RESOLUTION OF BOARD OF NATIONAL BANK OF THE REPUBLIC OF BELARUS

of January 22, 2018 No. 25

About the organization of internal procedure of assessment of capital adequacy and risk management

Based on the paragraph of third of part four of Article 34 and part one of article 39 of the Bank code of the Republic of Belarus, part three of subitem 1.1 of Item 1 of the Presidential decree of the Republic of Belarus of June 21, 2011 No. 261 "About creation of the open joint stock company "Development Bank of the Republic of Belarus" Board of National Bank of the Republic of Belarus DECIDES:

1. Approve the Instruction about the organization of internal procedure of assessment of capital adequacy and risk management it (is applied).

2. Make changes and additions to the following resolutions of Board of National Bank of the Republic of Belarus:

2.1. in the resolution of Board of National Bank of the Republic of Belarus of October 31, 2006 No. 172 "About establishment of forms of the reporting and approval of the Instruction about procedure for creation and representation by banks, "Development Bank of the Republic of Belarus" open joint stock company and non-bank credit and financial organizations of the prudential reporting in National Bank of the Republic of Belarus" (The national register of legal acts of the Republic of Belarus, 2006, No. 201, 8/15355; 2009, No. 55, 8/20511; National legal Internet portal of the Republic of Belarus, 10.08. 2012, 8/26247; 20:05. 2014, 8/28673; 31.12. 2015, 8/30517):

"normative" to exclude the word from Item 1;

in appendix 1 to this resolution:

"normative" to exclude 2801 words from the name of form;

add appendix in the lines 19-1 – 19-3 following of content:

 

	"Capital adequacy, calculated within internal procedure of assessment of capital adequacy
191	Available capital	8743
192	Economic capital	8744
193	Excess of the available capital over the economic capital (column 4 = lines 191–192 columns 4)	8745	";

to state subitem 6.1 of Item 6 of the Instruction on procedure for creation and representation by banks, "Development Bank of the Republic of Belarus" open joint stock company and non-bank credit and financial organizations of the prudential reporting in National Bank of the Republic of Belarus approved by this resolution in the following edition:

"6.1. form 2801 "Calculation of capital adequacy and size of leverage" (further – the form 2801) intended for implementation by National Bank of supervision of observance by banks of standard rates of the minimum size of the normative capital, sufficiency of the normative capital and the standard rate of leverage, and also requirements to internal assessment of capital adequacy and risk management.

The registered authorized capital of bank is taken into consideration of the normative capital of bank in the amount of the registered authorized fund considered on bank accounts.

In the cover sheet to the reporting of bank higher requirements to sufficiency of the normative capital established by bank, and also the following data on results of internal procedure of assessment of capital adequacy are specified:

list of essential types of risks of bank;

the amount of unexpected losses by essential types of risks by which the economic capital of bank is calculated;

method of calculation of unexpected losses by essential types of risks.

Data on the size of the available and economic capitals, excess of the available capital of bank over the economic capital, the data on results of internal procedure of assessment of capital adequacy specified in paragraphs the second or fourth to part three of this subitem join respectively in the form 2801 and the cover sheet to the reporting of bank constituted on the 1st, the accounting year following after the last month of every quarter;";

2.2. ceased to be valid according to the Resolution of Board of National Bank of the Republic of Belarus of 21.02.2024 No. 62

3. This resolution becomes effective since April 1, 2018.

Approved by the Resolution of Board of National Bank of the Republic of Belarus of January 22, 2018 No. 25

The instruction about the organization of internal procedure of assessment of capital adequacy and risk management

Chapter 1. General provisions

1. This Instruction establishes requirements to the organization of internal procedure of assessment of capital adequacy and risk management in banks, "Development Bank of the Republic of Belarus" open joint stock company (further – banks).

2. For the purposes of this Instruction the terms below are used in the following values:

validation – confirmation by bank on the basis of objective proofs of compliance of the used instruments of measurement (assessment) to specific requirements to their application;

internal procedure of assessment of capital adequacy – the actions performed by bank on regular basis directed to determination of the total value of the risks accepted by it and the economic capital of bank, maintenance of sufficient level of the available capital of the bank providing its safe functioning;

the available capital – the size of the capital, available bank for covering of unexpected losses from essential types of risks in case of unusual (crisis) situations;

insignificant types of risks – the risks inherent in activities of bank, but not recognized as essential types of risks;

the profitability of the capital corrected on risk – the indicator characterizing ratio of the gross income corrected on the size of nedosozdanny reserves on risks and the economic capital of bank which is applied along with other indicators of profitability (profitability) of bank within risk management system, including to determination of optimal capital structure, and management of key performance indicators;

essential types of risks – the risks recognized by bank essential by results of the identification of essential types of risks which is carried out by it;

the economic capital – the size of the capital of the bank necessary for covering of unexpected losses from essential types of risks in case of unusual (crisis) situations.

The terms "risk", "inherent risk", "risk profile", "risk management system", "tendency to risk (risk appetite)", "risk tolerance", "stress test (stress testing)", "management reporting" have the values determined by the Instruction about the organization of the risk management system approved by the resolution of Board of National Bank of the Republic of Belarus of October 29, 2012 No. 550.

Chapter 2. Organization of internal procedure of assessment of capital adequacy

3. Internal procedure of assessment of capital adequacy is element of risk management system which general requirements to the organization are installed by the Instruction about the organization risk management systems.

4. When implementing internal procedure of assessment of capital adequacy the bank shall provide consecutive achievement of the following purposes:

assessment of sufficiency of available bank of the capital for covering of essential types of risks of bank;

planning of the available and economic capitals proceeding from results of comprehensive assessment of essential types of risks of bank, stress testing of resistance of bank to internal and external factors of risks, reference points of business development provided by the development strategy of bank;

integration of internal procedure of assessment of capital adequacy in system of strategic planning of bank so that results of internal procedure of assessment of capital adequacy were used in case of decision making on business development (forming of the development strategy) of bank as basis for assessment of the size of the capital necessary for bank for covering of essential types of risks.

5. The bank under the organization of internal procedure of assessment of capital adequacy shall consider the following basic principles:

proportionality (assessment of capital adequacy of separate bank provides its compliance to risk level, complexity and scale of activities of bank);

forecasting (assessment of capital adequacy considers not only the existing risks to which the bank, but also potential risks taking into account future business strategy of bank is subject);

dynamism (assessment of capital adequacy is not static, and it is dynamic and reproduced on continuous basis for the purpose of providing bank with the sufficient capital for covering of risks in each timepoint);

development (assessment of capital adequacy is periodically reviewed for the purpose of detection of vulnerabilities, increase in efficiency and updating of methods and tools for ensuring their compliance to the changeable nature of risks and to internal plans of bank).

6. Internal procedure of assessment of capital adequacy of bank includes:

identification of essential types of risks;

calculation of the available and economic capitals of bank;

capital adequacy assessment;

use of the economic capital when calculating the profitability of the capital corrected on risk, establishment and control of limits of essential types of risks;

forming of the management reporting.

7. The board of directors (supervisory board), collegiate executive body of management of bank (further – governing bodies of bank) shall at least once a year consider question of need of modification of the local legal acts regulating implementation of internal procedure of assessment of capital adequacy.

In the course of forming of the development strategy of bank internal procedure of assessment of capital adequacy shall be exposed to assessment regarding its compliance to new conditions of activities of bank, to the changing nature and scale of the performed transactions, level and combination of the accepted risks.

Chapter 3. Identification of essential types of risks

8. Identification of essential types of risks assumes carrying out the independent analysis by bank own risk profile and identification of types of risks, the most essential to bank. The credit risk, market risk, liquidity risk and operational risk cannot be acknowledged as bank insignificant types of risks.

9. The methodology of identification of essential types of risks is established by local legal acts of bank in which are reflected:

procedure for forming of the list of risks inherent in bank;

the recognitions of types of risks applied by bank of the basis (criterion) essential;

procedure for identification of new types of the risks arising in activities of bank including in connection with the beginning of implementation by bank of new transaction types (implementation of new products), entry into the new markets and review of the list of essential types of risks (but at least once a year);

functions and powers of the governing bodies of bank participating in identification of essential types of risks.

10. The list of essential types of risks and the changes made to it by results of review affirm governing body of bank.

Chapter 4. Calculation of the available and economic capitals. Capital adequacy assessment

11. Within internal procedure of assessment of capital adequacy techniques of determination of the size of the available and economic capitals shall be provided in local legal acts of bank.

12. The size of the available capital is determined on the basis of the sources taken into consideration of the normative capital of bank according to the Instruction about standard rates of safe functioning approved by the resolution of Board of National Bank of the Republic of Belarus of July 11, 2022 No. 257, taking into account the following conditions:

the attracted subordinated loan (loan) joins in full (without restrictions of the amount in relation to the size of fixed capital of the I level and irrespective of the period before the termination of term of complete return (repayment) of the credit (loan);

the profit of last years and funds created at her expense join in full (without restrictions connected with availability of auditor confirmation and for its representations);

general reserves on covering of possible losses join in full (without restrictions of the amount in relation to the size of the supplementary capital of the II level).

13. For determination of value of the economic capital by essential types of risks the bank uses technique according to appendix 1 or other approaches on condition of observance of requirements to quantitative instruments of measurement (assessment) of the economic capital according to appendix 2.

14. The bank uses the calculated value of the economic capital for:

providing covering of unexpected losses as a result of realization of essential types of risks;

implementation of pricing taking into account risks;

effective capital allocation taking into account all types of risks, essential to bank.

15. Assessment of capital adequacy is performed by comparison of the sizes of the economic and available capitals of bank.

In case of excess of the size of the economic capital over the size of the available capital the bank needs to take measures for increase in the size of the available capital and (or) decrease in level of essential types of risks.

16. For capital adequacy assessment in stressful conditions it is necessary to perform stress testing of essential types of risks. The procedure of stress testing shall be reflected in the local legal acts of bank developed within internal procedure of assessment of capital adequacy and be reviewed depending on change of the external and internal factors influencing activities of bank, but at least once a year.

Chapter 5. Use of the economic capital. Establishment and control of limits

17. The bank establishes the level (size) of risk tolerance according to requirements of the Instruction about the organization of risk management system.

18. The bank taking into account the established risk tolerance determines tendency to risk (risk appetite) in the form of set of quantitative and qualitative indexes by types of risks, activities, divisions of bank, providing their continuous observance in the long term, including in stressful situations.

19. Indicators of tendency to risk (risk appetite) are determined by bank independently.

20. On the basis of indicators of tendency to risk (risk appetite) the bank determines the planned (target) level of the capital, planned capital structure, sources of its forming, planned (target) level of capital adequacy, planned (target) levels of risks and target risk profile of bank.

21. In case of realization of package of measures by bank, directed to restriction (decrease) of risk according to Item 31 of the Instruction on the organization of risk management system, and also for the purpose of control of capital adequacy the bank shall provide in local legal acts procedure for capital allocation through system of limits of types of risks, to activities (business lines), divisions which generate risks. In particular:

limits shall be set by types of risks concerning which requirements to capital adequacy, for all activities (business lines), divisions of bank which generate risks are determined;

when calculating limits it is necessary to be guided by assessment of capital need concerning essential types of risks taking into account the profitability of the capital corrected on risk with use of formulas of measure calculation of the profitability of the capital corrected on risk for bank in general and to its certain business line (division) according to appendix 3 or with use of other approaches determined by bank;

the system of limits shall have the multi-level structure including limits:

by essential types of risks, including credit, market, operational risks and liquidity risk;

on divisions which generate essential types of risks;

on amount of transactions (transactions) made with one partner (partners of separate type of economic activity);

on amount of transactions (transactions) made with financial instruments;

on limit of losses on divisions of bank which generate essential types of risks.

22. The bank exercises control of observance of the set limits. Within this control control indicators and their threshold values to which approach testifies to extent of use of limit are established.

For each value of control indicators the corresponding list of the adjusting actions depending on extent of approach of limit to threshold value is determined, for example:

decrease in level of the accepted risk;

capital allocation, allocated for covering of essential types of risks, by these types of risks, activities (business lines), divisions of bank which generate essential types of risks;

increase in the size of the available capital.

Chapter 6. Forming of the management reporting

23. The bank shall create the management reporting concerning internal procedure of assessment of capital adequacy containing information:

about the size of the economic capital of bank, including about amounts of its distribution by essential types of risks;

about the size of the available capital of bank and size of its excess over the economic capital, capital adequacy assessment;

about the facts of violation of the set limits, the taken (taken) measures for settlement of the revealed violations;

about results of stress testing of essential types of risks and assessment of its influence on capital adequacy of bank.

The management reporting created concerning internal procedure of assessment of capital adequacy shall provide possibility of generalization of information on different essential types of risks for the purpose of implementation of the complex analysis of degree of exposure of bank to risks, evaluating capital adequacy of bank and capital need on perspective.

24. The management reporting created concerning internal procedure of assessment of capital adequacy is submitted in the board of directors (supervisory board) at least once a year, in committee on risks in case of the board of directors (supervisory board) of bank and collegiate executive body of bank – monthly.

Information on the facts of violation of the set limits (achievement of threshold values) is monthly provided to division managers of bank, the risks generating essential types, and also divisions on management of separate types of risks and (or) risks on separate activities (business lines).

Appendix 1

to the Instruction about the organization of internal procedure of assessment of capital adequacy and risk management

Method of calculation of the economic capital

1. The size of the economic capital of bank (EK) is calculated by method of simple summing of the amount of unexpected losses by essential types of risks of bank on the following formula:

EK = Npkr + Nprr + Npor + Nppr,

where Npkr – the amount of unexpected losses on credit risk;

Nprr – the amount of unexpected losses on market risk, liquidity risk, interest risk of bank portfolio;

Npor – the amount of unexpected losses on operational risk;

Nppr – the amount of unexpected losses by other essential types of risks.

2. The amount of unexpected losses is determined by credit risk with use of one of the calculation options provided below:

2.1. the amount of unexpected losses (Npkr) is determined by summing of the sizes of debt on assets (contingent obligations) reduced by the size of the special reserves created on them and weight coefficients of risk weighed on risk level with use by the following formula:

where debt – the size of remaining balance of debt on principal debt of asset (contingent obligation);

reserve – the size of the created special reserve on covering of possible losses on asset (contingent obligation);

K – weight coefficient of risk on asset (contingent obligation).

______________________________

1 The size of debt on contingent obligation is adjusted on credit equivalent of contingent obligations by multiplication of difference between the amount of contingent obligation and size of the created special reserve on covering of possible losses on the corresponding coefficient of equivalent of credit risk established by the Instruction about standard rates of safe functioning.

When calculating weight coefficient of risk for asset (contingent obligation):

concerning legal entities and physical persons of the Republic of Belarus value of coefficient of risk is determined by the assets subject to credit risk, and contingent obligations according to the table 2 presents of appendix depending on asset type (contingent obligation) and value of probability of the default determined depending on group of reservation to which this asset (contingent obligation) is carried according to the table of 1 this appendix;

value of coefficient of risk is determined by other assets (contingent obligations) according to the table 2 presents of appendix depending on asset type (contingent obligation) and value of probability of the default determined depending on the long-term country rating of the partner according to the table of 1 this appendix (if the long-term ratings of the international agencies differ among themselves, the worst rating is used).

Table 1

Ratio of value of probability of default of the partner depending on the country rating determined by the international rating agencies or from risk group when forming special reserves

Risk group when forming special rezervov2	Probability of default of the partner, percent	International rating agencies
		Moody "s Investors Service	S&P Global Ratings	Fitch Ratings
–	0,03	Aaa	AAA	AAA
–	0,03	Aa1	AA+	AA+
–	0,03	Aa2	AA	AA
–	0,03	Aa3	AA–	AA–
–	0,03	A1	A +	A +
–	0,03	A2	A	A
–	0,03	A3	A–	A–
–	0,05	Baa1	BBB+	BBB+
–	0,10	Baa2	BBB	BBB
–	0,25	Baa3	BBB–	BBB–
–	0,50	Ba1	BB+	BB+
–	1,00	Ba2	BB	BB
–	1,30	Ba3	BB–	BB–
–	2,00	B1	B +	B +
–	2,50	B2	B	B
1	3,00	B3	B–	B–
2	6,00	Caa1	CCC +	CCC +
3	10,00	Caa2	CCC	CCC
4	15,00	Caa3	CCC–	CCC–
5	20,00	Ca	CC	CC
63	40,00	With	With	With
64	100,00	–	D	RD, D

______________________________

2 The risk groups determined when forming special reserves according to the Instruction about procedure for forming and use of special reserves on covering of possible losses by the assets and transactions which are not reflected in balance, the Republic of Belarus approved by the resolution of Board of National Bank of September 28, 2006 No. 138 are specified.

3 On condition of reference of asset (contingent obligation) to the VI risk group no more than 30 days.

4 On condition of reference of asset (contingent obligation) to the VI risk group more than 30 days.

Table 2

Weight coefficients of risk on asset (contingent obligation) for calculation of unexpected losses

(percent)

Probability of default of the partner	The assets subject to credit risk, concerning legal entities and individual entrepreneurs, banks, the governments, the Central (national) Banks of the countries, international financial institutions and development banks	The loans granted to physical persons on financing of the real estate	The loans granted to physical persons (except the credits for financing of the real estate and the overdraft credits)	The overdraft loans granted to physical persons
0,03	11,30	2,30	8,41	1,85
0,05	15,39	3,46	12,52	2,86
0,10	23,30	5,94	21,08	5,12
0,25	39,01	11,83	39,96	10,88
0,40	49,49	16,64	53,69	15,88
0,50	54,91	19,49	61,13	18,97
0,75	65,14	25,81	75,74	26,06
1,00	72,40	31,33	86,46	32,53
1,30	78,77	37,22	95,95	39,70
1,50	82,11	40,80	100,81	44,19
2,00	88,55	48,85	109,53	54,63
2,50	93,43	55,91	115,03	64,18
3,00	97,58	62,22	118,61	73,03
6,00	119,48	90,29	127,94	116,37
10,00	146,51	113,56	142,69	158,47
15,00	171,91	130,96	167,36	196,23
20,00	188,42	140,62	189,41	222,86
40,00	204,93	150,28	211,46	249,49
100,00	1000,00	1000,00	1000,00	1000,00

2.2. the amount of unexpected losses on credit risk (Npkr) is determined by summing of the sizes of debt on assets (contingent obligations) weighed on risk level with use of weight coefficients by the following formula:

where debt – the size of remaining balance of debt on principal debt of asset (contingent obligation);

K – weight coefficient of risk on asset (contingent obligation).

The weight coefficient of risk (K) is calculated by the following formula:

where PD – value of probability of default;

LGD – value of specific weight of losses;

N(x) – function of cumulative distribution for standard normal accidental variable in case of which the probability that the normal accidental variable with average value zero and dispersion of unit is less or is equal x;

G(z) – the return cumulative distribution function for standard normal accidental variable, in case of which value x such is that N(x) = z;

b – adjustment of repayment period;

M – term before repayment (it is estimated advanced in years);

R – coefficient of correlations.

The coefficient of correlations (R) is calculated by the following formula:

where PD – value of probability of default;

e – mathematical constant equal to number e.

Adjustment of repayment period (b) is calculated by the following formula:

where PD – value of probability of default.

When calculating weight coefficients:

concerning legal entities and physical persons of the Republic of Belarus values of probability of default are determined by the assets subject to credit risk, and contingent obligations depending on group of reservation to which this asset (contingent obligation) is carried according to the table of 1 this appendix;

are determined by other assets (contingent obligations) of value of probability of default depending on the long-term country rating of the partner according to the table of 1 this appendix (if the long-term ratings of the international agencies differ among themselves, the worst rating is used);

on each asset (contingent obligation) value of specific weight of losses in case of default on secure assets (contingent obligations) equals to 45 percent, on insufficiently secure assets (contingent obligations) – 75 percent, on unsecured assets (contingent obligations) – 85 protsentam5.

______________________________

5 Reference of assets (contingent obligations) to secure, insufficiently secure and unsecured is performed according to the Instruction about procedure for forming and use of special reserves on covering of possible losses on the assets and transactions which are not reflected in balance.

3. Calculation of the amount of unexpected losses of bank for market risk, liquidity risk, interest risk of bank portfolio is performed by summing of unexpected losses on each of the specified types of the risks determined taking into account the following conditions:

the amount of unexpected losses is determined separately by each substantial market risk with use of model of assessment of VaR;

on currency and to other market risks (in case of recognition by their essential) the amount of unexpected losses is calculated as VaR of risk according to the technique operating in bank at the time of calculation and providing:

confidential level – at least 99 percent;

the time horizon – at least three months;

in case of expectation of essential negative changes assessment of unexpected losses on currency risk can be adjusted towards increase based on results of stress testing of risk or motivated judgment risk management;

the amount of unexpected losses is determined by interest risk of bank portfolio based on stress testing of risk in the amount of the half-received (negative) net interest income in case of implementation of crisis scenarios on the temporary horizon three months (as the scenario one of the most negative scenarios by results of stress testing is accepted);

on liquidity risk the amount of unexpected losses is estimated based on stress testing and determined at the rate of interest expenses by attraction of the interbank credits necessary for safe functioning of bank. As the scenario one of the most negative scenarios by results of stress testing is accepted (outflow of funds from customer accounts poste restante at least 30 percent, outflow of funds from term deposits of clients at least 20 percent, return and impossibility of refinancing of the raised funds of banks from residual repayment periods to one month);

overall assessment of values of unexpected losses by the specified types of risks can be adjusted towards increase taking into account expert opinion risk management.

4. The amount of unexpected losses is determined by operational risk as the average size of annual real loss from operational incidents less compensation of such losses with use of information on losses and compensations from the internal database of bank about operational incidents for the period at least five years.

5. The amount of unexpected losses is determined by other essential types of risks on the basis of expert evaluation or other internal method of calculation of bank, but there cannot be less than 5 percent of value of unexpected losses on all other essential types of risks of bank.

Appendix 2

to the Instruction about the organization of internal procedure of assessment of capital adequacy and risk management

Requirements to quantitative instruments of measurement (assessment) of the economic capital

The bank uses own method of calculation of the size of the economic capital by essential types of risks on condition of accomplishment of the following requirements to quantitative instruments of measurement (assessment) of the economic capital:

concerning calculation of unexpected losses for credit risk:

quantitative instruments of measurement (assessment) of unexpected losses shall have certain forecast accuracy, that is forecast values of probability of default of debtors shall correspond to the actual frequency of the realized defaults of debtors of bank, forecast values of the wastage rate in case of default – to the actual values of real losses on debtors of bank;

entrance variable (parameters) of quantitative instruments of measurement (assessment) are sufficient for receipt of forecast values of probability of default and the wastage rate in case of default;

the bank carries regularly out internal validation of quantitative instruments of measurement (assessment) which includes the analysis of quality and stability of their functioning, the analysis of technical characteristics, testing of the forecast values of probability of default and wastage rate in case of default received as a result of use of tools, by their comparison to the actual frequency of the realized defaults of debtors and the actual values of real losses on debtors of bank;

the bank performs the statistical information used as entrance variable (parameters) of quantitative instruments of measurement (assessment) including assessment of accuracy and completeness of statistical information;

the calculation of value of unexpected losses for credit risk considering probability of default of the debtor is based on statistical information of bank for the most long period (at least three years);

the bank can involve external (independent) experts to internal validation of quantitative instruments of measurement (assessment);

concerning all risks:

the bank independently develops, implements and observes internal procedures and rules of the analysis of quality of statistical information;

quality of statistical information provides its reliability, completeness and relevance (taking into account time of receipt and use);

the quantitative instruments of measurement (assessment) developed by external suppliers are used by bank in case of their compliance to the requirements stated in this annex;

the division of internal audit of bank regularly performs check of performing procedures of development, implementation and internal validation of quantitative instruments of measurement (assessment). The procedure, format and frequency of the specified checks are provided by local legal acts of bank.

Appendix 3

to the Instruction about the organization of internal procedure of assessment of capital adequacy and risk management

Measure calculation of the profitability of the capital corrected on risk

1. Measure calculation of the profitability of the capital corrected on risk for bank in general (RAROC) is performed on the following formula:

where NI (net income) – profit (loss);

EL (expected losses) – the size of nedosozdanny reserves (difference between the size of the required and created reserves on covering of possible losses (losses) by essential types of risks);

ECap (economic capital) – the size of the economic capital of bank.

2. Measure calculation of the profitability of the capital corrected on risk for the certain business line (division) of bank (RAROCi) is performed on the following formula:

where NIi – profit (loss) on the certain business line (division) of bank;

ELi – the size of nedosozdanny reserves (difference between the size of the required and created reserves on covering of possible losses (losses) by essential types of risks for the certain business line (division) of bank;

ECapi – the size of the economic capital for the certain business line (division) of bank.

 

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