Armenia is a small open highly dollarized economy subject to external shocks. Against this backdrop, the Armenia’s financial system is relatively shallow and dominated by banks. The banking sector’s assets equal about 78 percent of GDP, and subsidiaries of foreign banks make up a sizable proportion of banking assets. Capital markets are thin, and external financing is important for long-term financing, given a small domestic investor base. As illustrated by the stress tests, risks from a high degree of financial dollarization are significant, including credit risks and limited liquidity cushions in foreign currency in the event of external shocks.
Since the 2012 FSAP the CBA has made progress in strengthening Armenia’s financial system. The CBA has adopted measures to mitigate risks from dollarization. Higher risk-weights and provisioning were imposed on dollar assets to absorb the credit risk due to unhedged borrowing.
Liquidity requirements were introduced in 2012 to mitigate the higher liquidity risk of foreign exchange funding. At the same time, the CBA has pursued an ambitious agenda to strengthen financial oversight, which includes adopting a risk-based supervision framework and addressing gaps in the regulatory framework identified in the previous FSAP.
Executive Directors agreed with the main findings and recommendations of the Financial System Stability Assessment (FSSA). They welcomed the progress made by the authorities in strengthening financial sector oversight and promoting financial deepening to further enhance financial sector resilience. Directors commended the Central Bank of Armenia (CBA) for the reforms undertaken since the 2012 FSAP review, notably in adopting the prudential measures to mitigate risks from dollarization and upgrading the risk-based supervision framework. They encouraged the authorities to prioritize reforms, recognizing capacity constraints. While welcoming the measures already adopted, Directors underlined that vulnerabilities remain from high levels of dollarization and insufficient liquidity cushions in foreign currency. They recommended that the authorities adopt the capital conservation buffer and the surcharge for domestic systemically-important banks as planned, as well as measures to address credit risk from unhedged foreign exchange exposures, such as the introduction of a stressed debt service to income ratio limit. In addition, Directors advised the gradual introduction of the requirement for banks to maintain reserves in foreign currency for li...
