Ad­vance­ment of bank­ing su­per­vi­sion stan­dard un­der prep

The UB Post - - Front Page - By B.DULGUUN

Di­rec­tor Gen­eral of Su­per­vi­sion De­part­ment at Mon­gol Bank N.Bat­saikhan gave an in­ter­view on the cen­tral bank’s lat­est op­er­a­tions.

Can you give an up­date on the ex­e­cu­tion of the In­ter­na­tional Mon­e­tary Fund (IMF)’s Ex­tended Fund Fa­cil­ity (EFF) ar­range­ment?

The Mon­go­lian gov­ern­ment de­cided to carry out IMF’s EFF for three years, passed the fi­nal ap­proval on May 24, 2017. The fifth re­view un­der the EFF ar­range­ment was held in Au­gust and was re­viewed by the IMF’s Ex­ec­u­tive Board on Oc­to­ber 31. An IMF staff team con­cluded that de­spite post­ing strong eco­nomic growth and sig­nif­i­cant over-per­for­mance on key fis­cal tar­gets, Mon­go­lia still needs to take fur­ther ac­tions to im­prove the econ­omy through the pro­gram.

Un­der the EFF ar­range­ment, Mon­go­lia will re­ceive a to­tal fi­nanc­ing pack­age amount­ing to around 5.5 bil­lion USD, of which, ap­prox­i­mately 434.3 mil­lion USD will be pro­vided by IMF. By the first half of this year, Mon­go­lia re­ceived a fi­nanc­ing of 184.5 mil­lion USD from IMF.

How will the as­set qual­ity re­view (AQR) im­pact the cur­rent bank­ing sys­tem?

The re­cently com­pleted the AQR con­cluded that the bank­ing sys­tem’s ag­gre­gate cap­i­tal ad­e­quacy short­fall was about 1.9 per­cent of GDP at the end of 2017, which is close to Mon­gol Bank’s fore­cast. As a re­sult, Mon­gol Bank is su­per­vis­ing re­cap­i­tal­iza­tion plans, sub­mit­ted by banks in Jan­uary and Sep­tem­ber. Banks sub­mit­ted their re­cap­i­tal­iza­tion plans through 2020 for a re­view.

In cor­re­la­tion with the AQR, banks made es­ti­ma­tions on the year-end cap­i­tal short­age and Mon­gol Bank has or­dered them to raise cap­i­tal to re­quired level by the end of the year. As of Sep­tem­ber, five banks man­aged to in­crease their cap­i­tal by 140 bil­lion MNT. Some banks have also re­quested to in­crease their cap­i­tal. Mon­gol Bank is cur­rently ex­am­in­ing whether their re­quests should be ap­proved. We’ll be able to eval­u­ate the ex­e­cu­tion of cap­i­tal plans of banks at the end of the year.

Within the scope of the medi­umterm strat­egy of bank­ing su­per­vi­sion and mon­i­tor­ing, the min­i­mum cap­i­tal re­quire­ment for com­mer­cial banks will be raised by 50 bil­lion MNT to 100 bil­lion MNT on De­cem­ber 31, 2021. It could be un­der­stood that banks are in­creas­ing their cap­i­tal in com­pli­ance with the de­cree by the pres­i­dent of Mon­gol Bank.

Fol­low­ing the AQR, ev­ery bank was given rec­om­men­da­tion on ways to im­prove their credit risk pol­icy, re­lated reg­u­la­tion, pro­ce­dures and guide­lines. The im­ple­men­ta­tion of these rec­om­men­da­tions is be­ing checked on the spot through a com­pre­hen­sive in­spec­tion at banks.

What is the sig­nif­i­cance of cap­i­tal to a bank?

Bank cap­i­tal is an in­stru­ment for im­prov­ing the bank’s cred­i­bil­ity and re­li­a­bil­ity, se­cur­ing money of cus­tomers, and re­pay­ing pay­ments if the bank liq­ui­dates. An ad­e­quate amount of cap­i­tal is the key to a sus­tain­able and re­li­able bank­ing and fi­nan­cial sys­tem. Hav­ing ad­e­quate amount of cap­i­tal to ab­sorb losses will pre­vent the bank from risks of insolvency.

Has the bank­ing le­gal en­vi­ron­ment been re­formed through the EFF ar­range­ment?

The Bank­ing Law, a vi­tal bank­ing reg­u­la­tion, was re­vised last in 2010. Un­der IMF’s EFF ar­range­ment, Mon­go­lia is striv­ing to fur­ther de­velop and

im­prove its bank­ing reg­u­la­tion and Mon­gol Bank’s op­er­a­tions based on in­ter­na­tional prin­ci­ples and stan­dards.

At the start of 2018, the Bank­ing Law was re­vised by Par­lia­ment. The new law sets much more de­tailed cri­te­ria ap­pli­ca­ble to founders, share­hold­ers, board of di­rec­tors and ex­ec­u­tive man­age­ment. It also set higher re­stric­tions on the re­la­tion­ship be­tween banks and re­lated par­ties. The amend­ment in­tro­duced new pre­ven­tive mea­sures to take if the bank breaches the Bank­ing Law, reg­u­la­tions, pro­ce­dures and de­ci­sions of Mon­gol Bank, or the bank is likely to do so, the bank does not sat­isfy the re­quire­ments of bank­ing li­censes, or the bank en­gages in un­re­li­able, “ir­reg­u­lar” or “ab­nor­mal” ac­tiv­i­ties.

The Law on Main­tain­ing Sta­bil­ity in the Bank­ing Sec­tor was en­acted last sum­mer. What kinds of pos­i­tive im­pacts will this law bring to Mon­go­lia?

First of all, I’d like to briefly ex­plain why it was nec­es­sary to ap­prove

this law. We started this in­ter­view with the AQR. The AQR as­sessed as­sets of banks and it eval­u­ated that it’s es­sen­tial for banks to cre­ate an as­set risk fund if they haven’t al­ready. An as­set risk fund is es­tab­lished at a cost, which pushes banks to in­crease their cap­i­tal. Fol­low­ing the AQR, Mon­go­lia was faced with the need to de­fine mea­sures to re-cap­i­tal­ize banks with cap­i­tal short­age, and ap­prove re­lated reg­u­la­tory doc­u­ments in or­der to main­tain sta­bil­ity in the bank­ing and fi­nan­cial sec­tor, pro­tect the rights of cus­tomers and de­pos­i­tors, and re­duce risks of be­ing bur­dened by large ex­penses of the state in the fu­ture.

The Law on Main­tain­ing Sta­bil­ity in the Bank­ing Sec­tor is sig­nif­i­cant for re­duc­ing po­ten­tial fi­nan­cial bur­den on banks caused by state ex­penses when they are un­able to gen­er­ate funds from the state or in­vestors due to a cap­i­tal short­age. This will en­sure nor­mal, prof­itable and sta­ble op­er­a­tions of banks.

What mea­sures are be­ing taken to re­duce non-per­form­ing loans?

2018 was a very im­por­tant year for Mon­go­lia's bank­ing sys­tem. Through the AQR, we di­ag­nosed the health of banks and de­ter­mined fu­ture course of ac­tions to take. We’re ex­pect­ing bank as­sets to in­crease by the end of the year. Since Mon­gol Bank is shift­ing its su­per­vi­sory prin­ci­ple from “ex­e­cu­tion-fo­cused” to “risk-fo­cused”, we be­lieve that we can achieve and en­sure fi­nan­cial sta­bil­ity.

More­over, the Min­istry of Fi­nance, Fi­nan­cial Reg­u­la­tory Com­mis­sion and De­posit In­sur­ance Cor­po­ra­tion signed a strat­egy doc­u­ment to re­duce non­per­form­ing as­sets. Non­per­form­ing loans in­crease risks as they re­duce banks’ cur­rent as­sets, af­fect prof­itabil­ity, and bring di­rect neg­a­tive im­pacts to the bank­ing sys­tem’s liq­uid­ity. It’s also one of the key rea­sons to stop loan dis­burse­ment.

Bank non­per­form­ing loans to to­tal gross loans reached 5.1 per­cent as of Sep­tem­ber 30.

Un­der the EFF ar­range­ment, we’re work­ing to im­prove the le­gal en­vi­ron­ment by amend­ing the Law on Ar­bi­tra­tion, Bank­ruptcy Law, Com­pany Law, Law on Prop­erty As­sess­ment, Gen­eral Law on Tax, and other leg­is­la­tion. We also hope to make changes in the le­gal en­vi­ron­ment for the sale of col­lat­eral in a non-ju­di­cial fore­clo­sure.

Can you share some more changes we can ex­pect in the bank­ing sys­tem?

In ac­cor­dance with a joint de­cree by Mon­gol Bank and the Min­istry of Fi­nance, fi­nan­cial state­ments are pro­vided con­sis­tently with the bank­ing ac­count­ing guide­lines. The guide­line was re­cently ad­justed to meet in­ter­na­tional fi­nan­cial re­port­ing stan­dards (IFRS). Start­ing 2020, banks will adopt the IFRS 9 Fi­nan­cial In­stru­ments, which in­cludes re­quire­ments for recog­ni­tion and mea­sure­ment, im­pair­ment, dere­cog­ni­tion and gen­eral hedge ac­count­ing. A fi­nan­cial in­stru­ment is a doc­u­ment rep­re­sent­ing a le­gal agree­ment in­volv­ing any kind of mon­e­tary value be­tween par­ties.

Will the cap­i­tal re­quire­ment of banks be changed?

We’re now car­ry­ing out the Basel II Pil­lar 2 su­per­vi­sory re­view process as part of the medium-term strat­egy of bank­ing su­per­vi­sion and mon­i­tor­ing. Its first pil­lar – Pil­lar 1 – sets min­i­mum cap­i­tal re­quire­ment (ad­dresses risks), while Pil­lar 2 pro­vides reg­u­la­tory re­sponse to Pil­lar 1 through a su­per­vi­sory re­view. It also pro­vides a frame­work for manag­ing the other bank risks: sys­temic risk, pen­sion risk, con­cen­tra­tion risk, strate­gic risk, rep­u­ta­tional risk, liq­uid­ity risk and le­gal risk.

In other words, banks will first get nec­es­sary tools to de­ter­mine the min­i­mum cap­i­tal it needs for its credit, mar­ket and op­er­a­tional risks. Se­condly, Mon­gol Bank will su­per­vise in­ter­nal poli­cies and method­ol­ogy of banks and eval­u­ate their co­or­di­na­tion, and if nec­es­sary, take reg­u­la­tory ac­tion. Thirdly, banks will have to in ad­di­tion to meet­ing their min­i­mum cap­i­tal re­quire­ments, ful­fill other re­quire­ments. Next, if a bank’s cap­i­tal falls be­low the min­i­mum amount, it will be re­quired to re­cap­i­tal­ize and if it is un­able to do so, reg­u­la­tory mea­sures will be taken.

With all of these works planned out, I be­lieve that Mon­gol Bank will be able to work even closer with com­mer­cial banks and ad­vance the su­per­vi­sory level even higher. Be­ing able to fully ap­ply Basel II stan­dard to the cen­tral bank’s su­per­vi­sory sys­tem will in­crease Mon­go­lia's cred­i­bil­ity, at­tract more for­eign in­vestors, and cre­ate a fa­vor­able in­vest­ment en­vi­ron­ment.

What kind of al­ter­ations will be made in terms of reg­u­la­tion and pro­ce­dure for su­per­vi­sory ac­tiv­i­ties?

In con­nec­tion to the said tasks, the reg­u­la­tion on cat­e­go­riz­ing as­sets, es­tab­lish­ing an as­set risk fund and ex­pen­di­ture will be en­hanced based on ef­fec­tive prac­tices of other coun­tries. We’ll also amend the reg­u­la­tion on set­ting pru­den­tial ra­tios to bank­ing op­er­a­tions and its mon­i­tor­ing. In ex­ist­ing reg­u­la­tion, dis­counts have been placed on the weight of credit risk of some sec­tors. This will be can­celed con­sis­tently with in­ter­na­tional stan­dards.

It’s nec­es­sary to in­clude reg­u­la­tory changes in banks’ re­cap­i­tal­iza­tion plans next year, while pay­ing at­ten­tion to other ac­tiv­i­ties.

...It’s nec­es­sary to in­clude reg­u­la­tory changes in banks’ re­cap­i­tal­iza­tion plans next year, while pay­ing at­ten­tion to other ac­tiv­i­ties...

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