1 GLOBAL CRISIS ISSUES AND CHALLENGES FOR THE ARMENIAN FINANCIAL SYSTEM VAHE VARDANYAN Head of Financial system policy and financial stability department Central Bank of Armenia

2 Financial system of Armenia From 2006 Central Bank is the mega regulator of Armenian financial sector At present the Armenian financial system consists of: 22 banks 26 credit organizations 12 insurance companies 5 insurance brokerage firms 9 securities firms 84 pawnshop 244 foreign exchange offices 10 payment systems processing and clearing companies

3 - Banks own more than 90% of financial system assets - 22 Banks with more than 380 Branches all over Armenia - About 70% of banking capital is foreign owned - 20 banks out of 22 are with foreign participation Banking system

4 Foreign banks and financial institutions which are represented in Armenia: EBRD, IFC HSBC, Credit Agricole, Byblos, Credit Bank, VTB, GazPrombank, Troyka Dialog, Bank Turanalem, Mellat, ProCredit. Banking system

5 - Average growth rate of Assets was 29.7% - Average growth rate of Loans was 51.0% - Average growth rate of Capital was 33.2% - Average growth rate of Profits was 37.0% But in line with that, we still have… Banking sector growth during last 5 years

6 Low level of financial intermediation - Despite the fact that Armenian banking system is stable and dynamically growing, the level of financial intermediation is still shallow. Total assets of the banking system constitute only 30% of GDP.

7 Impact of the crisis

8 why we avoided the direct impact of world financial crisis Emerging Financial markets – market capitalization for 2007 was only 1% of GDP, for 2008 – 1.5% of GDP Almost no investments in foreign securities, including structured instruments Very low dependence on external financing of both banking sector and corporations, banks external liabilities are long term (85%), mostly from the international organizations and affiliated companies Sound and liquid banking system (CAR is about 27%) Strict lending requirements

9 why we avoided the direct impact of world financial crisis Low penetration of financial services (Loan portfolio / GDP)

10 Impact on real sector of economy (indirect impact) Decline in external demand of metal and metal prices Economic slowdown in Russia Decline in remittances (89% are from Russia) Increase in uncertainty and negative expectations

11 Consequences Slowing of Economic growth in IV quarter of 2008 and GDP contraction during first 5 months of 2009 Dollarization – share of AMD deposit in total deposits shrinked from 60% to 30% during last quarter of 2008 an first 5 months of 2009 Slowdown of capital inflow Worsening of credit quality (NPL grew to 10%) But no deposit run

12 Response of banking institutions More strict bank lending terms Bank lending slowdown Capital injections from shareholders – during capital rose by 37% Increase of bank deposit and loan interest rates Growth of liquidity ratios

13 Central bank actions Concentration on Financial stability, rather than on price stability Decrease of Central bank repo rate Increase in Central bank open market operations Design of contingency plans for crisis situation Regular stress-tests Financial stability committee More frequent monitoring of banking system

14 Long term stimulus for Banks Injection of liquidity for long-term lending (about 60 bln AMD for lending to SMEs, large businesses, agriculture, consumer and mortgage sectors) Establishment of Secondary Mortgage Operator

15 Changes in supervisory framework CBA should rely more on stress-tests Keep supervision function under CBA umbrella Macroprudential analysis New efficient tools for consolidated supervision

16 Thank you