Bank of Russia puts forward possible macroprudential measures to limit companies’ debt burden for discussion

Photo: Denis Abramov / Vedomosti / TASS

The Bank of Russia has prepared a report on the systemic risks linked with the high debt burden of large companies and the tools available to limit these risks. It has been published for consultation with market participants.

Given the gradual reduction in 3Russian non-financial organisations’ foreign debt, there has been an increase in their liabilities to the Russian banking sector. Moreover, there has been a significant rise in the concentration risk of bank loan portfolios on large corporate borrowers. Some of these borrowers are already fraught with a high debt load or are steadily heading in that direction.

The experience of Russia and foreign countries has shown that a high corporate debt burden is a source of systemic risks. In the medium term, significant levels of accumulated financial debt lead to increased vulnerability to economic stress in both individual companies and the economy as a whole.

Approaches have been developed outlining the possible introduction of measures into Russian banking regulation that take into account international experience in limiting systemic risks linked with high corporate debt burden as well as the tools currently at the Bank of Russia’s disposal. It has been proposed that a counter-cyclical regulation mechanism be used, which involves measures being introduced during the expansion phase of the financial cycle in order to bolster banks’ stability should risks emerge in the future. During a contraction phase, regulation may be eased, which will allow banks to cover losses using previously-generated capital and continue lending to the economy.

The report proposes that, when making decisions on lending (investing in debt securities) to corporate borrowers with debt already accrued of over 100 billion rubles, banks should assess them for compliance with high debt burden criteria. Given the fact that lending to the largest companies is mainly undertaken by systemically important banks, regulation should primarily apply to large credit institutions.

It is planned that the report be fully discussed with the professional community and all interested parties by 13 May 2019. Following the discussion, the Bank of Russia may introduce corporate debt burden indicators in monitoring mode. Depending on the outcome of this monitoring, a decision will then be made on whether to introduce the indicators into regulation as parameters used to determine the values of risk ratio buffers in order to calculate capital adequacy ratios in accordance with Bank of Russia Ordinance No. 4892-U, dated 31 August 2018.

11 April 2019

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