Speech by Bank of Russia Governor Elvira Nabiullina at the 14th International Banking Forum ‘Banks of Russia – XXI Century’ (transcript)

9 September 2016, 12:00

Good afternoon, dear colleagues!

During the first one and a half days of the forum you have discussed the majority of questions related to various aspects of banking regulation and development of the banking sector in general. The so-called cross-sectoral part of the forum programme – the discussion of the ‘Guidelines for Financial Market Development’ is about to begin. This document is fundamental for us. When we presented the Guidelines for the first time, it was mistakenly perceived by many as a document unrelated to the banking sector. However, there is no difference between bank and non-bank parts of the industry, and as a regulator and as a megaregulator we aim for the balanced development of all financial market sectors. We understand that there must be uniform principles for the financial market regulation and supervision. It was the correct decision to include the discussion of the Guidelines, specifically, the practical aspects of their implementation, in the programme of the traditional banking forum.

In my today’s speech opening up this important discussion I would like to briefly describe certain conditions, which shape the dynamics in the current financial system and influence business operation and planning.

Moreover, the Association of Regional Banks’ forum is the best platform for discussion of the reform we proposed in July, which involves the creation of a three-level system.

I would like to begin with changes in monetary conditions.

Over the next couple of months, we expect the transition to the structural liquidity surplus. The amount of credit institutions’ borrowings from the Bank of Russia dropped by 11% in August (to 2.4 trillion rubles) and, at the same time, the amount of deposits placed by the Federal Treasury with credit institutions went up by a factor of 1.3. As a result, within banking sector liabilities, the share of funds attracted from the Bank of Russia fell from 3.4% to 3.0% over the month, and the share of Federal Treasury funds increased from 0.8% to 1.0%.

The timeframe for the transition to the structural liquidity surplus is determined mostly by the federal budget spending rate.

What is important, we see that the transition to the structural liquidity surplus goes hand in hand with almost automatic easing of the monetary policy. Therefore, the key rate becomes a benchmark for deposit rates rather than lending rates. Such change in the role of the key rate per se means its reduction. Nevertheless, the key rate, and I want to emphasise it, remains the anchor for other rates in the monetary market.

The easing of the monetary conditions manifested itself most clearly in the reduction of deposit rates. It also influenced bond yields making the curve markedly inversed. Lending terms for households and businesses have also softened slightly in recent months.

The development of structural liquidity surplus encourages growth in high-risk segments of the lending market. We are concerned about a possible rapid growth in unsecured consumer lending that might put a brake on inflation decline. For example, in August, the amount of household lending grew faster than corporate lending (as adjusted by FX revaluation, by 0.8% and 0.2% respectively). Such structure of credit growth is more pro-inflationary than the case when corporate lending supporting supply (that is, new production) grows faster than corporate lending supporting consumer demand.

We take and will continue to take into account the structural surplus pass through on rates and lending activity in the process of our key-rate decision-making. All else being equal, under the structural liquidity surplus the key rate should be slightly higher than under the structural liquidity deficit in order to ensure equal influence on inflation and inflation expectations.

Recent macroeconomic data are quite positive, albeit fairly heterogeneous. Still, I would like to emphasise once again that in making our key rate decisions we will take into account the whole range of factors, carefully analyse various measures we can possibly take this year and the next year, as well as their impact on inflation decline rate, inflation delivery to the target under each scenario, also the influence on inflation expectations and on economy as a whole.

We seek to align our action regarding the key rate with the path of sustainable inflation decline to the 4% target by the end of 2017, so the release of positive or negative macroeconomic statistics by itself does not determine our decision. Main economic trends and price dynamics does not seem to be definite and stable yet.

As I said before, the Bank of Russia monetary policy remains moderately tight and will not change in future. It means that interest rates in the economy (including the key rate) will exceed inflation by several percentage points. It is crucial for both inflation and inflation expectations’ persistent decline and their sustainably low level.

Keeping real (inflation-adjusted) interest rates consistently positive even under the decrease of nominal rates is a key requirement for a robust economic growth, which, given current situation in Russia, should be driven by investment in fixed assets, structural transformation in the economy and improvement of its effectiveness.

To ensure high savings rate and set up conditions for their transformation into investments it is necessary to effectively protect household deposits against inflationary depreciation. Once achieved, these conditions will determine the whole range of interest rates in the banking sector.

Positive real interest rates on bank loans encourage producers and intermediate sellers to enhance their operating performance rather than rely solely on price surge, as well as help to avoid excessive accumulation of leverage, which in certain industries of corporate sector is already close to maximum level.

We see stability of interest rates and their predictable steady decline along with inflation slowdown as an important factor underlying the stabilisation of economy and a pre-requisite for its transition to the growth phase based on higher labour productivity and enhanced efficiency.

Positive real interest rates are the new reality for the foreseeable future for the Russian economy, which it must accept in order to progress. Therefore, all economic agents – banks, companies, general government – should not rely on a sudden improvement in external economic conditions or easing in internal monetary conditions, but rather try to live and be successful in the new reality, by increasing productivity, efficiency and reducing costs.

Let me speak briefly about those banking sector innovations which have been actively discussed at the forum. We presented the concept of the proportional regulation in the banking sector or, using the generally accepted terminology, the establishment of a three-level banking system, for the first time at the International Financial Congress in early July. We believe that the setting of the three-level banking system shall improve the structure of the banking business and lay down foundation for better efficiency and sustainability of various banks.

Driven by the concern to create more favourable environment for banking activities, we are implementing the proportional approach in regulation and supervision. Given the extent of threat posed by the largest systemically important banks to the financial system, these banks are to be grouped under a separate category. They have already been placed in this category and are facing now enhanced requirements. The basic set of regulation and supervision instruments is applied to large and medium banks. Small banks engaged in simple business will be treated by a simplified set of instruments, but their licences will be of limited character compared with other credit institutions. To be implemented, this approach will require a certain re-alignment in the operation of banks, and of the regulator.

As promised, we discussed the proposed approaches with the banking community for two months. Yesterday, Mikhail Sukhov spoke about the amendments we introduced to our proposals. We were able to adjust the methods used to determine the category of a bank, though the principle idea remained the same, i.e. the fewer risks a bank assumes, the simpler regulation shall be used to it. This is the essence of the proportional regulation. The principle does not say that smaller banks require simplified regulation, it says that less significant risks require simplified regulation. Moreover, a simplified regulation does not mean a less strict regulation, it means a proportional and more commensurate regulation. The principle of commensurability and proportionality is not directly linked with the bank’s size. In reality, even a small bank can assume many risks, which is supported by extensive evidence. Therefore, regulation may become less sophisticated, when banks assume moderate risks and conduct clear and transparent business, when we may be sure that the interests of customers, depositors and creditors are properly protected.

Initially, we proceeded from the fact, that regional limitations and foreign (cross-border) business-related limitations would help solve the task of identifying banks which require simplified regulation. That was the case for several other countries, whose experience we studied. But in the current setting, both banking products and operations, and customer requirements have drifted far apart from the situation when other countries introduced similar systems.

The outlook for remote banking services points to the need to put a limit on the list of active operations of a regional bank rather than to install territorial limitations. This was also discussed with the banking community therefore we appreciate such extensive and thorough discussion, and your arguments regarding this issue.

In view of the above and considering the stand of the banking community, we decided to quit the idea of regional characteristics and stick to the principle governing the assessment of such banks’ activities and installing restrictions for them. Initially, we informally named them ‘regional banks’, now I believe we need to think of another name. I suggest we select it together. There are different proposals: small, specialised, with limited licence, with standard licence, whereas all the rest will be called universal or wholesale banks. There may appear other proposals, we stand ready to discuss them. The name should be the last item on our agenda, first we need to come to terms about governing principles, restrictions, and methods to simplify regulation; we need to make sure the banking community understands it perfectly well.

By the way, no restrictions are intended with regard to liabilities and types of borrowing, whereas active operations shall be clearly limited to understand their inherent risks, including risks pertaining to credit operations, retail banking, mortgage, and SME lending operations. These banks may be involved in syndicated lending, which unfortunately remains quite underdeveloped in this country.

We would like these banks, irrespective of their name – be it regional, non-universal, small, – to stay focused on local business, to develop skills enabling them to analyse the quality of small borrowers, which is a rather complicated task. It is worth mentioning that the banking system often lacks the ability to successfully deal with small and medium businesses. As evidenced by the lending dynamics, both small and medium businesses turn out the most deprived from the point of view of access to funding. This is just the natural niche where these banks can get a competitive advantage.

We hope that owing to the intermediation of the so-called small or regional or non-universal banks SME lending will become more accessible. Small business development is pivotal to our economy, and the phase of sustainable growth much depends on the SME advancement. It is our belief that banks working with small businesses shall get a first-order access to the Bank of Russia’s specialised refinancing facility. We have this special facility. At the moment, it is broadly used by large banks providing funding for small businesses. At this juncture, we would like small banks to get a priority access to this facility and also a priority access to the state-supported financial facilities meant for small business. In many aspects, such banks could become the engines for these programmes. This subject was also discussed with Russian Small and Medium Business Corporation.

Let me speak in more detail about the concept.

As it has become perfectly known lately, global banking regulation has tightened since the 2008 crisis. Sophisticated standards were introduced to mitigate the risks of complex financial products. There is no point in using such highly cost- and labour-consuming, and also intricate regulatory standards in a situation when there are no complex products. Therefore non-universal banks shall not be obliged to observe the requirements that are in place for complex operations and products, such as capital buffers and the financial leverage ratio. Requirements for information disclosure shall also be simplified. We need to discuss in detail the process of information disclosure on risk management. In this regard, we consider the possibility to simplify the capital calculation template so that to relieve banks of the obligation to submit information under Basel III. We think about ways to reduce the scope of reporting, while staying within the mentioned limitations and risks.

We do not intend to apply instant and longer-term liquidity ratios, and also Basel III liquidity ratios and the net stable funding ratio. Similarly, some other ratios, including the size large credit exposures, use of capital for buying shares, etc., will not be included either. But all this calls for a more thorough and in-depth discussion. It does not seem possible that we are able to reach a final decision today. Nonetheless, it is highly desirable to discuss these issues as soon as practicable in order to be able to prepare amendments to legislation.

Roughly in three hours, we will be summing up the work of the forum together with Anatoly Aksakov, and I hope to learn about your view on the new approach to determining levels in the banking system. I would like to stress once again that this decision shall not be taken after such a brief discussion. Still, judging by the ideas we heard yesterday (I believe we all had time to think them through), I would like to receive your feedback so that to continue working on this concept. This brings me to the end of my presentation. Let me wish you all success in your professional activities and in the forum. Thank you for your attention.

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