On the joint conference of the ARDFM and the IMF on the results of Financial Sector Assessment Program (FSAP)
A conference dedicated to the results of the Financial Sector Assessment Program (FSAP) conducted by the International Monetary Fund (IMF) and the World Bank in Kazakhstan in 2023 was held at Narxoz University in Almaty. The event was organized by the Agency of the Republic of Kazakhstan for Regulation and Development of the Financial Market (the Agency) and the IMF.
The conference was attended by Madina Abylkassymova, Chairperson of the Agency; Akylzhan Baimagambetov, Deputy Governor of the National Bank; Pierpaolo Grippa, Head of the FSAP Mission in Kazakhstan; and Sha Yu, Climate Economist of the FSAP Mission in Kazakhstan. Representatives from various financial organizations, including international ones, as well as members of the scientific and expert communities, were present.
The previous FSAP assessment in Kazakhstan took place in 2014. Since then, significant reforms have been implemented to ensure the stability and development of the financial sector. For the 2023 assessment, the Agency was designated as the national coordinator. The assessment also involved the National Bank, AIFC, Ministries of Finance and Economy, the Agency for the Protection and Development of Competition, National Development Institutions, and local experts.
Ms. Madina Abylkassymova welcomed the conference participants and highlighted the importance of the Financial Sector Assessment Program (FSAP) as a crucial tool for analyzing the stability and efficiency of Kazakhstan's financial sector.
In his speech, Mr. Pierpaolo Grippa, Head of the FSAP Mission in Kazakhstan, outlined the essence, objectives, and significance of the program for the countries’ whose financial sector is being assessed.
“The Financial Sector Assessment Program has been conducted by the IMF jointly with the World Bank since 1999 to provide a comprehensive and in-depth analysis of a country's financial sector stability. The IMF specializes in stability aspects, while the World Bank focuses on the developmental needs of the financial system. The Assessment Program offers recommendations for further reforms and assistance in capacity building,” Grippa explained.
Mr Pierpaolo Grippa highlighted Kazakhstan's macroeconomic stability, significant progress in risk-oriented supervision, advancements in supervisory tools, achievements in the digitalization of the financial industry, and increased financial inclusion compared to the previous 2014 assessment. The IMF representative then proceeded with a discussion of the results of the risk analyses and the FSAP recommendations for further improvement in the areas of financial oversight and financial safety net.
The results of the stress testing of banks confirmed the overall stability and adequate capitalization and liquidity of banks in the face of the assumed shocks. “Under the adverse stress scenario, banks' aggregate capital adequacy declines from 17.9% at the end of 2022 to 13% by the end of 2024, with a subsequent recovery to 18.2% by the end of 2025, well above regulatory requirements, with some smaller banks facing higher solvency pressures than others. The aggregate liquidity coverage ratio (LCR), which measures a bank's ability to cover possible cash outflows within 30 days during crisis events, remained above the Basel requirements in 10 out of 11 stress scenarios and dropped to 0.96 in the most conservative scenario,” the IMF representative added.
According to the IMF representative, it is essential to legislate the independence of the Agency in terms of resources and organizational structure, as well as to strengthen the legal protection of its employees.
“Banks' related party transactions need to be identified and assessed, and exemptions for troubled asset transactions between banks and subsidiary stressed asset management organizations should be eliminated. Additionally, the application of banking prudential standards and risk management requirements needs to be expanded at the banking conglomerate level,” Grippa stated.
Mr Pierpaolo Grippa also announced the results of the assessment and key recommendations on macro-prudential regulation, crypto-asset market regulation, interaction between AIFC and the domestic financial system, issues related to key elements of the financial safety net, and the further development of the financial sector.
Ms Sha Yu, Climate Economist at the FSAP mission in Kazakhstan, presented the results of the assessment of climate risks to financial stability in Kazakhstan. The expert highlighted the high carbon intensity of Kazakhstan's economy and the country's plans to achieve carbon neutrality by 2060, which will require a significant transformation of its economy and energy system in particular.
Ms Yu detailed the assessment methodology and scenarios used, climate risk analysis results for the banking sector, and provided recommendations on mitigating the impact of climate risks on financial stability.
Recommendations based on the results of the FSAP assessment program were considered at the meeting of the Financial Stability Council. As a result, a roadmap for implementing these recommendations was approved and is planned for execution in 2024-2025. During her speech, the Head of the Agency, Ms Madina Abylkassymova, outlined the measures implemented in seven areas of assessment.
“The assessment of compliance with banking regulation and supervision showed that Kazakhstan's banking regulation and supervision fully or significantly comply with 22 of 29 Basel principles and partially comply with 7 principles. No instances of non-compliance with the Basel principles were identified,” Ms Abylkassymova noted.
Since 2022, the Agency has begun implementing consolidated supervision. Regulatory legal acts on key prudential standards, risk management systems, and corporate governance at the consolidated level have been developed and will be implemented this year.
As part of strengthening capital requirements, the Agency introduced a supervisory capital surcharge based on SREP, AQR, and supervisory stress testing results last December. It also increased the capital conservation buffer requirements to 2.5% for non-systemic banks. Effective January 2024, the LCR and NSFR liquidity ratios will be raised from 0.8 to 0.9. By the end of the year, a new prudential norm—a leverage ratio of 3%—is planned to be introduced.
The head of the Agency noted that following the 2014 assessment, the regulator took systemic measures to clean up the banking sector from problem assets. “Thank to the measures taken to revitalize the banking system, the level of loans overdue for more than 90 days reached a historic low of 3%, and Stage 3 loans decreased from 13.9% in 2020 to 6% in 2023. This contributed to an increase in the assessment of the banking sector (BICRA, S&P in 2023). This year, an expanded definition of non-performing loans (NPL) will be introduced, along with requirements for the term of NPL write-offs,” emphasized Ms Abylkassymova.
A recommendation from international experts to limit the maximum amount of consumer loans has already been implemented this year. The corresponding amendment was included in the Law on minimizing risks in lending, signed by the Head of State on June 19.
According to Ms Madina Abylkassymova, as part of further aligning banking regulation with Basel principles, the Agency will take measures to tighten regulations on related party transactions, introduce risk-based supervision within the framework of anti-money laundering and combating the financing of terrorism (AML/CFT), and establish requirements for the qualification and coordination of heads of risk management, compliance, and internal control.
Regarding the financial safety net assessment, the Head of the Agency noted that a draft law on the settlement of insolvent banks had been developed. This law includes stricter conditions for using public funds, clearly defining the roles of the Government, the National Bank, and the Agency, limiting dividend and bonus payments until the full return of state support, and introducing requirements for settlement plans and the minimum level of liabilities to be converted into capital.
The head of the Agency outlined further directions for the regulator's work, including improving tools for assessing systemic and climate risks, strengthening macroprudential policy, reducing consumer credit risks, developing financial intermediation and competition, enhancing capital markets and crypto-asset regulation, and strengthening the system for protecting the rights of financial service consumers.
The results of the assessment and the recommendations for the further development of the financial sector generated wide interest and discussion among conference participants, confirming their significance and relevance for the financial market.
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