Banking- Kazakhstan.

An amendment to the Law on Banks and Banking Activity has significantly increased the regulatory powers of the Financial Markets Supervision Agency. The amendment, which was passed on February 19 2007, allows the agency to suspend the rights and authority of a bank's shareholders and management. Pursuant to a recent court judgment, ValutTransit Bank, once one of the top 10 banks in Kazakhstan, became the second bank to be liquidated in as many years. These measures reflect efforts to increase the stability and transparency of the country's banking system.

In 2005 ValutTransit Bank stopped submitting the audited reports which it was legally required to send to the agency. Several investigations into its activity by the agency revealed irregular credit arrangements with the bank's affiliates and questionable mortgages. By December 1 2006 the bank's losses were more than twice its aggregate assets and over 86% of its loan portfolio was composed of bad debts. However, the bank refused to comply with the agency's orders, either ignoring them or challenging them in court (thereby effectively putting them on hold until judgment was issued).

In December 2006 the agency revoked the bank's licence and in February 2007 it ordered the liquidation of the bank. Kazakhstan's Deposit Guarantee Fund will be almost emptied in order to repay the insured deposits of the bank's clients, most of whom are retired individuals.

The case exposed internal problems in the sector and the law has been amended promptly at the agency's instigation. A bank's appeal against an order issued by the agency or the National Bank of Kazakhstan to suspend or revoke its licence will no longer suspend the implementation of such an order. The agency can also remove a bank's chairman and the members of the board from their positions if the bank fails to comply with the agency's orders. These changes will help to prevent problems such as those caused by the ValutTransit Bank collapse.

Auditing organizations also have greater responsibility: they must now submit risk management evaluations of the relevant banks to the agency annually, in addition to the audited reports submitted by the banks themselves. The agency has also imposed increased capitalization ratios in order to force banks to correlate their risks to their own capital. 

The amendments to the law are intended to stabilize the banking sector and prevent further defaults. The agency has encouraged banks to increase their capital and stressed the need to attract foreign capital. In 2006 Halyk Bank and Kazkommertsbank offered their global depositary receipts on the London Stock Exchange, almost doubling the aggregate capitalization of the banking sector. However, the agency's recent measures may be counterproductive; the liquidation of a former top 10 bank and the agency's decision to revoke the bank's licence instead of allowing new investors to rescue it may deter foreign investors.