Agency for Regulation and Development of the Financial Market has arranged a roundtable discussion with market participants that covered a new mechanism for regulation of insolvent banks within the new draft Law on Banks and Banking Activities developed at the instruction of the Head of State.

The event was attended by management of the Agency, the National Bank, the Association of Financiers of Kazakhstan, second-tier banks, international organizations and experts.

In his welcoming speech, First Deputy Chairman of the Agency Timur Abilkassymov pointed out that the new Law on Banks introduces a modern system for regulation of insolvent banks that complies with international standards and takes into account specifics of the financial market in Kazakhstan. This reform is designed to protect interests of depositors, reduce systemic risks and minimize use of budget funds in crisis situations.

The new draft law establishes a three-tier crisis management architecture intended to improve resilience of the banking sector and ensure financial stability.

"The main burden of bank recovery falls on shareholders, creating a fairer and more sustainable model. To ensure these principles are implemented in practice, the law improves the early response system. This means the regulator has more tools to work with banks even at the initial stage of challenges. If indicators begin to deteriorate, supervision is enhanced, and the bank has to take measures to rectify the situation. Each bank is required to have a recovery plan agreed upon with the regulator, clearly outlining the measures shareholders and management will take to improve the financial stability. If they fail to discharge their obligations to restore stability, a regulation mechanism will be launched to protect interests of depositors," said T. Abilkasymov.

He emphasized that such mechanism reduces the risk of sudden crises and increases predictability for the entire market.

In his report, Deputy Chairman of the Agency Dauren Salimbayev presented regulation tools. Backbone banks are required to establish a safety margin – the Total Loss Absorbing Capacity (TLAC) mechanism. This means that the bank must have sufficient capital and debt instruments prepared in advance for possible write-offs or conversion to equity in case of significant losses. Thus, losses are mainly covered by shareholders and investors, without resorting to budgetary funds.

Direct state participation in regulation will be possible only in the most extreme cases – if use of all market instruments has proven insufficient, and the bank poses a systemic risk to the country's financial stability. Even in such cases, state assistance is permitted only subject to compliance with strict conditions. Decisions must be transparent, minimal interference in market mechanisms must be ensured, and the No Creditor Worse Off (NCWO) principle must be strictly followed. This means that no creditor should suffer losses during the regulation process larger than they would have sustained under a standard bankruptcy procedure. This eliminates the possibility of arbitrary redistribution of losses and guarantees protection of rights of bona fide creditors.

"The new system completely eliminates automatic or politically motivated provision of the state aid. The regulation approach has become predictable, economically sound, and fair. This fundamental change is designed to eliminate moral hazard, increasing the responsibility of bank owners, and protecting the interests of depositors and taxpayers," emphasized D. Salimbayev.

In development of these mechanisms, experience of such jurisdictions as the European Union, the United Kingdom, South Korea, Canada and others was taken into account. These jurisdictions are based on uniform international principles enshrined in G20 and Basel Committee documents.

In turn, international experts shared their experience in reimbursing state participation in regulation of insolvent banks. In particular, they highlighted that a number of countries use a model in which state funds can only be used as a last resort, with the mandatory condition that they are subsequently reimbursed by shareholders and the banking system itself. This approach minimizes the burden on the budget and maintains public confidence in financial institutions.

Experts emphasized that implementation of similar mechanisms in Kazakhstan will improve stability of the financial sector and ensure a balance between interests of the state, depositors and investors.

Source : https://www.gov.kz/memleket/entities/ardfm/press/news/details/1082977?lang=kk