## 1. Detailed Assessment of Compliance of the Basel Core Principles

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### Assessment scope, methodology, and sources
- First external comprehensive assessment of the system of banking supervision in Belarus; mission conducted in November 2004 by Árpád Király and Walter Zunic.
- Assessment methodology: Guidance Note on Assessment of Implementation of the Basel Core Principles for Effective Banking Supervision and Core Principles Methodology Document (October 1999).
- Materials reviewed include:
  - Law of the Republic of Belarus of October 3, 2000 “On the Banking Code of the Republic of Belarus” (Banking Code).
  - Edict 320 of June 13, 2001 (Statute of the National Bank of the Republic of Belarus).
  - Rules and Instructions issued by the National Bank of the Republic of Belarus (NBRB), NBRB “Recommendations”, internal Provisions, licensing documents, bank examination reports, annual reports, NBRB website, and the NBRB self-assessment.
- Assessment approach: qualitative review of observance of each Core Principle’s essential criteria and, where needed, additional criteria; discussions with NBRB staff and market participants; review of documents and on-site interviews.

### Institutional setting, market structure, and legal framework
- Legal framework: series of laws and regulations reasonably comprehensive and broadly consistent with international best practices.
- Regulatory policy structure:
  - Level 1: Banking Code (BC) and Presidential decrees.
  - Level 2: NBRB prudential regulations, Regulatory Legal Acts jointly with the Government, Rules, and Instructions.
- NBRB responsibilities for authorization, supervision, and regulation are fulfilled through the Banking Supervision Directorate (BSD).
- Macroeconomic context: “the macroeconomic situation continues difficult.”
- Market concentration and state involvement:
  - The six large banks make up about 85 percent of the total assets and 83 percent of the total capital of the banking system.
  - Of the 6 systematically important banks (SIBs) 5 are exclusively or mainly state owned.
  - The largest domestic savings bank accounts for about 41 percent of the assets, and holds 63 percent of retail deposits.
  - SIBs authorized to participate in state programs and to lend on preferential terms; lack of level playing field and political influence noted (government officials on supervisory boards).

### Banking Supervision Directorate (BSD) organization and staffing
- BSD staffing and regional structure:
  - BSD consists of 62 specialists, inspectors and analysts at NBRB headquarters in Minsk.
  - A further 67 staff undertake supervision of branches across 6 regional NBRB branches.
  - Inspection Department (on-site) consists of three Divisions: Asset Quality Assessment and Profitability Division; Capital Adequacy and Liquidity Inspection Division; Administration and Risk Management Assessment Division. Inspection Department total listed as 19 persons (per organizational listing).
  - Off-site supervision conducted by Supervision Organization Department with three Divisions: Division of Personal Supervision over Authorized Banks (6 persons); Division of Personal Supervision Over Non-Authorized Banks (7 persons); Division of Personal Supervision over Crisis Banks (4 persons).
  - Other units: Licencing and Registration Division; Information and Analytical Department (7 persons); Methodology of Prudential Supervision Department (10 persons).
- Examination responsibilities:
  - Head Office BSD examiners primarily examine Head Offices of banks in Minsk; branches examined by Minsk Regional Office and other five regional branches.
  - Banks in free economic Zones (FEZ) examined by Head Office examiners.

### Accounting, reporting, and IFRS introduction
- NBRB implementing IFRS standards in stages; eleven national standards introduced based on international standards; full implementation anticipated by 2006.
- NBRB developed Regulations on Compilation and Filing of an Annual Report by Banks, No. 350, December 28, 2001.
- Instructions on Compiling Financial Report Forms (NBRB Supervisory Board Resolution No. 20, January 2003) require yearly obligatory validation by external audit of certain prudential report forms.
- Key concern: International Financial Reporting Standards have not been fully introduced; fair (market) value appraisal not employed; audits in accordance with international standards not obligatory.

### Core findings and compliance assessments (selected Principles)
- Principle 1 — Preconditions for effective supervision
  - Principle 1(1) Objectives: Compliant.
  - Principle 1(2) Independence: Materially non-compliant.
    - Key facts: BSD staff 62 at HQ and 67 regional; NBRB budget coordinated with Council of Ministers and Ministry of Finance and approved by the President; operational independence weakened by Coordination Council/SCC oversight and government representation on Supervisory Board.
  - Principle 1(3) Legal framework for supervisor: Largely compliant.
  - Principle 1(4) Enforcement powers: Largely compliant.
  - Principle 1(5) Legal protection for supervisors: Non-compliant (no law provides legal protection or indemnification for NBRB staff acting in good faith).
  - Principle 1(6) Information sharing and cooperation: Materially non-compliant (cooperation with State Securities Commission and Insurance Supervisory Department of the MoF not formalized).
- Principles 2–5 — Licensing, permissible activities, ownership and investment
  - Principle 2 Permissible Activities: Compliant (Article 8 BC defines bank; Article 14 BC exhaustive list; Article 74 BC requires “bank” in name).
  - Principle 3 Licensing Criteria: Materially non-compliant.
    - Key facts: Minimum authorized capital (Rules No.173): new/reorganized bank: equivalent to €5.0 million; operating bank: €5.0 million; operating bank licensed to attract deposits from individuals: €10.0 million. Free Trade Zone banks: minimum € 500.000. Professional suitability: education in economics or law and minimum three years’ relevant experience. Business plan: three-year forecast required.
    - Comment: law does not explicitly permit full analysis of ownership structure or ultimate owners.
  - Principle 4 Ownership: Materially non-compliant.
    - Key facts: NBRB permission required for acquisition of more than 10 percent of shares; notification required for acquisitions >5 percent. Civil Code: controlling interest defined as 50%+1 of voting shares.
  - Principle 5 Investment Criteria: Materially non-compliant.
    - Key facts: participation limits—single legal person not exceed 5% of own funds; aggregate participation not exceed 25% of own funds. Investments exceeding 10% of authorized fund require NBRB authorization. Investments ≥20% of issuer's authorized capital deducted for capital adequacy.
    - Comment: supervision of bank investments largely formal; NBRB lacks consolidated supervision powers.
- Principles 6–15 — Prudential regulations and risk management
  - Principle 6 Capital Adequacy: Materially non-compliant.
    - Key facts: Rule No.173 minimum capital adequacy ratio set at 14 percent for first two years, 10 percent thereafter; minimum core capital ratio 7 percent for first two years, 5 percent thereafter. Planned reductions from 1st of January, 2005: capital adequacy to 12 percent and 8 percent; core capital to 6 percent or 4 percent. Capital adequacy reporting monthly.
    - Comment/recommendation: minimum ratios exceed Basel benchmarks but do not cover market risk; recommendation to retain 10% rather than planned reduction to 8%.
  - Principle 7 Credit Policies: Largely compliant.
    - Key facts: Instructions No. 226 require internal rules for loan approval, collateral valuation, monitoring; prudential reports include large exposure reports and insider exposures (monthly from January 2005).
    - Concern: external pressure for banks to lend to government/social programs.
  - Principle 8 Loan Evaluation and Provisioning: Largely compliant.
    - Key facts: Current asset classification system (Regulations No.33): 4 risk groups with provision requirements: 0 percent for the Standard loan category, 30 percent for the next classification category, 50 percent for Doubtful assets, 100 percent for Loss assets.
    - Concern/recommendations: sudden jump from 0 percent to 30 percent is high; recommendation to create a new loan category requiring a 10 percent provision and establish a general provision of 2 percent to cover unexpected deterioration.
  - Principle 9 Large Exposure Limits: Materially non-compliant.
    - Key facts: Rules No.173 limits: maximum exposure to single customer/group: 20 percent of equity capital in first two years, 25 percent thereafter; large exposure defined as exposure >10 percent of equity capital; maximum large risks: six times equity capital.
    - Comment: NBRB lacks discretionary power to interpret “closely related group”; data limitations on shareholders below 10 percent weaken monitoring.
  - Principle 10 Connected Lending: Largely compliant.
    - Key facts: Rules No.173 defines insiders and related parties; maximum exposures: single individual insider: not more than 2 percent of equity capital; single legal entity insider: not more than 10 percent (first two years) and 15 percent thereafter; maximum exposure to all insiders: 25 percent of equity capital.
    - Comment: definition of connected/related parties not in law; supervisors lack discretion to detect undisclosed insiders.
  - Principle 11 Country and Transfer Risks: Materially non-compliant.
    - Key facts: Instruction 92 (June 2004) requires risk assessment by country rating and to take effect January 2005; international ratings grouped A to E used for classification.
    - Comment: Instruction 92 not yet effective at assessment time; banks have not established internal country/transfer risk limits.
  - Principle 12 Market Risk: Materially non-compliant.
    - Key facts: OEP limits (Instruction/Resolution No.57, March 29, 2002): overall OEP ≤ 20 percent of capital; OEP per currency ≤ 10 percent; forward transactions per currency ≤ 10 percent. Instruction 92 requires capital charge on market risks effective January 1, 2005. Securities accounted at acquisition price.
    - Comment: interest-rate risk measurement absent; market risk capital charges not yet effective at assessment time.
  - Principle 13 Other Material Risks / Comprehensive Risk Management: Materially non-compliant.
    - Key facts: Instruction 92 (June 2004) establishes minimum capital requirements for country, off-balance sheet, liquidity, market and operational risks; effective January 1, 2005. NBRB requires banks to have internal control and risk management procedures.
    - Comment: Instruction 92 not yet implemented at assessment time; operational risk guidance not implemented; liquidity risk management requires significant improvement.
  - Principle 14 Internal Controls and Audit: Largely compliant.
    - Key facts: Article 73 BC and NBRB Guidance/Standard Statute on Organizing Internal Audit (1998) require internal audit services; recommendation that Head of Internal Audit report directly to the bank’s supreme administrative body.
  - Principle 15 Market Conduct / AML and “Know‑Your‑Customer”: Materially non-compliant.
    - Key facts: AML Law (May 2002) requires internal control measures and appointment of an official responsible for internal control. Primary functions for controlling “On Measures to Prevent Legalization of Criminal Proceeds” assigned to Ministry of Taxes and Duties and State Control Committee, not to NBRB. Financial Monitoring Department created post-AML Law.
    - Recommendation: centralize financial intelligence in a single agency and strengthen provisions for international cooperation; supervisors need to emphasize detection, deterrence, and reporting of suspicious transactions.

### Methods of ongoing supervision (CPs 16–20) — practices and findings
- On-site supervision:
  - Full-scope on-site examinations of banks including larger branches on a two year basis.
  - Inspections emphasize management quality, risk management and internal controls, liquidity management, contingency programs.
  - Two examination reports prepared at completion of each full-scope examination: one Regulatory Aspects Review and one financial report covering CAMELS components.
  - Examiners use the equivalent of a CAMELS system.
- Off-site supervision:
  - Comprehensive off-site monitoring with monthly and quarterly reporting; procedure for compilation and submission of prudential reports regulated by Instruction 135 (approved August 2004) effective January 1, 2005.
  - NBRB develops methods of accounting and reporting for banks (Article 26 BC).
- Consolidated supervision:
  - CP 20 (consolidated supervision): Non-compliant. NBRB does not conduct consolidated supervision; draft amendment to BC prepared to define banking group and bank holding company and to allow consolidated supervision.
- Reporting and audit interaction:
  - NBRB can require external audit certification of annual reports; in practice NBRB does not exercise right to bring in external auditors for inspections and uses its own inspection staff.
  - External audit opinions required to be filed with NBRB; trilateral meetings (bank, auditors, NBRB) not commonly held.

### Formal powers, remedial measures and crisis intervention (Principle 22)
- Legal basis: Articles 97 and 135 BC; Law No. 423-Z Article 181 “On Economic Insolvency (Bankruptcy)”; various NBRB resolutions and instructions.
- Corrective actions NBRB may apply include (selected):
  - require correction of violations;
  - collect fines established by the National Bank;
  - suspend licenses for up to one year;
  - demand implementation of measures for financial recovery including changes to asset structure;
  - submit proposals for replacement or re-evaluation of directors and chief accountant;
  - require removal of bank director;
  - demand reorganization of the bank;
  - change economic standards for a bank for up to one year or until violations are corrected;
  - suspend banking licenses for up to one year or until violations are corrected;
  - revoke licenses for particular banking operations;
  - place a bank under temporary management or appoint an interim administration.
- Assessment: Largely Compliant.
  - Comment: powers are not flexible; NBRB cannot apply several corrective actions simultaneously for one violation or apply supplemental measures if prior ones have insufficient impact; proposed changes to Banking Code to address this.

### Cross-border banking and cooperation (Principles 23–25)
- Principle 23 Global consolidated supervision: Materially non-compliant.
  - Article 92 BC establishes procedure for permission to open subsidiaries/branches outside the country and for participation in foreign banks; Article 120 requires consolidated reporting only when a bank owns more than 50 percent of voting shares of another entity.
  - Practical situation: Belarusian banks do not have branches or subsidiary banks abroad; 11 representative offices abroad (6 in Russia, 1 in Germany, 4 in Poland).
  - Draft amendment to BC prepared to introduce definitions of banking group and bank holding company and grant consolidated supervision powers.
- Principle 24 Contact and information exchange with host supervisors: Not applicable (no foreign branches engaging in banking operations).
- Principle 25 Local operations of foreign banks and information sharing with home supervisors: Largely compliant.
  - Key facts: Prudential requirements for banks with foreign investments are the same as domestic banks; prior to issuing a license to a subsidiary of a foreign-owned bank, NBRB ensures home supervisor approval; NBRB has eight bilateral arrangements with foreign supervisors and a memorandum of understanding with Cyprus.

### Key quantitative supervisory standards and thresholds (selected)
- Asset concentration: six large banks account for about 85 percent of total assets and 83 percent of total capital.
- Largest domestic savings bank: about 41 percent of assets; 63 percent of retail deposits.
- BSD staffing: 62 at headquarters; 67 at regional offices.
- Minimum authorized capital (Rules No.173):
  - new/reorganized bank: equivalent to €5.0 million;
  - operating bank: €5.0 million;
  - operating bank licensed to attract deposits from individuals: €10.0 million;
  - Free Trade Zone banks: minimum € 500.000.
- Asset classification provisioning rates (Rules No.33):
  - Standard loan category: 0 percent;
  - next classification category: 30 percent;
  - Doubtful assets: 50 percent;
  - Loss assets: 100 percent.
- Capital adequacy (Rule No.173):
  - minimum capital adequacy ratio: 14 percent for first two years, 10 percent thereafter;
  - minimum core capital ratio: 7 percent for first two years, 5 percent thereafter;
  - Planned reductions from 1st of January, 2005: capital adequacy to 12 percent and 8 percent; core capital to 6 percent or 4 percent.
- Large exposure limits (Rules No.173):
  - maximum exposure to single customer/group: 20 percent of equity capital in first two years, 25 percent thereafter;
  - large exposure threshold: >10 percent of equity capital;
  - maximum large risks: six times equity capital.
- Insider exposure limits (Rules No.173):
  - single individual insider: not more than 2 percent of equity capital;
  - single legal entity insider: not more than 10 percent (first two years) and 15 percent thereafter;
  - maximum exposure to all insiders: 25 percent of equity capital.
- Open foreign exchange position (OEP) limits (Instruction/Resolution No.57, March 29, 2002):
  - overall OEP ≤ 20 percent of capital;
  - OEP per currency ≤ 10 percent;
  - forward transactions per currency ≤ 10 percent.
- Reporting frequency: monthly filings required for capital adequacy; banks file reports daily, weekly, monthly, quarterly and annually as required by NBRB (Article 120 BC).

### Key shortcomings and recommended supervisory improvements (selected)
- Independence and governance:
  - Increase the level of independence in the budgetary process and increase visibility of Head of Directorate of Bank Supervision.
  - Provide legal protection to supervisors against legal actions and legal costs.
- Ownership and transparency:
  - Amend legislation to permit deeper analysis of ownership structure including indirect ownership and ultimate owners.
  - Decrease the current 10% authorization threshold to 5% for share acquisitions transferred from original owner to subsequent owners (recommendation).
- Consolidated supervision and reporting:
  - Adopt and implement proposed amendment to the BC to allow NBRB to supervise banking groups and holding companies on a consolidated basis.
  - Grant NBRB discretionary power to interpret closely related groups and make judgments about connections between bank and other parties.
  - Authorize NBRB to request consolidated reports from banking groups and holding companies (except where current Article 120 only requires consolidated reporting when control >50 percent).
- Capital, provisioning and risk management:
  - Retain capital adequacy at current level (recommendation to retain 10% rather than planned reduction to 8%).
  - Ensure effectiveness of Implementation of Instruction 92 dated June 2004 (effective January 1, 2005) for country, market, operational and other risks.
  - Create a new loan category requiring a 10 percent provision and establish a general provision of 2 percent to cover unexpected deterioration.
  - Establish operational risk management procedures and procedures for calculating interest-rate risk.
  - Banking supervisors require additional training to analyze and monitor market activities complexity.
- AML/financial intelligence:
  - Centralize financial intelligence in a single agency and strengthen provisions for international cooperation; supervisors should emphasize detection, deterrence, and reporting of suspicious transactions.
- Accounting and audit:
  - Accelerate transition to International Financial Reporting Standards (IFRS) by the banking sector and require audits in accordance with international standards.
  - NBRB should more routinely use external auditors for supervisory purposes and hold trilateral meetings (bank, auditors, NBRB).
- Supervisory tools and early-warning:
  - BSD should introduce an early warning system focusing on liquidity demand and intermediation.
  - Grant NBRB the right to make corrections in reports based on reasoned judgments about risk-weighted assets/liabilities and equity capital.

### Authorities’ response
- The NBRB broadly agreed with the assessment and found it objective and useful for further improvement of banking supervision in Belarus.
- The NBRB felt that the ratings of several principles (CPs 5, 6, 9, and 21) could have been higher.
- The NBRB noted that authorities continue working on implementation of international standards of banking supervision, including monitoring and limiting country risks, operational risks, and market risks, and that several steps have already been taken to implement the recommendations in the assessment.

*Source: _cr06176 - 1. Detailed Assessment of Compliance of the Basel Core Principles*

### 1. Detailed Assessment of Compliance of the Basel Core Principles........................................9

### 1. Detailed Assessment of Compliance of the Basel Core Principles

### Assessment scope, methodology, and sources
- First external comprehensive assessment of the system of banking supervision in Belarus; mission conducted in November 2004 by Árpád Király and Walter Zunic.
- Assessment methodology: Guidance Note on Assessment of Implementation of the Basel Core Principles for Effective Banking Supervision and Core Principles Methodology Document (October 1999).
- Materials reviewed:
  - Law of the Republic of Belarus of October 3, 2000 “On the Banking Code of the Republic of Belarus” (Banking Code).
  - Edict 320 of June 13, 2001 on approval of the Statute of the National Bank of the Republic of Belarus.
  - Rules and Instructions issued by the National Bank of the Republic of Belarus (NBRB).
  - NBRB “Recommendations”, internal Provisions, licensing documents, bank examination reports, annual reports, NBRB website, and the NBRB self-assessment.
- Assessment approach: qualitative review of observance of each Core Principle’s essential criteria and, where needed, additional criteria; discussions with NBRB staff and market participants; review of documents and on-site interviews.

### Institutional setting, market structure, and legal framework
- Legal framework has seen significant reform over the last decade; a series of laws and regulations that are reasonably comprehensive and broadly consistent with international best practices.
- Regulatory policy structure:
  - Level 1: Banking Code (BC) and Presidential decrees; NBRB has substantial influence in drafting laws.
  - Level 2: NBRB issues prudential regulations, Regulatory Legal Acts jointly with the Government, Rules, and Instructions.
- NBRB responsibilities for authorization, supervision, and regulation are fulfilled through the Banking Supervision Directorate (BSD).

### Banking Supervision Directorate (BSD) organization and staffing
- BSD staffing and structure:
  - BSD consists of 62 specialists, inspectors and analysts at NBRB headquarters in Minsk.
  - A further 67 staff undertake supervision of branches located across 6 regional NBRB branches.
  - Inspection Department (on-site) consists of three Divisions:
    - Asset Quality Assessment and Profitability Division.
    - Capital Adequacy and Liquidity Inspection Division.
    - Administration and Risk Management Assessment Division.
  - Inspection Department total: 19 persons (per organizational listing).
  - Off-site supervision conducted by Supervision Organization Department with three Divisions:
    - Division of Personal Supervision over Authorized Banks (6 persons).
    - Division of Personal Supervision Over Non-Authorized Banks (7 persons).
    - Division of Personal Supervision over Crisis Banks (4 persons).
  - Other functions: Licencing and Registration Division; Information and Analytical Department (7 persons); Methodology of Prudential Supervision Department (10 persons); Divisions in the Inspection Department listed with personnel counts.
- Examination responsibilities:
  - Head Office BSD examiners primarily examine Head Offices of banks in Minsk; branches examined by Minsk Regional Office and other five regional branches.
  - Banks in free economic Zones (FEZ) examined by Head Office examiners.

### Macroprudential context and market concentration
- Macroeconomic situation: improved stabilization in recent years but “the macroeconomic situation continues difficult.”
- High concentration of banking system:
  - The six large banks make up about 85 percent of the total assets and 83 percent of the total capital of the banking system.
  - Of the 6 systematically important banks (SIBs) 5 are exclusively or mainly state owned.
  - The largest domestic savings bank accounts for about 41 percent of the assets, and holds 63 percent of retail deposits.
- State involvement and market distortions:
  - SIBs authorized to participate in state programs and to lend on preferential terms (often government guaranteed or recommended by Presidential/Government Decrees).
  - Lack of level playing field allows large banks to offer loans below market prices and crowd out competitors.
  - Non-competitive environment and frequently changing rules discourage foreign investors.
  - Political influence: presence of government officials on supervisory boards; supervisory authority should not be owner of institutions it supervises.

### Accounting and emergency roles
- NBRB implementing IFRS standards in stages; eleven national standards introduced based on international standards; full implementation anticipated by 2006.
- By law NBRB is charged with function of creditor of last resort and supports liquidity by operating in the interbank market; management indicated emergency measures can be applied to sustain private depositor confidence.

### Preconditions for effective banking supervision (CP 1) — findings
- Statute of the NBRB defines objectives including “developing and strengthening the banking system of the Republic of Belarus.”
- BSD performs both off-site and on-site supervision.
- Institutional weaknesses:
  - Director of Bank Supervision lacks autonomy and visibility: position is third-level relative to NBRB Board; Head of Bank Supervision refers matters to a Deputy Governor who has other responsibilities.
  - Legal protection for supervisors: no law provides for legal protection or indemnification for NBRB staff acting in good faith.
  - Coordination with other agencies: cooperation with State Securities Commission and Insurance Supervisory Department of the MoF is not formalized; meetings and information exchange not regular.

### Licensing and structure (CPs 2–5) — findings
- Banking Code requires the word “Bank” in a bank’s name.
- NBRB is sole authority for granting banking licenses.
- NBRB has right to request information about founders, assess financial condition, and evaluate fitness of executive bodies and chief accountant.
- Ownership approval threshold:
  - Bank ownership approval by NBRB limited to shareholdings of 10 percent or higher; BSD may not be aware of the full extent of financial interests of some shareholders.

### Prudential regulation and requirements (CPs 6–15) — findings and recommendations
- Capital adequacy:
  - Rules generally conform to the Basel Capital Accord 1988.
  - As of January 1, 2005 rules will include capital charge for market risk, country risk, foreign exchange risk and other material risks.
- Credit risk, asset classification and provisioning:
  - NBRB regulations cover criteria, practices and procedures for extension of credit and asset classification; procedures for establishing special loss reserves are mandated.
  - Current asset classification system: 4 risk groups with provision requirements of:
    - 0 percent for the Standard loan category,
    - 30 percent for the next classification category,
    - 50 percent for Doubtful assets,
    - 100 percent for Loss assets.
  - Concern: sudden jump from 0 percent to 30 percent is high by international standards.
  - Recommendation: NBRB should create a new loan category requiring a 10 percent provision.
  - Recommendation: NBRB should establish a general provision covering all loans of 2 percent to cover unexpected deterioration.
- Independence of banks’ credit decisions:
  - Banking Code requires banks be independent and determine conditions independently, but in practice banks are often not independent due to Presidential/Government regulations requiring lending to social programs, sometimes to insolvent enterprises—creating solvency and liquidity problems and prompting government resource allocations.
  - Recommendation: State and local government policies should not be funded by banks; banks should not be pressured to lend on non-compliant terms.
- Related-party operations:
  - Regulations exist for identifying related customers; most banks operate within limits, but there have been instances where government agencies did not take corrective action for violations, especially in large State banks. Recommendation: eliminate such practices and apply uniform evaluation of bank financial condition and risks.
- Risk measurement systems:
  - NBRB issued regulations and recommendations requiring systems to measure and monitor country risk, market risk, foreign exchange risk and other material risks.
  - Instruction on Economic Standards for Banks effective January 1, 2005; effectiveness cannot be analyzed at present.

### Anti–money laundering (AML) and financial intelligence
- Primary functions for controlling “On Measures to Prevent Legalization of Criminal Proceeds” are assigned to Ministry of Taxes and Duties and State Control Committee, not to NBRB.
- Supervisors need to place more emphasis on detection, deterrence, and reporting of suspicious transactions.
- Recommendations: centralize financial intelligence in a single agency and strengthen provisions for international cooperation.

### Methods of ongoing supervision (CPs 16–20) — findings
- CPs 16, 18 and 19: assessed as largely compliant.
- CP 17: assessed as Compliant.
- On-site supervision:
  - NBRB conducts full-scope on-site examinations of banks including larger branches on a two year basis.
  - Examination process comprehensive: risk management systems, internal controls, management systems, compliance with prudential requirements, asset quality and provisioning.
  - Two examination reports prepared at completion of each full-scope examination and forwarded to management.
- Off-site supervision:
  - Comprehensive system of off-site monitoring involving analysis of a wide range of information provided monthly and quarterly (some more frequent).
- CP 20 (consolidated supervision): assessed as Non-compliant.
  - NBRB does not conduct consolidated supervision.
  - A draft amendment to the BC prepared to introduce definitions of a banking group and a bank holding company and to allow NBRB supervision on a consolidated basis; adoption would allow development of consolidated supervision mechanisms.

### Accounting standards (CP 21)
- NBRB has not introduced International Financial Reporting Standards (IFRS) to the full extent.
- Recommendation: introduction of IAS standards for financial statements of banks should move expediently forward.

### Formal powers of supervisors (CP 22)
- Banking Code empowers NBRB to take remedial actions to restore conditions and remove abuses, develop corrective action and early intervention.
- Remedial actions in Code include removal of the bank’s governor and withdrawal of the bank's license.

### Cross-border banking (CPs 23–25)
- Banking Code does not currently provide NBRB with means to conduct supervision on a global consolidated basis over banking entities (authority for consolidated supervision of banks considering foreign subsidiaries and investments in foreign banks is not codified).
- Foreign banking institutions in Belarus are subject to similar regulatory requirements as domestic banks.
- Current legal provisions give NBRB powers to access information on a subsidiary of a foreign banking institution in Belarus.

*Source: _cr06176 - 1. Detailed Assessment of Compliance of the Basel Core Principles*

### 37.      The following assessment of the Basel Core Principles (BCP) is based on the Core

### _cr06176 - 37–38. Assessment basis and grouping of the Basel Core Principles

### Assessment methodology
- The assessment of the Basel Core Principles (BCP) is based on the Core Principles Methodology of the Basel Committee on Banking Supervision, October 1999.
- The methodology makes a distinction between “essential” and “additional” criteria.
- “Essential” criteria should be present in order for supervision to be considered effective.
- “Additional” criteria further strengthen supervision and countries should strive to implement as many of the additional criteria as possible.
- This assessment takes both the essential and additional criteria into consideration.

### Grouping of the Basel Core Principles
- The Basel Core Principles are grouped into seven categories:
  - (1) Preconditions for Effective Banking Supervision;
  - (2) Licensing and Structure;
  - (3) Prudential Regulations and Requirements;
  - (4) Methods of Ongoing Banking Supervision;
  - (5) Information Requirements;
  - (6) Formal Powers of Supervisors; and
  - (7) Cross-border Banking.

*Source: _cr06176 (pages 37–38).*

### 39.      A principle will be considered compliant whenever all essential criteria are generally

### _cr06176 - 39.      A principle will be considered compliant whenever all essential criteria are generally

### Assessment framework (paragraph 39)
- Definitions used in assessments:
  - Compliant: "all essential criteria are generally met without any significant deficiencies."
  - Largely compliant: "only minor shortcomings ... do not raise any concerns about the authority’s ability and intent to achieve full compliance ... within a prescribed period of time."
  - Materially non-compliant: "despite progress, the shortcomings are sufficient to raise doubts about the authority’s ability to achieve compliance."
  - Non-compliant: "no substantive progress toward compliance has been achieved."
  - Not applicable: principle does not apply given structural, legal, and institutional features.

### Principle 1 — Objectives, Autonomy, Powers, and Resources
- Legal/organizational framework:
  - Main law: Law of the Republic of Belarus of 3 October, 2000 “On the Banking Code of the Republic of Belarus” (BC). BC entered into force on January 1, 2001.
  - Statute of the National Bank of Belarus (NBRB) approved June 13, 2001 by Edict 320 of the President.
  - NBRB issues legally binding Instructions and Rules; these must be approved by Resolutions of the Board of NBRB (Articles 34 and 38 of BC).
  - NBRB powers include state registration and licensing of banks, regulation and supervision, procedures for banking operations, consent to securities trading; Article 181 (Law “On Economic Insolvency (Bankruptcy)”) grants rights to implement measures to prevent bankruptcy.
  - Primary supervisory goals (Article 34 BC): "maintenance of stability of the banking system in Belarus and protection of the interests of depositors and creditors."
- Coordination:
  - Council for Coordination of Control Activities created by Edict No. 673, November 15, 1999; SCC (State Control Committee) heads the Council; NBRB submits inspection plans twice a year.
  - Joint inspections involve Procuracy, SCC, Ministry of Taxes and Duties, others; results reviewed jointly.
- Powers for crisis intervention (Article 135 BC and related):
  - Remedies include: require remediation of violations; corrective actions; require reorganization; revoke licenses; file for bankruptcy; act as lender of last resort (Article 52 BC); temporary management appointment.
- Transparency and reporting:
  - NBRB audited annually (Article 46 BC) by auditing organization specified by the President; interagency inspections by order of the President.
  - Information on banking sector accessible on NBRB website and official publications; Resolution No. 176 (June 28, 2001) regulates release of supervisory information.
- Assessments and key findings:
  - Principle 1(1) Assessment: Compliant.
    - Comment: legislation meets essential/additional criteria; coordination arrangements raise questions because NBRB is subordinated operationally to the Coordination Council and SCC in practice.
  - Principle 1(2) Assessment: Materially non compliant.
    - Key facts:
      - BSD staff: 62 at headquarters; 67 staff at regional offices participate in supervision.
      - BSD staff increased from 47 three years earlier to 62.
      - NBRB Supervisory Board members appointed for a term of five years (Article 61 BC); Chairman is member of the Presidium of the Council of Ministers (Article 36 BC).
      - NBRB budget coordination: draft budget coordinated with Council of Ministers and Ministry of Finance and approved by the President; financial independence undermined.
    - Comment: operational independence weakened by Coordination Council/SCC oversight, government representation on Supervisory Board, budget coordination with MoF and President; interference via demands/directives on lending and prudential relaxation.
  - Principle 1(3) Assessment: Largely compliant.
    - Comment: NBRB is licensing authority; scope of NBRB's regulatory power can be interfered with by other parties.
  - Principle 1(4) Assessment: Largely compliant.
    - Comment: NBRB has ample formal powers to address compliance and access information; limited explicit legal provision for discretionary qualitative judgments and to require reporting aligned with supervisor's assessment.
  - Principle 1(5) Assessment: Non-compliant.
    - Comment: no explicit legal protection against lawsuits or defense costs for supervisors/staff acting in good faith.
  - Principle 1(6) Assessment: Materially non-compliant.
    - Key facts:
      - NBRB has cooperation agreements with: Russia, Kazakhstan, Armenia, Lithuania, Latvia, Moldova, Ukraine, Kyrgyzstan, and Cyprus (no MoU with Austrian FMA).
      - Article 122 BC: bank account/deposit information is bank secret; Article 34 BC: supervisory information may not be disclosed except as prescribed by law.
    - Comment: cooperation with State Securities Commission and Insurance Supervisory Department is not formalized; lack of clear statutory provisions for interagency and international information sharing and for protection of confidential information.

### Principle 2 — Permissible Activities
- Assessment: Compliant.
- Key findings:
  - Article 8 BC defines "bank"; Article 14 BC provides exhaustive list of permissible banking activities.
  - Article 74 BC requires the word “bank” in a bank’s name; non-licensed entities cannot use “bank.”
  - Comment: legislation meets essential criteria; a recommended clarification of essential attributes of banking activity.

### Principle 3 — Licensing Criteria
- Assessment: Materially non-compliant.
- Key facts:
  - Minimum authorized capital set by Rules No.173: for a new (reorganized) bank: equivalent to €5.0 million; operating bank: €5.0 million; operating bank licensed to attract deposits from individuals: €10.0 million. Free Trade Zone banks: minimum € 500.000.
  - Professional suitability requirements: education in economics or law and minimum three years’ relevant experience.
  - Business plan: three-year forecast required (Article 80 BC).
- Comments:
  - Law does not explicitly permit full analysis of ownership structure or identification of ultimate owners; no definition of banking groups or bank holding companies; transparency of ownership is inadequate; business reputation definition lacking; need for regulation to reveal ultimate owners and origin of initial capital.

### Principle 4 — Ownership
- Assessment: Materially non-compliant.
- Key facts:
  - Article 124 BC: NBRB permission required for acquisition of more than 10 percent of shares; notification required for acquisitions >5 percent.
  - Civil Code: controlling interest defined as 50%+1 of voting shares; shareholders may set higher controlling block thresholds in charter.
- Comments:
  - No clear statutory definition of "significant" ownership beyond NBRB practice; 10% threshold easily circumventable if buyers act in concert; controlling interest not regulated sufficiently.

### Principle 5 — Investment Criteria
- Assessment: Materially non-compliant.
- Key facts:
  - Article 118 BC and Rules No. 173: participation limits—single legal person not exceed 5% of own funds; aggregate participation not exceed 25% of own funds.
  - Investments exceeding 10% of authorized fund require NBRB authorization.
  - When calculating capital adequacy, investments into subsidiaries and investments ≥20% of issuer's authorized capital are deducted.
- Comments:
  - Supervision of bank investments is largely formal; NBRB lacks consolidated supervision powers and criteria to assess influence of invested entities on bank activities; recommendation to establish NBRB power to supervise on consolidated basis.

### Principle 6 — Capital Adequacy
- Assessment: Materially non-compliant.
- Key facts:
  - Capital adequacy rules (Rule No.173): minimum capital adequacy ratio set at 14 percent for first two years, 10 percent thereafter; minimum core capital ratio 7 percent for first two years, 5 percent thereafter.
  - Planned reductions (from 1st of January, 2005): capital adequacy to 12 percent and 8 percent; core capital to 6 percent or 4 percent.
  - Article 113 BC: components of equity defined by ability to absorb losses.
  - Capital adequacy reporting: monthly filings required.
- Comments:
  - Minimum ratios exceed Basel benchmarks but do not cover market risk; no explicit statutory requirement for banks to consistently maintain minimum ratio; capital ratios not applied on consolidated basis; recommendation to retain 10% rather than planned reduction to 8%.

### Principle 7 — Credit Policies
- Assessment: Largely compliant.
- Key facts:
  - Instructions No. 226 (December 30, 2003) require banks to approve internal rules covering loan approval, borrower creditworthiness assessment, collateral valuation, monitoring, limits on branch powers.
  - Prudential reports include large exposure reports, insider exposures (monthly from January 2005), and others.
- Comments:
  - Banks subject to external pressure to lend to government/social programs; supervisory forbearance and exceptions reduce effectiveness; need to eliminate practice of state-driven exceptions.

### Principle 8 — Loan Evaluation and Loan-Loss Provisioning
- Assessment: Largely compliant.
- Key facts:
  - Article 110 BC: banks must form reserves; Rules No.33 (Resolution No.33, February 19, 2001) set asset classification and provisioning procedures (to be replaced 1st of January 2005).
  - Reserves adjusted at least monthly; bad assets written off against reserve after 1 year in risk group IV.
- Comments:
  - Regulation does not cover classification/provisioning for off-balance sheet exposures; instances of concealment and rescheduling identified; NBRB applies corrective actions when misclassification is found.

### Principle 9 — Large Exposure Limits
- Assessment: Materially non-compliant.
- Key facts:
  - Rules No.173 limits: maximum exposure to single customer/group: 20 percent of equity capital in first two years, 25 percent thereafter; maximum large risks: six times equity capital.
  - Large exposure defined as exposure >10 percent of equity capital.
  - Maximum exposure to insiders and aggregate insider exposure limits specified (see Principles 9–10).
- Comments:
  - NBRB lacks discretionary power to interpret "closely related group" on a case-by-case basis or to independently evaluate inter-customer relations; data limitations on shareholders below 10 percent weaken monitoring; selective supervisory forbearance observed.

### Principle 10 — Connected Lending
- Assessment: Largely compliant.
- Key facts:
  - Rules No.173 defines insiders and related parties; maximum exposures:
    - single individual insider: not more than 2 percent of equity capital;
    - single legal entity insider: not more than 10 percent (first two years) and 15 percent thereafter;
    - maximum exposure to all insiders: 25 percent of equity capital.
- Comments:
  - Definition of connected/related parties not in law; supervisors lack discretion to detect undisclosed insiders or require report corrections; NBRB not yet authorized to reduce capital when insider exposure exceeds limits (to be examined in Rule changes); identification of beneficial borrowers is incomplete, especially with foreign shareholders below 10 percent.

### Principle 11 — Country and Transfer Risks
- Assessment: Materially non-compliant.
- Key facts:
  - Instruction 92 (June 2004) requires risk assessment by country rating and to take effect January 2005; Moody’s, Fitch and Standard & Poor’s ratings used to group countries A to E (Group A: AAA to AA-).
  - Resolution N 92 (June 2004) regulates country risk.
- Comments:
  - Instruction 92 not yet effective at time of assessment; banks have not established specific internal country/transfer risk limits; recommendation to require periodic reporting of exposures using NBRB rating classification; reassessment warranted after implementation.

### Principle 12 — Market Risk
- Assessment: Materially non-compliant.
- Key facts:
  - OEP limits (Instruction/Resolution No.57, March 29, 2002): overall OEP ≤ 20 percent of capital; OEP per currency ≤ 10 percent; forward transactions per currency ≤ 10 percent.
  - Instruction 92 (June 26, 2004) requires capital charge on market risks effective January 1, 2005.
  - Securities accounted at acquisition price (Regulations on Accounting in Banks, November 22, 2000); Regulations on Creation of Reserves against Devaluation of Securities (Resolution No.164, June 28, 2001).
- Comments:
  - Interest-rate risk measurement requirements absent; market risk capital charges not yet effective at assessment time; stress testing and operationalization of Instruction 92 pending.

### Principle 13 — Other Material Risks / Comprehensive Risk Management
- Assessment: Materially non-compliant.
- Key facts:
  - Instruction 92 (June 2004) establishes minimum capital requirements for country, off-balance sheet, liquidity, market and operational risks; effective January 1, 2005.
  - NBRB requires banks to have internal control and risk management procedures; Recommendations on Internal Control updated June 2004.
- Comments:
  - Instruction 92 not yet implemented at assessment time; operational risk guidance not implemented; liquidity risk management requires significant improvement in many banks.

### Principle 14 — Internal Controls and Audit
- Assessment: Largely compliant.
- Key findings:
  - Legal frameworks (Civil Code, Law on Joint-Stock Companies) and Article 73 BC require charters to specify administrative and internal control bodies.
  - NBRB Guidance and Standard Statute on Organizing Internal Audit (1998) require internal audit services; internal audit reports to executive body annually.
- Comments:
  - Principle largely meets essential criteria; recommendation that Head of Internal Audit report directly to the bank’s supreme administrative body and that NBRB be empowered to evaluate members of bank oversight councils.

### Principle 15 — Market Conduct / AML and “Know‑Your‑Customer”
- Assessment: Materially non-compliant.
- Key facts:
  - AML Law (May 2002) requires internal control measures and appointment of an official responsible for internal control; Article 4 lists operations subject to special controls.
  - Article 6 AML Law grants liability protection for persons acting in lawful performance of responsibilities.
  - Financial Monitoring Department created post-AML Law; main supervisory/control functions assigned to Ministry of Taxes and Duties and State Control Committee, not NBRB.
- Comments:
  - Implementation, adequacy and effectiveness of AML/CFT arrangements assessed as weak: functions not assigned primarily to NBRB; need for centralized financial intelligence unit; supervisors need to emphasize detection, deterrence and reporting of suspicious transactions; training and expert assistance by NBRB limited by legal assignment of responsibilities.

### Principle 16 — On-site and Off-site Supervision
- Status (partial content supplied):
  - Article 34 BC: NBRB exercises continuous control over observance of banking laws.
  - BSD developed Methodological Recommendations on Comprehensive Analysis of a Bank's Financial Condition (NBRB Supervisory Board Resolution No. 208, dated June 25, [text cut]).
- Comment: on-site and off-site supervision structures exist and NBRB uses reporting and inspections; detailed assessment and concluding remarks for Principle 16 are in the subsequent text beyond the supplied excerpt.

*Source: Excerpt from the Detailed Assessment of Compliance of the Basel Core Principles (Belarus) contained in the supplied IMF chapter/section text.*

### 2002. These Recommendations implemented a comprehensive approach to assess the financial

### _cr06176 - 2002. These Recommendations implemented a comprehensive approach to assess the financial

### Supervisory framework and activities
- The BSD performs on-site and off-site supervision to assess the financial condition of banks and reveal risks at their inception; results inform inspection frequency, inspection focus, and supervisory measures.
- Information from inspections is used to select supervisory response measures.
- Article 37 of the BC requires banks and nonbank credit and finance institutions to provide the NBRB with financial and economic information and documentation necessary for the BSD performance of its functions.
- In accordance with Article 120 of the Banking Code, banks file periodic reports (daily, weekly, monthly, quarterly and annual basis) with the NBRB covering their various activities.
- Complying with the Instructions on the Procedure for Organizing Inspections of Banks (NBRB Supervisory Board Resolution No. 8.12, March 2000), the BSD:
  - conducts on-site inspections to establish the real financial condition of a bank, risks assumed, internal controls, management organization, compliance with prudential requirements, bookkeeping accuracy, and report accuracy;
  - reveals situations endangering creditors and depositors, violations of banking legislation and bank internal documents, their causes and conditions;
  - generates recommendations for corrective action, prevention, corrective measures against a bank, and accountability of officials when necessary.

### BSD structure, staffing, and regional organization
- The BSD consists of 62 specialists, inspectors and analysts of whom 62 are located at the NBRB headquarters in Minsk. 67 staff located at the 6 regional offices undertake inspections of bank branches and report to the BSD.
- On-site supervision is carried out by the Inspection Department, consisting of three Divisions:
  - Asset Quality Assessment and Profitability Division;
  - Capital adequacy and Liquidity Inspection Division;
  - Administration and Risk Management Assessment Division.
- Off-site supervision is conducted by Supervision Organization Department, consisting of three Divisions:
  - Division of Personal Supervision over Authorized Banks;
  - Division of Personal Supervision Over Non Authorized Banks;
  - Division of Personal Supervision over Crisis Banks.
- Complementary units: Licencing and Registration Division, Departments of Information and Analysis, and Methodology of Supervision Department.
- BSD objective: analyze financial condition, risks taken by management, adequacy of internal control system, adherence to prudential requirements, accounting accuracy, and reliability of reports submitted to the NBRB.
- BSD staff in Minsk supervises and coordinates activities of NBRB regional offices.

### Inspection program and practices
- Comprehensive inspections of each bank are conducted on site over a two year cycle to evaluate financial soundness, operational efficiency, and adequacy of risk evaluation.
- Inspections emphasize:
  - quality of management;
  - presence and quality of risk management and internal control systems;
  - liquidity management and correctness of liquidity reports;
  - analysis of risks, their identification, and minimization methods;
  - presence of contingency action programs.
- During inspection preparation, off-site supervision results are analyzed to determine problem areas.
- Two inspection reports are prepared on completion:
  - one covering the Regulatory Aspects Review conducted by the BSD;
  - one financial report covering all components of a CAMELS assessment.
- Review of four examination reports indicated examiners have a good degree of proficiency and utilize the equivalent of a CAMELS system covering Capital, Assets, Management, Earnings, Liquidity and Sensitivity to Risk.
- Inspections are conducted on the basis of inspection plans; unscheduled inspections occur as necessary.
- Methodological Recommendations on Organizing and Conducting Inspections of Banks (NBRB Supervisory Board Resolution No. 209, June 25, 2002) were developed to optimize inspections.
- BSD examiners at the Main Office primarily examine Head Offices of banking institutions in Minsk; Minsk Regional Office and other five regional offices examine branches.

### Reporting, prudential returns, and off-site surveillance
- Effective January 1, 2005, the procedure for compilation and submission of financial reports will be regulated by the “Instruction on Procedure for Compilation of Prudential Reports by Banks and Nonbank Credit and Financial Organizations and their Submission to the NBRB” 135, approved in August 2004.
- In accordance with Article 120 of the BC, banks file financial reports as required by the NBRB; the National Bank has the right to request and obtain from banks any necessary information on their activity.
- Article 26 of the BC: NBRB develops and approves methods of accounting and reporting for banks; procedure for compiling and filing reports falls under NBRB authority.
- Reporting requirements are established by various Rules/Resolutions, including:
  - Rules on Regulating Activities of Banks and Nonbank Credit and Finance Institutions (NBRB Supervisory Board Resolution No. 173, June 2001);
  - Instructions on the Procedure for Open Foreign Exchange Position Management (NBRB Supervisory Board Resolution No. 57, March 2002);
  - Regulations on Forming and Using Special Loss Reserves for Assets (NBRB Supervisory Board Resolution No. 33, February 2001);
  - Regulations on Creation of Reserves against Devaluation of Securities by Banks (NBRB Supervisory Board Resolution No. 164, June 28, 2001).
- The Methodological Recommendations on Comprehensive Analysis of a Bank's Financial Condition (NBRB Supervisory Board Resolution No. 208, June 25, 2002) suggest analyzing banks on the basis of both prudential and financial reports.
- The frequency of prudential reporting depends on the frequency of control of observance of relevant prudential requirements; frequency of financial reports is established in Instructions on Compiling Financial Report Forms.

### External and internal audit interaction
- Based on Article 34 of the Banking Code, the National Bank can require external audit certification of annual reports and shorter period reports and to file the auditor's opinion unabridged.
- As required by NBRB Letter No. 27, of February 2002 “On the Procedure and Times of Public Release of Bank Annual Reports”, an external audit's opinion on the accuracy of a bank's annual report (balance sheet and profit/loss statement) is filed obligatorily with the NBRB.
- The NBRB evaluates external audit results during inspections; factors considered include auditor competency, independence, and adequacy/effectiveness of external audit program.
- In practice the NBRB does not exercise its right to bring in external auditors to conduct inspections for supervisory purposes and instead uses its own inspection staff.
- Every bank is required to undergo a comprehensive inspection not less than once every three years; banks with deteriorating condition, higher risks, or legislative violations are examined more frequently.

### Accounting standards, disclosure, and audit practice
- NBRB developed Regulations on Compilation and Filing of an Annual Report by Banks, No. 350, December 28, 2001, requiring banks to file an annual report validated by an external auditor's opinion.
- National Financial Reporting Standards developed for IFRS introduction include:
  - NSFO 1, NSFO 7, NSFO 21, NSFO 27, NSFO 28, NSFO 29, NSFO 30.
- NBRB Supervisory Board Resolution No. 27, February 2002, requires banks to release their annual report in official Republican media after validation by an auditing organization.
- Instructions on Compiling Financial Report Forms (NBRB Supervisory Board Resolution No. 20, January 2003) require yearly obligatory validation by external audit of certain prudential report forms, including calculations of capital adequacy, liquidity calculations, information on large exposures, and calculations of loss reserves for assets.
- Republic of Belarus Law “On Accounting and Reporting” assigns responsibility for report accuracy to the organization's director and chief accountant.
- Article 11 of the Republic of Belarus Law “On Auditing” requires auditors to communicate in writing to shareholders information on violations of law resulting in substantial losses or potential substantial losses.

### Assessments by Basel Core Principles (selected Principles 17–21) and key findings
- Assessment summary excerpts:
  - Assessment: Largely compliant (general supervisory system; BSD cooperation and inspector proficiency).
  - Principle 17 (regular contact with bank management): Assessment — Compliant.
    - BSD officers meet with senior and middle bank management to discuss inspection results; Director of BSD holds meetings throughout the year with senior officers of all 31 banks.
    - Article 81 of the BC requires NBRB to evaluate professional fitness of executive directors and chief accountant prior to registration/license.
  - Principle 18 (collection, review and analysis of prudential reports): Assessment — Largely Compliant.
    - Comments: consolidated reports currently filed are insufficient to permit full accounting of influence of persons connected with a bank; National Bank cannot request consolidated reports from banking groups and holding companies (only consolidated reports of a bank and subsidiaries with >50 percent control).
    - Ownership by banks of other enterprises is insignificant and represents less than two percent of total assets.
    - National Bank does not have right to make corrections in reports based on reasoned judgments regarding risk-weighted assets/liabilities and equity capital.
    - Adequate tools for operational analysis on solo and consolidated basis are to be introduced by 2005.
  - Principle 19 (independent validation via on-site or external auditors): Assessment — Largely Compliant.
    - Comments: NBRB does not normally use external auditors to conduct inspections; trilateral meetings (bank, auditors, NBRB) are not commonly held; auditing regulations are being revised to incorporate risk-based supervision.
  - Principle 20 (consolidated supervision of banking groups): Assessment — Non-compliant.
    - Description: Legislation does not codify consolidated supervision; NBRB lacks authority to request information on makeup of banking groups or to inspect parent companies or nonbank entities in group supervised by other agencies.
    - Article 120 requires consolidated reporting when a bank owns more than 50 percent of voting shares of another legal entity.
    - A draft amendment to BC prepared to define banking group and bank holding company and grant NBRB consolidated supervision powers; until adoption, Non-compliant.
  - Principle 21 (adequate records and financial statement reliability): Assessment — Materially non-compliant.
    - Comments:
      - International Financial Reporting Standards have not been fully introduced; fair (market) value appraisal of assets and liabilities is not employed.
      - Carrying out audits in accordance with international standards is not obligatory for annual bank audits.
      - Practice exists of releasing banks from liability for not creating appropriate reserves in full, allowing banks not to show real losses.
      - Some state banks report earnings but subsequently require government capital injections.
      - No rule allows NBRB to demand replacement of an outside auditor by a bank; auditors are not required to report information directly to NBRB beyond filing a complete auditor's opinion.
      - Pending full introduction of IFRS and its implementation by banks, the Principle is Materially non-compliant.

### Key shortcomings and recommended supervisory improvements (as described in source)
- NBRB supervisors do not have authority to request and obtain information on the makeup of a banking group; draft amendments to the BC are prepared to address this.
- Accelerate transition to International Financial Reporting Standards (IFRS) by the banking sector.
- BSD should introduce an early warning system that focuses, among other things, on liquidity demand and intermediation.
- National Bank lacks authority to request consolidated reports from banking groups and holding companies (except where bank controls >50 percent).
- National Bank lacks the right to make corrections in reports based on reasoned judgments about risk-weighted assets/liabilities and equity capital.
- NBRB does not routinely engage external auditors to perform inspections; trilateral auditor meetings are not standard practice.
- Auditing regulations are in process of revision to incorporate new risk-based supervisory procedures.

*Source: _cr06176 - 2002. These Recommendations implemented a comprehensive approach to assess the financial*

### introduction of International Financial Reporting Standards for banks by the NBRB, and its

### _cr06176 - introduction of International Financial Reporting Standards for banks by the NBRB, and its

### Principle 22 — Remedial Powers and Supervisory Measures
- Legal basis:
  - Articles 97 and 135 of the BC.
  - Republic of Belarus Law No. 423-Z, Article 181, dated August 2000 “On Economic Insolvency (Bankruptcy)”.
  - NBRB Supervisory Board Resolution No. 3 and No. 4, dated January 2001.
  - NBRB Supervisory Board Resolution No. 71, March 29, 2001.
  - Instructions on the Procedure for Organizing Inspections of Banks, approved by NBRB Supervisory Board Resolution No. 8.12, March 30, 2000.
  - Methodological Recommendations on Organizing Inspections of Banks, approved by NBRB Board of Directors Resolution No. 209, June 25, 2002.

- Corrective actions the NBRB may apply in the event of violations:
  - require correction of revealed violations;
  - collect fines of amounts established by the National Bank;
  - suspend the licenses of a bank or a nonbank credit and finance institution pertaining to particular banking operations for up to one year;
  - demand implementation of measures for financial recovery of a bank or a nonbank credit and finance institution, to include changes to the structure of assets;
  - submit proposals for the replacement of their directors or for re-evaluation of the professional fitness of the directors of executive bodies and the chief accountant;
  - require removal of the bank director from his position;
  - demand reorganization of the bank or nonbank credit and finance institution;
  - change economic standards for a bank or nonbank credit and finance institution for a period of up to one year, or until violations are corrected;
  - impose a prohibition on the opening of branches (offices) as well as structural subdivisions away from the bank's or nonbank credit and finance institution's location for a period of up to one year, or until violations are corrected;
  - suspend banking licenses for a period of up to one year, or until violations are corrected;
  - revoke licenses for particular banking operations;
  - place a bank or nonbank credit and finance institution under the temporary management of the National Bank, or appoint an interim administration by procedure established by Republic of Belarus legislation.

- Additional authorities:
  - The NBRB has the right to impose administrative punishments on officials pursuant to Republic of Belarus legislation.
  - The NBRB has the right to collect fines without contest.
  - Under Article 181 of the Law “On Economic Insolvency (Bankruptcy)”, the NBRB can: improve the financial condition of the bank; appoint an interim administration to manage the bank; reorganize the bank.
  - Shareholders are required to take necessary steps to improve the bank's financial condition or to reorganize the bank when grounds for anti-bankruptcy measures arise.

- Assessment:
  - Largely Compliant

- Comments:
  - The powers of the supervisor to implement response measures are not flexible.
  - The National Bank does not have the right to apply several corrective actions simultaneously for one violation, or apply supplemental measures if prior ones have not had sufficient impact.
  - Appropriate changes to the Banking Code have been proposed to rectify the situation.
  - The system of laws does not permit application of corrective actions against senior management and members of the oversight council; there is no possibility for applying measures against the oversight agency of a bank's administration.

### Principle 23 — Global Consolidated Supervision of Internationally‑active Banking Organizations
- Legal and reporting framework:
  - Article 92 of the Republic of Belarus Banking Code establishes procedure for permission to open subsidiary banks and branches outside the country and for participation in foreign banks.
  - Banks are obliged to file consolidated reports including subsidiary structures in which a bank controls more than 50 percent of voting shares or stakes (Article 120 of the Banking Code).
  - The authority to perform consolidated supervision that considers foreign subsidiary legal entities and investments in foreign banks is not codified in the legislation.
  - NBRB may perform consolidated supervision over foreign branches since they are dependent subdivisions (not legal entities).

- Cooperation arrangements:
  - To obtain supplemental information for global consolidated supervision, the NBRB enters into memoranda of understanding and cooperates informally with foreign supervisors.
  - Republic of Belarus legislation does not contain restrictions on inspections of foreign subsidiary banks and branches of Belarusian banks.

- Practical situation and numbers:
  - Belarusian banks do not have branches, subsidiary banks, and investments in the authorized capital of foreign banks.
  - At present, Republic of Belarus banks have 11 representative offices abroad (6 in Russia, 1 in Germany, 4 in Poland).
  - Branches and subsidiary banks have not been registered outside the Republic of Belarus.

- Assessment:
  - Materially non-compliant

- Comments:
  - CP 23 is not relevant in practice because currently no cross border operations of Belarusian banks exist, but this situation can change rapidly and the NBRB should be given more authority to control foreign expansion.
  - Current informal exchange of information with foreign supervisors should be formalized; memoranda of understanding should be in place with supervisors of countries whose banks have purchased a participation in a Belarus licensed bank.
  - The NBRB has prepared a draft to the BC that:
    - introduces definitions of a banking group and a bank holding company;
    - grants the NBRB the possibility for supervising such groups and holding companies on a consolidated basis;
    - provides for establishment of certain economic standards for banking groups/holding companies;
    - establishes corrective actions to be taken by the NBRB for their violation.
  - Implementation of the draft will enable development and introduction of mechanisms for consolidated supervision of banking groups and holding companies.

### Principle 24 — Contact and Information Exchange with Other Supervisors (Host Country Authorities)
- Current arrangements and activity:
  - Belarus banks have 11 representative offices abroad (6 in Russia, 1 in Germany, 4 in Poland).
  - The NBRB is establishing and developing contacts and information sharing with banking supervisors in countries where Belarusian banks maintain representative offices.
  - A draft arrangement (memorandum of understanding) was offered to supervisors of 10 foreign countries for review.
  - The NBRB has entered into eight bilateral arrangements with foreign banking supervisors (mainly in CIS countries and the Baltics) and has a memorandum of understanding with Cyprus.
  - Bilateral arrangements provide for information sharing on national banking legislation, norms and requirements of banking supervision, including conduct of consolidated supervision.
  - These arrangements provide for NBRB to inform host-country supervisors regarding material changes to a Belarusian finance and credit institution (prohibition/restriction of operations, appointment of interim administration, reorganization, revocation of license).
  - In absence of formal arrangement, information may be provided at the request of the host-country supervisory authority.
  - The NBRB provides supervisory information in response to requests under arrangements and on an informal basis, after receiving consent of the relevant institution.
  - Belarusian banks may open representative offices abroad only with the consent of the NBRB; the NBRB may prohibit opening in countries with legislation prohibiting provision of information necessary for adequate supervision.

- Assessment:
  - Not Applicable

- Comments:
  - None of the Belarusian banks have established foreign branches or other structures abroad with the right to engage in banking operations.
  - The Belarusian banks have established representative offices in three countries.
  - Requests for information from the control agencies of these countries on the situation of offices of Belarusian banks abroad is not warranted.

### Principle 25 — Local Operations of Foreign Banks and Powers to Share Information with Home Supervisors
- Legal basis and supervisory approach:
  - Pursuant to the BC, requirements and NBRB regulations established for banks created on the basis of Belarusian capital also apply to banks with foreign investments and to subsidiary banks of foreign banks.
  - Per Article 34 of the BC, the NBRB regulates activities of banks, including banks with foreign investments and subsidiary banks of foreign banks, and supervises them.
  - Prudential requirements imposed on such banks are the same as those imposed on banks created with Belarusian capital.
  - According to Article 110 of the Banking Code, foreign banks, and all banks registered in the Republic of Belarus, must comply with economic standards, requirements, and limits established pursuant to Article 112, classify assets by reliability, form loss reserves, and file reports as established by the NBRB.
  - Prior to issuing a license to a bank that is a subsidiary of a foreign owned bank, the NBRB ensures the home supervisor has issued an approval.
  - Under agreements with home country supervisors, the NBRB shares information on a reciprocal basis and gives on-site access to home country examiners to examine the subsidiary; the NBRB has the right to assist foreign examiners.

- Assessment:
  - Largely Compliant

- Comments:
  - The NBRB has entered into eight bilateral arrangements with foreign banking supervisors, mainly in CIS countries and the Baltics, and has a memorandum of understanding with Cyprus.
  - The NBRB is pursuing an agreement with the Austrian Bank Supervisory authorities and is waiting for a reply.
  - The NBRB reports a signed bilateral agreement with the Central Bank of Russia and a very good informal exchange with that agency.
  - Needs identified:
    - strengthen assessment of adequacy of reporting systems from a subsidiary to the parent and parent’s supervision of the subsidiary;
    - ensure NBRB remains well-versed of developments affecting the soundness of parent banks and banking groups;
    - maintain close liaison with parent supervisory authorities.

### Summary Compliance (selected items from Table 2)
- Principle 1.1 Objectives: Compliant
- Principle 1.2 Independence: Largely compliant
- Principle 1.3 Legal framework: Materially non-compliant
- Principle 1.4 Enforcement powers: Materially non-compliant
- Principle 1.5 Legal protection: Not applicable
- Principle 1.6 Information sharing: Largely compliant
- Principle 2 Permissible Activities: Compliant
- Principle 3 Licensing Criteria: Largely compliant
- Principle 6 Capital Adequacy: Largely compliant
- Principle 21 Accounting Standards: Largely compliant
- Principle 22 Remedial Measures: Largely compliant
- Principle 23 Globally Consolidated Supervision: Materially non-compliant
- Principle 24 Host Country Supervision: Not applicable
- Principle 25 Supervision Over Foreign Banks’ Establishments: Largely compliant
- (Table 2 contains the full matrix of CP numbers and compliance categories.)

### Recommended Action Plan (selected items from Table 3)
- 1.2 Independence:
  - Increase the level of Independence in the Budgetary Process and increase visibility of Head of Directorate of Bank Supervision.
- 1.5 Legal Protection:
  - Provide legal protection to the Supervisors against legal actions. Protect Supervisors against legal costs incurred.
- 1.6 Information Sharing:
  - Formalize the coordination among different agencies involved in financial sector regulation and supervision.
- 3. Licensing Criteria:
  - Amend legislation to permit deeper analysis of ownership structure including indirect ownership.
- 4. Ownership:
  - Decrease the current 10% limit to 5% for authorization of purchases of shares transferred from original owner to subsequent owners.
- 5. Investment Criteria:
  - Authorize the NBRB to conduct deeper analysis of the impact of investments on the bank’s financial position.
- 6. Capital Adequacy:
  - Retain capital adequacy at current level. Implement the disposition of Instruction 92, taken effect I Jan 2005.
- 9. Large Exposure Limits:
  - Give NBRB discretionary power in the interpretation of what constitutes closely related groups.
- 10. Connected Lending:
  - Grant bank supervisors the discretion to make judgments about the existence of connections between the bank and other parties.
- 11. Country Risk:
  - Ensure effectiveness of Implementation of Instruction 92 dated June 2004, that become effective in January 2005.
  - Ensure that individual banks have established country exposure limits and transfer risk limits on their operations.
- 12. Market Risk:
  - The effectiveness of Implementation of Instruction on Economic Standards for banks on January 1, 2005 cannot be analyzed at the present time.
  - Banking supervisors require additional training to analyze and monitor market activities complexity.
- 13. Other Risks:
  - Establish an operational risk management procedure and a procedure for calculating aspects of interest-rate risks.
- 20. Consolidated Supervision:
  - Adopt and implement proposed amendment to the BC to allow NBRB to supervise banking groups and holding companies on a consolidated basis.
- 21. Accounting Standards:
  - Take steps to introduce International Financial Reporting Standards to the full extent more rapidly than the current timetable provides for.
- 23. Globally Consolidated Supervision:
  - Adopt and implement the draft to the BC that introduces definitions of a banking group and a bank holding company, and grants the NBRB the possibility for supervising such groups and holding companies on a consolidated basis.

### Authorities’ Response
- The NBRB broadly agreed with the assessment and found it objective and useful for further improvement of banking supervision in Belarus.
- The NBRB felt that the ratings of several principles (CPs 5, 6, 9, and 21) could have been higher.
- The NBRB noted that authorities continue working on implementation of international standards of banking supervision, including monitoring and limiting country risks, operational risks, and market risks, and that several steps have already been taken to implement the recommendations in the assessment.

*Source: _cr06176 - introduction of International Financial Reporting Standards for banks by the NBRB, and its*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06176.pdf_