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    IMF Reports on 2018 Article IV Consultation with Russian Federation

    September 12, 2018

    IMF published its staff report and selected issues report under the 2018 Article IV consultation with the Russian Federation. Directors commended the progress made to restructure the banking sector. However, considering the failure of several large banks last year, the Directors pointed to significant shortcomings in the sector and urged the authorities to complete the clean-up of the banking sector, close the gaps in bank supervision and regulation, including addressing related-party lending, and further efforts to complete the asset quality evaluations. Directors underscored the importance of having a credible strategy for returning rehabilitated banks to private hands in a way that is consistent with increasing competition and efficiency.

    The staff report notes that the failures of three large private banks in the second half of 2017 weakened the banking sector’s overall performance. Aggregate profits declined for the first time since 2015, mainly due to additional provisioning for nonperforming loans (NPLs) by the banks under resolution. NPLs increased from 9.7% in March 2017 to 10.7% in March 2018. Aggregate capital adequacy dipped below 13% in late 2017, but has recovered in recent months (13% in March 2018, against a regulatory minimum of 8%). The Central Bank of Russia (CBR) has continued the cleanup of the banking system, by closing another 62 credit institutions in 2017 (compared to 110 in 2016), which brings the total number of credit institutions to 561 at the end of 2017. The authorities have taken further actions to support financial stability. Through the recently created Risk Analysis Service, CBR has initiated some elements of an Asset Quality Review, or AQR, for the banking system. A new regulation, which limits related-party exposures at 20% of banks’ total regulatory capital, came into effect in January 2017. With respect to the macro-prudential policies, a new federal law authorized CBR to increase risk-weights for certain types of assets to mitigate threats to financial stability. CBR continues to develop and refine its stress-testing methodologies, including for macro-prudential stress-testing.

    Staff argued that additional efforts are needed to strengthen bank supervision and regulation. The establishment of the Risk Analysis Service is welcome, but more efforts are needed to swiftly complete the evaluations and to ensure their alignment with best international practices. Supervision could be enhanced by enabling CBR to exercise professional judgment as part of an explicit early intervention mechanism. Moreover, CBR could strengthen the ex post communication of the rationale behind its bank resolution decisions. The stress-testing capacity of CBR could substantially benefit from improved internal cooperation, by ensuring that the Banking Supervision and Financial Stability Departments have seamless access to all supervisory/macro-prudential reporting and modeling. Staff suggested that the structure and governance of the banking system should evolve toward greater efficiency, more competition, and better governance. The authorities could target improvements in the governance and risk management practices of state-owned banks. Policies should seek to reduce concentration in the sector and to level the playing field between private and state-owned banks, which currently enjoy lower funding costs due to cheap government deposits and implicit government guarantees. Looking further ahead, gradually reducing the significant footprint of the state in the banking sector would help to increase competition and efficiency. However, staff recognizes that, in the current environment, it would be difficult for the authorities to seek out responsible stewards for bank privatization, including reputable foreign investors with long-term interests, and this will only be possible in the long-term.

    The selected issues report studies the role of the state in the Russian banking sector. The study looks to assess how ownership impacts profitability, the degree of competition, and the relative efficiency of Russian state-owned banks. The banking sector is heavily concentrated and the state plays an important role. State-owned banks control nearly 66% of the system assets, privately owned banks control about 12%, and foreign-owned banks and specialized retail banks control about 6% and 1% of the system assets, respectively. The analysis suggests that the Russian banking system is far from the efficiency frontier and that ownership structure might be playing a role in competition. State-owned banks have healthy balance sheets compared to privately owned banks; however, their profitability is lower. With respect to competition, the results suggest that the Russian banking sector can be best characterized as operating under monopolistic competition and that foreign-owned banks appear to be the most competitive. However, while the degree of competition for private banks would be larger than the one for state-owned banks, it was not statistically significant. The report also notes that the Russian economy is recovering from the 2015–16 recession and the banking system is stable and liquid. The relatively modest response to the large external shocks reflects the authorities’ effective policy response—floating exchange rate, banking system liquidity support and capital injections, and limited fiscal stimulus coupled with restrictive incomes policies. Continuous effort in cleaning up the banking sector and closing weaker banks has helped stabilize the banking system.


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    Keywords: Europe, Russia, Banking, NPLs, Stress Testing, Macro-prudential Policy, Article IV, CBR, IMF

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