23 Sep 2022 16:45

Russian Central Bank looking to tighten requirements for quality of bank capital simultaneously with easing capital amounts

MOSCOW/KAZAN. Sept 23 (Interfax) - The Central Bank of Russia (CBR), which announced the other day the easing of requirements for the amount of banks' capital for stimulating lending, as well as the resolving of matters with frozen assets, plans simultaneously to tighten the requirements for the quality of credit institutions' own funds.

The CBR on Friday published a draft amendment to regulation 646-P, which regulates the methodology for determining banks' capital.

"Yesterday, we announced that we would grant certain concessions on capital, on capital adequacy ratio buffers, and on provisions. We are ready to meet the banks halfway in terms of the amount of capital, though we still have certain requirements in terms of the quality of capital. We cannot allow poor quality in capital while easing the requirement for amounts. No, we are ready to ease the amount requirements, but, in terms of quality, please," Alexander Danilov, Central Bank Director of the Banking Regulation and Analytics Department, said when explaining the essence of the draft amendment to Interfax.

The draft amendment tightens the inclusion in capital of sources funded by the bank itself. Specifically, the absolute value of "inadequate" sources is introduced at 10 billion rubles, which will be deducted from the calculation of a bank's capital when exceeded.

"So-called inadequate sources are deducted from a bank's capital, when the bank funds the capital itself. For example, a bank issues a loan and sells some sort of insurance - not the bank itself, but some other related insurance company - and the bank also finances said insurance with a loan, then the bank simultaneously reflects the insurance commission in the capital as profit. This means that the bank has not received the money yet, and the client will then pay from the loan proceeds, but it turns out to be indirect financing of its own capital. These are the aspects that we want to remove from the capital," Danilov said.

"It once was that up to 5% of capital was possible. There was such a materiality criterion, but, for a small bank, this is one matter; and, for a large bank, 5% is a lot. We would not want banks to carry out so many of these operations in absolute terms. Therefore, an additional criterion is set at 5% or 10 billion rubles, the minimum of the two. That is, for a large bank, the minimum threshold would only be 10 billion rubles for the provisions. If more, then I apologize, but we will deduct from the capital," Danilov added.

Given the substantial effect of the changes on individual banks, the CBR has envisaged implementing the new rules incrementally. The amount of "inadequate" provisions exceeding 5% of capital continues to be excluded in full. Meantime, the remaining amount of "inadequate" provisions exceeding 10 billion rubles, though not exceeding 5% of capital, is to be excluded from the calculation at 50% as of January 1, 2024, and at 100% as of January 1, 2025. Consequently, banks will have a year to adapt to the amended requirements.