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Armenia’s Financial Institutions Face Risk Management Challenges

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In the aftermath of the 2007-2008 global financial and economic crisis, it became clear that regulatory efforts aimed at individual financial institutions were insufficient to maintain stability in the entire financial system. The importance of maintaining financial stability has been enshrined in law as one of the primary objectives of central banks in many countries.

Prioritizing Financial Stability in Armenia

In Armenia, ensuring financial stability is a top priority for the Central Bank, which is responsible for this function. According to Article 200.2 of the Constitution and Article 4 of the Law on the Central Bank of Armenia, maintaining price stability and financial stability are the bank’s primary objectives.

Defining Financial Stability

The Central Bank defines financial stability as the ability of the financial system - including institutions, markets, and market infrastructure - to withstand potential shocks and imbalances, thereby reducing the likelihood of disruptions to financial intermediation functions. The goal is not to stabilize individual financial institutions but rather to ensure the stability of the entire financial system.

Macro-Prudential Policy

To achieve this goal, the Central Bank pursues a macro-prudential policy, continuously monitoring early warning indicators that signal the accumulation or materialization of risks in the financial system. The bank uses various risk assessment models and macro-stress testing systems to analyze these indicators and make recommendations for maintaining stability.

Financial Stability Committee

The Financial Stability and Special Regulatory Committee is an advisory body that assesses the stability of the financial system, proposes measures to maintain stability, and conducts comprehensive analyses if necessary. The committee’s meetings often involve representatives from other state agencies, including the Ministry of Finance and the Deposit Guarantee Fund.

Importance of Risk Management Practices

The Central Bank’s efforts to ensure financial stability are crucial for maintaining a sound macroeconomic environment in Armenia. As the country continues to develop its financial sector, effective risk management practices will be essential for preventing future crises and promoting long-term growth and prosperity.

Some key takeaways:

• The Central Bank prioritizes financial stability as one of its primary objectives.
• Financial stability is defined as the ability of the financial system to withstand potential shocks and imbalances.
• The Central Bank uses macro-prudential policy, risk assessment models, and macro-stress testing systems to monitor early warning indicators and maintain stability.
• The Financial Stability Committee assesses the stability of the financial system and proposes measures for maintaining stability.