ArmInfo. The Central Bank of Armenia continues to increase the premium to the capital adequacy ratio buffers- countercyclical capital buffer, the rate of which from August 2023 will reach 1.5% of risk-weighted assets. As noted on the official website of the Central Bank of Armenia, the purpose of increasing the " countercyclical capital buffer is to support the stability of the banking sector to systemic risks that have a high probability of materialization.
It would be appropriate to recall that on October 24, 2022, the Central Bank of the Republic of Armenia already decided to raise the countercyclical capital buffer from zero to 1% with the entry into force of this norm from May 2023. Prior to this, for more than two years, the countercyclical capital buffer rate remained at the level of 0%. This decision, as well as the current one (dated June 24,2023 with publication on June 31, 2023), the regulator bases on a comprehensive analysis of the development of the macro- financial and credit market. The analysis substantiating the current decision of the Central Bank regarding the countercyclical capital buffer showed, firstly, that the financial cycle index continued to grow in Q4 2022.
In the reporting quarter, an increase in activity was recorded in the credit market, and in all directions. The exception was mortgage lending, where there were risks of overheating. At the same time, in other areas of lending, the current development and the position of the financial cycle indicate that cyclical systemic risks in the financial sector are generally balanced. The loan-to-GDP ratio dropped to 64% in 2022 Q4 (vs. 67% in Q3), but this decline is mainly due to more progressive GDP growth. The deviation from the long-term trend (loan gap /GDP), calculated for this indicator using the Basel Committee methodology, also decreased by 9 percentage points (against -6.7 percentage points in Q3).
The Central Bank has repeatedly stressed in its previous justifications that when making a final decision on the level of the countercyclical capital buffer, it attaches importance to the results of a comprehensive analysis of the development of systemic risks, and is not guided solely by the size of the loan gap /GDP calculated according to the methodology of the Basel Committee.
Secondly, high rates of growth in mortgage lending were maintained, which was simultaneously accompanied by an accelerated increase in real estate prices. Taking into account that the growth in the volume of financial debt on mortgages and the growth in real estate prices are considered, in fact, complementary and absorbing each other, the Central Bank, estimates the duration of overheating risks in the real estate market.
Thirdly, according to the results of macro stress tests, to absorb unforeseen losses resulting from unforeseen shocks at the current stage of the financial cycle, the required amount of additional capital is estimated at almost 84 billion drams, or 1.43% of risk-weighted assets.
Fourth, the banking system is currently characterized by a high level of profitability and capital adequacy. Under such conditions, the costs of meeting the requirements for an increased countercyclical capital buffer for participants in the banking system will be minimal, and the current level of capitalization of banks is more than sufficient to ensure normal rates of lending to the economy.
Fifth, in the context of ongoing geopolitical uncertainty, the likelihood of materialization of systemic (cyclical) risks continues to be high, both in terms of the degree of impact and the speed of implementation. In the current environment, the Central Bank attaches importance to increasing the ability of the banking system, through the accumulation of capital buffers, to withstand future possible shocks. Capital buffers also expand the ability of the banking system to provide uninterrupted credit to the economy in the face of the materialization of cyclical risks.
It should be noted that initially the decision to introduce a capital adequacy ratio buffers - the countercyclical capital buffer of banks, was taken by the Central Bank on July 31, 2020, setting it at 0% of risk-weighted assets, with entry into force from August of the same year. Since then, the countercyclical capital buffer bar has been kept at zero for more than 2 years.
The countercyclical capital buffer is necessary to cover the bank's losses in the event of systemic risk thresholds in the banking sector. According to the Procedure for "Calculating and Setting Thresholds for Capital Adequacy Ratio Buffers of Banks", the regulator reviews the countercyclical capital buffer threshold on a quarterly basis. When determining the countercyclical capital buffer, the Central Bank is guided by the provisions of the document "General Methodology of the Countercyclical Capital Threshold", according to which, when setting the threshold, the basis for the Central Bank is the gap in the credit/GDP ratio estimated by the Basel methodology and the financial cycle index characterizing the development of systemic risk, as well as other indicators of the so-called early prevention (early response).
