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RESOLUTION OF BOARD OF NATIONAL BANK OF THE KYRGYZ REPUBLIC

of December 27, 2019 No. 2019-P-12/68-1-(NPA)

About approval of the Procedure for determination of level of the capital necessary for covering of operational risks of banks

According to articles 20 and 68 of the Law of the Kyrgyz Republic "About National Bank of the Kyrgyz Republic, banks and banking activity" the Board of National Bank of the Kyrgyz Republic decides:

1. Approve the Procedure for determination of level of the capital necessary for covering of operational risks of banks it (is applied).

2. This resolution becomes effective after fifteen days from the date of official publication.

3. To legal management:

- publish this resolution on the official website of National Bank of the Kyrgyz Republic;

- after official publication to send this resolution to the Ministry of Justice of the Kyrgyz Republic for entering into the State register of regulatory legal acts of the Kyrgyz Republic.

4. To management of methodology of supervision and licensing of banks to bring this resolution to the attention of OYuL "Union of Banks of Kyrgyzstan", commercial banks, National bank of development of the Kyrgyz Republic, the relevant structural divisions, regional managements, representative offices of National Bank in Batken Province.

5. To impose control of execution of this resolution on the board member of the National Bank of the Kyrgyz Republic supervising Management of methodology of supervision and licensing of banks.

Chairman of the board of National Bank of the Kyrgyz Republic

T. Abdygulov

Appendix

to the Resolution of Board of National Bank of the Kyrgyz Republic of December 27, 2019 No. 2019-P-12/68-1-(NPA)

Procedure for determination of level of the capital necessary for covering of operational risks of banks

Chapter 1. General provisions

1. The procedure determines method of calculation of the capital necessary for covering of operational risks of the commercial banks including performing transactions according to the Islamic principles of banking and financing, and National bank of development of the Kyrgyz Republic (further - banks).

2. The operational risk is risk of direct or indirect losses to which the bank as a result of failures in the transactions of bank or its subsidiary companies caused by external events, human errors, fraud and also as a result of inadequacy or violation of processes, procedures or the control system is subject.

Chapter 2. Calculation of the capital for covering of operational risks by basic indicative method

3. Banks need to perfrom calculation of the size of the capital necessary for covering of operational risks, for basic indicative method.

4. The size of the capital necessary for covering of operational risks joins in calculation of total adequacy of the capital of bank.

5. Calculation of the capital necessary for covering of operational risks is performed on the basis of data of the periodic regulating bank statement.

6. The basic indicative method assumes direct dependence of level of operational risk on scales of activities of bank and implies use of the single indicator of risk for bank as which the net income of bank acts. At the same time neither internal procedures of control, nor risk exposure by various activities are considered.

7. The size of the capital necessary for covering of operational risks is calculated by multiplication of annual average net income for the last three years on the coefficient designated alpha (Alpha).

8. The net income is determined as the amount of net interest income and net not interest income and is calculated to reserve deduction on covering of losses according to loans. When calculating this indicator are excluded:

- losses from any transactions with securities of bank;

- the income from the one-time, not repeating transactions;

- income gained from insurance.

For the banks performing transactions according to the Islamic principles of banking and financing the net interest income is understood as the income calculated by deduction of the expenses incurred on attraction transactions from income gained on transactions of placement (financing).

9. Net not interest income is calculated by deduction of all not interest expenses from all not interest incomes. When calculating net not interest income operating and/or administrative expenses do not join.

Not percentage income / expenses of the banks performing transactions according to the Islamic principles of banking and financing is understood as the income/expenses which is received/suffered on the transactions other than placement/attraction transactions. When calculating net not interest income operating and/or administrative expenses, including depreciation expenses under agreements of idzhara/idzhar muntakhiya bittamlik do not join.

10. The capital necessary for covering of operational risks is calculated by formula:

рис.1 к Пост. от 27.12.2019 г. №12-68-1

where:

BOX - the capital size reserved for covering of operational risks within basic indicative method;

ChD - positive annual net income for the previous three years;

n - the number of years from previous three in which the net income was positive;

Alpha = 15%, reservation coefficient which is established by Basel Committee on Banking Supervision.

Examples of calculation of the capital reserved for covering of operational risks are given in Appendix 1 to this Procedure.

11. Indicators for any year in which the annual net income was negative or zero are excluded from numerator when calculating average value, and the number of years in which the bank suffered losses is excluded from denominator.

12. Banks shall review the size of the capital necessary for covering of operational risks, once a year following the results of year suffices and to provide predesign of the size of the capital necessary for covering of operational risks, and coefficient of sufficiency of total (adequacy) of the capital (K2.1) taking into account the reviewed size of the capital necessary for covering of operational risks, to the Board of directors of bank and in National Bank no later than the 15th following after accounting year.

The calculation of the size of the capital necessary for covering of operational risks reviewed following the results of year shall be represented by banks as a part of the Periodic regulating bank statement, since April of the year following for reporting.

13. For the purpose of continuous, proper and effective management of operational risks of bank the Board of directors is responsible for implementation of direct supervision behind implementation process of policy on operational risk management of bank.

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