Bank of Russia and Finance Ministry discuss regulation of bank holding companies

There are plans to establish equal regulation for bank holding companies and groups, bringing it in complete alignment with global practices. In an effort to set up a level playing field for all market players, the Bank of Russia has submitted to the RF Finance Ministry its proposal for changes to Federal Law No. 86-FZ, dated 10 July 2002 ‘On the Central Bank of the Russian Federation (the Bank of Russia)’ and Federal Law No. 391-FZ, dated 3 December 2011, ‘On Banks and Banking Activities’, with a view to improving the regulation of bank holding company / bank group operations.

According to the document, the technical term ‘bank holding company’ would be extended to informal associations of credit and non-bank financial institutions of the same owners. Beyond their own risks, banks making up holding companies assume those related to other subsidiaries within a holding. This implies that any financial difficulties or loss of a business reputation incurred by a subsidiary within a holding company may entail damage to the financial soundness of its other subsidiaries.

Until recently, bank holding companies enjoyed a softer regulatory regime compared to banking groups.  In this manner, holding companies were subject to a rule whereby the Bank of Russia would be notified when a bank holding company and its management company were set up, and would be supplied with disclosed information, along with the holding company's risk reporting. Once the proposed legislative changes are made, bank holding companies will be obliged to observe statutory ratios, capital adequacy buffers and requirements for risk, capital management and internal control systems. Head office CEOs will be obliged to meet the same business reputation and qualification criteria as CEOs of credit institutions. The Bank of Russia will have the responsibility to ensure the oversight of the holdings’ operations.

Under the proposed regulation, owners of bank holding companies which include members with non-financial operations shall unbundle their banking and financial operations into a subholding, creating a management company for the banking holding company.  This rule does not include a transfer to the management company of shares in financial organisations. The management company will have the responsibility to execute all duties of the holding company’s head offices unless federal laws require otherwise. This same subholding company shall be founded in Russia in the case of a holding’s head office located abroad.

Before these novel regulatory standards as regards credit institutions, banking groups and bank holding companies come into effect, a three-year transitional period will be envisaged. In particular, requirements for the creation of banking group or bank holding company management bodies will be effective from 1 January 2020, while those in respect of bank holding company regulation — from 1 January 2021.