The Armenian authorities would like to express their sincere appreciation to the joint IMF-World Bank FSAP mission team for the constructive and candid engagements since June 2018. They welcome the comprehensive and in-depth Financial System Stability Assessment (FSSA) report and broadly agree with staff’s assessment and recommendations.

Armenia has made considerable progress since the last FSSA in 2012. The Armenian financial system remains sound and resilient. The banking system is well capitalized, and while the NPL ratio and banks’ profitability remain a challenge, both have been improving over the recent period. The authorities have significantly upgraded the legislative, regulatory and supervisory frameworks since 2012. The CBA has largely complied with 2012 FSAP recommendations and Basel Core Principles (BCP). The most notable amendments include the revamping of the Risk Based Supervision (RBS) framework in 2017, the enactment of legislation on consolidated supervision of financial groups and the alignment of minimum capital requirements among all banks. The CBA has strengthened the regulatory framework requirements for corporate governance, country risk and stress testing. The AML/CFT framework, the Bankruptcy Law and the Deposit Guarantee Fund (DGF) legislation have been further enhanced.

The CBA continues to adhere to the full adoption of the BASEL III Standards to address the existing gaps in the regulatory and supervisory frameworks. The CBA has set up a clear Basel III plan and is pursuing to fully comply with the Basel III standards by 2024. The regulation on the new capital requirements, including the conservative, countercyclical and systematic capital buffers, is in the process of validation. In addition, the CBA has been monitoring the LCR and NSFR Basel III liquidity ratios since 2015 and the exact phase-in schedule is currently being discussed. While the current capital adequacy requirements are largely based on the Basel II approach, the regulatory capital elements are consistent with the Basel III requirements, and the CET1 capital has a dominant share in the total capital. Also, the capital requirements are tighter than the Basel III minimum, and the current average capital adequacy ratio is above the regulatory 12% minimum. In this context, the CBA ensures that the Armenian banking system has all necessary preconditions in place to easily meet the Basel III capital requirements over the planned time-period.

The Armenian authorities remain strongly committed to addressing the risks related to the financial dollarization, low profitability and large exposures. The CBA is aware of the challenges related to the high level of dollarization, and while a wide range of prudential measures have been implemented over the last years, additional measures are planned to be taken, in line with staff’s recommendations, to mitigate and prevent the future FX-related risks. The feasible timing for the adoption of the stressed loan-to-value (LTM) limit is in the process of active discussions, while the debt service to income (DSTI) limit requires more time to be introduced related to the data shortcomings. The adoption of the LCR and NSFR ratios may mitigate the risks further. The CBA has also initiated some preparatory work aimed at reforming the current reserve requirement regime to address the shortage of high quality liquid assets (HQLA) in foreign currency. Regarding the large exposures, given the decisive and strict view on the prudential limits, the CBA has undertaken decisive measures over the last two months to address the violations. In this regard, the CBAs’ actions have proven to be quite effective resulting in positive outcomes. The CBA is determined to continue with the enforcement of the adopted measures to set the operational standards for banks.

The CBA closely monitors the vulnerabilities revealed by the FSAP stress tests and stands ready to undertake adequate measures to address the weaknesses. The “top-down” solvency and liquidity stress tests have provided a helpful addition to the CBA’s own regular test with similar results. Although spillover risks appear not to be a threat to financial solvency and the Armenian banking system shows resilience against market-wide shocks, the tests reveal important vulnerabilities that need to be carefully addressed. In this regard, the plans are underway towards implementing a comprehensive set of measures over the next two years to further strengthen the prudential requirements and supervision process, to enhance liquidity reporting and monitoring by banks in every significant currency as well as to expand liquidity stress testing methods through the inclusion of risks from currency mismatch.

The authorities will push forward to improve the financial safety net and crisis management frameworks as well as to safeguard financial integrity. As staff noted, significant progress has been achieved in the crisis preparedness planning since 2012. The CBA has established a Financial Stability and Special Regulatory Committee (FSSRC) with the purpose of assessing the key issues and risks related to the financial system stability. In addition, the CBA has prepared a detailed Crisis Management Guide to deal with emergency situations which currently is in the validation phase. In this context, the FSSRC has been effectively providing both financial stability and crisis management functions since its establishment, and the MOU signed between the CBA, the MOF and the DGF has outlined a multi-stakeholder decision-making process in case of crisis. Furthermore, the CBA is determined to discuss the appropriateness of the expansion of the DGF’s mandate to “paybox plus” in the future. However, the DGF is still in its early years of operation, and more time and efforts are needed to evaluate and reassess its functions in a paybox plus model. The staff’s recommendations on the adoption of the Special Bank Resolution regimes and on the Recovery and Resolution Planning are well taken. Regarding financial integrity, our authorities remain committed to further enhance the AML/CFT framework and address the shortcomings identified in the 2015 mutual evaluation report.

On the macroprudential oversight, the authorities put addressing the challenges that lie ahead high on their agenda. They welcome the acknowledgement in the FSSA report of the considerable progress achieved by the CBA with enhancing the banking supervision, notably by adopting the RBS framework. However, the authorities agree that the framework is still in an early stage and needs enhancement in several aspects. In this regard, the authorities are determined to carefully consider the staffs’ recommendations to further refine the robust and effective supervisory framework. This generally includes the risk-based differentiation in banks’ capital levels with more standardized stress testing and the ICCAAP approaches; the alignment of non-performing and restructured loans with international best practices, and the application of IFRS9 techniques during the risk management process. This may take two to three years until full implementation.

And finally, the CBA remains attached to the objective of further development of the financial sector. The authorities have made substantial improvements in the legal and regulatory frameworks, notably through the reforms in the credit infrastructure, transactions regime, bankruptcy law and payments systems. The pension system reform fully implemented in July 2018 was an important step forward. Amid the current success, the authorities acknowledge that more efforts are needed. They will continue to take decisive measures to refine the insolvency regime, accounting and auditing standards, as well as the corporate transparency and efficiency of government support programs.