## _cr16299 - 2016. The FSAP findings were discussed with the ## Source details **Canonical URL:** [_cr16299 - 2016. The FSAP findings were discussed with the](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16299.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16299.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16299.pdf.json) --- ### FSAP purpose, team, and preparation - Purpose: - Assess stability of the financial system as a whole; not individual institutions. - Identify key sources of systemic risk and policies to enhance resilience to shocks and contagion. - Operational, legal, and fraud risks are excluded. - FSAP team and report: - Mission chiefs: Sònia Muñoz (IMF) and Aquiles Almansi (WB); deputy mission chiefs: Mustafa Saiyid (IMF) and Angela Prigozhina (WB). - Contributors include Tanai Khiaonarong, Peter Lohmus, Pavel Lukyantsau, Torsten Wezel, Rasool Zandvakil (MCM), Beata Jajko (EUR), José Tuya, José Rutman, Rodolfo Wehrhahn (IMF consultants); Pasquale Di Benedetta, Henri Fortin, Natalie Manuilova, Harish Natarajan, Jan Nolte, Juan Ortiz (WB); Adolfo Rouillon (WB consultant). - Report prepared by Sònia Muñoz and Mustafa Saiyid with FSAP contributions. - Date on report: July 25, 2016. - Mission meetings: - Met with the Governor of the National Bank of the Republic of Belarus, Ministers of Finance and Economy, Chairman of the Development Bank, senior state-owned, foreign and private banks, insurance companies, stock exchange, research organizations, law firms, Ministry of Justice, tax authorities, accounting and auditing firms, and professional bodies. ### Executive summary — major findings - State dominance and systemic vulnerabilities: - State-dominated financial sector with deep structural problems and negative external spillovers. - Government directs a large proportion of loans from state-owned banks to unhedged state-owned corporates. - Development Bank (DB), created in 2011 to centralize directed lending, has grown rapidly and assumed systemic significance. - External sector and reserves: - International reserves: US$4.3 billion as of end-May, equivalent of two months of imports. - Significant negative spillovers from Russia. - Exchange rate: depreciated sharply, by nearly 40 percent versus the U.S. dollar during 2015. - Inflation: trended downwards, falling to 12 percent by end-2015. - Credit risk and NPLs: - Banks’ reported NPLs rose to over 12 percent of total loans in April 2016 from 7 percent in December 2015. - Only about 40 percent of reported NPLs are provisioned. - Solvency stress tests, adjusted partly for underprovisioning and evergreening, confirm very high credit risk. - Credit concentration risk large at individual banks; indirect credit risk from unhedged foreign-currency borrowers remains a concern. - Liquidity risk: - High foreign currency liquidity risk due to dollarization of deposits and limited access to foreign currency liquidity. - Liquidity facilities of the NBRB and mandatory reserve requirements are in local currency. - Term deposits can be pre-cancelled by depositors at no penalty, potentially underestimating liquidity needs. - Interbank payment system carries liquidity, operational, and legal risks. - Insurance and FMIs: - Small, mainly state-owned insurance sector exposed to significant contagion risk from banks. - Risk management framework for financial market infrastructures needs a stronger legal basis. - Oversight and forbearance: - Banking and insurance oversight constrained by lack of operational independence. - Adjustment and relaxation of prudential standards as forbearance have eroded market discipline. - Lack of detailed requirements on corporate restructuring has resulted in understatement of problem loans and evergreening. - Recent move of DB supervision to the NBRB will require additional skilled staff. ### Policy conclusions and priorities - Transition to independent and risk-based oversight: - Urgently required to address state dominance and enable independent risk-based financial oversight. - Reinforce capital requirements and strengthen risk analysis of liquidity needs in foreign currency. - Consolidation and reform of state-directed lending: - Consolidate state-directed lending in the DB and gradually phase it out. - DB should focus on viable development finance not served by commercial banks; strengthen governance, risk management, and supervision. - No further NPL transfers to the DB. - NPL resolution and corporate restructuring: - Comprehensive NPL resolution strategy alongside corporate restructuring. - Strong merits for delegating NPL resolution to an entity with wide powers for debt and enterprise restructuring, including privatization and advisory help. - Remove blanket government guarantees; improve credit risk management and governance in all state-owned banks. - Private sector NPLs: resolve using market-based solutions via enhanced bankruptcy, enterprise restructuring, and debt foreclosure frameworks. - Macroprudential measures to support dedollarization: - Gradual increase in the mandatory reserve requirement for foreign currency deposits to be held in foreign currency accounts. - Identification of unhedged foreign currency debtors. - Increase risk weight on exposures to unhedged debtors. - Standardize minimum sensitivity analysis that banks should apply to unhedged debtors. - Create Financial Stability Council with formal mandate; include subcommittee on crisis management. - Financial safety net and resolution framework: - Designate NBRB as agency responsible for bank resolution; need expanded resolution tools, additional skilled staff, and accountability. - New Emergency Liquidity Assistance (ELA) facility to provide collateralized emergency liquidity support to solvent banks is urgently needed. - Introduce strong measures to reduce banks’ foreign currency liquidity needs before considering ELA in foreign exchange. - Deposit Insurance Agency (DIA) should be allowed to provide funding for purchase & assumption transactions. - Consider limiting deposit insurance coverage and shortening payout period in line with international standards over time. ### Selected FSAP Key Recommendations (items and timing as listed) - Systemic Risks: - Conduct AQR for banks with significant differences between IFRS and prudential provisions (NBRB). — I - Apply Pillar 2 measures to specific banks to reinforce capital and prudential requirements (NBRB). — I - Conduct bottom-up solvency and liquidity stress tests for banks on a regular basis (NBRB). — NT - Increase the RR for foreign currency deposits, require its integration in foreign currency accounts at the NBRB and consider an increase in the daily maintenance requirement (NBRB). — NT - Consolidate and gradually phase out directed lending in DB (NBRB). — NT - Financial Oversight: - Strengthen loan provisioning by issuing standards on restructuring and interest accrual (NBRB). — I - Link temporary forbearance only to plans for strengthening specific banks (NBRB). — I - Initiate collection of data on unhedged borrowers in foreign currency (NBRB). — I - Consider an increase in the risk-weight of banks’ foreign currency loans to unhedged borrowers. — NT - Improve risk assessment for early termination of foreign currency term deposits (NBRB). — I - Improve design of liquidity indicators and supervision with focus on foreign currency liquidity risk (NBRB). — I - Develop risk-based insurance supervision with EWS, stress testing, and onsite risk inspection (MoF). — NT - Introduce a risk-sensitive capital regime for insurances and regulation following IAIS (MoF). — NT - Financial Stability Council should include a crisis management subcommittee including DIA (NBRB, MoF, MoE, DIA). — I - Financial Infrastructure: - Refine risk management framework to include all FMIs, risk-based scenarios and testing (NBRB). — I - Draft law and amend regulations to protect settlement finality, netting, and collateral (NBRB). — NT - Stress test payment system to assess sufficiency of liquidity under stressed conditions (NBRB). — NT - Governance: - Discontinue restrictions on operational independence of the NBRB (NBRB). — NT - Amend NBRB statute to introduce concept of independence for the NBRB (NBRB). — MT - Divest banks’ stakes due to resolution to avoid conflicts of interest as supervisor (NBRB). — MT - Discontinue employing resources and powers to enforce monetary policy or criminal law (NBRB). — NT - Strengthen insurance supervisor’s operational independence and remove conflicts of interest (MoF). — NT - Allow DB to lend only to viable projects not financed by commercial banks (NBRB). — NT - Amend Bankruptcy Law to upgrade priority of secured creditors and establish effective procedures for rehabilitating viable businesses (Government). — NT - Establish mechanisms to enable and incentivize out-of-court debt restructuring (Government). — NT - Restructuring and Financial Safety Nets: - Delegate NPL resolution to a single entity with powers for restructuring / privatization (NBRB). — I - Designate the NBRB as a resolution authority (Government). — NT - Establish comprehensive powers for bank recovery and resolution using FSB Key Attributes (NBRB). — I - Establish an ELA framework and define conditions for support (NBRB). — I - Require all banks to establish and test recovery plans; initiate planning for systemic banks (NBRB). — MT - Limit coverage of deposits, shorten the payout period over time and end NBRB's co-financing (DIA). — MT - Timing key: I — “Immediate” is within one year; NT — “near-term” is 1–3 years; MT — “medium-term” is 3–5 years. *Source: FSAP report prepared by Sònia Muñoz and Mustafa Saiyid, July 25, 2016.* --- ### Macroeconomic and balance-sheet pressures (public and private) - Macroeconomic impact: - Corporate profits falling and leverage rising, particularly private sector. - Corporate debt to equity rose to 50 percent in 2015Q1 from 26 percent at end-2012. - Household disposable income fell sharply during 2015. - Household sector debt about 8 percent of GDP. - Debt-servicing costs about 7.5 percent of household earnings on average. - Exchange rate depreciation of 40 percent in 2015 increased exposure of unhedged borrowers. - Fiscal and contingent liabilities: - Growing fiscal contingencies from government support to state-owned banks and SOEs. - Guarantees and recapitalizations have adversely affected public balances and added to public debt. - Weakening fiscal position could require sovereign issuance placed with banks. - Credit developments and real sector: - Overall credit growth to corporates and households fell sharply since 2013 and turned negative at a constant exchange rate during 2015. - Growth of state-directed lending almost halved, mainly due to high debt amortization. - Commercial real estate contracting; real estate loans still being offered. ### Financial structure and sector composition - Sector shares and concentration: - Commercial banks: about 85 percent of total assets and 73 percent of GDP. - Development Bank (DB): 7 percent of sector assets. - Insurance sector: 3 percent. - Leasing and microcredit: about 5 percent. - Largest 10 banks make up majority of banking system; top five and two foreign banks part of conglomerates. - Nearly 65 percent of total assets are state-owned; foreign banks account for 33 percent; domestic private banks 2 percent. - Lending to SOEs: 29 percent of banking assets at end-2015. - Claims on SOEs: 55 percent of all banks’ claims on the corporate sector. - Dollarization and cross-border linkages: - Just over 70 percent of banks’ deposits, mostly from households, are in foreign currency. - About 60 percent of loans, mostly to corporates, are in foreign currency. - Majority of external liabilities to banks located in Russia, followed by Germany and Austria; about 90 percent of these liabilities are interbank loans—over half exceeding a residual maturity of 1 year. - Cross-border asset exposure mostly denominated in US dollar due to correspondent accounts in the United States, followed by euros in Germany. - Development Bank and insurance: - DB does not take private deposits; funds mainly from government-guaranteed debt. - DB is fourth-largest institution by assets and responsible for about one-third of new directed lending. - Insurance sector: life business only 8 percent of overall insurance business; largest insurers are state-owned and comprise 90 percent (life), 60 percent (non-life) and 100 percent (reinsurance) of totals; insurance penetration low. ### Snapshot findings and indicators - Lending to SOEs: 29 percent of banking assets at end-2015. - Claims on SOEs: 55 percent of all banks’ claims on corporate sector. - Just over 70 percent of banks’ deposits in foreign currency. - About 60 percent of loans in foreign currency. - Exchange rate depreciation of 40 percent in 2015. - Banks typically require additional cashflow buffers—often as much as 50 percent more—on foreign currency lending. - Reported banks’ NPLs rose by more than 50 percent during the past year to reach 6.8 percent of gross loans at end-2015. - April data under national standards indicates NPLs over 12 percent. - Provisioning costs less than 40 percent of NPLs. - Banking sector return on equity fell to 10.4 percent at end-2015 from 15.3 percent at end-2014. - Overall banking sector CAR reached 18.7 percent at end-2015 following capital injections in the three largest banks. - System-wide liquidity declined to 26 percent at end-2015 compared with 30 percent a year earlier. - High loan-to-deposit ratio near 114 percent. --- ### Stress testing: methodology, scenarios, and main results - Scope and methodology: - Focused on 11 largest banks (95 percent of total bank assets) at end-December 2015 over a three-year horizon. - Solvency tests: bottom-up (BU) and top-down (TD) using regression-based satellite models and expert judgment. - Liquidity tests: LCR and NSFR proxies by currency and a conventional TD liquidity stress test evaluating mismatches for remaining maturity buckets. - Contagion risk: interbank and cross-border exposures using network approach. - Macroeconomic scenarios: - Baseline: IMF WEO projections as of February 2016. - Adverse I (V-shaped): deep recession in first year from sharp oil-price decline affecting Russia, followed by relatively quick recovery. - Adverse II (L-shaped): milder but longer-lasting shock with slower recovery and larger loss in output. - Debt service restructuring scenario based on corporate stress testing and evergreening adjustments. - Solvency stress test findings: - Baseline TD: two large banks likely have immediate need for recapitalization. - Under both adverse scenarios: five banks (two state-owned) with combined market share of 42 percent fall below regulatory minimum rate of 10 percent with projected capital shortfall at 2017Q1 of 1.1 percent of projected 2017 GDP. - Mission subtracted Basel III regulatory deductions effective February 2016, lowering overall CAR by 0.1 percentage point to 17.8 percent. - Two other small banks would fall below minimum required rate plus capital conservation buffer being phased in (adds 1.125 percent of RWA). - Hidden losses, evergreening, and corporate stress testing: - Hidden losses from non-recognition of restructured loans are sizable. - Interest Coverage Ratio threshold: EBIT should be at least 1.5 times interest payments. - Interest payment reductions scaled up by factor 1.9 (share of sampled SOE bank debt in total SOE bank debt: 52.6 percent). - Debt service restructuring scenario projects combined capital shortfall at 2017Q1 of 0.4 percent of projected 2017 GDP. - Mission increased actual provisions by individual shortfalls before applying stress. - Coverage ratio assumed to need increase by 10 ppt per year of stress (10 ppt in Adverse I; 20 ppt in Adverse II). - Liquidity stress test findings and foreign currency vulnerabilities: - LCR and NSFR suggest overall buffers of 170 and 130 percent respectively. - Short-term liquidity shortfall in individual foreign currencies, particularly Euro and Russian Ruble; about half the banks reporting such foreign currency exposures show ratios below 100 percent. - In Russian Ruble, individual LCRs as low as 3 percent. - Deposits in foreign currency are 63 percent of the total, of which only 10 percent belong to corporates. - Foreign currency term deposits represent 84 percent of total foreign currency deposits with estimated weighted average maturity of 9 months. - All NBRB liquidity mechanisms are in local currency; term deposits can be pre-cancelled by depositors at no penalty within five days; liquidity regulations assume term deposits are held to contractual residual maturity. - Contagion and payments findings: - Domestic interbank contagion risks appear limited; interbank loans make up 1.8 percent of banking system liabilities. - Direct cross-border contagion risks, particularly from Russia, are large; network analysis suggests sizeable effects on capital adequacy from foreign credit and funding shocks. - Insurance sector assets mainly in government bonds and bank deposits with state-owned banks; under adverse scenarios sector losses average about 10 percent of market capital, though some life companies could lose over 100 percent and some nonlife companies up to 65 percent. - Interbank payment system faces legal risks from ‘zero-hour rules’ and has not been stress-tested for default of largest participant and affiliates. ### Systemic liquidity management recommendations from stress tests - Increase average reserve requirement for foreign currency deposits to be held in foreign currency accounts; current unified RR for all deposits is 7.5 percent and held in local currency. - Implement a differentiated reserve rate to mitigate higher risks from foreign currency deposits and act as tax on foreign currency financial intermediation. - Raise daily fixed maintenance requirement (currently at 10 percent) gradually. - Strengthen supervisory assessment of liquidity needs, particularly in foreign currency. - Recalibrate the four prudential liquidity ratios by currency and compare with LCR by currency. - Assess banks’ ability to convert foreign currency-denominated domestic government and NBRB securities into foreign currency cash in stress. --- ### Supervisory framework, independence, and regulatory gaps - Progress and constraints: - Implemented: broad regulatory framework, offsite and onsite supervision, internal capital adequacy assessment process, enhanced bank risk assessment grading methodology. - Ongoing: implementation of Basel capital standards. - Governance reform: NBRB Board composition modified after 2009 FSAP to remove undue industry or political representation. - Constraint: state dominance complicates achieving risk-based supervision. - NBRB independence and legal constraints: - Banking Code: NBRB accountable to the President who approves and removes the Chair and the statutes. - Presidential decree regulates onsite inspections (coordination with State Control Committee) and limits regulatory reports to 13. - Approximately 50 percent of onsite special inspections in past two years were conducted to assist Prosecutor’s Office on criminal cases. - Recommendation: legislate checks-and-balances to ensure NBRB operational independence and accountability. - Supervisory tools and forward-looking measures: - NBRB can impose Pillar 2 capital add-ons and should use them to address heightened bank-specific risks. - Recommend imposing dividend restrictions well before capital breaches. - Risk analysis, liquidity and asset-quality assessment: - High exposure to unhedged foreign currency-denominated assets reduces effectiveness of liquidity ratios and interest rate GAP analysis. - Banks required to stress test; recommend systematic inclusion of cashflow analysis. - Gap: no detailed NBRB standards for recognizing restructured loans or upgrading restructured status; recommend standards on extending loans, re-negotiating interest rates, nonaccrual and upgrading after provisioning. - Empirical audits show higher IFRS provisions than NBRB prudential basis in some banks, reinforcing evergreening concerns and need for AQRs. - Cross-border supervision: - NBRB has signed supervisory agreements with 17 countries, including Russia. - EU supervisors refused some MoUs due to confidentiality equivalence assessments by EBA; EBA assessments announced within two years. - Recommendation: increase cross-border cooperation to cover all Belarusian subsidiaries of foreign banks. - Supervision of the DB: - DB supervision transferred to NBRB without increase in staffing; NBRB not operationally independent. - Recommended safeguards: revisit institutional arrangements, ensure adequate staffing and functional separation, provide training on wholesale lending and liquidity management, contract temporary expertise, and firewall reporting lines. - Insurance supervision: - Insurance supervisor has limited operational independence, conflicts of interest, no allocated budget discretion, and ISGD combines supervisory and sector development roles. - Solvency requirements based on Solvency I; supervision is compliance-focused rather than risk-based. - Recommendation: ensure independence of supervisors, remove conflicts of interest, establish risk-sensitive capital regime, and issue regulations on governance and risk management. - Financial market infrastructure (FMIs): - Draft new payment services law to protect settlement finality, netting, and collateral. - Establish stress testing program for payment system liquidity and business continuity plan: resume critical IT systems within 2 hours of disruptions. - Consider integrated approach to cyber resilience. - NBRB should refine FMI risk management framework, increase oversight resources, publicly disclose CPMI-IOSCO responses, and publish annual Financial Infrastructure Oversight report. ### Macroprudential framework and de-dollarization - Institutional development: - Create Financial Stability Council (FSC) co-chaired by NBRB Board chairman and Deputy Prime Minister; Secretary from NBRB Financial Stability Department; participants include MoF and MoE. - Mandate: tightly defined; recommend NBRB as macroprudential authority and lead of FSC. - Establish subcommittee for crisis coordination including DIA. - Implemented measures: - Capital conservation buffer; - Net open foreign currency position limits; - Development and monitoring of LCR, countercyclical capital buffers; - Identification and classification of systemic banks. - Weaknesses and gaps: - Measures tightened or relaxed frequently; some deviated from international standards. - No data collected on foreign currency exposure of borrowers, LTV or DTI ratios. - No capital surcharge set for systemically important banks. - De-dollarization recommendations: - Increase reserve requirements for foreign currency deposits. - Increase risk weights on exposures to unhedged foreign currency debtors. - Standardize minimum sensitivity analysis for banks on such exposures. ### AML/CFT - 2008 EAG assessment: “Non-Compliant” or “Partially Compliant” with 29 of 49 recommendations, including 8 “core/key.” - Progress by 2014: deficiencies in six “core/key” recommendations reported addressed. - Remaining deficiencies operative to date: two related to freezing/confiscation of terrorist assets and international cooperation on terrorist finance. - Next assessment planned in October 2018. - Note: new standard emphasizes effective implementation and national-level AML/CFT risk assessment and statistics. --- ### Directed lending, NPL resolution, and SOE restructuring - Directed lending: - Recommendation: consolidate state-directed lending in DB and gradually phase out by not extending new loans and letting existing stock mature. - DB should become principal agent of directed lending and focus on viable development finance not served by commercial banks. - State banks should operate increasingly on commercial terms. - Strengthen DB governance, risk management, and supervision; no more NPL transfers to DB. - NPL handling and single entity proposal: - Need holistic view linking public sector NPL resolution with comprehensive SOE restructuring. - Delegating NPL resolution to a single entity with powers for SOE restructuring and privatization has strong merits. - Powers should include asset divestment, change management, debt/equity swaps under time-bound objectives. - Use private expertise for workouts; remove blanket government guarantees; improve credit risk management and governance in state-owned banks. - Private sector NPLs to be solved via strengthened bankruptcy, enterprise restructuring, and debt foreclosure frameworks. --- ### Financial safety nets, resolution framework, and DIA - Institutional arrangement and contingency planning: - Recommend designating NBRB as bank resolution authority; currently de facto authority without explicit responsibility. - Establish small dedicated full-time resolution unit within NBRB; provide legal protection for professionals in resolution. - Corrective action and recovery: - NBRB existing powers include early intervention measures; recommend expanding powers to force asset sales, appoint managers, and require operational/structural changes. - Temporary administrator should be able to assume shareholders’ assembly powers when solvency or liquidity jeopardized. - Require banks to prepare recovery plans with early warning triggers; periodic testing; NBRB to provide guidance and evaluate plans. - Emergency Liquidity Assistance (ELA): - Current NBRB ELA mandate in local currency; regulations allow going beyond maturity and collateral pools but framework insufficient. - Recommended: provide ELA only to solvent banks that exhausted eligible collateral; against broad collateral at penalty rates and subject to ongoing conditionality; abolish long-term non-standard liquidity facilities; reduce banks’ foreign currency liquidity needs before considering ELA in foreign exchange given limited reserves. - Resolution tools, funding, and DIA: - Missing resolution powers: P&A transactions, bridge bank creation, recapitalize and temporarily fund systematically important bank, allocate losses to shareholders/creditors. - No resolution funding institutionalized in government finances; no contingent lines of credit with international banks. - Recommendations: FSC to discuss resolution options and contingency plans; DIA able to provide funding for P&A transactions based on least cost rule; consider establishing resolution fund financed by banks for open bank assistance over time. - Deposit Insurance Agency (DIA): - DIA fully covers all deposits of individuals regardless of currency. - DIA performance: recent payout tested functionality; DIA conducts stress tests and on-site visits with NBRB. - Transition recommendations: - Limit coverage and shorten payout period in line with international standards over time. - Reduce payout period to seven working days over time. - Abolish use of NBRB’s profits to strengthen DIA reserve. - Provide legal protection to DIA staff; DIA to seek IADI membership. --- ### Legal framework for resolution and recent practice - Current legal options: - NBRB can appoint temporary administrator, declare bank insolvent, and commence liquidation procedures. - Recent failures relied on liquidation as only available resolution method; DIA appointed liquidator in some cases. - NBRB has participated in acquisition of an insolvent bank and carries a stake in another; recommendation to divest these stakes to avoid conflict of interest. - Legal constraints and planning: - Law on Bankruptcy only allows NBRB to file for bankruptcy at court when it is creditor. - NBRB has yet to initiate institution-specific resolution planning for systemic banks and lacks crisis resolution arrangements with foreign counterparts. - Authorities made progress drafting new regulation but further improvements needed. --- ### Risk Assessment Matrix — principal risks (selected entries) - 1. Protracted slowdown in growth in Russia or globally due partly to low or falling energy prices. - Overall Level of Concern: High/Medium - Likelihood of Severe Realization in Next 1–3 Years: High/Medium - Russia: 41 percent of all exports; 32 percent of imports; 59 percent of total FDI; energy subsidies of over 10 percent of GDP. - Expected impact on financial stability: High — reduced exports/remittances, pickup in NPLs, higher provisioning, weaker capital buffers, adverse banking funding/liquidity/solvency effects. - 2. Rapid escalation of Russia/Ukraine conflict. - Overall Level of Concern: Medium - Likelihood: Medium - Expected impact: Medium — deposit runs, funding retrenchment from Russia, higher NPLs. - 3. Further exchange rate depreciation. - Overall Level of Concern: High - Likelihood: High - Expected impact: High — SOE foreign currency servicing difficulty, higher NPLs, loss of confidence and deposit withdrawals. - 4. Corporate-Banks / Insurance, Sovereign Nexus, directed lending expands further. - Overall Level of Concern: High - Likelihood: High - Key observations: DB expanding rapidly; DB functions as AMC and lender; DB debt not reflected in state budget as contingent liability. - Expected impact: High — higher NPLs, fiscal losses, erosion of capital cushions, potential insurer-related fiscal losses. - 5. Fed liftoff. - Overall Level of Concern: High - Likelihood: High - Expected impact: Medium — higher borrowing costs, potential non-resident deposit withdrawals, exchange rate pressures, weaker performance of foreign currency loans. - Stress testing linkage: selected risks modeled via adverse macroeconomic scenarios, solvency and liquidity stress testing, and corporate stress testing. --- ### Progress on 2009 FSSA recommendations (selected status) - High priority: - Carve out government-directed loans and concentrate in single agency: Partially implemented — about 15 percent of total stock transferred to DB as of September 2014; DB expected to provide new directed lending from May 1, 2016 except housing construction (Belarusbank) and working capital in agriculture (Belagroprombank). - Strengthen independence of NBRB Board and supervision: Partially implemented. - Revise loan classification and provisioning to reflect entire balance of NPLs: Implemented (NBRB requires reporting full principal and payments due) though rules recently softened. - Move government deposits to NBRB: Partially implemented; government continues placing deposits in commercial banks. - Document ELA framework: Not implemented (NBRB drafting regulations). - Lower priority: - Adopt crisis management framework and operational guidelines: Not implemented. - Make explicit legal power to suspend dividends: Implemented. - Provide more expedient bankruptcy proceedings: Partially implemented via amendments in 2012/2014; further Draft Law on Bankruptcy 2016 under consideration. - Strengthen autonomy of insurance and securities supervisors: Not implemented. --- *Source: IMF staff report (Republic of Belarus), FSAP report prepared by Sònia Muñoz and Mustafa Saiyid, July 25, 2016.* ### 2016. The FSAP findings were discussed with the ### _cr16299 - 2016. The FSAP findings were discussed with the ### FSAP team, contacts, and preparation - FSAP team composition, mission chiefs, and contributors: - Sònia Muñoz (IMF mission chief) and Aquiles Almansi (WB mission chief); Mustafa Saiyid (IMF deputy mission chief), Tanai Khiaonarong, Peter Lohmus, Pavel Lukyantsau, Torsten Wezel, Rasool Zandvakil (all MCM), Beata Jajko (EUR), José Tuya, José Rutman, Rodolfo Wehrhahn (IMF consultants); Angela Prigozhina (WB deputy mission chief), Pasquale Di Benedetta, Henri Fortin, Natalie Manuilova, Harish Natarajan, Jan Nolte, Juan Ortiz, (all WB); and Adolfo Rouillon (WB consultant). - Mission meetings: - Met with Mr. Pavel Kallaur, Governor of the National Bank of the Republic of Belarus; Mr. Vladimir Amarin, Minister of Finance; Mr. Vladimir Zinovsky, Minister of Economy; other senior central bank and government officials; Mr. Sergei Roumas, Chairman of the Development Bank; senior representatives of state-owned, foreign and private banks, insurance companies, stock exchange, research organizations, law firms, the Ministry of Justice, tax authorities, accounting and auditing firms, and professional bodies. - Report preparation: - This report was prepared by Sònia Muñoz and Mustafa Saiyid, with contributions from the FSAP team. - Date on report: July 25, 2016. ### Purpose and scope of the FSAP - FSAPs assess the stability of the financial system as a whole and not that of individual institutions. - Intended to help countries identify key sources of systemic risk in the financial sector and implement policies to enhance resilience to shocks and contagion. - Certain categories of risk are not covered: operational risk, legal risk, or risk related to fraud. ### Executive summary — major findings - State dominance and systemic vulnerabilities: - The state-dominated financial sector confronts several critical challenges stemming from deep and long standing structural problems and negative external spillovers. - Government directs a large proportion of loans from state-owned banks to unhedged state-owned corporates. - A Development Bank (DB), created in 2011 to centralize directed lending, has grown rapidly to assume systemic significance. - External sector and reserves: - Low and falling international reserves: US$4.3 billion as of end-May, an equivalent of two months of imports. - Significant negative spillovers from Russia, the main trade and financial partner. - Exchange rate: depreciated sharply, by nearly 40 percent versus the U.S. dollar during 2015. - Inflation: trended downwards, falling to 12 percent by end-2015. - Credit risk and NPLs: - Banks’ reported NPLs rose to over 12 percent of total loans in April 2016 from 7 percent in December 2015. - Only about 40 percent of reported NPLs are provisioned. - Solvency stress tests, adjusted partly for underprovisioning and evergreening, confirm very high credit risk. - Credit concentration risk is large at individual banks; indirect credit risk from unhedged foreign-currency borrowers remains a concern. - Liquidity risk: - Foreign currency liquidity risk is high due to high dollarization of deposits and limited access to foreign currency liquidity. - Liquidity stress tests reveal significant pockets of vulnerability in some foreign currency positions. - Liquidity facilities of the National Bank of the Republic of Belarus (NBRB) and mandatory reserve requirements are in local currency. - Term deposits can be pre-cancelled by depositors at no penalty, leading to potential underestimation of liquidity needs. - Interbank payment system carries liquidity, operational, and legal risks. - Insurance and FMIs: - A small, mainly state-owned insurance sector is exposed to significant contagion risk from banks. - Risk management framework for financial market infrastructures needs a stronger legal basis. - Oversight and forbearance: - Banking and insurance oversight constrained by lack of operational independence. - Adjustment and relaxation of prudential standards as forbearance have eroded market discipline. - Lack of detailed requirements on corporate restructuring has resulted in understatement of problem loans and evergreening. - Recent move of DB supervision to the NBRB will require additional skilled staff. ### Policy conclusions and priorities - Transition to independent and risk-based oversight: - Urgently required to address state dominance and to enable independent risk-based financial oversight. - Forward-looking measures: reinforce capital requirements and strengthen risk analysis of liquidity needs in foreign currency. - Consolidation and reform of state-directed lending: - State-directed bank lending should be consolidated in the DB and gradually phased out. - DB should become the principal agent of directed lending, focus on viable development finance not served by commercial banks, strengthen governance, risk management, and supervision. - No further NPL transfers to the DB should occur. - NPL resolution and corporate restructuring: - A comprehensive and in-depth NPL resolution strategy is needed alongside corporate restructuring. - Strong merits for delegating responsibility for NPL resolution to an entity with wide powers for debt and enterprise restructuring, including privatization and advisory help. - Complementary measures: remove blanket government guarantees; improve credit risk management and governance in all state-owned banks. - Private sector NPLs: resolve using market-based solutions through enhanced framework for bankruptcy, enterprise restructuring, and debt foreclosure. - Macroprudential measures to support dedollarization: - Gradual increase in the mandatory reserve requirement for foreign currency deposits to be held in foreign currency accounts. - Identification of unhedged foreign currency debtors. - Increases in the risk weight on exposures to unhedged debtors. - Standardization of minimum sensitivity analysis that banks should apply to unhedged debtors. - Financial Stability Council creation should help; formal mandate suggested for ensuring financial stability and crisis management. - Financial safety net and resolution framework: - NBRB should be designated as the agency responsible for bank resolution; will need expanded resolution tools, additional skilled staff, and accountability. - A new Emergency Liquidity Assistance (ELA) facility to provide collateralized emergency liquidity support to solvent banks is urgently needed. - Introduce strong measures to reduce banks’ foreign currency liquidity needs before considering ELA in foreign exchange. - Deposit Insurance Agency (DIA) should be allowed to provide funding for purchase & assumption transactions. - Authorities should consider limiting the amount of deposit insurance coverage and shortening its payout period, in line with international standards, over time. ### Selected FSAP Key Recommendations (items and timing as listed) - Systemic Risks - Conduct AQR for banks with significant differences between IFRS and prudential provisions (NBRB). — I - Apply Pillar 2 measures to specific banks to reinforce capital and prudential requirements (NBRB). — I - Conduct bottom-up solvency and liquidity stress tests for banks on a regular basis (NBRB). — NT - Increase the RR for foreign currency deposits, require its integration in foreign currency accounts at the NBRB and consider an increase in the daily maintenance requirement (NBRB). — NT - Consolidate and gradually phase out directed lending in DB (NBRB). — NT - Financial Oversight - Strengthen loan provisioning by issuing standards on restructuring and interest accrual (NBRB). — I - Link temporary forbearance only to plans for strengthening specific banks (NBRB). — I - Initiate collection of data on unhedged borrowers in foreign currency (NBRB). — I - Consider an increase in the risk-weight of banks’ foreign currency loans to unhedged borrowers. — NT - Improve risk assessment for early termination of foreign currency term deposits (NBRB). — I - Improve design of liquidity indicators and supervision of liquidity for individual institutions and aggregate system with focus on foreign currency liquidity risk (NBRB). — I - Develop risk-based insurance supervision with EWS, stress testing, and onsite risk inspection (MoF). — NT - Introduce a risk-sensitive capital regime for insurances and regulation following IAIS (MoF). — NT - The recently-created Financial Stability Council should include a subcommittee on crisis management that includes DIA as a member (NBRB, MoF, MoE, DIA). — I - Financial Infrastructure - Refine the risk management framework to include all FMIs, risk-based scenarios and testing (NBRB). — I - Draft law and amend regulations to protect settlement finality, netting, and collateral (NBRB). — NT - Stress test payment system to assess sufficiency of liquidity under stressed conditions (NBRB). — NT - Governance - Discontinue restrictions on the operational independence of the NBRB (NBRB). — NT - Amend NBRB statute to introduce concept of independence for the NBRB (NBRB). — MT - Divest banks’ stakes due to resolution to avoid conflicts of interest as supervisor (NBRB). — MT - Discontinue employing resources and powers to enforce monetary policy or criminal law (NBRB). — NT - Strengthen insurance supervisor’s operational independence and remove conflicts of interest (MoF). — NT - Allow DB to lend only to viable projects not financed by commercial banks (NBRB). — NT - Amend Bankruptcy Law to upgrade priority of secured creditors and establish effective procedures for rehabilitating viable businesses (Government). — NT - Establish mechanisms to enable and incentivize out-of-court debt restructuring (Government). — NT - Restructuring and Financial Safety Nets - Delegate NPL resolution to a single entity with powers for restructuring / privatization (NBRB). — I - Designate the NBRB as a resolution authority (Government). — NT - Establish comprehensive powers for bank recovery and resolution using FSB Key Attributes (NBRB). — I - Establish an ELA framework and define conditions for support (NBRB). — I - Require all banks to establish and test recovery plans; initiate planning for systemic banks (NBRB). — MT - Limit coverage of deposits, shorten the payout period over time and end NBRB's co-financing (DIA). — MT - Timing key: I — “Immediate” is within one year; NT — “near-term” is 1–3 years; MT — “medium-term” is 3–5 years. *Source: FSAP report prepared by Sònia Muñoz and Mustafa Saiyid, July 25, 2016.* ### 2. Public and private sector balance sheets are under pressure due to the deteriorating ### _cr16299 - 2. Public and private sector balance sheets are under pressure due to the deteriorating ### Macroeconomic pressures on balance sheets - Corporate profits have been falling and leverage rising particularly in the private sector. - Arrears (including wage arrears) have been accumulating and companies have sought to reduce hours worked by employees. - The sharp depreciation of the rubel has weighed on the unhedged corporate sector, which borrow mostly in foreign currency. - Corporate debt to equity rose to 50 percent in 2015Q1 from 26 percent at end-2012 reflecting a pickup in leverage. - Household disposable income fell sharply during 2015. - Household sector debt of some 8 percent of GDP is relatively low in international comparison. - Debt-servicing costs are only about 7.5 percent of household earnings on average. ### Growing financial sector contingent liabilities and fiscal challenge - The recent macroeconomic deterioration has increased the size of fiscal contingencies arising from government’s support to state-owned banks and SOEs. - Some contingencies are related to the realization of guarantees on state-directed loans and the issuance of new loans with guarantees—without due assessment of creditors’ payment ability and offered at below-market rates—requiring the government to cover the payments or recapitalize banks frequently. - Realization of guarantees and recapitalization needs has affected public balances adversely and added to public debt. - Weakening of the fiscal position means the sovereign may have to issue more debt, which would have to be placed with banks. ### Credit developments and real sector impacts - Overall credit growth to corporates and households has fallen sharply in both national and foreign currency since 2013 and turned negative at a constant exchange rate during 2015. - During this period, the growth of state-directed lending almost halved, mainly due to high debt amortization. - Credit to households has also declined sharply, though real estate loans are still being offered. - Commercial real estate is contracting as companies cut down investment amid the economic downturn. ### Financial structure - The majority of the financial sector is comprised of commercial banks, equivalent to about 85 percent of total assets and 73 percent of GDP. - Remainder of the sector: DB (7 percent), the insurance sector (3 percent), and leasing and microcredit companies with about 5 percent. - Within the banking sector, the largest 10 banks make up most of the banking system; the top five and other two foreign banks are part of conglomerates. - Nearly 65 percent of total assets are state-owned, foreign banks account for 33 percent, while domestic private banks are only 2 percent. - State-owned banks offer government-subsidized interest rates and do not operate on a level playing field with private banks. - Banks are strongly interlinked to SOEs: lending to SOEs made up 29 percent of banking assets at end-2015, while claims on SOEs were 55 percent of all banks’ claims on the corporate sector. - The largest source of deposits is households. - About 10 percent of interbank funding comes from the domestic market, where the DB plays a small role. - Banks hold ownership, funding, and lending links with nonbank financial institutions (insurance, leasing, and microcredit companies); interconnections are a channel of risk transmission. - Externally, the banking system has significant cross-border linkages especially to Russia. - The majority of external liabilities are to banks located in Russia, followed by Germany and Austria; most funding comes from parent banks. - About 90 percent of these liabilities are interbank loans—over half exceeding a residual maturity of 1 year; the rest are deposits mainly held in euro. - Cross-border exposure on the asset side is mostly denominated in US dollar due to correspondent accounts in the United States, followed by corresponding accounts in euros in Germany. ### Development Bank (DB) and insurance sector - The DB, created in 2011 to centralize state-directed lending, does not take private deposits and obtains funding mainly from the issuance of government-guaranteed debt. - The DB has grown rapidly to become the fourth-largest institution by assets and is responsible for about one-third of new directed lending. - The DB acquired assets originated by two state-owned commercial banks under directed lending programs and acts as an agent for resolving NPLs for the Ministry of Finance. - The insurance sector is small and state-dominated: - Life business is only 8 percent of the overall insurance business. - The largest insurers in life, non-life and reinsurance lines of business are state-owned and comprise 90 percent, 60 percent and 100 percent of the total respectively. - Insurance penetration remains low. ### Financial sector stability — credit, liquidity, and capital - Financial sector credit risk has materialized and foreign currency liquidity risk is high. - Banks have faced a significant pickup in NPLs and reduced profitability. - Authorities injected capital in some systemically important banks recently; some banks may require further capital support in the near-term particularly if risks materialize and loan impairments are recognized adequately. - The highly dollarized banking system faces a significant mismatch in foreign currencies, which could lead to a liquidity shortage in a crisis situation. - Contagion from banks could have adverse consequences for the small insurance sector. Snapshot findings and indicators - Lending to SOEs: 29 percent of banking assets at end-2015. - Claims on SOEs: 55 percent of all banks’ claims on the corporate sector. - Just over 70 percent of banks’ deposits, mostly from households, are in foreign currency. - About 60 percent of loans, mostly to corporates, are in foreign currency. - Exchange rate depreciation of 40 percent in 2015 significantly increased exposure of unhedged borrowers. - Banks have typically required additional cashflow buffers—often as much as 50 percent more—on foreign currency lending. - Reported banks’ NPLs rose by more than 50 percent during the past year to reach 6.8 percent of gross loans at end-2015. - April data under national standards indicates NPLs over 12 percent. - Provisioning costs remain inadequate at less than 40 percent of NPLs. - Banking sector profitability (return on equity) fell to 10.4 percent at end-2015 from 15.3 percent at end-2014. - Overall banking sector capital adequacy ratio (CAR) reached 18.7 percent at end-2015 following capital injections in the three largest banks. - System-wide liquidity declined to 26 percent at end-2015 compared with 30 percent a year earlier. - High loan-to-deposit ratio near 114 percent. ### Stress testing exercise - Stress testing focused on banks’ resilience to solvency, liquidity, and contagion risks for the 11 largest banks (accounting for 95 percent of total bank assets) at end-December 2015, over a three-year horizon. - Solvency tests: both bottom-up (BU) and top-down (TD) using regression-based satellite models or expert judgment. - Liquidity tests: LCR and NSFR proxies and a conventional TD liquidity stress test evaluating liquidity mismatches for different remaining maturity buckets. - Contagion risk: analyzed for interbank and cross-border exposures using a network approach. - Macroeconomic scenarios used in stress tests: - Baseline scenario based on the IMF World Economic Outlook (WEO) projections as of February 2016. - Adverse scenario I (V-shaped): a deep recession in the first year from a sharp decline in the oil price affecting Russia, followed by a relatively quick recovery (RAM Risks #1 and 3, 4). - Adverse scenario II (L-shaped): a milder but longer-lasting shock with a slower recovery, leading to a larger loss in output, explained by continued geopolitical and global uncertainty (RAM Risks #1, 2, 3, 4, 5). *Source: IMF staff report (Republic of Belarus).* ### 18. Credit risk is very high as recent developments and the solvency stress tests confirm. ### 18. Credit risk is very high as recent developments and the solvency stress tests confirm. ### Solvency Stress Tests: overall findings - In the baseline scenario of the mission’s TD stress test two large banks likely have an immediate need for recapitalization. - Under both adverse scenarios, although the aggregated CAR remains just above the minimum requirement given the recapitalization of three major banks in 2015, five banks (two state-owned) with a combined market share of 42 percent fall below the regulatory minimum rate of 10 percent with a projected capital shortfall at 2017Q1 of 1.1 percent of projected 2017 GDP. - The results of the authorities’ TD and BU tests conducted by the banks broadly corroborate these results. - As a correction to the starting point, the mission subtracted from end-2015 capital of each bank the regulatory deductions under Basel III that went into effect in February 2016. These deductions lowered the overall CAR by 0.1 percentage point, to 17.8 percent. - Two other small banks would fall below the minimum required rate plus the capital conservation buffer being phased in, which, at that point, would add another 1.125 percent of RWA to the regulatory minimum. ### Hidden losses, evergreening, and corporate stress testing - Hidden losses associated with the lack of recognition of restructured loans are sizable. - Corporate stress testing was carried out to adjust for evergreening practices. - The mission estimated the level of sustainable interest payments for a sample of large SOEs and compared to an earnings measure (EBIT), leading to the haircut on payments deemed necessary to restore debt service sustainability. - For interest payments to be sustainable, EBIT should be at least 1.5 times interest payments—the so-called Interest Coverage Ratio. - The amount of interest payment reductions was scaled up by the factor 1.9 which results from the share of bank debt of the SOEs in the sample in total SOE bank debt (52.6 percent). - This debt service restructuring scenario predicts a projected combined capital shortfall at 2017Q1 of 0.4 percent of projected 2017 GDP. - While the same banks fail this test at some point over the projection horizon as under the stress scenarios, more banks see a considerable decline in capital ratios. - Aside from loan classification issues, most of the 10 largest banks in the system had a provisioning shortfall at end-2014 when compared to loan loss reserves under international accounting standards. In the solvency stress test, the actual provisions were increased by the amount of the individual shortfalls even before applying stress. - The mission assumed that the coverage ratio (specific provisions-to-NPLs) would need to increase by 10 ppt for every year of assumed stress (i.e., 10 ppt in the Adverse I and 20 ppt in the Adverse II scenario). ### Credit concentration and sovereign exposures - Banks carry high credit concentration risk. With regulatory large exposure limits not fully enforced at present due to legacy cases of forbearance, the impact of deteriorating creditworthiness of large clients has a considerable impact on bank solvency. - A stress test downgrading the largest 53 state-owned borrowers by one classification category led to a drop in the CAR by 1.7 ppt. - A second test assessing a hypothetical outright default of the 5 largest SOEs produced even larger losses with one large bank failing the 10-percent hurdle rate in both tests, and another large, while remaining solvent, experiencing a drop in its CAR of 7½ ppt. - To assess banks’ exposure in government securities, the average 1-year ahead probability of default associated with Belarus’ sovereign rating was applied to banks’ sovereign bond positions other than those held for trading. The associated write-downs lowered the system CAR by 1.8 pp. - Belarus is currently rated B- by two international rating agencies and CCC+ by a third one. The mission team therefore obtained the PD corresponding to the rating of each agency and used the average of the three PDs which turned out to be 8.9 percent. ### Liquidity tests and foreign currency vulnerabilities - Liquidity stress testing reveals significant pockets of vulnerability in foreign currency positions. - Both the overall LCR and NSFR suggest ample buffers of 170 and 130 percent respectively. - There is a short-term liquidity shortfall in individual foreign currencies, particularly in Euro and Russian Ruble positions, where about half the banks reporting such foreign currency exposures show ratios below 100 percent. - In Russian Ruble, individual LCRs are as low as 3 percent, since some foreign banks invest their funding—largely wholesale financing, including from parent banks—mostly in other currencies or at longer maturities. - The rising share of foreign currency-denominated domestic government bonds (close to 90 percent of all domestic government issuance) also poses a concern. - In an alternative liquidity stress test—assessing mismatches within maturity buckets—the inflow rate on maturing short- and longer-term government bonds was lowered to 50 percent. The results showed that one small and one medium-sized bank did not pass the test. - The negative impact would be larger if term deposits were considered revocable. - Deposits in foreign currency are 63 percent of the total, of which only 10 percent belong to corporates. - Foreign currency term deposits, which represent 84 percent of total foreign currency deposits, have an estimated weighted average maturity of 9 months. - At present, all NBRB mechanisms for supplying liquidity to banks are in local currency. Term deposits can be pre-canceled by depositors at no penalty within five days. All liquidity regulations assume these term deposits are held to their contractual residual maturity and no adjustment is made for early termination. ### Systemic liquidity management recommendations - The NBRB could increase the average reserve requirement for foreign currency deposits to be held in foreign currency accounts. The reserve requirement for all types of deposits is unified at a rate of 7.5 percent and held in local currency. - A differentiated reserve rate would mitigate the higher risks from foreign currency deposits due to the absence of liquidity windows and emergency liquidity assistance (ELA) in foreign currency, and the higher volatility of inflows from foreign currency loans. It would also act as a tax on the financial intermediation in foreign currency, helping—at the margin—to reduce the dollarization of the financial system. - The daily fixed maintenance requirement (currently at 10 percent) should also be raised gradually to reduce risks. - The authorities should strengthen their supervisory assessment of liquidity needs, particularly in foreign currency. - The four prudential liquidity ratios should be recalibrated by currency and compared with the LCR by currency already monitored by the authorities. - The authorities should assess banks’ ability to convert foreign currency-denominated domestic government and NBRB securities into foreign currency cash in stress situations and measure needs accordingly. ### Contagion, payments, insurance, and supervisory actions - Domestic interbank contagion risks appear limited; loans make up 1.8 percent of banking system liabilities. - Direct cross-border contagion risks, particularly from Russia, are large. Network analysis suggests effects on capital adequacy could be sizeable in case of credit and funding shocks from abroad. - The insurance sector is exposed to contagion risk through investments and credit default insurance products. Assets are mainly invested in government bonds and bank deposits with state-owned banks. - Under the adverse scenarios of the stress tests, losses averaged over the whole insurance sector appear low, at about 10 percent of market capital. However, some individual life insurance companies could lose over 100 percent of their capital and some individual nonlife companies up to 65 percent. - There are legal, liquidity, and operational risks in the interbank payment system. Settlement finality may face potential legal risks from ‘zero-hour rules’ in insolvency. Liquidity needs in the payment system have not been tested against potential stress scenarios, particularly the default of the largest participant and its affiliates. - The authorities took prudential steps in 2015: (i) an increase in the minimum capital requirement for all banks to EUR 25 million from EUR 15 million; (ii) tighter limit on banks’ net open foreign currency position to 10 percent from 20 percent; (iii) a new class of term deposits, which may not be withdrawn prior to maturity; and (iv) the elimination of a tax exemption on interest income from short-term deposits. - On the other hand, some measures related to provisioning, regulatory capital, and risk weightings have relaxed the prudential regulatory framework. - A number of weak banks were closed in recent years. Four very small banks are in the process of liquidation; two received deposit payouts from the Deposit Insurance Agency (DIA). Eleven other very small banks were in breach of the new minimum capital requirement and the authorities are assessing further steps based on banks’ capital plans. Three large state-owned banks were recapitalized in 2015. - In May 2016, the supervisory mandate of the NBRB was extended beyond commercial banks to include the Development Bank (DB). Presidential Decree No. 184 grants additional powers only for DB supervision while the decision on other sectors has been postponed for a year. The Ministry of Finance remains the supervisor for the insurance sector and securities markets. *Source: _cr16299 - 18. Credit risk is very high as recent developments and the solvency stress tests confirm.* ### 32. Despite significant progress, full implementation of an effective, risk sensitive and ### _cr16299 - 32. Despite significant progress, full implementation of an effective, risk sensitive and ### Supervisory framework: progress and constraints - Implemented: a broad framework of regulations, a supervisory process involving offsite and onsite analysis, an internal capital adequacy assessment process, and an enhanced bank risk assessment grading methodology. - Ongoing: implementation of Basel capital standards. - Governance reform: composition of the NBRB Board was modified following the 2009 FSAP recommendation to remove undue representation of industry or political interests. - Constraint: state dominance increases the complexity of achieving risk-based supervision. ### NBRB independence, legal constraints, and accountability - Legal framework: the Banking Code states that the NBRB is accountable to the President of the Republic of Belarus who approves and removes the Chair and the statutes of the NBRB. - Operational constraints: - A presidential decree regulates onsite inspections, requiring coordination with the State Control Committee, and sets guidelines on the duration and number of annual onsite activities. - Another pronouncement sets a limit of 13 regulatory reports to be collected from banks. - Banking supervision powers are applied for purposes not directly related to banking safety and soundness. - Empirical note: Approximately 50 percent of onsite special inspections in the past two years were conducted to assist the Prosecutor’s Office on criminal cases. - Recommendation: prescribe in law a system of checks-and-balances to ensure NBRB operational independence and accountability. ### NBRB supervisory tools and forward-looking measures - Authority: the NBRB has the authority and should impose Pillar 2 capital add-ons, and other forward-looking measures, to reinforce capital and prudential requirements. - Recommended use: - Use capital add-ons to address heightened risk due to foreign asset levels at specific banks instead of system-wide forbearance by amending regulations. - Impose dividend restrictions well before a bank breaches the minimum capital requirement (currently applied only after breaches). ### Risk analysis, liquidity and asset-quality assessment - Current state: risk analysis is deep and will be further enhanced when information technology systems are implemented. - Key vulnerability: high percentage of unhedged foreign currency-denominated assets exposed to credit and liquidity risk reduces the effectiveness of balance sheet liquidity ratios and interest rate GAP analysis. - Stress testing: banks are required to stress test, but a more systematic inclusion of cashflow analysis in balance sheet analysis is recommended. - Restructuring standards gap: - No detailed NBRB standards for recognizing amendments as restructured loans or for upgrading from restructured status. - Standards should address extending loans, re-negotiating interest rates, amending loan agreement requirements, nonaccrual status, restoring accrual status, and upgrading after provisioning. - Empirical audit finding: annual external audits disclosed higher IFRS provisions than on NBRB prudential basis in some banks, reinforcing concerns about evergreening and the need for independent asset quality reviews. ### Cross-border supervision - Current coverage: the NBRB has signed supervisory agreements with 17 countries, including Russia. - Limitation: supervisors of EU state members have refused to sign memoranda of understanding because equivalence of confidentiality regimes must be positively assessed by the European Banking Authority (EBA). - Timeline: In 2015, the EBA finalized a first round of assessments, which did not include Belarus, and announced further assessments within two years. - Recommendation: increase cross-border cooperation to cover all Belarusian subsidiaries of foreign banks. ### Supervision of the Development Bank (DB) - Institutional change: recent transfer of DB supervision to the NBRB intended to achieve more independent oversight. - Operational risk: the NBRB is not operationally independent; the plan is for the NBRB’s Banking Supervision Department (BSD) to supervise the DB along with commercial banks with no increase in staffing. - Risks: exposure to new and more complex risk types may adversely affect NBRB reputation if not properly managed. - Recommended safeguards: - Revisit planned institutional arrangements to ensure adequate staffing, skills, and functional separation from the BSD. - Provide training to prospective DB supervisors on wholesale lending with credit enhancements, infrastructure financing, export financing, and liquidity management in a bank without customer deposits. - Contract temporary expertise to organize and establish internal procedures. - Firewall reporting: the DB supervision team should report to a different board member than commercial banking supervision. ### Insurance supervision and regulation - Independence and conflicts: the insurance supervisor has limited operational independence and suffers from conflicts of interest. - No explicit procedures for appointment/dismissal of the head and governing body members. - Many supervision decisions require Ministry of Finance involvement, leading to political interference. - The ISGD has no allocated budget and no discretion in resource allocation. - Conflict of interest: ISGD is simultaneously responsible for business development of the insurance sector. - Supervisory approach: solvency requirements are based on Solvency I; offsite supervision is rule-based and compliance-focused rather than preventive risk oversight. - Inspection constraint: limited flexibility for onsite inspections due to Presidential Decree; unscheduled inspections only allowed under exceptional circumstances. - Regulatory gaps: missing regulation on governance, internal controls, and quality and effectiveness of risk management. - Recommendation: when changing supervisory set-up, ensure independence of supervisors and removal of conflicts of interest; establish a risk-sensitive capital regime and forward-looking supervision; issue appropriate regulation on governance, internal controls and risk management. ### Financial market infrastructure: legal, liquidity, operational risks and oversight - Legal risk mitigation: draft a new payment services law including protection of settlement finality, netting, and collateral arrangements. - Liquidity risk monitoring: establish a stress testing program with robust stress scenarios to monitor potential liquidity risk to the payment system during market stress. - Business continuity: design and test a business continuity plan to ensure critical information technology systems can resume operations within 2 hours following disruptive events. - Cyber resilience: consider adopting an integrated approach to cyber resilience. - Oversight enhancement: - Refine the risk management framework to include all financial market infrastructures, risk-based scenarios, regular testing, material risks from interdependencies, and links with central bank governance. - Increase oversight resources. - The NBRB should publicly disclose its responses to the CPMI-IOSCO Disclosure Framework and publish an annual report on Financial Infrastructure Oversight. ### Macroprudential policy framework and measures - Institutional development: creation of a Financial Stability Council (FSC) to monitor and coordinate measures, develop strategies and recommendations for financial stability. - Governance: the chairman of the NBRB Board will co-chair the FSC with the Deputy Prime Minister; the Secretary will be in charge of the Financial Stability Department of the NBRB; participation includes the MoF and the Ministry of Economy (MoE). - Mandate recommendation: - The FSC mandate should be tightly defined. - Recommend that the NBRB takes full leadership in the FSC and be designated as the macroprudential authority. - Establish a dedicated subcommittee under the FSC for crisis coordination arrangements distinct from macroprudential policy; include the Deposit Insurance Agency (DIA); the subcommittee could evolve into a separate committee over time. - Implemented macroprudential measures include: - (i) the capital conservation buffer, - (ii) net open foreign currency position limits, - (iii) development and monitoring of the LCR, countercyclical capital buffers, - (iv) identification and classification of systemic banks. - Weaknesses: several measures have been tightened or relaxed frequently; some measures have deviated from international standards. - Data gaps and calibration limits: - No information collected on foreign currency exposure of borrowers, Loan to Value or Debt to Income ratios of debtors. - No capital surcharge has been set for banks identified as systemically important. - De-dollarization measures recommended: - Increase reserve requirements for foreign currency deposits (already used). - Increase risk weights of banking sector exposures to unhedged foreign currency debtors. - Standardize minimum sensitivity analysis for banks on such exposure. ### AML/CFT regime - 2008 assessment: rated “Non-Compliant” or “Partially Compliant” with 29 of the 49 recommendations by the Eurasian Group for Combating Money Laundering (EAG), including 8 considered “core” or “key.” - Progress by 2014: deficiencies in six of the “core/key” recommendations were reported to have been addressed. - Remaining deficiencies (operative to date): two related to - (i) the freezing and confiscation of terrorist assets; and - (ii) international cooperation in combating terrorist finance. - Planning: the Republic of Belarus is planning for its next assessment in October 2018. - Note on new standard: the new standard focuses on both effective implementation and the extent to which it adequately addresses the country’s ML/FT risks; proving effective implementation usually requires comprehensive statistics showing ML/FT intelligence reporting, investigations, prosecutions, convictions, and confiscations at an appropriate level and a national-level AML/CFT risk assessment. ### Directed lending, NPL resolution, and state-owned enterprises (SOEs) - Directed lending: - Recommendation: consolidate state-directed lending in the DB and gradually phase it out by not extending new loans and allowing existing stock to mature. - Role: DB should become the principal agent of directed lending and focus on a viable development finance agenda not served by commercial banks. - State banks should increasingly operate on commercial terms to reduce fiscal costs and increase public value and competitiveness. - Governance: strengthen DB governance, risk management, and supervision; its increased role warrants no more NPL transfers to the DB. - NPL handling: - Need for a holistic view linking public sector NPL resolution with comprehensive SOE restructuring policies. - Risk of fragmented initiatives: fragmented approaches could result in high fiscal cost and delayed transformational impact. - Single entity for NPL/SOE resolution: - Strong merits for delegating NPL resolution to a single entity with powers for comprehensive SOE restructuring and privatization. - Powers and instruments: access to asset divestment, change management, debt/equity swaps under clear time-bound qualitative and quantitative objectives. - Involvement of private expertise: outsource workout and restructuring tasks to experienced professional asset managers and consulting firms. - Complementary reforms: remove blanket government guarantees and improve credit risk management and governance in all state-owned banks. - Private sector NPLs: rely on private sector solutions through enhanced frameworks for bankruptcy, enterprise restructuring, and debt foreclosure. ### Financial safety nets: institutional roles, corrective actions, ELA, and resolution - A. Institutional arrangement, coordination, and contingency planning - Recommendation: designate the NBRB as the bank resolution authority. - Current status: NBRB is the de facto resolution authority but has no explicit responsibility; it needs adequate staffing and accountability. - Suggestion: establish a small, dedicated, full-time unit within the NBRB responsible for resolution planning. - Legal need: law should address legal protection for professionals involved in bank resolution. - B. Corrective action arrangements - Existing powers: the NBRB may impose early intervention measures including forcing a bank to cease certain operations, restrict dividend payouts, require additional reserves for losses, remove executive directors or board members, scale down or cease certain operations, establish adequate reserves for losses, increase capital. - Recommended expansion: include powers to force the bank to sell its assets, appoint (and not only remove) high-level managers, and require changes to bank operations and structure to facilitate pre-positioning for resolution. - Temporary administration: when solvency or liquidity is jeopardized, the temporary administrator should be able to assume powers of the shareholders’ assembly. - C. Recovery planning and testing - Recommendation: the NBRB should require banks to prepare recovery plans and undertake periodic testing. - Scope: recovery plans should develop early warning triggers and cover liquidity and capital management during financial stress. - Supervision: banks’ contingency plans should be evaluated as part of individual bank supervision; the NBRB can provide written guidance. - D. Emergency Liquidity Assistance (ELA) - Current mandate: the NBRB is empowered to act as lender of last resort and provide temporary liquidity to banks in local currency at its discretion. - Regulatory gaps: two separate regulations allow the NBRB to go beyond maturity and collateral pools but the ELA framework is insufficient because it does not set as conditions the solvency of a bank or charge excessive rates compared with standard liquidity facilities and its collateral requirements are inadequate. - Recommended reforms: - Provide ELA only to banks that are solvent but have exhausted eligible collateral for interbank and central bank liquidity operations. - Provide ELA against a broad range of collateral at penalty rates and subject to ongoing conditionality of solvency, capital adequacy and viability, and further restrictions on business activities. - Abolish existing long-term non-standard liquidity facilities for banks. - Introduce strong policy measures to reduce the risk of banks’ foreign currency liquidity needs before considering ELA in foreign exchange, given the limited international reserves. *REPUBLIC OF BELARUS INTERNATIONAL MONETARY FUND* ### 57. The legal framework provides few options for bank resolution and liquidation. The ### The legal framework provides few options for bank resolution and liquidation. ### Legal framework and current practice - The NBRB can appoint a temporary administrator, declare a bank insolvent, and commence liquidation procedures. - In recent bank failures, the authorities have had to rely on liquidation as the only available resolution method. - The DIA has been appointed as liquidator in some of these cases. - The NBRB has also participated in the acquisition of an insolvent bank and carries a stake in another. - Recommendation/observation: These stakes should be divested to avoid conflict of interest with the NBRB’s role as supervisor. ### Resolution tools and institution-specific planning - Finding: The NBRB needs an effective set of resolution tools to act as a resolution authority. - Missing tools and powers: - Powers for purchase and assumption (P&A) transactions. - Powers to create a bridge bank. - Powers to recapitalize and temporarily fund a systematically important bank. - Powers for allocating banks’ losses to shareholders and creditors. - Legal constraint: The Law on Bankruptcy only allows the NBRB to file for bankruptcy of a failed bank at court when it is the creditor of the bank. - Planning and cross-border coordination: - The NBRB, as the de facto resolution authority, has yet to initiate institution-specific resolution planning, at least for all the systemic banks. - The NBRB has no specific crisis resolution related arrangements with their respective foreign counterparts. - Progress note: The authorities have made some progress in drafting a new regulation along these lines, but further improvements are needed. ### Resolution funding and contingency arrangements - Finding: There is no resolution funding institutionalized in the government finances. - Financing gaps: - There are no contingent lines of credit with international banks or other financial institutions to draw on during financial crisis. - Recommendations: - The FSC should discuss options for resolution and propose contingency plans for crisis situations. - The DIA should be able to provide funding for P&A transactions based on a least cost rule and ensure that depositors keep access to their funds. - Over time, the financial safety net could be broadened by establishing a resolution fund, financed by the banks, for open bank assistance. ### Deposit Insurance Scheme (DIA) - System design and coverage: - The DIA fully covers all deposits of individuals (not corporates) regardless of currency. - The DIA is a relatively well-developed deposit insurance system. - Transition recommendation: - The DIA should limit the coverage and shorten the payout period in line with international standards over time. - A transition task force should determine a credible level of coverage and develop a transition strategy and timeline. - Corresponding operational requirement: The DIA will need to inform the public regarding its move to the future level of coverage. - Operational performance: - A recent payout served as a test case showing that the DIA is able to fulfill its functions. - The agency regularly conducts stress tests of its own systems and performs on-site visits of member banks together with NBRB. - Additional recommendations: - (i) The use of NBRB’s profits to strengthen the DIA’s reserve should be abolished. - (ii) The payout period should be reduced to seven working days over time. - (iii) The DIA and its staff should have legal protection when carrying out their activities. - (iv) The DIA should seek membership in the International Association of Deposit Insurers (IADI) in order to ensure compliance with international best practice. *Source: IMF staff report excerpt (Republic of Belarus).* ### Appendix Table 5. Risk Assessment Matrix ### Appendix Table 5. Risk Assessment Matrix ### Principal risks and summaries - 1. Protracted slowdown in growth in Russia or globally due partly to low or falling energy prices. - Overall Level of Concern: High/Medium - Likelihood of Severe Realization of Threat in the Next 1–3 Years: High/Medium - Key observations: - Slower growth in Russia would produce negative spillovers through trade, financing, and remittances. - Russia is the largest trade partner with 41 percent of all exports and 32 percent of imports; accounts for 59 percent of total FDI; and provides energy subsidies of over 10 percent of GDP. - Russian banks’ assets in the Republic of Belarus account for over two-thirds of the total for foreign banks, and nearly 25 percent of the overall banking system. - Price volatility may increase due to uncertainty about the persistence of the oil supply shock and the underlying drivers of the price decline. - Supply factors would reverse only gradually and weaker demand may lead to persistently low prices. - Sanctions on Russia could last longer than anticipated. - Expected Impact on Financial Stability if Threat is Realized: High - Reduced exports, especially to Russia, or falling remittances would lead to slower overall growth and could lead to a pickup in banks’ NPLs from households and private corporates. In turn, this would require more provisioning by banks, reducing profits and weakening prospects for building capital buffers. - Fiscal support from Russia could be adversely affected, which would increase the size of alternative financing required by the government. - A related slowdown in Russia could have an adverse banking sector impact on funding, liquidity, asset quality, and solvency. - Profit margins of energy-related companies could get squeezed, weakening debt-servicing ability and increasing NPLs to banks. - Implementation note: In the stress tests, these risks are incorporated through an adverse macroeconomic scenario in the solvency stress testing. - 2. Rapid escalation of Russia/Ukraine conflict. - Overall Level of Concern: Medium - Likelihood of Severe Realization of Threat in the Next 1–3 Years: Medium - Key observations: - Ukraine is an important trade partner. - Nearly 150,000 Ukrainians have already moved to the Republic of Belarus since the onset of the conflict. - Could depress business confidence and heighten risk aversion, amid disturbances in global financial trade and commodity markets. - Expected Impact on Financial Stability if Threat is Realized: Medium - Elevated risk of deposit runs at banks. - Banks could also suffer from a potential funding retrenchment from Russia, which could weaken liquidity conditions further. - Over the longer term this could hurt firms’ operating conditions and increase banks’ NPLs. - Implementation note: In the stress tests, these risks are incorporated through an adverse macroeconomic scenario in the solvency and liquidity stress testing. - 3. Further exchange rate depreciation - Overall Level of Concern: High - Likelihood of Severe Realization of Threat in the Next 1–3 Years: High - Key observations: - Exports fall further, especially to Russia, on lower demand from commodity producers for heavy machinery. - Banks demand foreign currency against FX-linked notes issued to them by the central bank. - Expected Impact on Financial Stability if Threat is Realized: High - Would make it more difficult for SOEs to service foreign currency debt raising risk of higher NPLs for banks. - Loss of confidence could lead to foreign currency deposits being withdrawn from banking system. - Implementation note: In the stress tests, these risks are incorporated through an adverse macroeconomic scenario in the solvency and liquidity stress testing. - 4. Corporate-Banks / Insurance, Sovereign Nexus, directed lending expands further - Overall Level of Concern: High - Likelihood of Severe Realization of Threat in the Next 1–3 Years: High - Key observations: - Banks continue to extend state-directed loans to loss-making SOEs and the government recapitalizes them frequently. - Although state-directed loans were transferred to the development bank with a view to centralizing and reducing such activity, it has nevertheless continued at state-owned banks. - The development bank, which is functioning as both an AMC and a lender, is expanding rapidly in terms of assets. Its debt is not reflected in the state budget as a contingent liability, its bonds are eligible for refinancing from the central bank. - Insurers are mainly state-owned, provide support to weak SOEs, are linked to banks via deposits, and appear to offer much higher coverage than justified by existing premia. - Expected Impact on Financial Stability if Threat is Realized: High - Banks’ underwriting of loans without due diligence or adequate assessment of investment return would likely either lead to higher NPLs or higher fiscal losses for the government arising from support provided to borrowers. - Erosion of banks’ capital cushions and fiscal losses for the government could result. - Fiscal losses related to the activities of the development bank could be significant. - Potential fiscal losses related to insurer failures are high. - Implementation note: In the stress tests, these risks are incorporated through the corporate stress testing. - 5. Fed liftoff - Overall Level of Concern: High - Likelihood of Severe Realization of Threat in the Next 1–3 Years: High - Key observations: - Market expectations of a U.S. Fed rate hike during 2016 remain elevated as shown by the pricing of Fed funds futures contracts. - Rising expectations of higher global interest rates in future have led to capital outflows, including withdrawal of FDI, from emerging markets. - The share of non-resident funds in banks’ liabilities is about 18 percent of the total. - Expected Impact on Financial Stability if Threat is Realized: Medium - Borrowing costs would rise, possibly sharply, when the sovereign and corporates regain access to debt markets. - Non-resident deposits may be at risk of further withdrawal. - Withdrawal of FDI could lead to further exchange rate pressures and thereby weaken the performance of banks’ foreign currency loans. - Implementation note: In the stress tests, these risks are incorporated through the liquidity stress testing. ### Stress testing linkage note - Risk references: In line with Risk #2 and 4 of the December 2015 Global Risk Assessment Matrix (G-RAM) for Risk 1; Risk #1 of the G-RAM for Risk 5. - Several risks above are modeled in stress testing via adverse macroeconomic scenarios, solvency stress testing, liquidity stress testing, and corporate stress testing as noted per risk. *Italic footnote: In line with Risk #2 and 4 of the December 2015 Global Risk Assessment Matrix (G-RAM).* --- ### Appendix Table 6. Stress Test Matrix (STeM) for the Banking Sector: Solvency, Liquidity, and Contagion Risks ### Banking sector: Solvency risk - Institutional perimeter - Institutions included: 11 banks. - Market share: Percentage of total sector assets: 95 percent. - Data and baseline date: Supervisory data; Banks’ own data; Supervisory data; Supervisory data; Publicly available data. - Channels of risk propagation / Methodology - Bottom-up: Combination of banks’ own internal models and their expert judgment as well as plausibility checks by mission. - Top-down by authorities: NBRB’s stress testing models. - Top-down by FSAP Team: IMF balance sheet stress testing framework (customized for the Belarus FSAP). - Satellite models: - Banks’ own models for credit losses, pre-impairment income, credit growth; and expert judgment. - NBRB’s models for credit losses, pre-impairment income, credit growth; expert judgment. - IMF’s econometric models for credit losses, pre-impairment income, credit and RWA growth; and expert judgment. - Stress test horizon: 3 years (12 quarters). - Tail shocks / Scenario analysis - Four scenarios: baseline scenario; adverse I external shock scenario; adverse II external shock scenario; and debt service restructuring scenario. - The size of the GDP shock in relation to historical episodes for the Adverse I and Adverse II scenarios is 3 and 2.5 standard deviations respectively. - Sensitivity analysis: Single-factor shocks: interest rate; exchange rate; sovereign default; Credit concentration risk. - Risks and buffers - Risks/factors assessed: Comprehensive coverage of banking risks. - Risk types explicitly modeled: - Credit risk: credit risk on loan book; issuer default risk on government and corporate bond and other debt instrument holdings. - Market risk: interest rate risk impact on net interest income, government and corporate bond and other debt instrument holdings; FX risk. - Operational risk (via RWA). - Real estate collateral risk (through shocks to loss given default (LGD)). - Behavioral adjustments: Evolution of assets and RWAs based on data availability (constant vs. dynamic balance sheet assumption). - Management actions: No management actions considered. - Income/tax rules: Other net income items, dividends, and taxes, based on macroeconomic scenarios and pre-determined rules. - Regulatory and market-based standards and parameters - Calibration of risk parameters: - Loan migration (downgrades) and corresponding changes in provisions based on banks’ internal models; and expert judgment. - Estimation of expected gains/losses on government and corporate bond holdings, and equity investments based on banks’ internal models, and expert judgment. - Loan migration and provisions informed by satellite models and bottom-up analysis. - Regulatory/Accounting and Market-Based Standards: - Hurdle rates based on regulatory minimum for total capital (minimum CAR). - Basel II (Standardized Approach). - Reporting format for results - Output presentation: - CAR, and buffer changes; system-wide and by entity. - Pass or fail; share of failing banks in system assets. - CAR, shortfall, and buffer changes; system-wide and by entity. ### Banking sector: Liquidity risk - Institutional perimeter - Institutions included: All banks (26 banks). - Market share: Percentage of total sector assets: 100 percent. - Data and baseline date: Supervisory data; Banks’ own data. - Channels of risk propagation / Methodology - Basel III LCR-type and NSFR-type proxies (LCR calculated also for major currencies). - Conventional liquidity test. - Risks and buffers - Risks: Drying up of market liquidity; Maturity and currency mismatches. - Buffers: Counterbalancing capacity (HQLA for LCR; cash and cash-like instruments for conventional liquidity stress test). - Tail shocks - Size of the shock: Run-off rates on funding, Roll-off rates on inflows from assets, and haircuts on securities as defined in Basel III for LCR and NSFR; rates and haircuts in conventional liquidity stress test defined by FSAP mission. - Regulatory and market-based standards and parameters - Regulatory standards: - LCR proxy should exceed 100 percent in general (not a legal/regulatory requirement). - NFSR proxy should exceed 100 percent (not a legal/regulatory requirement). - Reporting format for results - Output presentation: Pass rate, remaining buffers, and liquidity shortfall (if applicable); system-wide and by entity. ### Banking sector: Contagion risk - Institutional perimeter - Institutions included: All banks (26 banks). - Market share: Percentage of total sector assets: 100 percent. - Data and baseline date: Supervisory data; Banks’ own data; Publicly available data. - Channels of risk propagation / Methodology - Network analysis, using the Sole and Espinosa-Vega (2010) methodology. - Interbank contagion analysis (“cascade effects”). - Tail shocks - Stress scenario with a credit shock: a severe stress in a banking system, causing a default on all claims. - Stress scenario with a credit shock where a bank or group of banks defaults hypothetically on its debt obligations and a funding shock when a banking system is unable to rollover its funding from another country due to severe stress in other country. - Reporting format for results - Output presentation: Implied losses (banks and country level), remaining buffers, number of affected banks (if cascade effects). --- ### Appendix II. Progress on 2009 FSSA Recommendations ### High Priority recommendations (status summary) - 1. Carve out government-directed loans from bank balance sheets and concentrate them in a single agency - Implementing Agency: Ministry of Finance, NBRB, Development Bank - Status of Implementation: Partially implemented. - About 15 percent of total stock of directed loans were transferred to the Development Bank (as of September 2014), with the expectation that most government directed lending programs will expire around 2015-2016. - From May 1, 2016, the Development Bank is expected to provide new directed lending, except for housing construction (by Belarusbank) and working capital in agriculture (by Belagroprombank). - 2. Strengthen independence of the NBRB Board and bank supervisory processes - Implementing Agency: NBRB - Status of Implementation: Partially implemented. - Significant progress in developing the supervisory process. - No longer undue representation of industry or political interests in the Board of the NBNB, but the Chairman could be discharged by the President for loss of confidence. - Performance of supervisory tasks is constrained: supervisor has not full control to decide the supervisory plan or the prudential reports; length of on-site visits is determined by a presidential decree. - 3. Revise the loan classification and provisioning requirements to reflect the entire balance of non-performing loans - Implementing Agency: NBRB - Status of Implementation: Implemented. - NBRB now requires banks to report as nonperforming loans both the full principal and payments due. - But loan classification and provisioning rules have been recently softened to aid banks show a better financial position. - 4. Engage a qualified experienced consultant to assist the Belarusbank privatization working group - Implementing Agency: Goskomimushchestvo [State Property Committee], Minister of Finance - Status of Implementation: Not implemented. - A working group has been established to develop terms and conditions for an open competition to select a financial consultant to advise on disposal of a minority take in Belarusbank. An ad for the hiring of the consultant was placed. - 5. Move government deposits from banks to the NBRB in line with the schedule for repayment of corresponding loans - Implementing Agency: NBRB - Status of Implementation: Partially implemented. - However, the government continues to place deposits in commercial banks, e.g., to fund housing construction program by Belarusbank. - 6. Document the framework for emergency liquidity assistance - Implementing Agency: NBRB - Status of Implementation: Not implemented. - The NBRB is in the process of drafting the regulations. - 7. Abolish the obligatory reinsurance requirement for local insurance companies - Implementing Agency: Ministry of Finance - Status of Implementation: Not implemented. - Remains relevant for stability and developmental aspects. It is recommended again. ### Lower Priority recommendations (status summary) - 1. Adopt a crisis management framework and operational guidelines - Implementing Agency: NBRB - Status of Implementation: Not implemented. - 2. Make explicit the legal power of the NBRB to suspend dividend payout - Implementing Agency: NBRB - Status of Implementation: Implemented. - 3. Establish legal certainty regarding the outcome of license withdrawal - Implementing Agency: NBRB - Status of Implementation: Partially implemented. - NBRB has the power to require removal from office of members of the board, executive body or CEO or chief accountant. NBRB officials are involved in the management of SOBs. - 4. Provide for more expedient bankruptcy proceedings - Implementing Agency: NBRB - Status of Implementation: Partially implemented through legislative amendments to the bankruptcy legislation in 2012/2014. - Further amendments regarding procedural terms in bankruptcy are being considered under the Draft Law on Bankruptcy 2016. - 5. Strengthen autonomy of the insurance and securities market supervisors - Implementing Agency: Ministry of Finance, NBRB - Status of Implementation: Not implemented. - No changes made to the supervisory structure since 2009. Remain relevant for stability aspects and it is recommended again. - 6. Allow private insurance companies to sell compulsory insurance products - Implementing Agency: Ministry of Finance - Status of Implementation: Not implemented. - No changes made to the supervisory structure since 2009. Remains relevant for developmental aspects. --- ### Appendix III. Financial Policy Advice in Recent Article IV Reports - 2012 - Assessment: The financial system is inefficient and causes a growing contingent liability for the government. - Staff recommends: - all directed lending should be channeled through the Development Bank to make it transparent; - full independence of NBRB supervision staff and use of risk-based supervision which would make the financial system more robust. - 2013 - Assessment: Banking supervision is improving but rapid FX lending growth bears close watching. - Staff recommends: - further measures to curb FX lending growth should be considered; - the DB should become the sole and transparent provider of directed lending. - 2014 - Assessment: Rising risks in the banking sector require close attention. - Staff recommends: - directed and subsidized lending should be curtailed and existing and future lending programs should be consolidated through the Development Bank; - the NBRB should closely monitor the health of individual banks and decisively address any uncovered problems; - the activities of the Development Bank should be contained and proper supervision and regulation of its activities need to be ensured; specifically, external regulation and supervision of the Development Bank should be introduced; as the commercial financial sector develops, the need for a state-run Development Bank should be reconsidered; - capital market needs to further develop; specifically, a framework law establishing operational independence of the securities supervisor should be adopted; the supervisory framework should migrate from a compliance-based to risk-based supervision of professional market participants; the need to implement rules governing the issuance of corporate bonds in FX by unhedged issuers should be analyzed in coordination with NBRB. - 2015 - Assessment: Risks in the banking sector have further increased and structural evolution of the financial sector remains a source of major concern. - Staff recommends: - directed lending growth needs to be rapidly further reduced; - the NBRB conducts a diagnostic study to assess asset quality in the aftermath of the recent devaluation and interest rate hikes; any detected problems in banks should be addressed decisively, and undercapitalized banks should be either recapitalized or resolved as feasible; - the activities of the Development Bank should be contained with proper supervision and regulation; a clear plan for the containment and winding down of the operations of the DB should be devised, consistent with the full phase out of directed lending; - the NBRB should swiftly divest Moscow-Minsk Bank. *Source: _cr16299 - Appendix Table 5. Risk Assessment Matrix* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16299.pdf_