CBR to introduce countercyclical buffer five months early to cool lending

MOSCOW. Nov 11 (Interfax) - The Central Bank of Russia (CBR) will introduce the countercyclical buffer for capital adequacy ratios five months earlier than initially planned - on February 1 rather than July 1, 2025 - in light of the ongoing growth of corporate lending, the CBR said in a press release.

The countercyclical buffer will be 0.25% of risk-weighted assets effective February 1 and will double to 0.5% on July 1.

"After the Bank of Russia made the decision in August 2024 to establish a countercyclical buffer in the amount of 0.25% of risk-weighted assets as of July 1, 2025, growth of corporate lending continued at a far faster pace than was expected. Debt has increased by 14.5% since the start of the year and by 6.4% in the third quarter of 2024 alone. In October, corporate lending grew by another 2.2%," the CBR said.

And while banks actively form a macroprudential capital buffer (1.1 trillion rubles as of October 1) for consumer loans and mortgages, the growth of which is slowing, they currently do not form a capital reserve to cover systemic risks for the rapidly growing corporate portfolio. The banking sector's N1.0 capital adequacy ratio fell to 12.1% as of October 1 from 13.3% at the beginning of 2024.

"Given the credit overheating, banks must accelerate the accumulation of a capital buffer to cover systemic risks. Increasing the countercyclical buffer will facilitate greater stability of banks and more balanced growth of lending to the economy. The future schedule for increasing the countercyclical buffer to the target level of 1% of risk-weighted assets will be considered in 2025," the CBR said.

The countercyclical buffer on the capital adequacy ratio was introduced by the Basel III regulatory framework to increase the stability of the banking system. It is essentially a buffer that is accumulated during periods of rapid credit supply growth and released in periods of economic stress. The release of the capital buffer during periods of uncertainty on financial markets is supposed to help maintain banks' lending activity and reduce the negative impact that destabilizing factors have on the real economy.

Russia introduced requirements for banks to calculate a countercyclical buffer as of January 1, 2016, but the value for the national buffer was set at 0% of risk-weighted assets. Basel III recommends a national countercyclical buffer in the range of 0% to 2.5%, but national regulators can set the buffer at more than 2.5%.

When making decisions on the size of the countercyclical buffer, the CBR uses a broad range of indicators, including the credit gap recommended by the Basel Committee on Banking Supervision and its modifications, the debt servicing ratio, and credit cycle indicator. Other indicators are auxiliary and make it possible to assess the conditions of bank lending to retail customers and nonfinancial organizations, the profitability of the banking sector and banks' ability to cover losses with capital.

The CBR announced plans to introduce a countercyclical buffer greater than zero in August 2024, citing the fact that accelerated growth of lending was being accompanied by a decline in banks' capital adequacy ratios.