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.
