Regulation of banks participating in ecosystems: Bank of Russia’s consultation paper
The Bank of Russia publishes its consultation paper on the regulation of ecosystem banks to discuss it with market participants. The regulator suggests a flexible approach in this area as the best option.
This approach will enable credit institutions and their clients to benefit from the development of ecosystems. Concurrently, it will limit risks for creditors and depositors as such investments, when over-concentrated, will be secured by banks’ capital.
According to the consultation paper, to achieve these objectives, it is necessary to fine-tune the regulation of credit institutions’ investments in assets that have no requirements for repayment and are only liquid to a limited extent (the so-called immobilised assets). They also include investment in ecosystems. The Bank of Russia suggests introducing a risk-sensitive limit for such assets (the utilisation of this limit also depends on the risk level of an asset). This limit is to be set as a percentage of capital — where a bank exceeds this limit, its capital should fully cover ‘excess’ immobilised assets.
Furthermore, it is necessary to provide for a reliable assessment of ecosystem-related risks (including operational risks, step-in risk) in banks’ internal capital adequacy assessment procedures (ICAAP). Where a capital adequacy ratio is low according to ICAAP, the Bank of Russia will be entitled to set additional (from 1 to 3 pp) capital adequacy requirements.
Moreover, to limit systemic risks, the regulator may classify certain banks developing large ecosystems as systemically important credit institutions (SICIs) even if they do not meet this criterion by the size of their banking operations. In such a case, banks will be required to have a systemic importance capital buffer amounting to one percentage point. In certain cases, there might be differentiated (increased) capital adequacy buffers that will be set for SICIs depending on the importance of an ecosystem.
In addition, the consultation paper considers such a general requirement as mandatory disclosure of information on the efficiency and key performance indicators of banks’ investments in non-financial business.
It will take up to two years to implement these suggestions in Bank of Russia regulations. Moreover, these requirements may be phased in over a period of three to five years to help even out regulatory burden.
The new consultation paper on the regulation of banks participating in ecosystems extends the publication made in April 2021 regarding the general issues of ecosystem regulation in the Russian market.