Armenia Central Bank increases countercyclical capital buffer from  1.5% to 1.75%

ArmInfo. The Central Bank of Armenia increases the regulatory surcharge - the countercyclical capital buffer (CCB) from 1.5% to 1.75% of risk-weighted assets, with this norm coming into force on May 1, 2025. As noted in today's message of the Central Bank of Armenia, the Board of the Central Bank made such a decision on October 15 this year, based on a  comprehensive analysis of the macro-financial and credit market  developments.

It is appropriate to recall that the decision to increase the CCB  from zero to 1% with the entry into force of this norm from May 2023  was made by the Central Bank of Armenia on October 24, 2022. Then, in  May 2023, a decision was made to increase the CCF from August of the  same year to 1.5%, and this level will be in effect until May 2025.  Further changes in the CCF (downward or upward) depend on  macro-financial conditions, the degree of uncertainty and the  scenario for the development of systemic risks. In the context of  ongoing geopolitical uncertainty, the probability of materialization  of systemic (cyclical) risks remains high. The use of this surcharge  is aimed at supporting the stability of the banking sector.

The analysis substantiating the current decision of the Central Bank  regarding the CCF showed, firstly, that the financial cycle index has  risen compared to the previous quarter, which was accompanied by high  growth rates in some areas of credit market. The estimated ratio of  loans to GDP for the second quarter of 2024 grew to 68% (from 64% a  year earlier), while continuing to be at a lower level (almost 6.5  percentage points, against 10 p.p. a year earlier) from the long-term  trend. Secondly, the yearly growth rate of total credit remained high  during the year. The main contributors to these high growth were the  loans granted to households and  construction sector. 

In particular, the high growth rates of consumer lending recorded in  the second half of 2023 continued in the first half of this year. The  annual growth rates of mortgage loans, despite some slowdown,  continue to remain at a high level. Moreover, the volumes of newly  issued mortgage loans were comparable to the high volumes of previous  years. Thirdly, the real estate market saw a trend of slowing price  growth. In the context of relatively stable growth in mortgage loans,  the trend of progressive growth in lending to the construction sector  continued. This trend may serve as a signal for an increase in the  debt burden in the construction sector, the formation of risks of  excess supply in the real estate market, and the resulting probable  increase in loan losses. Fourth, according to the estimates of the  conducted stress testing, the amount of additional capital required  to absorb unexpected losses arising from a possible shock to the  financial cycle at the current stage is estimated at about 1.79% of  risk-weighted assets.

Fifth, the banking system is currently characterized as a sector with  a high level of profitability and capital adequacy. Consequently,  banks' costs of complying with the requirements of the proposed  higher level of the CCB are low, and the current level of  capitalization is more than sufficient to sustain the natural pace of  lending to the economy.

It should be noted that the Central Bank initially made the decision  to introduce a surcharge to the capital standard of banks, known as  the countercyclical capital buffer (CCB), on July 31, 2020. The CCb  was set at 0% of risk-weighted assets, with implementation starting  in August of the same year. Since then, the CCB bar has remained zero  for over 2 years. The countercyclical surcharge is necessary to cover  the bank's losses in the event of  extreme  systemic risk in the  banking sector. According to the Procedure for "Calculating and  Establishing Thresholds of Surcharges to the Bank Capital Adequacy  Standard", the regulator reviews the CCB threshold quarterly. When  determining the CCB, the Central Bank is guided by the provisions of  the document "General Methodology for the Countercyclical Capital  Threshold", according to which the Basel methodology's estimated  credit-to-GDP ratio gap and the financial cycle index characterizing  the development of systemic risk are the basis for the Central Bank  when setting the threshold, as well as other indicators of early  prevention (early response).