Central Bank of Russia expecting new rules to issue bank subordinated debt to enter into force in 2027

MOSCOW. Feb 24 (Interfax) - The Central Bank of Russia is expecting that the new rules for issuing subordinated bank instruments to enter into force in 2027, Central Bank Director of the Banking Regulation and Analytics Department Alexander Danilov said during an interview with Interfax.

"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," Danilov said.

Central Bank Governor Elvira Nabiullina in September last year spoke about the Central Bank's plans to improve the rules for issuing banks' subordinated instruments, to establish a high conversion trigger for them, and to divide them into two types.

"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," Danilov said.

The Central Bank is 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 infringed.

"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," Danilov said.

The Central Bank would like 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," Danilov said.