Title Page
INTERNATIONAL MONETARY FUND
MIDDLE EAST AND CENTRAL ASIA DEPARTMENT
DEPARTMENTAL PAPER
Macroprudential Policies to Enhance Financial Stability in the Caucasus and Central Asia
Prepared by a team led by Padamja Khandelwal and including Ezequiel Cabezon, Sanan Mirzayev, and Rayah Al-Farah
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Copyright ©2022 International Monetary Fund
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Names: Khandelwal, Padamja, author. | Cabezon, Ezequiel, author. | Mirzayev, Sanan, author. | Al-Farah, Rayah, author. | International Monetary Fund. Middle East and Central Asia Department, issuing body. | International Monetary Fund, publisher.
Title: Macroprudential policies to enhance financial stability in the Caucasus and Central Asia / prepared by a team led by Padamja Khandelwal and including Ezequiel Cabezon, Sanan Mirzayev, and Rayah Al-Farah.
Other titles: Departmental papers (International Monetary Fund).
Description: Washington, DC : International Monetary Fund, 2022. | March 2022. | DP/2022/006 | Departmental paper series. | Includes bibliographical references.
Identifiers: ISBN 9798400201240 (paper)
Subjects: LCSH: Financial risk management -- Caucasus. | Financial risk management -- Asia, Central. | Banks and banking.
Classification: LCC HC415.16.K43 2022
Prepared under the supervision of Nicolas Blancher and Nathan Porter by a team led by Padamja Khandelwal and including Ezequiel Cabezon, Sanan Mirzayev, and Rayah Al-Farah, and approved by Subir Lall. This paper benefited from comments from Itai Agur, Max Appendino, Maria Atamanchuk, Omer Bayar, Mohamed Belkhir, Sergei Dodzin, Bihong Huang, Jiri Jonas, Lili Karapetyan, Jeta Menkulasi, Erlend Nier, Tjoervi Olafsson, Azim Sadikov, Sergejs Saksonovs, Sahra Sakhar, Juan Yepez Albornoz, Jianping Zhou, and excellent editorial support by Nataliya Bondar, Liliya Nigmatullina, and Tatiana Pecherkina.
The Departmental Paper Series presents research by IMF staff on issues of broad regional or crosscountry interest. The views expressed in this paper are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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Contents
Executive Summary
1. Introduction
2. Stylized Features of CCA Economies
3. Financial Cycles in the CCA and Their Economic Implications
A. Credit Gap Analysis
B. Credit Cycles Analysis
C. Impact on the Economy
4. Using Macroprudential Policies to Support Financial Stability in the CCA
A. Institutional Frameworks for Macroprudential Policy
B. Macroprudential Tools
C. Capital Tools
D. Liquidity Tools
E. Tools to Reduce Risks from Dollarization
F. Other Tools
G. Response to COVID-19 Crisis
Annex 1. The Credit-to-GDP Gap and Credit Cycle Analysis Methodology
Annex 2. Systemic Financial Crises in the CCA
Annex 3. Macroprudential Tools Deployed in the CCA Countries, June 2020
References
BOXES
Box 1. Capital Inflow Reversals in CCA Countries
Box 2. Macroprudential Response to COVID-19
FIGURES
Figure 1. Characteristics of CCA Economies
Figure 2. Tourism and Capital Flows in the CCA
Figure 3. Banking Sector Indicators
Figure 4. Private Credit in the CCA Contribution to Private Sector Credit Gap
Figure 5. Contribution to Private Sector Credit Gap Oil Prices, Remittances, and Credit Downturns
Figure 6. Oil Prices, Remittances, and Credit Downturns
Figure 7. Housing Prices in US Dollars
Figure 8. Real GDP Growth and Credit Downturns
Figure 9. NPL s and Credit Downturns
Figure 10. Selected Features of Macroprudential Institutional Frameworks
Figure 11. Selected Broad Tools to Contain Credit Cycles
Figure 12. Selected Tools to Contain FX Risks
Figure 13. Dollarization in the CCA
Figure 14. Banks’ Capital Adequacy
Figure 15. Selected Sectoral Tools
Figure 16. Relaxation of Regulatory Capital during Crises
TABLES
Table 1. Duration and Amplitude of Credit Cycles in the CCA, 2001–20
Table 2. Interagency Coordination Groups
Table 3. Minimum Regulatory Capital Requirements in the CCA, June 2020
Executive Summary
Limited economic diversification has made the economies of the Caucasus and Central Asia (CCA) particularly vulnerable to external shocks. The economies in the region are heavily reliant on oil and mining exports as well as remittances. In some countries, tourism and capital flows also play a prominent role in aggregate economic activity.
The effect of external shocks on economic activity in the CCA is amplified through large financial cycles. Over the past two decades, favorable external conditions in the region have been accompanied by large credit expansions and rising systemic risks. Adverse external shocks have led to sharp contractions in credit and asset prices and higher nonperforming loans. Banking sector crises—more frequent in the less diversified CCA economies—have aggravated macroeconomic outcomes and necessitated costly publicly funded bailouts, also weakening financial sector development and potential growth. The COVID-19 fallout is the latest economic shock to affect CCA financial sectors, with its full impact expected to materialize with a lag.
Stronger macroprudential policy frameworks can help strengthen financial sector resilience to mitigate the impact of the region’s large financial cycles. Time-varying macroprudential policies can help address risks over the financial cycle by moderating credit and asset price booms and by building buffers that can be released to maintain resilience as shocks materialize. In addition, structural macroprudential policies can help reduce the financial sector’s vulnerability to common shocks and dollarization.
A broad range of macroprudential tools is needed in CCA countries to curtail financial sector risks. The design of the macroprudential toolkit should reflect the size and complexity of the financial sector, data availability, and analytical capacity. Tools should be calibrated and evolve in line with risks, minimize leakages, and avoid undue complexity.
Many CCA countries have started the process of strengthening their macroprudential policy frameworks. In this context, it is important to adopt a macroprudential strategy, establish a system to identify and monitor systemic risks, select and operationalize tools in line with identified risks, and upgrade communication and ex post evaluation. While efforts to improve monitoring of systemic risks are underway in a number of countries, several of them still need to address gaps in the independence of the macroprudential authorities as well as in data and capacity.