Approval of the ‘Regulation on liquidity risk management in banks’

31-10-2023

31 October 2023, Baku: The Central Bank continues activities as part of aligning the banking sector regulatory framework to international standards and improving the liquidity risk management in banks according to strategic priorities of the country.

The Management Board of the Central Bank with its decision of 18.10.2023 adopted the new edition of the ‘Regulation on liquidity risk management in banks’ (Regulation). According to the decision, the Regulation will take effect on 01.12.2023 and the ‘Regulations on liquidity risk management in banks’ valid since 2009 will be repealed.

The updated Regulation covers recent requirements of international standards and addresses the requirements in the previous regulation in a more advanced way. Experience of foreign supervisory authorities along with standards of the Basel Committee that shapes banking supervision approaches, recommendations of IMF experts, and progressive proposals provided during discussions with the banking community were considered in the elaboration of the Regulation.

The liquidity risk is considered as the key element of the corporate governance and risk management framework in the Regulation, and it improves the liquidity risk appetite, policy, internal rules, and the requirements for liquidity risk identification, evaluation, monitoring and reporting. A new monitoring tool (Herfindahl-Hirschman Index) regarding the concentration of sources of attracted funds has been introduced, the composition of the instant liquidity ratio improved. Moreover, the Regulation determines principles and requirements for daily liquidity management to allow the bank to timely make payments and settlements under normal and stress conditions.

The Regulation introduces a Liquidity Coverage Ratio (LCR) for total and in foreign currency separately based on historical data related to the behavior of bank customers introduced in Basel III standards as part of the improvement of liquidity position forecasting. The objective of the ratio is to facilitate banks to maintain uninterrupted activities and sustain liquidity under stress within a short-term (30 days) to meet liabilities in full and on time.

The Regulation provides for the application of the ratio both as total and on foreign currency. As of the date of entry into force of the Regulation, the banks with the 100% or above LCR   will have to ensure that the ratio does not fall below the norm. To avoid sharp pressure on the banks whose liquidity position is below 100% the ratio will be introduced stepwise within 18-24 months. Systemically important banks should ensure that the ratio reaches 100% within 18 months, while other banks within 24 months after the Regulation takes effect. The current instant liquidity ratio, whose composition has been purified, will continue to be applied until banks maintain a 100% LCR.

The application of the Regulation in question will strengthen the risk management capacity in the banking sector, forecast the liquidity position more properly under potential stress and more effectively protect its resilience.