Bank regulation: necessity, essence and main directions

 

Thus, open market operations as a method of monetary management differ significantly from the previous two. The main difference - it is more flexible regulation, since the volume of purchases of securities, as well as used in this interest rate may change on a daily basis in accordance with the direction of central bank policy. Commercial banks, given the specified feature of this method should closely monitor its financial position, while preventing the deterioration of liquidity. 
 
Thus, taken by the National Bank of measures to regulate the activities of commercial banks contribute to banking sector stability and resilience of the financial system as a whole. Activities of the National Bank and the FSA aims to address the challenges identified in the relevant policy documents on development of sectors of the financial market, to ensure growth and maintain high quality financial services, as well as transparency and financial market stability.

Chapter II . Analysis of the regulation and supervision of banks in the Republic of Kazakhstan

 

2.1 Analysis of the implementation of prudential norms of banks

 

To ensure stability and soundness of the banking system of banking supervision authorities to establish a commercial bank prudential regulations, the latest in banking practice of Kazakhstan called prudential. The composition of prudential regulations include: 
 
- Minimum capital; 
 
- Capital adequacy ratio; 
 
- Maximum risk per borrower. 
 
The main indicator is the prudential capital adequacy. Capital adequacy of the bank is characterized by two factors: 
 
- The ratio of Tier I capital, net of bank's investments made within the share of Tier I capital to total Tier I capital and included in the calculation of the equity capital of the second level to the size of bank assets, reduced by the amount of investment bank, made within the share capital the first level in the total amount of Tier I capital and included in the calculation of the equity capital of the second level (K1); 
 
- The ratio of equity to the sum of: the assets and contingent liabilities weighted by the degree of credit risk, reduced the amount of general reserves (provisions) are not included in the calculation of second-tier capital, assets, contingent and potential claims and liabilities, calculated taking into account market risk, operational risk (K2). 
 
According to the instructions on the normative values ​​and calculation methods of prudential standards for banks in the second level value of capital adequacy ratio of the bank K1 should not be less than 0.06, and the value of capital adequacy ratio of the bank K2 must be at least 0,12. 
 
The purpose of the analysis of capital adequacy of the bank - maintaining it at a certain level sufficient for adequate growth of banking assets, as well as compensation for potential losses and protect the interests of depositors and creditors of the bank. 
 
Bank's capital adequacy - is the main criterion for a comprehensive assessment of financial stability of a commercial bank. This follows from the basic function of bank's own capital: it protects the bank from financial volatility and excessive risk-taking, protects the bank from bankruptcy. 
 
On this basis, the calculation of capital is important to determine how bank capital could be used to protect depositors and whether its value. 
 
In the world of banking practice, there are many ways of calculating capital adequacy. The most widely used method for the coefficient. 
 
For the calculation of adequacy ratios should be defined so-called regulatory capital. To do this, the share capital of the bank deducted certain assets that are not considered a reliable source of funds if the bank should be sold or liquidated. Deducted as investment in equity of subsidiaries and other entities, to bankruptcy of one of them does not cause a reduction in bank capital. Certain liabilities, in contrast, is added to equity, such as subordinated debt. With all these amendments regulatory capital may become more or less stock. 
 
Calculated in this way capital is divided into Tier I capital and Tier II capital. 
 
Tier I capital includes the most robust and stable sources that actually are a measure of protection of creditors and depositors. It is called "capital base". In contrast, the Tier II capital or subsidiary capital "consists of articles which, for various reasons do not fully protect creditors and depositors. 
 
Detail components of equity capital of the first and second levels are set out in the Regulations on the normative values ​​and calculation methods of prudential norms for commercial banks. 
 
Once defined the capital necessary to calculate that with than his match. In one case, the size of bank assets, reduced by the amount of investment bank. In the second case, the amount of assets and contingent liabilities weighted by the degree of risk, reduced by the amount of special provisions. Then calculated capital adequacy ratio, ie is K1 and K2. 
 
Thus, to determine the adequacy of bank's equity capital is not easy, but it is very important. The bank grew, increased its deposits and profitable assets, he must build up their capital and at the same time maintain the same level of risk. 
 
In analyzing the adequacy of own capital of commercial banks are to: 
 
- Determination of actual values ​​of capital adequacy ratios; 
 
- Match the actual performance standard values; 
 
- Identification of factors causing the deviation of the actual values ​​of the coefficients of the established banking supervisory authorities. 
 
The ability of a commercial bank in a timely and fully meet its obligations depends not only on the work of the bank itself, but the financial situation of borrowers. Deteriorating financial position of the borrower may lead to failure to return a loan, which adversely affect the profitability and liquidity of the bank. To avoid such situations, commercial banks use in their work a variety of tools, one of which is the limit concentration of loans to one borrower. Limit in this case is the maximum amount of credit, including guarantees and contingent liabilities, single borrower or group of entities controlled by one person, as a percentage of capital. 
 
In the practice of domestic banks in accordance with the Rules of prudential regulations for commercial banks introduced the restriction of loan to a borrower (the coefficient of K3). 
 
In determining the amount of risk is taken into account the aggregate amount of loans, issued by the bank to a borrower (or group of related borrowers), as well as guarantees and warranties. 
 
The term "one borrower" means any natural or legal person to whom the bank has claims or may have requirements for which the bank has committed itself to a borrower in favor of third parties or to the borrower, as well as on other grounds provided for by legislative acts of the Republic of Kazakhstan or the concluded agreements. 
 
Risk per borrower (P), including the bank, calculated as the sum of: 
 
1) the bank's claims to the borrower, on the balance sheet of the bank; 
 
2) the bank's claims to the borrower, retired from the Bank's balance sheet during the last five years preceding the current year; 
 
3) claims for which the bank has committed itself to a borrower in favor of third parties or to the borrower, as well as on other grounds provided by legislation of the Republic of Kazakhstan or contracts; 
 
4) minus the amount of security for the obligations of the borrower in the form: 
 
- Deposits placed at the disposal of the bank as security for the obligation; 
 
- Government securities of the Republic of Kazakhstan, issued by the Government of the Republic of Kazakhstan and National Bank; 
 
- Refined precious metals; 
 
- Guarantees of the Government of the Republic of Kazakhstan; 
 
- Guarantees of other banks that have long-term debt rating not lower than "A" agency Standard & Poor's or a similar rating by any other rating agencies.

 
 
 

  2.2 Improvement of banking supervision in the Republic of Kazakhstan

 
 

The stability of the banking system depends largely on the efficiency of regulatory bodies. Improvement of banking supervision in Kazakhstan must meet international norms and principles (at least because much of the economic reforms, including in the banking sector is following the example of countries with developed market economies). In these countries, its emergence was not easy, significant experience, which we can use. Principles of effective banking supervision were consolidated in the Basel Committee on Banking Supervision. However, the effectiveness of supervision it provides a holistic system of oversight activities. 
 
The rapid pace of financial market development in recent years, the emergence of new products, development of financial groups as indicators of the degree of integration of financial markets, brought not only new business opportunities, but also increased risks. Currently, there is a trend of rapid growth in lending. Accordingly, increasing credit risks of banks. 
 
In order to manage the growth of external borrowing by banks FSA has reduced foreign exchange position limits for banks and has made changes to prudential regulations providing for the calculation of capital adequacy. In particular, it introduced more stringent requirements in respect of non-resident, which involves the calculation of credit risk the bank, depending on the credit rating of non-residents. To reduce external borrowing revised method of calculating the minimum reserve requirements. 
 
In recent years, Kazakhstan has seen the achievement of relative macroeconomic stability, growing prosperity of the population, an attractive investment climate in the country, the active development of the banking sector. High domestic demand and relatively low cost of borrowed funds on international capital markets have stimulated banks to attract significant amounts of foreign capital. 
 
The influx of capital from abroad at a lower cost contributed to an increase in the resource base of banks and, consequently, increased banking activity. 
 
Along with this, there are negative consequences of growth of external borrowings, which are associated with an increased level of exposure of the banking sector to foreign currency risk, negative impact which may be due to the revaluation of foreign exchange liabilities of banks, and refinancing risk, interest rate risk and liquidity risk. 
 
In this regard, the Agency's Board in 2006 adopted the Resolution № 120 "On Amending Resolution of the Board of the Agency on September 30, 2005 № 358" On Approval of the normative values ​​and calculation methods for prudential norms for commercial banks, stipulating a number of prudential measures aimed at reducing short-term liabilities to nonresidents and increase foreign exchange liquidity in the banking sector, in particular, set limits on foreign currency liquidity, depending on the timing, the maximum limit of short-term liabilities to nonresidents, as well as reduced foreign exchange position limits. 
 
Introduction to the maximum limit short-term liabilities was due to concern of the supervisory authority the high volatility of short-term liabilities and risks associated with the practice of banks to attract external loans with short maturities for future funding of long-term projects that may adversely affect the liquidity of the banking sector. 
 
At the moment, the dynamics of indicators showed a decrease in the relative performance of short-term bank liabilities to nonresidents, which has a positive impact on liquidity in the banking sector and, in turn, the stability of the banking sector as a whole. In particular, in the period from April 1 to January 1, 2007 the share of short-term liabilities in total liabilities decreased from 22,3% to 11,8%. 
 
Besides, since September 1, 2006 reduced the limits currency net position with 30% of the bank's equity capital to 25%. The slowdown in growth in liabilities in foreign currencies, has caused reduction in the open currency positions. The ratio of net foreign currency positions to equity as of January 1, 2007 was 1.48% versus 4.6% - on April 1, 2006. Low ratio of net foreign currency positions to equity ratio indicates sufficient margin of safety of the banking system with respect to currency risk. 
 
Regulation of liquidity of assets and liabilities in foreign currency stimulates the efficient management of the banks own liquidity risk. In this regard, October 1, 2006, were introduced to comply with mandatory limits on foreign currency liquidity by banks depending on the timing. At this point, in general, the combined factors characterize a sufficient level of foreign currency liquidity, with the exception of the indicator of the current foreign currency liquidity in the euro, which is due to the lack of banks' liquid assets in the currency. 
 
Imposed by the Agency requirements for the liabilities of the banking sector to non-residents established with regard to international practices and recommendations of the IMF mission that visited Kazakhstan in order to hold annual consultations. 
 
Despite the Agency's actions to date amount of liabilities of banks to non-residents continued to grow quite rapidly, which ultimately may contribute to rise of banking sector risks. 
 
Given current trends in the financial market of Kazakhstan, the Agency together with the National Bank of Kazakhstan and ULE, "Association of Financiers of Kazakhstan consider the adoption of additional measures against banks that minimize the risks associated with external borrowing by the banking sector. 
 
One of the analytical tools designed to assess the potential losses of financial institutions in case of any possible downturns in the economy and other negative economic trends can be called stress testing. It has received wide international circulation, so the agency is developing a methodology for conducting stress testing of banks, which analyzes the quantitative and qualitative parameters. The problem of stress testing is to identify the limits, when the banks could be in a critical situation, the number of banks at risk, and their relationship to the entire banking sector. The purpose of stress testing is to identify high-risk situations, identifying the banks most often fall into them, as well as consideration of issues in a time warp, the definition of the current situation in financial markets. 
 
In September 2007 the FSA and the National Bank of Kazakhstan was carried out stress testing of banks. Stress test found a positive trend since the beginning of 2007, taking into account that the number of banks violating the norms of adequacy for the devaluation of 20% with 6 banks (K1 - 3 and k 2 - 3) on 01.01.07g. decreased to 3 (K1 - 1 and k 2 - 2) at 01.09.07g. It turned out that the 50% devaluation of the coefficient K1 is broken three banks, and k 2 - 4 banks. Revealed the maximum (threshold) value - the devaluation of 5.5%, in which all commercial banks will carry out capital adequacy ratios K1 and K2 . 
 
Of stress test shows that the second-tier banks are sufficiently hedge currency risk, which is one of the most found risks in the banking sector. However, we can not ignore the fact that part of the funds raised by banks in foreign currency, issued by banks in the form of credits in national currency, and while the dollar has a tendency to depreciate, the policy of national banks enabling them to make high profits.

 

Consider a more fundamental measures to improve regulation of the banking sector in Kazakhstan. 
 
1) The liberalization of access for foreign banks on the domestic financial market. 
 
Given the globalization processes, the prospect of entering the Republic of Kazakhstan to the WTO, it seems appropriate continuation of liberalization and increased competition in the banking system. 
 
In addition to the already removed restrictions for the activities of foreign banks (in respect of the aggregate charter capital of banks with foreign participation composition of the Board, the requirements for placement of funds in domestic assets, and personnel) is expected to consider the resolution of their branches in Kazakhstan, subject to transitional and conditions to ensure the financial stability of the country. 
 
2) Improvement of consolidated supervision and ensuring the transparency of the national banking sector to accelerate its entry into the world markets and international cooperation. 
 
In order to improve consolidated supervision and transparency in the banking sector will be enhanced supervisory procedures aimed at ensuring that the banks legal requirements in terms of consolidated supervision, ownership structure, relationships with affiliates. 
 
3) Take steps to reduce banking risks associated with the growth in lending to real estate, banks' expansion to foreign markets, consumer finance and small business lending, as well as the development and expansion of banking services. 
 
In order to assess the credit risk of banks, as well as the above-mentioned risks, as appropriate and taking into account the economic viability will improve the existing banking laws, particularly in terms of prudential regulation and methods of classification of assets of banks. 
 
4) Improvement of banking legislation with international standards. 
 
In order to bring regulation of the banking sector in Kazakhstan to international standards, will continue to implement the transition of the banking system of Kazakhstan to the new agreement the capital adequacy of the Basel Committee on Banking Supervision, "International convergence of capital calculation and capital standards" (International Convergence of Capital Measurement and Capital Standards) ( Basel II). In the medium term will be made to complete the transition to Basel II, which involves a series of measures, including: 
 
- To agree a schedule for the Agency for Basel II with the representatives of the Group for the implementation of Basel II (Accord Implementation Group); 
 
- In order to spread awareness and greater understanding of the principles of Basel II be placed on the official website of the Agency Russian-language version of the text; 
 
- Send appropriate requests to the supervisors of their intent and conditions for the transition to Basel II; 
 
- Consider the appropriateness of the use of domestic banks method of centralized ratings. 
 
In addition, work will continue to raise the requirements for banks, further improving risk management in banks in the light of international practice. 
 
5) The interaction with the supervisory authorities of foreign countries for the exchange of supervisory information. 
 
As part of measures to improve banking legislation with international standards, especially regarding the transition of the banking system of Kazakhstan to Basel II is expected to expedite the conclusion of memoranda of cooperation and information exchange with all the regulatory bodies of financial institutions, which are affiliated financial institutions in Kazakhstan ( In particular, the United States, the Netherlands), and, accordingly, with the countries that have subsidiaries and branches of financial institutions in Kazakhstan, as well as develop a strategy for interaction with supervisors parent banks with subsidiaries in Kazakhstan (in particular the U.S., the Netherlands, UK), the parent banks in applying the provisions of Basel II, including to improve relations with the supervisory authorities of foreign countries in technical cooperation. 
 
6) Improvement of obligatory deposit insurance system. 
 
In order to comply with the Kazakhstan system of deposit insurance (hereinafter - the system) with international best practices necessary to implement the following key measures: further improvement of the system, taking into account best international practices and recommendations of the International Association of Deposit Insurance Systems (IABI); introduction in 2007 of differential rates of compulsory contributions to calendar for banks participating in the system, participation in the development of the regulatory framework for carrying out operations on simultaneous transfer of liabilities and assets compulsorily liquidated the bank the other (s), bank (s). 
 
Will be explored alternative ways of funding systems, in case of shortage of funds for the payment of compensation to depositors of liquidated banks in the form of reinsurance abroad, or the use of credit derivatives. 
 
7) Improving the management of external borrowing by the banking sector. 
 
Taking into account adopted in the current year indirect measures to limit external borrowing by banks, based on the examination of international practice, taking into account the recommendations of international financial organizations in the future, within the prevailing situation, the economic feasibility and impact of these measures on the volume of external borrowing by the banking sector, if necessary , possible revision of certain standards and limits in a given direction to the improvement of prudential regulation of banks. 
 
8) Improvement of financial statistics. 
 
Lack of statistical long-term lending by the financial sector of economy does not allow a proper assessment of the investment banking system credit creation and modernization of plant and equipment industry, which in turn requires the adoption of appropriate measures in this direction. 
 
Thus, the main measures in the banking sector will be aimed at liberalizing access for foreign banks on the domestic financial market, improve management of the growth of external borrowing by the banking sector and assess its impact on asset quality of banks, promote the reduction of possible negative impact of destabilizing the real estate market on the quality of banking sector assets as well as increased transparency of domestic banks.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Conclusion 
 
On the basis of theoretical and practical consideration of issues relating to regulation and supervision of commercial banks in Kazakhstan, we have reached the following conclusions and suggestions. 
 
1) The need for banking regulation and supervision justified by the need to maintain and strengthen confidence in the banking system, prevent violations of banking laws and regulations, the ability to understand the depth and determine the cause of problems in a particular bank. Government regulation and banking supervision is aimed at improving the stability of the banking system of Kazakhstan and to create conditions to prevent violations of rights and legitimate interests of consumers of banking services. 
 
Undertaken by the National Bank of measures to regulate the activities of commercial banks contribute to banking sector stability and resilience of the financial system as a whole. Activities of the National Bank and the FSA aims to address the challenges identified in the relevant policy documents on development of sectors of the financial market, to ensure growth and maintain high quality financial services, as well as transparency and financial market stability. 
 
2) In recent years, the Agency increased attention to the banking sector risks associated with an increase in its external obligations. In this regard, the Agency annually undertaken prudential measures aimed at reducing short-term liabilities to nonresidents and increase foreign exchange liquidity in the banking sector. 
 
Since the limited sanctions in 2006, used by 20 banks from 91 violations of banking laws, including the requested letter of commitment in 13 cases, issued a written prescription in 44 cases, warnings in 9 cases, signed an agreement in writing. Sanctions in the form of fines have been applied in 23 cases, and in Valut-Transit Bank revoked the license to conduct operations under the banking legislation in the national and foreign currencies. 
 
In January 2008, the Agency received 77 complaints of physical and legal persons as well as other government agencies. Of the total number of appeals received 50.65% of the letters touched on issues of second-tier banks, 5.19% - on the activities of securities market subjects, 10.39% of the letters - on the activities of insurance companies, 33.77% - on the activities of pension funds. 
 
3) As a result of the above measures taken by the FSA part of the regulation of banks, a decrease in loan growth, which has a "chilling" effect on the "overheating" of the segment. For example, growth in consumer lending in 2006 was 2.6 times, I while in 2007 the volume of issued consumer credit grew in 1,6 times. 
 
With a view to strengthening and improvement of financial situation, as well as improving the quality of the banks, the FSA conducts a series of administrative, legal, financial, organizational, technical and other measures for banks, which is conservation. 
 
Mode of preservation of the bank entered in the case of systematic (for 3 consecutive months) non-capital adequacy ratio or on the basis of Article 48 of the Law of the Republic of Kazakhstan "On banks and banking activities in Kazakhstan and is funded from the bank itself. 
 
Regulation and the vector of financial market development in Kazakhstan aimed at achieving the goal set by the Head of State - in the next 10 years to make Kazakhstan one of the 50 most competitive countries in the world. With this is also closely related to strategic issues, such as Kazakhstan's joining the WTO, the deepening of relations within the framework of integration associations like the EurAsEC, CES, CIS, SCO, improvement of operating parameters of the domestic financial market in the light of international practice. 
 
4) Existing problems and additional risks in the financial sector of the Republic of Kazakhstan will be addressed through new initiatives of the Government, the National Bank and the Agency for Regulation and Supervision of Financial Markets and Financial Institutions. This will facilitate implementation of the Concept of financial sector development for 2007-2011, which determines the main priorities of financial sector development, as well as directions and approaches to government regulation of its individual sectors. 
 
A key role in the way of closer integration into the global economy is further improving the domestic banking system. Liberalisation of the banking sector promotes the introduction of progressive international experience in capital management, improving the quality of management and, consequently, the level of development of the banking system. The issue of liberalization of the banking sector is considered in the framework of negotiations on Kazakhstan's accession to the WTO. In this regard, excluded a number of restrictions on access by non-residents of Kazakhstan to the Kazakh banking market with a view to further liberalization, as well as creating equal conditions for their activity on the territory of the Republic of Kazakhstan. 
 
In order to enhance transparency of the banking system was developed and offered to banks to sign a memorandum on cooperation and collaboration on enhancing the transparency of the bank, which provides for the disclosure by banks of information about the real owners of the bank, controlled by the bank on the list of organizations about the affiliates of the bank and transactions made with them about the bank's business development strategy for the next five years. 
 
Continuous economic growth, favorable investment climate in the country, the sustainable development of the banking sector in recent years have strengthened the confidence of international lenders and as a consequence, active inflow of foreign borrowing, which in turn can lead to greater dependence on the banking sector by borrowing from abroad. 
 
It should be noted that the increase in foreign borrowing increases the exposure of the banking sector to foreign exchange risk significant, negative impact which may be due to the revaluation of foreign exchange liabilities of banks, and refinancing risk, interest rate risk and liquidity risk. 
 
It is extremely important to note that Kazakh banks are involved in external borrowing, mostly on a floating interest rate. In turn, a sharp change in the situation on the world market and conditions of credit agreements, the banks may be unable to respond in a timely manner its obligations, which could negatively affect both the ranking of individual banks and the banking system of the republic. 
 
In order to limit external borrowing by banks in the current year had been taken indirect measures of prudential nature. 
 
Despite the steps taken to improve the domestic banking system must continue to work in this direction. 
 
In order to further develop the banking sector, as well, given the forthcoming accession to the WTO, according to the concept it is supposed to work on further improvement of banking legislation with international standards, competition and liberalization of foreign banks on the domestic financial market, measures to improve consolidated supervision based on risk assessment (taking into account existing conglomerates in Kazakhstan and raised the risks), reduce banking risks associated with the expansion of banks to foreign markets, consumer finance and lending to small businesses, improving financial statistics. 
 
Thus, over time, reforming the banking sector of the country, the level of competitiveness and capacity of domestic banks has increased significantly, which allows us to speak about their ability to compete with foreign banks if they came to the financial market of Kazakhstan.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

List of literature

 

1.Message from the President of Kazakhstan Nursultan Nazarbayev to the people of Kazakhstan "The growth of welfare of citizens of Kazakhstan - the main goal of public policy. " Astana. February6,2008 
 
2.Banking (Handbook banker): A Textbook. Manual / Under scientific ed. AA Abisheva, SA Svyatov.-Almaty:Economics,2007.

 
3.SeytkasimovGS,Banking.-Almaty:Karzhy-Karazhat,2003 
 
4.KonakbaevAG.Banking.Textbook.-Karaganda,2007.-223. 
 
5.Banking (Handbook banker): A Textbook. Manual / Under scientific ed. AA Abisheva, SA Svyatov.-Almaty:Economics,2007.382  
 
6.Law "On banks and banking activities in the Republic of Kazakhstan"dated 31.08.1995, № 2444. 
 
7.Law of the Republic of Kazakhstan "On State Regulation and Supervision of Financial Market and Financial Organizations " dated July 4, 2003 № 474 (as of 10/06/2006 year)

 

8.Ilyasov AA Gilimov AK Journal Journal of execution. "A series of economic. № 4 (26). 2006. 
 
9.Lavrushina OI, "Money, credit, banks. " Second edition, Moscow 2000.

 

10. Azhimetov NN The procedure of conservation banks urovnya. / Publication / www.afn.kz