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 Post subject: How Russia's central bank is clamping down on the financial
Post Number:#1  PostPosted: 18 Jun 2014 08:04 
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How Russia's central bank is clamping down on the financial sector

The head of the Russian central bank has been clamping down on the country's sprawling banking industry – and more regulatory action is likely in future. OPRisk looks at the new face of financial regulation in Russia.

A stroll around the streets of Moscow is enough to demonstrate that the Russian banking industry is highly fragmented – spotting the same bank logo twice can often seem a challenge.

This crowded market has long been in need of some kind of reform, with undercapitalised balance sheets and lax operational practices among the problems faced by the sector. But until last year, there seemed to be little appetite for change from the Russian authorities.

Enter Elvira Nabiullina. The former minister of economic development in Russia has sent shock waves through the country's banking industry since she took up the role of governor at the country's central bank, Bank of Russia, in June 2013.

Over 40 banks have had their licences taken away since Nabiullina came into her post, including several large and high-profile institutions. The reported reasons for the loss of licences have ranged from fraudulent financial reporting and inability to satisfy creditors to asset quality issues and breaches of money laundering laws.

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Elvira Nabiullina and Putin

Nabiullina's ability to reform the financial sector was boosted shortly after her appointment when the old financial regulator, the Federal Financial Markets Service, was folded into the Bank of Russia to create the new Bank of Russia Financial Markets Service. These changes gave the central bank sweeping powers over everything from securities markets to insurance companies and credit rating agencies, creating one all-powerful regulator for Russia's financial markets.

Many of Russia's high-profile banks are reluctant to speak out about the changes taking place and several of the largest refused to be interviewed on the subject, but some in the industry are willing to give their view.

Artem Konstandyan, president of one of the largest Russian banks, Promsvyazbank (PSB), expects the tightening in banking supervision to go further, but believes it should be executed carefully in order not to create panic in the market. He told Operational Risk & Regulation that on average there was just one licence repealed monthly until mid-2013, but that figure rose to four licences per month after Nabiullina took office.

"The majority of bankers welcomed this change of attitude because most of the banks that had been driven out of business were clearly operating with serious deficiencies in their credit issuance policies," says Konstandyan, who has been president of PSB since September 2010. "Clearly this more strict policy indeed invoked a degree of stress on some minor banks. Still, in general the Russian banking system stayed resilient and continued to function smoothly."

Nabiullina's job has presumably been made easier by receiving the public support of the country's president. While addressing a group of students at the National Research Nuclear University in January this year, Vladimir Putin took the opportunity to explain his own opinions on Russia's banking system and made clear his backing for Nabiullina's regime.

"We currently have 970 banks," Putin told the students. "And for our economy, of course, this is a very large number of financial institutions. The German economy is comparable to ours in size, not in income per capita, but overall volume...but they have, I believe, 251 banks. What does this mean? It means that some of the financial institutions must increase their capital and their resources, their assets, in order to feel confident, stable, and must fight for the quality of their loan portfolio. And the central bank, in turn, must react swiftly to financial institutions' problems and make corresponding decisions. This is not related to any sort of mythical interests in the financial sector or Russia's economy, but first and foremost, depositors' interests, so that depositors do not ultimately end up with nothing."

Putin went on to say that banks which offered abnormally high deposit rates should come under especially close scrutiny. "There is an average interest rate in the financial system that banks provide to their clients, for example, for deposits. If the rate is very different from other financial institutions, you must look into it carefully. What does it mean? It usually means that the bank wants to attract depositors' money at any cost, and usually, this is because of some sort of difficulties faced by the institution. So the Central Bank of the Russian Federation must fulfil its function as an auditor and regulator professionally."

A broader policy

One lawyer who advises Russian banks believes the policy adopted by Nabiullina and the Bank of Russia fits with Putin's agenda of fighting corruption within the country and the president needs to apply little overt pressure to his subordinates to achieve his aims.

"With the system Putin has created, he doesn't need pressure from the top," says the lawyer. "There are people who want to go above and beyond to fulfil what they see as the policy goals."

The rise of Nabiullina has been watched particularly closely by operational risk officers within Russia's banks as they try to stay on top of the new reality being implemented by the Bank of Russia and ensure their organisations are not found wanting when it comes to the new standard – not an easy task, as the standards, they say, are far from clear.

"People are scared in compliance and being more careful than usual," the lawyer says. "A lot of the regulations just don't make sense. There is no logic to them. In some cases under the risk weighting regulations, the risk may be characterised as much higher than it actually is likely to be, while in other cases under the regulations the risk may be characterised as far lower than it actually is likely to be."

"There's a feeling the Bank of Russia believes there are too many 'mom and pop shops' out there and it wants to filter them out," adds the lawyer.

Some see other motives behind the Bank of Russia's actions and question the objectivity of the crackdown. "The bigger question is whether the [assessment] of quality of assets is being done in a non-discriminatory manner, and that's a difficult one," says a second lawyer, who also works closely with banks in Russia. "The state banks have risen in the past four or five years. The foreign banks are clearly losing market share. Let's hope there is going to be a balance."

Domestic dominance

Few foreign banks are significant players in the Russian market – the market is dominated by the state-owned Sberbank, VTB and Gazprombank, according to research by AT Kearney. Some foreign banks, including UniCredit and Raiffeisenbank, and Rosbank (majority owned by Societe Generale) have some market presence, but only in the 1–2% range. Sberbank alone (run by Gherman Gref, one of Nabiullina's predecessors as economy minister) has 46% of retail deposits.

Foreign banks have never been a large part of the Russian banking sector – even in 2006 they only had a 9% market share, according to research by UniCredit, much lower than the figure in the other central and eastern European countries. And in recent years many have been struggling compared with their Russian competitors. Out of 48 loss-making banks in Russia, 13 were foreign-owned, according to a January 2013 speech by Bank of Russia deputy governor Dmitry Sukhov, though foreign-owned banks constitute only 11% of Russian banks overall. Sukhov said they were not "developing their business in Russia...most likely, these banks are in a waiting mode," according to press reports.

But it's not just foreign banks that could lose out as the Bank of Russia's new approach gathers pace, according to the second lawyer. Russian private banks will not be encouraged by the central bank's policies either, but some may feel less vulnerable than others based on their corporate structure.

"There are lots of banks within conglomerates and it does not seem like they are being targeted. Banks surrounded by large interests may be more protected," the lawyer explains. Of the 10 largest Russian banks by deposits, three – UniCredit Bank, Raiffeisenbank and Rosbank – are foreign owned; Gazprombank is part of the massive Gazprom energy firm, and Alfa Bank is part of the Alfa Group, an investment group; Bank of Moscow, VTB and VTB 24 are all part of the VTB Bank group, which is majority state-owned, as is RAB; and Sberbank is majority owned by the central bank itself.

The internal machinations of the Bank of Russia and its position within the Russian governmental bureaucracy could also shed light on the motivations driving the organisation in its quest to clean up the banking sector. According to the second lawyer, the central bank appeared to be losing power during the crisis, but has now clawed back some of that authority.

"It seems to be the characteristic of banks that lost their licences that they were very active on consumer markets," continues the second lawyer. "People are saying that this would have had an effect on market lending, but it has not had much of an effect."

So will 2014 see more of the same? And what sort of banking industry do Putin and Nabiullina want to see in Russia?

"People have been speculating that the taking of licences would be limited by deposit reserves, but that seems not to be the case," concludes the lawyer. "The banks know that if they get a central bank exam, they will have to write a report and if it's not in compliance with their licence, they are in danger."

This is the reality faced by risk managers in Russia. A strong Bank of Russia with a seemingly determined and well-connected governor at the helm shows little sign of slowing down its drive to clean up the banking sector. Shoddy practices and weak balance sheets that might have been accepted in the past are now being scrutinised with far more vigour, with the industry's bigger players seemingly not immune. These are the things that industry participants can be more certain about and should be prepared for, but that still leaves plenty of unknowns – though Putin's comparison of the Russian industry with the German could mean that the ultimate target is for the number of Russian banks to drop by up to three quarters: a chilling prospect for bankers across Russia.

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Author Robert Hartley at Risk Net

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 Post subject: Re: How Russia's central bank is clamping down on the financ
Post Number:#2  PostPosted: 18 Jun 2014 17:18 
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The Central Bank of the Russian Federation

The Central Bank of the Russian Federation (Bank of Russia) was founded on July 13, 1990, on the basis of the Russian Republic Bank of the State Bank of the USSR. Accountable to the Supreme Soviet of the RSFSR, it was originally called the State Bank of the RSFSR.

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On December 2, 1990, the Supreme Soviet of the RSFSR passed the Law on the Central Bank of the RSFSR (Bank of Russia), which declared the Bank of Russia a legal entity and the main bank of the RSFSR, accountable to the Supreme Soviet of the RSFSR. The law specified the functions of the bank in organising money circulation, monetary regulation, foreign economic activity and regulation of the activities of joint-stock and co-operative banks.

In June 1991, the Statute of the Central Bank of the RSFSR (Bank of Russia), accountable to the Supreme Soviet of the RSFSR, was approved.

In November 1991, when the Commonwealth of Independent States was founded and Union structures dissolved, the Supreme Soviet of the RSFSR declared the Central Bank of the RSFSR to be the only body of state monetary and foreign exchange regulation in the RSFSR. The functions of the State Bank of the USSR in issuing money and setting the ruble exchange rate were transferred to it. The Central Bank of the RSFSR was instructed to assume before January 1, 1992, full control of the assets, technical facilities and other resources of the State Bank of the USSR and all its institutions, enterprises and organisations.

On December 20, 1991, the State Bank of the USSR was disbanded and all its assets, liabilities and property in the RSFSR were transferred to the Central Bank of the RSFSR (Bank of Russia), which several months later was renamed the Central Bank of the Russian Federation (Bank of Russia).

In 1991-1992 an extensive network of commercial banks was created in the Russian Federation under Bank of Russia guidance through commercialisation of the specialised banks’ branches. The disbandment of the State Bank of the USSR was followed by changes in the chart of accounts, the establishment of a network of Central Bank cash settlement centres and their provision with computer technology. The Central Bank began to buy and sell foreign exchange in the currency market it established and to set and publish the official exchange rates of foreign currencies against the ruble.

In December 1992, as a result of the establishment of a single centralised federal treasury system, the Bank of Russia was no longer required to provide cash services for the federal budget.

The Bank of Russia carries out its functions, which were established by the Constitution of the Russian Federation (Article 75) and the Law “On the Central Bank of the Russian Federation (Bank of Russia)” (Article 22), independently from the federal, regional and local government structures.

In 1992-1995, to maintain stability of the banking system, the Bank of Russia set up a system of supervision and inspection of commercial banks and a system of foreign exchange regulation and foreign exchange control. As the agent of the Ministry of Finance, it organised the government securities market, known as the GKO market, and began to participate in its operations.

In 1995, the Bank of Russia stopped extending loans to finance the federal budget deficit and centralised loans to individual sectors of the economy.

To override the consequences of the 1998 financial crisis, the Bank of Russia took steps towards restructuring the banking system in order to improve the performance of commercial banks and increase their liquidity. Insolvent banks were removed from the banking services market, using the procedures established by the applicable law. Of great importance for the post-crisis recovery of the banking sector was the creation of the Agency for Restructuring Credit Institutions (ARCO) and the Inter-Agency Co-ordinating Committee for Banking Sector Development in Russia (ICC). Thanks to the effective measures implemented by the Bank of Russia, ARCO and ICC, by the middle of 2001 Russia’s banking sector had on the whole overcome the aftermath of the crisis.

The Bank of Russia monetary policy was designed to maintain financial stability and create conditions conducive to sustainable economic growth. The Bank of Russia promptly reacted to any change in the real demand for money and took steps to stimulate positive economic dynamics, cut interest rates, damp down inflationary expectations and slow the inflation rate. As a result, the ruble gained somewhat in real terms and financial market stability increased.

Due to the balanced monetary and exchange rate policies pursued by the Bank of Russia, the country’s international reserves have grown and there have been no sharp fluctuations in the exchange rate.

The efforts made by the Bank of Russia with regard to the payment system were designed to increase its reliability and efficiency for financial and economic stability. To make the Russian payment system more transparent, the Bank of Russia introduced reports on payments by credit institutions and its own regional branches, which took into account international experience, methodology and practice of surveillance over payment systems.

In 2003, the Bank of Russia launched a project designed to improve banking supervision and prudential reporting by introducing international financial reporting standards (IFRS).

The project provides for the implementation of a set of measures, including measures to ensure credit institutions’ credible accounting and reporting, raise requirements for the content, amount and periodicity of information to be published, and introduce accounting and reporting standards matching international good practice. In addition, measures are to be taken to disclose information on the real owners of credit institutions, exercise control over their financial position and raise requirements for credit institutions’ executives and their business reputation.

There are some problems to which the Bank of Russia pays special attention. One of them is that specific risks connected with the dynamics of the prices of some financial assets and the price situation on the real estate market have begun to play an increasingly important role recently. The practice of lending to related parties led to high risk concentrations in some banks, compelling the Bank of Russia to upgrade the methods of banking regulation and supervision by making greater emphasis on substantive (risk-oriented) supervision.

Fictitious capitalisation of banks is another matter of serious concern for the Bank of Russia. To prevent banks from using all sorts of schemes designed to artificially overvalue or undervalue the required ratios, the Bank of Russia in 2004 issued a number of regulations, including the Regulation “On the Procedure for Creating Loan Loss Reserves by Credit Institutions” and the Instruction “On Banks’ Required Ratios.”

As the number of credit institutions extending mortgage loans to the public increased, in 2003 the Bank of Russia issued the Ordinance “On Conducting a One-off Survey of Mortgage Lending,” which set the procedure for compiling and presenting data on housing mortgage loans extended by credit institutions.

With the adoption of the Federal Law “On Mortgage Securities,” credit institutions which ensured the observance of the requirements for the protection of investors’ interests received the lawful opportunity to refinance their claims on mortgage loans by issuing mortgage securities.

In pursuance of the Federal Law “On the Central Bank of the Russian Federation (Bank of Russia)” and Federal Law “On Mortgage Securities,” the Bank of Russia issued the Instruction “On the Required Ratios for Credit Institutions Issuing Mortgage-Backed Bonds,” which specified the calculation and established the values of the required ratios and the values and methodology of calculating additional required ratios for credit institutions issuing mortgage-backed bonds.

In December 2003, the Federal Law “On Insurance of Personal Bank Deposits in the Russian Federation” was adopted. The law stipulated the legal, financial and organisational framework for the mandatory personal bank deposits insurance system, and also the powers, procedure for the establishment and operation of an institution implementing mandatory deposit insurance functions and set the procedure for paying deposit compensation.

At present, an overwhelming majority of banks participate in the deposit insurance system. They account for almost 100% of total personal deposits placed in Russian banks.

In April 2005, the Russian Government and Bank of Russia adopted the Banking Sector Development Strategy for the Period up to 2008, a document which set as the main objective of banking sector development in the medium term (2005-2008) the enhancement of the banking sector’s stability and efficiency.

The principal goals of banking sector development are as follows:

— increasing the protection of interests of depositors and other creditors of banks;

— enhancing the effectiveness of the banking sector’s activity in accumulating household and enterprise sector funds and transforming them into loans and investments;

— making Russian credit institutions more competitive;

— preventing the use of credit institutions in dishonest commercial practices and illegal activities, especially the financing of terrorism and money laundering;

— promoting the development of the competitive environment and ensuring the transparency of credit institutions;

— building up investor, creditor and depositor confidence in the banking sector.

The banking sector reform will help implement Russia’s medium-term social and economic development programme (2005-2008), especially its objective to end the raw materials bias of the Russian economy by rapidly diversifying it and utilising its competitive advantages. At the next stage (2009-2015), the Russian Government and Bank of Russia will attach priority to effectively positioning the Russian banking sector on international financial markets.



Senior Executives of the State Bank of the RSFSR — Central Bank of the RSFSR — Central Bank of the Russian Federation (Bank of Russia)

1. Matyuchin G.G. — Chairman of the RSFSR State Bank — RSFSR Central Bank — Central Bank of the Russian Federation (Bank of Russia) in 1990-1992
2. Gerashchenko V.V. — Chairman of the Central Bank of the Russian Federation (Bank of Russia) in 1992-1994, 1998-2002
3. Paramonova T.V. — Acting Chairperson of the Central Bank of the Russian Federation (Bank of Russia) in 1994-1995
4. Khandruyev A.A. — Acting Chairman of the Bank of Russia in November 8 to 22, 1995
5. Dubinin S.K. — Chairman of the Central Bank of the Russian Federation (Bank of Russia) in 1995-1998
6. Ignatiev S.M. — Chairman of the Central Bank of the Russian Federation (Bank of Russia) in 2002-2013
7. Elvira Nabiullina — Governor of the Central Bank of the Russian Federation (Bank of Russia) since 2013 up to date


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