RESOLUTION OF BOARD OF NATIONAL BANK OF THE KYRGYZ REPUBLIC

of December 27, 2024 No. 2024-P-12/71-3-(BS)

About approval of the Provision "About Internal Procedures of Assessment of Sufficiency (Adequacy) of the Capital of Commercial Banks of the Kyrgyz Republic"

According to Articles 5, "About National Bank of the Kyrgyz Republic" the Board of National Bank of the Kyrgyz Republic decides 9 and 64 constitutional Laws of the Kyrgyz Republic:

1. Approve the Provision "About Internal Procedures of Assessment of Sufficiency (Adequacy) of the Capital of Commercial Banks of the Kyrgyz Republic" it (is applied).

2. This resolution becomes effective after 15 (fifteen) days from the date of official publication.

3. To legal management:

- from the date of receipt of the relevant documents within 3 (three) working days to 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 after official publication within 3 (three) working days to bring this resolution to the attention of commercial banks, OYuL "Union of Banks of Kyrgyzstan", structural divisions, regional managements and Representative office of National Bank of the Kyrgyz Republic 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.

Appendix

to the Resolution of Board of National Bank of the Kyrgyz Republic of December 27, 2024 No. 2024-P-12/71-3-(BS)

Regulations on internal procedures of assessment of sufficiency (adequacy) of the capital of commercial banks of the Kyrgyz Republic

Chapter 1. General provisions

1. This Provision determines the bases, procedure and procedures of development of internal procedures of assessment of sufficiency (adequacy) of the capital by commercial banks of the Kyrgyz Republic (further - banks).

Action of this provision extends to banks, including the banks performing transactions according to the Islamic principles of banking and financing including the banks having "Islamic window" taking into account the special terminology applied by them in case of banking operations.

2. Internal procedures of assessment of sufficiency (adequacy) of the capital (further - VPODK) will allow banks to implement reliable, effective and complex strategy and processes for assessment and maintenance on permanent basis of the amounts, types and capital allocation which is sufficient for covering of level of risks to which banks are subject or can be exposed. These strategy and processes are subject to regular internal assessment regarding ensuring their completeness and proportionality to nature, amount and complexity of activities of bank.

3. The description of the main aspects which banks shall consider in case of development of reliable, effective and comprehensive process of VPODK, and also its content which the National Bank of the Kyrgyz Republic (further - National Bank) will estimate within annual process of supervising assessment of VPODK of each bank is provided in this Provision.

4. In addition to the this provision regulations banks are also recommended to consider other publications of such international institutes as Basel Committee on Banking Supervision relating to VPODK.

Besides, banks shall consider all recommendations connected with VPODK, for example, of the recommendation addressed to them, following from process of supervising assessment of National Bank and also the recommendations concerning proper risk management and control.

Chapter 2. The used terms and determinations

5. In this Provision the determinations provided in the following regulatory legal acts of the Kyrgyz Republic are used:

1) the Law of the Kyrgyz Republic "About banks and banking activity" of August 11, 2022 No. 93 (further - the Law on banks);

2) the Instruction for determination of standards of sufficiency (adequacy) of the capital of commercial banks of the Kyrgyz Republic approved by the resolution of Board of National Bank of October 12, 2022 No. 2022-P-12/63-1-(NPA) (further - the Instruction on capital adequacy);

3) the Provision "About the Minimum Requirements on Risk Management in Banks of the Kyrgyz Republic" approved by the resolution of Board of National Bank of June 15, 2017 No. 2017-P-12/25-8-(NPA) (further - the Provision on risk management).

6. For the purposes of this provision the following concepts are used:

1) the Supplementary capital - the supplementary capital of the First level specified in Item 17 of the Instruction on capital adequacy;

2) the Internal document on level the risk appetite is understood in that value which is specified in the Provision on risk management;

3) Basic capital - The basic capital of the First level provided in Item 16 of the Instruction on capital adequacy;

4) Business plans - plans which concern the strategy of bank and the sphere of its activities according to article 25 of the Law on banks;

5) Capital allocation - process of allocation of certain amount of the capital on certain type of risk (for example, credit, operational, etc.) taking into account the level of specific risk which the bank faces.

Capital allocation includes the risks specified in the Instruction on capital adequacy (credit risk and operational risk), and other risks, not provided by the Instruction on capital adequacy (market risk, risk of credit concentration and other risks);

6) the Capital of the First level or equity - the capital of the First level specified in Item 15 of the Instruction on capital adequacy;

7) Planning of the capital - the forecasting of coefficients of sufficiency (adequacy) of the capital of bank for certain period (as a rule, for 3 years) by perspective assessment of the capital of bank and requirements to the capital allowing to provide its full compliance to the business plan of bank;

8) Target indicators on the capital - various limits (such as the purpose, the indicator of the early prevention or limit) established by bank within its internal document on level risk appetite on the indicators connected with its capital adequacy (coefficients of sufficiency (adequacy) of the Basic capital, sufficiency of total (adequacy) of the capital, etc.);

9) the Main activities - activities which represent the essential sources of the income of bank, profit or cost of the franchize which are usually connected with the segments used by bank for informing the market, investors, etc.;

10) Internal models of the capital - the methodologies developed in bank and used for quantitative risks assessment concerning which requirements according to the Instruction on capital adequacy, and other risks which are not provided by the Instruction on capital adequacy are established;

11) Inherent risk - risk level, peculiar to activities, products or services of bank, i.e. probability that the bank will suffer substantial damages because of the risk exposure and uncertainty arising in connection with the current and future events. In this context the amount of losses exceeding 5% of capital cost of the First level of banks belongs to the term "substantial damages";

12) Internal requirements to the capital - internally calculated limits of bank in the capital for covering of risks to which requirements are provided in the Instruction on capital adequacy (credit risk and operational risk) and it is risk to which are not provided by the Instruction on capital adequacy of the requirement (for example, risk of credit concentration, market risk, etc.);

13) the Additional buffer reserve is capital sum which the bank is ready to hold over the minimum requirements to the capital and the "capital buffer" index. The amount of "additional buffer reserve" shall be determined by bank taking into account such factors as: (a) risk profile; (b) risk appetite; (c) minimum requirements to the capital; (d) policy of dividend payout of bank, etc.;

14) Substantial risks - risks, exposure of bank to which it is rather serious potentially to cause essential losses which can reduce the capital of bank. For the purposes of materiality establishment banks shall consider risk essential if their exposure to such risk is equal or exceeds 5% of capital cost of the First level of bank;

15) the Minimum requirements to the capital - the minimum size of equity and standard rates of sufficiency (adequacy) of the capital which the bank shall observe according to regulatory legal acts of National Bank;

16) the Pro-rata rule belongs to the basic principles by which it is possible to be guided in case of realization of this provision, including the system importance of bank, complexity of its activities, business model and the size;

17) the Risk appetite is understood in the value determined in the Provision by risk management;

18) the Risks assessment - process according to which the bank measures inherent risk of all the substantial risks and individually classifies each of these risks on the basis of risk level to which it is subject, and also adequacy of the corresponding risk management systems and control over them;

19) Risk factors - factors which can affect materiality of risks to which the bank is exposed or can undergo. Risk factors can be quantitative or high-quality;

20) the Risk degree - result of assessment on four-point scale which is carried out by bank concerning its risks on the basis of set of exposure of bank to its substantial risks and to adequacy of the corresponding risk management systems and control over them;

21) Identification of risks - regular process during which the bank reveals all substantial risks which it faces when implementing the activities;

22) Limits of risks are understood in the value determined in the Provision by risk management;

23) Net risk - complex assessment of bank of its substantial risks taking into account the level of inherent risk and quality of management and risk control (KUK);

24) the Capital of the Second level - the capital of the Second level provided in Item 19 of the Instruction on capital adequacy;

25) the Net total capital - capital sum of the First level and the capital of the Second level according to the subitem (a) of Item 6 of the Instruction on capital adequacy;

26) the Interest rate risk in bank portfolio - the risk arising in connection with carrying out banking activities with bank portfolio;

27) ChRA - the amount of the balance sheet assets and off-balance obligations weighed on risk degree minus special reserves on covering of potential losses and losses.

Chapter 3. Requirements for VPODK

7. Banks shall develop annually the reliable, effective and complex report on VPODK according to the following criteria:

1) the report shall be updated annually by banks and be provided in National Bank till May 31;

2) the report shall belong to data as of December 31 of previous year;

3) the report shall contain information required in paragraph 1 of Chapter 4 this provision;

4) the report shall be estimated and affirm the board of directors of bank before its submission to National Bank.

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