BAKU, Azerbaijan, August 12. Basel III reforms will strengthen the ability of banks in Azerbaijan to cover losses.
According to Fitch Ratings, alignment of the country’s bank
capital rules with Basel III standards should strengthen its banks’
loss-absorption capacity, particularly through higher
buffer-adjusted capital thresholds, and support banking-sector
resilience through the cycle.
The agency noted that Azerbaijan’s Basel III framework continues
advancing. The revised regulatory capital definitions are more
closely aligned with international standards, and the framework
should make Azerbaijani banks’ capital metrics more comparable with
other markets.
Amendments made by the Central Bank of Azerbaijan (CBA) in
December 2025 under the 2024–2026 Financial Sector Development
Strategy envisage full compliance with new requirements from
January 2027.
According to the new rules, a minimum common equity Tier 1 (CET1)
requirement is set at 4.5% of risk-weighted assets (RWAs), and
minimum thresholds for Tier 1 are raised from the previous 5% to
6%. Meanwhile, a minimum requirement for total capital is set at 8%
(previously 10%).
"The CBA is also adding a 2.5% capital conservation buffer on
top of the 0.5% countercyclical buffer in place since March 2025,
lifting the effective minimum thresholds to 7.5% for CET1, 9% for
Tier 1, and 11% for total capital," the agency said.
The agency noted that the CBA will apply an additional buffer for
systematically important banks (D-SIBs) from 1% to 4%, depending on
each bank’s systemic footprint.
"The buffer replaces the current flat add-ons of 1% for Tier 1 and 2% for total capital," the agency explained.
According to Fitch, this will contribute to the banking system
stability, but will add complexity to capital planning and can
increase capital needs for D-SIBs during periods of strong credit
growth.
"The amendments also formalise additional Tier 1 (AT1) instruments
with loss-absorption features, including write-down or conversion
if the CET1 ratio falls below a 5.125% trigger.
While this broadens funding options, Fitch expects common equity
and retained earnings to remain the primary means of meeting higher
capital requirements in the medium term given the nascency of the
local AT1 market," the agency reported.
Besides, capital quality requirements are being tightened through
the introduction of additional regulatory capital deductions,
particularly from CET1. However, according to Fitch, international
comparisons will still not be fully consistent, as Azerbaijani
banks will continue to use regulatory RWAs to calculate capital
ratios.
"These are not fully compatible with Basel standards across credit, market and operational risk components," the agency pointed out.
Full adoption of Basel methodologies is likely to occur only after 2027, and local adaptations cannot be ruled out, Fitch added.
