Bank of Russia suggests discussing approaches to how systemically important banks should be determined and regulated
Systemically important credit institutions (SICI) largely impact trends in the entire banking sector, and a potential loss of their financial sustainability could involve material systemic risks. In this regard, the regulator should adequately assess the systemic importance of SICIs and the extent to which the regulatory requirements for SICIs should be tightened, so as to reduce potential risks to the financial system and the social cost of risk mitigation. In view of the above, the Bank of Russia presents its consultation paper ‘On determining systemically important credit institutions and approaches to their regulation’ for public discussion.
It should be noted that the classification of a bank as ‘systemically important’ should not be considered solely a privilege. Systemic importance, rather, implies increased responsibility of owners and executives to the society and the necessity for such a credit institution to comply with additional regulatory requirements (in particular, the maintenance of a higher capital adequacy ratio through applying a risk-based buffer) in order to mitigate systemic risks.
According to the Bank of Russia, a key area for enhancing the regulation of SICIs in Russia is the establishment of differentiated requirements for the systemic importance buffer depending on a bank’s size and its impact on the financial system. The proposal to be discussed comprises five groups of SICIs with buffer ratios ranging from 1% to 3.5% (the latter group with the 3.5% ratio is expected to be ‘empty’, being intended to prevent SICIs from excessive expansion of their business and to avoid growth of systemic risks).
Another alteration proposed by the Bank of Russia is the implementation of a new credit risk concentration ratio (the ratio of total non-risk weighted exposures to a counterparty / group of related counterparties to Tier 1 capital) of no more than 25% of SICIs’ Tier 1 capital calculated on a consolidated basis, in accordance with the requirements of the publication ‘Supervisory framework for measuring and controlling large exposures’ by the Basel Committee on Banking Supervision (April 2014).
These regulatory requirements would not only reduce systemic risks, but also help improve the competition in the banking sector.
In addition, the Bank of Russia is considering the issue of obliging SICIs to apply internal ratings-based approaches to credit risk assessment for calculating capital adequacy ratios. It is expected that banks will have a 5-year period to ensure compliance with the above requirement.
As regards the principles for determining SICIs provided for by Russian law, they are generally in line with international approaches, while requiring certain adjustments, given the changes in the external environment of the functioning of the Russian banking sector entailing a decrease in the volume of international operations. The proposed amendments to these approaches are also described in the consultation paper.