Background

Central Bank of Azerbaijan (CBA) expressed interest in developing a tool to test the health of their banking system which will also help them to identify weaknesses in their supervisory framework after a World Bank mission that was conducted during fall 2009. Establishing a systemic risk response framework is the part of CBA's strengthening banking sector financial stability and supervision strategy and also included to the 2010 Action Plan of Banking Supervision department.     

Project

Goal: The main aim of this project is to assist to CBA in developing a systemic risk response framework (SRRF) and an advanced bank scenario analysis tool.

Purpose: The specific objectives are:

·         To design a SRRF for Azerbaijan financial system to identify potential risks, generated by exceptional but plausible shocks, to individual institutions, but also to the banking system as a whole;

·        To perform modeling and scenario analysis to diagnose weaknesses in Azerbaijan's banking system;

·        To assess systemic risk using econometric analysis and close gaps to the extent possible in financial system of Azerbaijan;

·        To assist to the authorities to develop long-term policies aligned with their economic goals.

Outputs:

The following key activities are realized through the development and implementation of a SRRF for Azerbaijan: i) examination of the interactions between the Azerbaijan banking system value chains; ii) analysis of the various subsystems from the real sector which affect the overall banking system; iii) modelling the complex system relationships through causal feedback loops and system flows taking into consideration of the country's financial system and authorities' specific needs; iv) delivery of functioning SRRF; v) manual regarding how to use the SRRF and the model itself; vi) as many meetings as needed with the authorities to tailor the model according to their needs; vii) working with the staff of the CBA on the model and ensure their ability to use it on a continuous basis.

Project LIFE TIME is 5 months, starting in May 2010

Project BUDGET is $518,000

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