Main Risk to Armenia’s Banking Sector Remains Ability to Withstand Crises of Confidence
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Despite its relatively stable financial system and strong capital positions, Armenia’s banking sector remains vulnerable to crises of confidence. The country’s ability to withstand such shocks is a major concern, with experts warning that even the most liquid and well-capitalized systems can collapse under the pressure of a large-scale crisis.
Deposit Insurance and Risk Assessment
The Armenian Deposit Guarantee Fund (ADGF) provides insurance for up to AMD 2 million (approximately $6,600) for dram-denominated deposits and up to AMD 1 million for foreign currency-denominated deposits. However, with an average deposit size of around AMD 500,000, these limits de facto cover over 80% of bank accounts in Armenia. Despite this, the ADGF itself may come under strain in the event of a large-scale run on the banks.
Communication Strategy and Reassurance
The authorities’ strategy to reassure depositors has been inadequate, with policymakers communicating that Armenia is immune from financial crises due to its disconnectedness from global markets. However, experts warn that such signals are unlikely to be sufficient and that significant improvements in communication strategy are needed to prevent a run on the banks.
“The lack of transparency and clear communication from authorities can exacerbate fears among depositors, leading to a bank run.”
- An economist at the Armenian Central Bank
Reduction in Official Assistance Flows
The reduction in official assistance flows from advanced countries also poses a significant risk to Armenia’s economy. The country relies heavily on external aid and concessional financing for its economic development, and a decrease in these flows could have a major impact.
Recommendations for Mitigation
To mitigate these risks, policymakers recommend the establishment of a Crisis Prevention Team (CPT) to provide high-level policy advice and ensure that the authorities are better prepared to respond to potential crises. The CPT would be responsible for:
- Monitoring early warning signs
- Developing contingency plans
- Providing comprehensive analysis on key economic sectors
“The lack of capacity and experience among relevant agencies is a major concern.”
- An official at the Armenian Ministry of Finance
Conclusion
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In conclusion, while Armenia’s banking sector appears stable on paper, its ability to withstand crises of confidence remains a significant risk. Policymakers must take immediate action to address these concerns and ensure that the country is better prepared to respond to potential shocks.