Countercyclical buffer to capital adequacy ratio and other macroprudential measures of the Bank of Russia
The Bank of Russia Board of Directors has decided to retain the countercyclical capital buffer (CCB) rate for Russian credit institutions at zero per cent of risk-weighted assets. In order to mitigate risks associated with the faster growth of lending activity in the segment of unsecured consumer lending, the Bank of Russia has raised risk ratios on loans extended after 1 September 2018. In view of further market developments, measures taken by the Bank of Russia to limit the share of mortgage loans with a small down payment may be tightened. Considering that increased risk ratios are applied in certain lending segments, it has been deemed unreasonable to set the countercyclical capital buffer above zero.
In making its countercyclical buffer decision, the Bank of Russia has recognised the following factors.
Credit activity. Credit activity is expanding at various paces across its segments.
The portfolio of loans to non-financial organisations, the largest by loan receivables, expands at the rate of the economy in general. Total outstanding loans of corporations for the 12 months grew 5.1%1 as of 1 September 2018. The period’s total outstanding loans in rubles increased 10.4%, while those in foreign currency dropped 7.1%, demonstrating that the dedollarisation of the credit portfolio is continuing.
There was further acceleration in growth of lending activity in unsecured consumer lending. Loan receivables increased 19.4% over the last 12 months, as of 1 September 20182. Their annualised growth rate3, the leading indicator of lending activity, amounted to 22.8% per annum in June-August 2018.
Annual growth in loan receivables in the ruble-denominated housing mortgage lending segment totalled 25.2% as of 1 September 20184. Growth in lending in this segment is driven both by banks’ revision of their pricing conditions and easing of down payment requirements. The share of new mortgage loans with the down payment of 10% to 20% stabilised at 42.6% in 2018 Q2 (vs 42.3% in 2018 Q1), although remaining at the historic highs5. Loans extended in 2018 Q2 with the down payment under 10% totalled less than 1.5%.
Against the backdrop of an uneven recovery in credit activity across various lending segments, estimated credit gaps for both corporate and retail lending (defined as the difference between the credit-to-GDP ratio, adjusted for FX revaluation, and its long-term trend) remain in the negative territory. This suggests that credit activity is so far below the long-term trend.
Capital adequacy ratios. Credit institutions are seeking to ramp up their capital amid growing credit activity. Over the last 12 months, credit institutions’6 capital adequacy ratio N1.0 grew on average 0.4 pp reaching 14.5% as of 1 August 20187.
Bank of Russia measures to limit retail lending risks. Although mortgage lending has grown rapidly, the unchanged debt burden of borrowers confirms that the current growth so far comes without substantial financial stability risks. The Bank of Russia’s measures effective 1 January 2018 aimed at sustainable development of the mortgage segment (see the 29 March 2018 press release for further detail) failed to decrease the share of loans with down payments ranging from 10% to 20% but helped stabilise it. Therefore, the Bank of Russia decided to increase the requirements for banks’ capital with respect to such loans extended from 1 January 2019 (see the Bank of Russia’s press release ‘Setting buffers to risk ratios for calculating capital adequacy requirements by credit institutions’ for further detail).
Due to accelerated growth of unsecured consumer lending, the Bank of Russia has raised risk ratios on unsecured consumer loans extended after 1 September 2018 with the effective interest rate (EIR) of 10% to 30%. If growth of loan receivables continues to exceed growth of nominal household income amid current average EIR on consumer loans, households might face higher debt burden.
Higher risk ratios on certain credit claims increase banks’ capital cushion necessary to cover potential losses. Considering that increased risk ratios are applied in certain household lending segments, it has been deemed unreasonable to set the countercyclical capital buffer above zero.
The new macroprudential regulation mechanism of the Bank of Russia will be applied from 8 October 2018. In accordance with that approach, the risk ratios for certain asset types, which are set by Bank of Russia Instruction No.
The Bank of Russia Board of Directors will hold its next CCB rate review meeting in December 2018.
1 For credit institutions that were operating as of the last reporting date, including banks that underwent restructuring. Adjusted for FX revaluation.
2 Credit institutions’ financial statements as per Form 0409115 (Section 3, Loan receivables on other consumer loans grouped into a homogeneous loan portfolio). For credit institutions operating as of the last reporting date, including banks that underwent restructuring.
3 Seasonally adjusted.
4 Credit institutions’ financial statements as per Form 0409316. For credit institutions operating as of the last reporting date, including previously reorganised banks.
5 According to the quarterly survey of banks which account for over 70% of household loan receivables.
6 Excluding banks undergoing resolution, including with the involvement of the Banking Sector Consolidation Fund.
7 As of 1 September 2018, the overall capital adequacy ratio of the banking sector was 12.2%.
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