RESOLUTION OF BOARD OF CENTRAL BANK OF THE AZERBAIJAN REPUBLIC

of January 28, 2025 No. 04/1

About approval of "Procedure for operational risk management in banks"

Based on article 22.1.17 of the Law of the Azerbaijan Republic "About the Central bank of the Azerbaijan Republic" the Board of the Central bank of the Azerbaijan Republic DECIDES:

1. Approve "Procedure for operational risk management in banks" it (is applied).

2. The "Procedure for operational risk management in banks" approved by part of 1 this Resolution becomes effective in month from the date of its official publication.

3. Charge to Legal support department of the financial markets to provide in 3-day time submission of this Resolution to the Ministry of Justice of the Azerbaijan Republic for entering into the State register of legal acts of the Azerbaijan Republic.

Approved by the Resolution of Board of the Central bank of the Azerbaijan Republic of January 28, 2025, No. 04/1

Procedure for operational risk management in banks

1. General provisions

1.1. This Procedure is developed according to article 34.5 of the Law of the Azerbaijan Republic "About banks" (further - the Law) and determines the minimum requirements by operational risk management in banks, and also local branches of foreign banks (further - bank).

1.2. The organizational structure of operational risk management in banks is regulated by the "Standards of corporate management in banks" approved by the Resolution of the Central bank of the Azerbaijan Republic (further - the Central bank) of August 28, 2023 No. 41/1.

2. Concepts

2.1. The concepts used in this Procedure have the following values:

2.1.1. operational risk - the risk of losses arising because of inadequate or unsuccessful internal processes, people, systems, and also external events;

2.1.2. incident - event(s) which leads (ят) to suspension or violation of critical transactions of bank;

2.1.3. general damage - the damage caused to bank as a result of risk event;

2.1.4. the recovered amount - the amount paid or returned on general damage by person which caused damage and (or) the third party;

2.1.5. external service - service in permanent implementation of certain activities by the third party (irrespective of whether it enters into group of companies to which the bank belongs, or not) based on the agreement signed between the parties;

2.1.6. the market-based approach - cost determination of asset on the basis of comparison of the same or similar asset types which are available in the market;

2.1.7. cost approach - cost determination of asset proceeding from the principle that it does not exceed costs which would be incurred by the buyer for acquisition (purchase, construction, etc.) asset with the same usefulness;

2.1.8. operational stability - capability of bank to carry out critical transactions during the incident;

2.1.9. critical transactions - the transactions, processes and services important for steady activities of bank.

2.2. Other concepts used in this Procedure have the values provided by the Civil code of the Azerbaijan Republic, "Standards of corporate management in banks" and other legal acts regulating the financial markets.

3. Oeprational risk management system

3.1. The bank creates the oeprational risk management system adequate to type and amount of the transactions made by it, to features of its activities, environment in which it functions, and also its risk profile.

3.2. The oeprational risk management system is integrated into risk management process of bank, covering all activities of bank, including the sphere of its business, products, services, processes and systems.

3.3. Ensuring forming of oeprational risk management system of bank and assessment of its efficiency are performed by the Supervisory board of bank.

3.4. The supervisory board of bank at least once a year considers adequacy of oeprational risk management system to the risks arising from new products, services, processes and systems and also to changes of external environment and other factors, and also results of assessment of oeprational risk management system internal audit, external audit and other specialized third parties and makes relevant decisions.

3.5. The oeprational risk management system shall be created adequately policy of bank on its activities and shall cover at least the following questions:

3.5.1. policy and rules of operational risk management;

3.5.2. instruments of identification and assessment of operational risks;

3.5.3. monitoring and reporting under operational risks;

3.5.4. measures and control methods of operational risks and decrease in risks;

3.5.5. plan of operational stability and business continuity of bank.

3.6. The oeprational risk management system covers all structural divisions of bank, intra country and extra country operational divisions, and also affiliated economic societies.

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