Central Bank of Russia will make accounting of non-core assets more transparent when calculating banks' capital adequacy ratios

MOSCOW. July 10 (Interfax) - The Central Bank of Russia plans to change the rules for consolidation in the calculation of the capital adequacy ratio for banking groups (N20) next year so that credit institutions reflect investments in non-core businesses more transparently on their balance sheets, First Deputy Director of the CBR's Department of Banking Regulation and Analytics Anton Naberukhin said in an interview with Interfax.

"We want to change the consolidation rules for banking groups. When we talk about capital adequacy ratios, we often refer to the adequacy of the banking group. For example, capital buffers are not required for N1.0, but they are required for N20. It is important for us not only how the bank itself is doing, but how the entire group is performing. And right now, our close attention is focused on consolidation in particular," Naberukhin said.

In international practice, only a narrow circle of companies is usually consolidated, including leasing, factoring and sometimes insurance - "in other words, businesses similar to banking," he said. Anything unrelated to banking should not be consolidated.

"In Russia, there is regulation 729-P, which governs the calculation of group-level ratios. It also outlines whom we allow to consolidate and whom we do not. We now want to clarify this list. We would like banks to consolidate fewer non-financial companies, because such consolidation is a double-edged sword. When we calculate the classic capital adequacy ratio, there are only three types of risk - credit, market and operational. If we look at e-commerce or a taxi fleet, there's no credit risk; there are entirely different types of risk - for example, marketing risk or cost risk - risks that a bank does not typically encounter. It turns out that if the capital of such a company is added to the capital of the banking group, the associated risk unfortunately won't be added, because banks do not calculate marketing risk in capital adequacy assessments; there are no such rules," he said.

The CBR wants to separate these two cases, so that businesses with risks not accounted for in banking regulations are not included in the consolidation. Such assets will be reflected as the bank's investments, Naberukhin said.

"The difference is this: in the case of consolidation, the bank essentially forgets that it has made certain investments and instead shows the assets that are on that company's balance sheet. For example, if it's a taxi fleet or some software, it will immediately appear on the bank's balance sheet. But if there is no consolidation, the bank will show its investment - for example, that it invested 100 billion rubles in developing a taxi business. And that may be worse for the bank because we assign higher risk weights to all investments in non-financial businesses. But the business of the banking group will become more understandable and transparent in terms of the allocation of banking and non-banking risks and capital," he said.

This is a classic approach to the treatment of non-core assets in banking reporting, he said.

"For example, I had the opportunity to work with Southern European banks that, after the PIIGS crisis, accumulated a significant number of non-core assets and hidden losses. At some point, construction projects, buildings and land appeared - it was unclear what they were worth, what to do with them, how to sell them and so on. The lack of transparency in bank balance sheets has always been a problem for creditors, shareholders and the state. We want the balance sheets to become clearer, so it's easy to determine whose fixed asset it is - the bank's or the taxi fleet's - whether it generates income, and how much it's worth," Naberukhin said.

The CBR's new rules will not affect reporting to International Financial Reporting Standards (IFRS), he said. The new consolidation rule will apply only to regulatory ratio calculations. "Accordingly, in the calculation of ratios, we will see a separation of banking and non-banking businesses," he said.

The amendments to regulation 729-P are expected to come into force in 2026, he said.