YEREVAN, May 3. /ARKA/.  Armenia's banking sector is characterized by a rather high level of capital and liquidity buffers, Central Bank Chairman Martin Galstyan said on Tuesday.

He said the results of macro stress tests show that even in case of a negative scenario the sector is able to absorb possible losses and continue to function as financial intermediary.

"Nevertheless, given the growing uncertainty, the likelihood that systemic cyclicality risks may materialzie is high. Under these conditions, the Central Bank urges the commerical banks to apply prudent and reasonable approaches in the process of balance sheet allocation, capital, shares and risk management," he said at a press conference.

Galstyan said the Central Bank tries to pursue a prudential policy that is countercyclical in nature.

"In good periods, the financial system should retain some of its accumulated profits in terms of a more natural response to possible potential adverse developments," he explained.

In this regard, the head of the regulator said that the financial cycle index rose last year and consists of several factors such as a number of early warning indicators of changes in lending market activity. These include the loan/GDP ratio, industry loan growth rates, interest rate spreads, and real estate prices.

Overall, he said, the index reflects comparative changes in risk appetite in the credit market.

According to Galstyan, given the fact that the level of capitalization of banks is sufficient to ensure the natural growth of lending to the economy, the Central Bank considered appropriate to apply macro-prudential tools, aimed at increasing the safety margin of the banking system and preserve the continuity of lending, which is key to the economy in stressful situations.

In this context, according to the head of the regulator, the Central Bank twice increased the countercyclical capital buffer: from May 2023, Armenian banks must meet the requirement of the countercyclical capital buffer rate of 1%, and 1.5% from August.

Galstyan also recalled that in order to respond to the risks of "overheating" in the mortgage and real estate market in the most effective and targeted way, the Central Bank introduced a macro-prudential tool "loan-to-value" (LTV) in 2022: 90% in the case of AMD mortgages and 70% in case of foreign currency.

"The LTV instrument not only helps to reduce losses in the event of borrower default, but also, through debt mitigation, helps to improve the borrower's creditworthiness or reduce the likelihood of default," he explained. -0-