As part of ensuring financial stability, the Central Bank of
Armenia underscores not only to strengthen financial stability, but also to
effectively manage financial crises.
In the context of financial system stability, a financial
crisis is defined as occurrence of serious liquidity and/or solvency problems
of the financial institution(s) or high probability that such problems will
occur, which may lead to disruption of the financial system’s functions and/or
loss of confidence in the financial system.
As part of management of financial crises, the Central Bank
may cooperate with the Deposit Guarantee Fund of the Republic of Armenia, the
Government of the Republic of Armenia and other public authorities based on a 2010
trilateral memorandum of understanding. Main issues relevant to the process of
financial crises management in the Central Bank are touched upon by the Central
Bank’s Financial Stability and Special Regulatory Committee.
Once a situation is recognized as
having reached a point of crisis, the Committee shall develop and propose an
action plan to restore financial stability. It should be a set of principles,
processes and actions aimed at preventing systemic risk in the financial system
in crisis situations or eliminating its negative consequences in the fastest
and most effective way. The measures proposed by the Committee should, as near as
possible, comply with the following principles:
- Efficiency and integrity
- Protection of public funds
- Regular exchange of information
and providing of confidentiality
When discussing proposals
included in the action plan, internationally practiced resolution plans, if
appropriate, can be considered, insofar as they are applicable to Armenia’s current
Legal framework for measures on financial crises management
The Central Bank of Armenia has a number of tools under its competence which it can use to restore the stability of the financial system. The main components of the above toolkit enable the Central Bank to:
Provide 6-month to 5-year loans, which can also be non-collateralized (RA Law on the Central Bank),
Provide banks with additional liquidity through frequent auctions, by way of expanded scope of collateral securities, prolonged terms,
Sign a contract with financial institutions that have committed violations to improve their financial condition and get back to normal (RA Law on the Central Bank),
Introduce limits to loan, deposit, financial operations of banks, certain types of investment, or establish a special procedure for carrying out such operations to control risk levels (RA Law on Banks and Banking),
Set special economic standards for financial institutions or tighter economic standards for individual financial organizations (banks, insurance companies) (RA Law on Banks and Banking),
Impose sanctions on individual financial institutions or managers, including revoke activity license of a financial institution, disallow a person to exercising the right to vote, to receive dividends, deprive managers of their certificate of qualification (RA Law on Banks and Banking),
Recognize financial institutions insolvent or go to court for bankruptcy (RA Law on Bankruptcy of Banks, Credit Organizations, Investment Firms, Investment Fund Managers, Insurance Companies),
Establish prudential normative standards for financial groups (RA Law on the Central Bank),
Where resources of the Deposit Guarantee Fund do not suffice to recompense individuals against their guaranteed deposits, the Central Bank of Armenia may make a loan under a budget guarantee to the DGF (RA Law on the Central Bank).
In order to effectively manage financial
crises, the Central Bank of Armenia organizes simulation exercises every year.
The simulation exercise is aimed to identify possible problems related to the
management of financial crises at the Central Bank, find ways to solve them, and
improve the skills of those engaged in the financial crisis management exercise.
As part of the simulation
exercise, the Central Bank actively cooperated with the World Bank, the
Financial Sector Advisory Center in Vienna (FinSac), which helped do the
exercise in line with international best practices. Many years, senior employees
of the Central Bank, the Ministry of Finance, the Deposit Guarantee Fund, and
the Bureau of Motor Insurers of Armenia have participated in these exercises.