ArmInfo. The risks of an outflow of funds against the background of the crisis, associated with the uncertainty of the timing of overcoming the coronavirus pandemic, and domestic and foreign policy shocks, predetermined the steps of the Central Bank of Armenia to take early proactive measures to neutralize short-term and long-term shocks of liquidity of the financial system. As part of these measures, the Central Bank of Armenia is introducing new prudential liquidity ratios recommended by Basel III - short-term (LCR - Liquidity Coverage Ratio) and long-term (NSFR - Net Stable Funding Ratio). Corresponding additions have already been made to Regulation 2 of the Central Bank of the Republic of Armenia "On regulation of banking activities and applied economic standards".
These measures, along with increasing capital requirements, were proposed for introduction long before 2020 and were periodically postponed. However, the outbreak of the coronavirus pandemic and the second Karabakh war negatively affected the economy and the level of real incomes of the population, leading to a deterioration in the quality of the total loan portfolio of banks and a drop in profits. Against this background, the Central Bank of Armenia considered it expedient to start introducing new Basel standards earlier than the stipulated time, according to which the deadlines for introducing changes to the Basel III reform package adopted in December 2017 were postponed by one year - until January 1, 2023. Thus, from August 2020, one of the three capital adequacy buffers - a countercyclical capital buffer - was set at that time at 0% and is still maintained at this level for all banks (subject to a phased increase to 2.5%). And the introduction of two other ones- to maintain capital adequacy (0.5% with a phased increase to 2.5%) and for systemically important banks (0.5% with an annual increase to 1.5%) - has been postponed for the time being. Now, new liquidity ratios have been introduced - short-term and long-term (with a gradual increase in the threshold), along with which the ratios of total and current liquidity will continue to operate (at the minimum specified level: N21 - 15% and N22 - 60%).
The liquidity coverage ratio (LCR - N23) shows the proportion of the bank's liquid assets of the amount required to cover within 30 days the increased outflow of funds that occurs in the banking system in crisis conditions. It reflects the bank's level of resilience to short-term liquidity shocks - a phenomenon typical of crisis periods when there is a significant outflow of customer funds.
Net Stable Funding Ratio (NSFR - N24) determines the minimum level of the bank's liquidity over the horizon of one year and is calculated as the ratio of the amount of available stable funding to the amount of required stable funding. The main goal of NSFR is to help mitigate one of the systemic risks to financial stability associated with short-term funding of banks, balance the assets and liabilities of banks by maturity, create incentives for banks to attract long-term deposits and reduce dependence on short-term financing. Both standards will be gradually increased. Thus, the minimum LCR (the ratio of highly liquid assets to net cash outflow) is set at 60% with the effect of this level until June 30, 2021, then from July 1 to December 31, 2021, the level will be increased to 80%, and from January 1, 2022 at the 100% level. In the same time frame and at the same levels, the NSFR standard (the ratio of stable funds available to the bank to the required stable funds of financing) will change.
According to AmRating experts, the package of regulatory requirements recommended by Basel III is a transition from regulation of the current economic situation to preventive regulation, containment, and mitigation of the impact of new crisis waves. In other words, it is a model that protects the banking sector from the emergence of crisis shocks. A feature of this package is the tightening of requirements for the structure and elements of capital, the level of its adequacy, the formation of additional capital buffers, as well as new approaches to assessing liquidity.
Undoubtedly, experts believe that the measures taken have a positive meaning and, above all, contribute to: an increase in the coverage of risk by bank capital; improving the quality of capital; smoothing the cyclical development of the banking sector; strengthening the liquidity of banks.
In general, in the experts' opinion, the regulatory measures taken are aimed at implementing the basic functions of banking capital (its protective and operational functions), increasing the liquidity of the banking sector, strengthening supervision and transparency of banking activities, and improving risk management in the monetary field. Experts believe that against the backdrop of the coronavirus crisis, with the ensuing serious socio-economic consequences, the measures of containment taken by the regulator turned out to be very useful in order to neutralize short-term and long-term liquidity shocks and maintain the stability of the financial sector at the proper level.
To note, in the same Regulation 2 of the Central Bank of the Republic of Armenia, regarding the requirements for banks on compulsory reserves in the Central Bank from attracted dram and foreign currency funds, it is indicated that at least 4% is reserved for dram borrowings, and for foreign currency - at least 18% (this also applies to funds on unallocated metal accounts). But in relation to the funds attracted from the placement of bonds, the compulsory reserve requirements are different: for AMD borrowings - at least 0%, for foreign currency - at least 10%.
According to the Financial Rating of Banks of Armenia as of December 31, 2020, prepared by ArmInfo IC, the level of total capital adequacy in 2016-2020 decreased from 38.76% to 24.21%, total liquidity - from 37.55% to 29.46%, the current liquidity - from 253.83% to 145.57%, with the required minimum regulatory levels of 12%, 15% and 60%, respectively. The total capital of the banking system slowed down during this period the annual growth from 32% to 6.2%, amounting to $ 1.7 billion. Assets in the context of five years slowed down the annual growth from 24% to 15%, amounting to $ 12.7 billion, and loan investments - from 24% to 17%, amounting to $ 8.4 billion. Net profit, after slowing growth in 2019 from 62% to 34%, in 2020 went into recession by 20%- to $ 115.7 million. As a result, efficiency ratios also decreased in 2020: return on equity (ROE) - from 9.4% to 6.8% and return on assets (ROA) - from 1.4% to 0.9%. Time deposits with a 14% growth in 2019 turned towards a 1% decline in 2020, amounting to $ 4 billion, and demand liabilities significantly slowed down growth from 35% to 8%, amounting to $ 2.9 billion. Moreover, deposits of individuals (urgent and additional claims taken in total) slowed down growth in 2020 already to a stagnant 1%, amounting to $ 3.8 billion.
In the structure of assets, the highly liquid component has shown the following dynamics over the past three years: cash - from 31% growth turned towards 11% decline, the same reversal was observed in funds on correspondent accounts (nostro) in banks - from 44% growth by 16% decline, while in an accelerated upward trend the balance of funds in unallocated metal accounts remained - from 6% to 70% and investments in government bonds - from 5% to 37%, the volumes of which amounted to $ 320.4 million, respectively, $ 207.7 million, $ 4.4 million and $ 1.6 billion.
