Mechanism for the regulator’s involvement in resolution worked out
The Bank of Russia drafted a set of regulations to implement a new mechanism of bank resolution. It provides for a shift from lending to direct participation of the regulator in the capital of banks under resolution. This approach is stipulated in the bill that passed its first reading at the State Duma on 22 February 2017.
The release of the regulations sets the stage for the second reading of the bill at the State Duma. ‘Given the extreme importance of this novation for the market, such a move will allow us to introduce a new resolution mechanism in details and find out bankers’ expert opinion,’ argues Vasily Pozdyshev, a Deputy Governor of the Bank of Russia. ‘It will allow for an in-depth — and, consequently, efficient — discussion of the proposed resolution mechanism.’
The new mechanism suggests that resolution be conducted by the Bank of Russia rather than the SC Deposit Insurance Agency. Resolution is supposed to be funded through the Banking Sector Consolidation Fund made up of the cash held by the Bank of Russia. Shares and other property of the bank under resolution, which the regulator should buy through the Fund, may be transferred in trust of the management company where the sole founder should be the Bank of Russia. The management company should act on behalf of the regulator, use the Fund, take bankruptcy prevention measures and settle banks’ liabilities. The management of recapitalised banks is ultimately aimed at selling them to a new owner at a public Bank of Russia-held auction.
Bankruptcy prevention through the Bank of Russia’s direct top-up of the authorised capital of the bank under resolution is supposed to be the key recovery model. However, the bill also suggests that the regulator should be able to get a third-party investor involved in the capital of the bank as is the case now for the participation of SC Deposit Insurance Agency in resolution. The new mechanism will minimise public expenditure on financial resolution.
The draft regulations regulate the new mechanism from the procedure for making the decision on the Bank of Russia’s involvement in bankruptcy prevention measures to the requirements for investors eligible for involvement in resolution.
In particular, if a bank shows an unstable financial position that threatens its creditors or the stability of the banking system, the Bank of Russia may send its representatives and representatives of the management company to assess its financial position. The results of this assessment will form the basis for a report with conclusions and suggestions about the expedience of the Bank of Russia’s involvement in resolution.
The draft regulations set the requirements for the procedure for the Bank of Russia to work out and approve bankruptcy prevention and liability settlement plans for credit institutions. The approved plans suggest that when the decision on financial resolution is made, the management company should be appointed as the bank’s provisional administration and the requirements to its activity should be revised accordingly.
The draft regulations also determine the procedure for bringing the bank’s authorised capital to its real value or one ruble (if the capital is expressed by a negative value). As soon as this procedure is completed, shares of the credit institution under resolution can be purchased. The investors and buyers of the credit institution’s assets and liabilities should meet the Bank of Russia’s financial stability requirements.
