RESOLUTION OF BOARD OF NATIONAL BANK OF THE KYRGYZ REPUBLIC

of June 28, 2006 No. 19/3

About approval of the Provision "About the Minimum Requirements on Management of Country Risk in the Commercial Banks and Other Financial Credit Institutions Licensed by National Bank of the Kyrgyz Republic"

Having considered the project of the Provision "About the Minimum Requirements on Management of Country Risk in the Commercial Banks and Other Financial Credit Institutions Licensed by National Bank of the Kyrgyz Republic", being guided by Articles 7, 43 Laws of the Kyrgyz Republic "About National Bank of the Kyrgyz Republic", Articles 24, 25 and 49-3 Laws of the Kyrgyz Republic "About banks and banking activity in the Kyrgyz Republic", the Board of National Bank of the Kyrgyz Republic decides:

1. Approve the Provision "About the Minimum Requirements on Management of Country Risk in the Commercial Banks and Other Financial Credit Institutions Licensed by National Bank of the Kyrgyz Republic" it (is applied).

2. To management of methodology of supervision and licensing together with Legal department in accordance with the established procedure to carry out state registration of this resolution in the Ministry of Justice of the Kyrgyz Republic.

3. This resolution becomes effective from the moment of official publication after state registration in the Ministry of Justice of the Kyrgyz Republic.

4. To commercial banks, JSC Settlement and Savings Company and Kyrgyz Agricultural Finance Corporation Ltd to bring the internal acts on management of country risk into compliance with this resolution, after its entry into force, till January 1, 2007.

5. After publication of the registered regulatory legal act to Legal department to inform the Ministry of Justice of the Kyrgyz Republic on publication source (the name of the edition, its number and date).

6. To impose control of execution of this resolution on the vice-chairman of National Bank Kyrgyz the Republics Dzhanybekova of Page E.

Approved by the Resolution of Board of National Bank of the Kyrgyz Republic of June 28, 2006 No. 19/3

Provision "About the Minimum Requirements on Management of Country Risk in the Commercial Banks and Other Financial Credit Institutions Licensed by National Bank of the Kyrgyz Republic"

I. General provisions

1.1. This Provision establishes obligatory for observance by commercial banks (further - banks) the minimum requirements to the organization of management of country risk.

1.2. The purpose of this provision is establishment of the minimum requirements to politicians, procedures and internal control in banks for forming in banks of adequate management system country risk, including risk of the translation (transfer risk) and sovereign risk which provide, at least, the following:

- tasks of management of country risk;

- procedure for identification, assessment, determination of acceptable level of country risk and monitoring of the level of country risk, including on the consolidated basis;

- taking measures to maintenance of acceptable level of country risk, including including control and/or risk minimization;

- procedure for information support concerning country risk (procedure for exchange of information between divisions and employees, procedure and frequency of submission of reporting and other information on questions of management of country risk);

- procedure for management of country risk when implementing currency bank servicing, in case of development and deployment of new forms and conditions of banking operations and other transactions, financial innovations and technologies, in case of entry into the new markets (on types of service, on currency types and on territorial (country) accessory);

- distribution of powers and responsibility between the Board of directors, executive bodies, divisions and serving in part of realization of the basic principles of management of country risk;

- procedure of control of effective management of country risk.

II. Determination of country risk

2.1. The country risk is risk of origin at bank of losses owing to change of economic, social and political conditions and events in foreign states when implementing the international crediting, foreign investments and other cross-border transactions, i.e. the transactions assuming participation of the partners who are residents of foreign state (1).

2.2. The bank should take into account availability of indirect country risk, including during the work with clients - residents of the Kyrgyz Republic.

2.3. The bank shall determine to what types of country risk its activities are subject. By bank losses owing to exposure of its activities to various types of country risk can be suffered, including:

2.3.1. Risk of the translation (transfer risk) - risk of losses which the bank as a result of inability of the borrower to fulfill the obligations owing to actions of the foreign government (3) can incur.

2.3.2. Sovereign risk - risk of possible real or indirect loss to which the bank or any of its subsidiary companies as a result of inability is subject or unwillingness of the foreign government to settle the obligations and to service the debts in accordance with the terms, the stipulated agreements. The sovereign risk can arise, for example, as a result of shortage of foreign currency or unwillingness to service the public debt.

2.3.3. Risk of chain reaction - the risk of losses arising in case unfavorable events in one country lead to impossibility of performance of the obligations borrowers of other country (4).

2.3.4. Currency risk - risk that assets of the borrower and cash flows will become insufficient for servicing of its obligations owing to change of currency rates.

2.3.5. Macroeconomic risk - risk of emergence of expenses (losses) as a result of considerable changes of macroeconomic conditions in the state or in foreign state which will affect capability of the borrower to fulfill the obligations (for example, acceptance of foreign state by the Central bank the decision on increase/decrease in refunding rate which is directed for prevention of impairment/strengthening of own currency which in subsequent can negatively affect the borrowers doing the business with this country).

2.3.6. The indirect country risk - risk that capability of the borrower to repay the debt can worsen owing to change of economic, political or social conditions in the foreign country in which the borrower has considerable business contacts and interests (see the note 2). The indirect country risk shall be taken into account in case of assessment of creditworthness of the client.

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