## _cr08300

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---

### Executive summary — key findings
- Major challenge: ensure Mongolia’s rapid financial sector growth takes place in a stable manner given economic volatility and the need to upgrade the regulatory and supervisory framework.
- Financial system status:
  - Relatively small and undeveloped; recent strong growth aligned with overall economic expansion and financial sector reforms.
  - System described as “still relatively unsophisticated” but growing strongly.
- Outlook and risks:
  - Overall outlook for financial system stability is positive on balance, but exposed to potentially significant risks.
  - Financial soundness indicators (FSIs) for the banking sector present a robust overall picture in line with strong economic growth.
  - Inflation has increased sharply over the past year, fuelled in part by very rapid credit growth, posing risks to macroeconomic stability and banks’ credit quality and profitability.
  - Dependence on a narrow range of commodity exports and potential volatility in output or prices poses important risks for banks.
  - Stress tests indicate the banking system as a whole would remain solvent, but significant recapitalization could be needed in the event of a very severe shock.
- Systemic liquidity and safety net:
  - Systemic liquidity management framework and the financial system safety net are undeveloped.
  - Money and foreign exchange markets are thin, complicating monetary policy tightening and weakening transmission to interest rates.
  - Authorities have in the past dealt firmly with financial sector problems, sometimes in an ad hoc fashion; plans exist to introduce a deposit insurance scheme.
- Development initiatives:
  - Multiple initiatives underway or planned (legal framework, payment system, financial infrastructure, development bank proposal, housing finance stimulation) but require careful design, prioritization, and sequencing to avoid distortions and unfair competition.
- Supervisory framework and governance:
  - Bank of Mongolia (BOM) has a reasonably well developed risk-based approach to bank supervision given current stage, but implementation can be improved—especially supervision of liquidity and operational risks.
  - Legal and regulatory framework needs improvement for consolidated supervision and stronger requirements for prior experience/background of senior management and boards.
  - Financial Regulatory Commission (FRC) supervision of NBFIs and capital markets is less developed and needs substantial resources, training, and better industry statistics.
  - Strengthened legal protections are needed for supervisory staff at both BOM and FRC.

### Financial system structure and macro/commodity exposure
- Structure and size:
  - 16 registered commercial banks accounted for over 95 percent of the total financial system assets (as at end-2007).
  - Total assets of the banking system grew from 52 percent of GDP in 2003 to about 87 percent of GDP in 2007, or by 4.3 times in nominal terms.
  - Banking sector is significantly foreign-owned; NBFIs, including SCCs, are generally small and underdeveloped.
- Commodity and macro exposure:
  - Mongolia has averaged around 7 percent real GDP growth since 2002.
  - Inflation declined to around 6 percent by mid-2007, but has since picked up strongly.
  - Copper-producing companies contribute around one fifth of Mongolian GDP, more than half of Mongolia’s merchandise exports, and around one fourth of government revenues.
  - There is a reasonable probability of a significant fall in copper prices; futures markets indicate an expected gradual decline in copper prices in the next few years.
  - Periodic adverse climatic shocks can materially affect livestock and agricultural output; winters in 2000 and 2001 led to losses of around one quarter of livestock.
- Exchange rate risks:
  - Recent stability of the togrog against the U.S. dollar owed in part to higher foreign reserves; abrupt fall in copper prices or agricultural exports could put downward pressure on the togrog.
  - Continued foreign investor inflows and coming on-stream of large mining projects could create pressure for togrog appreciation.

### Banking sector strengths, vulnerabilities, and key FSIs
- Performance and vulnerabilities:
  - Aggregate FSIs present a robust picture, though many are backward-looking; rapid credit growth can mask NPL build-up.
  - Short loan maturities and roll-over practices can delay visibility of deteriorating credit quality.
  - Bank performance heterogeneous: four largest commercial banks very profitable; several smaller banks perform less well and some have incurred losses.
- Selected FSI figures (preserve exact values):
  - Regulatory capital to risk-weighted assets: 2002 20.0, 2003 20.4, 2004 20.0, 2005 18.2, 2006 18.1, 2007 14.2
  - Regulatory Tier I capital to risk-weighted assets: 2002 17.7, 2003 18.5, 2004 17.4, 2005 15.8, 2006 15.6, 2007 11.9
  - NPLs to gross loans: 2002 5.0, 2003 4.7, 2004 6.0, 2005 5.6, 2006 4.7, 2007 3.2
  - Sectoral distribution of loans (in % of total loans): Construction 2002 6.2, 2003 7.5, 2004 8.6, 2005 8.9, 2006 9.1, 2007 15.6; Mining and quarrying 2002 15.4, 2003 8.4, 2004 8.6, 2005 9.0, 2006 7.8, 2007 6.3; Wholesale and retail trade, repair of household goods 2002 30.8, 2003 34.0, 2004 34.6, 2005 33.2, 2006 31.0, 2007 29.2
  - ROA (after tax): 2002 4.3, 2003 3.1, 2004 2.5, 2005 2.2, 2006 2.7, 2007 2.5
  - ROE (after tax): 2002 20.8, 2003 14.7, 2004 12.3, 2005 12.1, 2006 14.3, 2007 20.8
  - Loans to deposits ratio: 2002 67.3, 2003 78.5, 2004 91.9, 2005 89.7, 2006 95.6, 2007 101.3
  - Net open positions in FX to capital: 2002 8.9, 2003 36.5, 2004 33.6, 2005 27.4, 2006 30.8, 2007 30.1
- Foreign-currency lending:
  - Foreign currency loans declined from 44 percent of total loans in December 2006 to 33 percent by October 2007.
  - Foreign currency deposits declined from 38 percent of total deposits to 34 percent over the same period.
  - At end June 2007, households’ loans in foreign currency were 12.9 percent of total household loans, equivalent of 2.1 percent of GDP.
  - More than half of enterprise loans are denominated in foreign currencies.
  - Note: as long as domestic interest rates remain significantly higher than foreign interest rates in nominal terms, demand for unhedged foreign currency borrowing would be expected to increase.

### Mortgage and household lending
- Recent mortgage market development and housing upgrade needs are driving a significant increase in lending to households.
- Outstanding stock of mortgages equivalent to only 3.5 percent of GDP (as of August 2007 mortgage portfolio: around 4.5 percent of total bank assets, or 3.5 percent of GDP).
- Mortgage interest rate details:
  - Interest rates in togrog are as high as 34 percent, and 18 percent in US dollars.
- Reported origination metrics:
  - Reported loan-to-value ratios (LTV) at origination between 70 and 80 percent.
  - Permitted debt-to-income ratios are 30 percent.
- Recommendation: BOM should pay special attention to oversight of mortgage underwriting and loan servicing operations.

### Stress testing — methodology, assumptions, and results
- Methodology:
  - Tests applied to all 16 commercial banks using end-June 2007 detailed balance sheet data; separate analysis for three bank groups (Group 1: five largest; Group 2: six small investment-banking-type; Group 3: remaining five).
- Bank group baseline indicators (as of June 30, 2007):
  - Number of banks: 5 | 6 | 5 | 16
  - Market share (in percent of total assets): 72.4 | 7.3 | 20.3 | 100.0
  - Capital adequacy ratio (in percent of risk-weighted assets): 12.3 | 40.4 | 13.1 | 15.2
  - Loans in percent of deposits: 81.9 | 258.5 | 113.8 | 93.4
  - FX loans in percent of total loans: 40.8 | 41.7 | 34.6 | 39.6
  - NPLs/Loans: 3.3 | 6.7 | 3.2 | 3.6
  - Return on equity: 46.4 | 2.5 | 6.2 | 22.1
- Sensitivity analyses (selected results, CAR in percent of risk-weighted assets):
  - Exchange rate risk — Depreciation by 15 percent: Group 1 13.0, Group 2 42.1, Group 3 13.1, Total 15.8
  - Exchange rate risk — Appreciation by 20 percent: Group 1 11.4, Group 2 38.2, Group 3 13.0, Total 14.3
  - Interest rate risk — Increase by 10 percentage points: Group 1 10.1, Group 2 38.2, Group 3 11.1, Total 13.0
  - Credit risk — Increase in the NPL ratio by 10 percentage points: Group 1 6.7, Group 2 36.8, Group 3 7.7, Total 9.8
  - Credit risk — Shock to agriculture sector (half of agriculture loans become non-performing): Group 1 8.6, Group 2 40.0, Group 3 11.6, Total 12.3
- Scenario analyses:
  - Scenario 1 (negative external shock, copper price fall, togrog depreciation by 10 percent, mining-sector loan losses assumed 50 percent): Group 1 7.1, Group 2 37.8, Group 3 7.0, Total 10.1
  - Scenario 2 (surge in capital inflows, appreciation of togrog by 20 percent): Group 1 9.5, Group 2 36.9, Group 3 11.2, Total 12.5
- Interpretation:
  - Banking system as a whole would remain solvent under various shocks, but the most severe shocks could require significant recapitalization for some banks, especially Group 1 (largest banks).
  - Example: a decline in the world copper price and associated slowdown would reduce aggregate CAR from around 15 percent to just over the regulatory minimum of 10 percent.
  - A single-factor test: an increase in the NPL ratio by 10 percentage points would take the aggregate CAR to 9.8 percent.

### Systemic liquidity, central bank operations, and payment systems
- Systemic liquidity management:
  - Constrained by thin money, FX, and securities markets and volatility in autonomous flows (especially Ministry of Finance treasury transfers).
  - One-week central bank bills (CBBs) became BOM’s key liquidity instrument from July 2007; only a few CBB auctions have taken place.
  - Interim steps recommended:
    - Deepen securities markets by introducing CBBs of longer maturities and increase frequency of 12-week CBB auctions.
    - Reduce number of BOM standing facilities and require full collateralization by CBBs for any drawings.
    - Improve BOM liquidity forecasts by having MOF provide better and more timely information on forthcoming treasury transactions.
- Payment system and RTGS:
  - RTGS for high-value transactions planned to replace end-of-day net settlement in 2008.
  - Recommendations:
    - BOM should develop intra-day liquidity support procedures in agreement with banks to manage settlement risk under RTGS.
    - Upgrade system architecture and establish a business continuity strategy and interim backup arrangements for the existing inter-bank payment system.
    - Consider upgrading BOM accounting software for settlement and central bank financial accounting and reporting.
- Credit Information Bureau (CIB):
  - CIB should be strengthened: improve data quality and coverage, consolidate all credit information by borrower, expand types of data collected, and upgrade reporting modules.
  - Coordination needed between BOM’s CIB upgrade and industry plans for a private bureau.

### Financial system safety net and contingency planning
- Findings:
  - BOM lender-of-last-resort facilities appear adequate; used infrequently owing to a very liquid banking system until recently.
  - Financial Stability Board established in June 2007 by BOM, MOF, and FRC to promote financial system stability and coordinate contingency planning.
- Deposit insurance proposal (parliamentary discussion):
  - Features include: ex ante funded and compulsory for all commercial banks; premiums envisaged at a flat quarterly rate of 0.08 percent of the total bank’s deposits; coverage of household deposits up to Tg 1.5 million (US$1,268, or around 80 percent of 2007 per capita GDP); emergency financing from the Government in crisis situations.
- Recommendations:
  - Rationalize BOM lender-of-last-resort facilities.
  - Prioritize additional contingency planning; strengthen BOM plans for dealing with banks that might encounter liquidity or solvency problems.
  - Move ahead with plans to introduce a deposit insurance scheme.

### Supervisory, legal, AML/CFT, accounting, and corporate governance issues
- Banking supervision and BCP observance:
  - BOM has built expertise and a risk-based supervisory framework and largely complies with Basel Core Principles for Mongolia’s stage of transition.
  - Key legal gaps and recommended actions (selected):
    - Consolidated supervision: introduce calculation and reporting on a consolidated basis; amend Banking Law to empower BOM to obtain required information on banking groups (CP 6, CP 24).
    - Legal protections: amend BOM Law to provide legal protection for BOM staff and supervisors (CP 1.5).
    - Liquidity risk: issue a comprehensive liquidity risk guideline (CP 14).
    - Large exposures and related parties: provide clear legal definition of “group of connected counterparties” and thresholds for large exposures; strengthen procedures for loans to directors/board members (CP 10, CP 11).
    - Licensing and fit-and-proper requirements: specify prior experience requirements for management and boards; eliminate one-year limitation on license revocation if based on false information (CP 3).
- Non-banks, SCCs, and FRC capacity:
  - FRC supervises nearly 400 institutions, established in 2006; needs improvements in staffing, expertise, and funding.
  - SCCs: rapid growth without clear regulatory framework led to failure of 32 SCCs accounting for more than half the assets of the sector in 2006. Around half of the total loss of the failed SCCs (TOG 33 billion) is supposed to be paid out by the state budget; as of April 2008, TOG 19 billion has already been paid.
  - Recommendations: FRC should collect data on newly licensed SCCs, categorize them and consider a tiered model for on-site supervision; prudential regulation of all SCCs may not be necessary or feasible given capacity constraints.
- AML/CFT:
  - Significant steps taken to improve compliance in banks; less progress for non-banks due to FRC’s recent creation.
  - FIU at BOM recently created and would benefit from additional staffing and AML training.
  - Identified gaps include legal deficiencies on suspicious transaction reporting, law enforcement capacity constraints, and need for powers to require disclosure of beneficial ownership.
- Accounting, auditing, and corporate governance:
  - Accounting Law requires accounts to be prepared in accordance with International Accounting Standards, but implementation outside banks appears weak; uncertainty over which version of IAS/IFRS should be used.
  - Auditing standards regarded as weak and auditor quality extremely variable.
  - Corporate governance well below international standards; FRC and Chamber of Commerce developing a Corporate Governance Code based on OECD Principles; consider amendments to the 1999 Company Law to set minimum number of independent directors and raise sanctions.

### Financial system development priorities and recommended actions (prioritized)
- Short term (high priorities):
  - Strengthen supervision of banks’ liquidity and operational risks; continue close monitoring of banks’ credit quality; increase FRC resources and staff skills; introduce legal protections for supervisors.
  - Improve systemic liquidity forecasting and management; strengthen contingency planning; introduce a well designed deposit insurance scheme.
  - Pass necessary laws relating to financial sector development and supervision, housing finance, and capital market infrastructure.
  - Provide backup arrangements to existing payment system; develop procedures to manage settlement risk under planned RTGS.
  - Strengthen existing credit information bureau and coordinate with industry on proposed private bureau.
  - Improve mortgage-lending infrastructure, including improving the property registry system.
  - Reduce banks’ reliance on donor programs and below-market funding for micro and SME lending.
- Medium term:
  - Implement formal consolidated supervision.
  - Strengthen powers and resources of the Unfair Trade Commission (UTC).
  - Review whether the FRC’s funding model is adequate.
  - Upgrade accounting and auditing to international standards (IAS/IFRS).
  - Improve corporate governance, establish consumer disclosure rules for lenders, and set professional standards for appraisers and real estate agents.

### Financial system development: housing, capital markets, development banking, SME finance, and technology
- Housing finance:
  - Mortgage lending began in 2002 with sub-market rate funding; as of August 2007 mortgage portfolio around 4.5 percent of total bank assets, or 3.5 percent of GDP.
  - Recommendations include enacting mortgage collateral and mortgage securitization laws, improving State Property Registry, consumer disclosure rules, financial literacy, appraisal standards, and professional standards for brokers.
- Capital markets:
  - Delisting of 200 of 380 listed companies in November 2007 to improve market quality.
  - Recommendations: upgrade legal foundations, develop medium-to-long term yield curve, expand processing capacity of Securities Clearing House and Central Depository.
- Development banking:
  - Authorities considering setting up a development bank; guidance: focus on underserved sectors, avoid concessional lending to well-served clients, and prefer enabling environment support over direct financial services.
- SME finance and technological innovations:
  - SMEs face high lending rates, limited market information, weak capacity; many bank-supported SME programs rely on donor funding.
  - Microfinance Development Fund (MDF): a BOM lending facility created under a World Bank project with 18 participating financial institutions (10 banks and 8 NBFIs).
  - Recommendations: diversify funding sources for SME lending; review MDF’s organizational structure and location at BOM; avoid permanent below-market funding institutions that distort credit assessment.
  - Technology: growing e-banking and card use require legal/regulatory framework on e-transactions, e-signatures, privacy, and confidentiality; draft laws expected to be submitted to Parliament in 2008.
  - Card processing: BOM’s Switch and Clearing Center capable of providing shared platform; BOM should revisit legal status of the Clearing Center before its card processing function becomes operational.

*Source: _cr08300 - Executive Summary.*

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

### _cr08300 - Executive Summary ......................................................................................................

### Executive summary — key findings
- Major challenge: ensure Mongolia’s rapid financial sector growth takes place in a stable manner given economic volatility and the need to upgrade the regulatory and supervisory framework.
- Financial system status:
  - Relatively small and undeveloped; recent strong growth aligned with overall economic expansion and financial sector reforms.
  - System is “still relatively unsophisticated” but growing strongly.
- Outlook and risks:
  - Overall outlook for financial system stability is positive on balance, but exposed to potentially significant risks.
  - Financial soundness indicators (FSIs) for the banking sector present a robust overall picture in line with strong economic growth.
  - Inflation has increased sharply over the past year, fuelled in part by very rapid credit growth, posing risks to macroeconomic stability and banks’ credit quality and profitability.
  - Dependence on a narrow range of commodity exports and potential volatility in output or prices poses important risks for banks.
  - Stress tests indicate the banking system as a whole would remain solvent, but significant recapitalization could be needed in the event of a very severe shock.
- Systemic liquidity and safety net:
  - Systemic liquidity management framework and the financial system safety net are undeveloped, limiting the system’s ability to absorb shocks and leaving the onus on the authorities.
  - Money and foreign exchange markets are thin, complicating monetary policy tightening and weakening transmission to interest rates.
  - Authorities have in the past dealt firmly with financial sector problems, sometimes in an ad hoc fashion; plans exist to introduce a deposit insurance scheme.
- Development initiatives:
  - Multiple initiatives underway or planned (legal framework, payment system, financial infrastructure, development bank proposal, housing finance stimulation), but need careful design, prioritization, and sequencing to avoid distortions and unfair competition.
- Supervisory framework and governance:
  - Bank of Mongolia (BOM) has a reasonably well developed risk-based approach to bank supervision given the current stage of banking development, but implementation can be improved—especially supervision of liquidity and operational risks.
  - Legal and regulatory framework needs improvement for consolidated supervision and stronger requirements for prior experience/background of senior management and boards.
  - Financial Regulatory Commission (FRC) supervision of NBFIs and capital markets is less developed and needs substantial resources, training, and better industry statistics.
  - Strengthened legal protections are needed for supervisory staff at both BOM and FRC.
- Financial infrastructure:
  - Real time gross settlement (RTGS) project should be implemented quickly; interim backup arrangements for the existing inter-bank payment system should be strengthened.
  - Coordination needed between BOM’s credit information bureau upgrade and the industry’s proposed private bureau.
- Governance and accounting:
  - Governance requirements for financial institutions are being strengthened; BOM issued a directive on bank boards’ roles and responsibilities for oversight of significant risks.
  - BOM’s supervisory board should be tasked with oversight of the risks facing the central bank.
  - Improved governance and implementation of international accounting and auditing standards in the corporate sector are essential for capital market development.
- Access to financial services:
  - Penetration of banks in rural areas has improved; many non-banks and savings and credit cooperatives still focus near urban areas.
  - Government and donor programs to improve access should ensure sustainability on market principles after program completion.

### Financial system structure and potential sources of risk
- Structure and size:
  - As at end-2007, the 16 registered commercial banks in Mongolia accounted for over 95 percent of the total financial system assets.
  - Total assets of the banking system grew from 52 percent of GDP in 2003 to about 87 percent of GDP in 2007, or by 4.3 times in nominal terms.
  - Banking sector is significantly foreign-owned; foreign owners are typically institutional investors, wealthy individuals, or relatively small regional banks.
  - Non-bank financial institutions (NBFIs), including savings and credit cooperatives (SCCs), are generally small and underdeveloped.
  - Stock market capitalization has grown, but a few stocks account for nearly all market capitalization and active trading.
- Macroeconomic and commodity exposure:
  - Mongolia has averaged around 7 percent real GDP growth since 2002.
  - Inflation declined to around 6 percent by mid-2007, but has since picked up strongly.
  - Monetary policy instruments are still evolving and money/FX market thinness complicates tightening of monetary policy.
  - Dependence on a narrow range of commodity exports creates risk:
    - There is a reasonable probability of a significant fall in copper prices; futures markets indicate an expected gradual decline in copper prices in the next few years.
    - Periodic adverse climatic shocks (e.g., harsh winters) can materially affect livestock and agricultural output; winters in 2000 and 2001 led to losses of around one quarter of livestock.
  - Copper-producing companies contribute around one fifth of Mongolian GDP, more than half of Mongolia’ s merchandise exports, and around one fourth of government revenues.
- Exchange rate risks:
  - Exchange rate against the U.S. dollar has been stable recently due to higher foreign reserves, but an abrupt fall in copper prices or agricultural exports could put downward pressure on the togrog.
  - Continued foreign investor inflows and coming on-stream of large mining projects could create pressure for togrog appreciation.

### Strengths and vulnerabilities of the banking sector (summary)
- Performance:
  - FSIs show a robust overall picture consistent with strong growth.
  - Rapid credit growth has contributed to rising inflation and potential deterioration in asset quality.
- Stress testing:
  - Banking system would remain solvent under stress tests, but a very severe shock could require significant recapitalization.
- Systemic liquidity and infrastructure:
  - Systemic liquidity forecasting and management need improvement.
  - RTGS should be implemented quickly; interim backup and settlement-risk procedures require strengthening.
- Supervision and oversight:
  - Need to strengthen supervision of liquidity and operational risks and to implement consolidated supervision formally.
  - FRC requires more resources and training for NBFI and capital market supervision.
  - Legal protections for supervisors should be introduced.

### Financial stability policy framework and development priorities
- Immediate priorities (short term, high priorities):
  - Bank and non-bank supervision:
    - Strengthen supervision of banks’ liquidity and operational risks.
    - Continue close monitoring of banks’ credit quality.
    - Increase FRC resources and staff skills.
    - Introduce legal protections for bank and non-bank supervisors.
  - Systemic liquidity and safety net:
    - Improve systemic liquidity forecasting and management.
    - Strengthen contingency planning for financial sector problems.
    - Introduce a well designed deposit insurance scheme.
  - Legal framework:
    - Pass necessary laws relating to financial sector development and supervision, housing finance, and capital market infrastructure.
  - Payment system:
    - Provide backup arrangements to existing system.
    - Develop procedures to better manage settlement risk under planned RTGS.
  - Credit information:
    - Strengthen existing credit information bureau and coordinate with industry on a proposed private bureau.
  - Housing finance:
    - Improve infrastructure for mortgage lending, including improving the property registry system.
  - Micro and SME lending:
    - Reduce banks’ reliance on donor programs and below-market funding for micro and SME lending.
- Medium-term priorities:
  - Banking supervision:
    - Introduce consolidated supervision on a formal basis.
  - Unfair Trade Commission (UTC):
    - Strengthen powers and resources of the UTC.
  - FRC:
    - Review whether the FRC’s funding model is adequate.
  - Accounting and auditing:
    - Upgrade accounting and auditing to international standards (IAS/IFRS).
  - Capital markets and housing finance:
    - Improve corporate governance.
    - Establish consumer disclosure rules for lenders, standards for methodology and professional conduct by appraisers and real estate agents.

### Main recommended actions (Box 1 excerpt — prioritized)
- Short term (high priorities):
  - Strengthen supervision (liquidity, operational risks); monitor credit quality; increase FRC resources; introduce legal protections for supervisors.
  - Improve systemic liquidity forecasting/management; strengthen contingency planning; introduce deposit insurance.
  - Pass financial-sector, housing finance, and capital market infrastructure laws.
  - Provide payment system backup; manage RTGS settlement risk.
  - Strengthen and coordinate credit information systems.
  - Improve mortgage-lending infrastructure and property registry.
  - Reduce donor-subsidized below-market funding dependence for micro and SME lending.
- Medium term:
  - Implement formal consolidated supervision.
  - Strengthen UTC powers and resources.
  - Review FRC funding adequacy.
  - Upgrade accounting and auditing to international standards.
  - Improve corporate governance and consumer protection and professional standards in housing finance.

*Source: _cr08300 - Executive Summary.*

### 6.      The recent development of the mortgage market, combined with the need to

### 6.      The recent development of the mortgage market, combined with the need to upgrade Mongolia’s housing stock, is leading to a significant increase in lending to households

### Mortgage and real estate lending
- Recent development of the mortgage market and need to upgrade Mongolia’s housing stock is leading to a significant increase in lending to households.
- Mortgage lending is a welcome diversification in bank lending but exposes banks to real estate price risk.
- Lending to the construction sector has increased significantly due to increased mortgage lending and infrastructure improvements.
- Outstanding stock of mortgages is equivalent to only 3.5 percent of GDP.
- Recommendation: The BOM should pay special attention to oversight of mortgage underwriting and loan servicing operations.

### Foreign-currency lending and unhedged exposure
- Share of lending in foreign currencies to unhedged borrowers (primarily corporates, and some households) remains reasonably high but has been falling.
- Foreign currency loans declined from 44 percent of total loans in December 2006, to 33 percent by October 2007.
- Foreign currency deposits declined from 38 percent of total deposits to 34 percent over the same period.
- Foreign currency loans are predominantly to enterprises; more than half of the loans to enterprises are denominated in foreign currencies.
- At end June 2007, households’ loans in foreign currency were only 12.9 percent of total household loans, equivalent of 2.1 percent of GDP.
- Note: As long as domestic interest rates remain significantly higher than foreign interest rates in nominal terms, demand for unhedged foreign currency borrowing would be expected to increase.

### Strengths and vulnerabilities — Performance (FSIs)
- Aggregate FSIs present a robust picture, though many are backward-looking.
- Capital adequacy and profitability
  - Average capital adequacy ratio (CAR) declined from 20 percent in 2002 to about 14 percent in December 2007, reflecting more efficient use of capital as lending volumes increased.
  - System’s average return on equity (after tax) declined from 21 percent in 2002 to 14 percent in 2006, then increased to 21 percent in 2007.
- Asset quality and liquidity
  - Non-performing loan (NPL) levels have fallen to relatively low levels.
  - Aggregate loan to deposit ratio is presently close to unity; this ratio has been increasing in the last two years, reflecting continued reliance on domestic deposits but growing funding pressures.
- Bank heterogeneity
  - Individual bank performance varies widely; four largest commercial banks are very profitable while several smaller banks perform less well and some have incurred losses.
  - NPL shares vary across banks, with the four largest banks having significantly smaller NPL ratios than the five smallest banks.
- Competition
  - Deposit interest rates remain very high; lending rates and spreads have been declining and converged to levels in peer countries.
  - Unfair Trade Commission (UTC) finds no clear signs of collusive behavior and sufficient depositor mobility.
  - Scope to foster more competition: some banks use dominant positions in rural areas to charge relatively high fees; interest margins in rural areas are higher than in cities.
  - Recommendation: Strengthen powers and resources of the UTC to enhance competition.

### Key financial soundness indicators (selected figures from Table 2)
- Capital Adequacy
  - Regulatory capital to risk-weighted assets: 2002 20.0, 2003 20.4, 2004 20.0, 2005 18.2, 2006 18.1, 2007 14.2
  - Regulatory Tier I capital to risk-weighted assets: 2002 17.7, 2003 18.5, 2004 17.4, 2005 15.8, 2006 15.6, 2007 11.9
- Asset Composition and Quality
  - NPLs to gross loans: 2002 5.0, 2003 4.7, 2004 6.0, 2005 5.6, 2006 4.7, 2007 3.2
  - Sectoral distribution of loans (in % of total loans, stock): Construction 2002 6.2, 2003 7.5, 2004 8.6, 2005 8.9, 2006 9.1, 2007 15.6; Mining and quarrying 2002 15.4, 2003 8.4, 2004 8.6, 2005 9.0, 2006 7.8, 2007 6.3; Wholesale and retail trade, repair of household goods 2002 30.8, 2003 34.0, 2004 34.6, 2005 33.2, 2006 31.0, 2007 29.2
- Earnings and Profitability
  - ROA (after tax): 2002 4.3, 2003 3.1, 2004 2.5, 2005 2.2, 2006 2.7, 2007 2.5
  - ROE (after tax): 2002 20.8, 2003 14.7, 2004 12.3, 2005 12.1, 2006 14.3, 2007 20.8
- Liquidity and sensitivity
  - Loans to deposits ratio: 2002 67.3, 2003 78.5, 2004 91.9, 2005 89.7, 2006 95.6, 2007 101.3
  - Net open positions in FX to capital: 2002 8.9, 2003 36.5, 2004 33.6, 2005 27.4, 2006 30.8, 2007 30.1
- Source for table: Bank of Mongolia

### Observations on indicators and supervision
- Many FSIs are backward-looking; rapid credit growth can mask an NPL build-up.
- Short loan maturities and ability to roll over loans can delay visibility of deteriorating credit quality.
- Response: BOM has intensified supervision, including targeted on-site inspections, and is confident credit quality has continued to improve.
- Risks: Financial deepening strengthens macro-financial linkages and exposes banks to new risks; increasing dependence on foreign funding would create potential vulnerability to sudden reassessments by foreign investors.

### Stress tests
- FSAP team performed sensitivity and scenario analyses with BOM staff; liquidity risks were not tested given low liquidity risks and short asset maturities.
- Main findings
  - Banking sector as a whole would remain solvent under various shocks and scenarios, but the most severe shocks could require significant recapitalization for some banks.
  - System resilience reflects strong starting capital positions, improving asset quality, relatively low share of foreign currency lending to unhedged borrowers, and short loan maturities.
  - Example: A decline in the world copper price and associated slowdown would reduce aggregate CAR from around 15 percent to just over the regulatory minimum of 10 percent.
  - Single-factor test: An increase in the NPL ratio by 10 percentage points would take the aggregate CAR to 9.8 percent.
- Heterogeneity of impact
  - Several systemically important banks would be significantly more affected than the system average.
  - Adverse agriculture shock reduces aggregate CAR for the largest banks group to around 8.5 percent.
  - An increase in NPL ratio by 10 percentage points would result in average CAR for the largest banks group falling to just below 7 percent.
  - Small banks, many providing investment banking-type services, would remain relatively immune to the direct effects of tested shocks.

### Systemic liquidity and central bank operations
- Systemic liquidity management constrained by thin money, FX, and securities markets, and volatility in autonomous flows (especially MOF treasury transfers).
- One-week central bank bills (CBBs) became BOM’s key liquidity instrument from July 2007; only a few CBB auctions have taken place and market participants are still adjusting.
- BOM’s liquidity forecasting hampered by volatility in MOF expenditures and revenues, constraining liquidity management and shock absorption capacity.
- Interim steps to improve liquidity management
  - Deepen securities markets by introducing CBBs of longer maturities and increase frequency of 12-week CBB auctions.
  - Reduce the number of BOM standing facilities and require full collateralization by CBBs for any drawings from facilities.
  - Improve BOM liquidity forecasts by having MOF provide better and more timely information on forthcoming treasury transactions.

### Financial system infrastructure
- Interbank payment system
  - Plans to modernize payments infrastructure: transaction volumes and values are growing; non-cash instruments growing though still small.
  - RTGS for high-value transactions planned to replace end-of-day net settlement in 2008.
  - Card processing system scheduled for launch to replace banks’ proprietary systems.
  - Recommendations:
    - BOM should develop intra-day liquidity support procedures in agreement with banks to manage settlement risk under RTGS.
    - Upgrade system architecture and establish a business continuity strategy to ensure backup center access for interbank payment system members.
    - Consider upgrading BOM accounting software for settlement of interbank payments and central bank financial accounting and reporting.
- Credit Information Bureau (CIB)
  - CIB should be strengthened: improve data quality and coverage, consolidate all credit information by borrower, expand types of data collected, and upgrade reporting modules.
  - Some banks are planning an independent private credit information system; good coordination between CIB and industry plans is important.

### Legal and regulatory framework
- Progress made post-late-1990s reforms, but weaknesses remain; many draft laws exist and government should move quickly to pass them.
- Laws to be passed include: (i) revised banking law; (ii) revised securities market law; (iii) draft law on mortgage collateral; and (iv) draft mortgage securitization law.
- Amendments needed to existing laws
  - Company law weaknesses: obligations to minority shareholders not properly set out; sanctions insufficient; no requirement for independent directors.
  - Bankruptcy law (passed 1996) has had only a handful of cases; process is slow and cumbersome.

### Financial stability policy framework — Supervisory and regulatory framework
- Banking supervision
  - Assessment against Basel Core Principles finds supervision relatively well developed for Mongolia’s stage of transition; BOM has built expertise and a risk-based supervisory framework and largely complies with BCPs.
  - Legal gaps: legislation does not allow consolidated supervision; legal definition of “connected parties” needed; stronger legal requirements for prior experience/background of banks’ management and board members; legal protections for BOM supervisors performing duties in good faith.
  - BOM requires banks’ management to identify and manage risks; market- and credit-risk computations and reporting requirements are in force.
  - Liquidity risk guidelines had not been issued at the time of the BCP assessment; schedule of maximum fines has been eroded by inflation and is not an effective deterrent.
- Non-banks and capital markets
  - Supervision needs significant improvement; Financial Regulatory Commission (FRC) needs improvements in staffing, expertise, and funding.
  - FRC oversees nearly 400 institutions, was established in 2006, and is building capacity and relationships with stakeholders.
  - Recommendations: Align staffing and skills with industry needs and international best practices; prioritize training, especially with experienced regulators overseas; consider increasing FRC financing from government given current sector limitations to bear a levy.

*Source: Bank of Mongolia*

### 28.      In addition, the NBFI Law should be amended to make more of an enabling than

### _cr08300 - 28.      In addition, the NBFI Law should be amended to make more of an enabling than

### B. Financial System Safety Net
- Findings and observations:
  - The BOM lender-of-last-resort facilities appear adequate; facilities used only infrequently owing to a very liquid banking system until recently.
  - Mongolia has limited exposure to the global financial system and had not been affected by the turbulence on the global financial markets since mid-2007.
  - Competition in the banking system is projected to increase and profits to reduce accordingly.
  - The recently established Financial Stability Board could become crucial in coordinating contingency plans.
- Recommendations:
  - Rationalize BOM lender-of-last-resort facilities.
  - Prioritize additional contingency planning to deal with possible future problems.
  - Strengthen BOM plans for dealing with banks that might encounter liquidity or solvency problems as competition increases.
  - Move ahead with plans to introduce a deposit insurance scheme for banks.
- Notable details:
  - The Financial Stability Board was established in June 2007 by the BOM, the Ministry of Finance, and the FRC to promote financial system stability and ensure better coordination in areas where all three bodies are involved, including systemic crises.
  - A deposit insurance scheme law is presently under discussion in the parliament. Features of the proposed scheme include:
    - ex ante funded and compulsory for all commercial banks;
    - premiums envisaged at a flat quarterly rate of 0.08 percent of the total bank’s deposits;
    - coverage of household deposits up to Tg 1.5 million (US$1,268, or around 80 percent of 2007 per capita GDP);
    - emergency financing from the Government, especially in crisis situations, is provided for.

### C. Monetary Policy Transparency and Central Bank Governance
- Findings:
  - Transparency of monetary policy is generally good.
  - Governance of the BOM, particularly formal accountability arrangements for the Governor, should be strengthened.
- Recommendations:
  - Amend the BOM Law to give more authority to the Supervisory Board to oversee the BOM and the Governor’s decisions, especially regarding aspects of BOM operations that give rise to financial or other risks.
  - Even before a BOM Law amendment, the Supervisory Board could enhance BOM transparency by publicizing oversight (e.g., include Supervisory Board reports to parliament in the BOM’s Annual Report, in detail or summary form).
  - Strengthen the Supervisory Board to include more individuals with background and experience in financial sector policies and practices.
  - BOM management should publicly disseminate more information about the policies and procedures to identify and manage its balance sheet and policy risks (e.g., internal rules limiting risks from foreign reserves investment transactions).
- Notable detail:
  - Internal rules for foreign reserves investment transactions should be publicized as international reserves and related transactions have increased.

### D. AML/CFT Framework
- Findings from APG assessment:
  - Significant steps taken to improve compliance with relevant prudential norms in banks; less progress for non-banks.
  - Differential progress primarily because the FRC was only recently created.
  - The Financial Intelligence Unit at the BOM is recently created and would benefit from additional staffing and AML training.
  - Good cooperation exists between the BOM, the FRC and the police Prosecutor’s Office.
  - Identified gaps include:
    - legal deficiencies regarding suspicious transaction reporting requirements by banks;
    - capacity constraints in law enforcement;
    - need for the State Registration Division and the FRC to be given more powers and resources to require disclosure of beneficial ownership when processing company registrations;
    - Mongolia’s large informal sector and channels for remittances have the potential to be used for money laundering.
- Reference note:
  - The mutual evaluation report assessing the framework can be found on the APG’s website (http://www.apgml.org).

### E. Accounting and Auditing Standards
- Findings:
  - The Accounting Law of Mongolia requires accounts to be prepared in accordance with International Accounting Standards, but implementation outside the banking sector appears weak.
  - According to the FRC, many accountants do not adhere to the requirements of the law.
  - Uncertainty exists about which version of IAS/IFRS accountants should follow: original IAS translated into Mongolian by the government, but subsequent updates (i.e., IFRS) have not been officially translated.
  - The Mongolian Institute of Certified Public Accountants issues guidance but is not viewed as very effective in promoting high and consistent standards.
  - Auditing standards are regarded as weak and auditor quality is extremely variable; independence appears an issue for smaller auditing firms and working practices and record keeping are often poor.
- Recommendation and action:
  - The Mongolian government has invited the World Bank to carry out a ROSC on Accounting and Auditing to assist in a sequenced approach towards improving accounting and audit standards in Mongolia.
- Notable detail:
  - Banks are subject to substantial disclosure requirements and are required by the BOM to follow international accounting standards rather than Mongolian standards and are audited accordingly.

### F. Corporate Governance
- Findings:
  - Corporate governance in Mongolia is well below international standards and needs improvement to increase investor confidence and encourage greater participation in the capital market.
  - Public and private sectors recognize the need for improvement.
- Ongoing measures and recommendations:
  - FRC and the Chamber of Commerce are developing a Corporate Governance Code based on the OECD Principles for Corporate Governance; initially intended as a voluntary code.
  - Authorities should consider amendments to the 1999 Company Law on matters such as setting a minimum number of independent members on company boards.
  - Raise the low level of sanctions for non-compliance.

### IV. FINANCIAL SYSTEM DEVELOPMENT PRIORITIES
- General guidance:
  - Ambitious plans exist to develop the financial system and capital markets to support sustained strong economic growth.
  - Plans need careful prioritization and sequencing to ensure success.
  - Specific government initiatives (e.g., stimulating housing and SME finance, proposed creation of a development bank) should be structured to avoid unfair competition or distortions, such as incentives for imprudent behavior.

#### A. Housing Finance
- Status and statistics:
  - Mortgage lending began in 2002 with sub-market rate funding provided by the ADB.
  - As of August 2007, the total mortgage portfolio stood at around 4.5 percent of total bank assets, or 3.5 percent of GDP.
  - Mortgage interest rates are high and maturities are short; loans can be as long as 10 years but in practice are much shorter.
  - Reported loan-to-value ratios (LTV) at origination are between 70 and 80 percent.
  - Permitted debt-to-income ratios are 30 percent.
  - Mortgage defaults are very low and foreclosure experience quite limited.
- Notable interest rate detail:
  - Interest rates in togrog are as high as 34 percent, and 18 percent in US dollars.
- Recommendations:
  - Promulgate planned improvements to the mortgage market’s legal framework as soon as possible to assist market development.
  - Enact the draft mortgage collateral law to establish preeminence of the mortgage contract and the necessity for borrowers to repay the mortgage or give up the house.
  - Clarify legal framework by enacting mortgage securitization and mortgage bond laws.
  - Ensure mortgage securitization is developed on a fully market-price basis without initiatives transferring risk away from purchasers of securities.
  - Improve the State Property Registry, develop consumer disclosure rules, financial literacy education programs, standards for real property appraisals, and professional standards for real estate brokers (including public disclosure of fees).
- Supporting actions:
  - ADB is helping to update property registry systems.
  - Millennium Challenge Corporation plans to help the State Registry update automated systems and improve business processes.

#### B. Capital Market Development
- Market drivers and potential developments:
  - Factors shaping capital market development include:
    - increased investment in Mongolian stocks by overseas emerging markets funds;
    - creation of mortgage backed and other asset backed securities;
    - creation of Mongolian depository receipts;
    - creation of a life insurance industry;
    - creation of private equity funds;
    - changes to the Banking Law to enable banks to take a greater role in capital markets;
    - listings by Mongolian companies on overseas stock exchanges.
- Challenges and recommendations:
  - Many companies listed from the early 1990s privatization were by 2007 little more than shells; majority owners of some did not regularly publish audited financial statements.
  - To aid capital market development and support the reputation of the MSE, 200 of the 380 listed companies were delisted in November 2007.
  - Other recommended measures:
    - upgrade legal foundations of the capital market to meet international standards;
    - develop a medium to long term yield curve of either government or similar high quality bonds as a basis for pricing (planned introduction of a market in mortgage backed securities might provide a suitable benchmark);
    - expand processing capacity of the Securities Clearing House and Central Depository to provide a cushion against a sudden increase in traded volume.

#### C. Development Banking
- Findings and guidance:
  - Authorities are considering setting up a development bank; any such initiative should focus on supporting underserved sectors (e.g., infrastructure development).
  - Instances of successful development banks worldwide are outnumbered by failures.
  - Government’s role in supporting an enabling environment that stimulates development of financially viable institutions is preferable to direct provision of financial services.
  - Care should be taken to ensure development banking activities do not undermine financial sector development through provision of concessional interest rates to clients already well served by the private financial sector.

#### D. Access to Financial Services — SME financing and Technological innovations
- SME financing findings:
  - Most Mongolian banks provide microfinance and SME finance services, but access to finance remains a major impediment to SME growth.
  - Most registered business entities fall in the SME category under the new SME Law.
  - SMEs face impediments: relatively high lending rates, limited market information, and weak capacity for market research and business planning.
  - Many banks target SME borrowers but a large portion of programs rely on donor funding.
  - The Microfinance Development Fund (MDF) is a key source of funds for the top three banks engaged in microfinance and other banks expanding to rural areas.
  - Continued reliance on preferential interest rates provided by MDF and other donors is an outstanding issue.
- MDF detail:
  - The MDF is a lending facility at the BOM created under a World Bank project and currently has 18 participating financial institutions (PFIs), of which 10 are banks and 8 NBFIs.
- Recommendations for SME finance:
  - Institutions need to diversify funding sources for SME lending to avoid perennial reliance on donor programs and to sustain operations from market-rate funds.
  - Review the future organizational structure of the MDF, especially as its location at the BOM could create a conflict with the BOM’s supervisory role.
  - Review the proposal in the SME Law to reform the SME Development Fund into a permanent apex institution providing funding to financial institutions at below market rates; such direct interventions can lead to weaker financial discipline and distorted credit risk assessments—programs using market mechanisms tend to have higher success rates.
- Technological innovations findings and recommendations:
  - Financial institutions are adopting e-banking and bank cards to reach new customers and maintain market share, but legal and regulatory environment needs strengthening.
  - Increased use of technologies is occurring without sufficient laws/regulations regarding authenticity and finality of e-transactions, verification of e-signatures, customer privacy protection, and banking information confidentiality.
  - Two laws and an amendment to the Civil Code on these subjects have been drafted by the Information Communication Technology Authority and are expected to be submitted to the Parliament in 2008.
  - Card business expected to grow rapidly; growth may be constrained by lack of a common platform for card processing and electronic billing systems.
  - Most credit/debit card transactions processed by the two largest banks; another bank has recently started developing its own card processing system, creating lack of interoperability.
  - The BOM’s Switch and Clearing Center has capability to provide a shared card processing platform and is in compliance with current international technical standards for card processing.
  - Before the Switch Clearing Center’s card processing function becomes operational, BOM should revisit the legal status of the Clearing Center, as card processing is a commercial activity.

### Appendix 1. Mongolia: Stress Testing Methodology and Assumptions
- Stress test overview:
  - Stress tests designed and performed by the FSAP team in close cooperation with BOM staff.
  - Tests performed individually for all sixteen commercial banks operating in Mongolia, and for the system as a whole, using detailed bank balance sheet data for end-June 2007.
  - Tests were also conducted separately for three peer groups of banks:
    - Group 1 included five largest Mongolian banks, accounting for almost three quarters of the total market share in terms of assets.
    - Group 2 included six small banks, with a combined market share of 7.3 percent, performing more investment banking-type activities, with very narrow deposit base and high capitalization ratios (average capital adequacy ratio of banks of this group is 40.4 percent).
    - Group 3 included the remaining five small- and medium-sized banks.
- Selected indicators of bank performance (based on data of June 30, 2007) — Group 1 | Group 2 | Group 3 | Total:
  - Number of banks: 5 | 6 | 5 | 16
  - Market share (in percent of total assets): 72.4 | 7.3 | 20.3 | 100.0
  - Market share (in percent of total deposits): 78.9 | 3.3 | 17.7 | 100.0
  - Capital adequacy ratio (in percent of risk-weighted assets): 12.3 | 40.4 | 13.1 | 15.2
  - Capital to assets ratio (in percent of total assets): 9.2 | 40.8 | 10.9 | 11.9
  - Loans in percent of assets: 61.7 | 81.4 | 68.6 | 64.5
  - Loans in percent of deposits: 81.9 | 258.5 | 113.8 | 93.4
  - Sectoral distribution of loans (in percent of total loans):
    - Agriculture: 9.7 | 1.7 | 4.1 | 7.9
    - Construction: 15.7 | 3.8 | 12.3 | 14.1
    - Mining: 8.7 | 8.8 | 10.2 | 9.1
    - Manufacturing: 11.5 | 38.6 | 10.0 | 13.2
    - Trade: 29.2 | 31.4 | 27.2 | 28.9
    - Transport & Communication: 2.3 | 1.3 | 1.7 | 2.1
    - Other sectors: 22.9 | 14.4 | 34.4 | 24.8
  - Type of borrowers (in percent of total loans):
    - Enterprises: 54.9 | 42.8 | 53.9 | 53.6
    - Households: 37.3 | 16.1 | 37.1 | 35.3
  - FX loans in percent of total loans: 40.8 | 41.7 | 34.6 | 39.6
  - FX household loans in percent of total household loans: 11.2 | 22.5 | 16.5 | 12.9
  - NPLs/Loans: 3.3 | 6.7 | 3.2 | 3.6
  - Provisions/NPLs: 91.0 | 82.0 | 80.6 | 87.5
  - NPLs net of provision /Capital: 2.0 | 2.4 | 3.8 | 2.4
  - Return on assets: 3.0 | 1.2 | 0.7 | 2.4
  - Return on equity: 46.4 | 2.5 | 6.2 | 22.1
  - Liquid assets/Total assets: 33.7 | 15.3 | 22.1 | 30.0
  - Liquid assets/Short-term liabilities: 35.7 | 25.9 | 23.4 | 32.7
- Source: BOM, and staff calculations.

*Italic: IMF staff report content provided in the source content unit.*

### 49.      The stress tests included both sensitivity and scenario analyses. Sensitivity stress

### The stress tests included both sensitivity and scenario analyses.

### Stress testing methodology
- Purpose: to examine the potential effects on banks’ financial condition of a set of specified changes in risk factors, corresponding to exceptional but plausible events.
- Approach: estimate the present value of net losses or gains incurred as a result of certain shocks and express these losses or gains as a one-time and immediate charge to capital.
- Treatment of risk types:
  - Credit quality shocks: losses = increases in provisions and a corresponding decrease in the amount of regulatory capital.
  - Foreign exchange shocks: losses/gains = revaluation gain or loss expressed as a percent of regulatory capital.
  - Interest rate shocks: losses/gains = net gains or losses in the discounted value of interest-bearing assets and liabilities, considered per maturity and re-pricing brackets, calculated as a percent of regulatory capital.

### Stress testing assumptions — sensitivity analyses
- Exchange rate risk:
  - Test (i): simultaneous depreciation of the togrog against all currencies by 15 percent.
  - Test (ii): simultaneous appreciation of the togrog against all currencies by 20 percent.
  - Rationale: the 15 percent depreciation is broadly equivalent to the largest depreciation of the togrog against the US dollar recorded within one quarter from January 1999 to April 2007 (a depreciation by 15.4 percent in March 1999); the 20 percent appreciation is hypothetical.
  - Additional test: hypothetical appreciation of the Chinese yuan (CNY) against all currencies by 10 percent.
- Interest rate risk:
  - Test (i): parallel upward shift in all interest rates by 10 percentage points.
  - Test (ii): steepening in the togrog yield curve — increase in the long-term interest rates by 5 percentage points, and a decrease in the short-term interest rates by 2 percentage points.
  - Test (iii): flattening in the togrog yield curve — increase in the short-term interest rates by 5 percentage points, and a decrease in the long-term interest rates by 2 percentage points.
  - Rationale: the 10 percentage points upward shift roughly corresponds to the actual largest quarterly increase in interest rates on central bank bills recorded in the period January 1999-April 2007 (11.4 percentage points, June 2003). The steepening/flattening assumptions are hypothetical.
- Credit risk:
  - Test (i): weather-related shock affecting agriculture — assumed that half of all bank loans distributed to the agriculture sector become non-performing, and the recovery rate on these loans is zero. Context: livestock losses of around one quarter of livestock in winters 2000 and 2001; agriculture accounts for one fifth of Mongolian GDP.
  - Test (ii): increase in the ratio of non-performing loans to total loans by 10 percentage points. LGD assumed equal to a simple average of the required provisioning ratios for loans classified as substandard, doubtful, and loss (approximately 72 percent). Rationale: similar to the largest historical quarterly increase in the NPL ratio for the system as a whole during April 1997-April 2007 (December 1997, 9.9 percent).
  - Test (iii): downward migration of loans by one classification category — 10 percent of standard loans become past due; all other classified loans migrate by one notch down (past due → substandard; substandard → doubtful; doubtful → loss), with a corresponding increase in required provisions.

### Stress testing assumptions — scenario analyses
- Scenario 1: negative external shock (terms of trade shock)
  - Assumptions:
    - Fall in the world price of copper (major Mongolian export).
    - Stable level of prices of oil and other fuel.
    - Deterioration in mining-sector loan quality: 50 percent of all loans to the mining sector are assumed to become losses.
    - Depreciation of the togrog by 10 percent.
    - Increase in interest rates and a general slowdown in economic activity.
  - Context: copper contributes around one fifth of Mongolian GDP, more than half of Mongolia’s merchandise exports, and around one fourth of government revenues.
- Scenario 2: surge in capital inflows (“Dutch disease”-type shock)
  - Assumptions:
    - Substantial trade and capital inflows result in an appreciation of the togrog by 20 percent.
    - Intensified inflationary pressures lead to a moderate slowdown in performance of all tradable and non-tradable sectors.
    - Interest rates assumed to remain at the current levels.

### Summary results of the stress tests (based on the data of June 30, 2007)
- Baseline capital adequacy ratio (in percent of risk weighted assets):
  - Group 1: 12.3
  - Group 2: 40.4
  - Group 3: 13.1
  - Total: 15.2
- A. Sensitivity analysis — Exchange Rate Risk
  - Depreciation by 15 percent:
    - Group 1: 13.0
    - Group 2: 42.1
    - Group 3: 13.1
    - Total: 15.8
  - Appreciation by 20 percent:
    - Group 1: 11.4
    - Group 2: 38.2
    - Group 3: 13.0
    - Total: 14.3
  - Appreciation of CNY by 10 percent:
    - Group 1: 12.3
    - Group 2: 40.4
    - Group 3: 13.0
    - Total: 15.2
- A. Sensitivity analysis — Interest Rate Risk
  - Increase in interest rates by 10 percentage points:
    - Group 1: 10.1
    - Group 2: 38.2
    - Group 3: 11.1
    - Total: 13.0
  - Steepening in the yield curve:
    - Group 1: 11.6
    - Group 2: 39.7
    - Group 3: 12.5
    - Total: 14.5
  - Flattening in the yield curve:
    - Group 1: 12.3
    - Group 2: 40.5
    - Group 3: 13.0
    - Total: 15.2
- A. Sensitivity analysis — Credit Risk
  - Shock to the agriculture sector:
    - Group 1: 8.6
    - Group 2: 40.0
    - Group 3: 11.6
    - Total: 12.3
  - Increase in the NPL ratio by 10 percentage points:
    - Group 1: 6.7
    - Group 2: 36.8
    - Group 3: 7.7
    - Total: 9.8
  - Downgrading of classified loans by one category:
    - Group 1: 11.1
    - Group 2: 38.4
    - Group 3: 11.8
    - Total: 13.8
- B. Scenario Analysis
  - Scenario 1:
    - Group 1: 7.1
    - Group 2: 37.8
    - Group 3: 7.0
    - Total: 10.1
  - Scenario 2:
    - Group 1: 9.5
    - Group 2: 36.9
    - Group 3: 11.2
    - Total: 12.5

- Note on group composition:
  - Group 1 includes five largest banks, accounting for almost three quarters of the total market share in terms of assets.
  - Group 2 includes six small banks, with a combined market share of 7.3 percent, which all perform more investment banking-type of activities.
  - Group 3 includes the remaining five small- and medium-sized banks.

### Supervision of Savings and Credit Cooperatives (SCCs)
- Rapid growth of the SCC sector occurred without a clear formal regulatory and supervisory framework to ensure financial discipline and protect member savings.
- Prior to the creation of the FRC in early 2006, SCCs were governed by the law on cooperatives which did not adequately distinguish financial intermediation activities; consequence: proliferation of financially weak SCCs.
- Outcome: imposition of oversight led to the failure of 32 SCCs accounting for more than half the assets of the sector in 2006. Footnote: Around half of the total loss of the failed SCCs (TOG 33 billion) is supposed to be paid out by the state budget. As of April 2008, TOG 19 billion has already been paid.
- Legislative status: a law specific to SCCs was drafted in 2006 but has not been passed yet.
- Licensing and supervision:
  - In 2006 the FRC issued a temporary regulation on licensing SCC activities.
  - Out of 955 registered SCCs in 2006, around 500 applied for a license before October 1, 2007 (the deadline for applying for licensing), and many have been subsequently licensed.
  - Newly licensed SCCs are mainly in the capital city and competing with the banking sector by offering higher deposit rates.
- FRC capacity constraints:
  - Limited skilled and experienced staff and insufficient staff numbers to conduct inspections.
  - Since June 2006, the FRC has conducted 50 on-site supervisions of SCCs and is mandated to conduct these regardless of SCC size.
  - Recommendation: FRC should collect data on key characteristics of newly licensed SCCs, categorize them as large, medium and small (based on asset size, number of members, etc.), and consider a tiered model for on-site supervision.
  - Prudential regulation of all SCCs may not be necessary or feasible given FRC capacity; as the draft law is discussed, FRC should examine other countries’ tiered approaches and revise supervisory aspects accordingly.

### Observance of selected financial sector standards — Basel Core Principles (BCP) summary
- Assessment basis:
  - Legal framework: Law of Mongolia on the Central Bank (BOM Law), the Banking Law of Mongolia, BOM regulations and guidelines, responses to a BOM questionnaire, and a BOM self-assessment.
  - Methodology: qualitative approach based on the revised Core Principles Document of October 2006; assessors examined essential criteria and additional criteria where necessary.
- Institutional and macroeconomic context:
  - Mongolia described as a less developed, but rapidly growing, economy driven by record commodity export prices and agricultural recovery.
  - Annual GDP growth has averaged over 7 percent since 2002; inflation reduced to mid-single digit levels by mid-2007 but started to pick up later in 2007.
  - Banking system: 16 registered commercial banks accounting for over 95 percent of total financial system assets. Total assets grew from 52 percent of GDP in 2003 to about 87 percent of GDP in 2007, or by 4.3 times in nominal terms.
  - BOM is the sole authority for licensing and supervision of banking institutions; SCCs and other non-bank financial institutions are supervised by the Financial Regulatory Commission.
- Preconditions for effective supervision (as noted):
  - Soundness and sustainability of macroeconomic policy: strong recent performance; inflation spike in late-2007/early-2008 may slow decline in nominal interest rates.
  - Legal infrastructure: suitable legal framework exists but weaknesses remain; needed new or amended laws include: (i) a revised banking law; (ii) a revised securities market law; (iii) a law on mortgage collateral; and (iv) a mortgage securitization law. Bankruptcy procedures are slow and used infrequently.
  - Effective market discipline: substantial disclosure requirements; banks required to follow international accounting standards; Banking Law requires monthly public financial statements and audited annual reports in the first quarter of the following year.
  - Systemic protection mechanisms: no compulsory deposit insurance scheme though one is under consideration; past bank resolution experience led to privatization and legal changes.
- Main findings by principle groups (high-level):
  - Objectives, independence, powers, transparency, and cooperation (CP1):
    - Supervisory objectives and legal powers of BOM are well laid out; formal independence satisfactory.
    - Concerns: reasons for possible removal of the Governor are very general; no formal legal protection for BOM against lawsuits for actions taken in good faith.
  - Licensing and structure (CPs 2–5):
    - Licensing laws and regulations are comprehensive but gaps exist: background and experience requirements for senior management/boards should be detailed.
    - If a license was granted based on false information, revocation is limited to within a year of registration.
    - Banking Law does not require notification or approval for an investment or majority share holding in banks beyond specified cases; banks are not required to fully consolidate all subsidiaries; no laws/guidelines on mitigating risks from non-banking activities of subsidiaries/associates.
  - Prudential regulations and requirements (CPs 6–18):
    - Senior management must establish acceptable limits for credit, market, operational, legal and reputational risks; 2006 enhancements require responsibilities and decision authorities appropriate to a bank’s risk profile with adequate internal controls.
    - Market-risk computations, capital charges, and reporting requirements are in force; BOM monitors effectiveness of risk assessments and models.
    - BOM had not issued a liquidity risk guideline at time of assessment; some smaller banks lack sophistication to calculate/control various risks.
    - Risk-weighted capital adequacy applied on a “solo” basis only; consolidated calculations made informally; draft regulation on consolidated supervision is in preparation.
    - No clear legal/regulatory definition of “group of connected counterparties”; threshold for identifying large exposures needs definition.
  - Methods of ongoing supervision (CPs 19–21):
    - Regulations and guidelines for onsite and offsite supervision are in place; BOM is improving inspection and monitoring processes.
    - Supervisors provide competent, objective evaluations mixing quantitative and qualitative judgment.
    - Legislation does not codify authority to conduct supervision on a consolidated basis, limiting access to information on banking groups or bank holding companies when entities are non-financial.
  - Accounting and disclosure (CP 22):
    - Banks required to follow international accounting standards; BOM supervisors could rely more on banks’ external auditors through direct meetings.
  - Remedial measures (CP 23):
    - BOM Law gives wide powers for supervisory intervention and corrective actions, including liquidation of insolvent banks.
    - The schedule of maximum fines has been eroded by inflation and needs updating to be an effective deterrent.
  - Consolidated and cross-border supervision (CPs 24–25):
    - Consolidated supervision not exercised formally by BOM, though an overall picture is sought informally.
    - Consolidated capital adequacy ratios are reported by banks but prudential requirements are not applied on a consolidated basis.
    - Amendments to the Banking Law are in preparation to empower BOM to obtain required information on banking groups and wider groups of which a bank is part.
    - A “Regulation on Information Sharing” between BOM and the Financial Regulatory Commission is in preparation to specify how lead supervisors of financial groups are decided.
    - No branches of foreign banks in Mongolia; foreign investors/investment companies own up to 100% of 6 Mongolian banks; Mongolian banks’ overseas presence comprises representative offices.

*Source: Excerpt from IMF country report content.*

### 62.      The Bank of Mongolia implemented a number of enhancements to the bank

### _cr08300 - 62.      The Bank of Mongolia implemented a number of enhancements to the bank

### Basel Core Principles: summary of observance
- Assessment conducted prior to changes the Bank of Mongolia (BOM) implemented after May 2007; subsequent changes not reflected but could improve future compliance.
- Core observations by principle (selected highlights preserved verbatim):
  - CP 1 (Objectives, independence, powers, transparency, and cooperation): Some deficiencies on the independence of the BOM exist and the exchange of information.
  - CP 1.1 Responsibilities and objectives: Responsibilities and objectives are clear.
  - CP 1.2 Independence, accountability and transparency: Independence of the BOM is satisfactory, however the reasons for removal of the BOM Governor from his post are overly general.
  - CP 1.3 Legal framework: A suitable legal framework exists.
  - CP 1.4 Legal powers: Suitable legal powers exist.
  - CP 1.5 Legal protection: No legal protections for supervisors are provided in law.
  - CP 1.6 Cooperation: Arrangements for cooperation exist but could be augmented by stricter confidentiality requirements on information that is exchanged.
  - CP 2 Permissible activities: The use of the term “bank” and banks’ permissible activities are well defined in law.
  - CP 3 Licensing criteria: Requirements for prior banking experience by bank management and boards and license revocation powers by the BOM could both be strengthened.
  - CP 4 Transfer of significant ownership: Definitions of significant ownership and controlling interest could be more formalized.
  - CP 5 Major acquisitions: Gaps in regulations covering notification and approval of major investments, and monitoring of risks arising from non-banking activities.
  - CP 6 Capital adequacy: Formal reporting is on a solo basis only, although the BOM makes informal consolidated calculations.
  - CP 7 Risk-management process: Supervision is adequate but is in the process of being significantly enhanced.
  - CP 8 Credit risk: Supervision of credit risk is sufficient.
  - CP 9 Problem assets, provisions, and reserves: Provisioning arrangements and supervisory review processes are satisfactory.
  - CP 10 Large exposure limits: No legal definition of a group of connected parties exists, and a quantitative threshold for defining a large exposure is needed.
  - CP 11 Exposure to related parties: Norms are generally adequate, although Banking Law should be strengthened as regards procedures covering loans to board members.
  - CP 12 Country and transfer risks: Inspection procedures are adequate however banks reporting requirements should be strengthened.
  - CP 13 Market risks: Suitable supervisory policies and procedures exist, but focused primarily on the larger, more sophisticated banks and separate limits for currencies and commodities do not exist.
  - CP 14 Liquidity risk: A comprehensive liquidity risk guideline is needed.
  - CP 15 Operational risk: Operational risk rules and requirements exist. Compliance by small banks can be improved.
  - CP 16 Interest rate risk in the banking book: Risk management systems are adequately supervised, however compliance with supervisory requirements by some smaller banks should be improved.
  - CP 17 Internal control and audit: The BOM is requiring internal audit functions at banks to become more risk focused.
  - CP 18 Abuse of financial services: The FIU at the BOM is new and so understaffed and requiring of training.
  - CP 19 Supervisory approach: Supervisors have a thorough understanding of banks.
  - CP 20 Supervisory techniques: Adequate regulations and guidelines are in place, and supervision is competent.
  - CP 21 Supervisory reporting: Banks are required to report quarterly, however only on a solo basis.
  - CP 22 Accounting and disclosure: Generally compliant however there could be greater input sought from banks’ external auditors.
  - CP 23 Corrective and remedial powers of supervisors: Adequate powers exist and are utilized, however the schedule of fines is far too low, due to inflation.
  - CP 24 Consolidated supervision: Consolidated supervision is not exercised, but necessary amendments to the BOM Law are being drafted.
  - CP 25 Home-host relationships: Activities by foreign banks in Mongolia are limited and by Mongolian banks offshore relate only to representative offices.

### Recommended action plan (selected actions by reference principle)
- CP 1.2 Independence, accountability and transparency:
  - Specify more concretely reasons for removal of BOM Governor.
- CP 1.5 Legal protection:
  - Amend BOM Law to provide protection for both the BOM and its staff.
- CP 3 Licensing criteria:
  - Issue laws, regulations or guidelines to provide for more intensive supervision of newly authorized banks; more detail experience requirements for bank management and board members; and elimination of the one year limitation on the revocation of a license if it was based on false information should be eliminated.
- CP 4 Transfer of significant ownership:
  - Provide a definition of significant ownership and controlling interest comparable to international standards in the Banking Law.
- CP 5 Major acquisitions:
  - The Banking Law or respective regulation or guidelines should provide a definition of a single qualifying holding in any other company, and should require the notification or approval for an investment or majority share holding in banks.
- CP 6 Capital adequacy:
  - Introduce calculation and reporting on a consolidated basis.
- CP 7 Risk management process:
  - Complete as soon as possible targeted onsite reviews at all banks to determine their extent of compliance with the new Corporate Governance Regulation, and their improvement of risk management policies.
- CP 10 Large exposure limits:
  - Provide a clear definition in the Banking Law on a “group of connected counterparties”, as the basis to monitor large exposures.
  - Introduce a definition and a threshold for identifying large exposures.
- CP 11 Exposure to related parties:
  - The Banking Law, together with any relevant regulations or guidelines, should indicate that any loans or transactions with a director or member of the board and related parties have to be discussed in their absence.
- CP 13 Market risks:
  - Set up separate position limits for currencies and for commodities.
- CP 14 Liquidity risk:
  - Issue a comprehensive liquidity risk guideline.
- CP 15 Operational risk:
  - Encourage the smaller banking institutions to implement operational risk control measures commensurate to their activities.
- CP 16 Interest rate risk in the banking book:
  - Require all banks to implement the interest risk methodology commensurate to their activities.
- CP 17 Internal control and audit:
  - Ensure that the implementation process of the Corporate Governance Principles for Banks (CGB) issued in 2006, is completed by the first quarter of 2008.
- CP 18 Abuse of financial services:
  - Allocate additional human resources to the FIU and train supervisors more fully in this area.
- CP 21 Supervisory reporting:
  - Issue guidelines covering implementation of consolidated supervision.
- CP 22 Accounting and disclosure:
  - Increase the frequency of contacts with the outside auditors.
- CP 23 Corrective and remedial powers of supervisors:
  - The schedule of fines should be reviewed and increased.
- CP 24 Consolidated supervision:
  - Introduce amendment to the Banking Law on consolidated supervision.
- CP 25 Home-host relationships:
  - Prepare, in the Banking Law, regulations and guidelines, for the eventuality that Mongolian banks seek to operate internationally and vice versa.

### Authorities’ response (summary)
- Mongolian authorities broadly agreed with the BCP assessment.
- Noted that since May 2007, significant steps taken to enhance supervisory and regulatory framework and expected to improve observance of the BCPs, including:
  - Strengthened regulations relating to AML/CFT issues, especially regarding reporting suspicious transactions and know-your-customer rules; a new regulation requiring banks to report all large exposures (as against the previous requirement to report only the largest 20 exposures).
  - Strengthening consolidated supervision by requiring prior BOM approval for any changes made by a holding company or other affiliate which affects the ownership, management or structure of a bank, and by strengthening the BOM’s rights to obtain information relevant to consolidated supervision.
  - Requiring banks using Value-at-Risk (VAR) frameworks to implement more comprehensive analysis, to introduce stress testing and scenario analysis, and to validate their internal models including through back testing.

### Code of Good Practices on Transparency in Monetary and Financial Policies: Monetary Policy — institutional overview
- Assessment examines BOM observance of the IMF’s MFP Transparency Code as it relates to monetary policy; based on the MFP Transparency Code and its Supporting Document.
- Institutional facts:
  - BOM formed through reorganization in May 1991.
  - BOM responsibilities include: formulating and implementing monetary policy; issuing currency into circulation; acting as the Government’s fiscal intermediary; supervising banking activities; arranging interbank payments and settlements; holding and coordinating the State’s international reserves.
  - Main objective of monetary policy in legislation: to promote the stability of the national currency; within that, BOM also promotes balanced and sustained development of the national economy, through maintaining stability of the money and financial markets, and the banking system.
  - Institutional framework provides for BOM and the State Ikh Khural (parliament). Constitution dated January 13, 1992 cited regarding parliament’s role.
  - BOM is statutorily independent from the government and parliament is prohibited from intervening in conduct of monetary policy.
  - BOM annually proposes “monetary policy guidelines” for the next year for review and approval by parliament; draft posted on BOM website for public discussion before submission; finalized guidelines made public through the media.
  - Governance: Governor has sole decision making power. There is a 14-seat Board, or Council, chaired by the governor and includes senior management and two outside non-voting members; a Supervisory Board monitors BOM activities and reports its views to parliament. Parliament appoints the Governor, the First Deputy Governor, and the Deputy Governor for terms of six years.

### Monetary policy transparency: main findings and recommended actions
- Main findings:
  - Reasonably high degree of monetary policy transparency with significant improvements in recent years, but room to further enhance transparency of monetary policy decisions.
  - Governance and accountability of the Governor could be strengthened.
  - Objective of monetary policy defined in legislation is broad and open to varying interpretation; BOM publicizes a narrower “price stability” as the ultimate objective on its website and in public statements.
  - Intention to amend the BOM Law; proposed amendments would help address institutional gaps. BOM issuing guidelines and internal regulations in the interim.
- Main recommended actions (summary):
  - (i) Achieve greater clarification in law of monetary policy role, responsibilities, and objectives of the BOM.
  - (ii) Achieve greater public disclosure of framework, instruments, targets, and decisions of monetary policy.
  - (iii) Improve the BOM’s internal governance procedures, including the accountability of the governor of the BOM.
  - (iv) Provide legal protection for officials and staff of the BOM when carrying out their duties in good faith.

### Observance of the Transparency Code: selected table findings
- Principle 1.1: Ultimate objective and institutional framework defined in the BOM Law; recommendation that objectives be redefined with price stability as primary objective and exchange rate and financial system stability as secondary objectives.
- Principle 1.2: Institutional relationship between BOM and government reasonably clearly defined; deficiencies exist regarding central bank lending to government, BOM’s involvement with rest of economy, and definition of BOM’s net income.
- Principle 1.3: Agency roles performed by BOM on behalf of government are defined in the BOM Law.
- Principle 2.1: Framework, instruments, and targets are described and publicly disclosed on BOM website and publications; annual inflation objective set in state monetary policy guidelines and publicly disclosed; draft posting practice introduced in 2007.
- Principle 2.2: Consideration suggested to establish a Monetary Policy Committee; alternatively strengthen Supervisory Board reporting to parliament.
- Principle 2.3: BOM Law requires publicizing changes in monetary policy instruments; practice is to announce main considerations for decisions though no pre-announced maximum delay for disclosures.
- Principle 2.4: BOM publishes progress and prospects in quarterly bulletins.
- Principle 2.5: Presumption in favor of consultation for substantive technical changes to monetary regulations.
- Principle 2.6: No specific single regulation on data reporting by financial institutions to BOM for monetary policy purposes, although BOM Law allows BOM to request information.
- Principle 3.1: Mongolia has been a participant in the GDDS since August 2000; data are disseminated shortly after the end of each reporting period.
- Principle 3.2: BOM publicly discloses its balance sheet monthly in its monthly bulletin on the BOM website; audited financial statements published in Annual Report each year. BOM has an internal regulation on publication deadlines but is addressing pre-announcement and annual report deadline issues. Disclosure of aggregate market transactions is not broken down by type of operation.
- Principle 3.3: BOM has a public information office and an informative website, including an English version.
- Principle 3.4: Texts of regulations issued by the BOM are readily available to the public.

*Based on the assessment text contained in the supplied content unit.*

### 4.1 Officials of the central bank should

### _cr08300 - 4.1 Officials of the central bank should

### Accountability to public authorities
- By October 1 each year, the BOM is required to submit to parliament the proposed draft state monetary policy guidelines for the following year.
- At that time, the Governor and other policy making department heads present to parliament:
  - the activities undertaken by the BOM,
  - monetary and financial developments,
  - policy targets, and
  - prospects for achieving those targets.
- BOM senior officials are available to appear before the parliamentary standing committees, joint assembly, and cabinet meetings to report on the conduct of monetary policy and exchange views on the state of the economy and the financial system.

### Public disclosure of financial statements and operations
- The Annual Report of the BOM includes an audited balance sheet and an income statement.
- Information on the expenses and revenues in operating the central bank is disclosed in the BOM’s Annual Report’s financial statements.
- The BOM publishes the details of its monetary market operations.

### Governance, legal protections, and conflicts of interest
- There is no formal protection for BOM staff in either the Central Banking Law or the Banking Law against lawsuits for actions taken while discharging their functions in good faith.
- The BOM’s Supervisory Board could play a greater role in ensuring good governance, including in relation to foreign reserves investment policies and performance.

### Recommended action plan (selected recommendations and required actions)
- Principle 1.1, 1.1.1: Redefine the objectives of the BOM with price stability as the primary objective and the stability of the exchange rate and the stability of the financial system as secondary objectives.
- Principle 1.1.6: When defining the annual state monetary policy guidelines, parliament should avoid conflicts between the BOM’s legal responsibilities in the BOM Law and broader guidance in the guidelines on financial sector development priorities.
- Principle 1.2.3: Issue new regulations on central bank lending to the government, covering detailed procedures for any BOM purchasing of government debt instruments in the primary market.
- Principle 1.2.4: Either amend the BOM Law or issue an internal regulation requiring disclosure of BOM involvement in the rest of the economy.
- Principle 1.2.5: Bring the definition of the BOM’s net income in the BOM Law into line with the BOM’s actual practice by including investment earnings from foreign reserves management.
- Principle 2.2: Consider establishing a Monetary Policy Committee with authority for monetary policy decisions; until then, strengthen the BOM Supervisory Board’s reporting to parliament to increase Governor accountability.
- Principle 2.3.1: Consider introducing a pre-announced maximum delay for disclosure of the main considerations underlying monetary policy decisions.
- Principle 3.2.2: Disclose a breakdown by type of monetary operation shortly after those operations have taken place.
- Principle 4.2.2: Amend the BOM Law to give more authority to the Supervisory Board to scrutinize the BOM’s risk management rules and procedures regarding foreign reserves management; increase disclosure of these rules and procedures in the interim.
- Principle 4.4.1: Amend the BOM Law to provide legal protections for BOM staff and officials when carrying out their duties in good faith.

### Authorities’ response
- Paragraph 73: The BOM welcomes the FSAP team’s evaluation of its generally high degree of policy transparency and intends to ensure and enhance effectiveness and transparency of monetary policy in the future. The BOM notes:
  - annual parliamentary resolutions on the state monetary policy guidelines set out inflation objectives for the following year;
  - the BOM Annual Reports provide detailed assessments of recent economic developments and the outlook that underlie monetary policy implementation;
  - the BOM publishes details of its monetary market operations.
- Paragraph 74: The BOM acknowledges that:
  - the current system where the Governor holds the ultimate authority to make decisions may not be ideal,
  - there is some ambiguity with regard to the objective of monetary policy in the legislation,
  - the BOM is planning to request that the BOM Law be amended by parliament to address these issues.

*Content from _cr08300 - 4.1 Officials of the central bank should*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr08300.pdf_