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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

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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

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- 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

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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

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- 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

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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.

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Impact of the crisis

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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

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why we avoided the direct impact of world financial crisis

Low penetration of financial services (Loan portfolio / GDP)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2002 2003 2004 2005 2006 2007 2008Armenia Azerbaijan, Rep. of Belarus EstoniaGeorgia Kazakhstan Latvia LithuaniaMoldova Russia Ukraine

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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

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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

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Response of banking institutions

More strict bank lending terms

Bank lending slowdown

Capital injections from shareholders – during 2008-2009

capital rose by 37%

Increase of bank deposit and loan interest rates

Growth of liquidity ratios

lending growth

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

2002 2003 2004 2005 2006 2007 2008Armenia Czech Rep. Hungary Azerbaijan GeorgiaBelarus Kazachstan Russia Ukraine

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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

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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

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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

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Thank you