Central Bank of Russia to allow banks to attract subordinated loans for up to 7 years with floating interest rate within key rate + 5 pp in H1
MOSCOW. Dec 28 (Interfax) - The Central Bank of Russia has allowed banks to temporarily place subordinated instruments with a floating interest rate, the maximum value of which is the key rate plus 5 percentage points (pp), according to a decision of the CBR's board of directors published on the regulator's website.
In accordance with the Central Bank's regulation 646-P on the methodology for determining banks' capital, the maximum interest rate for a ruble subordinated loan (or a deposit, borrowing or bond loan) should be 15%.
In 2022, after a sharp increase in the key rate, the CBR introduced relaxations to the maximum subordinated rate. It was set to the maximum of two values - 15% or the key rate increased by 5 pp. This measure lasted until December 31, 2022, and was not extended since the key rate had decreased by that time.
This autumn, amid tightening monetary policy, banks asked the CBR to adjust the maximum subordinated loan interest rate, as the instrument was less profitable compared to deposits due to this limitation. The CBR promised to review the issue of adjusting the maximum rate.
As stated in the Bank of Russia's decision of December 24, the regulator has set the maximum value for subordinated instruments with a floating interest rate at the level of the key rate plus 5 pp. For fixed-rate instruments, the maximum value remains at 15%. This measure will be in effect from January 1, 2025, to June 30, 2025, inclusive.
"Given that due to the increase in the key rate (KR) even an ordinary deposit cannot currently attract 15%, we provided banks with the opportunity to issue relatively high-yield subordinated instruments with a floating rate (KR plus 5 pp). A subordinated instrument is attractive to an investor only if its yield is higher than that of a deposit, as deposits are mainly offered at KR minus 2 pp to KR plus 3 pp, because subordinated debt can be written off in case of a significant reduction in the bank's capital adequacy and it is not covered by the deposit insurance system," the CBR's press service told Interfax.
As a temporary solution, to replenish the banks' capital, which has thinned out due to the rapid growth of loans, the regulator has allowed them to attract subordinated debt for up to seven years so that the duration of lower-quality subordinated debt, in terms of capital protection and investor protection, is limited - effectively less than two years of the total initial issue, as subordinated debt starts amortizing five years before maturity, and an ever decreasing portion is included in the bank's capital.
At the same time, the CBR excludes the possibility of attracting subordinated deposits, as they have the lowest level of legal protection and can be seized from the investor in the event of bankruptcy. The only exception is for National Wealth Fund (NWF) deposits, as there are no such risks for the NWF.
"To limit the risks of misselling, a decision was also made to set a minimum lot for subordinated bonds so that they are not sold to individuals with small sums, and only clients with large asset volumes, likely with more developed investment decision-making skills, can purchase them," the CBR said.
According to the board of directors' decision, the nominal value of a subordinated bond with a floating interest rate must be no less than 100 million rubles.
At the same time, the current regulatory requirements for subordinated debt as a capital absorption tool are very low, the CBR said. The Central Bank plans to raise the requirements for including subordinated debt in banks' capital in 2025.