Republic of Armenia: Financial System Stability Assessment

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Armenia’s growing financial system is dominated by banks, and its regulatory and supervisory system is robust. The Executive Board of the International Monetary Fund (IMF) has recommended the Central Bank of Armenia (CBA) to develop a program to gather information and monitor the hedging ability of borrowers. Liquidity requirements in foreign currency would be an important risk mitigant particularly because the CBA has a limited ability to extend foreign currency emergency liquidity assistance. Implementation of the pension reform in 2014 will bring additional investments to the market.
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International Monetary Fund
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Published on
Jan 11, 2013
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Business & Economics / International / Economics
Business & Economics / Money & Monetary Policy
Political Science / Public Policy / Economic Policy
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In 1971, President Nixon imposed national price controls and took the United States off the gold standard, an extreme measure intended to end an ongoing currency war that had destroyed faith in the U.S. dollar. Today we are engaged in a new currency war, and this time the consequences will be far worse than those that confronted Nixon.


Currency wars are one of the most destructive and feared outcomes in international economics. At best, they offer the sorry spectacle of countries' stealing growth from their trading partners. At worst, they degenerate into sequential bouts of inflation, recession, retaliation, and sometimes actual violence. Left unchecked, the next currency war could lead to a crisis worse than the panic of 2008.

Currency wars have happened before-twice in the last century alone-and they always end badly. Time and again, paper currencies have collapsed, assets have been frozen, gold has been confiscated, and capital controls have been imposed. And the next crash is overdue. Recent headlines about the debasement of the dollar, bailouts in Greece and Ireland, and Chinese currency manipulation are all indicators of the growing conflict.

As James Rickards argues in Currency Wars, this is more than just a concern for economists and investors. The United States is facing serious threats to its national security, from clandestine gold purchases by China to the hidden agendas of sovereign wealth funds. Greater than any single threat is the very real danger of the collapse of the dollar itself.

Baffling to many observers is the rank failure of economists to foresee or prevent the economic catastrophes of recent years. Not only have their theories failed to prevent calamity, they are making the currency wars worse. The U. S. Federal Reserve has engaged in the greatest gamble in the history of finance, a sustained effort to stimulate the economy by printing money on a trillion-dollar scale. Its solutions present hidden new dangers while resolving none of the current dilemmas.

While the outcome of the new currency war is not yet certain, some version of the worst-case scenario is almost inevitable if U.S. and world economic leaders fail to learn from the mistakes of their predecessors. Rickards untangles the web of failed paradigms, wishful thinking, and arrogance driving current public policy and points the way toward a more informed and effective course of action.

From the Hardcover edition.
EXECUTIVE SUMMARY The insurance sector in Bosnia and Herzegovina (BiH) has been growing in recent years but remains small. The total assets of the insurance companies stood at KM 1.2 billion, or about 5 percent of the financial sector assets as of end-2013. Insurance penetration is low at about 2.1 percent of GDP, resulting in vast uninsured risks. The sector collected KM 527 million in premiums in 2013, a 4.3 percent increase from a year earlier. The nonlife insurance sector collects over 80 percent of the insurance premium, including about two-thirds from the mandatory Motor Third Party liability insurance (MTPL). About half of insurance sector assets are held in bank deposits. Ten insurance companies, accounting for 40 percent of the nonlife market, have low solvency margins and may require supervisory action in the near future. The sector’s resilience could be understated since the Solvency I capital requirements do not incorporate all the relevant risks. While liquidity is not a major risk given the high share of bank deposits in assets, a few insurers are heavily exposed to real estate and hold large amounts of receivables. Life insurance is relatively new and has low interest rate risk. MTPL insurance remains under pressure as market participants are not always compliant with the statutory tariff. In some cases, competition has led to insufficient premiums for the risks assumed. Market participants are bypassing regulations for tariffs and commissions. Technical provisions depend heavily on the views of appointed actuaries working for the companies while the regulations do not call for external actuarial audits. Actuarial reviews are carried out but of independent reviews of technical provisions are necessary. Insurance regulation has improved in both entities but the level of harmonization between entities and with the EU directives is still insufficient. It is expected that the Insurance Agency of Bosnia and Herzegovina (BiH-IA) will enhance the harmonization of entity-level regulations within BiH as well as with the EU insurance directives. While the main laws regulating insurance activities: the Insurance Law, Contract Law, the Law on Intermediaries and the MTPL law do not have significant disparities across the entities there have been occasional differences in the legal framework as the amendments have been carried out at different times. The existing disparities and their implications on the effectiveness and decisiveness of the supervision are reflected in this assessment. Since the 2006 FSAP, each supervisory agency has shown some progress. The previous FSAP found the Insurance Supervision Agency in the Republika Srpska (RS-ISA) not operational. However, commendable progress has been achieved since then: the staff has been doubled and has a mix of professionals with legal and actuarial backgrounds; operational processes and internal controls, as well as supervisory and inspections manuals are in place. As a result, the RS-ISA is well positioned to supervise the market. The FBIH-ISA took over the function of the old Insurance Supervision agency (ISA). While the FBiH-ISA inherited a number of experienced staff, the legacy problems hindered a fresh turn-around for the new agency. Hence, the progress at the FBiH-ISA has been fairly limited.
EXECUTIVE SUMMARY AND KEY RECOMMENDATIONS The Samoan financial sector is dominated by commercial banks and Public Financial Institutions (PFIs). The four commercial banks provide almost 60 percent of credit to the economy, and the most important PFIs, the Samoa National Provident Fund, and the Development Bank of Samoa, account for around 30 percent. There is also a small and shrinking offshore banking sector without linkages to the domestic financial sector. Banks are liquid and report high capitalization, but close supervisory attention is required in light of high and rising non-performing loans (NPLs) and the results of the FSAP stress tests.1 Banks are still dealing with the effects from past natural disasters, and assessments of their health are impeded by the significant uncertainty surrounding the quality of balance sheet data, in particular on asset quality and provisioning. High loan concentration and exposure to natural disasters represent significant risks to the financial system. The stress tests illustrate that the local banks are relatively less resilient and could not withstand a severely adverse scenario. Thus, close monitoring, through on-site supervision and asset quality reviews, paired with prompt corrective action and a plan to address NPLs (including in PFIs) as needed, are top priorities. PFIs are particularly vulnerable to shocks due to low asset quality and strong linkages with state owned enterprises. This is largely the result of increased policy lending in response to the extraordinary economic stress from recent natural disasters. Significant stress in PFIs could have significant impact on other financial institutions (FIs) through the effect on the economy, and explicit and implicit government guarantees raise potential fiscal risks. The authorities, therefore, are encouraged to step up oversight of the PFIs, including through enhanced data collection and on-site reviews. Where substantial adjustments are needed, new lending should be restricted. The Central Bank of Samoa (CBS), as the main supervisor and regulator of domestic financial institutions, has made important efforts to strengthen its oversight in recent years. These efforts include conducting on-site inspections, introducing elements of risk-based supervision, expanding staff resources, initiating PFI supervision, submission of a new CBS Act (CBA) to reform governance and safeguards, promoting financial inclusion, and progress on Anti-Money Laundering and Combating Financing of Terrorism (AML/CFT). Still, much remains to be done, including improving the quality and coverage of the financial sector data, upgrading legal, regulatory and supervisory frameworks, and building capacity and staff.
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