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IMF Country Report No. 22/212

REPUBLIC OF KAZAKHSTAN

TECHNICAL ASSISTANCE REPORT—RISK-BASED SUPERVISION RECOVERY PLANS AND INTEREST RATE RISK

July 2022

This technical assistance report on Republic of Kazakhstan was prepared by a staff team of the International Monetary Fund. It is based on the information available at the time it was completed in July 2022.

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TECHNICAL ASSISTANCE REPORT

REPUBLIC OF KAZAKHSTAN

Risk-Based Supervision: Recovery Plans and Interest Rate Risk

July 2022

Prepared By

Alan Ball, Magda Pecena, and Keith Ligon (MCM External Experts)

Authoring Department:

Monetary and Capital Markets Department

Contents

• Glossary

• Preface

• Executive Summary

• I. Introduction

• II. Banking Sector Overview

• III. Recovery Plans

• A. Regulatory Framework in Kazakhstan Related to Recovery Plans

• B. New Recovery Plan Requirements in Kazakhstan

• C. Supervisory Assessment Process for Recovery Plans

• IV. Interest Rate Risk in the Banking Book (IRRBB)

• A. Regulatory Framework for IRRBB in Kazakhstan

• B. Current approach to assessing IRRBB

• C. Internal methodology for IRRBB

• V. Update on previous TA recommendations

• Table

• 1. Key Recommendations

• Figure

• 1. Recovery Plan Supervisory Review Cycle

• Appendices

• I. TA Recommendations from Previous Missions

• II. Structure of the Banking Sector April 1, 2021

• III. International Standards and Comparative Example Regulatory Approaches on Recovery Planning

• IV. Information to be included in a Recovery Plan

• V. Supervisory Issues for Assessing Recovery Plans

• VI. International Standards and Comparative Example Regulatory Approaches on IRRBB

• VII. BIS and EBA Principles and Assumptions on IRRBB

• VIII. Supervisory Issues for Assessing IRRBB

Glossary

Preface

At the request of the Agency for Regulation and Development of the Financial Market of the Republic of Kazakhstan (the Agency), the Monetary and Capital Markets (MCM) Department conducted a virtual mission from April 19, 2021 to May 20, 2021 to assist the Agency with developing regulations and internal supervisory methodologies in line with international standards and best practices on recovery plans and interest rate risk in banking book.

The mission had virtual meetings with Mr. Oleg Smolyakov, First Deputy Chairperson of the Agency, and with senior and middle management of the Agency. Six training sessions were also held with bank supervisors and other Agency staff. The mission also had virtual meetings with representatives of two large banks and one medium size bank.

The mission team would like to express its gratitude to the Agency and its staff, and in particular to Mr. Smolyakov, Mr. Daniyar Nurmanov, Ms. Anar Sadykova, Mr. Madi Burin and his team, and to the members of the Working Groups established to develop methodologies for assessing bank recovery plans and interest rate risk for their openness, productive discussions, and excellent cooperation.

Executive Summary

This virtual technical assistance (TA) mission supported the Agency in strengthening certain elements of its risk-based supervisory framework. The mission provided recommendations and training to the Agency on the assessment of banks’ recovery plans and interest rate risk in the banking book (IRRBB). The mission benefited from simultaneous translation. The priorities for the forthcoming TA missions were discussed with the Agency (strengthening cybersecurity in financial institutions, and assessment of banks’ liquidity within the SREP framework).

The Agency continues to make progress on aligning its prudential regulatory and supervisory frameworks with international standards. The legal framework for banking supervision was revised in 2018, enabling the authority to apply risk-based supervision (RBS). The regulatory framework for banks was strengthened in 2019, with new regulations relating to corporate governance, risk management, business models, and the Internal Capital Adequacy Assessment Process (ICAAP). The Agency is rolling out a risk-based approach to supervision through the implementation of its Supervisory Review and Evaluation Process (SREP), which will require fundamental changes to the Agency’s supervisory approach, development of internal methodologies, and capacity building.

The two missions in September 2020 and November 2020 focused on strengthening the Agency’s institutional set up, and on the implementation of certain elements of the Pillar 2 requirements of the Basel Framework. Recommendations arising from the missions focused on enhancements to the Agency’s operational independence, accountability and transparency; the organizational arrangements for banking supervision and inter-agency cooperation; capacity building; and the development of internal supervisory methodologies for the assessment of a bank’s ICAAP and setting individual Pillar 2 supervisory capital requirements. An implementation plan for the recommendations from both missions has been approved by the Agency and good progress has been made to date.

Previous TA missions noted the necessity of developing supervisory expectations around banks’ recovery plans and an internal supervisory methodology to assess these plans. Recovery planning is an essential component of a bank’s risk management and contingency planning framework and is required under long-established international standards. Recovery plans allow for timely intervention to remedy capital shortfalls, liquidity pressures, and other stresses. Recovery plans are intended to address the continuity of critical economic functions at troubled banks through the development of actionable recovery options that can restore long term viability of the institution, thus avoiding a negative impact on financial stability.

This mission recommended the Agency develop comprehensive regulatory requirements for banks’ recovery plans. The new framework should provide standards that comply with international standards and reflect proportional application to Kazakhstan banks’ systemic risk profile. A short-term follow-up TA can be considered to ensure consistency of the revised regulations with international standards. To support effective interagency cross-border information-sharing and coordination, existing agreements and relationships should be reviewed and, as necessary, cooperative agreements put in place to support the development and execution of recovery plans.

The Agency should develop supervisory procedures and related processes to support the supervisory assessment of banks’ recovery plans consistent with the new regulatory standards. These procedures should ensure that deficiencies in submitted plans are communicated to bank senior management and supervisory boards and that remediation efforts are taken in a timely and effective fashion. To assess the plans, the Agency will need to develop internal criteria and analysis related to the identification of critical functions.

The existing regulations on interest rate risk should be revised to align more closely with international standards and best practice, and an internal supervisory methodology for the assessment of banks’ IRRBB should be developed. The existing rules on IRRBB are set out in Regulation 188, but they are not comprehensive and do not fully meet current international standards or best practice. The Regulation should be reviewed and amended, as necessary, to bring into line with the relevant Basel Standard on IRRBB. The Agency should develop an internal supervisory methodology that provides guidance to assist supervisors gain a better understanding of the nature and composition of a bank´s interest rate risk profile, the different calculation approaches to IRRBB (earnings-based and economic value measures), and of the relevant interest rate shocks and scenarios. The methodology should also provide guidance on the approach to assessing the robustness of a bank’s IRRBB governance and how to challenge the assumptions that determine the quantity of IRRBB that a bank is running. The methodology should set out clearly how the assessment of a bank’s management and measurement of IRRBB fits into the wider SREP framework.

The Agency should consider developing a regular IRRBB regulatory reporting framework by banks. The Agency currently collects a limited set of qualitative and quantitative data from banks on IRRBB management and measurement. Onsite visits and the ICAAP, when fully operational, should provide sufficient qualitative information to enable supervisors to assess the effectiveness of a bank’s risk management of IRRBB, but additional quantitative reporting should be considered to provide data on the nature, size, and trend of a bank’s IRRBB exposures. The Agency should consider conducting a review on banks’ current approaches to IRRBB management and measurement prior to introducing a new reporting regime to inform the scope and frequency of the reporting requirement.

The mission included six training sessions for supervisors on IRRBB and recovery plans. The sessions covered the international standards and best practices drawn from other jurisdictions in respect of IRRBB and recovery plans, and provided practical training advice on how to evaluate a bank’s IRRBB exposures and the effectiveness of its recovery plans, linking these assessments to the Agency’s SREP framework.

Table 1.

Kazakhstan: Key Recommendations

Table 1.

Kazakhstan: Key Recommendations

Key Recommendations	Priority	Timeline1
1. Agency to amend the current legal framework to set clear and comprehensive recovery plan requirements that reference international standards and are proportional to banks’ systemic profile; for example, by revising Regulation 188 to incorporate and integrate recovery planning requirements into the existing supervisory framework. Agency, as a precondition to the development and issuance of recovery plan standards, should conduct a gap analysis of its existing legal and regulatory structure to ensure that the inter-relationships between its existing standards and new recovery plan requirements are clarified and that the Agency possesses supervisory powers and tools appropriate and necessary to support the development, implementation, and assessment of credible banks’ recovery plans.	High	ST
2. Agency to develop an internal methodology including supervisory procedures, internal documentation requirements and other processes to support the supervisory assessment of recovery plans consistent with the new regulatory requirements.	High	ST
3. Agency to integrate the supervisory assessment of recovery plans into its supervisory review and evaluation process.	High	MT
4. Agency to review its information-sharing powers and processes to identify and address gaps and obstacles to information-sharing and coordination necessary for the ef f ective development and implementation of recovery plans.	High	MT
5. Agency to revise Regulation 188 in respect of IRRBB to align it more closely to international standards, taking into account the principle of proportionality.	High	ST
6. Agency to develop an internal supervisory methodology for assessing banks’ measurement and management of IRRBB exposures for use by both onsite and offsite supervisors.	High	ST
7. Agency to consider introducing a requirement for banks to submit a regular supervisory report on IRRBB to enable supervisors to assess the amount and trend of a bank’s IRRBB exposure.	Medium	MT
8. Agency to enhance its review and assessment of IRRBB in banks’ ICAAP reports to inform its SREP assessment and calculation of Pillar 2 capital add-ons.	Medium	MT

View Table

Table 1.

Kazakhstan: Key Recommendations

Key Recommendations	Priority	Timeline1
1. Agency to amend the current legal framework to set clear and comprehensive recovery plan requirements that reference international standards and are proportional to banks’ systemic profile; for example, by revising Regulation 188 to incorporate and integrate recovery planning requirements into the existing supervisory framework. Agency, as a precondition to the development and issuance of recovery plan standards, should conduct a gap analysis of its existing legal and regulatory structure to ensure that the inter-relationships between its existing standards and new recovery plan requirements are clarified and that the Agency possesses supervisory powers and tools appropriate and necessary to support the development, implementation, and assessment of credible banks’ recovery plans.	High	ST
2. Agency to develop an internal methodology including supervisory procedures, internal documentation requirements and other processes to support the supervisory assessment of recovery plans consistent with the new regulatory requirements.	High	ST
3. Agency to integrate the supervisory assessment of recovery plans into its supervisory review and evaluation process.	High	MT
4. Agency to review its information-sharing powers and processes to identify and address gaps and obstacles to information-sharing and coordination necessary for the ef f ective development and implementation of recovery plans.	High	MT
5. Agency to revise Regulation 188 in respect of IRRBB to align it more closely to international standards, taking into account the principle of proportionality.	High	ST
6. Agency to develop an internal supervisory methodology for assessing banks’ measurement and management of IRRBB exposures for use by both onsite and offsite supervisors.	High	ST
7. Agency to consider introducing a requirement for banks to submit a regular supervisory report on IRRBB to enable supervisors to assess the amount and trend of a bank’s IRRBB exposure.	Medium	MT
8. Agency to enhance its review and assessment of IRRBB in banks’ ICAAP reports to inform its SREP assessment and calculation of Pillar 2 capital add-ons.	Medium	MT