ArmInfo.On November 30, 2018, the Executive Board of the International Monetary Fund (IMF) discussed the Financial System Stability Assessment (FSSA) of Armenia, evaluating the macroeconomic environment in the country as satisfactory, and the state of the financial system as stable. This is stated in a report released today by the Fund's Department of Communications.
According to the assessment, Armenia's banking sector has weathered the 2014 economic slowdown, aided by additional capital injected by shareholders, several mergers, and improved regulation and supervision. It is noted that 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, of which a substantial proportion is covered by provisions, although NPL ratios are still high in a few banks.
Armenia is a small open highly dollarized economy subject to external shocks. Against this backdrop, the Armenia's financial system is relatively shallow and dominated by banks. The banking sector's assets equal about 78 percent of GDP, and subsidiaries of foreign banks make up a sizable proportion of banking assets. Capital markets are thin, and external financing is important for long-term financing, given a small domestic investor base. As illustrated by the stress tests, risks from a high degree of financial dollarization are significant, including credit risks and limited liquidity cushions in foreign currency in the event of external shocks.
Since the 2012 FSAP (Financial Sector Assessment Program) the CBA has made progress in strengthening Armenia's financial system. The CBA has adopted measures to mitigate risks from dollarization. Higher risk-weights and provisioning were imposed on dollar assets to absorb the credit risk due to unhedged borrowing.
Directors commended the improvements in banking oversight, but noted that shortcomings remain. They called on the authorities to refine the risk-based supervision framework for a more granular assessment of banks' capital needs, enforce large exposure limits, and amend the definition of nonperforming and restructured loans in line with international best practices. In addition, Directors encouraged the authorities to implement measures to improve transparency in reporting and accounting by corporations and sub-national and state-owned entities.
Directors noted the narrow functions of the Deposit Guarantee Funds and the absence of a true interagency high-level crisis management committee. They urged the authorities to fully develop all components of the financial safety net and crisis management arrangements in line with international standards and best practices. Given the significant presence of foreign subsidiaries, they stressed the importance of expanding the supervisory memoranda of understanding to include resolution planning of foreign subsidiaries in Armenia.
Directors welcomed the progress in enhancing the AML/CFT framework since the 2015 assessment. They looked forward to continued efforts to address the remaining gaps to align the framework with the Financial Action Task Force standard.