IMF published its staff report and selected issues report in context of the 2019 Article IV consultation with the Russian Federation. IMF Directors encouraged the authorities to continue to enhance bank supervision and regulation, also welcoming the recent macro-prudential measures to curb unsecured consumer lending. However, they noted that additional macro-prudential measures may be needed if lending growth does not moderate. They also recommended continued efforts to complete the consolidation of the banking sector. Directors underscored the importance of having a credible strategy for returning rehabilitated banks to the private sector in a way that is consistent with increasing competition among banks.
The staff report highlighted that the banking sector has been performing well, putting it in a position to support growth. The aggregate returns on assets and equity both increased in 2018, mainly driven by the largest banks. The system-wide capital adequacy ratio stayed close to 12%. NPLs remain high (at 10.3% in March) but are adequately provisioned. The Central Bank of Russia (CBR) has continued its cleanup of the banking sector, bringing the total number of credit institutions to 469, as of May 01, from over 900 in 2013. A bank for core and non-core assets (bad bank) has been set up to deal with the impaired assets of banks in open resolution, with a size (in book value) of nearly 2% of GDP. The authorities hope for a recovery rate of about 40% through actions, including asset sales to the market. The IMF staff emphasized the importance of having a strategy for returning rehabilitated banks to the private sector in a way consistent with increasing competition among banks. Staff also recommended that CBR should assess the viability of NPLs and ensure bank incentives to write off these loans.
Rapid retail lending growth has spurred a regulatory response, but more action may be needed. To mitigate financial stability risks from the sector, CBR raised risk-weights several times in 2018 and once in April 2019. CBR, in 2018, made further changes to its supervisory and regulatory framework, which it should continue to develop. Capital adequacy requirements can now be augmented with risk-based buffers and CBR has set the Basel III net stable funding ratio (NSFR) for systemically important banks (SIBs). Additionally, a set of formal criteria were adopted to guide bank resolution decisions and 149 banks with capital of less than RUB 1 billion were switched to a restricted basic license, under which they will be subject to simplified regulation but prohibited from most overseas operations. Nevertheless, the legal framework for related party exposures and the draft law upgrading the framework for banks’ external auditors could be strengthened further. The final increase of the capital conservation buffer and capital surcharge for SIBs should be implemented as scheduled to enable banks to achieve fully loaded levels by January 2020. Supervision could be enhanced by enabling CBR to exercise professional judgment as part of an explicit early intervention mechanism.
Keywords: Europe, Russia, Banking, Article IV, NPLs, Basel III, NSFR, Resolution, Financial Stability, CBR, Macro-Prudential Policy, IMF
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