Banking regulation: 2018 Q4 Bulletin released

The Bulletin presents regulatory acts issued within the past quarter, as well as draft regulations posted on the Bank of Russia website.

Specifically, under the regulations released in 2018 Q4, the current prudential approaches will continue to hold from 1 January 2019: they concern the method of calculating loss provisions and capital and required ratios following the introduction of IFRS 9 (‘Financial Instruments’).

To support and develop project finance, SME, and other segments of the Russian economy, the regulator established a procedure for loan loss provisions in relation to loans extended under Vnesheconombank-based project financing arrangements; amendments were made to streamline the classification of loans as those falling within a uniform loan portfolio; updates were made to the information that can, beyond formal reporting, be used for analysis of a borrower's financial position. Credit institutions have been given the right to disavow a restructured loan in cases when the interest rate under the loan agreement is reduced. Furthermore, the list of Category 1 collateral was updated to include independent guarantees and the SME Corporation's guarantees.

The new methodology to be used by bank to calculate credit exposure as regards securitisation transactions published by the Bank of Russia in 2018 Q4 enabled credit institutions to conduct markedly more precise assessments of the risk these transactions carry, with the transaction structure now taken into account and the range of applicable risk ratios broadened — beginning with 15% for best credit quality positions to capital ratios fully covering high-risk junior securitisation tranches.

Concurrently, the so-called ‘simple, transparent and comparable’ securitisation was carved out, with the relevant risk ratio reduced to 10% as regard investments in senior tranches.

The current value of the capital buffer (1.875%) was extended through 31 March 2019. It was decided that moving forward, the capital buffer would be upgraded on a gradual basis so as to become equal in 2019 to the Basel III level (2.5%). Furthermore, the deadline for a full-scale rollout of the systemic importance capital buffer (1.0%) was extended to 1 January 2020; its value for 2019 was confirmed at the 2018 level (0.65%).

A three-year extension was provided to the 75% risk ratio covering corporate Crimea/Sevastopol-based borrowers, used to calculate capital adequacy ratios and risk concentration; and prolonged were preferential approaches towards assessing debt risks as regards borrowers under foreign sanctions. The regulator repealed the increased risk ratio at 130% applicable to debt of bank-related parties, which is used to calculate bank capital adequacy ratios.

Also repealed were requirements for maximum loan amounts and bank guarantees provided by non-credit institutions providing deposit and credit operations to their shareholders (N9.1). Updates were made to expand the list of requirements for securities with which basic licence banks are entitled to conduct transactions.

In 2018 Q4, the Bank of Russia prepared a number of draft regulations posted on its website to assess their regulatory impact.

In particular, requirements for operational risk management were developed, which include requirements for a risk event data base. This data base will enable banks to calculate the loss component which is part of capital adequacy ratios.

As part of its efforts to improve the regulation of banking groups, the regulator proposed a draft regulation which specifies the method of calculating banking group capital and sets out the specifics of capital buffer calculation for banking groups.

Moving forward, there are plans to implement new interest rate risk requirements in relation to bank portfolios and determine a procedure for calculating interest rate risk applicable to bank portfolios.

Real estate developers received a special procedure for making loan loss provisions: a reserve will be created based on holistic project analysis per specified criteria.

Universal licence banks received a new method of calculating credit exposure on derivatives in order to calculate regulatory ratios.

It has also been suggested that the deadlines for quality assurance in relation to corporate capital adequacy assessment procedures be reviewed.