Azerbaijan: Azerbaijan's new supervision strategy will strengthen banks' risk management, the international rating agency Moody's Ratings told APA-Economics.
According to Azeri-Press News Agency, on 11 March, the Central Bank of the Republic of Azerbaijan (CBA, Baa3 positive) announced that it had approved its Banking Supervision Strategy for 2026-27. This new strategy builds on the CBA's previous work under its Financial Sector Development Strategy for 2024-26 and the World Bank-supported Financial Sector Modernization Project. The project introduced a formal policy framework for risk-based supervision, established the Azerbaijan Risk Assessment System, and aligned supervisory practices more closely with international standards, including Basel III-oriented capital and liquidity oversight.
Moody's noted that the strategy's approval marks a shift toward a more comprehensive risk-based supervisory regime, which is seen as a credit positive for banks. This shift will enhance banks' risk-management capabilities and improve their resilience to macrofinancial shocks. Furthermore, it aligns their supervisory practices more closely with international standards, which supports more forward-looking oversight, enhances capital and liquidity planning, and reduces the likelihood of emerging vulnerabilities.
The agency also highlighted that the strategy will improve banks' business model sustainability and profitability management. This enhancement will bolster their operational resilience, modernize their risk-management practices, and strengthen governance, risk culture, and consumer protection. The implementation of new supervisory standards aims to reinforce banks' ability to withstand economic and financial volatility by promoting stronger capital planning and more robust stress-testing.
Additionally, the introduction of Internal Capital Adequacy Assessment Processes (ICAAP) and Internal Liquidity Adequacy Assessment Processes (ILAAP) requirements, consistent with emerging Basel III practices, will push banks to better assess their internal capital and liquidity adequacy under adverse scenarios. This will result in stronger buffers and more prudent balance-sheet management over time.
Moody's expects that continuous alignment with the new strategy will result in enhanced asset quality control, liquidity management, and profitability. Among the banks rated by Moody's, those with less robust loss absorption capacity of capital or weaker asset quality, such as Kapital Bank OJSC (Ba2 positive, ba3), XALQ BANK, OJSC (Ba3 stable, b1), and Joint Stock Commercial Bank Respublika (B1 stable, b1)1, will likely see the most significant improvements.