Journal Issue

Credit Expansion and the Macroprudential Policy Function in Russia1

International Monetary Fund. European Dept.
Published Date:
October 2013
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Credit Expansion and the Macroprudential Policy Function in Russia1

  • Rapid growth in retail lending in Russia raises concerns about financial stability. In particular, the very rapid expansion in uncollateralized retail lending and declining capital and liquidity cushions are matters of concern. This section analyzes the credit expansion and concludes that the risks to financial stability are moderate, but growing. This situation requires improving systemic risk monitoring and the institutional design for macroprudential policy.

1. Russia’s brisk credit expansion raises concerns about its financial stability. At 39 percent at end-2012, (y-o-y) growth in retail lending, driven by very rapid growth in unsecured personal loans (60 percent, y-o-y), is particularly high. While to some extent this represents financial deepening, available data and anecdotal evidence suggest that the quality of the uncollateralized retail loan portfolio is deteriorating and the debt burden is heavy and growing for some borrowers. On the other hand, corporate lending has been moderating, but still represents the largest share of credit risk in a challenging economic environment characterized by high GDP volatility and institutional weaknesses.

2. This situation gives rise to two questions: (i) has the recent brisk credit expansion created systemic risks?, and (ii) what can be done to effectively manage the associated risks?2 This paper attempts to answer these questions using a combination of methodologies. In this context, the paper also discusses how macroprudential policy could supplement the existing microprudential policy framework in Russia. This is done through (i) analyzing the strengths and weaknesses of the existing institutional arrangements for macroprudential policy in a number of countries, with a view to identifying best practices that could be applied in Russia, and (ii) discussing the advantages and disadvantages of different macroprudential policy instruments, based on the experience of other countries, and their potential usefulness in Russia.

3. Available information suggests that the risks to financial stability are moderate but are increasing.3 This requires improving systemic risk monitoring and the institutional design for macroprudential policy. Key recommendations are (i) the microprudential supervision framework should be strengthened; (ii) the planned “mega-supervisor” needs to be given adequate authority to issue regulations independently and to have the capacity to enforce corrective actions and the resolution of both banks and nonbanks; (iii) the Central Bank of Russia (CBR) should formally have a leading role in conducting macroprudential policy; (iv) the CBR should consider adopting ceilings on the loan-to-value ratio and debt-to-income ratio (including the interest) to prevent risks accumulating in the retail segment.

A. Has Rapid Credit Growth Created Systemic Risks?

  • A broad spectrum of macroeconomic and financial variables suggests that the current risks to financial stability are moderate, but growing. In particular, rapid growth in uncollateralized retail credit and worsening bank and borrower performance indicators need to be closely monitored.

4. To analyze systemic risks, policymakers need to combine various types of analytical tools and qualitative information, based on market intelligence and a thorough analysis of a country’s macroeconomic and financial stability framework. There is no “all-in-one” tool for systemic risk assessment. Instead, different tools need to be used to cover various types of key risks (IMF, 2013). Both low-frequency and high-frequency indicators should be utilized. Generally, slowmoving leading indicators signal that risks are building up in the financial system, while high-frequency indicators are useful in predicting the imminent unwinding of systemic risk.

Total credit growth

5. Since 2000, Russia’s credit growth has been very strong (in real terms, averaging 21 percent per annum). As a result, the credit-to-GDP ratio increased at about 11 percent per annum from 2001 to 2012, which is above the level considered safe in other countries. Credit growth was particularly strong before the 2008–09 banking crisis: between 2001 and 2008, credit grew at 28 percent in real terms, and the credit-to-GDP ratio grew at more than 16 percent (per annum). After decelerating sharply in 2009–10, credit growth has resumed, albeit at a slightly slower pace: in 2011–12, on average, credits grew by 16 percent in real terms; and the credit-to-GDP ratio grew by 6 percent, above the 3 percent threshold level considered as an early warning indicator.4 It should be noted, however, that Russia’s credit-to-GDP ratio is not high compared to that of peer countries, which suggests that it will continue to grow faster than that of other countries for some time.5

Figure 1.Credit Growth in Russia and Credit-to-GDP Ratio in Selected Countries

Sources: IMF, International Financial Statistics database, and IMF staff estimates.

1/ The straight lines represent the 3 percent and 10 percent threshholds as in the IMF’s Global Financial Stability

6. A combination of analyses suggests that at the moment the risks are moderate:

  • “Credit gap” analyses using total credit data suggest the absence of acute systemic risks at the moment6. The estimate of the credit gap using the so-called cubic trend methodology (Appendix 1) suggests that the current deviation from the trend is not large (text figure)7. In addition, strong credit growth in 2011 can to some extent be seen as a recovery from the decline in 2009–10, and appears to be moderating, reflecting the slowdown in the economy.
  • A model equation for the supply of credit (Appendix II) also suggests that Russia’s total credit growth was only slightly above the level predicted by the model in Q1 of 2013 (text figure).8
  • In addition, most banks are profitable,9 and, using stress tests, the CBR suggests that “the banking sector as a whole is stable” and resilient to a variety of shocks. Russian banks’ average return on assets is one of the highest among emerging market economies. The CBR’s stress tests suggest that the banking system’s capital adequacy ratio would decline to 11.1 percent in the “pessimistic scenario” and 10.6 percent in the “extreme” scenario (compared to the minimum ratio of 10 percent).10 However, the same stress tests suggest that 308 banks (34 percent of the banking system assets) would need additional capital under the extreme scenario (236 banks with 26 percent of total assets under the less severe “pessimistic scenario).
  • Furthermore, Russia’s flexible exchange rate, the expected adoption of an inflation targeting (IT) framework, a new fiscal rule, and small fiscal deficits reduce the chances of systemic risk. Russia’s large international reserves (more than 14 months of imports at end-2012), BOP surpluses (about 4 percent of GDP in 2012), and Stabilization Fund are cushions that could help mitigate the impact of adverse shocks.

“Credit GAP” (cubic trend method)

Residuals From the Credit Supply Equation (scaled)

7. On the other hand, the following financial factors suggest that risks to financial stability have been growing:

  • Since the fourth quarter of 2011, the increase in the credit-to-GDP ratio has far exceeded the 3 percentage point safety threshold (see footnote 3).
  • Credit growth has led to declines in capital and liquidity cushions, which suggest a limited ability to absorb shocks. Since 2010, credit growth has outpaced deposit growth, with the loan-to-deposit ratio increasing. This has led to reduced liquidity positions, with the reported average capital adequacy ratio declining from 18.1 percent at end-2010 to 13.4 percent in February 2013 (one of the lowest among emerging market economies, Table 1 and Figure 2).
  • HEAT maps suggest that the weakening in banks’ capital adequacy positions has been broad based (Figure 3). Most large private banks’ capital adequacy positions are generally lower than the average for the system, while some foreign-owned banks have worse liquidity positions. While it is difficult to compare CAMELS-like indicators11 across countries, due to potentially significant differences in financial reporting, a general observation in comparing Russian banks’ performance indicators with the performance indicators of Global Systemically Important Financial Institutions (Global SIFIs) is that Russian large banks are less leveraged and more profitable than Global SIFIs, but they have somewhat lower capital and liquidity cushions.
  • Moreover, as the 2011 FSAP Update discussed, the reported data probably overstate the capital strength, potentially masking vulnerabilities. In particular, the FSAP pointed to (i) overvaluation of the foreclosed assets on bank balance sheets; (ii) the transfer of assets to affiliated off-balance sheet entities that are not subject to consolidated supervision; and (iii) the doubtful quality of restructured loans, which account for around one-third of all large loans.
  • Nonperforming assets continue to grow in nominal terms. While the NPL ratio is declining, this is due to rapid credit growth (text figure).
  • While bank credit is still low in comparison to GDP, the household debt burden is high in international comparison. The household debt ratio is low, which implies that it will increase over time compared to that of other countries. However, the ratio of household debt-to-income has been increasing rapidly and is high in international comparison. This is due mainly to very high shares of short-term borrowing and high interest rates (Figure 4).
  • Compared to other countries, Russia has a high concentration of banks and debtors. The five largest banks account for more than half of the banking system assets. Russian banks’ large exposures are high in international comparison (text figure).
  • The ongoing economic difficulties in Cyprus and other crisis-affected European countries represent risks. Spillovers from Cyprus have so far been small, but capital controls in Cyprus could complicate the servicing of loans extended by Russian banks and their subsidiaries. While the subsidiaries of Bank of Cyprus and Cyprus Popular Bank in Russia are likely to be affected, their combined assets are around $3 billion, well below one percent of the Russian banking system’s assets.

Figure 4.Russia’s Household Debt Burden in International Comparison

Russia’s household debt service ratio is high.

Sources: CBR, and IMF Financial Soundness Indicators database.

Russia: Non Performing Loans (all loans)

Sources: Russian authorities, and IMF staff estimates.

Large Exposures to Capital, 2012 (unless otherwise specified)

Figure 3.Heatmap for Russian Banks
Capital AdequacyAsset QualityLiquidity
200720082009201020112012 1/200720082009201020112012 1/200720082009201020112012 1/
Bank 10.0−0.1−0.3−0.3−0.4−−0.3−0.8−0.6−0.5−1.1−1.1−1.2−1.3−1.4−1.1
Bank 20.2−0.3−0.1−0.3−0.4−−0.4−0.4−0.2
Bank 35.2−−−0.10.0
Bank 41.5−0.5−0.3−0.3−0.4−0.3−0.2−0.3−0.5−0.5−−0.3−0.2−0.4
Bank 5−0.8−0.4−0.1−0.3−0.3..0.0−−0.60.2−0.4−0.7−0.7−0.5
Bank 60.2−0.5−0.1−0.3−0.3..−1.2−0.5−
Bank 7........................−1.4−1.1−1.2−1.1−1.1..
Bank 8−0.6−0.4−0.3−−0.6−4.6−2.4−4.3−0.8−0.3−0.5−0.4−0.11.5
Bank 9−0.6−0.3−0.1−0.2−0.3−−0.8−0.8−0.7−0.5−0.3−0.3
Bank 10..−0.4−0.50.3−0.2..7.7..........0.2−0.5−0.2−0.5−1.0−0.9
Bank 11−0.4−0.3−0.2−0.4−0.4−0.3−0.1−0.7−0.5−0.3−0.4−0.2−0.2−0.40.4−0.4−0.3−0.6
Bank 12....0.20.1−0.1..0.0−0.2−0.2−0.2−0.20.0−0.1−0.40.3−
Bank 13−0.6−0.4−0.4−0.4−0.5−0.50.0−0.40.1−0.2−0.10.0−0.6−0.4−0.2−0.6−0.6−0.6
Bank 14−1.2−0.6−0.6−0.6−0.5−−0.7−0.7−0.6..−−0.2−0.7
Bank 15............−0.2−0.4−
Bank 17−0.2−0.10.0−0.1−0.3..0.3−−0.6−0.8−0.9−0.7−0.9..
Bank 18............−0.3−0.4−0.5−0.3−0.2..−0.6−1.4−1.2−1.1−1.2..
Bank 19..−
Bank 22−0.2−0.4−0.4−0.4−0.4−0.4−0.2..−0.4−1.0−1.1..−0.5−0.5−0.6−0.5−0.3−0.3
Bank 23..............0.1−0.6−0.10.0..−
Bank 240.2..−0.2−−0.10.3−0.10.1−0.5..
Bank 25............−0.10.0−0.4−0.4−0.3..−0.9−0.8−0.3−0.20.9..
Bank 26....................................
Bank 27−0.4−0.4−0.2−0.3−0.5−0.5−0.2−0.3−0.5−0.5−0.3..0.1−0.20.1−0.3−0.5−0.3
Bank 28....−0.2−0.5......1.7−0.3−0.10.4....−0.4..
Bank 29....................0.6..........−1.0..
Bank 30..−0.3−0.3−0.5−0.3−−0.1−0.10.0−0.7−1.0−0.5−0.2−0.2−0.1
Bank 31..−0.8−0.3−0.2−0.3....−0.6−1.1−0.6−1.0..0.3−0.8−0.7−0.70.1..
Bank 32........................
Bank 33−0.7..−0.5−0.2−0.4..0.60.7....0.6..−0.2..
Bank 34..−−0.5−0.6......0.10.0−0.1−0.5−0.50.5−0.6−1.1−1
Bank 35....0.90.5−0.2....0.1−0.1−0.1−0.2....3.9−0.2−0.2−0.4..
Sources: BankScope; and IMF staff estimates.

As of June 2012 or latest.

Sources: BankScope; and IMF staff estimates.

As of June 2012 or latest.

8. Pockets of vulnerability are emerging. The examination of macro-financial linkages, through which potential risks may be transmitted to the financial and real sectors, points to the possibility of risks accumulating (Figure 5):

Figure 5.Selected Economic Indicators

Sources: Country authorities, and IMF staff estimates.

  • The retail lending boom is contributing to robust growth in personal consumption. In particular, the deviation of retail trade from the real disposable income index coincides with the rapid consumer credit expansion, suggesting that the retail credit boom has contributed to robust growth in personal consumption. At the same time, the household savings ratio is at record low levels (CBR, Financial Stability Report, page 29).
  • Real estate price increases have accelerated again, although the price increases are well below the levels observed before 2009. Following a large drop in 2009-10, house prices increased by 10-12 percent in 2012, well above the (CPI) inflation rate; no data are available on commercial real estate prices.
  • The real exchange rate has been appreciating, which usually adversely affects the competitiveness of domestic producers. Cross country studies show that, in emerging economies, the real effective exchange rate (REER) tends to appreciate rapidly in the run-up to a crisis. In Russia, there has been a trend appreciation of the REER since 2000 with increased volatility since mid-2009 (the latter is largely due to a policy shift to a flexible exchange rate). On the other hand, the IMF external balance estimates (EBA) suggest the exchange rate is broadly in line with fundamentals.
  • Financial stock prices started underperforming other stock prices. The greater declines in financial stock prices compared with other stocks may signal increased risks for banks’ performance (compared to the performance of other sectors).
  • In addition, banks’ operating environment remains challenging. In particular, Russia’s GDP is more volatile compared to that of peer countries (mainly due to the large share of the commodity sector, which is vulnerable to volatile price changes), and Russia underperforms its peer countries in terms of creditor rights, rule of law, etc.

Composition of credit growth and risks

9. The very rapid expansion of unsecured retail credit has become a source of increased risk. Russia’s retail lending growth has far exceeded corporate lending growth every year since 2000, with the exception of 2009 (text figure). An important feature of the ongoing boom is that it is driven by very strong growth in unsecured personal loans, which are riskier than other types of loans. In response, the CBR has introduced higher provisioning requirements for uncollateralized retail loans and increased the risk weights for consumer loans.

Y-o-y Growth in Credits (in percent)

Share of Lending to Households in Total Credit to the Economy (in percent)

10. The debt burden is heavy for some categories of borrowers. Russia’s household debt-to-GDP ratio is not very high compared to peer countries and is low compared to developed countries, suggesting significant room for growth in the future. The recent retail credit boom has involved a significant increase in the number of borrowers, and thus may have helped improve access to finance. However, the debt burden has recently increased rapidly (text figure) and is high in an international comparison (Figure 4). Anecdotal evidence suggests that some individuals are borrowing to pay off their existing debt.

Russia: Ratio of Household Debt to Annual Income

Sources: Rosstat, the Bank of Russia

11. Corporate lending has been moderating. Corporate lending was strong in the run-up to the presidential elections in 2012, but has slowed down since then. The fact that corporate lending is moderating while retail lending is booming suggests that the former is caused by a decline in the demand for loans from large corporate; small and medium-size enterprises continue to have difficulties in obtaining loans.

12. Nevertheless, corporate lending still represents a large risk given its size (¾ of banks’ loan portfolios) and the high volatility of economic activity in Russia. Russian GDP growth is more volatile than that of peer countries, perhaps due to the important role of oil revenues in the economy. Combined with Russia’s underperformance in terms of creditor rights and the business environment, risks related to corporate lending remain an important concern.

Market-based indicators

13. Prices of shares of the banks involved in Cyprus were adversely affected in the aftermath of the Cyprus crisis. The shares of Sberbank, VTB, and other banks with connections to Cyprus lost about 2-7 percent of their value in the first days of the Cyprus crisis. The price of the shares of VTB, which reportedly has the largest exposure to Cyprus, has been particularly volatile (text figure). The recently announced new share issuance by the bank (for about $3 billion) is expected to improve VTB’s financial situation.

VTB Share Price Changes since end-

Sources: Bloomberg, and IMF staff estiamtes.

Sberbank Share Price Changes since end-

14. Market-based indicators suggest that the risk of a major bank’s (imminent) failure is small, but the risks have increased since early-2011.12 Moody’s EDF data suggest that, by early 2010, the probability of default for banks had declined from the very high levels seen at end-2008 and early 2009. However, they increased somewhat in H2-2011 and H1-2012 (text figure).

Large exposures by some banks to certain market segments

Some banks are heavily concentrated in few market segments (e.g., credit cards). These so-called “specialized institutions” increased their lending by 50–120 percent in 2012 (y-o-y), mostly in the uncollateralized retail segment. Currently, there are no additional capital requirements for these concentration risks. The share of these banks in the total assets of the banking system is small.

B. How can Macroprudential Policies Supplement the Microprudential Policy Framework?

  • The legislation on consolidated supervision, expected to be adopted shortly, will empower the CBR to supervise complex financial holding companies, and therefore. The planned creation of a mega-supervisor through the merger of the CBR and the Federal Service for Financial Markets may improve the framework for monitoring systemic risks, but the existing weaknesses in the supervisory framework for nonbank financial institutions need to be addressed.
Table 1.Financial Soundness Indicators, 2007–May 2013(Percent)

Financial Soundness Indicators
Capital adequacy
Capital to risk-weighted assets15.516.820.918.114.713.713.4
Core capital to risk-weighted assets11.610.613.
Capital to total assets13.313.615.714.012.612.3
Risk-weighted assets to total assets85.681.075.277.485.987.7
Credit risk
NPLs to total loans2.
Loan loss provisions to total loans3.
Large credit risks to capital211.9191.7147.1184.6228.4209204.9
Distribution of loans provided by credit institutions
Agriculture, hunting and forestry3.
Production and distribution of energy, gas and wat1.
Wholesale and retail trade18.017.418.417.115.614.914.6
Transport and communication3.
Other economic activities23.323.321.922.222.320.521.0
Of which: mortgage loans5.
Geographical distribution of interbank loans and deposits
Russian Federation40.027.129.541.141.647.135.0
United Kingdom23.329.121.721.420.217.524.0
Cyprus 1/
Highly liquid assets to total assets28.026.813.511.811.110.7
Liquid assets to total assets24.825.928.026.823.923.221.8
Liquid assets to short-term liabilities72.992.1102.494.381.682.986.9
Ratio of client’s funds to total loans94.884.699.9109.5105.3101.2101.7
Return on assets3.
Return on equity22.713.34.912.517.618.217.0
Balance Sheet Structure, in percent of assets
Total asset growth rate44.
Total customer loans growth rate53.034.5-2.512.628.2
Asset side
Total customer loans61.159.054.853.755.956.0
Accounts with CBR and other central banks6.
Interbank lending7.
Securities holdings11.28.414.617.214.914.214.4
Liability side
Funds from CBR0.
Interbank liabilities13.913.010.611.
Fund raised from organizations35.031.332.532.933.631.6
Individual deposits25.621.125.429.028.528.830.0
Bonds, PN and bank acceptance5.
Sources: Central Bank of Russia; and IMF staff calculations.

Exposure to Cyprus mostly reflects a state-owned bank’s exposure to its subsidiary in the country.

Sources: Central Bank of Russia; and IMF staff calculations.

Exposure to Cyprus mostly reflects a state-owned bank’s exposure to its subsidiary in the country.

Figure 2.Financial Soundness Indicators in International Comparison

Sources: CBR, and IMF Financial Soundness Indicators database.

The strengths and weaknesses of existing institutional arrangements for macroprudential policy in other countries

15. The key institutional elements of a macroprudential policy framework include the mandate, powers, instruments, and coordination between microprudential and macroprudential policies. For example, a formal mandate can improve the clarity of decision making and avoid policy paralysis when the views of stakeholders differ. A mandate normally comes with the power to collect information and adopt measures. Establishing accountability in conducting macroprudential policy is important given that there is no easily measurable metric of success (Appendix III).13

16. Previous IMF studies identify three broad categories of stylized models of macroprudential policy. The three broad categories are differentiated mainly based on how the objectives and functions of macroprudential, monetary, and microprudential policies are coordinated and how much information is available within the central bank.

  • full integration means that all financial supervisory and regulatory functions are carried out by the central bank or by its subsidiaries;
  • partial integration means that the securities supervisor or business conduct supervisor are separate entities, while prudential supervision of banks and other financial institutions is conducted by the central bank; and
  • separation means that essentially all financial regulatory functions (other than payments oversight) are housed outside of the central bank (Nier and others, 2011 and Appendix III).

17. In the models within the full and partial integration categories, the central bank, either alone or together with other agencies, is in charge of macroprudential policy. The central bank becomes the owner of macroprudential policy when it is given the objective to safeguard financial stability (as in the Czech Republic and Singapore). The partial integration or twin peaks models involve close institutional integration between the functions of the central bank and the prudential supervisor, while the regulation of activities or “conduct” in retail and wholesale financial markets is conducted by another agency (e.g., the set-up in Brazil, the Netherlands, the U.K., and the U.S.). The main advantages of the full or partial integration models relate to better flow of information and improved coordination across objectives and functions within one organization, which can increase the effectiveness of decision making. The main disadvantage relates to the lack of institutional mechanisms to challenge the “house views” formed within one institution.

18. In the models falling under the separation category (models 5–7 in Appendix Table), the central bank is not directly responsible for macroprudential policy. The strengths of such a multi-agency set-up include (i) reduced risk that any one institution will not be challenged in its identification of risks or assessment of the appropriate policy response, and (ii) keeping each agency focused on its main objective, which in itself may contribute to maintaining financial stability. Under this arrangement, policy making benefits from different perspectives on the sources of systemic risk, the potential for regulatory arbitrage, and the appropriateness of measures (which may be housed in different agencies). Canada, Chile, Mexico, Peru, as well as Australia, Hong Kong SAR, and Korea provide examples of such stylized models.

Appendix Table.Stylized Models for Macroprudential Policy 1
Features of the model/ModelModel 1Model 2Model 3Model 4Model 5Model 6Model 7
1. Degree of institutional integration of central bank and supervisory agenciesFull (at a central bank)PartialPartialPartialNoNo (Partial*)No
2. Ownership of macroprudential policy mandateCentral bankCommittee “related” to central bankIndepende ntCentral bankMultiple agenciesMultiple agenciesMultiple agencies
3. Role of MOF/treasury/governmentNo (Active*)PassiveActiveNoPassiveActiveNo (Active*)
4. Separation of policy decisions and control over instrumentsNoIn some areasYesIn some areasNoNoNo
5. Existence of separate body coordinating across policiesNoNoNo (Yes*)NoYesYes (de facto**)No
Examples of specific model countries/ regionsCzech Republic Ireland (new) Singapore*Malaysia Romania Thailand United Kingdom new)Brazil* France (new) United States (new)Belgium (new) The Netherlands SerbiaAustraliaCanada Chile Hong Kong SAR* Korea** Lebanon MexicoIceland Peru Switzerland
Source: Nier and others, 2011.

Stars are explained in the table.

Source: Nier and others, 2011.

Stars are explained in the table.

19. However, this set-up faces a number of challenges in ensuring the effectiveness of macroprudential policy. In particular, a collective responsibility for systemic risk mitigation can dilute accountability and incentives and may create a situation where no one institution has all the information needed to analyze all interlinked aspects of systemic risk (e.g. due to barriers to free flow of information, caused by rivalry or legal obstacles). This may increase the chances of risks remaining unaddressed and delays in taking remedial measures.

20. A key mechanism to address some of these weaknesses is the establishment of a coordinating committee. It can facilitate the exchange of information between agencies and foster the engagement of each agency with the shared goal of financial stability. Formal arrangements, which are more visible to the public, can enhance these benefits. Specifically, more formal arrangements may allow the committee to issue public warnings and recommendations to constituent agencies (as in Mexico). This can foster the effective use of macroprudential policy instruments even where such recommendations are not binding on the agency. However, a committee may not be able to fully address deep-rooted accountability and incentive problems, and this remains a concern for the effectiveness of this group of models.

21. Another important risk is that decisions may be subject to delay. This risk is greater where the committee’s membership is large or where the treasury occupies a strong role. Careful design of voting arrangements can reduce the risk that no action is taken as a result of persistent disagreement between constituent agencies or political economy pressures. Such voting should be subject to a simple majority or a qualified majority rule rather than requiring unanimity among all constituent agencies (Nier and others, 2011).

The macroprudential policy framework in Russia

22. In Russia, the CBR is responsible for financial stability, but there is no formal mandate for macroprudential policy. It collaborates closely with the government, and disagreements are resolved through consensus. The CBR does not have power to initiate legislation; it forwards its proposals to the MoF. In December 2010, an Inter-Agency working under the Presidential Council (Working Group to Monitor Financial Market Conditions) was created. In March 2011, the CBR established a Financial Stability Directorate to carry out systemic risk monitoring; the CBR produces Financial Stability Reports. The authorities are planning to establish a Financial Stability Council.

23. The absence of a macroprudential policy mandate has so far not prevented the CBR from taking measures of a macroprudential nature. In particular, the CBR (i) used differentiated reserve requirements to reduce capital inflows before the 2008-09 crisis; ii) reduced provisioning standards during the crisis to stimulate lending in the downturn (that “saved” some 220 billion rubles for banks); (iii) introduced limits on net open FX positions to prevent capital outflows during the crisis; and (iv) even proposed legislation outside its mandate (with a view to promoting financial stability) such as the Tax Code to make foreign currency denominated borrowings less attractive.14

24. More recently, the CBR has introduced the following measures aimed at maintaining the stability of the financial system.

  • An increase in risk weights for noncore assets and foreign-currency retail loans to 150 percent from 100 percent (from July 2012);
  • An increase in risk weights to 50 percent from 20 percent for placements in unrated banks in countries considered low risk by the OECD (from January 2013);
  • An increase to 10-75 percent in impairment reserves on project-finance loans with grace periods for interest payments (from July 2013);
  • An increase in risk weights on newly issued high-margin loans to up to 200 percent (from July 2013). The impact of this measure is reduced by the fact that not all loan-related charges are captured in the “effective rate” calculations.
  • Assignment of permanent bank supervisors to the largest banks, to be located on the banks’ premises.

25. However, the banking prudential supervisory framework suffers from several weaknesses with implications for systemic risk monitoring and prevention. In particular, the CBR lacks the authority to (i) supervise bank holding companies and broadly defined related parties; (ii) impose restrictions on transactions between affiliates; (iii) use professional judgment in applying laws and regulations to individual banks; (iv) sanction individual directors and key managers; (v) raise capital requirements on individual institutions; and (vi) share without restrictions information with other supervisors. Most of these shortcomings would be addressed by pending legislation to be adopted soon.

26. The planned merger of the CBR and Federal Service for Financial Markets (FSFM) may enhance the capacity to monitor systemic risks, but the current weaknesses of the supervisory framework for nonbank financial institutions need to be resolved. In particular, currently the FSFM does not have adequate power to require insurers to have in place internal controls and a risk management system commensurate with the complexity of their business; apply fit and proper requirements to directors and key management of insurers; and take preventive and corrective actions to address weak securities firms. Also, the FSFM can issue regulations only after consultation with the MoF, but this issues is expected to be resolved when the mega-regulator is established.

Advantages and disadvantages of different macroprudential policy instruments

This section describes briefly the most frequently used macroprudential measures and discusses their relevance for Russia. The measures considered here include the loan-to-value ratio (LTV), debt (service)-to-income ratio (DTI), and dynamic provisioning (DP). The advantages and disadvantages of other measures are described in Appendix IV.15 These are for illustration purposes only; the actual assignment and specification of instruments has to take into account local considerations, such as legal constraints, the effectiveness of the instruments to meet the objectives, and the level of development, structure, and complexity of the financial system.16


27. LTV limits enhance banks’ resilience to credit risks by increasing the collateral backing of loans and thus restricting losses in the event of default. Generally, the ratio is set based on the historical volatility of the collateral value. It directly limits risky lending, slowing down the supply of credit to specific sectors (e.g., real estate, car lending, etc).17

28. Limits on LTV ratios have been increasingly applied to reduce systemic risk arising from boom-bust episodes, notably in real estate markets. By limiting the loan amount to well below the current value of the property, LTV limits can help rein in house price increases by putting the brakes on household leverage, reducing the financial accelerator effect. For example, Wong and others (2011) find that, for a given fall in prices, the incidence of mortgage default and bank losses are higher for countries without an LTV measure. This measure is less prone to

29. The ratio can be (and often is) applied countercyclically. Tightening the ratio during a boom restricts the accumulation of risks, thereby moderating the credit cycle and house price increases. Some countries have kept LTV rates constant to provide a minimum buffer against an unsustainable increase in house prices (Colombia, Lebanon, Malaysia, and Sweden). In other countries, LTV limits are adjusted in line with the cyclical position, with a tightening occurring during housing booms and a relaxation during downturns (China, Hong Kong SAR, and Korea). In some cases, the adjustments are made in a reactive, and not necessarily countercyclical, manner (Lim and others, 2011).

30. Like other measures, LTV limits have also a number of disadvantages. First, implementing this measure has costs associated with potential credit rationing. For example, new entrants to the housing and real estate market could be rationed out. In some countries (e.g. Hong Kong SAR), this problem is addressed with insurance programs for first-time home buyers. Accordingly, it is difficult to calibrate the trade-off between financial stability benefits, economic activity, and societal preferences for home ownership. Second, the measure is susceptible to circumvention and could encourage obtaining second mortgages on the same property or unsecured loans such as credit card borrowing. Importantly, it has less impact on the leverage of bor rowers and banks.

31. Globally, this is the most frequently used tool. According to the 2010 IMF survey, 34 out of the 52 responding countries had this measure in place.18 LTV limits are particularly popular in Asian countries experiencing real estate booms.

32. Russia, there are no formal LTV requirements. Individual banks apply LTV ratios for their creditworthiness assessments. However, the increased competition may force banks to apply less stringent requirements. The authorities could usefully consider formal requirements, including lower ratios in zones where housing prices increase much faster than the national average. To be able to apply such a differentiated ratio, the authorities would need to collect and analyze information on housing prices as well as (actual) LTVs applied by banks.


33. When used alone, limits on DTI aim at safeguarding banks’ asset quality. They limit risky lending and reduce the probability of default. When used in conjunction with the LTV, the DTI can help further dampen the cyclicality of collateralized lending by adding another constraint on households’ capacity to borrow. Like in the case of LTV limits, adjustments in the DTI ceilings can be made in a counter-cyclical manner to address the time dimension of systemic risk (Lim and others, 2011).

34. Like the LTV, the DTI may involve costs associated with potential credit rationing. Moreover, data requirements can be challenging, calibration is difficult, and it is susceptible to circumvention.

35. In Russia, there are no formal DTI requirements. Although this is less of a problem in a growing economy, the situation may change in downswings with higher unemployment rates.


36. DP is designed to distribute loan losses evenly over the credit cycle. It is based on the notion that provisions should account for expected loss over the long term (cycle) rather than incurred loss. Generally, the level of provisioning in a dynamic provisioning approach would be less subject to sharp swings stemming from the strength (or weakness) of economic activity because of the primacy of expected, rather than actual, losses. By requiring banks to build reserve buffers during an upswing, DP counterbalances the tendency of specific loan reserves to be low when credit quality is high. As a result, the marginal cost of loan-loss provisioning is smoothed significantly over the credit cycle. DP is more effective when applied to narrowly-defined categories at the beginning of the credit cycle. In the same way, DP would be less effective if a bank incurred large losses in an upswing, reducing the available cushion in the form of accumulated reserves.

37. While DP has a number of beneficial properties, there are also limitations to what it can achieve. For example, it can help absorb reasonably large shocks to loan quality, reducing a bank’s probability of default, but it is not designed to cover large unexpected loan losses (for which there is bank capital) or tail risks. For example, in Spain, the buffer of dynamic provisions was large enough to offset about half of the loan losses that occurred during 2008–09 but not all delinquencies, since eventual loan losses exceeded expected losses. By contrast, the reserves coverage in Uruguay ballooned as the expected loan delinquencies on which the model was calibrated did not materialize (Lim and others, 2011). While DP contributes to smoothening the credit cycle, it is not designed to rein in rapid credit growth. Its overall impact on credit growth is muted, as lending can be shifted to foreign (parent) banks and less-regulated intermediaries.

38. Data requirements and calibration can become challenges. Some calibration does not take into account the credit risk profile of banks. Those involving probability of default estimations require granular data, which are missing in many countries. Moreover, data should cover a full credit cycle; data covering only the boom period would lead to underestimation of risks. There are strong overlaps with countercyclical capital buffers and variable risk weight tools.

39. Arguably, Russia’s softening of the provisioning standards during the 2008-09 crisis is similar to DP. However, DP implies building capital during the “boom phase,” which then can be released in a slowdown. In that sense, the easing of provisioning standards in Russia was more of forbearance rather than DP.

Implications and conclusions

40. Available information suggests that risks to Russia’s financial stability are moderate, but growing. In particular, the very rapid expansion in uncollateralized retail lending and declining capital and liquidity cushions are matters of concern. These need to be closely monitored.

41. The CBR should build on its progress in monitoring systemic risks. The CBR’s Financial Stability Report’s focus could be extended to cover real estate prices (both housing and commercial real estate), financing conditions in the corporate sector, and risks to financial institutions at the conglomerate level. In addition, the authorities should consider utilizing market based indicators (e.g. bank stock prices; Beta index for banks; CDS; CDS-based probabilities of default for banks; the difference between interbank rates and the yield on Treasury bills; corporate bond spreads; see footnote 12) to analyze immediate risks to financial stability.

42. The macroprudential policy function can complement sound prudential supervision and macroeconomic policies (which are the starting points in preventing the accumulation of risks).

  • The mega-supervisor should be given adequate authority to conduct stringent (micro)prudential supervision. Implementing the recommendations of the 2011 FSAP should be the priority. In addition, it is very important to maintain and enhance the independence of the CBR in the merger of the two supervisory agencies.
  • The authorities should stand firm against calls for loose macroeconomic policies and build up the credibility of the existing policy frameworks. Prudent macroeconomic policies reduce risks to financial stability. Russia’s welcome flexibility in the exchange rate, the IT-like monetary policy framework (and expected move to an IT regime), and the new fiscal rule reduce risks to the economy and financial system and should be maintained and enhanced.

43. It is essential to maintain and strengthen the independence of the central bank in the process of merging the two supervisory agencies. In particular, it is important for the new megasupervisor to be able to issue relevant regulations independently and have adequate capacity to enforce corrective actions and the resolution of both banks and nonbanks.

44. CBR’s leading role in macroprudential supervision should be formally established. In Russia, the CBR has already shown itself as an institution capable of conducting macroprudential policy. If established (as originally envisaged), a Financial Stability Council (FSC) would provide a good platform to bring all relevant stakeholders together to maximize the benefits of macroprudential policy, but it will be important to secure the leading role of the CBR in the work of the council. Furthermore, the agency in charge of macroprudential policy (either the FSC with the CBR playing a leading role or the CBR itself) would be more effective if (i) it is given a formal mandate, which would strengthen accountability and incentives to act, and reduce (potential) risks of delayed action due to political pressures or lobbying in the presence of multiple agencies; and (ii) the roles of the involved agencies are clearly defined.

45. Any specific macroprudential measures that the authorities might adopt would depend on the type and expected impact of the systemic risks that need to be addressed. While banks apply (self-imposed) LTV and DTI ratios, increased competition may force them to loosen lending standards. Thus, the authorities could consider adopting formal LTV and DTI requirements or at least recommend a range, taking into account the leverage of the household sector. In adopting any measures, the authorities should weigh the benefits of the measures against their costs.

46. Regarding high concentration risks (very large exposures to certain market segments) at the “specialized” institutions, the authorities should consider either (i) requiring additional capital under the Pillar II capital requirement for concentration risks or (ii) introducing a higher Pillar I minimum capital requirement for “simpler financial institutions.”

Appendix I.The Cubic Trend Methodology

(as in Dell’Ariccia and others, 2011)

Define the credit to GDP ratio as crt=CRtGDPtGDPt1

For each t, consider the time window from period t - 10 to period t - 1:

{crt_10, crt_9, … crt_1) and regress those observations on a cubic trend. Use the estimated coefficients to predict crt,=β,o+β,1t+β2,t2+β,3t3

Define the credit gap measure as cgt=crtcrt,.

For each t, consider the time window from period t - 10 to period t: {cgt.10, cgt_9,… cgt}

and compute the standard deviation sdcgt.

A boom is identified when the deviation from trend (credit gap) is greater than 1.5 times its

standard deviation (cgt > 1.5sdcgt) and the annual growth rate of the credit to GDP ratio exceeds 10 percent (crtcrt1crt1>0.1) or the annual growth rate of credit to GDP ratio exceeds 20 percent (crtcrt1crt1<0.2) Booms created by a drop in GDP are ignored

The start of the boom is the earliest year in which either (i) the credit to GDP ratio exceeds its trend by more than three-fourths of its standard deviation (cgt > 0.75sdcgt) while its annual growth rate exceeds fiver percent (crtcrt1crt1>0.05) or (ii) its annual growth rate exceeds 10 percent (crtcrt1crt1>0.1)

A boom ends as soon as either (i) the growth rate of the credit to GDP ratio turns negative (crtcrt1crt1<0) or (ii) the credit to GDP ratio falls from trend within three-fourths of its standard deviation (cgt < 0.75sdcgt) and its annual growth rate is lower than 20 percent (crtcrt1crt1<0.2)

Appendix II.Credit Supply Equation

Here, in two steps, an equation for the supply of credits is estimated to identify the factors of total credit growth and excessive supply of credits.

  • Since some variables appear to have unit roots, first, a cointegration analysis is carried out, using three lags. The results suggest a cointegrating relationship (vec) between loan supply in real etrms (L), total deposits in real terms (D), stock prices (SP), volatility of bank stock prices (VBS), and lending rate in real terms (I). The vector can be written in the following form:
  • Then, this co integrating relationship is used to estimate an error-correction model. A general-to-specific approach yields the following equation.
    where, y stands for real GDP, ins for the banking sector share price volatility relative to the total market bolatility; and ut for shocks.

Appendix III.Some Relevant Elements of the Institutional Design of Macroprudential Policy1

Information and resources. To gauge the accumulation of systemic risks, it is essential that policy makers have access to information and data on the components of the financial system, including data on individual financial institutions, their exposures to other institutions, and developments in payments and settlement systems. When several bodies are involved, the arrangements for sharing information become complex, as some information is confidential and market sensitive. It is also important that adequate resources are available to process received information and develop measures or provide recommendations.

Mandate and powers. The advantages of developing a formal macroprudential mandate include establishing clear objectives, responsibilities, and powers for the agency (agencies) involved in macroprudential policy. The 2010 IMF macroprudential survey found that less than half of the respondents had a formal macroprudential mandate in place, beyond financial stability. A larger proportion of emerging market economies (50 percent) than advanced economies (35 percent) has such a mandate, which may be related to the fact that emerging markets have had more frequent financial crises in the past than advanced economies. Of those without a formal mandate, about half either have plans to adopt such a mandate or are contemplating doing so.

Powers to communicate risk warnings and to recommend regulatory instruments and actions are essential parts of policy making. Examples include the ability to issue non-binding recommendations to other authorities. The recommendations are often subject to a “comply or explain” mechanism (e.g., in the EU, U.K. and U.S.), sometimes strengthened by an ability to publish recommendations.

Accountability. An institutional design challenge is to establish accountability when the “costs” of macroprudential measures in the form restrictions on certain activities are felt immediately while the “benefits” of a lower incidence of financial distress accrue over a long term and are hard to measure. This challenge is often compounded by the presence of multiple agencies in macroprudential policymaking that may differ in their primary objectives. This challenge highlights the importance of insulating the authorities in charge of macroprudential policy from pressures linked to the political cycle.

Transparency and clear communication of policy decisions to the public are central elements of accountability. This can include ex ante statements of strategy, publication of records of meetings, Financial Stability Reports, and annual performance statements with an ex post assessment of policy effectiveness.

Appendix IV.Some Key Distinguishing Dimensions of Real Life Macroprudential Policy Models

(based on Nier and others, 2011)

- Degree of institutional integration of central bank and financial regulatory functions. Institutional integration affects coordination across the objectives and functions of macroprudential, monetary, and microprudential policies and how much information is available within the central bank. The degree of integration can be full, partial, or separation.

- Ownership of macroprudential policy. Ownership of the macroprudential mandate can rest with the central bank or a committee related to the central bank or an independent committee or be shared by multiple agencies. If the mandate is given to multiple agencies, each agency is expected to take responsibility for the mitigation of systemic risk arising in its domain.

- Role of the treasury. The formal role of the treasury can be (i) active, if it plays a leading role in policymaking or coordinating committees; (ii) passive, if the treasury participates in such committees, but has no special role; or (iii) simply nonexistent.

- Existence of a separate body coordinating across policies to address systemic risk. A separate coordinating committee is a common feature when the policy mandate is shared by multiple agencies.

Appendix V.Selected Systemic Risk Manifestations and MaPP Tools in Other Countries(Based on a review of the literature)
MaPP toolsCountry of useProsCons
Leverage ratioCanada, USAGuards against underestimation of asset risk. Less susceptible to arbitrage and mis-measuring.A blunt instrument that can constrain economic activity. No penalty for risk may create perverse incentives to “risk-up.”
Time varying countercyclical capital surchargesIncreases costs of borrowing while building loss-absorbing capacity to cope with the eventual bust. May help moderate credit cycles. Under Basel III, the “leakage problem” is mitigated by introducing mutual recognition of national countercyclical buffers. In particular, it is envisaged that the national buffer measure will apply to the local exposure of foreign banks. This reciprocity is mandatory only for buffers of up to 2.5 percent. The leakage problem could be more significant in small countries with large and open financial systems.Limited success in curtailing the incidence and duration of credit booms. It is a crude tool if exuberance is localized in particular sectors, and may even encourage “risking up.” May divert attention from the liabilities side of banks’ balance sheets and is subject to “international leakage.” The effectiveness of this measure is very sensitive to appropriate risk weighting of assets.
Ceiling on general credit or credit growth.Bulgaria, China, Colombia, Croatia, Greece, Nigeria, Portugal, Serbia, Slovakia, RomaniaDirect impact on credit. Limits rapid expansion and leverage. Have had some success in slowing down the pace of bank credit.Susceptible to circumvention. Can be offset by increases in credit from nonbanks, leading to build-up of systemic risk in often less-regulated intermediaries, and foreign borrowing by some borrowers.
Risk weights/ Sectordependent risk weightsAustria, Argentina, Brazil, Bulgaria, Croatia, Czech republic, Estonia, France, India, Lebanon, Malaysia, Mongolia, New Zealand, Norway, Poland, Spain, TurkeyTargeted approach. May provide sharper incentives than countercyclical capital buffers. Adjusting risk weights on the flow of lending relative to its stock could restrain lending in booms or encourage lending in downturns.May displace risk to other parts of the system—a “water bed” effect. Implementation challenges to ensure consistent application across the balance sheet. Data needs greater than with aggregate tools.
Sectoral credit growth or level limitsChina, Colombia, Malaysia, Philippines, Portugal, SingaporeTargets specific sectors, with limited impact on other sectors.Muted impact on overall lending growth.
Time-varying liquidity buffersArgentina, China, Croatia, India, Indonesia, Lebanon, Nigeria, Norway, Portugal, Serbia, South Africa, Switzerland,Direct effect on banks’ liquid asset holdings and maturity mismatch, increasing resilience. Harder to arbitrage than capital-based measures. May also help to moderate the credit cycle (Croatia)Limited international experience with liquidity requirements. Microprudential standards still under development.
Core funding ratiosBelgium, Greece, India, Indonesia, Switzerland, Italy, Lebanon, Mongolia, Netherlands, Poland, Portugal, Spain, Sweden, UruguayAffect the quality and amount of liabilities. Limit the ability of financial institutions to rely on risky sources to fund growth in upswings and thus minimize the impact of liquidity crises in bust periods.

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1Prepared by Etibar Jafarov (MCM).
2Systemic risk is defined here as the risk of disruptions in the provision of key financial services that can have serious consequences for the real economy (IMF, FSB, BIS, 2011).
3Extreme tail events such as a collapse of oil prices as well as risks related to fraud and mismanagement are not focus of this note.
4International experience shows that increases in the credit-to-GDP ratio above 3 percentage points, year-on-year, could serve as an early warning signal one to two years before a financial crisis. Cross-country studies show that one in three credit booms end in a banking crisis within three years of its end. See the IMF’s Global Financial Stability Report (GFSR), September 2011 and Dell’Ariccia and others, 2012.The rapid credit growth in Russia in 2011 triggered an increase in Fitch Ratings’ Macro Prudential Index (an indicator of potential stress in the banking system) for Russia from “low” to “moderate.”
5From a more aggregate and forward-looking perspective, rapid credit growth is often central to the buildup of macro-financial risk. High credit growth leads to risks because it may be associated with a decline in underwriting standards and excessive risk taking by both lenders and borrowers. The rapid growth of the loan base may mask an underlying deterioration of loan quality, partly because loans generally take some time to be classified as non-performing. Indeed, international experience shows that credit growth can be a powerful predictor of financial crises.
6Credit gap analyses assume that large deviations from trend growth will lead to higher probability of a correction (“bust phase”). There are various approaches to estimate trend growth in the ratio (e.g. simple regression, Hodrick-Prescott filter, or cubic trend. Dell’Ariccia and others, 2012 define the credit gap as a percentage deviation of creditto-GDP from a backward looking, rolling, cubic trend estimated over the period between t-10 and t. They suggest that a credit boom occurs when the deviation from trend is greater than 1.5 times its standard deviation and the annual growth rate of the credit to GDP ratio exceeds 10 percent.
7This result should be interpreted with caution since the large shock in 2009-10 increases the standard deviation so that the current boom is within the threshold of one standard-deviation.
8The results of credit supply equation should be considered in light of the results from the cubic trend method since, by default, the former would not reveal a “gap” if total credit grew in line with growth in the explanatory variables, even if growth in the explanatory variables was excessive
9High profitability of Sberbank is in part related to its monopolistic position, easy access to government and central bank financing, and perceived state (and central bank) guarantees on its liabilities.
10The pessimistic scenario assumes 1.2 percent GDP growth, a 10 percent devaluation of the currency, a 200 percentage point (pp) increase in the risk-free rates, and a 500 pp increase in interest rates on corporate bonds. The extreme scenario assumes a 5 percent decline in GDP, a 20 percent devaluation of the currency, a 350 percentage point (pp) increase in the risk-free rates, and a 1000 pp increase in interest rates on corporate bonds. For comparison, in 2009, GDP declined by 7.8 percent, the ruble depreciated by about 21 percent, and the three-month interbank prime rate increased by more than 400 pp.
11CAMELS indicators measure capital adequacy, asset quality, management capability, earnings, liquidity, and sensitivity to market risk.
12Moody’s uses CDS prices to assess the probability that individual financial institutions may undergo distress or fail; it publishes daily information on distance-to-default (DtD) and expected default frequency (EDF). Other indicators frequently used in the literature include (i) Beta index for banks, which measures the correlation between the total returns to the banking sector stock index and the overall stock market index, (ii) the spread between the interbank interest rates or commercial paper and government short-term rate, (iii) “inverted term spread,” which is the difference between government short-term rate and government long-term rate; (iv) stock market volatility; (v) sovereign debt spread; (vi) exchange rate volatility; and (vi) corporate debt spread (over government bond yield (see Balakrishnan and others, 2009; Cardarelli and others, 2009. These are good near-term indicators of crisis and spillover risks. The main weakness of this approach is increased risks for errors when markets incorrectly price risks (e.g., in illiquid markets).
13The “costs” of macroprudential measures in the form of restrictions on certain activities are felt immediately, while the “benefits” of lowering the incidence of financial distress accrue over a long term and are hard to measure.
14Furthermore, during the crisis, the CBR reduced “haircuts”/margins on collateral for borrowing from the CBR and lent to banks without collateral; and used the refinancing rate to affect capital flows (increased them in November– December 2008 to contain capital outflows and reduced them in 2009-10 to contain inflows).
15Most macroprudential measures can be (and are) applied also for microprudential purposes. Both policies exist to correct market failures and externalities related to them. Generally, microprudential policy looks at individual institutions, and macroprudential at a financial system as a whole. In practice, overlaps are possible in the areas of perimeter, toolkit, and its transmission mechanism. Osiński and others, 2012 offer several approaches to deal with the problem of borderlines and potential tensions and conflicts.
16These instruments are used to address the time dimension of systemic risks. See Appendix III for instruments that are used for addressing the cross-sectional dimension of systemic risks.
17Crowe and others (2011) find that tighter LTVs lead to lower house price increases, at least in the short run. Igan and Kang (2011) find similar results.
18In addition, several countries such as Australia, Canada, Korea, Latvia, Thailand, and United Kingdom had granular capital requirements based on LTVs.
19Based on FSB, IMF, BIS (2011).

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