IMF Executive Board Concludes Armenia's 2018 Financial System Stability Assessment
IMF News, December 3, 2018
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- Published: December 3, 2018
Background and context
- Press Release No. 18/447; December 3, 2018.
- On November 30, 2018, the Executive Board of the International Monetary Fund (IMF) discussed the Financial System Stability Assessment (FSSA) of Armenia.
- The Financial Sector Assessment Program (FSAP) was established in 1999 and is mandatory for the 29 jurisdictions with systemically important financial sectors; its key findings are summarized in an FSSA.
Macroeconomic and financial-sector overview
- Armenia is a small open highly dollarized economy subject to external shocks.
- The financial system is relatively shallow and dominated by banks.
- The banking sector’s assets equal about 78 percent of GDP.
- Subsidiaries of foreign banks make up a sizable proportion of banking assets.
- Capital markets are thin; external financing is important for long-term financing given a small domestic investor base.
Recent performance and indicators
- Armenia’s financial system has expanded further since the 2012 Financial Sector Assessment Program (FSAP).
- The country’s macroeconomic performance has been satisfactory, and the financial system has been stable.
- The banking sector weathered the 2014 economic slowdown, aided by additional capital injected by shareholders, several mergers, and improved regulation and supervision.
- At present, financial soundness indicators show signs of improvement.
- All banks meet the 12 percent minimum capital requirement.
- Bank profitability has gradually recovered, although it is still below pre-crisis levels.
- Nonperforming loans (NPLs) have fallen; a substantial proportion is covered by provisions, although NPL ratios are still high in a few banks.
Progress since the 2012 FSAP (Central Bank of Armenia actions)
- Measures adopted to mitigate risks from dollarization:
- Higher risk-weights and provisioning were imposed on dollar assets to absorb credit risk due to unhedged borrowing.
- Liquidity requirements were introduced in 2012 to mitigate the higher liquidity risk of foreign exchange funding.
- Strengthened financial oversight:
- Adoption of a risk-based supervision framework.
- Addressing gaps in the regulatory framework identified in the previous FSAP.
Executive Board assessment — main findings
- Directors agreed with the main findings and recommendations of the FSSA.
- Progress welcomed:
- Strengthening financial sector oversight.
- Promoting financial deepening to enhance resilience.
- CBA reforms since the 2012 FSAP, notably prudential measures to mitigate risks from dollarization and upgrading the risk‑based supervision framework.
- Remaining vulnerabilities highlighted:
- High levels of dollarization.
- Insufficient liquidity cushions in foreign currency.
- Need for further refinement of supervision and crisis management arrangements.
Executive Board recommendations and priorities
- Capital and buffers:
- Adopt the capital conservation buffer and the surcharge for domestic systemically‑important banks as planned.
- Be prepared to implement the countercyclical capital buffer if the current trend in credit growth persists.
- Credit-risk and dollarization measures:
- Adopt measures to address credit risk from unhedged foreign exchange exposures, such as introducing a stressed debt service to income ratio limit.
- Gradually introduce the requirement for banks to maintain reserves in foreign currency for liabilities denominated in foreign currency.
- Liquidity standards:
- Introduce the liquidity coverage ratio and net stable funding ratio in Armenian dram and in U.S. dollars.
- Supervision and regulatory practices:
- Refine the risk‑based supervision framework for a more granular assessment of banks’ capital needs.
- Enforce large exposure limits.
- Amend the definition of nonperforming and restructured loans in line with international best practices.
- Implement measures to improve transparency in reporting and accounting by corporations and sub‑national and state‑owned entities.
- Financial safety net and crisis management:
- Fully develop all components of the financial safety net and crisis management arrangements in line with international standards and best practices.
- Expand supervisory memoranda of understanding to include resolution planning of foreign subsidiaries in Armenia.
- AML/CFT:
- Continue efforts to address remaining gaps to align the AML/CFT framework with the Financial Action Task Force standard.
Source: IMF Press Release No. 18/447 (December 3, 2018).
