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CB RA REMOVES NOT VIABLE BANKS FROM THE MARKET
Below is an interview of President of the Central Bank of the Republic of Armenia Tigran Sarkissian to the ARMINFO news agency
-Would You describe in detail the current processes in Armenia's
banking system?
The analysis of banking systems of countries in transition testifies
that restructuring process took place in most of them, and is now
under way in many of them. Major differences are only in how painless
this process in each country, which, in turn, depends on whether it
is the result of a bank crisis or a planned stage in a high-quality
development of the banking system. Restructuring as a result of a
bank crisis is quite expensive for a state: some international
experts estimate the expenses for recovery of the banking system at
15% of the GDP. Only few countries (for example, Hungary, etc..) were
able to avoid restructuring, as their banking system was initially
formed on the basis of foreign capital and is mostly represented by
branches of big foreign banks now.
The situation that developed in Armenia's banking system
during last few years - existence of unhealthy banks, whose
activities had a negative impact on the banking system as a whole and
raised the probability of system risks, establishment of
undesirable business traditions of functioning on the financial
market - forced the Central Bank to take drastic measures. As a
result, in 2000, the CB made a serious decision inaugurating the
process of restructuring of the banking system, as further delay
could result in a bank crisis. A concept of banking system
development until 2005 was elaborated, measures toward improving the
country's legislation were implemented, which furnished the CB with
sufficient powers for accomplishing the tasks set.
At the first stage of realization of the concept the major task was
getting unviable banks to leave the market, simultaneously minimizing
the damage resulting from mass closure of banks and meeting and
demands of creditors and depositors as well as possible.
Simultaneously, the requirements concerning the permissible risk
level set to the healthy banks were tightened, for consequences of
restructuring for these banks and the indirect effect of the measures
to be minimized. Considering the fact that not all the healthy banks
were able to meet the requirements that were being constantly
tightened and brought to conformity with international standards. the
CB started preparing a legislative and normative base for the banks
that would make decisions on restructuring into credit institutions
and, according to new legislation, would be able to render a limited
range of services.
The banking system can now be conventionally divided into two groups.
The first group is the normally functioning banks, which meet all the
economic standards set by the CB. These banks are the backbone of the
banking system. They really perform the function of financial
mediators in economy, have a permanent clientele which were not built
up in a day. The finance indicators of this group of banks is
characterized by a steady increase. Most of them ensure a sufficient
level of profitability, which is a prerequisite for further
development.
The second group is the so-called problematic banks, which are in the
center of attention of the Bank Supervision Service.
Most of them have temporary administrations or, according to the
former legislation, under trusteeship. These banks are functioning is
a special regime, outside the principal standards. Under a
program, which is currently being elaborated and is to be approved by
the CB Board, recovery measures will be implemented.
Recovery can in some cases be regarded as implementation of measures
aimed at preparing the bank for dissolution with minimal losses.
-What is the CB's policy toward the problematic banks now?
Permanent monitoring, as well as on-site inspections of all the banks
working in Armenia, is conducted as part of bank supervision. The
results sometimes testify to the need for drastic measures aimed at
recovery of individual banks or at their dissolution. However, it
was not until the end of last year that the law allowed the CB to
initiate bankruptcy procedures immediately, without court verdicts.
On the other hand, the delay in consideration of bankruptcy cases by
courts, certain pressure on the part of bankers resulted in judicial
bodies formally considering a real bankrupt bank as a healthy one,
and years passed before verdicts on dissolution of such banks were
returned. It was not until the enforcement of new bank laws that the
CB was allowed to promptly respond to the deterioration of the
financial situation of such banks. Thus, immediately after the new
law on bankruptcy was enforced, temporary administrations were
appointed at some banks. The main goal of the temporary
administrations in most of the banks is preservation and restoration
of assets for meeting as many liabilities as possible.
A prerequisite for the legislative institution of temporary
administrations (specifically, the fact that the CB is entitled to
appoint heads of administrations) is the experience gained during
previous years, when the temporary trustee was, as a rule, connected
with the bank, and the liabilities to depositors were not the first
to be taken care of.
The actions of temporary administrations are strictly regulated by
decisions of the CB Board, and daily monitoring of the financial
situation of the banks is conducted as part of bank supervision. The
temporary administrators have a hard task of reimbursement of the
credits and other assets previously issued by the bank
administration, when, as a rule, hopeless credits are the ones that
were issued, by means of machinations, to persons connected with the
bank in any way and were unsecured.
For example, about 100 civil claims have been lodged with courts
during the last few months in connection with one of the bank's
failing to pay deposits (the bank is currently managed by temporary
administration).
The Cb is sometimes accused of dragging out the dissolution of
certain banks, but objective reasons for this exist, which force the
CB to resort to such steps. Temporary administrations often discover
unregistered financial assets and liabilities (which are mostly the
result of illegal activities of former managers), and their
restoration sometimes lasts for months. The result is as a rule worth
the efforts made.
The fact that the CB has assumed the highest responsibility for
recovering the country's banking system first of all testifies that
the CB administration exercises overall control over the situation
developing on the bank market and implements consistent measures
aimed at improving the indicators of the banking system.
What is Your assessment of the bank supervision and the CB's ability
to ensure stability on the bank market?
Simultaneously with clearing the banking system of unviable
banks,the CB is carrying out reforms aimed at improving bank
supervision. Under the concept of the banking system development, a
system of measures has been elaborated aimed at bringing the level of
bank supervision to conformity with international standards,
considering all the progressive trends and international experience.
The major goal of the reforms is transition to a qualitative
assessment of intrabank risk control systems. Without refusing to
control the quantitative indicators of banks' activities, bank
supervisors shift the main emphasis on the management level.
During the licensing of new banks or new bank owners, major attention
is paid to the legality of finances of the owners, their reputation,
stability of the potential owners' financial flows. These measures
are first of all aimed at preventing the owners from using the banks'
resources for funding their own businesses.
At the function phase, more attention will be paid to the banks'
having active constraint systems,which reduce the assets loss risk.
The structural changes in the bank supervision system are aimed at
enhancing the efficiency of the bank supervisors' response to
processes going on in certain banks. The essence of the changes is
that the functions of prudential supervision are combined with the
on-site inspection functions, which allows the risks arising during
the banks' activities to be thoroughly and, therefore, efficiently
estimated. Each division of the Bank Supervision Service exercises
control over a certain group of banks, the banks being divided into
two groups by the principle of similarity of functioning
and, therefore, risk of activities,which allows bank supervisors
to more efficiently assess the situation and forecast the development
of a similar situation in another bank of this type.
Currently, a special division has been formed at the Bank Supervision
Service to deal with problematic banks. The division's specialization
is risks in the activities of the banks in bankruptcy. To perform the
function of temporary administrator one has not only to be a
specialist in banking business. Therefore, there is a necessity for
a narrow specialization of the division staff. Especially
urgent are skills in crisis management, purchase and sale of
immovable property, strategic management and estimation of prospects
of restoration and development of problematic banks, and, finally,
the negotiating skill and one's being a decent man.
18 Jule, 2002
Emmanuil Mkrtchian, ARMINFO
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