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).
