid-2002 amendment enabling more aggressive clearing of old NPLs.
  - Evergreening and issuance of government guarantees.
  - Presidential decrees mandating lending or restructuring permitting partial provisioning.
- Loan classification and provisioning laxities include:
  - Reclassification generally required only after the second roll-over.
  - For long-term (> 1 year) loans, only overdue portion is classified.
  - Result: substantial underprovisioning and over-capitalization bias in reported indicators.
- Enterprise sector financials remain weak; high share of loss-making enterprises and inter-enterprise arrears cast doubt on low reported overdue loans.
- Official wage targets (wages to reach US$190 by end-2004; official wage target US$250 by end-2005) could translate into increased NPLs and recapitalization needs.

### Banking system structure, capitalization, and ownership
- 31 banks in total; six systemically important banks constitute about 85 percent of total assets and total capital.
- Belarusbank accounts for about 40 percent of banking system assets and over 60 percent of retail deposits.
- As of September 2004:
  - Share of government and state agencies (including the NBRB) in banking system capital around 80 percent.
  - State-owned banks accounted for 70 percent of total banking assets.
  - Only one of the six largest banks, Priorbank, is foreign controlled.
- Number of licensed banks and branches (selected figures):
  - Licensed banks: 28 (2000), 25 (2001), 28 (2002), 31 (2003), 32 (2004).
  - Bank branches: 529 (2000), 509 (2001), 478 (2002), 473 (2003), 463 (2004).
- Assets of commercial banks (percent of GDP): 29.5 (2000), 25.5 (2001), 25.7 (2002), 29.5 (2003), 31.2 (2004).
- Percent state-controlled of assets: 65.2 (2000), 63.9 (2001), 63.8 (2002), 70.6 (2003), 72.8 (2004).
- Percent with foreign participation of assets: 4.4 (2000), 7.5 (2001), 8.1 (2002), 20.4 (2003), 20.0 (2004).

### Stress testing — methodology and key results
- Stress tests used adjusted balance sheet data for all thirty-one commercial banks as at June 2004; adjustments reduced CAR from 24.9 percent to 18.6 percent (approximately 25 percent reduction).
- Bank groups:
  - Group 1: six largest banks
  - Group 2: state-owned commercial banks (6 banks)
  - Group 3: local private banks (7 banks)
  - Group 4: foreign banks (18 banks)
  - Group 5: all commercial banks (31 banks)
- Reported CAR by group (selected):
  - Reported: Group 1 24.1; Group 2 26.0; Group 3 22.0; Group 4 23.2; Group 5 24.9
  - Adjusted: Group 1 17.6; Group 2 18.7; Group 3 16.2; Group 4 18.5; Group 5 18.5
  - Without one very large bank: Adjusted CAR for Group 1 would be 10.5 (was 17.6 with bank included).
- Credit risk scenarios (post-shock CAR by group, selected):
  - 50 percent of loans to agriculture become loss: Group 1 13.0; Group 2 13.4; Group 3 15.8; Group 4 17.5; Group 5 14.6
  - 5 percent of loans to nonagriculture become loss: Group 1 14.6; Group 2 15.8; Group 3 13.5; Group 4 15.9; Group 5 15.7
- Exchange rate and combined shocks:
  - Depreciation by 20%; deterioration in quality of all unhedged FX loans (50% provisions): Group 1 12.1; Group 2 13.9; Group 3 9.8; Group 4 10.8; Group 5 13.0
  - Combined shock (depreciation 20%; deterioration in unhedged FX loans with 50% provisions; increase in BLR short-term interest rates): Group 1 9.2; Group 2 10.5; Group 3 9.4; Group 4 10.0; Group 5 10.4
  - Under the combined shock, CAR of Group 1 would be reduced to 9.2 percent; a capital injection of approximately BYR610 billion would be required to restore capital adequacy of these banks.
- Liquidity stress:
  - Reported liquidity ratio (liquid assets / liquid liabilities) by group: Group 1 53.1; Group 2 50.1; Group 3 78.5; Group 4 80.1; Group 5 59.1
  - Prudential minimum for liquidity ratio is 70 percent.
  - A 20 percent run on liquid liabilities (BYR and FX) would reduce Group 1 liquidity ratio to 41.4 and Group 2 to 37.6; private and foreign banks would remain above 70 percent.

### Payment system oversight, BISS findings and recommendations
- BISS (real-time gross settlement in central bank money) is technically well functioning but improvements needed to achieve full compliance with CPSIPS.
- 2003: 92 percent of interbank payments by value settled in BISS; by volume, 8 percent.
- Six biggest banks account for about 80 percent of both value and volume of payments.
- Key recommendations:
  - Establish effective and transparent governance for the payment system and formally establish an oversight function separated from operations.
  - Allow a greater share of reserve holdings to be used intraday for payments; make intraday credit instruments available subject to eligible collateral.
  - Elaborate and regularly test business continuity and contingency procedures.
  - Address cost allocation and possible overstaffing; consider throughput guidelines and operating hours adjustments.
  - Introduce explicit rules for voluntary and enforced exit.

### Deposit insurance — current shortcomings and proposed reform
- Current system gives full guarantees to Belarusbank and Belagroprombank without requiring contributions from them; other authorized banks receive preferential treatment.
- Proposed new law objectives:
  - Level playing field between state and non-state banks; mandatory membership.
  - Treat foreign and local currency deposits equally.
  - Initial contribution: 0.5 percent of a bank’s capital; ongoing quarterly contributions of 0.3 percent of deposits (noted as high by international standards).
  - Deposits covered in full up to Euro 2,000 equivalent with 80 percent coverage for next Euro 3,000 equivalent.
- Sequencing concern: structural liquidity shortage requires careful sequencing of deposit insurance changes and transitional arrangements to address Belarusbank’s and Belagroprombank’s depositors’ concerns.

### Conflict of interest, governance, and supervisory independence
- NBRB is both supervisor and shareholder in four banks; senior ministers and NBRB Board members sit on boards of larger banks.
- Recommendations:
  - NBRB should dispose of bank shareholdings to limit conflicts of interest.
  - Government ministers and NBRB officials should cease sitting on commercial bank boards.
  - Provide legal protection and indemnification for supervisors acting in good faith.

### Insurance, securities markets, and investor climate
- Recent measures reversed positive trends in insurance market; state companies made sole providers of MTPL from 2004, restricting almost half the market to State companies.
- Capital market activity nascent; technical infrastructure reasonable but regulatory environment lacks protection of property and contractual rights; impediments to secondary market trading and some government debt issuance practices hinder development.
- Golden share rule (strengthened March 2004) can be applied broadly, has no duration limit, and deters investment.
- Voucher privatization contingent liability: about 800 billion rubels (around US$400 million), approximately 12 percent of the annual budget; program extended to December 31, 2005.

### AML/CFT assessment — main findings and key recommended actions (summary)
- Strengths:
  - Money laundering is criminalized; financial institutions must monitor and report financial transactions subject to special control.
  - Compliance supervision detailed with strong on-site examination culture; ML offenses are investigated and prosecuted; some capacity for international cooperation exists.
- Weaknesses and recommendations:
  - Legal and institutional arrangements need updating and consolidation; implementation incomplete and, on several points, fall well short of FATF standards.
  - Key actions include: update legislation; centralize financial intelligence in a single FIU (DFM); reduce evidentiary burden for ML prosecutions; criminalize FT as a separate offense; require reporting of suspicious transactions regardless of thresholds; extend preventive measures to DNFBPs; improve CDD and beneficial ownership identification; enhance international cooperation and MLA procedures; provide training to judges, prosecutors, and supervisory authorities.

### Supervisory powers, licensing and recommended actions (selected)
- NBRB conducts comprehensive on-site examinations on a two-year basis and comprehensive off-site monitoring.
- Gaps and recommendations include:
  - Increase NBRB independence and budgetary autonomy (CP 1(1)).
  - Provide legal protection and indemnification to supervisors (CP 1(5)).
  - Formalize interagency information sharing (CP 1(6)).
  - Amend licensing legislation to permit deeper analysis of ownership, including indirect and beneficial owners (CP 3, CP 21).
  - Adopt and implement amendments to allow consolidated and globally consolidated supervision (CP 20, CP 23).
  - Move ahead more rapidly with IFRS implementation for banks’ financial statements.

*Source: _cr05216 - Executive Summary and selected excerpts (IMF staff assessment).*

### Executive Summary ......................................................................................................

### Executive Summary

### Overview and main assessment
- Reform of the Belarusian financial system has been slow overall; a centralized approach to managing the economy still dominates the financial system.
- The Government’s Banking Concept states an intention to move toward an efficient financial system with substantial private sector and foreign ownership, and progress has been made in a few areas.
- The National Bank of the Republic of Belarus (NBRB) has stabilized the value of the Belarusian rubel, and the financial system’s technical infrastructure and the regulatory and supervisory framework have been significantly upgraded toward international standards.
- With one exception, the major banks are still government owned or controlled and play a key role in economic management; they are frequently requested to lend to priority enterprises and sectors irrespective of whether recipients are profit-making.
- Directed/recommended lending and encouragement to lend at close to the official refinance rate have contributed to liquidity shortages and undermined profitability, especially in the two largest banks; repeated recapitalization and liquidity injections by the government have been required.
- Measures taken to offset liquidity impacts (for example, shifting deposits of some state controlled enterprises to government-owned banks) have contributed to an uneven playing field and supervisory forbearance for the largest banks; these banks also benefit from not having to contribute to the deposit insurance system.
- The nonbank financial sector remains underdeveloped; the regulatory environment for nonbanks is unpredictable due to frequent changes and ad hoc administrative measures (including an extensive and recently tightened golden share rule that deters private sector participation).
- The securities market lacks good investment opportunities despite progress in market infrastructure; there have been some backward steps in the insurance sector.
- Structural weaknesses in the banking system include periodically tight liquidity, low profitability, periods of underprovisioning, underdeveloped interbank markets, and possibly higher NPLs than official statistics indicate.
- Significant proportion of bank loans and deposits are in foreign currency while official foreign reserves are low; a shock affecting confidence in the rubel could lead to a run on foreign exchange deposits.
- In the absence of a shock, the banking system can likely continue operating as it currently does, provided the Government continues periodic financial support; however, such support does not address underlying structural issues and may increase fiscal contingent liabilities over time.
- Fundamental restructuring should commence sooner rather than later, with cessation or significant phasing back of directed/recommended lending as an essential first step.

### Key high-priority recommendations (Box 1)
- Commence fundamental financial sector reform, with an essential first step of stopping, or at least winding back, the policy of recommended lending.
- Develop a plan for bank restructuring, incorporating:
  - the removal of non-performing recommended loans from bank balance sheets;
  - changing the composition of government banks’ boards;
  - refraining from measures that create moral hazard and distort the financial markets, such as directing deposits of state owned entities for liquidity provision purposes; and
  - elimination of caps on lending rates and informal recommendations to banks to lend at close to the refinance rate.
- Increase NBRB independence, and provide banking supervision with greater autonomy.
- Enhance and better enforce the system of supervisory remedial measures.
- Increase the awareness of bank borrowers of the risks implied in unhedged foreign currency lending.

### Medium-term and developmental recommendations (Box 1)
- Accelerate the transition to International Financial Reporting Standards (IFRS), especially in the banking sector.
- Approve the proposed new structure of the deposit insurance system.
- Phase out the golden share rule.
- Consolidate all substantive legal provisions in the Law on Securities and Stock Exchanges and remove inconsistencies with other laws, such as the Civil Code.
- Implement a phased opening of the insurance sector to domestic and foreign private competition, reduce excessive regulation, relax licensing, tariff setting and controls, and implement a more level playing field in taxation of insurance premiums.
- Strengthen the role and independence of the insurance supervisory authority to ensure adequate on- and off-site supervision.

### Stability issues (summary of Section I)
- Financial system stability issues in Belarus arise almost entirely in the banking system; the capital market is in early stages and the insurance sector is small and not growing in real terms.
- Continued central management practices have resulted in major banks being “recommended” to expand lending to priority sectors irrespective of borrower profitability (see Box 2).
- Aggregate ratio of liquid assets (assets with a maturity of less than one month) to short term liabilities (liabilities with a maturity of less than one month) was 63 percent in December 2004, below the prudential minimum of 70 percent; individual bank ratios ranged from 29 percent to 112 percent across the ten largest banks.
- Interbank interest rates have been volatile; interbank rates have at times exceeded the overnight credit interest rate when liquidity was particularly tight.
- Recommended lending (flow terms) reached 3.4 percent of GDP in 2004 or about half of all new lending by banks, with two thirds of it extended to agriculture.
- Central Government guarantees to support bank credits increased sharply in 2004: the annual limit for central government guarantees on loans extended by banks in 2004 was initially BYR 100 billion (0.3 percent of GDP), a Presidential Decree subsequently increased the amount by another BYR 500 billion (1.1 percent of GDP), and a limit of BYR 200 billion for central government guarantees has been included in the 2005 budget.

### Recommended structural and governance changes (excerpted)
- If government influence over bank lending continues, concentrate such lending in one or two institutions that:
  - focus only on these activities so they do not compete unfairly and inhibit financial system development;
  - should not be able to take deposits but instead be funded directly from the budget.
- Government ministers and NBRB officials should cease sitting on the boards of commercial banks even if the government is the major shareholder.
- In the short run, move toward more autonomous bank managements and boards comprised of professionals with incentives to focus solely on viable banking activities.
- Financial sector reform must be accompanied by enterprise restructuring; loss-making enterprises are a major source of banking sector problems and a comprehensive corporate sector reform program is required.
- Government funding currently provided as periodic bank recapitalizations could be shifted to direct enterprise subsidies for sectors the government wishes to support.

### Selected Financial Soundness Indicators for the Banking Sector (Table 1)
- Capital Adequacy:
  - Regulatory capital to risk-weighted assets: Dec-00 24.4; Dec-01 20.7; Dec-02 24.2; Dec-03 26.0; Dec-04 25.2
  - Regulatory Tier I capital to risk-weighted assets: Dec-00 n.a.; Dec-01 n.a.; Dec-02 19.2; Dec-03 21.7; Dec-04 21.0
  - Capital (net worth) to total assets: Dec-00 n.a.; Dec-01 15.1; Dec-02 18.7; Dec-03 20.4; Dec-04 20.0
- Asset composition and quality:
  - Sectoral distribution of loans to total loans (Dec-00 to Dec-04): Industry 49.5 46.0 45.3 41.1 35.9; Agriculture 9.9 11.1 11.3 11.3 12.6; Trade 8.7 8.0 7.1 6.7 7.2; Construction 1.0 1.4 1.7 1.5 2.1; Households 9.8 11.2 13.6 18.1 21.2; Others 21.1 22.3 21.0 21.3 21.0
  - Share of state-owned enterprises in total loans 1/: Dec-00 39.4; Dec-01 42.2; Dec-02 45.3; Dec-03 35.7; Dec-04 31.7
  - Foreign exchange loans to total loans: Dec-00 54.9; Dec-01 50.7; Dec-02 51.9; Dec-03 50.4; Dec-04 43.8
  - NPLs to gross loans: Dec-00 10.8; Dec-01 13.4; Dec-02 10.8; Dec-03 6.2; Dec-04 4.6
  - Required Provisions to NPLs: Dec-00 n.a.; Dec-01 67.9; Dec-02 55.5; Dec-03 58.0; Dec-04 56.6
  - Actual Provisions to NPLs: Dec-00 n.a.; Dec-01 37.7; Dec-02 15.8; Dec-03 29.1; Dec-04 32.4
  - Actual Provisions to Required Provisions: Dec-00 n.a.; Dec-01 55.5; Dec-02 28.5; Dec-03 50.2; Dec-04 57.2
  - NPLs net of provisions to capital: Dec-00 n.a.; Dec-01 32.9; Dec-02 27.3; Dec-03 12.3; Dec-04 11.4
  - Annual growth in loans: Dec-00 219.1; Dec-01 66.1; Dec-02 56.4; Dec-03 57.6; Dec-04 59.3
  - Annual growth in assets: Dec-00 224.3; Dec-01 62.7; Dec-02 53.0; Dec-03 57.8; Dec-04 45.7
- Earnings and Profitability:
  - ROA (after tax): Dec-00 1.0; Dec-01 0.8; Dec-02 1.0; Dec-03 1.5; Dec-04 1.4
  - ROE (after tax): Dec-00 4.8; Dec-01 4.9; Dec-02 4.4; Dec-03 6.4; Dec-04 6.3
  - Noninterest income to gross income: Dec-00 23.7; Dec-01 46.5; Dec-02 46.3; Dec-03 35.4; Dec-04 40.8
  - Noninterest expenses to gross income: Dec-00 45.0; Dec-01 66.3; Dec-02 67.7; Dec-03 61.5; Dec-04 64.3
  - Administrative expenses to noninterest expenses: Dec-00 n.a.; Dec-01 18.0; Dec-02 19.5; Dec-03 30.7; Dec-04 19.2
- Liquidity:
  - Liquid assets to total assets 2/: Dec-00 13.2; Dec-01 13.9; Dec-02 16.0; Dec-03 29.1; Dec-04 27.7
  - Liquid assets to short-term liabilities 3/: Dec-00 n.a.; Dec-01 n.a.; Dec-02 n.a.; Dec-03 60.9; Dec-04 63.0
  - Long-term assets to long-term liabilities 4/: Dec-00 1.8; Dec-01 1.5; Dec-02 2.4; Dec-03 3.9; Dec-04 4.1
  - Loans to deposits: Dec-00 106.8; Dec-01 114.1; Dec-02 112.7; Dec-03 111.7; Dec-04 123.2
  - Foreign exchange loans to foreign exchange deposits: Dec-00 81.2; Dec-01 87.8; Dec-02 96.7; Dec-03 103.3; Dec-04 116.0
  - Foreign exchange deposits to total deposits: Dec-00 72.2; Dec-01 65.9; Dec-02 60.5; Dec-03 54.5; Dec-04 46.5
  - Foreign exchange liabilities to total liabilities: Dec-00 54.2; Dec-01 47.6; Dec-02 44.6; Dec-03 42.1; Dec-04 40.4

*Source: _cr05216 - Executive Summary (IMF staff assessment).*

### 4.      To address the liquidity problem, the Government has repeatedly provided

### _cr05216 - 4.      To address the liquidity problem, the Government has repeatedly provided

### Liquidity support and government injections
- The Government has repeatedly provided funds to the two largest banks.
- Some injections were effectively book transactions: converting funds previously provided for recommended loans into capital or providing capital injections from the proceeds of government securities placed in the same bank; "These approaches do not add liquidity in the system."
- Other measures to alleviate major banks’ liquidity included directions that the deposits of state controlled insurance companies be shifted to the government owned banks.
- The two largest banks have at times received preferential supervisory treatment.
- Recapitalization costs have averaged close to 1 percent of GDP over the last five years.

### Foreign currency exposure, dollarization, and external liquidity
- The banking system remains highly dollarized; foreign currency deposits currently amount to close to 40 percent of broad money.
- The economy is classified as "highly dollarized" where the ratio of foreign currency deposits to broad money exceeds 30 percent (reference to IMF Occasional Paper 117).
- Official foreign reserves are relatively low, at two weeks of imports, limiting the NBRB’s ability to maneuver or absorb shocks.
- Net foreign assets of commercial banks are negative; a sudden, unexpected withdrawal of foreign currency liquidity could be disruptive.
- The significant role of Russian banks in providing liquidity to the Belarusian interbank market implies that disruptions in the Russian banking system could rapidly spill over to Belarus.

### Credit and exchange risk from foreign-currency lending
- Foreign currency lending increases borrower credit risk due to foreign exchange risk; borrowers without foreign currency hedges may have difficulty servicing loans in case of a substantial depreciation of the rubel.
- Interest rates for foreign currency deposits and loans have been less volatile and lower than domestic currency interest rates.
- High dependence on nonresident banks for liquidity entails risks.

### Trade concentration and sectoral lending concentration
- Belarus’s high trade concentration with Russia (the main trading partner) makes Belarus susceptible to external shocks.
- Many large banks have high sectoral lending concentration:
  - At end-2004, over 50 percent of loans by Belagroprombank were for agriculture.
  - At end-2004, loans to the industrial sector constituted about 70 percent of Belpromstroybank’s and Belvnesheconombank’s loan portfolios.
- Regulations that required enterprises could have BYR denominated accounts with only one bank likely increase enterprise-level portfolio concentration.
- Periodic NBRB exemptions on the maximum legal lending limit to a single client are indicative of probable loan concentration.

### Interest rate restrictions, pricing opacity, and profitability
- Administrative measures restrict interest rates and banks’ ability to price risk, especially at the longer end of the curve:
  - Interest rates on loans in foreign currency are capped.
  - Interest margins for loans in rubel are limited by a general recommendation to lend at the refinance rate plus 3 percentage points.
- Banks compensate in part with added fees and commissions, leading to non-transparent pricing.
- Banking sector profitability (reported, 2004):
  - Average reported return on assets was 1.4 percent.
  - Return on equity was 6.3 percent.
- These ratios are among the lowest for emerging European countries (typical 2004 ranges cited: return on assets 1.2 percent to 2.5 percent; return on equity 10 percent to 25 percent).
- Several Belarusian banks are under-provisioned, implying reported profitability may be overstated.

### Nonperforming loans (NPLs), reporting practices, and risks
- NBRB instruction required banks to reduce NPL to total loan ratio below 5 percent by end-2004.
- Reported NPLs declined to 4.6 percent by end-2004, down from 13.4 percent in December 2001.
- Contributing factors to the reported decline include:
  - Rapid growth in bank lending.
  - Mid-2002 NBRB amendment to loan classification and provisioning rules enabling more aggressive clearing of old NPLs.
  - Evergreening (rolling over) of loans.
  - Issuance of government guarantees, which doubled in nominal terms in 2003 and increased further in 2004.
  - Presidential decrees mandating lending or restructuring that permit partial provisioning of loss loans.
- Loan classification and provisioning laxities:
  - Reclassification generally required only after the second roll-over.
  - For long-term (> 1 year) loans, only the overdue portion is classified.
  - Result: substantial underprovisioning and an over-capitalization bias in reported soundness indicators.
- Despite high recent economic growth, enterprise sector financials remain weak:
  - High share of loss-making enterprises and large inter-enterprise arrears cast doubt on the reported low level of overdue bank loans.
  - Government-mandated wage targets: wages should reach a minimum equivalent to US$190 by end-2004; official wage target of US$250 by end-2005 could create pressures and translate into increased non-performing loans and further recapitalization needs.
  - Considerable share of non-monetary payments between enterprises implies persisting lack of liquidity in some sectors.
- Rapid loan growth raises concern about future NPLs:
  - Loans grew in real terms by in excess of 40 percent in both 2003 and 2004.
  - Average loan growth rate for central and eastern European countries in 2003-04 was around 25 percent.

### Banking system structure, capitalization, and stress testing
- The financial system is dominated by six commercial banks; 31 banks in total.
- The six systemically important banks constitute about 85 percent of total assets and total capital.
- Belarusbank accounts for about 40 percent of banking system assets and over 60 percent of retail deposits.
- As of September 2004:
  - Share of government and state agencies (including the NBRB) in banking system capital was around 80 percent.
  - State-owned banks accounted for 70 percent of total banking assets.
  - Only one of the six largest banks, Priorbank, is foreign controlled.
- Table 2 highlights (selected exact figures preserved from table):
  - Number of licensed banks: 28 (2000), 25 (2001), 28 (2002), 31 (2003), 32 (2004).
  - Number of bank branches: 529 (2000), 509 (2001), 478 (2002), 473 (2003), 463 (2004).
  - Assets of commercial banks (percent of GDP): 29.5 (2000), 25.5 (2001), 25.7 (2002), 29.5 (2003), 31.2 (2004).
  - Percent state-controlled of assets: 65.2 (2000), 63.9 (2001), 63.8 (2002), 70.6 (2003), 72.8 (2004).
  - Percent with foreign participation of assets: 4.4 (2000), 7.5 (2001), 8.1 (2002), 20.4 (2003), 20.0 (2004).
- Reported average capital adequacy ratio (CAR, capital to risk-weighted assets) was 25.2 percent as of end-2004.
- Staff estimate adjusting for Belarusian accounting and asset classification biases:
  - Adjusted average CAR could be reduced by 25 percent (to around 19 percent), with several largest banks potentially having CARs below 10 percent.
  - Estimate is very approximate due to limited information.
- Stress tests:
  - Conducted to assess impact of deterioration in credit portfolio quality; exchange rate and interest rate fluctuations; and liquidity withdrawals.
  - Tests used adjusted balance sheet data to compensate for over-capitalization biases.
  - Tests found several systemically important banks are vulnerable to credit and liquidity shocks.
  - Sector and economy features that amplify disturbance: large share of loss-making enterprises; large share of foreign-currency-denominated loans; large share of assets with long-term maturities.

### Insurance, securities markets, voucher privatization, and investor climate
- Recent Government and Presidential administration measures have reversed positive trends in the insurance market, limiting competition and prompting private (especially foreign) companies to leave the market.
- State companies were made the only providers of motor third party liability insurance (MTPL) with effect from 2004, restricting almost half the market to State companies; similar provisions on other compulsory lines were subsequently introduced.
- Abolition of the ability to deduct voluntary insurance premiums from taxation reduced private insurers’ incentives.
- Capital market:
  - Activity is nascent; basic technical infrastructure reasonable but regulatory environment for protection of property and contractual rights is lacking.
  - Impediments to secondary market trading and some government debt issuance practices are not conducive to capital market development (e.g., lack of transparency in direct placement of Government bonds; foreign exchange denominated Government long-term securities are not tradable and can be called before maturity at the issuer’s discretion).
- The golden share rule, strengthened by a March 2004 Presidential Decree, is a deterrent to investors:
  - The golden share can be applied to any company previously owned or created by the State, including 100 percent privately owned.
  - There is no limit to the duration of the golden share.
  - Reportedly to be applied in limited circumstances: anti-competitive conduct, possible liquidation, failure to pay tax, and failure to pay employees’ salaries for a period of 6 months.
- Voucher privatization program:
  - Contingent liability from redemption of unused vouchers at present face value is about 800 billion rubels (around US$400 million) or approximately 12 percent of the annual budget.
  - By law unused vouchers may be redeemed for cash at face value at the end of the program.
  - Program originally to finish at end-2003; extended to December 31, 2004, and recently extended again till December 31, 2005.

### Financial regulation, supervision progress, and main recommendations
- Significant progress in upgrading regulatory and supervisory framework and NBRB supervisory capacity toward international standards; supervision converging with the Basel Core Principles (BCP).
- Since 2003, NBRB moved from transaction testing to a more risk-focused supervisory approach.
- Main recommendations for further strengthening banking supervision (as given in the Annex):
  - provide banking supervision with more autonomy through strengthening the institutional standing within the NBRB of the Director of the Bank Supervision Directorate;
  - make the current system of remedial measures more specific;
  - strengthen the licensing process to grant the NBRB the right to conduct a deeper analysis of a proposed bank's ownership structure, reveal true beneficial owners, and assess their potential influence on the bank's activities;
  - introduce specific legislative provisions to protect NBRB supervisory staff against law suits for measures taken in good faith against a financial institution;
  - move ahead expeditiously with the introduction of international financial reporting standards (IFRS) for banks’ financial statements;
  - introduce a comprehensive Manual of Examination Procedures.

*Source: IMF staff report excerpt from _cr05216 - 4.      To address the liquidity problem, the Government has repeatedly provided*

### 30.      Conflict of interest issues potentially arise as the NBRB is both the supervisor of

### _cr05216 - 30.      Conflict of interest issues potentially arise as the NBRB is both the supervisor of

### Conflict of interest in bank supervision
- The NBRB is both the supervisor of banks and has shareholdings in four banks.
- Senior ministers and members of the Board of NBRB are also seated on the boards of the larger banks.
- Recommendations:
  - The NBRB should dispose of its bank shareholdings to limit actual or apparent conflicts of interest.
  - Government ministers and National Bank of Belarus officials should cease sitting on the boards of commercial banks even where the government is the major shareholder.
  - Near-term objective: bank managements and boards comprised of professionals with incentives to focus solely on viable banking activities.
  - Ultimate goal: privatization.

### Payment system oversight and resilience
- Technical functioning: payment system was found to be technically well functioning.
- Gaps relative to CPSIPS: improvements needed to achieve full compliance with the Core Principles for Systemically Important Payment Systems.
- Recommendations:
  - Establish effective and transparent governance for the payment system.
  - Introduce an oversight function and have the NBRB define and make publicly available its main payment system oversight objectives and policies.
  - Elaborate technical security and business continuity measures.
  - Subject the system to regular risk analysis.

### Insurance legal and supervisory framework
- Law on Insurance:
  - Issued in June 1993; described as comprehensive and modern.
  - Defines insurance concepts, products and market participants; provides legal basis for establishment of insurance companies, brokers and intermediaries, licensing procedures, financial reporting and solvency criteria and sanctions.
  - Includes a definition of solvency margin according to EU directives.
  - Lacks: requirement for application of IFRS; norms on corporate governance; safe custody and segregation; discount rates and mortality tables for mathematical reserves calculation; rules for group consolidated control and treatment of derivative products.
  - Regulatory system foresees a strict licensing process for all new insurance products, and strict controls and guidelines for tariffs and commissions, which are set by law.
- Supervisory authority:
  - Originally separate; downsized in 2002, staff reduced, converted into a department of the Ministry of Finance (MOF).
  - Main functions: register and license insurers, re-insurers, brokers, intermediaries; ensure compliance with the law; provide accounting and reporting rules; supervise tariff rates and reserving levels; regulate foreign insurance activity.
  - Assessment: department is currently too small; should be reinforced and made more autonomous to cope with a more developed market.

### Securities market regulation and supervisory capacity
- Legal/regulatory regime: has undergone fairly constant change; governed by a plethora of laws, rules and regulations.
- Consequences: uncertainty from continuing change, heavy layers of regulation, and lack of clarity in drafting and implementation limits investor, issuer and intermediary confidence.
- Primary regulator: State Committee for Securities Supervision (SC) under the Council of Ministers.
  - Lacks operational independence, has limited enforcement powers, and lacks skills and resources to respond quickly to market or regulatory requirements.
  - While the Chairman has day-to-day responsibility, important matters are apparently referred to the Council of Ministers for decision.

### Safety nets — Systemic liquidity
- NBRB liquidity instruments:
  - Chiefly relies on Lombard auctions and standing facilities.
  - Foreign exchange swaps and mutual placement of foreign exchange deposits now rarely used.
  - Repo auctions introduced earlier, used only since October 2004 because of technical difficulties.
- Interbank market characteristics:
  - Fairly shallow and segmented.
  - Two of the largest banks represented two thirds of the borrowing at times in late 2005.
  - Resulted in upward pressure on interbank interest rates and significant access to NBRB funds.
  - Due to limited collateral, quantity constraints at times on access to NBRB funding; interbank rates occasionally exceeded the NBRB’s overnight credit rate during the period of tightest liquidity in the second half of 2004.
- Secondary markets and collateral:
  - Lack of secondary markets limits liquidity of banks’ assets.
  - Secondary market for government bonds (GKOs and GDOs) is shallow; primary market does not appear to respond to market signals or banks’ liquidity needs.
  - Government bonds denominated in foreign currency (VGDOs) placed with banks, primarily in Belarusbank, amounting to US$135 million by end-September 2004, are not tradable and cannot be used as collateral for operations with the NBRB.
- Payment system structural liquidity:
  - Structural limitation on liquidity available in the payment system.
  - Possible approach: greater share of reserve holdings available intraday for payments purposes; NBRB should examine potential impact given structural liquidity shortage.
- Interbank foreign exchange market:
  - Less segmented and relatively less volatile than the interbank market in rubels.
  - Relatively wide dispersion of interest rates across banks.
  - About three quarters of the liquidity on the market is provided by foreign banks, with Russian banks representing the majority.
  - Impact of Russian banking crisis in summer 2004 on Belarusian interbank FX market was limited; Russian banks returned fairly promptly after initial withdrawal.

### Deposit insurance — current shortcomings and proposed reform
- Current system shortcomings:
  - Provides preferential treatment to the authorized banks; Belarusbank and Belagroprombank receive an even greater advantage than the other four authorized banks.
  - Lowers cost of funding for these banks, giving them a competitive advantage in attracting deposits.
- Proposed new law objectives:
  - Level the competitive playing field between state-owned banks and privately owned rivals.
  - Incorporates most best practices of a sound deposit insurance scheme.
  - Envisioned premium: quarterly 0.3 percent of deposits (noted as high by international standards).
  - Recommendation: higher premium may be justified while fund builds up, but contribution rates probably should not be held so high for an extended period.
  - If implemented, the new scheme would reduce Government contingent liabilities and reduce moral hazard, though proposed maximum coverage per individual is high relative to other CIS countries and would still imply substantial moral hazard given small average household deposit sizes in major banks.
- Sequencing concern:
  - Structural liquidity shortage means authorities need careful sequencing of deposit insurance changes with other banking sector reforms; transitional arrangements necessary to address Belarusbank’s and Belagroprombank’s depositors’ concerns; lessons from Russia useful.

Box 3 — Key features of the current and proposed deposit insurance schemes

- Key features of the current scheme
  - Under the current deposit insurance system in Belarus, two of the authorized banks, Belarusbank and Belagroprombank benefit from a full guarantee on all their deposits. However, they are not required to pay any contributions to the Guarantee Fund.
  - Foreign currency deposits are fully guaranteed in the four other authorized banks, Belpromstroybank, Belinvestbank, Belvnesheconombank, and Priorbank. Local currency deposits in those banks are covered up to US$1,000 equivalent. These four banks pay monthly 0.1 percent of the household deposits to the Guarantee Fund.
  - All other banks are covered up to US$1,000 equivalent both for their local and foreign currency deposits and they pay monthly contributions according to the total deposit levels:
    - 0.1 percent if deposits do not exceed the capital of the bank;
    - 0.2 percent if the deposits are between one and two times the capital of the bank; and
    - 0.3 percent if the deposits are greater than two times bank capital.

- Key features of the proposed scheme
  - State and non-state owned banks will be treated equally, with membership of the scheme being mandatory.
  - Foreign and local currency deposits will be treated equally, hence reducing possible incentives for dollarization.
  - Contributions will be an initial 0.5 percent of a bank’s capital, with ongoing quarterly contributions of 0.3 percent of deposits.
  - Deposits will be covered in full up to Euro 2,000 equivalent with 80 percent coverage for the next Euro 3,000 equivalent.

### Crisis resolution and contingency planning
- Bank resolution:
  - Bank liquidations proceed slowly, even for smaller banks.
  - NBRB needs to react consistently and promptly to information indicating a bank is in violation of prudential/regulatory requirements.
  - Failure to rectify problems upon NBRB instruction should lead to increasingly onerous penalties.
  - NBRB should be empowered to take corrective action: replace management, seek take-over, or close the bank.
  - Bank resolution should be guided by principles of corrective action, least-cost reorganization, deposit safety, and systemic stability.
  - Any recapitalization of a seriously under-capitalized bank should be accompanied by a solid restructuring program.
- Contingency planning:
  - NBRB has no formalized contingency planning; crisis management is case-by-case.
  - Recommendations:
    - Put in place an early warning system and contingency plans for handling problems in individual banks.
    - Establish clear sequencing of actions and criteria for their application.
    - Limit liquidity provision for troubled banks in time and ensure it does not impact monetary operations; current liquidity provision has been ad hoc and on occasion without collateral.

### Monetary policy transparency
- Informal assessment based on IMF’s Code of Good Practices on Transparency in Monetary and Financial Policies.
- Observations:
  - Belarus appears to observe many aspects of monetary policy transparency.
  - Responsibilities of the NBRB are specified in legislation, which also establishes the NBRB’s authority in using monetary policy instruments.
  - Legislation allows for a relatively heavy role for the state in monetary policy; Banking Code states monetary policy is a component part of a single state economic policy rather than solely based on identified goals of price or exchange rate stability.
- Recommended improvements:
  - (a) Clarification of the NBRB’s autonomy;
  - (b) Further clarification of the institutional relationship between monetary and fiscal operations;
  - (c) Greater clarity regarding the role, if any, of the U.S. dollar in anchoring monetary policy;
  - (d) Distribution of NBRB profits according to international best practice;
  - (e) Adoption and disclosure of specific standards of NBRB staff conduct, and granting legal protection for its staff; and
  - (f) Publishing of the detailed audited financial statements in accordance with IFRS.

### AML/CFT regime assessment
- Assessment basis: FATF Forty Recommendations 2003 and Eight Special Recommendations on Terrorist Financing 2001, using AML/CFT Methodology 2004.
- Strengths:
  - Money laundering is criminalized.
  - Financial institutions must monitor and report financial transactions subject to special control.
  - Compliance supervision is detailed with a strong culture of on-site examination.
  - Two agencies exercise financial intelligence responsibilities.
  - ML offenses are investigated and successfully prosecuted.
  - Some capacity exists to cooperate internationally.
- Weaknesses and recommendations:
  - Gaps and misalignments in legal and institutional arrangements and incomplete implementation undermine full effectiveness.
  - On several key points arrangements fall well short of FATF standards.
  - Needs:
    - Update legislation;
    - Streamline and better coordinate functions of relevant agencies;
    - Supervisors should emphasize detection, deterrence, and reporting of truly suspicious transactions;
    - Centralize financial intelligence in a single agency;
    - Strengthen provisions for international cooperation.
  - Authorities are aware and well advanced on a reform agenda.

### Annex — Basel Core Principles (BCP) summary findings (selected)
- Legal and regulatory framework:
  - Significant reform over the last decade with adoption of a series of laws and regulations reasonably comprehensive and broadly consistent with international best practices.
  - Main legislative act: Law of the Republic of Belarus of October, 2000 On the Banking Code of the Republic of Belarus; NBRB responsible for authorization, supervision and regulation; NBRB issues Regulatory Legal Acts jointly with the Government, as well as Rules and Instructions.
- Governance and independence:
  - Present governance arrangements undermine the operational independence of the NBRB in banking supervision.
  - A member of the government and a representative of the banking sector are both seated in the main decision making body of the NBRB.
  - Various official directives and requests can have implications for supervisors; government can significantly influence the NBRB budget.
  - Coordination among NBRB, State Securities Commission and Insurance Supervisory Department of MOF could be better formalized; meetings and information exchange could be made regular.

*Source: IMF staff report content.*

### 53.      The legal protection for supervisors is currently not addressed. The law does not

### _cr05216 - 53.      The legal protection for supervisors is currently not addressed. The law does not

### Legal protection for supervisors
- The law does not provide for legal protection for the supervisory agency and its staff for actions taken while discharging their duties in good faith.
- There is no formal NBRB indemnification policy protecting employees against the costs of defending their actions while discharging their duties.

### Licensing and structure
- The BC requires that the name of a bank must include the word “bank”.
- Prior to engaging in banking operations, each institution must obtain a license from the NBRB, which is the sole authority for granting banking licenses.
- The BC grants the NBRB the right to request information about founders, to assess their financial condition, and to evaluate the professional fitness of executive bodies and the chief accountant.
- The NBRB has authority to grant authorization for acquisitions or increases of qualifying holdings in an existing bank, but:
  - Legislation does not explicitly grant the NBRB the right to conduct a full analysis of a bank’s ownership structure.
  - Bank ownership approval by the NBRB is limited to shareholdings of 10 percent or higher.
  - The NBRB may not detect if buyers are acting in concert, potentially obscuring the full extent of shareholders' financial interests.
  - The BC does not define “controlling interest”.

### Prudential regulation and requirements
- Rules and regulations regarding capital adequacy generally conform to the Basel Capital Accord 1988, and as of January 1, 2005 will include a capital charge for market risk, country risk, foreign exchange risk and other material risks.
- NBRB regulations adequately address criteria, practices and procedures for extension of credit.
- Procedures for classifying assets exposed to credit risk and for establishing special loss reserves are mandated by NBRB regulations.
- Banks are required by the BC to be independent in their activities and to independently determine the condition of transactions not conflicting with the legislation; however, in practice:
  - Banks often are not completely independent in credit decisions.
  - Regulations signed by the President and Government of the Republic of Belarus frequently request banks to allocate resources to official programs.
- NBRB has regulations for identifying related customers and banks mostly operate within those limits, but:
  - Instances occurred where Government Agencies opted not to take corrective actions against banks for violations, tied to the State importance of measures financed by those credits.
- NBRB issued regulations and recommendations requiring banks to measure and monitor country risk, market risk, foreign exchange risk and other material risk; these regulations became effective on January 1, 2005 (after this BCP assessment) so effectiveness could not be assessed.
- AML Law (May 2002) assigns main compliance functions not to the NBRB but to the Ministry of Taxes and Duties and the State Control Committee. Recommendations:
  - Bank supervisors need to place more emphasis on detection, deterrence, and reporting of suspicious transactions.
  - Financial intelligence should be centralized in a single agency and provisions for international cooperation need strengthening.

### Methods of ongoing supervision
- NBRB conducts full-scope on-site examinations of banks, including larger branches, on a two year basis.
  - Examinations are comprehensive: risk management systems, internal controls, management systems, compliance with prudential requirements, asset quality and provisioning.
  - Two examination reports are prepared at completion of each full scope examination and forwarded to management.
- Off-site monitoring is comprehensive, based on daily, weekly, monthly and quarterly information provided by banks.
- Legislation does not codify consolidated supervision; a draft amendment to the BC is prepared to define a banking group and a bank holding company and allow consolidated supervision.
- NBRB is implementing International Financial Reporting Standards for financial institutions stage-by-stage, and so far has introduced eleven standards. It is anticipated that implementation will be accomplished by 2008.

### Formal powers of supervisors
- The BC empowers the NBRB to issue decisions to restore rightful conditions and remove abuses, develop corrective action and early intervention.
- Remedial actions include removal of the bank’s governor and withdrawal of the bank's license.
- Limitations:
  - NBRB cannot apply several corrective actions simultaneously for one violation.
  - NBRB cannot apply supplemental measures if prior ones have not had sufficient impact.
  - Proposed changes to the BC have been made to rectify these limitations.

### Cross-border banking
- Supervisory responsibilities of the NBRB apply equally to Belarusian and foreign banks.
- Prior to licensing a subsidiary of a foreign-owned bank, the NBRB ensures the home supervisor has issued an approval.
- MOUs exist with most relevant home country supervisors for reciprocal information sharing and on-site access.
- The BC does not currently provide the NBRB with means to supervise credit institutions on a global consolidated basis.
- Currently no cross-border operations of Belarusian banks exist; draft amendments to enable consolidated supervision of banking groups and holding companies have been prepared.

### Table 3 — Recommended Actions in the Area of Banking Supervision (selected)
- Independence (CP 1(1)): Increase the level of independence in the budgetary process.
- Legal protection (CP 1(5)): Provide legal protection to the supervisors against legal actions. Provide indemnification of supervisors for legal costs incurred.
- Information sharing (CP 1(6)): Formalize coordination among different agencies involved in financial sector regulation and supervision.
- Licensing criteria (CP 3): Amend legislation to permit deeper analysis of ownership structure including indirect ownership.
- Ownership (CP 4): Decrease the current limit for authorization of purchases of shares transferred from original owner to subsequent owners.
- Investment criteria (CP 5): Authorize the NBRB to conduct deeper analysis of the impact of investments on a bank’s financial position.
- Large exposure limits (CP 9): Give the NBRB discretionary power in interpretation of what constitutes closely related groups.
- Connected lending (CP 10): Grant bank supervisors discretion to judge existence of connections between a bank and other parties.
- Country risk (CP 11): Ensure individual banks have established country exposure limits and transfer risk limits. Ensure effectiveness of Instruction 92 dated June 2004 that becomes effective January 1, 2005.
- Market risk (CP 12): Ensure effectiveness of Instruction 92 dated June 2004 that becomes effective January 1, 2005. Bank supervisors should require additional training to analyze and monitor market activities.
- Other risks (CP 13): Establish operational risk management procedure and procedure for calculating aspects of interest-rate risks. Ensure effectiveness of Instruction on Economic Standards for banks due January 1, 2005.
- Consolidated supervision (CP 20): Adopt and implement proposed amendment to the BC to allow NBRB to supervise banking groups and holding companies on a consolidated basis.
- Accounting standards (CP 21): Introduce IFRS to the full extent more rapidly than current timetable.
- Globally consolidated supervision (CP 23): Adopt and implement proposed amendments to the BC that define a banking group and a bank holding company and grant NBRB the possibility for supervising such groups on a consolidated basis.

### Authorities’ responses
- The NBRB broadly agreed with the assessment, finding it objective and useful.
- The NBRB felt ratings of CPs 5, 6, 9, and 21 could have been higher.
- The NBRB noted ongoing work on implementation of international standards of banking supervision, including procedures to monitor and limit country risks, operational risks, and market risks, and reported that several steps have been taken to implement the assessment’s recommendations.

### CPSS — Core Principles for Systemically Important Payment Systems: Institutional setting
- Assessment summarizes observance of the Belarus Interbank Settlement System (BISS) with CPSIPS.
- Information sources: NBRB documents including a BISS self-assessment, NBRB plans for payment system development, other documents and statistics, and meetings with NBRB officials and representatives of three banks participating in BISS.
- The core elements of the Belarusian payment system are owned and managed by the NBRB:
  - BISS: real-time gross settlement in central bank money for high-value transactions in Belarusian ruble. There are currently 36 participants in BISS.
  - National Bank clearing system: net settlement of large volumes of low-value interbank transactions. The clearing system has 35 participants.
- Currency and Stock Exchange operates a clearing and settlement system for securities.
- BelCard handles domestic plastic card payments; international card payments processed by international systems’ processing centers.
- Net interbank balances from securities clearing/settlement and plastic card transactions are settled in BISS.

### CPSS — Payment system operations and statistics
- BISS payment processing:
  - Valid payment request -> checks for sufficient funds in ordering bank's correspondent account; if sufficient, debit ordering bank and credit receiving bank (payment final once debited); message released to receiving participant.
  - If insufficient funds, payment placed in waiting queue; queued payments processed first by priority, then by time of input.
- Payment requests can be prioritized by the originating bank.
- Real-time information management allows participants to monitor account balance, queued payments (outgoing and incoming), change priority of queued payments, and request funds to be reserved.
- 2003: Some 92 percent of all interbank payments, in value terms, were settled in BISS; in volume terms, some 8 percent of total traffic was settled through BISS.
- The six biggest banks account for some 80 percent of both value and volume of payments.
- Intraday pattern is unbalanced: around some 50 percent of the payments value processed toward the end of the day.
- May 2004: NBRB Board approved the Concept Document for the Development of the National Payment System of the Republic of Belarus until 2010 with an Account for Global Trends.
- Major project: upgraded BISS expected to start live operations as from April 2005. New BISS will split payment flow into two categories: large value and/or time sensitive; and non-time sensitive. System will attempt automated queue optimization.

### CPSS — Main findings and recommendations
- BISS is generally technically well functioning, but improvements are needed for full compliance with CPSIPS:
  - Establish effective and transparent governance for the payment system, including overall economic efficiency.
  - Improve intraday liquidity conditions: allow a greater share of reserve holdings intraday for payments and reconsider current limitations to intraday credit facility.
  - Further elaborate technical security and business continuity measures and subject the system to regular risk analysis.
  - Introduce an oversight function and publicize main payment system oversight objectives and policies.
- Legal foundation (CP I):
  - Two-tier legislative framework: laws and presidential decrees (first tier) notably the BC, and regulatory documents issued by NBRB (second tier).
  - Legal basis is well-founded but complex; simplification/consolidation of documentation is recommended.
- Understanding and management of risks (CPs II–III):
  - As an RTGS with settlement in central bank money, participant credit risk does not arise.
  - NBRB is subject to credit risk to the extent it provides credit to participants; this risk is mitigated by requiring collateral with haircuts.
  - Main participant risks: legal risk, operational risk, liquidity risk.
  - Rules and procedures on credit and liquidity risk management, system design, work schedule, and technical/operational risk management are well documented.
  - Structural limitation on liquidity available in the RTGS: central bank liquidity is limited and banks have limited possibilities to raise/re-allocate liquidity in the market.
    - Recommendations: allow banks to use a larger share of reserve holdings for transaction purposes during the day; make available an instrument and procedures for provision of intraday credit not subject to restrictions other than availability of eligible collateral.
    - Consider replacing pre-blocking of funds procedure with more liquidity-efficient risk management arrangements.
- Settlement (CPs IV–VI):
  - Individual payments settled on a real-time gross basis in central bank money in BISS.
  - Payments that cannot be settled due to lack of funds are queued and processed first by priority, then by time of input.

*Source: IMF staff assessment content provided in the supplied PDF excerpt.*

### 80.      Security and operational reliability and contingency arrangements (CP VII). The

### _cr05216 - 80.      Security and operational reliability and contingency arrangements (CP VII). The

### Payment systems — Security, reliability, governance, and efficiency (CPs VII–X; CPs II–III; CP VIII–IX)
- Findings on BISS security and operations (CP VII)
  - The BISS is a stable and reliable system with a very good track record as regards availability.
  - Technical security has been improved over time and a secondary site established recently.
  - Opportunities for further improvement exist: a comprehensive risk analysis and management framework should be elaborated, documented and implemented.
  - Business continuity and contingency procedures should be defined, documented and, subsequently, regularly tested.
  - Change management procedures should be refined and the test system upgraded.

- Efficiency and practicality (CP VIII)
  - The NBRB follows an approach according to which the running (but not investment) costs of the BISS should be recovered.
  - There are large differences in fees for differing payments.
  - Because the BISS and the NBRB clearing system operate on a shared hardware platform, it is unclear whether costs are appropriately allocated to the two.
  - There appears to be some overstaffing in payment system-related activities, implying a loss in cost efficiency.
  - The system could usefully close earlier.
  - To achieve a more balanced payments traffic throughout the day, the NBRB could consider introducing some throughput guidelines to banks.

- Participation criteria (CP IX)
  - Access to the BISS is granted to banks and nonbank credit and financial institutions (all current participants are classified as banks).
  - Access criteria are set out in an NBRB Board of Directors Resolution.
  - Some streamlining of the agreements which must be signed by participants is possible.
  - Recommended action: Introduce explicit rules for (voluntary and enforced) exit.

- Governance (CP X)
  - Banks are informed in advance on upcoming changes and NBRB meets regularly with the banking community at senior management and payment system expert levels.
  - Reports on BISS activities are published annually and statistics are available on the NBRB website and in its monthly statistical report.
  - The main content of the “concept document” has been published.
  - The overall organization and governance of the BISS is not very easy to understand; cost recovery arrangements are unconventional.
  - Roles, duties and the controls thereof could be further clarified in detailed service level agreements with the NBRB payment system subsidiaries.
  - Recommended action: Critically assess and strengthen the governance arrangements for the BISS; clarify roles, duties and controls in detailed service level agreements; address overstaffing in the Belarusian Interbank Settlement Center and the Center for Banking Technologies, and administrative overhead in general.

- Central Bank responsibilities in applying the CPSIPS
  - Payment systems objectives of the NBRB derive from the Banking Code and the NBRB Statute, which note one of the (three) main objectives of the NBRB shall be “ensuring efficient, reliable and secure functioning of the payment system”.
  - Some informal oversight-like activities have started, but the NBRB has not yet formally defined and established an oversight function.
  - As a consequence, oversight objectives and policies are yet to be formulated.
  - While the BISS does not yet comply with all Core Principles, the NBRB has shown clear interest in identifying areas for improvement.
  - Recommended action: The NBRB should formally establish an oversight function (separated from the operational function) and, subsequently, ensure sufficient training in building up oversight competence; define and make publicly available the main NBRB payment system oversight objectives and policies; establish an Action Plan for addressing the shortcomings identified in the assessment of BISS against the Core Principles.

- Table 4 — Selected recommended actions (extracted)
  - CPs II-III: Make available an instrument and procedures for the provision of intraday credit to participants. Allow a greater share of reserve holdings to be used intraday for payments purposes.
  - CP VII: Elaborate, document and implement a comprehensive risk analysis and management framework; regularly perform risk analysis; define, document and regularly test business continuity and contingency procedures; further elaborate security and performance requirements for communication services and strengthen adherence control.
  - CP VIII: Elaborate on the justification for the large difference in fees and ensure consistency in fees applied; assess accuracy of cost allocation between BISS and the NBRB clearing system; develop the cost calculation methodology further and consider including at least some of the investment costs (e.g. software development) in the costs to be recovered; shorten the operating time and consider introducing some throughput guidelines to banks.
  - CP IX: Introduce explicit rules for (voluntary and enforced) exit.
  - CP X: Critically assess and strengthen governance arrangements for the BISS; clarify roles, duties and controls in detailed service level agreements between the NBRB and its payment system subsidiaries; address overstaffing in the Belarusian Interbank Settlement Center and the Center for Banking Technologies, and administrative overhead in general.
  - Responsibilities A–D: Formally establish an oversight function separated from operations; ensure sufficient training to build oversight competence; define and publish main NBRB payment system oversight objectives and policies; establish an Action Plan to address identified shortcomings.

- Authorities’ response
  - The authorities generally agree with the assessment.
  - Noted: even though the National Bank does not have a formally defined task to supervise payment systems, it engages in a broad set of measures associated with fulfillment of that function.

### AML/CFT assessment — main findings, institutional framework, and gaps
- Assessment scope and methodology
  - Report is based on the Forty Recommendations 2003 and the Nine Special Recommendations on Terrorist Financing 2001, as amended, and prepared using the AML/CFT Methodology 2004.
  - The assessment reviewed institutional framework, relevant AML/CFT laws, regulations, guidelines and other requirements, regulatory and other systems in place to deter ML and FT through financial institutions and DNFBPs, and examined capacity, implementation, and effectiveness.

- Main findings (summary)
  - Belarus has many elements of a modern AML regime:
    - Money laundering is criminalized.
    - Financial institutions must monitor and report financial transactions subject to special control under the AML Law and take other measures to deter money laundering.
    - Compliance supervision is detailed with a strong culture of on-site examination.
    - Two agencies currently exercise financial intelligence responsibilities.
    - Money laundering offenses are investigated and some have been successfully prosecuted.
    - Some capacity exists to cooperate internationally.
  - Identified gaps and misalignments:
    - The AML/CFT legal and institutional framework needs to be updated and reorganized.
    - Implementation is incomplete, undermining full effectiveness.
    - All relevant government agencies should coordinate to ensure legislative and regulatory changes are implemented effectively.
    - Authorities are aware and well advanced on a reform agenda.

- Situation of ML/FT and predicate offenses
  - Belarusian officials identified predicate offenses they believe are linked to money laundering: tax evasion, customs violations, contraband, fraud and other white-collar crime.
  - Officials observed proceeds from crimes related to drugs, trafficking in people, and illegal arms dealing could be significant.
  - Cross-border cash movements, particularly across the Russian border where there are no controls, were cited as a concern.
  - No centralized agency systematically collates this information.

- Financial sector and DNFBPs overview
  - Banks dominate financial activity in Belarus.
  - The National Bank of Belarus (NBRB) is the regulator of banks.
  - The banking sector comprises 31 active banks with the six largest banks making up about 85 percent of the total assets of the banking system.
  - Of the six largest banks, five are exclusively or mainly state owned.
  - Foreign participation is largely confined to smaller banks, primarily through joint ventures in Belarus banks.
  - Money exchange is a separately licensed activity authorized only for banks to date.
  - Only banks may be authorized to be agents for money remitters; Western Union is the largest money remitter.
  - Internal security authorities expressed confidence that no significant informal transfer activity takes place.
  - Insurance sector: 34 companies, 31 currently licensed and operational, three government owned; the largest (government owned) accounts for approximately 60 percent of the market.
  - Securities sector: 131 firms licensed to operate, with activity dominated by transactions in government securities and NBRB securities; banks dominate trading.
  - Important DNFBPs: lawyers, notaries, auditors, real estate agents, and casinos; company formation services by lawyers, notaries and accountants; trust activity not well developed; asset management largely confined to banks.
  - Dealings in precious metals and stones conducted on a limited scale, primarily by banks under a special license from the NBRB, and nonbank dealers licensed by the MOF.
  - Approximately 25 casinos, none on a large scale.

- Criminalization of ML and FT
  - ML criminalized in June 1999 through Article 235 of the Criminal Code (CC).
  - Predicate offenses for ML include criminal, civil and administrative offenses, but do not cover all offenses required by the Vienna and Palermo conventions (insider trading and securities market manipulation are not yet covered), or provide for self-laundering.
  - Very high evidentiary standard for prosecuting ML requires proving both intent to legalize illegal proceeds and specific knowledge of the predicate offense; this needs to be reduced.
  - A prior conviction for the predicate offense is required to prove funds are proceeds of crime.
  - Law No. 77-3 of January 3, 2002 “On combating terrorism” (CT Law) does not criminalize FT as a separate, autonomous offense; FT can only be prosecuted as a form of complicity in terrorism-related crimes.
  - The AML Law does not cover terrorist financing; a draft law amending the CC would criminalize FT separately.

- Confiscation, freezing, and seizing of proceeds
  - Legislation provides broad powers of seizure and for law enforcement to identify and trace property.
  - Confiscation system is conviction-based and available for all serious criminal offenses in the CC, including ML; confiscation generally applied upon conviction to assets seized in the judicial procedure.
  - Confiscation from third parties appears possible, but rights of bona fide third parties are not expressly provided for in the legislation.

- Financial Intelligence Unit (FIU) and functions
  - The Department of Financial Monitoring of the State Control Committee (DFM) is the designated FIU.
  - In practice, FIU functions are carried out by both the DFM and the Ministry of Taxes and Duties (MTD).
  - The DFM only receives Special Data Forms (SDFs) regarding foreign currency transactions, while the MTD receives SDFs for both local and foreign currency transactions.
  - Each authority processes and disseminates resulting intelligence to appropriate law enforcement agencies.
  - The DFM's operational independence is not specifically provided for in legislation but appears effective in practice.
  - Need to expedite legislation to consolidate the DFM as the single, centralized FIU for Belarus.
  - The DFM represents Belarus in the Eurasian Group Against Money Laundering (EAG) and has applied for membership of the Egmont Group of FIUs, but has yet to be accepted.
  - Comprehensive statistics on SDFs (including in domestic currency) are not yet compiled.
  - Need for adequate funding, staffing and resources for the DFM and an enhanced electronic database for analysis.

- Law enforcement, prosecution, and coordination
  - Investigation of economic crimes is carried out under supervision of the Prosecutor General's Office (PGO) and its investigatory divisions, the Ministry of Internal Affairs (MIA), the Financial Investigations Department (FID) of the SCC and the Economic Security Directorate of the State Security Committee (SSC).
  - The Anti-Terrorism Centre of the SSC coordinates preliminary investigations of terrorism-related offenses.
  - Specific areas of responsibility of investigatory agencies are not clearly established by legislation, nor is a precise coordination mechanism for AML/CFT actions.
  - Law on state security agencies provides powers to search and compel production; investigative techniques such as controlled delivery, surveillance, infiltration, and wire-tapping are available.
  - Need for additional staff, training, experience and expertise to fight organized crime and serious economic crime.
  - Comprehensive AML/CFT statistics are not maintained on seizure and confiscation, mutual legal assistance (MLA), or extradition requests.
  - Controls on cross-border movements of cash need to be reviewed for effectiveness and extended to cover negotiable instruments.

- Preventive measures — financial institutions
  - Under the AML Law, preventive measures required include: recording and reporting of financial operations subject to special control; customer identification; retention of records related to foreign exchange transactions for 10 years; retention of other records related to domestic currency transactions for periods specified by relevant supervisors; and development of internal policies and controls as necessary.
  - Scope and content of these preventive measures need more detailed specification in legislation.
  - Oversight of preventive measures falls to several agencies: the SCC, the MTD, and primary functional regulators.
  - Legally binding regulations issued with respect to financial transactions subject to special control, with compliance procedures specified by the MTD.
  - The NBRB has issued AML/CFT implementing recommendations to institutions it supervises; although not legally binding, they are treated as mandatory in practice.
  - Other functional regulators have not yet issued guidance on implementation.
  - Preventive measures obligations apply to sectors: securities, insurance, investment funds, a range of money service businesses, notaries, and casinos.
  - The post office, attorneys, real estate agents, or dealers in precious metals and stones are not subject to preventive measures requirements.

- Suspicious transaction reporting
  - The AML Law requirement to report “financial operations subject to special control” stresses threshold reporting and could not be considered as providing for suspicious transactions reporting in line with the FATF standard.
  - The Law lists categories of transactions that must be reported where they exceed one of the specified thresholds: 2,000 base units for individuals and 20,000 for legal entities, equivalent to approximately US$23,000 and US$230,000, respectively.
  - Authorities and reporting institutions were unclear whether suspicion needs also to be taken into account or whether exceeding the threshold value is the sole determinant for reporting.
  - Some transactions below the thresholds are reported and it is unclear whether the exemption from confidentiality obligations would also apply to them.
  - Extension of reporting requirements to a broader range of DNFBPs would require clarification of professional secrecy obligations, particularly for lawyers.

- Customer Due Diligence (CDD)
  - Requirement in Article 3(4) of the AML Law for customer identification is scant.
  - Other tax and legal provisions impose strict registration requirements for legal entities and individual entrepreneurs, requiring multiple layers of identification by financial institutions.
  - AML Law gives broad authority to supervisors to adopt implementing regulations.
  - For banks, the NBRB’s KYC recommendations set out detailed identification provisions for individuals and legal entities: face-to-face account opening with identity verification based on passport for individuals or registration documents and tax records for legal entities.
  - Normally an individual may not open an account on behalf of another.
  - There are no requirements for politically-exposed persons, foreign or domestic.
  - Requirements for correspondent banking are being updated.

*Source: _cr05216 - 80.      Security and operational reliability and contingency arrangements (CP VII). The*

### 106.     While banks are instructed to identify the founders of legal entities, identification of

### _cr05216 - 106.     While banks are instructed to identify the founders of legal entities, identification of

### Customer identification and CDD in banks
- Banks are instructed to identify the founders of legal entities; identification of beneficial owners is not addressed in the NBRB recommendations.
- Banks are advised to assess the level of risk on the basis of information provided and to question the sources of funds and type of business in high-risk cases.
- Anonymous accounts are not accepted; bearer accounts are still legally provided for, but they do not exist in practice.
- NBRB recommendations do not address one-time transactions but suggest that for transactions below mandatory reporting threshold passport identification is sufficient.
- Compliance with customer identification procedures is systematically reviewed by the NBRB during on-site examinations.
- Interviews with banks indicated a high level of awareness of CDD requirements and well-established routines for ensuring compliance.

### Internal controls, compliance, training and audit (banks)
- The NBRB’s recommendations provide useful guidance on developing banks’ AML internal control systems.
- Although not legally binding, the recommendations are treated as mandatory in practice and are subject to on-site and off-site checking and review by the NBRB.
- Internal audit is mandatory.
- Officials and financial institutions showed a keen awareness of the requirements, but the focus seemed to be on compliance with centralized control and taxation needs.
- Additional training is needed to develop an overall awareness of the risks and implications of AML/CFT.

### Supervisory and oversight system (banks)
- Banks in Belarus are licensed and supervised by the NBRB, which is well staffed and has comprehensive enforcement powers.
- Fit and proper tests are applied to shareholders above a 10 percent threshold.
- Through active on-site and off-site supervision, the NBRB checks compliance in the implementation of the AML Law and its AML recommendations.
- On-site inspections include a review of relevant policies and procedures and sample transaction testing.

### Insurance and securities sectors
- Insurance:
  - Under Presidential Decret No. 17, last amended in 2003, insurance businesses are registered, licensed, and supervised by the MOF.
  - MOF is adequately resourced and has an active program of on-site inspections for legislative obligations of the insurance acts, though not for AML/CFT.
  - MOF does not carry out specific fit and proper testing for ownership of insurance companies and has not issued any specific AML/CFT guidance.
- Securities:
  - Other than dealings in government securities, securities operations are small.
  - The SC carries out active supervision within the limits of its resources.
  - Although securities firms are subject to the AML Law, the SC has not issued guidance or taken any specific steps to ensure that AML/CFT measures are applied.
- Additional training in AML/CFT is needed for all supervisory authorities, particularly for implementation of the FATF Recommendations.

### Preventive measures — Designated Non-Financial Businesses and Professions (DNFBPs)
- Customer due diligence and record keeping:
  - DNFBPs are subject to customer identification and record-keeping requirements, typically imposed under professional or administrative laws and regulations.
  - For individuals, passport identification is the norm.
  - For legal entities, registration documentation, including details on founders and controllers, is the norm.
  - Identification of beneficial owners is rare.
  - Face-to-face identification is standard; by exception notarized documents may be accepted.
  - A statement of business purpose may be requested.
  - There is no provision for enhanced due diligence for high-risk transactions.
  - Record keeping requirements meet or exceed a minimum five-year retention period.
  - Reidentification is not addressed.
  - For casinos, customer identification is required only for winnings above 1,000 base units (approximately US$11,500).
  - Regulators should issue CDD guidance for their sectors.
- Monitoring of transactions and relationships:
  - For lawyers, notaries, and auditors, monitoring of client transactions does not typically arise since these professions are prohibited from engaging in commercial activities and do not normally execute transactions on behalf of clients.
  - Where continuing relationships are involved, regulations and professional norms typically call for annual update of client information.
- Suspicious transaction reporting:
  - Under the current AML Law, the post office, lawyers, auditors, real estate agents and dealers in precious metals and stones are not expressly required to report financial operations subject to special control.
  - Of the FATF list of DNFBPs, only notaries and casinos are required to report suspicious transactions.
- Internal controls, compliance, and audit:
  - DNFBPs are subject to internal control requirements, although typically not imposed explicitly for AML/CFT.
  - Casinos are subject to the AML Law and are required to have stringent financial controls for tax purposes as well as to prevent employee theft, but not for AML purposes.
- Regulation, supervision and monitoring:
  - Attorneys, notaries, and real estate agents are under the MOJ.
  - Auditors and insurance are under the MOF.
  - Casinos are regulated by the Ministry of Sports and Tourism.
  - The Post Office is the responsibility of the Ministry of Communications.
  - Dealers in precious metals and stones are regulated by the NBRB (for banks) or the MOF (others).
  - The Law on the Legal Profession delegates responsibility for regulation and oversight of lawyers, including sanctioning, to the Republican Bar.

### International cooperation
- Belarus is a party to the Vienna Convention, the Palermo Convention and the Terrorist Financing Convention and to 11 U.N. treaties concerning terrorism-related crimes.
- Belarus is also a party to the U.N. Convention Against Corruption.
- Belarus is making efforts to implement the UNSCRs 1267, 1373 and successor Resolutions.
- NBRB Resolution No. 10 of January 28, 2002 provides for the suspension of credit and debit transactions in respect of accounts belonging to terrorists, terrorist organizations, and persons associated therewith.
- There has not yet been a case in practice where terrorists’ assets have been frozen or identified by the banks in Belarus.
- Coordination of counter-terrorism is conducted by the Interdepartmental Counter-Terrorism Commission.
- MLA in criminal matters may be provided based on multilateral or bilateral treaties to which Belarus is a party, or case by case on condition of reciprocity as determined by the PGO and the Supreme Court.
- Belarus normally does not apply a dual criminality condition. Financial secrecy or taxation issues would not be grounds for refusal of assistance.
- All crimes are extraditable offenses under the CC, including ML and the FT-related offenses.
- Belarus does not consider terrorist acts to be political offenses for which extradition can be refused.
- There is no extradition law in Belarus, but provision is included in the CC.
- Belarusian nationals may not be extradited to a foreign state.
- The CC does not mention any specific grounds for the refusal of extradition, other than those specified in each of the bilateral treaties.
- Belarus has signed extradition treaties with the 15 FSU countries and with four other countries.
- All authorities are authorized to share information spontaneously with their foreign counterparts in relation to ML and predicate offenses, subject to reciprocal treatment and within the limits established in the legislation.
- The performance of inquiries on behalf of foreign counterparts is also authorized.

### Summary assessment against the FATF Recommendations — key recommended actions (excerpt)
- General:
  - The current AML/CFT measures in Belarus were designed mainly for purposes other than specific compliance with the FATF Recommendations; many changes and improvements are needed to achieve such compliance.
- Legal System and Related Institutional Measures:
  - Criminalization of Money Laundering (R.1 & 2):
    - Reduce excessive burden of proof for prosecuting ML and criminalize all the types of ML offenses under the Vienna and Palermo Conventions.
    - Allow prosecution for “self-laundering” and that intention of ML may be inferred from objective factual circumstances.
    - Establish criminal liability of legal entities for ML.
  - Criminalization of Terrorist Financing (SR.II):
    - Criminalize FT as a separate offense from terrorist acts and introduce preventive measures against FT.
  - Confiscation, freezing and seizing of proceeds of crime (R.3):
    - Make confiscation obligatory for ML or FT, including for legal entities.
    - Extend provisional measures to include ML and FT.
  - Freezing of funds used for terrorist financing (SR.III):
    - Require freezing of terrorist assets without delay or prior notice. Allow for unfreezing. Clarify powers of authorities in relation to suspected terrorist assets.
  - The Financial Intelligence Unit and its functions (R.26, 30 & 32):
    - Enact draft AML Law to provide for DFM as the centralized FIU for Belarus, with adequate resources.
    - Expedite implementation of steps needed to gain admission to the Egmont Group.
  - Law enforcement, prosecution and other competent authorities (R.27, 28, 30 & 32):
    - Improve coordination between investigating agencies.
    - Provide training for judges and prosecutors.
    - Compile and maintain relevant statistics.
  - Cash couriers (SR IX):
    - Provide AML/CFT training to customs officers.
    - Improve border controls for movements of cash and include bearer negotiable instruments.
- Preventive Measures — Financial Institutions:
  - Customer due diligence, including enhanced or reduced measures (R.5 to 8):
    - Explicitly prohibit anonymous and bearer accounts.
    - Specify in AML Law the basis for, nature, and timing of CDD and the identification of beneficial owners.
    - Require in the AML Law ongoing due diligence for all transactions, not just special control list.
    - Introduce enhanced due diligence for foreign PEPs. Consider extending to domestic PEPs.
    - Proceed with more detailed requirements for correspondent banking.
  - Record keeping and wire transfer rules (R.10 & SR.VII):
    - Provide clearly for five-year record retention and for originator information for all wire transfers.
  - Monitoring of transactions and relationships (R.11 & 21):
    - Require special attention for complex or unusual transactions and for countries with weak AML/CFT.
  - Suspicious transaction reports and other reporting (R.13-14, 19, 25 & SR.IV):
    - Require reporting to the DFM of all suspicious transactions, regardless of size or currency and provide a clearer prohibition on tipping off.
    - Issue AML/CFT guidance to all reporting entities.
    - Enact an FT Law.
  - Internal controls, compliance, audit and foreign branches (R.15 & 22):
    - Require additional employee training programs.
  - Shell banks (R.18):
    - Presence and control of banks to be within Belarus.
  - The supervisory and oversight system (R. 17, 23, 29 & 30):
    - Specify the role of the SC in supervising AML/CFT for the securities sector.
  - Financial institutions — market entry and ownership/control (R.23):
    - Apply fit-and-proper tests to owners (and ultimate beneficial owners) of financial institutions.
  - AML/CFT Guidelines (R.25):
    - Update NBRB guidance and provide firm legal basis.
    - Issue guidance for the insurance and securities sectors.
  - Ongoing supervision and monitoring (R.23, 29 & 32):
    - Collect and analyze comprehensive statistics.
- Preventive Measures — Nonfinancial Businesses and Professions:
  - Customer due diligence and record-keeping (R.12):
    - Apply CDD, record-keeping requirements, and preventive measures to lawyers, auditors, real estate agents, and dealers in precious metals and stones.
    - Issue CDD guidance, simplified if ML/FT risk is low.
    - Apply five-year record-keeping requirements.
  - Monitoring of transactions and relationships (R.12 & 16):
    - Require all DNFBPs to monitor all transactions for suspicious characteristics. Issue guidance.
    - For each DNFBP category, issue AML/CFT guidance. For lawyers, both the MOJ (for “public” lawyers) and the Republican Collegium (for “private” lawyers) should issue such guidance.
  - Suspicious transaction reporting (R.16):
    - Amend the AML law to extend suspicious transactions reporting to all DNFBPs.
    - Provide training on identification of suspicious transactions to all DNFBPs.
  - Internal controls, compliance & audit (R.16):
    - Require internal policies and controls, employee screening and training; and an audit function.
  - Regulation, supervision and monitoring (R.17, 24-25):
    - Apply AML Law to lawyers, auditors, real estate agents, and dealers in precious metals and stones.
    - Assign AML/CFT compliance responsibility to the functional regulator, the DFM, or both.
    - Provide training to both regulators and regulated.
  - Other DNFBPs (R.20):
    - Require settlement of real estate transactions between individuals by bank transfers or check.
- Legal Persons and Arrangements (R.33):
  - Improve completeness and accuracy of company registration information, to include verification of beneficial ownership, including for nonresidents.
- National and International Cooperation:
  - National cooperation and coordination (R.31):
    - Include DNFBPs in interdepartmental agreements with an AML/CFT coordinating committee.
  - The Conventions and UN Special Resolutions (R.35 & SR.I):
    - Ensure full implementation of UNSCRs.
    - Review FT Convention; amend legislation as needed.
  - Mutual Legal Assistance (R.32, 36-38, SR.V):
    - Enact draft law on international legal assistance.
    - Adopt administrative procedures to prevent MLA requests from being unduly delayed.
  - Extradition (R.32, 37 & 39, & SR.V):
    - Enact draft law to render international legal assistance.
    - Ensure that extradition requests are not delayed.

### Authorities’ response
- The Authorities were broadly in agreement with the assessment.

### Stress testing — methodology
- Stress tests used detailed balance sheet data for all thirty-one commercial banks operating in Belarus as at June 2004.
- Purpose: examine potential effects of specified changes in risk factors on banks’ financial condition using historical and hypothetical scenarios.
- Tests gauged vulnerabilities to deterioration in credit portfolio quality, exchange rate and interest rate fluctuations, and liquidity withdrawals.
- No stress tests were performed for equity price risk because private sector securities accounted on average for less than 5 percent of the total bank holdings of securities and 0.4 percent of the banking sector assets as of end-June 2004.
- Balance sheet data were adjusted to correct over-capitalization bias of Belarusian accounting and asset classification practices.
- Adjustments reduced the capital adequacy ratio (CAR) of the banking sector as at June 2004 from 24.9 percent to 18.6 percent, or by approximately 25 percent.
- Banks grouped for testing:
  - Group 1: six largest banks
  - Group 2: state-owned commercial banks (6 banks)
  - Group 3: local private banks (7 banks)
  - Group 4: foreign banks (18 banks)
  - Group 5: all commercial banks (31 banks)

### Stress testing — results and key statistics
- Overall finding: Belarusian banks are vulnerable to credit and liquidity shocks.
- Credit risk scenarios:
  - Deterioration in the quality of 50 percent of loans issued to agricultural enterprises.
  - Deterioration in the quality of 5 percent of loans issued to non-agriculture sectors.
  - A shift by one category in classified loans (for example due to decline in collateral value).
  - Results indicate all five groups of banks would be able to withstand such credit shocks.
- Market risk:
  - Banks were found sufficiently capitalized to withstand direct effects of substantial volatility of exchange rate or interest rate.
  - Regulatory capital in two large banks would decline below the required minimum in case of a hypothetical parallel increase in the rubel yield curve by 10 percentage points.
  - Indirect exposure to exchange rate fluctuations is a serious concern for many banks.
  - A depreciation of the rubel by 20 percent, with deterioration in quality of unhedged foreign-currency-denominated loans (assuming a 50 percent provisioning), would substantially affect solvency of many Group 1, 3, and 4 banks.
  - More than 80 percent of all loans issued by Group 3 and Group 4 banks were denominated in foreign currency as of June 2004.
- Combined credit and market risk:
  - Simultaneous shocks (depreciation by 20 percent; deterioration in unhedged foreign-currency loans with 50 percent provisions; increase in interest rates of short-term maturities) would substantially impact capital positions, especially for Group 1 and Group 3 banks.
  - Under such combined shock, CAR of Group 1 banks would be reduced to 9.2 percent.
  - A capital injection of approximately BYR610 billion would be required to restore capital adequacy of these banks.
- Liquidity risk:
  - A 20 percent run on liquid liabilities would worsen liquidity of state-owned banks: liquidity ratio would fall from 50.1 percent to 37.6 percent.
  - Such a shock would not result in a significant liquidity shortage in private banks and foreign banks; liquidity coverage (ratio of liquid assets to liquid liabilities) would remain above 70 percent in these banks.

*Source: IMF staff report content provided in the supplied PDF excerpt.*

### 127.     The reported and adjusted aggregate CAR for Group 1, 2, and 5 banks as well as the

### _cr05216 - 127.     The reported and adjusted aggregate CAR for Group 1, 2, and 5 banks as well as the

### Key findings on capital adequacy and sample sensitivity
- The reported and adjusted aggregate CAR for Group 1, 2, and 5 banks as well as the aggregate stress test results for these banks are substantially affected by the ongoing recapitalization of large banks.
- Exclusion of one very large bank from Group 1, 2, and 5 significantly reduces aggregate CAR. Example:
  - Adjusted CAR for Group 1 banks would be reduced from 17.6 percent to 10.5 percent when this bank is excluded from the sample.

### Box 4 — Adjustments to the reported data (summary of assumptions)
- Establishment of general provisions:
  - Belarusian banks were assumed to form general provisions equal to 2 percents of their total loans, which were then subtracted from the amount of regulatory capital.
- Increase in specific provisions for loans prolongated by official decrees:
  - It was assumed that 70 percent of these rescheduled loans are in fact loss, which should be fully provisioned for, whereas they are currently classified as substandard and are provisioned for at 30 percent.
- Increase in specific provisions for the estimated amount of underreported NPLs:
  - It was assumed that the six largest banks need to increase their provisions for bad loans by 10 percent.
- Increase in specific provisions for unclassified long-term NPLs:
  - It was assumed that specific provisions for long-term NPLs should be increased by 12 times.
- Reduction in the amount of revaluation accounts included in the regulatory capital:
  - It was assumed that only 50 percent of these revaluation accounts are included in the regulatory capital.

### Stress test summary (selected reported and adjusted ratios and scenario outcomes)
- Reported Capital Adequacy Ratio (CAR) by group:
  - Group 1: 24.1
  - Group 2: 26.0
  - Group 3: 22.0
  - Group 4: 23.2
  - Group 5: 24.9
  - without one large bank (Reported CAR): 16.5, 16.6, 18.5 (corresponding to Group 1, Group 2, Group 5 as presented)
- Adjusted Capital Adequacy Ratio (CAR) by group:
  - Group 1: 17.6
  - Group 2: 18.7
  - Group 3: 16.2
  - Group 4: 18.5
  - Group 5: 18.5
  - without one large bank (Adjusted CAR): 10.5, 10.0, 12.7 (corresponding to Group 1, Group 2, Group 5 as presented)

- Credit risk scenarios (post-shock CAR by group):
  - 50 percent of loans to agriculture become loss:
    - Group 1: 13.0; Group 2: 13.4; Group 3: 15.8; Group 4: 17.5; Group 5: 14.6; without bank (Group 1/2/5): 9.2, 8.6, 11.5
  - 5 percent of loans to nonagriculture sectors become loss:
    - Group 1: 14.6; Group 2: 15.8; Group 3: 13.5; Group 4: 15.9; Group 5: 15.7; without bank: 7.1, 6.4, 9.5
  - Shift in classified loans by one category (20 percent of standard loans assumed to become substandard):
    - Group 1: 12.4; Group 2: 13.3; Group 3: 12.3; Group 4: 14.6; Group 5: 13.6; without bank: 5.7, 4.9, 8.1

- Exchange rate risk scenarios:
  - Depreciation by 20%:
    - Group 1: 17.5; Group 2: 18.8; Group 3: 15.8; Group 4: 18.2; Group 5: 18.5; without bank: 10.4, 9.9, 12.5
  - Depreciation by 20%; deterioration in the quality of all unhedged FX loans (50% provisions):
    - Group 1: 12.1; Group 2: 13.9; Group 3: 9.8; Group 4: 10.8; Group 5: 13.0; without bank: 4.3, 4.3, 6.5
  - Appreciation by 20%:
    - Group 1: 17.6; Group 2: 18.7; Group 3: 16.6; Group 4: 18.7; Group 5: 18.6; without bank: 10.7, 10.1, 12.9

- Interest rate risk scenarios:
  - Increase in BLR yield curve by 1000 basis points:
    - Group 1: 13.8; Group 2: 14.2; Group 3: 15.8; Group 4: 18.3; Group 5: 15.3; without bank: 7.5, 6.1, 10.1
  - Increase in FX interest rates by 500 basis points:
    - Group 1: 16.6; Group 2: 17.7; Group 3: 16.1; Group 4: 17.8; Group 5: 17.7; without bank: 9.4, 8.7, 11.7
  - Increase in interest rates of short-term maturities:
    - Group 1: 14.7; Group 2: 15.4; Group 3: 15.8; Group 4: 17.6; Group 5: 15.9; without bank: 7.9, 6.8, 10.4

- Combined scenario:
  - Depreciation by 20%; deterioration in the quality of all unhedged FX loans (50% provisions); increase in BLR short-term interest rates:
    - Group 1: 9.2; Group 2: 10.5; Group 3: 9.4; Group 4: 10.0; Group 5: 10.4; without bank: 1.6, 1.1, 4.2

### Liquidity ratios and liquidity stress
- Reported Liquidity Ratio (BYR and FX) by group:
  - Group 1: 53.1; Group 2: 50.1; Group 3: 78.5; Group 4: 80.1; Group 5: 59.1; without bank: 48.8, 44.4, 55.8
- Reported Liquidity Ratio (BYR):
  - Group 1: 50.3; Group 2: 48.4; Group 3: 82.8; Group 4: 78.7; Group 5: 55.4; without bank: 44.1, 41.0, 50.5
- Reported Liquidity Ratio (FX):
  - Group 1: 56.8; Group 2: 52.8; Group 3: 75.4; Group 4: 81.0; Group 5: 63.9; without bank: 54.6, 49.4, 62.1
- Liquidity ratio definition and prudential minimum:
  - Liquidity ratio is defined as the ratio of liquid assets (assets with a maturity of less than 1 month) to liquid liabilities (liabilities with a maturity of less than 1 month).
  - The prudential minimum required for this ratio is 70 percent.
- Liquidity shocks (Liquidity Ratios After Shocks — selected results):
  - A 20% withdrawal in liquid liabilities (BYR and FX):
    - Group 1: 41.4; Group 2: 37.6; Group 3: 73.1; Group 4: 75.1; Group 5: 48.9; without bank: 36.0, 30.4, 44.8
  - A 20% withdrawal in liquid liabilities (BYR):
    - Group 1: 37.9; Group 2: 35.5; Group 3: 78.5; Group 4: 73.4; Group 5: 44.2; without bank: 30.1, 26.3, 38.1
  - A 20% withdrawal in liquid liabilities (FX):
    - Group 1: 46.0; Group 2: 41.0; Group 3: 69.2; Group 4: 76.2; Group 5: 54.8; without bank: 43.2, 36.7, 52.6

### Notes on grouping and key assumptions (as presented)
- Group composition:
  - Group 1 includes 6 largest commercial banks.
  - Group 2 includes state-owned commercial banks (6 banks).
  - Group 3 includes local private banks (7 banks).
  - Group 4 includes foreign banks (18 banks).
  - Group 5 includes all commercial banks (31 banks).
- Unhedged FX loan assumption:
  - All loans issued to agriculture, construction, and households, and 20 percent of loans issued to industry, trade, and other sectors are estimated as being unhedged.
- Classification shift assumption:
  - 20 percent of standard loans are assumed to become substandard.

*Source: _cr05216 - 127. The reported and adjusted aggregate CAR for Group 1, 2, and 5 banks as well as the*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05216.pdf_