## _cr0930

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---

### Executive overview
- Belarusian financial sector "so far weathered recent strains well, but is facing mounting challenges."
- Latest bank performance indicators "remain satisfactory," with "the relatively high aggregate capital adequacy ratio of banks provid[ing] some cushion for unexpected losses."
- External environment deterioration: "much less forgiving external environment and a slowdown in Russia and other main trading partners" increasing credit and liquidity risks.
- Authorities adopted a blanket guarantee on household deposits in early November 2008 to help "maintain systemic stability."
- Progress since 2004 FSAP:
  - Several important laws and regulations adopted.
  - Privatization advanced with elimination of the golden share rule in 2007.
  - Divestment of government stake in some of the largest banks under discussion.
- Persistent constraints:
  - "Pervasive government influence"—significant state ownership of banks and nonfinancial enterprises, large share of bank lending under state programs, and administrative controls—reduce incentives for effective risk assessment and allow many nonviable enterprises to survive.
  - Authorities urged to "overhaul the existing directed lending mechanisms" to ensure long-term viability of the banking sector.

### Sources of potential risk to financial stability
- Macroeconomic environment:
  - Annual real GDP growth around 10 percent since 2004; "real GDP growth was 8¼ percent in 2007 and 10¼ percent in the first half of 2008."
  - International reserves remained low; structural reforms lagging.
  - Monetary policy anchored by the fixed exchange rate regime.
  - Recent global developments: demand for exports from Russia and other main trading partners "has fallen sharply," energy import price slated for further increase in 2009, and key sources of external financing have dried up.
- Major counterparties:
  - Corporate lending > "over two thirds of the total stock of loans issued by Belarusian banks."
  - Significant share of corporate loans are state programs (directed lending) or loans with government guarantees.
  - Corporate loss-making share decreased from 19 percent in June 2007 to 11 percent in June 2008 (NBRB data).
  - Corporate leverage "was only around 33 percent in June 2008."
  - Household debt "8.4 percent as of end 2007."
  - Financial sector relatively closed: out of 28 banks in June 2008, 16 were majority foreign-owned but combined market share "only around 20 percent."
  - External liabilities share "12 percent of total liabilities as of June 2008."
  - Syndicated loans comprise "around one third of all short-term debt contracted by Belarusian banks"; maturity typically one year; spreads "around 300 basis points over the LIBOR" in mid-2008.
  - Since September 2008, Belarusian banks unable to attract new syndicated loans at affordable terms.

### Banks — performance and vulnerabilities
- Key indicators and dynamics:
  - Aggregate capital adequacy ratio "16.5 percent as of September 2008."
  - Government injected "BYR 3 trillion to boost the capital of four large state-owned banks in December 2008."
  - NPLs to gross loans "less than 1 percent since 2007."
  - Credit growth "nearly 50 percent annually in nominal terms in recent years."
  - Loan-to-deposit ratio "165 percent as of September 2008."
  - Some banks had difficulty complying with minimum prudential liquidity ratios.
- Reporting and measurement caveats:
  - Loan quality information distorted by loan classification and provisioning practices.
  - Banks permitted to fully include revaluation reserves in regulatory capital.
  - Indicative target for bank NPL ratios set annually at "2 percent in 2008" may create incentives for misreporting.
- State-influenced lending:
  - Four state-controlled banks extend bulk of recommended loans; funding bolstered by government deposits and short-term NBRB loans.
  - Government recapitalization of these banks averaged "1 percent of GDP per year."
  - Planned elimination of directed lending in the Stand-By Arrangement intended to improve long-term viability.

### Nonbank financial institutions, securities market, and money market
- Insurance sector:
  - Total insurance premium below 1 percent of GDP; limited asset composition, high concentration, high state ownership, weak competition.
  - Regulatory regime "is not supportive of the development of insurance sector and securities market."
  - Insurance supervisor located within MoF with limited autonomy; private insurers not allowed to provide compulsory insurance.
- Other non-bank financial institutions: practically non-existent.
- Securities market:
  - Small and illiquid; value of all securities in circulation around US$8.2 billion (18 percent of GDP) at the beginning of 2008.
  - Government securities largest share; no yield curve; equity market nearly nonexistent.
- Money market:
  - Fairly shallow and segmented.
  - One large state-owned bank dominant borrower due to tight liquidity from government recommended lending programs.
  - Interest rates fluctuate within NBRB corridor; corridor "sufficiently wide" and some volatility occurs.

### Regulatory, supervisory, and safety-net framework — strengths and weaknesses
- Improvements since 2004 but key concerns:
  - "Lack of full independence of the agencies in charge of supervision of bank and nonbank financial institutions" persists.
  - Need to strengthen independence of the NBRB Board and bank supervisory processes.
  - Loan classification and provisioning requirements need revision to reflect the entire balance of non-performing loans.
- Financial safety nets and resolution:
  - Authorities used blanket deposit guarantee and government capital injections to preserve stability.
  - Deposit insurance law passed July 2008, effective January 2009; key features effective from January 1, 2009:
    - Covered institutions: All banks.
    - Covered deposits: Household deposits in rubel and foreign currencies.
    - Coverage limit: Blanket guarantee (Presidential decree of November 4, 2008, extended a full guarantee on all household deposits; Law had established coverage limit equivalent of €5,000).
    - Premium: 0.3 percent of deposits per quarter 3/.
    - Target size of fund: 5 percent of insured deposits; if reached premium reduces to 0.15 percent per quarters.
    - Timeline for compensation payments: No more than one month after the withdrawal of bank license.
    - Mandate: New agency will remain a pay box.
  - Transitional arrangements:
    - Old framework until December 31, 2008 covered all banks except the six largest; old coverage limit equivalent US$1,000.
    - Transitional period for Belarusbank: three years; premium gradually increases from 0.005 to 0.3 percent.
    - Contingent liability of government related to blanket guarantee equals 10.5 percent of GDP.
  - Emergency liquidity assistance (ELA):
    - No documented policy; NBRB allowed to provide ELA without collateral in October 2008; facility up to 30 days at Lombard rate plus 300 basis points.
    - Available collateral as of June 2008 equaled around 6.2 percent of total banks’ assets.
    - Recommendation: document ELA framework; avoid uncollaterized lending except exceptional circumstances with conditions.
  - Remedial powers:
    - NBRB can request rehabilitation, remove managers, propose capital increases, suspend activities up to one year, revoke license, impose stricter prudential requirements, appoint temporary administration.
    - NBRB cannot explicitly prohibit or limit dividend payout; supervisory decision to withdraw license potentially reversible by courts (court can void NBRB decision and require restoration within 15 days).

### Developmental issues and recommended reforms
- Banks and privatization:
  - Recommendation to engage an experienced consultant for Belarusbank privatization working group.
  - Move government deposits from banks to the NBRB "in line with the schedule for repayment of corresponding loans."
  - Establish dedicated development agency to carve out government-directed loans and become exclusive funding source for state development programs; include operations in the budget.
- Non-bank financial institutions:
  - Abolish obligatory reinsurance requirement for local insurance companies.
  - Strengthen autonomy of insurance and securities market supervisors; allow private insurers to sell compulsory insurance products.
  - Equalize tax treatment across insurance companies.
- Access to finance:
  - Access constrained by state-dominated banking sector and directed lending; reform recommended to expand private-sector access.
  - Loans per capita as of March 2008: equivalent of US$415 (comparatives: Russia US$939; Kazakhstan US$1,370).
  - MSME finance limited; regional provision weaker than in Minsk.
  - NBRB should consider modifying formulae for microloan ceilings under simplified approval procedure.

### Main FSAP Update recommendations (selected, with timing)
- Highest Priority:
  - Carve out government-directed loans from bank balance sheets and concentrate them in a single agency — ¶34 — Continuous
  - Strengthen independence of the NBRB Board and bank supervisory processes — ¶17 — Short term
  - Revise loan classification and provisioning requirements to reflect the entire balance of non-performing loans — ¶17 — Medium term
  - Engage a qualified experienced consultant to assist the Belarusbank privatization working group — ¶36 — Medium term
  - Move government deposits from banks to the NBRB in line with repayment of corresponding loans — ¶35 — Continuous
  - Document the framework for emergency liquidity assistance — ¶22, 23 — Short term
  - Abolish obligatory reinsurance requirement for local insurance companies — ¶19, 37 — Medium term
- Lower Priority (selection):
  - Adopt a crisis management framework and operational guidelines — ¶21 — Short term
  - Make explicit legal power of NBRB to suspend dividend payout — ¶25 — Medium term
  - Establish legal certainty regarding outcome of license withdrawal — ¶26 — Medium term
  - Provide for more expedient bankruptcy proceedings — ¶27 — Medium term
  - Strengthen autonomy of insurance and securities market supervisors — ¶18, 20 — Medium term
  - Allow private insurers to sell compulsory insurance products — ¶37 — Medium term

### Key quantitative and structural highlights
- Government guaranteed loans outstanding "around BYR 8.5 trillion (equivalent to around US$4 billion)" or "one fifth of all bank loans to the economy" as of June 2008.
- Around "30" state programs in 2008; nine largest banks involved; in largest banks "60–70 percent" of recommended credits extended at subsidized rates.
- Two largest state-owned banks distribute almost all recommended loans and predominantly channel them to the agriculture sector.
- Number of banks operating in June 2008: "28."
- Five largest banks accounted for 84 percent of market share (assets) as of June 2008; combined market share of all state-owned banks was 76 percent as of June 2008.
- Total assets of financial institutions: BYR 54 trillion in June 2008 (up from BYR 16 trillion in December 2004), equivalent to around 50 percent of GDP.
- Nonbank financial institutions account for less than 2 percent of total financial system assets.

### Stress test methodologies, scenarios, and principal results
- Methodology and scope:
  - Based on end-June 2008 data; top-down approach; tests for all 28 commercial banks individually and aggregated; no specific adjustments to pre-shock CAR for under-provisioning.
  - Sensitivity tests: credit portfolio deterioration, exchange rate fluctuations, domestic and foreign interest rate fluctuations, sudden liquidity withdrawals.
  - Shocks calibrated using Belarus historical experience.
  - Three macro scenarios:
    - Two energy-import-price increase scenarios (one with moderate rubel depreciation, one with sharp devaluation).
    - Third scenario: significant increase in employee wages within next two years.
  - Peer groups: size (large >5 percent, medium 1–5 percent, small <1 percent) and ownership (state-owned banks SOB, foreign-owned FB, private domestically-owned PB).
- Capitalization and credit risk exposure:
  - Aggregate CAR: 17.1 percent (baseline stated in Appendix IV and Table 6).
  - Baseline CAR for small banks: almost 40 percent.
  - Immediate increase in imported energy prices (assuming reserves sufficient):
    - Aggregate CAR would shrink by around one third but remain well above 8 percent.
    - Only three banks (combined 19 percent of total assets) would fall below the 8 percent threshold.
  - If energy-price shock followed by devaluation:
    - System CAR would fall to just over 8 percent; several large and mid-sized banks severely affected.
  - Credit risk is main driver: interest rate increases affect credit quality indirectly (floating rate loans); depreciation affects servicing of FX loans but less so given FX lending predominantly to export-oriented enterprises.
  - Concentration risk: assuming LGD 45 percent, default of five largest debtors would leave four banks (27 percent of total assets) undercapitalised with CAR < 8 percent.
- Liquidity risk (sensitivity results):
  - Sudden withdrawal of 20 percent of household and corporate deposits:
    - Aggregate current liquidity ratio falls from almost 100 percent to below 50 percent.
    - Large banks' current liquidity ratio falls to 33 percent (one half of minimum regulatory requirement).
  - Hypothetical withdrawal of 25 percent of liabilities to non-residents would cause current liquidity of three banks, including some large banks, to fall below minimum requirement.
  - Hypothetical withdrawal of 50 percent of liabilities to non-residents would cause short term liquidity of eight banks, including some large banks, to fall below minimum prudential requirement.
- Status of adjustments to banking data for stress testing:
  - 2004 FSAP reduced aggregate CAR by 6.4 percentage points after adjustments; by June 2008 magnitude of possible over-capitalization related adjustments decreased to around 2-3 percentage points.
  - General provisions: assume 2 percents of total loans and subtract from regulatory capital; reserve fund ≈ 2 percent of total loan book as of mid 2008.
  - Provisioning for long-term unclassified NPLs could reduce aggregate CAR by 2 percentage points; no adjustments made in 2008 tests though insufficient provisioning remains relevant.
  - Reduction in revaluation accounts included in regulatory capital: share has been falling from 30 percent in 2001 to [text truncated].

### Detailed stress test tables — selected figures (from Table 6 and Table 7)
- Regulatory capital (percent of risk-weighted assets): 25.2 (2004), 26.7 (2005), 24.4 (2006), 19.3 (2007), 17.9 (Mar-08), 17.1 (Jun-08), 16.5 (Sep-08).
- Regulatory Tier I (percent of risk-weighted assets): 21.0 (2004), 18.7 (2005), 17.4 (2006), 14.0 (2007), 13.3 (Mar-08), 12.9 (Jun-08), 12.1 (Sep-08).
- Total capital (percent of total assets): 19.0 (2004), 19.0 (2005), 17.9 (2006), 16.0 (2007), 14.6 (Mar-08), 13.8 (Jun-08), 13.0 (Sep-08).
- NPLs (percent of total loans): 2.8 (2004), 1.9 (2005), 1.2 (2006), 0.7 (2007), 0.7 (Mar-08), 0.7 (Jun-08), 0.6 (Sep-08).
- Provisions (percent of NPLs): 32.4 (2004), 48.4 (2005), 51.3 (2006), 61.5 (2007), 59.1 (Mar-08), 58.7 (Jun-08), 60.9 (Sep-08).
- NPLs net of provisions (percent of regulatory capital): 11.4 (2004), 6.3 (2005), 6.1 (2006), 3.8 (2007), 4.2 (Mar-08), 4.2 (Jun-08), 3.7 (Sep-08).
- FX loans (percent of total loans): 43.8 (2004), 37.0 (2005), 33.8 (2006), 37.6 (2007), 37.6 (Mar-08), 37.3 (Jun-08), 34.7 (Sep-08).
- Loans to state-owned enterprises (percent of total) 1/: 31.7 (2004), 26.3 (2005), 25.4 (2006), 22.4 (2007), 22.2 (Mar-08), 21.3 (Jun-08), 20.9 (Sep-08).
- Return on assets (after tax): 1.5 (2004), 1.3 (2005), 1.7 (2006), 1.7 (2007), 1.7 (Mar-08), 1.8 (Jun-08), 1.7 (Sep-08).
- Return on equity (after tax): 7.8 (2004), 6.8 (2005), 9.6 (2006), 10.7 (2007), 11.3 (Mar-08), 11.9 (Jun-08), 12.0 (Sep-08).
- Liquid assets to total assets 2/: 27.7 (2004), 30.4 (2005), 24.1 (2006), 22.6 (2007), 24.7 (Mar-08), 21.9 (Jun-08), 20.7 (Sep-08).
- Instant liquidity ratio 3/: 64.9 (2004), 117.8 (2005), 128.9 (2006), 104.1 (2007), 115.8 (Mar-08), 110.9 (Jun-08), n.a. (Sep-08).
- Current liquidity ratio 4/: 63.0 (2004), 95.9 (2005), 96.7 (2006), 98.8 (2007), 110.6 (Mar-08), 97.5 (Jun-08), 91.8 (Sep-08).
- Loans to deposits: 123.2 (2004), 119.9 (2005), 135.0 (2006), 144.3 (2007), 147.7 (Mar-08), 152.4 (Jun-08), 165.2 (Sep-08).
- Foreign exchange deposits to total deposits: 46.5 (2004), 38.0 (2005), 34.7 (2006), 38.2 (2007), 39.9 (Mar-08), 38.3 (Jun-08), 37.9 (Sep-08).
- Foreign exchange liabilities to total liabilities: 51.4 (2004), 44.6 (2005), 41.2 (2006), 44.7 (2007), 46.6 (Mar-08), 44.5 (Jun-08), 40.8 (Sep-08).
- Net open position in FX (percent of capital): n.a. (2004), 13.1 (2005), 9.5 (2006), 4.8 (2007), n.a. (Mar-08), n.a. (Jun-08), n.a. (Sep-08).
- Selected CAR baseline and shocks (Table 6 excerpts):
  - Baseline ALL: 17.1; L: 15.9; M: 17.3; S: 39.4; SOB: 16.6; FB: 17.8; PB: 32.0.
  - Energy Price Shock: Aggregated CAR ALL: 12.6; L: 11.3; M: 12.4; S: 36.2; SOB: 12.1; FB: 13.3; PB: 28.3.
  - Energy Price Shock with Currency Breakdown: Aggregated CAR ALL: 8.1; L: 6.6; M: 7.9; S: 33.4; SOB: 7.5; FB: 8.7; PB: 25.1.
- Liquidity stress (Table 7 excerpts):
  - Baseline CLR (prudential minimum 70): ALL: 97; L: 93; M: 102; S: 146; SOB: 89; FB: 110; PB: 157.
  - Withdrawal of 20% private sector deposits: ALL: 48; L: 33; M: 84; S: 132; SOB: 89; FB: 146; PB: 323.
  - Withdrawal of 50% liabilities to non-residents: ALL: 70; L: 68; M: 68; S: 136; SOB: 68; FB: 68; PB: 147.

### Problem assets, provisioning, and supervisory recommendations
- Impairment recognition issues:
  - Impairment test not required to cover all loans to same borrower/group upon overdue payment; delinquent payment does not trigger provisioning/write-off of entire exposure in practice.
  - GDBS recommendation not to exceed indicative NPL thresholds reduces likelihood of appropriate impairment recognition.
  - Significant differences may exist between national accounting standards and IFRS.
- Recommended actions (Table 9 highlights):
  - Encourage early recognition of losses and immediate write-offs.
  - Extend impairment tests to cover all exposures of a borrower/group.
  - Ensure realistic assessments of current value of future cash flows.
  - Increase frequency of on-site inspections; perform targeted inspections.
  - Identify and assess reporting differences between national standards and IFRS.
  - Incorporate concept of exertion of control in the Banking Code; grant discretion to apply it case-by-case.
  - Remove/limit external factors impairing risk-taking decisions and increasing supervisory forbearance.
  - Enable NBRB to restrict or reinstate powers of senior managers and to stop or limit dividend payout as preventive measure.
  - Grant NBRB power to set capital adequacy requirements for individual banks and make case-by-case deductions from regulatory capital.
  - Continue implementation of consolidated supervision and impose prudential norms on groups in 2009.

### Bankruptcy, payment systems, credit registry, accounting, and AML/CFT
- Bankruptcy regime for credit institutions:
  - Bankruptcy can only be initiated after revocation of banking license or NBRB certification.
  - NBRB certification time limit: one month; court has four months to rule — "creates a potential for a long period of legal uncertainty."
- Payment systems:
  - All inter-bank payments transferred in 2008 to Belarusian Inter-bank Settlement System (BISS), a real time gross settlement system.
  - No formal CPSIPS reassessment in FSAP update.
- Credit registry:
  - NBRB maintains registry established in 2007; pre-January 2009 coverage includes loans exceeding US$10,000.
  - From January 2009 registry to include all loans regardless of amount and additional data (sector classification, collateral).
  - Recommendation: make expanded credit registry fully operational short-term; consider privately-operated credit bureau long-term.
- Accounting standards:
  - Transition to IFRS in process; IFRS to be applied by banks and some nonfinancial enterprises starting in 2009.
  - Neither banks nor nonfinancial enterprises required to publish IFRS-compliant financial statements; banks may publish annual reports in IFRS or national standards.
  - Reporting to NBRB based on national standards.
- AML/CFT:
  - New Law on AML/CFT effective March 2006; NBRB instruction on AML/CFT passed February 2008.
  - Eurasia Group AML/CFT assessment conducted mid-2008; results not reflected in Update.

*Source: _cr0930 - Executive Summary; IMF staff report (financial sector assessment chapters, stress tests, and appendices) as provided in the source content.*

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

### _cr0930 - Executive Summary

### Executive overview
- The Belarusian financial sector has "so far weathered recent strains well, but is facing mounting challenges."
- Latest bank performance indicators "remain satisfactory," with "the relatively high aggregate capital adequacy ratio of banks provid[ing] some cushion for unexpected losses."
- A "much less forgiving external environment and a slowdown in Russia and other main trading partners" have increased vulnerability to credit and liquidity risks.
- Authorities adopted a blanket guarantee on household deposits in early November 2008 to help "maintain systemic stability."
- Progress since the 2004 FSAP: several important laws and regulations adopted; privatization advanced with elimination of the golden share rule in 2007; divestment of government stake in some of the largest banks under discussion.
- Persistent constraints: "pervasive government influence"—significant state ownership of banks and nonfinancial enterprises, large share of bank lending under state programs, and administrative controls—have reduced incentives for effective risk assessment and management and allowed many nonviable enterprises to survive.
- Authorities are urged to "overhaul the existing directed lending mechanisms" to ensure long-term viability of the banking sector.

### I. Sources of potential risk to financial stability
A. Macroeconomic environment
- Annual real GDP growth around 10 percent since 2004; "real GDP growth was 8¼ percent in 2007 and 10¼ percent in the first half of 2008."
- International reserves remained low; structural reforms lagging.
- Monetary policy anchored by the fixed exchange rate regime.
- Recent global developments: demand for exports from Russia and other main trading partners "has fallen sharply," energy import price slated for further increase in 2009, and key sources of external financing have dried up.

B. Major counterparties of Belarusian financial institutions
Corporate sector
- Lending to the corporate sector represents "over two thirds of the total stock of loans issued by Belarusian banks."
- Significant share of those loans are state programs (directed lending) or loans with government guarantees.
- Financial condition of corporate sector "has been satisfactory so far, but is likely to worsen"; share of loss-making enterprises decreased from 19 percent in June 2007 to 11 percent in June 2008 (NBRB data).
- Corporate leverage ratio "was only around 33 percent in June 2008."
Household sector
- Household debt "8.4 percent as of end 2007," one of the lowest in Europe; household debt-to-income ratio also relatively low.
- Household debt expected to continue increasing over the medium term, especially if foreign banks enter.
Rest of the world
- Financial sector remains relatively closed to the rest of the world; penetration of foreign banks limited.
- Out of 28 banks operating in Belarus in June 2008, 16 banks were majority foreign-owned, but their combined market share was "only around 20 percent of the total."
- Share of external liabilities of Belarusian banks was "12 percent of total liabilities as of June 2008."
- Foreign funding for Belarusian banks has grown; syndicated loans comprise "around one third of all short-term debt contracted by Belarusian banks."
- Maturity of syndicated loans typically one year; interest rate spreads were "around 300 basis points over the LIBOR" in mid-2008.
- Since September 2008, Belarusian banks have been unable to attract new syndicated loans at affordable terms.

### II. Strengths and vulnerabilities: institutions and markets
A. Banks — performance and vulnerabilities
- Aggregate capital adequacy ratio was "16.5 percent as of September 2008."
- Government injected "BYR 3 trillion to boost the capital of four large state-owned banks in December 2008."
- Ratio of nonperforming loans (NPLs) to gross loans stood at "less than 1 percent since 2007."
- Credit growth "nearly 50 percent annually in nominal terms in recent years."
- Loan-to-deposit ratio "165 percent as of September 2008."
- Some individual commercial banks have at times had difficulty complying with minimum prudential liquidity ratios.
- Reported figures may overstate capital position:
  - Loan quality information distorted by loan classification and provisioning practices.
  - Banks are allowed to fully include revaluation reserves in regulatory capital.
  - Indicative target for bank NPL ratios set annually at "2 percent in 2008" may create incentives for misreporting.
- State-influenced lending:
  - State-influenced lending interferes with development of sound risk culture, proper pricing, and efficient allocation of credit.
  - Four state-controlled banks extend bulk of recommended loans; funding bolstered by government deposits and short-term loans from the NBRB.
  - Government recapitalization of these banks averaged "1 percent of GDP per year."
  - Planned elimination of directed lending in the Stand-By Arrangement intended to improve long-term viability.

B. Nonbank financial institutions
- The regulatory regime for nonbank financial institutions "is not supportive of the development of insurance sector and securities market."
- Lack of full independence of agencies supervising bank and nonbank financial institutions "continues to pose operational and reputation risks."

C. Securities market
- Regulatory regime and supervisory independence shortcomings constrain securities market development (details in main report).

D. Money market
- Liquidity risks noted; some banks experienced difficulty meeting prudential liquidity ratios despite broadly stable deposits in recent months.

### III. Strengths and vulnerabilities: the policy framework
A. Regulatory and supervisory frameworks
- Improvements since 2004, but key concerns remain:
  - "Lack of full independence of the agencies in charge of supervision of bank and nonbank financial institutions" persists.
  - Need to strengthen independence of the NBRB Board and bank supervisory processes (see recommendations).
  - Loan classification and provisioning requirements need revision to reflect the entire balance of non-performing loans.

B. Financial safety nets and bank resolution framework
- Authorities have taken measures (e.g., blanket deposit guarantee, government capital injections) to preserve stability.
- Recommendations include documenting emergency liquidity assistance framework and adopting a crisis management framework and operational guidelines.

C. Financial system infrastructure
- Some progress in modernization, but state influence and administrative controls limit market development and risk management incentives.

### IV. Developmental issues
A. Banks
- Privatization progressed (elimination of golden share rule in 2007); divestment under discussion.
- Recommendation to engage an experienced consultant to assist the Belarusbank privatization working group.
- Move government deposits from banks to the NBRB "in line with the schedule for repayment of corresponding loans."

B. Non-bank financial institutions
- Abolish obligatory reinsurance requirement for local insurance companies recommended to support insurance sector development.
- Strengthen autonomy of insurance and securities market supervisors; allow private insurance companies to sell compulsory insurance products.

C. Access to finance
- Access constrained by state-dominated banking sector and directed lending practices; reforms recommended to expand private-sector access.

### Main FSAP Update recommendations (Table 1)
Highest Priority (with paragraph references and timeframe)
- Carve out government-directed loans from bank balance sheets and concentrate them in a single agency — ¶34 — Continuous
- Strengthen independence of the NBRB Board and bank supervisory processes — ¶17 — Short term
- Revise the loan classification and provisioning requirements to reflect the entire balance of non-performing loans — ¶17 — Medium term
- Engage a qualified experienced consultant to assist the Belarusbank privatization working group — ¶36 — Medium term
- Move government deposits from banks to the NBRB in line with the schedule for repayment of corresponding loans — ¶35 — Continuous
- Document the framework for emergency liquidity assistance — ¶22, 23 — Short term
- Abolish the obligatory reinsurance requirement for local insurance companies — ¶19, 37 — Medium term

Lower Priority
- Adopt a crisis management framework and operational guidelines — ¶21 — Short term
- Make explicit the legal power of the NBRB to suspend dividend payout — ¶25 — Medium term
- Establish legal certainty regarding the outcome of license withdrawal — ¶26 — Medium term
- Provide for a more expedient bankruptcy proceedings — ¶27 — Medium term
- Strengthen autonomy of the insurance and securities market supervisors — ¶18, 20 — Medium term
- Allow private insurance companies to sell compulsory insurance products — ¶37 — Medium term

Additional quantitative and structural highlights
- Government guaranteed loans outstanding "around BYR 8.5 trillion (equivalent to around US$4 billion)" or "one fifth of all bank loans to the economy" as of June 2008.
- Around "30" state programs were in place in 2008; the nine largest Belarusian banks involved in their financing; in the largest banks, "60–70 percent" of recommended credits extended at subsidized rates.
- Two largest state-owned banks distribute almost all recommended loans and predominantly channel them to the agriculture sector.
- Number of banks operating in Belarus in June 2008: "28."
- Credit growth indicators: rapid credit growth "nearly 50 percent annually in nominal terms"; NPL ratio "less than 1 percent"; loan-to-deposit ratio "165 percent."
- Supervisory and reporting weaknesses may distort official measures of loan quality and capital adequacy.

*Source: _cr0930 - Executive Summary.*

### 11.      Stress test results indicate that the main vulnerabilities of banks relate to credit

### Stress test results indicate that the main vulnerabilities of banks relate to credit risk and domestic liquidity risk

### A. Stress test findings and banking vulnerabilities
- Stress tests show banks would be significantly affected by the simultaneous increase in imported energy prices, a depreciation of the rubel, and higher interest rates, which are all expected to occur in early 2009.
- Many banks, including some large banks, face high credit concentration risk.
- Liquidity risk: large Belarusian banks would be affected particularly strongly by a sudden withdrawal of domestic deposits.
- A hypothetical withdrawal of 50 percent of liabilities to non-residents would cause short term liquidity of eight banks, including some large banks, to fall below the minimum prudential requirement.
- Broad finding: the majority of Belarusian banks could withstand a wide range of shocks (Appendix IV).
  - Direct effects of interest rate hikes or exchange rate volatility are small due to the short duration of assets and liabilities, and almost matched net positions in foreign currencies.
  - Effects of deteriorating credit quality would be more substantial, though the high initial level of capital would allow banks to absorb significant losses.
  - Indirect effects of exchange rate depreciation are less important in Belarus than in many other Eastern European countries because foreign currency loans are predominantly issued to the export-oriented enterprises, which are naturally hedged.

### B. Nonbank financial institutions and securities market
- Insurance sector: total insurance premium equal to below 1 percent of GDP; characterized by limited composition of assets, high concentration, high state ownership, and weak competition.
- Other non-bank financial institutions: practically non-existent.
- Securities market: small and illiquid.
  - At the beginning of 2008, the value of all securities in circulation was equivalent to around US$8.2 billion (18 percent of GDP).
  - Government securities represent the largest share, but there is no yield curve on these securities.
  - The equity market is nearly nonexistent and is not used to raise capital.

### C. Key financial soundness indicators (selected highlights from Table 2)
- Regulatory capital (in percent of risk-weighted assets): 25.2 (2004), 26.7 (2005), 24.4 (2006), 19.3 (2007), 17.9 (Mar-08), 17.1 (Jun-08), 16.5 (Sep-08).
- Regulatory Tier I (in percent of risk-weighted assets): 21.0 (2004), 18.7 (2005), 17.4 (2006), 14.0 (2007), 13.3 (Mar-08), 12.9 (Jun-08), 12.1 (Sep-08).
- Total capital (in percent of total assets): 19.0 (2004), 19.0 (2005), 17.9 (2006), 16.0 (2007), 14.6 (Mar-08), 13.8 (Jun-08), 13.0 (Sep-08).
- NPLs (in percent of total loans): 2.8 (2004), 1.9 (2005), 1.2 (2006), 0.7 (2007), 0.7 (Mar-08), 0.7 (Jun-08), 0.6 (Sep-08).
- Provisions (in percent of NPLs): 32.4 (2004), 48.4 (2005), 51.3 (2006), 61.5 (2007), 59.1 (Mar-08), 58.7 (Jun-08), 60.9 (Sep-08).
- NPLs net of provisions (in percent of regulatory capital): 11.4 (2004), 6.3 (2005), 6.1 (2006), 3.8 (2007), 4.2 (Mar-08), 4.2 (Jun-08), 3.7 (Sep-08).
- FX loans (in percent of total loans): 43.8 (2004), 37.0 (2005), 33.8 (2006), 37.6 (2007), 37.6 (Mar-08), 37.3 (Jun-08), 34.7 (Sep-08).
- Loans to state-owned enterprises (in percent of total) 1/: 31.7 (2004), 26.3 (2005), 25.4 (2006), 22.4 (2007), 22.2 (Mar-08), 21.3 (Jun-08), 20.9 (Sep-08).
- Return on assets (after tax): 1.5 (2004), 1.3 (2005), 1.7 (2006), 1.7 (2007), 1.7 (Mar-08), 1.8 (Jun-08), 1.7 (Sep-08).
- Return on equity (after tax): 7.8 (2004), 6.8 (2005), 9.6 (2006), 10.7 (2007), 11.3 (Mar-08), 11.9 (Jun-08), 12.0 (Sep-08).
- Liquid assets to total assets 2/: 27.7 (2004), 30.4 (2005), 24.1 (2006), 22.6 (2007), 24.7 (Mar-08), 21.9 (Jun-08), 20.7 (Sep-08).
- Instant liquidity ratio 3/: 64.9 (2004), 117.8 (2005), 128.9 (2006), 104.1 (2007), 115.8 (Mar-08), 110.9 (Jun-08), n.a. (Sep-08).
- Current liquidity ratio 4/: 63.0 (2004), 95.9 (2005), 96.7 (2006), 98.8 (2007), 110.6 (Mar-08), 97.5 (Jun-08), 91.8 (Sep-08).
- Loans to deposits: 123.2 (2004), 119.9 (2005), 135.0 (2006), 144.3 (2007), 147.7 (Mar-08), 152.4 (Jun-08), 165.2 (Sep-08).
- Foreign exchange deposits to total deposits: 46.5 (2004), 38.0 (2005), 34.7 (2006), 38.2 (2007), 39.9 (Mar-08), 38.3 (Jun-08), 37.9 (Sep-08).
- Foreign exchange liabilities to total liabilities: 51.4 (2004), 44.6 (2005), 41.2 (2006), 44.7 (2007), 46.6 (Mar-08), 44.5 (Jun-08), 40.8 (Sep-08).
- Net open position in FX (in percent of capital): n.a. (2004), 13.1 (2005), 9.5 (2006), 4.8 (2007), n.a. (Mar-08), n.a. (Jun-08), n.a. (Sep-08).

Notes:
- 1/ State-owned enterprises are defined as enterprises with a 100 percent state ownership.
- 2/ The definition of liquid assets was broadened from 1/1/2004 to include all assets with a remaining maturity of less than 1 month.
- 3/ Ratio of demand assets to demand liabilities.
- 4/ Assets/liabilities with a remaining maturity of less than 1 month.

### D. Money market
- The money market remains fairly shallow and segmented.
- One large state-owned bank is the dominant borrower due to tight liquidity from heavy involvement in government recommended lending programs.
- Money market interest rates fluctuate within the interest rate corridor set by the NBRB’s overnight credit and deposit rates; the corridor is sufficiently wide and some volatility occasionally takes place.

### E. Regulatory and supervisory framework: strengths and key weaknesses
- Progress: majority of recommendations from the 2004 Basel Core Principles assessment have been adopted or are in process; improved level of compliance achieved.
- NBRB supervision is moving from compliance-based to more risk-based supervision; uses a mix of off-site analysis and on-site inspections.
- Major supervisory challenges: implementation of consolidated supervision; introduction of international financial accounting standards for the banking sector; enhancing risk management processes, procedures, and risk culture in banks.

Key issues compromising effectiveness:
- Concerns regarding independence of banking supervision persist: a member of the government and a representative of the banking sector are both members of the Board of the NBRB, posing potential conflict of interest.
- State-influenced lending pervasiveness can significantly distort bank supervisory analysis.
- Loan classification and provisioning regime departs from best international practices:
  - Granting concessions (prolongation or restructuring) does not impact loan classification.
  - Impairment test with respect to other loans to the same borrower is not required in event of overdue payment.
  - Loans guaranteed by central and local governments are classified as standard irrespective of borrower condition; government guarantee can be called upon only after expiration of loan maturity.

Insurance sector supervisory issues:
- Insurance supervisor located within the Ministry of Finance (MoF) with limited autonomy.
- Transfer of state-owned insurance companies to MoF administration in 2006 placed supervisor in conflict as owner, manager, and supervisor concurrently.
- Competition constrained: private insurance companies not allowed to provide compulsory insurance; state-owned enterprises can buy insurance only from state-owned insurers.
- Reinsurance business in process of being monopolized by state-owned reinsurance company established in 2006.

Securities market regulation issues:
- Securities regulator located within MoF lacks operational independence, powers, and resources.
- Regulator cannot issue regulations, issue/suspend/revoke licenses, or trace ultimate controllers of regulated entities.
- MoF preparing new law on securities to address shortcomings.

### F. Financial safety nets and bank resolution framework
- Institutional framework for dealing with a potential financial crisis needs formalization: roles and powers of authorities and coordination guidelines should be defined. MoF should play a central role; new Agency for Deposit Insurance should be involved.
- No documented policy for emergency liquidity assistance (ELA); only internal understanding at NBRB. A formalized policy and operational framework should describe: (i) circumstances for ELA, (ii) types of institutions eligible, (iii) terms and conditions including collateral requirements.
- New uncollaterized NBRB lending to banks should be avoided:
  - In October 2008, NBRB was allowed to provide ELA without collateral; some banks have used this facility.
  - As of June 2008, available collateral (government securities, NBRB bills, bank bonds) equaled only around 6.2 percent of total banks’ assets.
  - The uncollaterized facility can be extended for up to 30 days at a penalty rate of the NBRB’s Lombard rate plus 300 basis points.
  - Such facility should be used only in exceptional circumstances and should include specific requirements (increased supervisory oversight, limitations on risky activities).
- Deposit insurance reform:
  - Law on Deposit Insurance passed July 2008, effective from January 2009; represents clear improvement over previous legislation.
  - Key features of new framework (effective from January 1, 2009):
    - Covered institutions: All banks.
    - Covered deposits: Household deposits in rubel and foreign currencies.
    - Coverage limit: Blanket guarantee (Presidential decree of November 4, 2008, extended a full guarantee on all household deposits in all banks; Law had established a coverage limit equivalent of €5,000).
    - Premium: 0.3 percent of deposits per quarter 3/.
    - Target for the size of the fund: 5 percent of the insured deposits; if the fund reaches this amount, the premium reduces to 0.15 percent of deposits per quarters.
    - Timeline for compensation payments: No more than one month after the withdrawal of bank license.
    - Mandate of the deposit insurer: A new agency which will remain a pay box.
  - Transitional arrangements and previous framework details:
    - Old framework effective until December 31, 2008 covered all banks except the six largest.
    - Under old framework coverage limit equivalent of US$1,000.
    - Under old arrangements certain large state-owned banks benefited from full guarantees and differential premium treatment.
    - Transitional period for the largest bank, Belarusbank: three year transitional period during which the premium will gradually increase every quarter from 0.005 to 0.3 percent.
  - Early November 2008: authorities extended a full guarantee on all household deposits to prevent a potential run; contingent liability of the government related to the blanket guarantee is currently equal to 10.5 percent of GDP.
- Remedial action and supervisory powers:
  - NBRB has a wide range of powers to deal with a bank in distress (request rehabilitation measures, removal of bank managers, propose capital increases, temporarily suspend license or activities up to one year, revoke license, impose stricter prudential requirements, appoint temporary administration).
  - NBRB currently has no explicit authorization to prohibit or limit distribution of dividends; it receives ex ante notifications but cannot stop dividend payout. Having the power to stop dividend payout would help prevent weakening of a bank’s financial condition.
- Judicial reversal risk:
  - Supervisory decision to withdraw a banking license is potentially reversible by courts; courts can void NBRB’s decision and require restoration of banking license within 15 days.
  - Recommendation: while courts must ensure supervisory authority does not overstep, courts should not be able to reverse supervisory decisions; shareholders’ interests should be protected by an appeals process for monetary compensation.
  - Current arrangement may pose an obstacle for prompt payment of depositors from the Agency for Deposit Insurance.

*Source: IMF staff report (chapter on financial sector assessment, as provided in the source content).*

### 27.      The regime for bankruptcy of credit institutions is overly lengthy. Bankruptcy

### _cr0930 - 27.      The regime for bankruptcy of credit institutions is overly lengthy. Bankruptcy

### Bankruptcy regime for credit institutions
- Bankruptcy can only be initiated after the revocation of banking license or the certification of the NBRB to the court.
- Time limits and procedural delays:
  - NBRB certification time limit: one month.
  - Court has four months to declare its ruling.
  - The combination of these time limits "creates a potential for a long period of legal uncertainty."

### Financial system infrastructure — Payment systems
- Assessment and recent changes:
  - Belarusian payment system received high marks in the 2004 assessment of the Core Principles for Systemically Important Payment System (CPSIPS).
  - All inter-bank payments were gradually transferred in 2008 to the Belarusian Inter-bank Settlement System (BISS), which is a real time gross settlement system.
  - As part of this transfer: payment fees were decreased and the number of staff reduced.
- Reassessment:
  - No formal CPSIPS reassessment was made in the context of the FSAP update.
- Appendix II: provides status of the 2004 CPSIPS recommendations (see separate appendix material).

### Credit registry
- NBRB maintains a credit registry established in 2007.
- Current coverage (pre-January 2009):
  - Includes financial description of loans (amount, currency, date of origination, date of repayment, guarantee, etc.) which exceed an equivalent of US$10,000.
- Expansion starting from January 2009:
  - Registry will include a broader set of data on all loans, independently of the amount.
  - New information will include classification of the sector of activity and the value of collateral.
- Recommended priorities:
  - Making the expanded credit registry fully operational should be a short-term priority.
  - Over the longer term, consider creation of a privately-operated credit bureau with comprehensive coverage (including non-financial data).

### Accounting standards
- Transition to IFRS:
  - Belarus is in the process of adopting international financial reporting standards (IFRS).
  - IFRS will be applied by banks and some nonfinancial enterprises starting in 2009.
- Reporting and disclosure concerns:
  - Neither banks nor nonfinancial enterprises will be required to publish IFRS-compliant financial statements, which is likely to negatively affect market discipline.
  - Banks will have discretion to publish annual reports according to either IFRS or national accounting standards.
  - Reporting to the NBRB is based on national standards.

### Anti-money laundering and combating the financing of terrorism (AML/CFT)
- Legal and supervisory developments since the 2004 FSAP:
  - New Law on AML/CFT became effective in March 2006.
  - NBRB instruction on AML/CFT for banks and non-bank financial institutions was passed in February 2008.
- Contents and support:
  - The instruction sets out criteria for organization of internal controls, staff qualification and responsibilities, and know-your-customer requirements.
  - The NBRB hosts periodic seminars for banks, provides methodological assistance, and has entered into cooperative agreements with several other central banks.
- Note on assessments:
  - An AML/CFT assessment by the Eurasia Group was conducted in mid-2008; results were not expected before early 2009 and are not reflected in this Update.

### Developmental issues — Banks
- Government-directed lending and guarantees:
  - Large number of government lending schemes inhibit competition, undermine sound credit underwriting, and raise costs.
  - Authorities changed status of government guarantees effective from January 2009:
    - Until January 2009, government guarantees covered only loan principal amounts and could be called only after expiration of loan maturity and after bank exhausted legal means to recover the debt (the NBRB had to certify sufficiency of recovery efforts).
    - Starting from January 2009, government guarantees cover both principal and interest rate obligations and become subject to immediate and unconditional execution upon debtor’s delinquency.
  - Implications:
    - Change should significantly improve banks’ position, at the cost of possible complication of fiscal management.
    - Outstanding stock of guarantees issued before January 2009 will remain on banks’ books and continue to pose risks.
- Recommendation: Establish a dedicated development agency
  - Functions and rationale:
    - Initially accumulate existing government-directed loans and associated state funding from commercial banks.
    - Become the exclusive source of funding for state development programs going forward.
    - Include the operations of this agency in the budget.
  - Authorities have expressed intention to establish such an agency as part of carving out government-directed loans from bank balance sheets.
- State deposits and competition:
  - All deposits of the state budget should gradually be directed from banks to the NBRB, in line with repayment schedules of corresponding loans.
  - Deposits of state-owned enterprises should be offered to banks on a competitive basis.
- Privatization of banks:
  - Ongoing bank privatization can bring long-term benefits if properly conducted: enhanced risk management, better resource allocation, and financial sector deepening.
  - Authorities are encouraged to engage a qualified, experienced, and reputable consultant to analyze financial condition of each bank slated for privatization, assess strategic options, and develop a time-bound restructuring and pre-privatization plan.
  - Privatization transactions should aim to attract strategic investors capable of know-how and technology transfer, as well as reliable funding support.
  - Context note: At the time of writing, authorities intend to sell minority stakes in the two largest banks and controlling stakes in two other large banks; a special working group on privatization of Belarusbank was formed in mid-2008.

### Developmental issues — Non-bank financial institutions
- Insurance sector reforms suggested:
  - Grant private insurers more freedom; allow private companies to offer mandatory insurance (example: motor third party liability).
  - The requirement for insurers to reinsure a gradually increasing share in excess of retention limits with the Belarusian National Reinsurance Organization:
    - Is damaging to effective competition and may result in significant concentration of risk.
  - Tax treatment:
    - All insurance companies should be subject to the same degree of taxation treatment.
    - Current practice: premium paid for employee benefits are not tax deductible for enterprises unless paid to state-owned insurance companies.
- Securities market development:
  - Strengthen legal and regulatory framework for protection of minority investor rights.
  - Accelerate privatization program to increase supply of traded shares.
  - Ministry of Finance should design and implement a plan to strengthen government debt management to develop a domestic government bond yield curve for benchmarking non-government debt securities.
  - Recent steps: ban on trading of shares under the mass privatization program was lifted; new rules require all equity trades to take place on-exchange.

### Access to finance
- Low financial intermediation and access indicators:
  - As of March 2008, loans per capita in Belarus: an equivalent of US$415.
  - Comparative figures: Russia US$939; Kazakhstan US$1,370.
  - Per capita deposits, ATM penetration, and branch penetration are below neighboring countries.
- MSME finance:
  - Only several (mostly small) banks actively work with micro, small, and medium-sized enterprises (MSME).
  - Some MSME lending is backed by donor-financed credit lines (e.g., EBRD’s Microlending Program).
  - Cost of MSME services remains relatively high; only a small fraction of Belarusian entrepreneurs receive these services.
  - Provision of MSME loans in regions is much weaker than in Minsk.
- Policy options to facilitate access:
  - NBRB should consider modifying formulae for calculating the ceiling for microloans granted under the simplified approval procedure (current formula imposes unnecessary constraints).
  - Contract enforcement is strong, but serious barriers remain to foreclosure of personal residences taken as collateral; these are expected to be addressed by the recently enacted Law on Mortgages.
  - Limited availability of long-term credits may be expanded by attracting additional donor resources.

### Appendix I — Status of key 2004 FSAP recommendations (selected)
- High priority items:
  - Commence fundamental financial sector reform to stop or wind back policy of recommended lending:
    - Policy of directed lending has not been stopped or even scaled back, but it will be curtailed in the context of the Stand-By Arrangement.
  - Develop plan for bank restructuring (remove nonperforming recommended loans; change government banks’ boards; refrain from measures creating moral hazard; eliminate caps on lending rates):
    - No action on removing nonperforming recommended loans, though share of NPLs declined markedly since 2004.
    - Government decree No 694 of May 16, 2008, specified duties of bank directors nominated by the government.
    - Directing deposits of state-controlled entities continues; no action to end this.
    - Caps on lending rates and informal recommendations: Eliminated in December 2009.
  - Increase NBRB independence and provide banking supervision greater autonomy:
    - NBRB resolution of November 15, 2005, assigned responsibility for banking supervision to the First Deputy Chairman of the NBRB and expanded supervision resources.
  - Enhance and better enforce supervisory remedial measures:
    - Worsened: 2006 Banking Code modified list of NBRB’s remedial measures by eliminating monetary penalties.
- Medium term and developmental items:
  - Accelerate transition to IFRS:
    - In process. NBRB regulation of September 27, 2007, requires banks to prepare annual financial statements based on both Belarusian accounting standards and IFRS, starting from 2008.
  - Approve new structure of deposit insurance:
    - Done. New deposit insurance law passed July 2008, effective January 2009.
  - Phase out golden share rule:
    - Done. Golden share rule for banks eliminated by Presidential decree of August 24, 2006; golden share rule for other corporate entities eliminated by Presidential decree of March 4, 2008.
  - Other recommendations on insurance sector opening and supervisory strengthening:
    - No action.

### Appendix II — Payment system recommendations: status highlights
- Intraday credit and reserve use:
  - Intraday credit facility is in place.
  - Share of required reserves usable for payment purposes increased:
    - On rubel-denominated liabilities: from 10 to 30 percent in 2005.
    - On foreign currency liabilities: from 0 to 30 percent in 2007.
- Risk analysis and contingency arrangements:
  - NBRB reported its approach in Protocol of Financial Stability Committee of December 26, 2007; payment system risks presented in Chapter V of the Financial Stability Report of July 2008.
  - NBRB instruction of May 28, 2008, on payment system oversight includes payment system risk analysis and minimization.
  - Contingency plan dated June 30, 2005, formulates procedures to ensure uninterrupted functioning in an emergency.
- Efficiency and fees:
  - NBRB regulation of April 27, 2007, aims to transfer all interbank payments to BISS during 2008; payment fees reviewed and decreased as part of the transfer.
- Governance and oversight:
  - New Concept of payment system oversight (July 20, 2007) defines NBRB oversight function.
  - NBRB regulation on organization and implementation of payment system oversight of May 28, 2008, provides methodological basis.
  - Fees charged to banks are now paid directly to the NBRB; number of staff in BISS was reduced.

### Appendix III — Recent structural developments and key financial statistics (selected)
- Growth and scale:
  - Total assets of financial institutions increased to BYR 54 trillion in June 2008, up from BYR 16 trillion in December 2004.
  - BYR 54 trillion was equivalent to only around 50 percent of GDP.
- Sector composition:
  - Nonbank financial institutions account for less than 2 percent of total financial system assets.
- Banking sector concentration and ownership:
  - As of June 2008, there were 28 banks operating in Belarus.
  - Five largest banks accounted for 84 percent of the market share (in terms of assets) as of June 2008.
  - Four of the five largest banks are state-owned.
  - Combined market share of all state-owned banks was 76 percent as of June 2008.

*Source: IMF staff report (text provided from the specified content unit).*

### APPENDIX IV

### APPENDIX IV — Belarus: Stress Tests

### Methodologies and assumptions
- Stress tests were based on end-June 2008 data and implemented jointly by the FSAP update team and NBRB staff using a top-down approach.
- Results were calculated for all 28 commercial banks individually, for the aggregate banking system, and for several peer groups of banks.
- No specific adjustments to pre-shock capital adequacy ratios were made despite under-provisioning of long-term loans being an issue.
- A variety of sensitivity stress tests were undertaken covering:
  - Deterioration in the credit portfolio.
  - Fluctuations in the exchange rate.
  - Fluctuations in domestic and foreign interest rates.
  - Sudden liquidity withdrawals.
- Shocks were calibrated using historical experience of Belarus.
- Three macroeconomic scenarios were considered:
  - Two scenarios: immediate increase in energy import prices to international levels, leading to a decrease in GDP growth, an increase in interest rates, and pressures on the exchange rate. One assumed the NBRB could withstand pressures on the rubel with only moderate depreciation; the other assumed a sharp currency depreciation (devaluation).
  - Third scenario: a significant increase in employee wages scheduled within the next two years, causing pressure on corporate profit margins, a possible increase in NPLs (notably in the agricultural sector), higher inflationary pressures, and higher interest rates.
- Peer groups: banks classified by size (large: market share in total system assets above five percent; medium-sized: share between one and five percent; small: share below one percent) and by ownership (state-owned, private domestically-owned, foreign-owned).

### Results — Capitalization and credit risk exposure
- Aggregate capital adequacy ratio (CAR): 17.1 percent.
- Baseline capital adequacy ratio for small banks: almost 40 percent.
- Under an immediate increase in imported energy prices (assuming currency reserves sufficient to withstand rubel pressure):
  - Aggregate CAR would shrink by around one third but remain well above the 8 percent threshold.
  - Only three banks with a combined share of 19 percent in total assets would fall below the 8 percent threshold.
- Assuming the energy-price shock is followed by a devaluation of the rubel:
  - System CAR would fall to just over 8 percent.
  - Several large and mid-sized banks would be severely affected.
- Sensitivity analysis highlights credit risk as the main driver of these results:
  - Increase in interest rates would pressure credit quality indirectly because most loans have floating interest rates.
  - Depreciation of the rubel would create problems servicing foreign currency-denominated loans, though this risk is less important in Belarus than in many other Eastern European countries because foreign currency loans are predominantly issued to the corporate sector (naturally hedged through exports).
  - Direct effects of interest rate risk are minor; direct effects of foreign exchange rate risk are insignificant due to almost matched net positions in foreign currencies.
- Concentration risk:
  - Assuming a loss given default of 45 percent, the default of the five largest debtors would leave four banks representing 27 percent of total assets undercapitalised with a CAR below 8 percent.

### Results — Liquidity risk
- A sudden withdrawal of 20 percent of household and corporate sector deposits would cause:
  - Aggregate current liquidity ratio (assets with remaining maturity < one month over liabilities with remaining maturity < one month) to fall from almost 100 percent to below 50 percent.
  - Large banks' current liquidity ratio to fall to 33 percent (or only one half of the minimum regulatory requirement).
- Foreign funding vulnerability:
  - A hypothetical withdrawal of 25 percent of liabilities to non-residents would cause current liquidity of three banks, including some large banks, to fall below the minimum requirement.

### Status of adjustments to banking data for stress testing (summary of Table 5)
- 2004 FSAP adjustment background:
  - In 2004 FSAP, aggregate CAR was reduced by 6.4 percentage points after adjustments for under-provisioning and other factors.
  - Since 2004, the magnitude of possible over-capitalization related to these adjustments has decreased; as of June 2008, it was around 2-3 percentage points.
- 1. Formation of general provisions:
  - Recommendation: assume general provisions equal to 2 percents of total loans and subtract from regulatory capital.
  - Status: In May 2007, NBRB authorized banks to create general provisions. Banks are required to form and maintain a reserve fund equal to 15 percent of the authorized capital. As of mid 2008, the size of this reserve fund was approximately equal to 2 percent of the total loan book.
- 2. Increase in specific provisions for loans prolongated by official decrees:
  - 2004 assumption: 70 percent of rescheduled loans to agricultural and industrial enterprises were loss and should be fully provisioned.
  - Status: Over 90 percent of such loans are concentrated in one large bank. NBRB estimates provisioning these loans would lead to a decrease of the aggregate CAR by 0.2 percentage points; impact on system CAR would be insignificant.
- 3. Increase in specific provisions for estimated underreported NPLs:
  - 2004 assumption: six largest banks need to increase provisions for bad loans by 10 percent.
  - Status: NBRB reports major improvement; under-reporting revealed in recent onsite inspections is insignificant. A respective adjustment would result in only around 0.05 percentage points decrease in the aggregate CAR.
- 4. Increase in specific provisions for the unclassified part of long-term NPLs:
  - 2004 assumption: specific provisions for long-term NPLs should be increased by 12 times based on remaining maturity and payment schedule assumptions.
  - Status: NBRB estimated provisioning for unprovisioned long-term NPLs (remaining maturity over one year) using short-term NPL ratio as proxy would result in a 2 percentage points decrease in the aggregate CAR. No adjustments were made in the 2008 FSAP stress tests for unclassified long-term NPLs; insufficient provisioning remains a relevant issue.
- 5. Reduction in the amount of revaluation accounts included in regulatory capital:
  - 2004 assumption: include only 50 percent of revaluation accounts in regulatory capital (instead of fully including them as Tier II).
  - Status: The share of revaluation accounts in total capital has been gradually falling from 30 percent in 2001 to [text truncated in source].

*Source: APPENDIX IV — Belarus: Stress Tests (FSAP update), end-June 2008 data.*

### 14.6 percent in 2004, to 11 percent as of September

### _cr0930 - 14.6 percent in 2004, to 11 percent as of September

### Capital Adequacy and Stress Testing Results (Table 6)
- Baseline CAR (prudential minimum: 8.0 percent):
  - ALL: 17.1
  - L: 15.9
  - M: 17.3
  - S: 39.4
  - SOB: 16.6
  - FB: 17.8
  - PB: 32.0
- Sensitivity analysis — Credit risk (selected shocks and resulting CARs):
  - Increase of NPLR by 5pp:
    - ALL: 14.8
    - L: 13.4
    - M: 15.4
    - S: 38.2
    - SOB: 14.2
    - FB: 15.9
    - PB: 30.7
  - Increase of NPLR by 10pp:
    - ALL: 12.4
    - L: 10.9
    - M: 13.4
    - S: 37.0
    - SOB: 11.6
    - FB: 13.8
    - PB: 29.3
  - Increase of NPLR by 15pp:
    - ALL: 9.8
    - L: 8.2
    - M: 11.3
    - S: 35.7
    - SOB: 8.9
    - FB: 11.6
    - PB: 27.9
- Sensitivity analysis — Sectoral losses (increase of lost loans by sector):
  - Households by 15pp:
    - ALL: 14.1
    - L: 12.9
    - M: 14.0
    - S: 36.9
    - SOB: 13.7
    - FB: 14.4
    - PB: 30.3
  - Corporates by 15pp:
    - ALL: 8.0
    - L: 6.2
    - M: 10.2
    - S: 35.3
    - SOB: 6.8
    - FB: 10.8
    - PB: 27.2
  - Agriculture by 50pp:
    - ALL: 11.5
    - L: 9.1
    - M: 17.1
    - S: 39.2
    - SOB: 9.2
    - FB: 17.7
    - PB: 31.9
- Concentration credit risk (defaults with LGD=45%):
  - Default of largest debtor:
    - ALL: 16.1
    - L: 14.9
    - M: 16.2
    - S: 38.2
    - SOB: 15.6
    - FB: 16.7
    - PB: 30.7
  - Default of 5 largest debtors:
    - ALL: 13.2
    - L: 12.1
    - M: 13.2
    - S: 35.2
    - SOB: 12.9
    - FB: 13.4
    - PB: 26.7
  - Default of 10 largest debtors:
    - ALL: 10.9
    - L: 9.8
    - M: 10.8
    - S: 33.1
    - SOB: 10.7
    - FB: 10.9
    - PB: 23.4
- Foreign exchange induced credit risk (NPLR responses noted):
  - Depreciation of Belarusian Ruble by 10% (NPLR: +67%):
    - ALL: 16.9
    - L: 15.6
    - M: 17.1
    - S: 38.9
    - SOB: 16.4
    - FB: 17.4
    - PB: 31.5
  - Depreciation by 20% (NPLR: +175%):
    - ALL: 16.6
    - L: 15.3
    - M: 16.8
    - S: 38.6
    - SOB: 16.2
    - FB: 17.0
    - PB: 31.1
  - Depreciation by 30% (NPLR: +281%):
    - ALL: 16.3
    - L: 15.1
    - M: 16.6
    - S: 38.2
    - SOB: 15.9
    - FB: 16.6
    - PB: 30.9
- Interest-rate induced credit risk (NPLR responses noted):
  - Increase of Belarusian interest rates by 500bp (NPLR: +215%):
    - ALL: 16.2
    - L: 14.9
    - M: 17.0
    - S: 38.8
    - SOB: 15.6
    - FB: 17.3
    - PB: 31.4
  - Increase of Belarusian interest rates by 1000bp (NPLR: +392%):
    - ALL: 15.5
    - L: 14.0
    - M: 16.7
    - S: 38.5
    - SOB: 14.7
    - FB: 16.9
    - PB: 31.3
- Market risk — FX and interest rate scenarios (selected):
  - Depreciation of Belarusian Ruble by 30% (FX risk):
    - ALL: 17.0
    - L: 15.7
    - M: 17.3
    - S: 39.6
    - SOB: 16.5
    - FB: 17.9
    - PB: 32.2
  - Increase of Belarusian interest rates by 1000 bp (interest rate risk):
    - ALL: 14.9
    - L: 12.9
    - M: 19.5
    - S: 38.9
    - SOB: 13.4
    - FB: 18.6
    - PB: 30.3
  - Decrease of Belarusian interest rates by 500 bp:
    - ALL: 18.7
    - L: 17.9
    - M: 15.8
    - S: 39.7
    - SOB: 18.7
    - FB: 17.4
    - PB: 33.2

### Macro Scenarios and Implied NPLR Changes (Table 6, Macro Scenarios)
- Energy Price Shock:
  - Aggregated CAR under shock: ALL: 12.6, L: 11.3, M: 12.4, S: 36.2, SOB: 12.1, FB: 13.3, PB: 28.3
- Depreciation of the Belarusian Ruble by 5% scenario (components listed):
  - Increase of Belarusian Rubel interest rates by 660bp
  - Implied overall shocked NPLR: 11.0% , increase: +9.1pp, +464% (3)
  - Increase of non-domestic interest rates by 100bp
  - Increase of NPLR due to GDP-decline by 5pp
- Energy Price Shock with Currency Breakdown:
  - Aggregated CAR: ALL: 8.1, L: 6.6, M: 7.9, S: 33.4, SOB: 7.5, FB: 8.7, PB: 25.1
  - Depreciation of the Belarusian Ruble by 30%
  - Increase of Belarusian Rubel interest rates by 1000bp
  - Implied overall shocked NPLR: 19.6% , increase: +17.6pp, +900% (3)
  - Increase of non-domestic interest rates by 200bp
  - Increase of NPLR due to GDP-decline by 10pp
- Accelerated Wage Increase:
  - Aggregated CAR: ALL: 16.1, L: 14.9, M: 15.7, S: 38.3, SOB: 15.6, FB: 16.5, PB: 30.6
  - Increase of Belarusian Rubel interest rates by 300 bp
  - Implied overall shocked NPLR: 5.2% , increase: +3.3pp, +167% (3)
  - Increase of corporate NPLR by 1pp
  - Increase of agriculture NPLR by 5pp

Notes from Table 6:
- NPLR is defined as the ratio of NPLs in total loans sensitive to the risk factor under consideration.
- Sub-groups by size: large banks (L) share in total assets above 5 percent; medium (M) between 1 and 5 percent; small (S) below 1 percent.
- Sub-groups by ownership: state owned banks (SOB), foreign owned banks (FB), domestic privately owned banks (PB).

### Liquidity Stress Testing Results (Table 7)
- Baseline Current Liquidity Ratio (CLR) (prudential minimum: 70):
  - ALL: 97
  - L: 93
  - M: 102
  - S: 146
  - SOB: 89
  - FB: 110
  - PB: 157
  - Distribution (by CLR bands):
    - < 0.35: 0.0
    - 0.35-0.7: 0.0
    - 0.7-1: 64.4
    - > 1: 35.6
- Domestic deposit withdrawals:
  - Withdrawal of 10% private sector deposits:
    - ALL: 75
    - L: 66
    - M: 94
    - S: 142
    - SOB: 58
    - FB: 104
    - PB: 159
    - Distribution after shock: 60.2, 12.3, 27.5 (bands)
  - Withdrawal of 20% private sector deposits:
    - ALL: 48
    - L: 33
    - M: 84
    - S: 132
    - SOB: 89
    - FB: 146
    - PB: 323
    - Distribution after shock: 59.9, 9.8, 22.7, 7.6
  - Withdrawal of 30% private sector deposits:
    - ALL: 31
    - L: 18
    - M: 69
    - S: 118
    - SOB: 38
    - FB: 121
    - PB: 469
    - Distribution after shock: 75.4, 7.0, 15.7, 1.9
- Non-domestic withdrawal of liabilities to non-residents:
  - Withdrawal of 25%:
    - ALL: 83
    - L: 80
    - M: 76
    - S: 139
    - SOB: 79
    - FB: 89
    - PB: 148
    - Distribution: 59.9, 26.6, 12.2
  - Withdrawal of 50%:
    - ALL: 70
    - L: 68
    - M: 68
    - S: 136
    - SOB: 68
    - FB: 68
    - PB: 147
    - Distribution: 69.5, 17.5, 11.8
  - Withdrawal of 75%:
    - ALL: 55
    - L: 54
    - M: 26
    - S: 133
    - SOB: 56
    - FB: 146
    - PB: 64
    - Distribution: 28.6, 51.4, 16.3, 3.7

Notes from Table 7:
- The Current Liquidity Ratio is the ratio of liquid assets over liquid liabilities, both with a maturity up to one month.
- Sub-group definitions for size and ownership are as in Table 6.

### Summary Assessment of Observance of the Basel Core Principles (Annex I)
- Assessment context:
  - Performed in accordance with the October 2006 Core Principles Methodology.
  - Conducted in September 2008 in the context of the IMF-World Bank FSAP Update mission.
  - Assessment covers compliance with both essential and additional criteria.
  - Assessors: Joerg Genner (German Supervisory Authority) and Fernand Naert (formerly Belgium Supervisory Agency).
- Information and methodology used:
  - (i) NBRB self-assessment in September 2008; (ii) detailed interviews with NBRB staff; (iii) review of laws, regulations, and supervisory documentation; (iv) contributions from FSAP Update team.
- Institutional and market setting (as of June 2008):
  - 28 licensed commercial banks: five state-owned banks, seven locally-owned private banks, 16 foreign owned banks.
  - Five banks dominate with combined market share of over 80 percent of total assets.
  - Financial system dominated by banks; insurance sector small; other non-bank financial institutions almost non-existent.
- NBRB structure:
  - NBRB empowered by the Banking Code as supervisory, regulatory, and licensing authority.
  - GDBS (General Directorate for Banking Supervision) responsible for licensing and supervising; subdivided into:
    - Banking System Stability Analysis Department
    - Off-site Supervision Department
    - Inspection Department
    - Prudential Supervision Methodology Department
    - Registration and Licensing Division
- Preconditions for effective supervision:
  - Broadly in place, but gaps remain.
  - Short-term macroeconomic outlook uncertain.
  - State influence through ownership of major banks and governance concerns in some private banks.
  - Information infrastructure (accounting and asset classification) and evolving legal framework may affect supervision quality.
- Main findings:
  - NBRB has made substantial progress toward international best practice in bank supervision.
  - GDBS applies an appropriate mix of off-site analysis and on-site inspections and leverages external auditors and, to a limited extent, banks’ internal audit and risk management.
  - Majority of crucial issues from the 2004 BCP assessment largely addressed.
  - External distortive factors impair risk management and assessment:
    - State program lending and interest rate ceilings.
    - Weak accounting and prudential standards for identification and write-offs of impaired loans.
  - Despite distortions, assessors view GDBS as having succeeded in managing resulting challenges to date.

### Summary Compliance with Basel Core Principles — Key Comments (Table 8, selected CPs)
- CP 1 (Objectives, independence, powers, transparency, cooperation):
  - Legal framework adequate regarding responsibilities and objectives.
  - NBRB legally independent, but board composition includes government and banking sector representatives (Chairperson is member of government; Deputy Prime Minister and a commercial bank board chair are board members).
  - Cases appear of pressure to exert forbearance on key prudential requirements to enable financing of state programs.
  - Legal protection exists for supervisors; arrangements for information exchange in law, but effectiveness questioned.
- CPs 2–5 (Licensing and structure):
  - Use of "bank" limited to licensed institutions; licensing criteria comprehensive and include “fit and proper” tests for managers, review of strategy, business plans, internal controls.
  - Suitability tests of shareholders are not performed.
  - GDBS has sufficient power to address prudential concerns from ownership and investments.
- CPs 6–17 (Prudential regulations and requirements):
  - Framework covers credit, market, liquidity, operational, and interest rate risk.
  - Capital adequacy regime based on simpler approaches of Basel Capital Accord.
  - National accounting weaknesses and significant state program lending distort reported capital adequacy ratios.
  - Capital adequacy requirements on a consolidated basis are in process of implementation.
  - Room to further advance forward-looking qualitative risk assessments.
- CP 18 (Abuse of financial services):
  - Legal framework covers basic elements: “know-your-customer” rules and a financial monitoring unit collecting data on large and suspicious transactions.
  - GDBS monitors effectiveness of arrangements as part of on-site work.
- CPs 19–25 (Methods of ongoing supervision):
  - NBRB performs off-site analysis and on-site inspections and receives comprehensive regulatory reports.
  - Regular contacts exist between bank senior management/board members and GDBS officers.
  - Broad range of remedial actions available to GDBS.
  - Exchange of information and cross-border cooperation with foreign (home) supervisors are limited; NBRB has not been invited to join colleges of supervisors nor are there regular contacts despite expectations.

- Selected detailed CP comments (Table 8):
  - CP 1.2: Board composition raises independence concerns; instances of pressure to relax prudential requirements to support state programs.
  - CP 3 (Licensing criteria): NBRB has no right to refuse to amend/supplement a bank’s license on grounds that structure will hinder effective supervision; professional skill requirements limited; founders' capability to provide financial support not assessed.
  - CP 4 (Transfer of significant ownership): NBRB empowered but not formally required to oversee ongoing suitability of significant shareholders; no requirement to inform NBRB of developments affecting suitability; no power to suspend voting rights or request dilution of shareholdings.
  - CP 6 (Capital adequacy): GDBS cannot set individual bank capital requirements or make case-by-case deductions from regulatory capital; national accounting standards depart significantly from international best practices.
  - CP 7 (Risk management process): Vested interests and practices (recommended lending, direct investments) impair risk-taking decisions; no obligation on senior management to ensure adequate risk management; mechanical formulae dominate over qualitative judgment.
  - CP 8 (Credit risk): Sufficient framework exists, but recommended lending and state guarantees distort credit risk management; awareness of FX- and interest-rate-induced credit risk and how they are addressed remains unclear.

*Source: IMF staff assessment as presented in the provided content unit.*

### 9. Problem assets,

### 9. Problem assets, provisions, and reserves

### Impairment recognition and provisioning (Problem assets)
- The regulations neither requires nor encourages an impairment test with regard to all loans granted to the same borrower or group of borrowers in the event of an overdue payment.
- A delinquent payment does not trigger in practice the provisioning or write-off of the entire exposure, potentially understating losses already incurred.
- A recommendation of the GDBS not to exceed indicative thresholds of non-performing loan ratios further reduces the likelihood that impairments are appropriately recognized and accounted for.
- The impairment test does not apply on the entire exposure to a borrower or a group of borrowers.
- There are potentially significant differences in evaluating bank assets under national accounting standards and IFRS.

Recommended actions (from Table 9)
- Encourage early recognition of losses and immediate write-offs.
- Extend the scope of impairment tests to cover all exposures of a borrower/group of borrowers.
- Ensure more realistic assessments of the current value of future cash flows.
- Increase frequency of on-site inspections and/or perform target inspections at individual banks as required.
- Identify and assess differences in reporting data based on the national standards and IFRS.

### Large exposure limits
- The Banking Code sets prudential limits to restrict bank exposures to single counterparties or groups of connected counterparties that are in line with international best practices.
- Corresponding large exposure limits are to be introduced on a consolidated basis in the course of the implementation of consolidated supervision.

### Exposure to related parties
- The framework for dealing with exposures to related parties and the corresponding potential risks is in line with international standards.
- Exertion of control is not explicitly mentioned in the Banking Code and banking supervisors do not have discretion to apply it on a case by case basis.
- Given the ownership structure of the banking sector, the existence of recommended/guaranteed lending, and the composition of the NBRB supreme body, a significant part of lending—especially of the state owned banks’ lending—should be qualified as related lending from a prudential perspective and be treated accordingly.

Recommended actions (from Table 9)
- Incorporate concept of exertion of control in the Banking Code, and grant discretion to apply it on a case by case basis.
- Remove/limit external factors which impair decisions on risk taking and increase risk of supervisory forbearance.

### Country and transfer risks
- (Section listed; no substantive detail provided in source excerpt.)

### Market risks
- (Section listed; no substantive detail provided in source excerpt.)

### Liquidity risk
- The shallowness of the interbank market makes banks vulnerable to liquidity risks, in particular as banks depend also on foreign funding.

### Operational risk
- The framework with regard to operational risk appears to be reasonably adequate.
- Current reporting and information requirements towards the NBRB do not allow fully adequate periodical assessment of banks’ internal systems and procedures for coping with operational risks.
- There is no practice to evaluate procedures of risk management at the level of bank groups and bank holdings yet.

### Interest rate risk in the banking book
- The present regime is reasonably commensurate with the nature of banking structures and operations in Belarus, though there are no enforceable instructions.
- The NBRB’s internal procedures with regard to assessing interest rate risk in the banking book and those for the assessments of the same during inspections need better formalization.

### Internal control and audit
- The overall regime for internal control and internal audit appears to be adequate with regard to the size, nature and complexity of banking entities in Belarus.
- The role and composition of supervisory boards should be significantly enhanced and the NBRB should be empowered to oversee their designation and functioning.

### Abuse of financial services (AML/CFT)
- The key role in AML/CFT is entrusted to a department of the State Control Committee; the functioning thereof has not been reviewed by the FSAP-team.
- The overall framework and its functioning were assessed in mid-2008 by a team commissioned by the Eurasia group; the report of this mission is not yet available, so a caveat is to be formulated with regard to the effectiveness of the overall regime in this area.
- Prudential regulations and supervisory practice with regard to AML/FT appear to be reasonably well established and functioning.
- NBRB does not require banks to report to it, in parallel with their reporting to the SCC.
- There are no specific legal or regulatory requirements with regard to “publicly exposed persons.”

Recommended action (from Table 9)
- Move to a more qualitative approach and provide for a proper publicly exposed persons regime.

### Supervisory approach and techniques
- Legislation does not establish mandatory requirements for banks to submit on their own initiative information about significant unfavorable developments in their business, except the explicitly indicated information; communication of such events to the supervisor should be mandatory.
- The overall supervisory review process appears to be adequately structured and is effectively functioning.
- Exposure to possible undue external interference at the decision-making stage remains a major weakness.
- Absence of suitability requirements for members of the Supervisory Board of banks is a problem.

Recommended actions (from Table 9)
- Progressively move to a more qualitative approach.
- Leverage off external and internal auditors work.
- Require filing of banks internal risk management and audit reports for off-site analysis.
- Improve domestic cooperation on bank supervisory issues.
- Enhance confidentiality of prudential information.

### Supervisory reporting
- (Section listed; no substantive detail provided in source excerpt.)

### Accounting and disclosure
- National accounting standards for banks differ from the IFRS mostly in accounting for loans with state subsidized interest rates.
- The existence of two parallel accounting standards and the reliance for prudential reporting on national accounting may impede proper assessment of banks’ financial position by the NBRB.
- Limited number of qualified auditors with knowledge of the IFRS constitutes a significant impediment for the enhancement of external audit quality and building synergies with supervision.

Recommended actions (from Table 9)
- Pass to a single set of accounting standards, preferably IFRS.
- Promote enhancement of the quality the audit profession.

### Corrective and remedial powers of supervisors
- The NBRB has a wide range of corrective and remedial powers, but it cannot limit dividend payout by banks as a preventive measure.
- The NBRB also has no power to remove all executive board members of banks.

Recommended actions (from Table 9)
- Enable the NBRB to restrict or reinstate the powers of all senior managers in banks.
- Enable the NBRB to stop or limit dividend payout by banks as a preventive measure.
- Grant the power to set capital adequacy requirements for individual banks to address specific risk profiles or weaknesses in the risk management processes.
- Grant the power to make deductions from regulatory capital on a case by case basis if its capacity to absorb losses is doubtful.

### Consolidated supervision
- Supervision of banks on a consolidated basis is being introduced, but prudential norms still have to be applied to all aspects of the business conducted by the groups.
- The NBRB has identified a number of bank holding groups.
- Reporting on a consolidated basis, financial as well as prudential, has been introduced.
- Capital requirements, and prudential limits on large exposures and on exposures to related parties as well as other risks will be imposed on a consolidated basis in 2009.

Recommended actions (from Table 9)
- Continue to implement prudential requirements on a consolidated level.
- Hold the major bank in a group responsible for compliance with the requirements resulting from supervision on a consolidated basis in cases where the parent of the group is not itself subject to supervision.
- Require consolidated supervision by home supervisor for groups acquiring banks in Belarus.

### Home-host relationships
- The NBRB has established contacts with foreign supervisors of banks with representative offices and establishments in Belarus.
- Exchange of information or strategies to that effect are not yet elaborated, since some foreign supervisors appear to be reluctant to do so.

*Source: _cr0930 - 9. Problem assets,*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr0930.pdf_