Elvira Nabiullina’s speech at Federation Council’s plenary session
Good afternoon, Ms Matviyenko. Good afternoon, colleagues.
Thank you for the invitation. The topic of today’s session is really essential. It is about the role of the financial sector in the development of the economy at the current stage. Besides, it is about how well the Russian financial system has adjusted to the earlier changes and what should be done for the financial sector to be capable of supporting the structural transformation of the economy and its growth in the future, while remaining stable and resilient.
Today, I would like to dwell on the following issues. First of all, this is the macroeconomic situation and our policy aimed at maintaining macrostability. The second issue is the banking sector and changes in the regulation supporting the structural transformation. Thirdly, this is the development of the stock market. Finally, an important issue is the transparency of the financial market for people and the protection of financial consumers’ rights.
The economy has been quickly recovering, owing to the flexibility and high performance of the private sector. Businesses have not just managed to cope with the situation, but are also making plans for the future. Business climate indicators are close to their ten-year highs, and economic activity has been bouncing back very fast. There are already companies that have introduced three work shifts. Many sectors and enterprises are actively hiring new employees, and there are often staff shortages. These trends are certainly optimistic. Nevertheless, for businesses to maintain the impetus to the development in the new environment, we need to ensure low inflation. This is a prerequisite for long-term investment and for raising funds in the market at comfortable interest rates.
Therefore, being aware of significant proinflationary risks created by the budget and the labour market amid quickly expanding domestic demand and reviving consumer lending, we are pursuing our monetary policy very cautiously.
We firmly believe that inflation is the critical anchor in the economy and that low and predictable inflation is crucial to ensure people’s and businesses’ confidence in the future and encourage them to invest in the national economy, in the country. This is about households’ real incomes, incomes that are not absorbed by price growth.
Our special focus is financial stability risks. Last year’s performance of the financial sector does not imply that we have no vulnerabilities. To the contrary, this means that to ensure long-term stability, it is absolutely necessary to carry out scrupulous monitoring of financial stability risks, promptly mitigate them, and address potential internal imbalances. This is especially relevant now when the situation is rapidly changing and external conditions remain extremely aggressive.
Thus, as regards potential internal imbalances, a matter of concern for us is mortgage lending as this segment has been inflated by both subsidised and allegedly subsidised programmes. Currently, by implementing our measures, we are limiting the growth rates of new mortgages with a small down payment in order to ensure a balanced expansion in mortgage lending, as we are seeking to prevent an increase in this segment through higher debt burden that people would not be able to sustain and to avoid simply a rise in housing prices.
Furthermore, we will be closely monitoring retail lending growth rates. This segment has contracted notably last year, but is also bouncing back fast now. It is essential that its expansion should not exceed the growth of people’s incomes as this might also excessively increase people’s debt burden, inducing the risks of a dangerous rise in household debt load. This is especially critical considering that some banks are confusing people, concealing the actual cost of credit behind fees and additional services. This is also a problem to be addressed, and I would speak on it a little later.
Now, I would like to talk of the banking sector and its role in the structural transformation of the economy.
Today, the banking sector is essential for the recovery and further structural transformation of the economy. Corporate lending has been expanding rather fast. Thus, according to April statistics, the annual growth of credit reaches 17.1%, which is a very good pace for corporate lending. However, today, the potential of lending should be focused on the projects that are vital for the economy. To this end, we have introduced incentive-based regulation. Relying on the taxonomy, or eligibility criteria of projects developed by the Government, banks will be able to issue loans with a lower burden on their capital. If they take advantage of these measures, this decision will enable them to release additional capital of up to ₽10 trillion for lending.
Another significant advantage of the incentive-based regulation is that we are using market instruments that are inherently more transparent and efficient for businesses than administrative ones. If we had decided to simply extend cheap loans to selected companies, this would have jeopardised the result in the first place, as those businesses that have greater lobbying power are not always the most efficient ones — rather the opposite, they often tend to improve their performance, which is persistently low, through government support measures. The second aspect is that such a programme would have caused an increase in interest rates for all other enterprises, considering the scale of the transformation. Consequently, really efficient companies could have lost access to affordable loans.
Hence, we expect that such incentive-based regulation for banks will be effective. We will be monitoring the progress in this area. Besides, we are now expanding the incentive-based regulation to the loans issued last year, namely beginning on 30 September, for banks that funded such projects to benefit from such incentives. The incentive-based regulation and its effect could certainly enhance the Government’s decisions on supporting such projects that are crucial for the economy, first of all decisions on expanding state guarantees and increasing the role of development institutes. We believe it totally reasonable for the Government to share risks with banks when it comprehends the importance of a project. It provides a guarantee that shall be real, unconditional and irrevocable and, thus, promises that it will not exit the project at a critical moment. These are projects that are improving society’s welfare. Therefore, the Government and private businesses should really rely on each other. The Government — on banks with regard to the selection of high-quality projects that will receive credit, and banks — on the Government trusting it that it is aware of banks’ risks and shares them if it has set the priorities.
Speaking of development institutes, we have found out that they play an important role in international practice supporting financing for small and medium-sized businesses, foreign trade, agriculture and infrastructure, as well as innovative and technological projects. As to Russia, the ratio of the largest development institutes’ assets to GDP is not high. For example, VEB.RF’s assets accounted for about 3% of GDP in 2021. For comparison, the three largest Chinese development banks’ assets account for up to 26% of GDP, and the largest Brazilian development institute — for up to 6.9% of GDP. In other words, the development institutes in these countries play a great role. We believe that Russia has the potential for increasing the role of development institutes. Moreover, banks simply cannot be the only ones to be tasked with the financing of all strategically important areas as they should not incur the risks that might threaten their financial stability and their depositors and creditors. Banks will not be able to finance loss-making projects — this should be done by the Government through development institutes. This is why, jointly with VEB.RF and the Government, we are working on the mechanism of an equity capital fund, among other things. Using this mechanism, banks will be able to receive a share in projects’ capital through special unit investment funds within VEB.RF’s Project Finance Factory.
It is essential that banks, which are the circulatory system of the economy, deliver financing to all companies that need credit and are capable of servicing these loans, especially to regional small businesses. Therefore, we are developing all segments of the banking market, including small banks and banks with a basic licence. A while ago, we were very much concerned that many of them were doubtful about what business model to choose, although we had simplified the requirements for such banks and granted new opportunities to them. Hence, at a recent meeting, we presented the development concept to them suggesting the models named Alliance and Umbrella that would enable banks to join their efforts and use larger players’ resources in order to reduce their costs and expand business, because we are aware of rising costs for both cyber security and IT development. A particular small bank will not be able to cope with this task, while such a bank is very important for a region and for financing regional businesses. This is why we have suggested such cooperation models and will discuss them with banks to enable them to provide all necessary services, in the first place lending to small and medium-sized businesses.
Now, I would like to say a few words about phasing-out of the regulatory easing measures. As during the previous crisis periods, we have been using this instrument and, this time, even more extensively. However, the current crisis involves insurmountable external barriers, which is why we will be scaling back the regulatory easing granted to banks for a longer period. Thus, banks will have five years to restore the amounts of their capital buffers. In addition, we are seeking to ensure comfortable conditions for working with frozen assets as some banks are facing this problem. In this case, banks are unable to influence the situation in any way. Accordingly, we give ten years for banks to create provisions for these frozen assets. Besides, they may be separated and transferred to special legal entities if banks have liabilities to non-residents. I would like to note that this comfortable mode is possible because banks are stable and we are confident that they are not concealing any problems using the regulatory easing to hide such problems. We are not concerned about this and, therefore, are ready to grant such easing in order to help banks recover gradually.
Now, I would like to speak about the development of the stock market. Historically, banks have been playing the key role in the financing of the economy, accounting for nearly 80% of the financial sector’s assets. However, banks cannot always be a source of long-term resources. Recently, the US banking crisis demonstrated what might happen when investments are long-term while deposits are short-term. Of course, we need to prevent such a situation.
A company’s long-term financing should include equity financing in the first place. Businesses should get this financing in the capital market. This will prevent a situation where economic growth might collapse because of expanding debt burden.
Of course, we are now going through a challenging period — last year’s turbulence, the exit of foreign investors from unfriendly states, and the loss of investors due to the freezing of assets — but all these factors have stalled the development of the stock market. Nevertheless, it has not been blocked. As recently as this week, the MOEX Russia Index rebounded to 2,800 points, which is higher than in April 2022. Secondly, the development of the stock market may not be put on ice as we need it right now, when the economy is undergoing its structural transformation and when companies need not only to expand their business, but also to make long-term plans and raise long-term investment.
We do see a significant potential for expanding equity financing within both industries and particular companies. To unleash this potential, we need measures targeted at both investors who are forming the demand for securities and issuers of these securities.
Besides, it is important to have special-purpose products for this. Specifically, the mechanism of individual investment accounts (IIAs) was implemented eight years ago. Currently, there are IIAs of the first and second types in circulation, and privileges are granted when they have been held for over three years. During these eight years, we have been observing a considerable increase in private investors’ interest in the stock market. This instrument has proven to be efficient. Nevertheless, today, we are aiming to ensure a longer horizon of these investments and, to this end, are working on IIAs of the third type. For this, we will need additional solutions.
A programme of long-term savings for investments for over ten years is a new instrument that the Ministry of Finance has been developing jointly with the Bank of Russia. The programme will be a good option for cautious investors, less active stock market participants. Generally, we believe that newbies should opt for collective investment instruments and rely on professionals, rather than jump into the deep end of market trading.
Another new instrument for investors will be unit-linked life insurance where a policyholder’s premiums are partly invested to generate returns. This instrument will be highly transparent as policyholders will have the opportunity to choose assets, track the dynamics of returns, and change assets for investment.
To increase the role of institutional investors, we will be changing the regulation so as to create greater incentives for investment in Russian issuers’ bonds for the financing of technological sovereignty and adaptation projects. In particular, we are going to lower the requirements for relevant bonds in the calculation of capital adequacy, introduce easing within stress tests for non-governmental pension funds, and allocate a special 5% limit for unit investment funds.
Understandably, we are now focusing predominantly on domestic investors, but we should also promote the conditions for attracting investors from friendly states. This is not a simple task as we need to arrange communication channels, including for external economic activity, settlements and payments. We are currently carrying out extensive and meticulous work with partner countries to organise such payment chains and develop an independent infrastructure. We will be taking efforts to do this.
As regards incentivising issuers, we consider it appropriate to also focus the support on companies participating in the transformation of the economy. The practice that is mostly used for small and medium-sized businesses should be expanded to cover this group of companies as well. The development of the criteria of such companies will soon be completed to be then approved in laws.
Of course, accessible and high-quality information on issuers and instruments is essential for investment. There can be no investment without information disclosure. Hence, we need to resume the publication of statements, although this involves sanction-related risks, and we are perfectly aware of them. Nevertheless, companies should not keep the information needed for the market development under cover of such sanction-related risks. Indeed, they may disclose aggregated data excluding information on sensitive issues. However, we believe that disclosures are necessary. This is critical to restore confidence.
Another important aspect to restore confidence is the work with frozen assets. This is a complicated issue as the core of its solution is in unfriendly jurisdictions. We are exploring multiple options and will be suggesting them in order to restore confidence in the market.
And the last but not the least, or maybe even the most important issue is the protection of financial consumers’ rights. We have been observing a downward trend in malpractice according to both the results of the market monitoring and the number of complaints. The powers that the Bank of Russia received from the legislative authorities to buy back ‘bad’ products have helped us a lot in this area. Nevertheless, we still have to deal sometimes with such issues as hard selling of services and other malpractice violating people’s interests.
In this regard, we need decisions, including legislative ones, obliging companies to inform customers of the total cost of credit. Today, banks are trying to hide actual interest rates behind fees and additional products, and people thus cannot understand the level of interest rates. By the moment, we have given the recommendations to banks on how they should disclose information about loans. However, we certainly need tighter measures, including amendments to law and the requirements for loan advertising so as to prevent misrepresentation.
Of course, banks’ and other financial institutions’ unfair approaches are a problem, but it is even much worse when people are deceived by fraudsters. After such troubles, they will prefer to stay away from the financial sector and hold their savings at home. Consequently, these funds will not help the economy.
Therefore, a critical component of our work is combating all types of fraud — from pyramids to social engineering.
We support Nikolay Zhuravlev’s draft law to prohibit unregulated companies from raising funds from people. This will help block the opportunities for pyramids to collect money from people much more quickly. Currently, when we detect signs of a pyramid, it takes quite a long time to prove that it is really a pyramid.
The second important initiative is the self-ban on loans and microloans as fraudsters now like a scheme when they raise loans on behalf of people, which can be done even without their participation. We have been receiving a lot of complaints about this. When a person imposes this self-ban, it will be impossible to issue a loan to this customer. If this person later on needs a loan, it will be possible to lift the self-ban. However, we suggest introducing a time lag for the cancellation of the self-ban. This will prevent a situation when people are misled by fraudsters and lift the self-ban immediately, thus damaging themselves. Customers should have time to understand what is actually happening.
These initiatives are now the most relevant ones, and we hope for senators’ support in this regard. Of course, this is not all our efforts aimed at protecting financial consumers and investors. I would not list all the measures. We are going to update the criteria for qualified and non-qualified investors and introduce regulation of instalment payments, online ads, and many other issues. We are currently working on all these initiatives and I am grateful to senators for supporting these legislative initiatives. We really feel this support and appreciate your constructive approach.
Wrapping up, I would like to say that, despite the external challenges and large-scale internal tasks, our economy does possess the potential for its stable development. The financial market should play a big role to help unleash this potential. We are perfectly aware of this and the changes that we are introducing in the regulation and our policy are intended to adjust the system and help it address these tasks.
Thank you for attention.