Thursday, January 15 2015 16:22

Economist: Amalgamation of Armenian banks will leave no negative effect on economy in case of rational distribution of financial resources

ArmInfo. If the government manages to distribute financial resources of Armenia's banking system rationally, the Armenian Central Bank's requirement on amalgamation of banks will leave no negative effect on economy, Vardan Bostanjyan, economist, MP, a member of the Prosperous Armenia Party, told reporters, Thursday. The Central Bank adopted a decision lately to increase the lower limit of the total capital of banks to 30 billion drams by January 1 2017. The decision looks to amalgamate banks and other actors of the banking sector.

"The given resources should be distributed so as to develop the sectors of economy, otherwise, amalgamation of banks will have negative effect on the sector. Such policy is new of Armenia," he said.

Bostanjyan believes that amalgamation and merger of banks will make them more sustainable and attractive to international financial organizations. "At present, the country's banking system can raise preferential loans from few international financial organizations - donors, including WB, IMF, and EBRD. Others (institutional and portfolio investors - editor's note) are not willing to cooperate, as they believe that Armenia's banking system cannot be stable amid low level of capitalization," he said. According to the economist, at least 7 banks will be amalgamated or merged, the lower limit of the total capital was increased many-fold (from 5 billion drams to 30 billion drams - editor's note). "The banking system is not an end in itself. It must contribute to development of economy, otherwise it's existence is senseless," Bostanjyan said.

Bostanjyan believes that a sharp reduction of the number of banks will monopolize the banking system of Armenia. This will reduce healthy competition and efficiency of banks, the economist said. He is sure that if monopolized, banks will act at their sole discretion when setting interest rates, issuing financial resources and forming portfolios.

As for the CB's decision to set a new requirement of the lower limit of the total capital of banks, Bostanjyan does not think that it was a reasonable decision. Neither he understands why the banks are demanded to meet that requirement within such short period of time. "The Central Bank did not explain its decision and goals. It appears that the mega-regulator seeks to leave only the strongest actors in the market," Bostanjyan said.

Starting January 1 2017, a new requirement for the lower limit total capital - 30 billion drams versus current 5 billion drams - will be introduced in the banking system of Armenia. The Central Bank's press-service told ArmInfo, the Central Bank Council made the given amendment to the provision 2 of the Law "On Regulation of the activity of banks and basic economic standards of the banking activity" on 30 December 2014. The amendment will apply to all the participants in the banking system of Armenia. The banks have enough time to meet the new requirements.

Earlier, on 17 December, the Central Bank increased the compulsory reservation requirements for the raised funds in foreign exchange from 12% to 24%. Banks place their "reserve funds" with the CB in terms of the AMD only. Earlier on December 3, the CB increased the Lombard repo rate from 10.25% to 21%. Finally on 23 December, the CB increased the refinancing rate from 6.75% to 8.5%. Since early December, the CB launched long-term foreign exchange swaps in the market (for a period of 3-6 months) to satisfy demand for US dollars.

According to the Financial Rating of Armenian Banks prepared by ArmInfo News Agency, the capital of the banking system of Armenia encompassing 21 banks totaled 499.3 billion drams as of 1 October 2014.

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