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Miss Mercedes Vera Martin, Mr. Tarak Jardak, Mr. Robert Tchaidze, Mr. Juan P Trevino, and Mrs. Helen W Wagner
External shocks since 2014—lower oil prices and slower growth in key trading partners—have put financial sectors, mainly banks, in the eight Caucasus and Central Asia (CCA) countries under increased stress.  Even before the shocks, CCA banking sectors were not at full strength. Asset quality was generally weak, due in part to shortcomings in regulation, supervision, and governance. The economies were highly dollarized. Business practices were affected by lack of competition and, in most countries, connected lending, which undermined banking sector health. Shortcomings in financial regulation and supervision allowed the unsound banking practices to remain unaddressed. The external shocks exacerbated in these underlying vulnerabilities. Strains in CCA banking sectors intensified as liquidity tightened, asset quality deteriorated, and banks became undercapitalized. These challenges have required public intervention in some cases.
Miss Mercedes Vera Martin, Mr. Tarak Jardak, Mr. Robert Tchaidze, Mr. Juan P Trevino, and Mrs. Helen W Wagner

-offs. In some countries, capital and liquidity injections helped repair banks’ balance sheets, but weak lending standards, rising numbers of NPLs, and lack of competition continued. With the economic recovery and actions taken by the authorities, banks in the CCA are now in a better position, but more needs to be done to build resilience in the banking sector and enable banks to better support the real sector. This paper outlines the actions already taken to support the financial sectors in response to the shocks and further actions needed for CCA banking sectors to

Mr. Peter J Kunzel, Phil De Imus, Mr. Edward R Gemayel, Risto Herrala, Mr. Alexei P Kireyev, and Farid Talishli
The Caucasus and Central Asia (CCA) countries are at an important juncture in their economic transition. Following significant economic progress during the 2000s, recent external shocks have revealed the underlying vulnerabilities of the current growth model. Lower commodity prices, weaker remittances, and slower growth in key trading partners reduced CCA growth, weakened external and fiscal balances, and raised public debt. the financial sector was also hit hard by large foreign exchange losses. while commodity prices have recovered somewhat since late 2014, to boost its economic potential, the region needs to find new growth drivers, diversify away from natural resources, remittances, and public spending, and generate much stronger private sector-led activity.
Miss Mercedes Vera Martin, Mr. Tarak Jardak, Mr. Robert Tchaidze, Mr. Juan P Trevino, and Mrs. Helen W Wagner

Toshmuhamedova for production assistance and to Peter Kunzel (MCD) and colleagues from the Communication Department for communication strategy assistance. Executive Summary External shocks since 2014—lower oil prices and slower growth in key trading partners—have put banking sectors in the eight Caucasus and Central Asia (CCA) countries under stress. 1 Even before the shocks, CCA banking sectors were not at full strength. Asset quality was generally weak, owing in part to shortcomings in regulation, supervision, and governance. The economies were highly dollarized

International Monetary Fund

Asia (CCA) countries under stress. These shocks exacerbated financial vulnerabilities, including weak asset quality, high dollarization, connected lending, and shortcomings in financial regulation and supervision. All CCA countries have taken policy actions in response to the shocks, but more needs to be done to restore the health of CCA banking sectors. The exact strategy will depend on banks’ financial health and will require prioritizing objectives. Countries where risks to financial stability remain elevated should focus on accurately assessing banks’ health

International Monetary Fund. Monetary and Capital Markets Department
This Technical Note on Stress Testing the Banking Supervision was prepared in the context of the Financial Sector Assessment Program (FSAP) for the People’s Republic of China–Hong Kong Special Administrative Region (HKSAR). Bank liquidity tests focus on sudden, sizable withdrawals of funding and the sufficiency of existing assets to withstand those shocks under stressed conditions. The stress test results confirm a high degree of resilience of the sector. This reflects the strength of the banks at the starting position, which reduces their fundamental vulnerability to shocks. Banks in HKSAR hold very high levels of capital, are very profitable, and have a low level of asset impairments amid stable funding profiles. The Hong Kong Monetary Authority is encouraged to continue its integration of risk-based supervision in the development of stress test scenarios for macroprudential policy and surveillance. Banking supervisors routinely conduct stress tests and, from time to time, modify relevant assumptions in order to support thematic reviews of identified vulnerabilities against emerging risks.
International Monetary Fund. Middle East and Central Asia Dept.

offshore vehicles may conceal Russian investment in other economies, and, more generally, the nationalities of foreign direct investment investors ( Figure 3.17 ). 1 Box 3.2 Euro Area Financial Spillovers to CCA Banking Sectors Most CCA countries saw significant declines in cross-border lending in the immediate wake of the 2008—09 crisis, thus reducing the potential for further deleveraging ( Figures 1 and 2 ). Deleveraging has been most pronounced in Kazakhstan, the Kyrgyz Republic, Tajikistan, and Turkmenistan, where public-sector deposits have replaced

Mr. Peter J Kunzel, Phil de Imus, Mr. Edward R Gemayel, Risto Herrala, Mr. Alexei P Kireyev, and Farid Talishli

finance lending. With significant net open FX positions, banks suffered large losses when domestic currencies depreciated beginning in late 2014. Banking sectors in Armenia, Georgia, and the Kyrgyz Republic have proven to be fairly resilient, reflecting a lower initial level of nonperforming loans (NPLs) and improved regulation and supervision. The impact of shocks was more pronounced in CCA countries that are more dependent on oil (Azerbaijan and Kazakhstan) and remittances (Tajikistan). Strains in CCA banking sectors intensified as liquidity tightened, asset quality

International Monetary Fund. Middle East and Central Asia Dept.

4978, The World Bank. 1 Indices; higher values indicate better outcomes. Market concentration and excessive government intervention : Given their still incomplete transition from centrally planned to market economies, many CCA banking sectors are characterized by high degrees of market concentration and government intervention. This reduces the pass-through of changes in policy rates—particularly rate cuts—to lending rates, and contributes to high spreads. One reason for the lack of competition—in, for instance, Azerbaijan, Turkmenistan, and Uzbekistan—is the

International Monetary Fund. Middle East and Central Asia Dept.

, mostly bank-based, and development of capital markets and access to global financing sources remain limited . Commercial banks cover over 87 percent of total assets, limiting alternate financing sources. The remainder is accounted for largely by microfinance organizations (10 percent), with negligible share of NBFIs, and a virtually nonexistent securities market, including for government debt. Limited debt instruments and foreign financing sources Foreign Liabilities of CCA Banking Sector (Percent of total assets, end-2011) and low penetration of