CBR's Banking Regulation Department Director Alexander Danilov: You can't fulfill what you like and not comply with the rest
Alexander Danilov
Photo: Press-office
The banking regulation is one of the Central Bank of Russia (CBR)'s mandates that maintains the stability of the financial system and the resilience of banks to shocks, be it a pandemic or sanctions. For many years, the CBR's approaches have been based mainly on the recommendations made by the Basel Committee on Banking Supervision, but unprecedented restrictions have altered this course: the Central Bank is currently following a special path not to "Basel" but to "Voronezh", adapting the regulation to the new reality. Director of the CBR's Banking Regulation and Analytics Department Alexander Danilov told Interfax in an interview about what changes await Russian banks in the near future.
Q.: The Bank of Russia has discussed a number of global regulatory changes with the banking community until 2022. One of these initiatives was the regulation of ecosystems that were formed through the purchase of non-core assets by major banks. After the sanctions were imposed, the discussion on the matter was postponed, while the amount of immobilized assets on the balance sheets of credit institutions has already reached 4 trillion rubles, which is more than 20% of the banking sector's capital. The Central Bank pledged to refine its concept of ecosystem regulation. What is the regulator's vision regarding immobilized assets now and when do you plan to publish the refined concept?
A.: We will publish the revised concept in the near future. In refining the concept, we clarified the types of assets that may be classified as immobilized. For example, we included perpetual bonds. In essence, they are very similar to stocks, carry fundamentally similar risks, and should rightfully be categorized as immobilized assets.
We are also currently discussing whether to classify loans issued by banks to their non-financial subsidiaries for long terms, without clear repayment sources (for instance, the subsidiary lacks sufficient cash flow), as immobilized assets. Such loans are essentially close to the definition of immobilized assets. Moreover, a bank has a strong incentive not to demand repayment if problems arise, in order to avoid losing the value of its investment. However, not every loan issued to a subsidiary qualifies as an immobilized asset. This is a complex issue, and we are currently working through it.
Q.: What caused the growth of immobilized assets in the last three years?
A.: This is mainly due to investments in non-core businesses. Besides, these could be both ecosystem investments and investments in non-financial companies that are unrelated to the bank's core activities.
Q.: Are there any assets that, after discussing with banks, you changed your mind to classify as immobilized?
A.: Not yet. The only major topic for discussion that arose when the previous version of the concept was published concerned fixed assets. Some of these investments of a bank could essentially be used for the needs of the ecosystem too. We found that in our banking system as a whole and in other countries, in the vast majority of cases, fixed assets, which are needed for banking activities, account for up to 10% of a bank's capital. Therefore, to avoid arbitrage, we proposed classifying fixed assets that are higher than 10% of a bank's capital as immobilized assets.
After that, there was a fork in the road: to include in the risk-sensitive limit (RSL) only a part of fixed assets that exceeds 10% of the bank's capital, or all fixed assets of the bank, while increasing the size of the limit by the same 10%. At that time, we chose the second option as it is essentially less stringent for banks.
Q.: Do you still plan to set a risk-sensitive limit for immobilized assets at 30% of a bank's capital? And if so, what is the schedule?
A.: We plan to keep the target limit at 30%. We will start with a 100% limit and gradually reduce it over five years to the target level. Compared to the original schedule, we are planning a smoother transition, which will soften the impact on capital in the first three years of the limit's implementation. This will give banks time to adapt - either by selling excess assets or by ensuring capital coverage for assets they consider essential to their ecosystem development. After discussions this year, we will prepare regulatory changes so that they take effect in October 2026.
Q.: The Bank of Russia's regulation is aimed at banks that are the core of ecosystems. What will change for banks that are part of ecosystems but are not their largest asset? For example, subsidiaries of marketplaces or telecommunications companies. What regulation are you preparing for them?
A.: They themselves do not carry ecosystem risks. They rather have the opposite situation, as they depend on support from larger non-financial mother companies. Therefore, the RSL will not be a constraint for them.
At the same time, we are currently actively working on new criteria for classifying banks as systemically significant. The factor of involvement in large ecosystem groups, along with other criteria, such as asset size, deposit volume and participation in other segments of the financial market, will be an additional ground for attributing banks to this category and setting higher capital adequacy surcharges for them.
Q.: Are there changes that the Central Bank was also discussing with the market back in 2020?
A.: In 2020, we released a report suggesting that differentiated surcharges should be set depending on a bank's significance. However, life made its changes to this, and we temporarily shelved these plans. Now, we want to revisit them. The core idea remains the same, but we have developed it in much greater detail.
First, in determining a bank's significance, we intend to consider not only the size of its assets but also the scale of its ecosystem business and its impact on the deposit insurance system and other market participants in the event of financial difficulties for a banking group. Second, we plan to classify systemically important credit institutions (SICIs) into different groups based on their significance and apply differentiated capital surcharges accordingly. The logic here is simple: the larger a bank and the greater its influence on the financial system, the better protected it should be against risks. This is crucial for maintaining overall financial stability. Such an approach is widely used in many countries, including China, the United States, India, Japan, Brazil and others.
We plan to publish the concept for discussion with the market by the end of the first half of 2025. However, the actual implementation will take much longer, because banks first need to restore their overall capital adequacy surcharges by 2028.
Q.: I remember that two banks were subject to the differentiation proposed earlier. Will it be different now?
A.: It will depend on the size of the surcharge and the number of systemically important groups. In some countries, the number of such groups reaches ten. However, it is too early to discuss specific banks and surcharge levels - we first need to refine the criteria in collaboration with the market.
Q.: Speaking of other surcharges, banks had to meet the capital adequacy ratio from February 1 for the first time, taking into account a 0.25% countercyclical buffer. Were all banks able to find extra capital to comply with this date?
A.: This is more a matter of preserving capital reserves rather than creating new ones after some overheating of lending in the past couple of years. Banks grew very quickly and partially consumed their capital reserves because they could not replenish them fast enough through profits. Something needed to be done about this, and we made the decision on the countercyclical buffer. This will somewhat cool the pace of lending and preserve part of the capital in case credit risks materialize after the previous rapid growth.
Q.: And why such an unexpected effective date of February 1? Not January 1 or the beginning of the quarter, for example.
A.: So that banks have time to adapt. This is a compromise option. We at the Bank of Russia considered January 1, but that would have been harsh, given that banks need time to adjust their growth and capital plans.
Q.: The Central Bank said in a recent statement that it stands ready to specify the timeframe for setting the countercyclical buffer should it be required to maintain the balance of lending to the economy. At what pace of lending will you adjust the schedule?
A.: This will depend on the pace of lending. The goal is to strengthen banks' capital, but it is also important to avoid credit contraction. Therefore, we will closely monitor lending growth and adjust the schedule if necessary.
Q.: So far, the Central Bank is planning to raise the buffer to 0.5 percentage points on July 1. Do you understand what schedule for raising the buffer after July 1 might be?
A.: The Bank of Russia assumes that the countercyclical buffer should be set at 1% of risk-weighted assets in the long term. The schedule and level will depend on the pace of lending growth and the potential accumulation of risks.
Q.: The short-term liquidity ratio (SLR) last year was a factor that strongly influenced the bank lending and savings market and was taken into account by the Bank of Russia when making decisions on the key rate. What are the Central Bank's plans for the SLR in 2025? What is the probability that the regulator will introduce a Russian counterpart of the SLR ahead of schedule?
A.: Indeed, the short-term liquidity ratio began to affect the borrowing rates. The point is that certain market players had difficulties in meeting the schedule for bringing the ratio back to the target value. Naturally, they began to attract deposits more actively, thereby creating higher demand. Due to competition, the rates started to grow, and to ease the pressure, we have slightly shifted the schedule of compliance. It was initially assumed that from January 1, 2025, banks would have to comply with the SLR without irrevocable credit lines (ICLs) at 60%, but we decided to keep it at 50%. And from July 1, the value of the ratio without ICLs will increase to 60% instead of the originally planned 70%. The target level of the ratio is 80% from January 1, 2026.
Let us talk about a new national short-term liquidity ratio (NSLR), which will replace the SLR. The draft of the regulation is at a high degree of readiness and we are considering the possibility of introducing the ratio earlier than planned. Certain banks want it to go into effect from the middle of 2025, but there are some who aren't ready, foremost due to the need to fine-tune IT systems. Banks' readiness for the introduction of the NSLR is now being discussed. The final decision on the timeframe will be made after this discussion.
The methodology of the new ratio takes into account the actual liquidity of assets on the Russian market and a more moderate level of stress factored into the outflow of client funds. In this regard, there is a "benefit" from transitioning to the national ratio, as the new NSLR for banks is 15-20 percentage points higher than the Basel SLR (meaning the actual value of the indicator). This is why we guided banks to observe the current SLR with their own resources, without ICLs, at a level of 80% for the possibility of achieving the target NSLR level of 100%. Thus, this transition should be seamless - if you meet 80% for the old ratio, you should meet 100% for the new one.
Obviously, not everyone has a benefit. Those banks that rely on short interbank loans or short federal treasury funds benefit less from the new ratio. By our estimate, most SICIs will be able to meet the ratio, but some will need to review the structure of their balance sheet, reduce the concentration of liabilities and dependence on government funds and Bank of Russia funds, better diversify high-liquid assets.
Q.: And for those who are ready, can you introduce a national ratio earlier than 2026?
A.: We cannot do it selectively.
Q.: Do you expect the SLR to have the same impact on demand and money market rates this year as it did last year?
A.: No, there was a peak in 2024 associated with the reinstatement of the regulatory schedule.
Q.: It will be July 1 and the same story will begin.
A.: We expect not. Banks are saying that they will work to improve liquidity positions.
Q.: You have already published the concept of the NSLR, and banks gave you their proposals. What have you adjusted based on the outcomes of this discussion?
A.: Among significant things, under the initial concept, corporate bonds are included in high-liquid assets if they meet a certain rating requirement. However, we have observed that some companies, in agreement with banks, issue small bond tranches that banks fully purchase for themselves. Essentially, these are quasi-loans - such securities are not particularly liquid and are not traded anywhere. It seems to us that such practices do not fully align with our objectives. What we want is for liquid securities to be included in the NSLR calculation - they should be traded on the market and have a diversified holder base.
Therefore, we are planning to establish additional criteria for high-liquid assets. The first criterion concerns the share of a single issuer's securities in a bank's portfolio - a bank's liquidity buffer should be composed of bonds from different companies. In other words, we do not want banks to put all their eggs in one basket. If a portfolio consists solely of securities from one issuer and they suddenly depreciate, the bank could face liquidity issues. The second criterion relates specifically to bond issuances. If a bank holds a significant share of an issuance, the question arises whether it can quickly sell such a package on the market if necessary, and whether it is truly liquid. We are currently discussing with banks the possibility of introducing such criteria. This is somewhat of a tightening measure, but we believe it is justified. At the same time, we will allow time for adaptation and establish a schedule for phasing out old securities from the high-liquid asset category.
There are also some easing measures among the revisions made by us. We will adjust the outflow coefficient scale for individual deposits by modifying the threshold for large deposits. A high outflow coefficient will apply only to very large deposits, the withdrawal of which could significantly impact a bank's liquidity. We also plan to allow banks to include excess liquidity from their foreign branches as part of high-liquid assets if these funds are available for covering outflows at the parent bank.
Q.: And if we are talking about the foreign exchange liquidity ratio, which you mentioned at a press conference dedicated to the annual results of the banking sector, you said that you would think about an open foreign exchange position rather than about introducing such a ratio. What is this about?
A.: We are not touching the existing open currency positions, though we will continue to consider the structure. Currency assets have term structures and liabilities have term structures. Do we somehow want to limit the currency positions structurally regarding timeframes? A bank's currency position today could be closed, for example, there is a currency asset, and against it is a currency deposit. The currency deposit could then suddenly flow out tomorrow, and a bank pays a client in rubles at the current rate, while the currency asset remains, and the position opens at full growth. We will think about how to regulate this 'future' currency risk better, though this is still at the initial level of discussion.
Q.: The Bank of Russia changed the rules for transferring blocked assets and liabilities to a separate legal entity at the end of last year. Can you tell us what the reason was behind this decision?
A.: How do we see the purpose of the law that allows banks to allocate blocked assets? It is a way to create an independent company which foreign creditors could interact with to settle and mutually offset blocked assets and liabilities. Sanctioned banks are not contacted on this matter because the other side is legally prohibited from communicating with organizations on the SDN list.
We oppose using asset allocation solely for optimizing reserves, which is why it has clarified its approach to reserving - if mutual offsetting cannot be carried out within two years, reserves must be created as if these assets remained on the bank's balance sheet. The new procedure will encourage banks to allocate assets specifically for netting rather than for saving on reserves.
The second issue is that banks wanted to allocate assets that have no real value, even without considering the blocking factor. Essentially, these are non-existent assets, such as shares in liquidated companies. These assets cannot be exchanged for anything, and the basic scenario here is the gradual recognition of losses. Clearly, there is no point in allocating them.
On the one hand, we do not see sufficient activity from banks in regulating issues with blocked assets, even though three years have passed since the imposition of sanctions. On the other, banks are actively looking for ways to minimize reserves and save capital after the very rapid balance sheet growth in 2023-2024. As a result, we receive various proposals - from allocating blocked assets that clearly no longer hold any value for creditors (and are unlikely to be exchanged) to writing off obligations due to their formal unclaimed status (since creditors cannot contact a sanctioned bank due to legal risks). We are against such 'creative' approaches to regulation.
Q.: Are there many now willing to create such a legal entity and allocate blocked assets?
A.: A few.
Q.: In order to encourage banks to lower concentration risks, the Bank of Russia planned to elaborate a concept of a new compliance regime for certain ratios and draft amendments to laws and regulations in 2024. At what stage of development is this issue?
A.: We took the first step and did not extend the easing of concentration ratios for sanctioned companies. The overwhelming majority of banks coped with it without violations. There are a few banks, whose concentration risks are elevated, but we are working with them individually - some of them already have long-term plans to reduce concentration, while some others are in the process of developing and approving them. Our philosophy is simple, if there are those who are not doing well in school, we will pull them up, rather than lowering the curriculum requirements for everyone.
The second point is the consolidated concentration ratio N30 for systemically important banks. It will be stricter than the N6 ratio, as it will not take into account lower risk weights and will be calculated based on core capital rather than total capital. We are discussing a bill introducing this ratio with the Finance Ministry, and we will discuss it with them using figures. I think the main questions will be about the timeframe for implementation, the feasibility of this ratio and its potential impact on the pace of lending. We will show our colleagues that, given the gradual implementation, banks will be able to distribute excessive concentration and fund the largest companies.
We expect the changes to take effect in 2026, but we will phase in the new ratio from 65% in 2026 to 25% starting 2031. We will adjust the implementation schedule so that we can smoothly adapt to the new regulation.
It is essential that we not only tighten the requirements, but also introduce mechanisms that will help banks adapt more easily, without losing quality in risk assessment. For example, we want to introduce criteria for the operational independence of companies, so that in order to calculate the concentration ratio it will be unnecessary to combine economically independent companies into one group only based on their influence and control. Preliminarily, a company will not need to be included in a group of related borrowers if its own creditworthiness grade is A or higher, it has separate IFRS reporting, independent directors on the board of directors (at least 25% of the board), and mutual revenue/cost shares with other group members are insignificant (less than 20%). This will help those groups that base their logic of operations on independent business divisions. We are currently finalizing the criteria and plan that banks will be able to use them from early 2026.
Q.: The Bank of Russia planned to improve the rules for issuing subordinated instruments of banks, set a high conversion trigger for them, and divide them into two types. Has this idea been discussed with the banking community? When do you plan to implement the idea?
A.: We are completing work on the concept within the Central Bank of Russia. We have for the time being temporarily allowed subordinated debt at a floating rate, though we have limited the timeframe to seven years, so that it exits circulation rather quickly.
We plan to discuss the new concept with the market in the first half of 2025, and introduce it into regulation in 2026. We expect the new rules to enter into force in 2027, though the process could require longer. It is necessary to amend not only the Central Bank's regulations, but also the laws. Banks have few sources of capital replenishment, mainly profit. Therefore, banks are very interested in subordinated debt, and we believe that our ideas will be supported even with some amendments during the discussion.
There are two main issues with subordinated debt as it currently exists. The first is that it essentially does not cover losses in a crisis situation. In theory, it should act as a damper. If something occurs, then banks write off subordinated debt and thereby replenish their core capital. However, unfortunately, our banks refuse to write it off, so as not to lose the trust of their clients and not to damage their business reputation. Meantime, the rights of the investors who have invested in subordinated debt could be infringed. When written off, they irrevocably lose their funds, while the bank could restore its solvency, and what is most unfair is that the shareholders, who should be the first to bear losses, do not lose anything in this situation. They retain control over the bank, and the value of their shares could rise again. We are planning to review the terms of writing off/converting subordinated debt and introducing the possibility of it being restored if certain conditions are met in order to ensure that the principle of responsibility is not breached.
The second issue is that the rules under which subordinated debt should be written off or converted are included, the trigger is activated, when the bank is already nearly insolvent, for example, the adequacy of core capital drops below 2%. We plan to increase the trigger for it being written off or converted in order to improve the ability of subordinated debt to absorb bank losses.
We have an idea to divide subordinated debt into two types. Most likely, one type would have a higher trigger and conversion into shares, and the second would have a lower trigger and restoration of the par value.
Q.: Can you comment on the opinion of some bankers that it takes the Central Bank too long to draw up and adopt regulatory documents?
A.: With regard to regulation, it is extremely important to measure seven times and only then cut once. We adhere to this principle when developing all, including tightening innovations, so as not to create excessive pressure. For example, as regards immobilized assets, we did not have a plan for accelerated introduction of regulation, because after the imposition of tough sanctions it was necessary to give banks time to adapt. We acted according to the plan, but the only thing is that we did not have time to publish the refined concept at the end of the year, because some banks were late in submitting their data.
The development cycle of a complex regulatory rule includes drafting a concept, collecting data and conducting a comprehensive analysis, publishing an advisory report, discussing it with the market and then refining the concept. A regulatory act or regulatory acts are being drafted only after that, depending on the complexity of the issue. Then it still requires their endorsement by the Justice Ministry. On average, the development cycle of a difficult regulation takes about nine months, but this is if everything goes as scheduled and there are no delays in obtaining data, (banks are not always able to provide figures rapidly, and sometimes they present incorrect data and one has to request it again), and in revising the concept that happens sometimes too.
There were questions about liquidity regulation, which we talked about earlier - that we somehow delayed the transition to the national ratio. This is not true at all. As you recall, when we granted the concession for the existing Basel short-term liquidity ratio after the stress of 2022, we recommended that banks restore its level. But some participants did not follow this, ate up liquidity, used it to grow the loan portfolio. In private conversations, they acknowledge this, that they monetized liquidity. Therefore, in 2024 we clarified the calculation of the Basel short-term liquidity ratio and, as much as was possible, adapted it to our specifics. At the same time, we made a regulatory schedule for restoring the SLR and calibrated it so as to make a seamless transition to the national ratio. We are now discussing with banks the accelerated introduction of the new ratio, but in fact, as I've already said, it turns out that half of them will not manage in time, the system's not ready. Moreover, some banks actually do not want to transition faster to the new ratio completely, and are ready to apply only some of its elements. But that's not right, this is comprehensive regulation, you can't fulfil what you like and not comply with the rest.
And there is a topic associated with blocked assets. As I have already said, we have refined the concept so that there would be no arbitrage and allocation of assets for saving on reserves. But we made a schedule for reserving blocked assets a long time ago, and we do not leave banks in an information vacuum. We are implementing the schedule through a temporary decision made by the Board of Directors, and we will incorporate it into regulation by a separate regulatory act in the future. We applied this principle earlier, when we reduced capital adequacy surcharges with a schedule of their gradual restoration. We also made temporary decisions at first, and then made changes to Instruction No. 199-I, which is now part of the regulation.
However, I take the bankers' wish for us to "run faster" positively as a whole. We will do our best.
Q.: Do you have enough staff to run faster?
A.: The question is complicated. Some things in regulation need to be worked out from scratch, taking into account our reality. This is also the reason why the enforcement of a new regulation takes so long. Look, for how many years the Basel standards have been introduced, even after the 2008 crisis it took several years for them to be first introduced, and the process is still in progress. We are also advancing gradually.
We do not need to increase our staff significantly. However, if someone wants to join us, having good experience, of course, please contact us, we will consider it.