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RESOLUTION OF BOARD OF CENTRAL BANK OF THE AZERBAIJAN REPUBLIC

of August 28, 2023 No. 41/1

About approval of "Standards of corporate management in banks"

Based on article 34.4 of the Law of the Azerbaijan Republic "About banks" and article 22.0.17 of the Law of the Azerbaijan Republic "About the Central bank of the Azerbaijan Republic", the Board of the Central bank of the Azerbaijan Republic DECIDES:

1. Approve "Standards of corporate management in banks" it (is applied).

2. Requirements of Item 6. 3, subitems 7.6.2 and 7.6.5 of "Standards of corporate management in the banks" approved by part of 1 this Resolution and also the requirement about creation in bank of Committee on corporate management, stipulated in Item 7.2, to apply after 12 (twelve) months from the effective date of this Resolution.

3. No. 1951100003 "About approval of "Rules of risk management in banks" and of June 27, 2019 No. 1951100027 "About approval of "Standards of corporate management in banks" to repeal resolutions of the liquidated Chamber on supervision of the financial markets of the Azerbaijan Republic of January 30, 2019.

4. Charge to Legal department (Rena Melikova) in 3-day time to provide submission of this Resolution to the Ministry of Justice of the Azerbaijan Republic for entering into the State register of legal acts of the Azerbaijan Republic.

Approved by the Resolution of Board of the Central bank of the Azerbaijan Republic of August 28, 2023 No. 41/1

Standards of corporate management in banks

1. General provisions

1.1. These Standards are developed according to article 34.4 of the Law of the Azerbaijan Republic "About banks" (further - the Law), and also taking into account "The principles of enhancement of corporate management" of "The Principles of Corporate Management in Banks" Basel Committee on Banking Supervision and the international experience of corporate management and determine standards of corporate management in banks.

1.2. The purpose in determination of these Standards is the organization of reliable, transparent management system and the reporting in banks, and also ensuring efficiency of internal control and risk management on the basis of requirements of the law on corporate management.

1.3. Item 3. 9, parts 18 and 19 of these Standards extend also to local branches of foreign banks.

2. Concepts

2.1. The concepts used in these Standards have the following values:

2.1.1. corporate management - the method of management providing determination of strategic tasks and purposes of bank on the basis of its strategic vision, availability of tools and processes for their achievement, accurate distribution of powers at all levels of management and also implementation of effective internal control system for the purpose of achievement of effective management of risks and transparency of the activities;

2.1.2. internal control system - the system covering managerial and organizational structure, providing monitoring of activities of bank including risk management functions, komplayens and internal audit;

2.1.3. strategic vision - the long-term reference point of actions aimed at strengthening of line item of bank in the market and increase in its cost;

2.1.4. the declaration of mission - the brief summary of the key principles of strategic vision;

2.1.5. the strategic plan - the periodic plan transforming strategic vision of bank to accurately particular, measurable purposes and connecting them with coordinated actions;

2.1.6. fiduciary duties - the obligations directed to protection of the current and future interests of bank;

2.1.7. risk management - the process reflecting identification, assessment, management, monitoring and the reporting on the risks characteristic of activities of bank;

2.1.8. strategic planning process - process of determination of long-term reference points of activities of bank, creation of the strategic plan for the purpose of achievement of these reference points;

2.1.9. independence - capability to make objective and independent decisions, without being under direct and (or indirect) influence of bank and (or) other strangers;

2.1.10. financial performance - the relative quantitative indices used for assessment of activities of bank and calculated on the basis of the financial reporting;

2.1.11. the chief financial manager - the board member exercising control (monitoring) of activities of divisions of financial management of bank;

2.1.12. the main risk administrator - the board member exercising control (monitoring) of activities of structural divisions of bank in connection with risk management function;

2.1.13. the chief komplayens-administrator - the board member exercising control (monitoring) of activities of structural divisions of bank in connection with komplayens-function;

2.1.14. the corporate secretary - the employee of bank promoting effective activities of the Supervisory board, the Chairman of the Supervisory board and committees of the Supervisory board and meeting the requirements, stipulated in Item 11.6 these Standards;

2.1.15. the employees belonging to the special category - the following workers performing the function having significant effect on risk profile of bank:

2.1.15.1. board members of Bank;

2.1.15.2. heads of control function of bank (the structural divisions performing risk management functions, komplayens and internal audit);

2.1.15.3. total income of bank for last year (the salary and awards) not below the annual average amount of official pay rate and allowances to it issued to board members of bank within calendar year, and having significant effect on the profile of risk of bank established by policy of remuneration of bank (for example, issuance of credits, treasury, project financing, etc.).) the bank employee who works and whose activities influence profile of risk of bank;

2.1.16. users of information are the existing and potential shareholders, participants of the market and other persons interested in receipt of information on activities of bank;

2.1.17. remuneration - the payments performed by bank in the form of money, shares and other financial instruments in exchange for professional activity of workers. Remunerations are established in two forms: fixed and variable. The one-time remunerations gifts which are not provided by salary system and paid to employees of bank according to the solution of management of bank (paid in connection with holidays, significant days and other payments of social nature) do not join in this concept;

2.1.18. the fixed remuneration - type of remuneration which conditions and the size are determined without any criteria connected with activities of bank in advance;

2.1.19. variable remuneration - the remuneration type based on results of activities of bank and determined according to the key indicators of activities (KPI) of bank employees or other indicators determined by management of bank;

2.1.20. risk - probability that costs (losses) caused by probable or unforeseen events will exert negative impact on the capital and liquidity situation of bank;

2.1.21. risk management system - the risk management system consisting of the elements determined by these Standards;

2.1.22. risk limit - the maximum limit of risk accepted for each type of activity of bank;

2.1.23. stress test - the tool of assessment of potential influence of one or several shocks on financial position of bank;

2.1.24. shock - probable and measurable event which can potentially influence activities of bank;

2.1.25. risk profile - the generalized level of risks to which the bank is subject;

2.1.26. risk appetite - amount of risk which the bank wants to accept to accept within the capability risk for achievement of the strategic objectives;

2.1.27. capability accept risk - the maximum extent of risk which the bank can accept, without violating requirements to the capital, liquidity and other prudential requirements;

2.1.28. the declaration risk appetite - the document reflecting cumulative limits of risk which the bank will accept for achievement of the business objectives;

2.1.29. risk culture - set of bank regulations, approaches and behavior on identification, acceptance and risk management, and also decision making on risks;

2.1.30. banking product - method of representation of the types of activity performed by bank;

2.1.31. komplayens-risk - risk of corrective actions and sanctions, financial losses or loss of reputation which the bank as a result of non-compliance with the legislation and requirements of the legal acts regulating the financial markets can face.

2.2. For the purposes of these Standards of the concept "the face tied with bank", "systemically significant bank" and "person having acceptable and necessary qualities" have the values given in the Law.

3. Basic principles of corporate management

3.1. Implementation of corporate management in bank provides the Supervisory board. The board is provided by effective implementation of the strategy and the politician approved by the Supervisory board.

3.2. The bank shall have the managerial and organizational structure including the main activities, distribution of powers, effective management of risks, adequate internal control system, including accounting procedures, effective information systems and based on effective policy of remuneration. The organizational structure of bank affirms general shareholder meeting or the Supervisory board if it is given authority. The organizational structure shall be reviewed regularly by bank and be updated if necessary.

3.3. The managerial and organizational structure, and also distribution of powers shall correspond to nature, amount and complexity of transactions of bank, shall not allow conflict of interest and shall communicate with all bank employees.

3.4. Each bank determines the strategic vision and on its basis prepares the declaration on mission for strategic planning. Strategic vision and the declaration on mission affirm the Supervisory board and are represented to shareholders of bank for data.

3.5. Based on strategic vision and the mission of bank the strategic plan shall be developed. The strategic plan affirms the Supervisory board. The strategic plan covers at least the three-year period, after the termination every year the strategic plan is reviewed following the results of previous year, and in case of change of business profile of bank, and also in case of the events and threats in the external environment influencing activities of bank, corresponding changes are made to the strategic plan. The strategic plan and the changes made to it are represented to shareholders of bank and to the Central bank for data within 30 (thirty) days from approval date. The strategic plan strategic vision of bank, the declaration on mission, risk analysis, priorities of development and types of implementable actions, strategic reference points and the action plan on them reflects, the organizational structure and financial forecasts necessary for implementation of the strategic plan.

3.6. For the purpose of ensuring stability for the long-term period the Bank shall consider in the strategy ecological (climate change, degradation of the environment, violation in ecosystem, etc.), social (gender issues, inclusivity, employment relationships, investments into human resources etc.) and managerial (organizational structure, remuneration, relations between workers, variety and equality etc.) factors (further - factors of ESI).

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