New rules of liquidity risk management in banks of Azerbaijan come into force
New rules of liquidity risk management in banks of Azerbaijan come into force
Today marks the enforcement of the "Liquidity Risk Management Rule in Banks," a regulatory framework approved by the Board of Directors of the Central Bank of Azerbaijan (CBA) on October 18 this year. This development signals the replacement of the previously enforced "Rules on Bank Liquidity Management" established in 2009.
The inception of this new rule aligns with the legal framework outlined in the "On Banks" law, which sets forth minimum requirements and liquidity indicators for managing liquidity risk in banks, including local branches of foreign banks. Furthermore, the organizational structure for liquidity risk management in banks, covering additional aspects not specified in this Regulation, is addressed by the "Standards of Corporate Governance in Banks."
In adherence to the latest international standards, particularly those defined by the Basel Committee, and in line with recommendations from experts associated with the International Monetary Fund, these new rules aim to elevate requirements for liquidity management policies, internal regulations, the identification of liquidity risks, their evaluation, monitoring, and reporting. The update introduces a novel monitoring tool for fund concentration, and modifications have been made to the standards structuring the instant liquidity ratio.
Within the ambit of Basel III standards, the rules necessitate the application of the liquidity coverage ratio (LCR) independently for foreign currency and in general. This is designed to ensure stable liquidity in banks over the short term (30 days) during stressful conditions. Banks are mandated to maintain the LCR at a minimum of 100% after the rules come into effect. For banks falling below this threshold at the time of the rule's implementation, major banks are granted 18 months to rectify and meet the required LCR level, while other banks are given a 24-month window for compliance.
The CBA underscores that the implementation of these new rules is geared towards enabling a more accurate prediction of the liquidity position of banks amid potential stress scenarios. This, in turn, is expected to enhance the effectiveness of ensuring the stability of credit institutions.
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