Russian Federation
Financial System Stability Assessment

Even though the Russian authorities have maintained financial stability at the time of a major global shock, the financial system is still weak. The crisis has set back progress toward a strong, competitive banking system for the future. The recent unification of the supervision of nonbank financial institutions is an opportunity for strengthened oversight. A more structured corrective action regime and a unified administration regime for all banks, with broad powers for the administrator, would help strengthen the system further.


Even though the Russian authorities have maintained financial stability at the time of a major global shock, the financial system is still weak. The crisis has set back progress toward a strong, competitive banking system for the future. The recent unification of the supervision of nonbank financial institutions is an opportunity for strengthened oversight. A more structured corrective action regime and a unified administration regime for all banks, with broad powers for the administrator, would help strengthen the system further.

I. Experience with the Recent Crisis and Current Risk Assessment

1. The Russian economy suffered from a severe crisis in late 2008 to early 2009. Following a decade of unprecedented boom, real GDP contracted sharply by 7¾ percent in 2009, reflecting plummeting world oil prices and a sudden surge in global risk aversion. The magnitude of recession was one of the deepest in the world, highlighting the dependence of the Russian economy on the performance of its energy sector and its exposure to volatile capital flows.

2. The authorities responded with a massive discretionary policy stimulus. Fiscal policy was substantially relaxed, with the increase in the non-oil budget deficit by 9 percentage points of GDP in 2009 (one of the largest stimuli among the G-20). Monetary and prudential policies were also significantly relaxed in the face of increased capital outflows and growing problems with credit servicing (Box 1). The provision of large scale liquidity assistance and the use of reserves to delay ruble depreciation were the cornerstones of the authorities’ crisis response. In addition, the deposit insurance framework was strengthened, and some banks were recapitalized using public funds.

3. These policy measures helped restore macroeconomic growth and ensured systemic financial stability. The Russian economy began to recover from mid-2009. Real GDP increased by 4 percent in 2010, and is expected to reach 4.8 percent in 2011 and 4.5 percent in 2012. Higher-than-projected oil prices could result in an even more favorable growth outcome in the short-term, although longer-term prospects remain clouded by abiding structural problems in the Russian economy. Although many small- and medium-sized banks were taken into receivership or restructured, the banking system as a whole was able to weather the crisis relatively well. The turbulence in financial markets was also quickly abated as the sharp increase in interest rates was reversed, and the volatility on the foreign currency market was reduced.

4. The crisis-related support to banks has since been gradually withdrawn. Improved liquidity conditions enabled banks to use excess funds to repay uncollateralized CBR refinancing ahead of schedule, and such refinancing was terminated by end-2010. Sberbank made an early repayment of Rub 200 billion (out of Rub 500 billion) in subordinated credits it had received during the crisis. The lax loan classification rules were terminated for new loans in mid-2010. And the CBR guarantees on interbank lending were unwound by end-2010.

The Recent Financial Crisis and the Monetary and Financial Policy Response

The initial policy response to the crisis focused on maintaining the stability of the ruble while providing large-scale liquidity support to financial institutions. The CBR used its sizable reserves to support a gradual and predictable depreciation, allowing the private sector to hedge its foreign exchange exposures and preventing large-scale deposit runs by easing concerns of disorderly ruble depreciation (akin to the one that took place during the 1998 crisis). The CBR also provided emergency liquidity assistance by offering guarantees for interbank lending to qualifying banks; widening the range of acceptable collateral on repurchase and Lombard operations; and extending loans that were unsecured or backed by non-marketable collateral and guarantees. In addition, the government auctioned excess budgetary funds to banks. The sizable liquidity provision—which at its peak, amounted to two-thirds of base money—facilitated a rebalancing of bank obligations away from foreign exchange liabilities.

After this initial phase, and in the face of surging reserve losses, the authorities subsequently allowed a faster depreciation of the ruble. In addition, the CBR started to curtail its liquidity support, allowing interest rates to rise significantly—at their peak, overnight interbank rates reached 28 percent. Pressure on the exchange rate eased almost immediately and reserves stabilized. In the context of a more stable ruble and recovering oil prices, monetary policy was then gradually eased during April 2009-June 2010. The reserve requirement was lowered, and policy interest rates were cut from 13 percent in April 2009 to 7.25 percent in June 2010.

Meanwhile, to strengthen the banking system, the authorities provided capital injections and enhanced deposit insurance. The Russian government shored up capital in several government-owned banks, with capital injections of Rub 505 billion (1.3 percent of GDP). Additional capital was provided to state and private banks from either Vnesheconombank (state development agency) or the CBR in the form of subordinated loans, totaling Rub 904 billion (2.2 percent of GDP). To bolster confidence in the banking system, the deposit insurance limit was raised and the deposit insurance agency was given additional resources and powers to deal with bank failures.

The CBR also used regulatory forbearance, temporarily easing loan classification and provisioning requirements. Under the relaxed loan classification requirements, a corporate (retail) loan was considered overdue only if had been delinquent for 30 days (60 days), up from 5 days (30 days) under the old rules. Provisioning requirements were also relaxed for overdue loans to borrowers whose financial condition was considered as adequate by banks. In addition, restructured loans were allowed to remain in their original classification category. These steps are estimated to have saved banks Rub 300 billion in provisions (7 percent of capital) by mid-2009.

5. Nevertheless, risks to financial stability remain significant, at least in the near term, as indicated in the staff’s Risk Assessment Matrix (Appendix II).1 These risks arise in part from the very volatile economic environment in which the Russian financial system operates. The swing in GDP growth from about 5 percent in 2008 to nearly -8 percent in 2009 far exceeded that observed in other major emerging markets, not to mention advanced economies. Of particular concern are risks related to the balance of payments: although oil prices have gone up substantially in the past 10 years, they remain highly volatile. The Russian banking system is also vulnerable to shocks to capital flows, both directly in terms of access to cross-border interbank funding (although these flows are concentrated among foreign-owned banks vis-à-vis their group entities and the reliance on such funding was reduced in the aftermath of the crisis, see below); and indirectly through increased exchange rate volatility and financial market volatility.

6. In addition, the crisis and its aftermath brought in sharp relief certain fundamental weaknesses in the Russian financial sector that could also have implications for financial stability. CBR exceptional refinancing or government support measures was directed mainly to the large systemically, important financial institutions. The crisis also illustrated the vulnerabilities stemming from the insufficient diversification of Russian banks and their reliance on short-term funding. The crisis has also underscored weak corporate governance in many banks and key flaws in the supervisory framework. The recent failures of Mezhprombank and the Bank of Moscow are illustrative in this regard (Box 2).

7. Risks from cross-border exposures are limited. Foreign banks account for only 17 percent of the Russian banking system in terms of assets (Appendix III). Russian banks are also not very active abroad, with a noticeable presence only in a few CIS countries, though some large state-owned banks are now discussing the possibility of sharply increasing their penetration in Eastern Europe. As noted above, the external liabilities of Russian banks were substantially reduced in 2009, while the external assets continued to increase. But Russia is a marginal source of funds even within the CIS, though the reported figures might understate the extent of flows going through international financial centers.2 Securities investment of Russian banks are mostly in domestic assets (government and corporate), and exposures to distressed European sovereign securities are negligible.

II. Strengths and Vulnerabilities: Institutions and Markets

A. Banks

8. Russian banks have fairly plain balance sheet structure (Table 2). The majority of assets are loans (mostly to industries), followed by plain-vanilla securities (mostly in domestic government and corporate bonds) and interbank lending (of which 60 percent are vis-à-vis non-resident banks). Banks are mainly funded by deposits of non-financial corporations and individuals and from other banks (including non-resident banks). Overall, Russian banks’ reliance on external borrowings declined to 13 percents of their book at end-2010 from 20 percent in 2007, and they are mostly long-term. About a half of these borrowings are from non-resident banks, and foreign-owned banks tend to rely more on this funding source. Capital market funding through debentures are very limited.

Table 2.

Russia: Financial Soundness and Balance Sheet Indicators of the Banking System, 2006–10

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Sources: Central Bank of the Russian Federation and IMF staff calculation

Large borrowers are those with loans exceeding 5 percent of regulatory capital.


9. After the severe shock during the crisis, the performance of banks started to recover. Partly as a result of bank recapitalization (based both on public funding and private capital markets), the aggregate capital adequacy ratio stood at 18.1 percent in December 2010, well above the prudential minimum of 10 percent and higher than in many comparator countries (Table 2, and Figure 1). Bank profitability rebounded in 2010, largely reflecting a reduction in provisioning for loan losses and release of existing provisions, which occurred despite the termination of a temporary relaxation of loan classification rules during the crisis. After climbing to almost 10 percent in 2009, the nonperforming loan ratio fell to 8.2 percent by end-2010. Funding conditions also improved, as household and corporate deposits grew strongly, allowing CBR to discontinue its emergency liquidity support. Bank assets and credits are now growing again, although at a much slower rate than before the crisis.

Figure 1.
Figure 1.

Russia: Comparative Indicators of Banking System Soundness

Citation: IMF Staff Country Reports 2011, 291; 10.5089/9781463904203.002.A001

The failures of Mezhprombank and Bank of Moscow

Mezhprombank (MPB) was a relatively large pocket bank. With assets of RUB 175 billion (US$6 billion), it was among the top 30 Russian banks. The bank did not collect household deposits (it had no license to do so), and its business was concentrated on servicing companies affiliated to it, which centered around two large shipyards. Since early 2009, MPB had been under severe liquidity pressures due to the fall in profits of its clients as the recession hit Russia, and possibly also reflecting fraud or mismanagement. However, the bank continued to enjoy good ratings from several international rating agencies, which enabled it to issue Eurobonds (€200 million was issued in early 2010, in addition to €200 million issued in 2007), as well as get large uncollateralized emergency funding from the CBR (RUB 32 billion). In July 2010, it defaulted on its maturing Eurobonds issued in 2007. In October 2010, the CBR withdrew its license. According to the Russian media, the reported capital of MPB was inflated by a factor of almost two through the use of multiple affiliated special purpose vehicles that were not subject to consolidation.

The Bank of Moscow (BoM) was Russia’s fifth-largest bank in early 2011. The BoM was partly owned by the city of Moscow and closely associated with former mayor Luzhkov. Problems began to surface after Mr. Luzhkov’s ouster, when the state-owned Vneshtorgbank (VTB) was directed to acquire a controlling stake in BoM. A review of the BoM’s credit portfolio by the authorities in June 2011 uncovered problem loans of about one-third of BoM’s total assets. The BoM had been able to disguise the true quality of these bad loans by the use of special purpose vehicles often located in offshore jurisdictions, many of which were apparently affiliated with the former managers of the BoM. On July 1, 2011, the Russian authorities announced a one percent of GDP rescue package for the BoM. Under the authorities’ rescue plan, the BoM received Rub 100 billion (US$3.6 billion) in new capital from VTB, as well as a Rub 295 billion (US$10.6 billion) 10-year loan from the DIA at a below market rate, which is ultimately financed by the CBR.

10. Performance varies significantly across different bank groups (Table 3).

  • State-owned banks. The 20 state-owned banks, with 46 percent of the system’s assets, are well capitalized, but the quality of their loans is, on average, weaker than that of other banks. These banks have relatively cheap and stable household deposits and can quickly access CBR refinancing, which allows them to hold less excess liquidity.

  • Foreign-owned banks. Foreign banks (108 banks, 19 percent of the system’s assets) are also well capitalized but do not typically have a branch network and rely substantially on external funding (particularly from their parent banks). Household loans represent the largest share of their credit portfolios.

  • Large private banks. These banks have relatively low capitalization and profitability, but also a relatively low share of nonperforming loans.

  • Small private banks. The aggregate capital and liquidity ratios of around 700 smaller banks are well above the system’s average, reflecting the difficulties in accessing interbank market and the absence of big foreign parents. These banks face higher concentration risks on both asset and liability sides and report weaker profitability.

Table 3.

Russia: Financial Soundness Indicators of Banks by Groups, end-2010

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Sources: Central Bank of the Russian Federation and IMF staff calculation.

Large borrowers are those with loans exceeding 5 percent of regulatory capital.

11. The reported data, however, probably overstate the capital strength of the system as a whole, potentially masking pockets of significant vulnerability.

  • The true magnitude of non-performing assets is probably higher than reported, due to (i) overvaluation of the foreclosed assets on bank balance sheets, (ii) transfer of distressed assets to affiliated off-balance sheet entities that are not subject to consolidated supervision, and (iii) doubtful quality of restructured loans, which account for around one third of all large loans (Figure 2).3

  • There are doubts about the adequacy of loan loss provisions. The provisioning ratios are on the lower end of the required ranges specified in the regulations for all loan classification categories (Figure 3).

  • There are also concerns about the collateral valuation. While bank lending to the private sector is typically secured, the quality of collateral varies widely. The costs of seizing the collateral, as well as the ability to sell it in distressed conditions does not seem to be reflected accurately in its valuation.

Figure 2.
Figure 2.

Russia: Share of Restructured Loans to Large Loans1

Citation: IMF Staff Country Reports 2011, 291; 10.5089/9781463904203.002.A001

Sourcece: CBR and IMF staff calculation1/ Data include loans to 30 largest (non-financial) corporate borrowers for each bank, which amounts to about 20-25 percent of the total loans
Figure 3.
Figure 3.

Mandatory and Actual Provisions, End-20101

Citation: IMF Staff Country Reports 2011, 291; 10.5089/9781463904203.002.A001

source: CBR and IMF staff calculation1/ All data are based on large loan data covering only the 30 largest loans

Stress testing

Methodology and assumptions

12. The stress testing exercise was based on the existing top-down CBR approaches, and also included a separate bottom-up exercise. The top-down single factor tests and macro scenario tests used bank-by-bank supervisory data as of end-2010 and covered all 1,012 operating banks. The bottom-up exercise covered 15 large banks, covering 56 percent of the system assets. The CBR’s Supervision Department coordinated the bottom-up tests using the same macroeconomic assumptions as were used in the top-down exercises. The macro scenario had a one year horizon. The resilience of the system was assessed in terms of the minimum regulatory capital adequacy ratio (CAR) of 10 percent, though other metrics were also shown as reference (Tier I capital ratio, liquidity ratio, and potential capital injection needs). The exercises covered a wide range of risks, including credit, market, and liquidity risks. Appendix IV provides details of the methodology and assumptions.

13. For macro stress tests, the FSAP team relied on the macro-financial linkage model recently developed under the initiative of the CBR. Key components of the model are the estimation of the NPL ratios for the household and corporate sectors vis-à-vis macroeconomic variables. The analysis of sensitivity of the NPL ratio to one standard deviation shock of each macro factors indicates that oil price is the most important source of risk to Russian corporations. The indirect effect of ruble depreciation through credit quality is estimated to be favorable for the corporate sector (other factors being constant), reflecting strong foreign currency earnings by the largest Russian companies, which are typically resource-oriented. While the effect on the quality of household loans from a depreciation of the ruble would be negative, the overall impact on bank credit portfolio is estimated to be negligible since most banks have larger exposures to the corporate sector.

14. The assumptions and stress scenarios were agreed between the CBR and the FSAP team.

  • The single-factor shocks were calibrated to be broadly in line with the 2009 experience and included increases in the NPL ratio by about 5 and 8 percentage points, the default of top five borrowers, a liquidity shock (withdrawal of liabilities followed by fire sales of liquid assets), market risks (exchange rate, equity valuation, and interest rate), and interbank contagion risks.

  • The macro scenarios included (i) a baseline scenario assuming annual GDP growth in 2011–12 of around 4 percent—slightly below the WEO forecast, (ii) a pessimistic scenario, and (iii) a severe scenario. The shocks in the pessimistic and severe scenarios (a drop in GDP growth by respectively 4½ and 8 percentage points relative to baseline) were equivalent to 1 and 1.7 standard deviations of GDP growth using data for 2000–2010.4 The swing assumed in the severe scenario is meant to represent a highly unlikely-but-plausible economic shock.

15. In addition, efforts were made to quantify the overestimation of capital discussed above. Staff has tried to assess the quantitative impact of some of the structural and supervisory weaknesses referred to in paragraph 10. Specifically, (i) to adjust for the impact of regulatory forbearance introduced during the crisis (Box 1), the estimated impact of these measures at end-2010 is added to provisions; and (ii) to adjust for the low level of provisions, provisions in each loan category are raised to the midpoint of the regulatory range and poor quality collateral is assumed to have no value. These adjustments were somewhat ad hoc (owing to data limitations) and arguably extreme; they also did not cover every factor identified in paragraph 10 (e.g., credit quality issues with restructured loans, which is very hard to estimate). But they still provide a useful gauge of the underlying strength of bank portfolio and capital.


16. The results of stress tests suggest that the Russian banking system is, on the whole, resilient to a variety of shocks (Tables 4 and 5, Figures 4 and 5).

  • Under the worst-case macroeconomic scenario, gross losses to the banking sector would be about one third of capital. The majority of losses would be are due to credit quality deterioration, followed by losses from security valuation. However, around one third of these losses (11 percent of capital) would be offset by retaining conservatively estimated bank profits. The system-wide CAR would remain above 14 percent, with only a small group of banks—79 banks representing 8 percent of the system—ending up with a CAR below the 10 percent minimum.

  • The series of single factor tests indicate that credit risk is the most important source of risks. In particular, the concentration risk is significant, especially for smaller banks where the share of top 5 borrowers is about 20 percent or more (Table 3). Valuation losses on securities (mostly domestic), especially bonds, could be notable, reflecting the recent increase in securities investment. Direct foreign exchange valuation risk is negligible, given the small open foreign exchange position.

  • Acute systemic liquidity shocks may have immediate effects on banks (unlike credit losses, which tend to materialize over a longer timeframe), especially large private and foreign banks (Figure 4).

Table 4.

Russia: Summary of Stress Test Results

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Sources: Central Bank of the Russian Federation and IMF staff calculation.

Impact of losses from temporary forbearance measures introduced during the crisis time.

Raise provisioning rates of each loan category to the middle value of the regulatory acceptable ranges, including high quality collaterals only.

Assuming 100% losses upon default. Loans to top 5 borrowers are about 50% of capital. Compared to other shocks, this secenario should have extremely lower probability to occur.

Losses from asset firesales upon liability withdrawals (30% of interbank liabilities from non-resident banks; 20% of individual deposits and corporate settlement accounts ; 10% of corporate deposits). 5, 20, and 60 percent haircuts with highly liquid, liquid, and low-liquid assets. No access to domestic interbank market, including the CBR.

Pararell shift up of bond yield curves, 300 (900) bps for government (corporate) bonds.

In addition to the combined test of credit (A: historical distribuiton), liquidity and market shocks. In the contagion stage, a bank “defaults” 100% on its interbank borrowings when its losses from interbank contagion effects reach 75% of its stressed capital.

Assuming, a 8 p.p. drop in GDP growth rate (i.e. 1.68 standard deviation using 2000-2010 data) from baseline.

Table 5.

Summary of Bottom-Up Stress Test Results

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Source: CBR
Figure 4.
Figure 4.
Figure 4.

Russia: Summary of Stress Test Results

Citation: IMF Staff Country Reports 2011, 291; 10.5089/9781463904203.002.A001

Source: CBR and IMF staff calculation.1/ Forbearance: Impact of losses from temporary forbearance measures introduced during the crisis time. Provisioning: Raise provinsioning rates of each loan category to the middle value of the regulatory acceptable ranges, including high quality collaterals only.
Figure 5.
Figure 5.

Summary of Bottom-Up Stress Test Results

Citation: IMF Staff Country Reports 2011, 291; 10.5089/9781463904203.002.A001


17. However, the structural and supervisory weaknesses discussed above imply that the system may be more fragile and vulnerable to shocks that the stress tests results suggest. Indeed, the quantitative impact of staff adjustments to the baseline to take these factors into account exceeds that of the most severe stress scenarios: staff estimated that adjusting for these factors could wipe out as much as one-third of total bank capital under the most extreme assumptions (Table 4). As mentioned above, however, in the absence of hard data, the magnitude of these adjustments is driven to some extent by subjective assumptions.

18. These results notwithstanding, there are important mitigating factors contributing to the stability of the system and limiting the costs of rescue. Even if capital injections are required to restore capital adequacy, the estimated economic cost of recapitalization is small and manageable, given the relatively small size of the Russian banking sector relative to GDP, low government debt, and high reserves.

B. Non-Banking Sectors

19. The performance of nonbank financial institutions is mixed. Investment funds and private pension funds registered solid profits in 2010, reflecting a booming stock market. As to insurance companies, both non-life and life sectors continue to suffer from lower demand due to the crisis, high claim payout, and low return on investment. The pre-crisis returns on assets of around 5 percent that supported negative combined ratios are no longer available in the current environment. The number of bankruptcies of insurance companies is increasing and clients are experiencing difficulties in claiming benefits, suggesting financial distress. Even though distress in the insurance sector is unlikely to threaten systemic stability, it might have adverse social repercussions. The new minimum capital requirement, which will enter in force in 2012, will put additional pressure on insurance companies.5

20. The combination of thin markets and weaknesses in market infrastructure require increased vigilance over the securities market. The low development of the capital market in Russia, notably the dearth of long-term securities and lack of a long-term institutional investor base, contributes to significant market volatility. The fact that corporate securities are commonly used as repo collateral translates this volatility into funding risk for banks. The absence of a central depository for securities also opens the possibility that some of these securities may be pledged as collateral more than once, amplifying this risk.

III. Strengths and Vulnerabilities: The Policy Framework

A. Regulation and Supervision


21. Despite some progress in recent years, the regulatory and supervisory framework for banks has numerous gaps and weaknesses. Although CBR strives to improve its supervisory process, it lacks enforcement powers to ensure implementation of those recommendations. In particular, the CBR lacks authority (i) to prevent abuses arising from exposures to related parties; (ii) to take enforcement action against banks’ directors and managers; and (iii) to require additional capital in individual banks to be maintained against specific risks.6 The legislation continues to limit the scope of consolidated supervision. The legal framework does not provide the CBR sufficient flexibility to exercise supervisory judgment (Box 3). There is also insufficient legal protection of the CBR and other supervisory agencies. Accordingly, progress in addressing shortcomings identified by the 2007 Basel Core Principles (BCP) assessment has been slow.7

The Exercise of Supervisory Discretion (“professional judgment”)

The financial sector supervision in Russia is currently hampered by the lack of legal capacity for supervisory agency to use discretion, or “professional judgment” in the preventive and corrective activities. This issue affects to some extent all supervisory agencies. The CBR’s lack of flexibility to use supervisory judgment in implementing existing legislation, for example, identification of connected parties and ability to implement international best practices without legislative changes, is a serious impediment to effective supervision. In the case of insurance, the problem is aggravated by the lack of power of the supervisory agency (prior to its absorption by the FSFM) to issue and sometimes even interpret regulations, which is a critical impediment to timely action.

International standards, such as the BCP, embed supervisory judgment in several Principles. The most well-known is capital adequacy, where supervisory discretion is needed to judge if the capital is adequate to the risk profile of individual banks. More broadly, when an assessment of “adequacy,” “sufficiency,” “consistency,” and “effectiveness” is warranted, it is always expected to be based on the supervisory authority’s discretion. The ultimate decision on whether a bank’s behavior is unsafe or unsound cannot be based on compliance alone. The legal framework for financial supervision in Russia today falls well short of these principles.

Naturally, supervisory discretion is only possible when applied in tandem with a robust internal organization and accountability. This includes well-defined decision-making processes and clear accountability mechanisms. The desirability of supervisors being able to make judgments and take actions needs to be balanced with a good governance framework. This can be achieved by establishing reviews of key decisions or raising them to committee structures. In practice, the operational level at which supervisory judgment may be exercised should be restricted depending on the experience levels of staff, possible impact of decision and layers of institutional review. While the ability to question a bank’s classification and provisioning of a loan may be delegated to a territorial office, issues on sanctions or capital adequacy may be limited to CBR headquarters.

22. Cross-border supervisory cooperation has improved, but its effectiveness is impeded by restrictions on information sharing. The CBR has entered into numerous bilateral MoUs or letters of cooperation with foreign bank supervisors to achieve cooperation and information sharing. Even in the absence of these formal agreements, the CBR cooperates with foreign supervisors by addressing ad-hoc requests for information and engages in bilateral meetings with bank supervisors of the home-host countries. However, the CBR powers to provide information subject to banking secrecy, in particular the information related to the operations of the credit institutions, their clients and correspondents, are restricted by the laws, even if a foreign supervisory body guarantees the safety (confidentiality) of such information.8

23. Many of these shortcomings are expected to be addressed in the near term. Legislative amendments are pending before the Duma that would enhance the CBR’s ability to conduct consolidated supervision and will expand CBR powers to define related parties. The amendments will also eliminate restrictions on the types of information that the CBR may exchange with other supervisors. In addition, the legal framework for bank regulation and supervision should be strengthened further in the context of implementing the government’s Development Strategy for the Banking Sector through 2015, which was adopted in April 2011.

Nonbank financial institutions

Supervisory architecture

24. The supervisory framework for the nonbank financial sector was overhauled in 2011. In accordance with the Presidential decree of March 2011, the insurance supervisor (FSIS) was absorbed by the securities market supervisor (FSFM). While this plan had been under discussion for a while, the decision to merge was taken without adequate preparation, creating a temporary gap in the supervision of the insurance sector.9 By June 2011, the basic legal and operational framework of the new, expanded FSFM had been introduced, although the actual merger will take longer.

25. The creation of a unified supervisory agency for the nonbanking sector can generate benefits. These include a comprehensive view of the financial market, harmonization of the supervisory approach, and economies of scale, in particular for the performance of centralized activities like licensing and enforcement. The unification may also strengthen human resources policy for the supervisory personnel, making the new agency more attractive by offering a more varied and challenging career for its staff.

26. The new legal and operational framework for the FSFM appears broadly appropriate, but needs to be tested in practice. In addition to insurance and capital markets, the FSFM’s remit is expanded to cover all nonbank financial entities. The FSFM is given the status of an independent government agency, like the Federal Antimonopoly Service, reporting to the Prime Minister. Its budget is approved by the Duma and is not part of any Ministry. The Chairman and Deputy Chairman of the FSFM are appointed by the Prime Minister (though their terms are not fixed and the law does not specify grounds for dismissal). The FSFM has absolute supervisory and enforcement authority, but its regulatory function is shared with the MoF. Specifically:

  • Submitting to the Duma laws affecting the non-bank financial sector, including minimum capital requirements, is the responsibility of the Ministry of Finance (like the central bank, the FSFM does not have the authority to propose legislation to the Duma directly).

  • Other regulations (e.g., on disclosure standards, licensing requirements, professional activities, etc.) are issued by the FSFM after consultation with the Ministry of Finance.

  • Implementing regulations, reporting requirements, licenses, audits, inspections, remedial letters, penalties, etc. are the sole responsibility of the FSFM.

Although this basic framework appears to guarantee adequate authority and operational independence for the FSFM (with the possible exception of the terms of appointment of its Chairman), a lot will depend on how it is implemented. In the near term, at any rate, the preoccupation with the ongoing merger may raise questions about the speed with which the needed improvements to the insurance and securities markets supervision (see below) may be made.

Insurance companies

27. The authorities have implemented important recommendations of the last FSAP in the areas of insurance regulation and supervision. Recently adopted legislation clarified and reduced the time for the completion for declaring bankruptcy of insurers and non state pension funds, and granted the supervisory agency the powers to appoint a temporary administration should this be required to protect the policyholders as a pre-bankruptcy step. Minimum capital requirements have been increased four-fold and are now at the EU level. The government adopted a medium-term insurance business development strategy that envisages removal of regulatory impediments, encourages competition, and contributes to a favorable business environment for the insurance activity.

28. However, there are significant shortcomings in insurance supervision. Although a formal assessment of compliance with IAIS principles was not, as noted above, possible, due to the disruption caused by the merger, the supervisory framework seems to depart from international standards in a number of areas. Licensing does not require insurers to have the necessary operational infrastructure, in the form of internal controls and risk management functions. Information on related party obligations and broader governance rules and responsibilities is not sought at present. The range of individuals to which fit and proper requirements apply is limited.10 Also, the supervisory agency does not have the power to disqualify key managers, including auditors and actuaries, who do not comply with the fit and proper requirements. While cooperation and information-sharing appears to function well, the home-host notifications and other relevant cross-border cooperation activities are not mandatory for the supervisory agency. Group-wide supervision is not incorporated in the regulation and presents a major risk to the objectives of supervision, given the importance of group activity. Preventive and corrective actions are missing from the current supervisor powers. Derivatives are used in the market and are becoming more sophisticated, but the current regulation does not address them.

29. The supporting infrastructure remains weak. The numbers of accountants and auditors that meet minimal professional requirements is small. Qualified lawyers and judges are in short supply due to a large number of disputes currently being brought to court, especially in the area of motor insurance. The actuarial profession has recently made progress, and the incorporation of the Russian Guild of Actuaries as a full member of the International Actuarial Association at the end of 2008 is a recognition of achieving international standards and qualification for their fellow members. However, with only 154 members, the supply of actuaries remains inadequate.

Capital markets

30. Compliance with the IOSCO principles has improved compared to the previous assessment (for details, see Appendix). This reflects a major expansion of FSFM’s powers in recent years. In particular, the FSFM was given increased authority to cooperate with foreign counterparts and investigate misconduct in the market; the authority to obtain more comprehensive disclosure on controlling and controlled persons; the capacity to obtain and provide the market with more informative material event disclosure, which in turn can trigger more intensive and targeted monitoring or help shareholders better evaluate investments; and additional powers to administer monetary sanctions and compel information from unlicensed third parties. Additionally, resources were found to fund new surveillance tools for FSFM staff, such as a real time monitoring system, to provide alerts as to non-standard or suspicious transactions.

31. The implementation of the procedures to execute the new powers and authorities may require further regulatory actions. It is therefore premature to confirm the efficacy of the newly-granted powers or to assess their operation in practice. Some experience with their actual application to specific circumstances will be necessary to determine whether they will achieve the intended benefits.

32. Further substantial legislation which should bring additional improvement is in train. Such legislation includes the laws on exchanges and organized trading, prudential supervision, joint stock companies, and amendments to the Federal Law on investment funds. The pending legislation on prudential supervision, when adopted, should provide FSFM with increased authority to freeze assets, take other prompt corrective action through the appointment of a temporary administrator or receiver, or assist in winding down of a regulated business so as to prevent asset stripping and protect customers.

B. Macroprudential Policy

Institutional setup

33. Commendable steps have been taken recently to strengthen macroprudential monitoring and inter-agency coordination. In December 2010, an Inter-Agency working group under the Presidential Council (Working Group to Monitor Financial Market Conditions) was created, with the mandate to identify mechanisms to monitor the state of the financial market and systemically important financial institutions and propose the legal amendments needed for the establishment of these mechanisms.11 In addition, in March 2011, the CBR established a Financial Stability Directorate, which is expected to carry out monitoring of emerging risks not only in the banking sector but also arising from emerging trends and products in other sectors.

34. Efforts are now required to make the systemic risk monitoring framework effective. The new working group participants should not only meet regularly to identify the institutions to be monitored and emerging risks, but agree on a road map where each agency has a clear understanding of its roles and responsibilities if pressures emerge. The working group should make sure all legal and operational hurdles for information exchange among participants are cleared. It would also be advisable to include representatives from the DIA in this working group, particularly as it is to be given permanent powers to resolve banks.12

Macroprudential policy tools

35. The CBR should play a leading role in developing macroprudential policy tools. Given the systemic importance of the banking sector in Russia and the synergies that can be achieved in conducting monetary policy and supervision, the CBR should be the leading agency in designing and applying macroprudential policy instruments. In this regard, the fact that the Director of the newly created Financial Stability Directorate has a seat on both the Supervision Committee and the Monetary Policy Committee is encouraging.

36. The CBR has already used some instruments of the macroprudential toolkit. It used differentiated reserve requirements for obligations denominated in foreign currency and for obligations to non-residents, and sought to implement an interest rate policy aimed at “mitigating the risk of a sudden capital outflow.”13 It lowered provisioning standards during the crisis to act against the cycle and stimulate credit in the downturn, and introduced a balance-sheet open foreign-exchange position with regard to foreign assets. It has also proposed legislation outside its mandate with a view to promoting financial stability, for example, an amendment to the Tax Code to make foreign currency denominated borrowings less attractive to financial and non-financial companies. In addition, the results of CBR’s stress tests are used not only to check resilience of the individual banks and orient supervision, but also to monitor systemic stability.14

C. Crisis Management and Resolution

37. The Russian authorities cooperated effectively in responding to the crisis despite the absence of formalized arrangements. Russian legislation does not assign explicit responsibility for overall financial stability and systemic risk monitoring, but the lion’s share of responsibility resides with the CBR, due to the dominance of the banking sector in the system. In fact, the CBR is legally responsible for maintaining the stability of the Russian banking system and protecting the interests of depositors and creditors. During the crisis, the MoF and the CBR played an important and appropriate role in coordinating crisis management, with regular meetings held with the other agencies.

Systemic liquidity

38. By early 2011, the liquidity position of credit institutions returned broadly to pre-crisis levels. The interbank money market overnight interest rate declined to 2.8 percent per annum, well below its peak of 28 percent in late January 2009. The segmentation of the interbank market also appears to have eased since the peak of the crisis in early 2009, although the operations remain concentrated on 15 banks. In March 2010, credit institution deposits in the CBR amounted to 7 percent of broad money, which was somewhat less than the pre-crisis level, but these deposits have been well in excess of those needed to comply with the required reserve ratio.

39. The CBR’s emergency liquidity assistance (ELA) played a crucial role in containing the effects of the liquidity crisis. The CBR significantly eased the conditions for access to its liquidity, including expanding existing monetary instruments, introducing new liquidity instruments, and helping to contain counterparty risk in the interbank market. With clear disclosure of the changes to its policies, the CBR was able to guide expectations, enhancing the effectiveness of the ELA.15 However, the CBR exposed its balance sheet to additional risk by extending loans that were unsecured or backed by non-marketable collateral or guarantees. The stock of liabilities of credit institutions peaked at Rub 4.2 trillion (about 10 percent of GDP) in January 2009, but these liabilities returned to pre-crisis levels by early 2011.

40. Going forward, the functioning of the interbank money market and the CBR’s ELA should be strengthened.

  • The use of RTGS should be expanded. Only one-fifth of the total volume of payments made through the CBR’s payment system passed through the RTGS in 2010. Further development of the CBR’s payment system is set forth in the “Conceptual Framework for the Development of the Bank of Russia Payment System for the Period up to 2015,” which was approved by the Board of Directors of the CBR in July 2010.

  • Counterparty risk in repurchase operations should be addressed. Given the short supply of government securities, the repo market relies heavily on corporate securities for collateral. However, steps to mitigate counterparty and other risks should be taken by: (i) extending the operations of the National Clearing Center to all operations of the repurchase market; (ii) setting minimum regulatory haircuts on securities used as collateral in repurchase transactions; (iii) setting concentration limits on collateral securities to limit exposure of single institutions as well as the market to a single issuer; and (iv) issuing CBR guidelines for banks that engage in repos.

  • ELA should be enhanced in several areas. The ELA could be strengthened by requiring the government to guarantee any loan that is unsecured or backed by non-marketable assets or guarantees. The CBR should also continue to strengthen its management of collateral. The CBR may also wish to consider the potential benefits of a more explicit explanation of its ELA policy—which could be implemented over time as market confidence continues to strengthen—especially to make the allocation of ELA among financial institutions more transparent.

Bank intervention tools

41. There is a range of early intervention tools set out in different pieces of legislation, but a more structured and consolidated corrective action regime is needed. The authorities should adopt a transparent regime for supervisory action (Prompt Remedial Action framework), with a clearly delineated set of mandatory and discretionary measures as a bank’s regulatory situation deteriorates. This regime should include a stepped scale of mandatory and discretionary penalties/restrictions as a bank falls below certain quantitative thresholds relating to capital and liquidity or qualitative triggers such as not complying with laws, regulations or directives, engaging in an unsafe or unsound practice or when the interests of depositors are otherwise threatened. This would enable a consistent approach in the treatment of different banks and contribute towards public confidence.

Bank resolution

42. A temporary law dealing with bank resolution adopted in October 2008 will expire at end-2011. This law introduced wide-ranging powers that are deployable at an early stage if the failing bank presents a systemic risk and there exists evidence of the bank’s unstable financial position or there is a threat to the legitimate interests of bank depositors and creditors. The DIA was empowered to take control of a bank, inject equity into, or purchase assets from, a bank, write down bank capital, undertake P&A transactions, and provide open bank assistance (OBA), including in the form of financial assistance to third parties needed to restore normal operations of an acquired bank (assisted mergers and acquisitions). Between October 2008 and April 2011, the DIA and the CBR used these temporary powers to successfully resolve 18 banks.

43. On the basis of this crisis experience the authorities plan to make the temporary law permanent, whereas we would recommend designing a new, permanent bank resolution regime. Although the current framework functioned well during the crisis, it risks exacerbating moral hazard, as it enshrines a limited set of resolution tools with late triggers for non-systemic banks and a wide range of tools with early triggers for systemic banks. Based on international best practice, staff would recommend the following for the new, permanent regime:

  • The CBR should be able to appoint the DIA as an official administrator at a sufficiently early stage for all banks, not just systemic ones, when one or more quantitative or qualitative triggers are met, e.g., capital falls below a fixed percentage of required CAR; if there is a threat to financial stability; and if the bank is or is likely to become insolvent, is engaging in unsafe/unsound practice, or poses a threat to interests of depositors/creditors.

  • The existing provisions in the Insolvency Law for Credit Institutions, BL, and the proposed permanent legislation should be merged into a single piece of legislation empowering the DIA as official administrator with a range of powers including: (i) taking over all powers of all decision-making bodies of the bank—management, board, shareholders—including the power to override the preemptive rights of existing shareholders in a recapitalization; (ii) writing down capital or converting subordinated debt into capital; (iii) P&A, including use of a bridge bank; (iv) merger; and (v) bank debt restructuring.

  • The decision on which official administration power to deploy, or whether instead to liquidate the bank and pay out insured deposits, should be taken on a least-cost basis. To mitigate moral hazard, OBA tools such as loans to purchasers and investors, capital injections, or nationalization should be restricted to only those cases that pose a grave systemic threat, with a clear process that entails a decision taken at a high level by the government. Furthermore, in such circumstances, the DIA can only contribute up to what it would have had to pay out if the bank were liquidated, with the remainder of the funds having to be provided by the government.

  • As needed to fulfill the official administrator powers, the DIA should be given more advanced notice before a license is revoked by the CBR, as well as the powers to conduct an audit of problem banks jointly with the CBR. A watch-list of problem banks should be created, and the DIA should be notified by the CBR of any banks that are placed on the list or that are reviewed for placement on the list subject to pre-agreed criteria.16

Orderly liquidation

44. The current liquidation framework is appropriate. There is a specific bankruptcy regime for banks that, while subject to the court process, closely involves the CBR at each stage of the liquidation process. The CBR is able to file the bankruptcy petition, appoints the temporary administrator, controls the appointment of the liquidator, audits the activities of the liquidator, requires the submission to the CBR of reports, performs accreditation of liquidators and approves the interim liquidation balance sheets and the liquidation balance sheets. Consideration should be given to introducing mechanisms for the mutual recognition of decisions made in other jurisdiction in the context of liquidation or reorganization proceedings, subject to conditions such as non-discriminatory treatment of foreign creditors and reciprocity.17

Deposit Insurance

45. The legal framework for the deposit insurance scheme is well-structured and functions well, as attested by the experience during the crisis. The purpose of the DI scheme is clear and participation is mandatory for all banks that accept household deposits. The DIA has made pay-outs to insured depositors in more than fifty cases during the crisis. In practice, the DIA is able to pay the depositors promptly (within 7 to 14 days after bank closure, upon receipt of depositor’s claims). The coverage is 100 percent of total deposits per depositor with a bank, net of liabilities, up to a maximum of Rub 700,000, which works out to about 99 percent of household deposits by number, and about 70 percent by amount. The DIA, through subrogation, is given a high priority right over the assets of the failed bank as part of the pool of first priority creditors. Depositor preference is provided for under the DI law and the bank insolvency law. There is also the possibility of using the DI fund to assist in bank resolution, such as a P&A transaction. This is subject to important safeguards to ensure that it is least-cost when compared to the amount that would have been paid by the DIA in case of liquidation of the bank. In this context, the recent abolition of co-insurance was appropriate.

46. The DI scheme is funded ex ante—through an initial contribution from the government and quarterly premiums paid by the member banks. As of January 1, 2011, the fund had Rub 122.7 billion, which was equivalent to 4.4 percent of total covered deposits excluding Sberbank, or 1.8 percent including Sberbank. Adequate provisions are also in place for funding from the federal budget if there is a shortfall.

47. A few features of the DI Law warrant reconsideration. In addition to the enhanced information sharing with the CBR on problem banks discussed above, the authorities should reconsider the use of a ban on accepting household deposits in the event of non-compliance of a bank with particular ratios established by the CBR, for example bank profits. This may cause difficulties, for example at banks which make small losses for a period longer than six months but which otherwise would not fail and which do not represent a risk to depositor interests, and this may have unintended consequences on financial stability. While there is a moratorium on this provision currently in force, it expires in July 2011. It is noted that there is a draft law before the Duma to consider making the moratorium permanent. If the moratorium is not made permanent, it would be desirable to revise the Directive to allow more discretion to the CBR or the DIA to assess the underlying reasons for the non-compliance with the various financial ratios and take action commensurate with the risk to depositor interests.

Appendix I. 2008 FSAP Main Recommendations: Status of Implementation

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Appendix II. Russia: Risk Assessment Matrix

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Appendix III. Russia: Structure of the Financial System

46. The Russian financial system is relatively small compared to advanced economies and dominated by commercial banks. As of end-2010, total assets of financial institutions were equal to Rub 36 trillion, or around 80 percent of GDP (Table 6). Banks accounted for over 90 percent of the total assets.

Table 6.

Russia: Financial System Structure, 2007–10

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Source: Central Bank of Russia; Federal Service for Financial Markets; Expert RA

Majority government-owned.

Majority foreign-owned.

Data for 2010 are for June.

Data for 2010 are for September.

47. Despite ongoing gradual consolidation, the number of banks in Russia is large, but the system is dominated by a few state-owned banks. As of end-2010, there were 1,012 banks operating in Russia, a decline by 46 from January 1, 2010, and about 250 lower than five years earlier. This trend continued during the crisis, supported by official policies (the CBR’s minimum capital requirement for banks was raised to Rub 90 million in January 2010, and further increases to Rub 180 million in 2012 and Rub 300 million in 2015, are in store). But the recent consolidations have favored a few large state-owned banks. Although the share of state-owned banks in total deposits had been falling through most of the decade until 2007, the financial crisis turned this trend around as depositors fled for safety. At the end of 2010, the share of the state banks in total was 52 percent, up almost 3 percentage points from 2007.

48. The degree of interconnectedness of the Russian banking system with the rest of the world is relatively limited. Foreign banks account for only 17 percent of the Russian banking system in terms of assets. Russian banks are also not very active abroad, with a noticeable presence only in a few CIS countries. And even in those countries, Russia is a marginal source of funds, though the reported figures might understate the extent of flows going through international financial centers.18

49. The dominance of the state-owned banks weighs heavily on the competitive environment. Since the state banks are widely viewed as safer—as they benefit from implicit guarantees on their liabilities—private banks must pay a premium over state banks to attract deposits. The state banks also benefited from superior access to emergency liquidity support during the crisis. As a result of the increasingly strong position of the state banks in core banking segments, some private banks are trending towards niche markets and, possibly, greater risk-taking, while some foreign banks are leaving the market.

48. The government is moving to partially privatize state banks. As part of the government’s strategy for the development of the banking system through 2015, the authorities intend to divest part of state holdings in banks, while keeping the majority in the three largest. A 10 percent stake in VTB was already sold in 2011, and there are plans to divest another 25 percent in this bank. Also, in March 2011, the CBR got a clearance from the National Banking Council for the sale of a 7.58 percent stake in Sberbank (which is owned by the CBR) in 2011. Separately, the government is moving to reduce the number of state officials on the boards of state-owned companies, including banks. While these measures represent progress, it is unclear that they will imply significant changes for the structure of the banking market as long as the key banks remain viewed as benefiting from an implicit government guarantee.

49. The nonbank financial institutions represent a small fraction of the financial system. Insurance companies, private pension funds, and investment funds each account for less than 3 percent of the total financial system assets.19 Factors constraining the expansion of these institutions include lack of a broad investor base, relatively underdeveloped pension companies, and lack of comprehensive disclosure by issuers. A consolidation has taken place in the last few years, with the number of nonbank financial institutions gradually decreasing.

50. Insurance penetration remains very low. It amounts to around 1 percent of GDP, when the state compulsory health insurance is not considered, or only one-third of the average penetration of the OECD countries in 2009.20 As in many countries the motor insurance is the dominant business, accounting for around 50 percent of the industry. Property is the second line of business, with 25 percent of the total premium. Life business traditionally creating large reserves is practically non-existent, with less than 2 percent of the whole insurance business, compared to the world average of around 50 percent.

51. Russia has a mid-sized securities market. Market capitalization of MICEX—the largest exchange—is about 60 percent of GDP; however, equity penetration is reportedly low. MICEX Group and RTS, the two Russian exchanges, are now expected to conclude a binding merger agreement by May. MICEX is among the top 20 exchanges according to the World Federation of Exchanges. RTS’s largest market is Futures and Options RTS, on which equity repos are traded through a CCP. More than 50 percent of securities markets participants by volume and value are banks, who often use equities for collateral given the lack of long-term bonds. The top ten market participants account for almost 50 per cent of trading.

Appendix IV. Summary of Stress Testing Framework

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Prognoz is an external consulting company based in Perm. It has been working with the CBR to develop various macroeconomic and stress testing models.

Appendix V. Summary of Factual Update of Compliance with Code on Monetary Policy Transparency

In recent years, the CBR has taken numerous steps to enhance its transparency by addressing shortcomings noted by the assessment of observance with the IMF’s Code on Monetary Policy Transparency in 2003. The 2003 assessment asked for clarification of several aspects of disclosure policy, and action has been taken in each of these aspects. These include:

The institutional relationship between the CBR and the MoF in debt service transactions and for disclosure of conditions for paying interest on the MoF deposits in CBR

  • By law, the CBR serves as fiscal agent for the government, and manages the resources of the reserve fund and the national welfare fund in accordance with an established legal framework that is publicly available. The financial balances of the government in the CBR are published monthly on the CBR website, and other financial information, such as yields on international reserves and balances in the two sovereign wealth funds are presented in the annual report.

Procedures for the CBR’s participation in the secondary market

  • Open-market transactions are defined by law as the purchase or sale of treasury bills, government bonds, or securities, and the purchase or sale of other securities by decision of the CBR Board of Directors. The CBR may not buy primary issues of government securities. The annual report explains the procedures for participation in the secondary market. Information on the size of the CBR’s portfolio of government securities is published in various ways, including the balance sheet of the CBR and the annual report.

The CBR’s participation in financial institutions and all other organizations it controls

  • The CBR is not entitled to participate in credit institutions unless stipulated by law. The CBR may participate in the capital and activities of international organizations that promote monetary and banking co-operation, including between central banks of foreign states. Information on this participation is disclosed in the Annual Report.

Division of responsibilities between government and CBR on secondary market

  • The CBR is the agent for the government’s domestic bond placements. The rules governing these transactions as well as the associated statistics are posted on the CBR website.

Reasons for changes in monetary policy

  • The instruments of monetary policy are presented on the website of the CBR. Explanations of changes in monetary policy appear in many ways, including publication of minutes of meetings of the Board of Directors, the quarterly inflation report, the annual report, and speeches by the members of the Board of Directors. A consultative council on monetary and regulatory policy allows for a more open dialogue with the private sector.

Appendix VI. Basel Core Principles—Summary Assessment

A. Introduction and Methodology

52. A targeted assessment of the Basel Core Principles for Effective Banking Supervision (BCP) was conducted as part of the FSAP in April 2011. The assessment was performed by Jose Tuya, an external consultant, and was based on the 2006 BCP Methodology. The principles reviewed (5, 6, 7, 8, 9, 11, 12, 18, 23, and 24) covered the following risk areas: major acquisitions, capital adequacy, risk management process, credit risks and provisions, exposure to related parties, abuse of financial services, remedial actions and consolidated supervision. The assessment was based on information available as of June 2011.

B. Institutional and Market Structure—Overview

53. The CBR Law and the Law on Banks and Banking Activities (BL) assign responsibility for the licensing and supervision of banks to the CBR. The law empowers the CBR to grant banking licenses, approve permissible activities, issue regulations, supervise and enforce compliance with laws and regulations.

54. As part of the Development Strategy for the Banking Sector through 2015, the CBR is in the process of overhauling the supervisory, legal and operational landscape to enable the implementation of supervision by risk; including an enhancement in the scope of consolidated supervision. A published strategic plan to strengthen capital requirements and strengthen banking supervision is comprehensive and candid in recognizing shortcomings in the banking supervision framework. The strategy proposes to strengthen the CBR’s legal supervisory powers, and improve transparency, asset valuation, and corporate governance in banks. Adopting the proposed agenda and pending legislation will enhance the CBR’s ability to conduct more intensive supervision, identify risks, and take timely corrective action.

55. Current oversight of banking activities by the CBR relies on an integrated process combining offsite reviews with on-site inspections. In the course of supervision exercised by the CBR’s territorial offices, as well as by the CBR’s central staff with respect to systemically important financial institutions (SIFIs), frequent contact is maintained with bank management. Since the 2007 FSAP, the CBR has been working on legislative changes required to enable the CBR to appoint resident inspectors at SIFIs.

56. Legislation granting the CBR increased professional judgment to implement international best practices without always requiring a revision of existing legislation would enhance the safety and soundness of the banking system. Currently, the CBR is unable to require banks to implement best practices in many areas of corporate governance, and risk management or to perform consolidated supervision because of a lack of regulatory authority. Authority, within an approved legislative framework, to rely on professional judgment to implement best practices as prescribed by international standard setters, adjusted to the local market, is an essential element of supervision.

57. The Russian banking sector is dominated by state-owned banks. As of January 1, 2011 there were 1,012 banks operating in Russia, a decline of 46 from January 1, 2010. The number of banks is expected to decline further as a result of increased minimum capital requirements. As of January 2010, minimum capital was raised to RUB 90 million and will be raised to RUB 180 million on January 2012. The 50 largest banks control 80 percent of assets and the top 5 (all state-owned) control 48 percent.

58. The level of nonperforming loans and overdue loans has declined recently. As of January 1, 2011 banking system assets totaled 33,805 billion rubles and the capital adequacy level was 18.1 percent. Nonperforming loans (NPL), which are defined as loans classified in categories IV and V, amounted to 8.2 percent of total loans, a decline from 9.6 percent on January 1, 2010. Loan provisions cover 102 percent of NPLs but seem inadequate to cover possible losses in the remainder of the loan portfolio. Profitability has increased over the last year, with a return on equity moving from 5 percent in 2009 to 12.5 percent in 2010.

C. Preconditions for Effective Banking Supervision

59. The Russian economy is emerging from a sharp recession with lower growth potential, at least in the near-term. The economy contracted by almost 8 percent in 2009, reflecting plunging oil prices and a sharp reversal of capital inflows. A recovery started in mid-2009 led mostly by domestic consumption, which, in turn reflected a policy stimulus. The recovery remains modest, with growth projected at the 4-4½ percent range in 2010-12. While risks appear manageable in the short-run, the combination of a more modest pace of economic growth and abiding regulatory and governance shortcomings cloud the outlook for Russian banks.

60. Russian standards and the application of international accounting and auditing standards are improving but further measures are still required. Approval of new draft laws on consolidation, accounting and audit would benefit the effectiveness of supervision and regulation. In the meantime, progress has been made to converge Russian and international accounting standards, but important differences remain, for instance on revenue recognition, consolidation, employee benefit and pension accounting, impairment testing, the application of fair value accounting, and related party transaction disclosure requirements. Proposed laws on consolidation and accounting envisage the mandatory use of IFRS in the consolidated financial statements of banks, listed companies, insurers, pension funds and other public companies. All in all, a roadmap exists to enhance the quality of financial reporting in Russia. The CBR requires all banks to prepare supplementary IFRS financial statements, although there is no requirement to publish. Improving transparency and reliability of financial information is an important element of the strategy of the government to develop the financial system reporting and bring supervisory standards to meet international best practices. An extensive legislative agenda is being developed to achieve those goals.

61. The CBR’s response to the financial sector turmoil confirmed its ability to respond to the liquidity stresses in the system. The CBR has powers to require early remedial action, mandate change of management and intervene in a failed bank. A system for early intervention would enhance the CBR’s powers, as well as powers to take action against individual managers and directors. Since 2005, Russia has a Deposit Insurance Agency, which has improved the level of confidence of depositors in the system.

D. Main Findings

62. While there has been some improvement in compliance with the BCPs, the CBR’s enforcement powers remain limited in critical areas such as corporate governance and related party supervision and identification. The CBR Law and the BL do not give the CBR sufficient authority to implement many of the BCP requirements. The CBR lacks authority to set key requirements to prevent abuses arising from exposures to related parties and to address conflict of interest. The narrow definitions of related parties makes it difficult, if not impossible, to: (i) identify all the lending relationships of each related party with the bank, (ii) identify all of the bank’s affiliates to monitor transactions and measure risk to the bank’s financial condition from affiliates, and (iii) be able to capture all related risks under the lending limits as a percent of capital to limit concentrations. The CBR also lacks the authority to sanction individual Board members.

63. Proposed amendments to the CBR Law and the BL are pending at the Duma that (when approved) are expected to address deficiencies noted by the previous and the current BCP assessments concerning consolidated supervision and related party supervision. These legislative amendments would enhance the CBR’s ability to conduct consolidated supervision by amending the CBR Law to expand the CBR’s supervisory authority to regulate bank holding companies and to take supervisory actions to mitigate risks to the bank from affiliate operations, including the ability to limit or not allow them. Additionally, the amendments will expand the definition of control to capture not only direct ownership but also economic dependency.

64. In an effort to continue strengthening the supervisory framework while the legislative process grinds on, the CBR has been issuing letters of recommendations to banks for implementing international best practices on risk management and corporate governance. However, without the regulatory support, the CBR lacks enforcement authority over the recommendations made in such letters. For example, the CBR currently lacks regulatory power to require banks to implement the internal capital adequacy assessment process (ICAAP) under Pillar 2 of the Basel II framework, so the CBR is planning to issue a recommendation letter to banks in 2011 on implementing the Pillar 2 requirements. The CBR reports that through moral suasion, and the fact that the banks are aware that regulations are in process, it has been able to make progress in having banks implement some of the recommendations.

65. Progress is noticeable in the risk supervision practices applied by the CBR. Pursuant to Directive No. 2005-U, the assessments of banks’ financial condition is based on the analysis of quantitative indicators for the adequacy/quality of capital, assets, profitability and liquidity, and qualitative indicators characterizing the status of risk management systems, internal supervision systems, strategic risk management systems, and transparency of ownership structure. With a view to identifying problems in the operations of banks at an early stage, projected values for capital and profitability are reviewed using forecast values projected 12 months out, based on data for the two previous years and on trend models. Based on the results, banks are assigned to one of five risk categories.

66. The enforcement actions/tools provided by the CBR Law do not allow sufficient options or flexibility to address imprudent practices at an early stage. The CBR is provided with a number of supervisory tools to encourage banks to address violations or unsafe banking practices. However, the corrective actions set by Art. 74 of the CBR Law and Art. 20 of the BL have limitations. The CBR lacks enforcement authority to: 1. Penalize or otherwise sanction individual bank directors at open banks, 2. Suspend21 some or all of the shareholders from participation in the management of the credit organization, including their right to vote or accept dividends. 3. Establish limits on salaries and bonuses paid out to directors and key bank personnel. 4. Require additional capital levels to be maintained against the risks specific to the bank, except to impose higher CAR as sanction for violations of Federal law and limited to a six-month period. 5. Require prior consent of the supervisory authority to incur a major expenditure or take on a new liability.

67. The following summarizes the main findings of the detailed assessment of compliance with the BCP.

Objectives, independence, powers, transparency and cooperation
  • Licensing and structure (CP 5)

68. The CBR Law does not establish requirements for banks to seek prior CBR approval when making domestic investments in nonbank financial institutions. Foreign investments by Russian banks require prior approval by the CBR, when they lead to the establishment of a subsidiary abroad, or acquisition of the status of parent company of a non-resident entity. A domestic acquisition of shares in a bank above a 20 percent ownership requires prior CBR approval. Acquisitions of over one-percent share require ex-post notification to the CBR. There is also an aggregate 25-percent limit on investments in banks and other entities. However, bank investments in nonbank financial firms do not require prior CBR approval. The CBR relies on the 25 percent aggregate limit to control that risk. Licensing regulations should provide for an approval/notification process for bank investments in non-banking institutions. Without such requirement the CBR is not able to measure the possible impact of acquisitions on a bank’s condition or to determine whether the acquisition will affect the transparency of the bank’s organizational structure and affect the ability of the CBR to supervise it.

  • Prudential Regulations and Requirements (CPs 6, 7, 8, 9, 11, 12 and 18)

69. Capital adequacy rules generally meet Basel II, Pillar 1 guidelines but the CBR lacks a legal authority to implement the Pillar 2 component. The standardized, simplified approach is being implemented but the CBR lacks the regulatory authority to implement the supervisory review process prescribed by Pillar 2. Under Pillar 2 the CBR plans to issue recommendations in the second quarter of 2011 on minimum standards for organizing internal procedures for assessing the adequacy of internal capital to cover potential and assumed risks and to provide for future capital needs based on stress testing, strategic plans and risk evaluation. Without legislation specifically stating the authority of the CBR to stipulate standards for risks and capital management, the CBR may not oblige credit institutions to implement said recommendations, to develop internal capital adequacy assessment procedures and to implement them.

70. The existing risk management regulatory framework is complex and multi-faceted, but it does not provide the foundation necessary for full implementation of supervision by risk. The CBR has issued numerous regulations, instructions and recommendations which directly or indirectly support banks’ strengthening their internal risk management processes. The nature of existing regulations enable a compliance approach to supervision but limit the ability of the CBR to exercise professional judgment to rate the adequacy of risk management systems or Board of Director policies and governance. Addressing these deficiencies is an area where the CBR is focused but needs amendments to existing legislation.

71. The concept of related parties has been identified in the regulations and the CBR collects reports on related parties, but the definition of related parties is narrow and based on legal relationships. Legislation is being reviewed by the Duma that would expand the definition of related parties and allow the CBR to make judgments based on economic relationships or evidence of ability to influence decisions. The regulatory framework for related party transactions is also deficient in that it does not require that lending to related parties be on same terms and conditions as those generally offered to the public. The CBR has issued recommendations to banks on related party lending, however, they lack enforcement capacity.

72. The CBR is considering amending Regulation 254-P to address country and transfer risk. The current system does not impose country risk limits or provisions, except for operations with residents of offshore centers. The CBR has issued recommendations to credit organizations on the management of risk country based on the approaches specified in the BCBS document “Management of Banks’ International Lending (Country Risk Analysis and Country Exposure Measurement and Control)” and also includes BCP requirements.

73. The supervisors do not have the authority to directly share client information with other agencies and regulators, at home or abroad, which constitutes a serious deficiency. However, it can share such information with the FIU. Also, the CBR is aggressive and very successful in closing banks that are involved in money laundering.

  • Corrective and Remedial Powers of Supervisors (CP 23)

74. The legal regime for corrective and remedial actions is clearly addressed in the regulations. Enforcement powers are broad and clearly spelled out. The remedial powers of the CBR are deficient in some key areas, such as the inability to sanction Board members and to prevent transactions between the bank and its affiliates.

  • Consolidated supervision (CP 24)

75. An inability to limit transactions between affiliates, and request information from holding companies limits the ability to conduct consolidated supervision. Legislation is pending with the Duma to amend the CBR Law and the BL that will extend the supervisory authority of the CBR to cover bank holding companies. The amendments will also expand enforcement authority over banking groups and bank holding companies by granting the CBR authority to limit transactions between affiliates. The CBR will be able to dictate the types of consolidated information that bank holding companies will need to provide. The CBR actively collaborates with foreign supervisors and the amendments will enable the CBR to exchange customer-specific information. Finally, the definition of direct and indirect influence is expanded. Absent such powers, the ability of the CBR to monitor transactions between affiliates is severely hampered, increasing risks that losses are hidden through affiliate operations or off-balance sheet transfers. In defining bank holding company the EU standard (to be a bank holding company, over 40 percent of the company’s activities must be in banking) will be applied. However, in Russia that definition may not be adequate as a large banking group would not be included. The definition should be reviewed and adjusted to the Russian market and ensure that all SIFIs are covered.

Table 7.

Summary of Compliance with the Basel Core Principles

Only principles 5, 6, 7, 8, 9, 11, 12, 18, 23 and 24 have been reassessed

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Table 8.

Recommended Action Plan to Improve Compliance of the Basel Core Principles

Only principles 5, 6, 7, 8, 9, 11, 12, 18, 23 and 24 have been reassessed. The recommended action for the other principles is carried over from the 2007 BCP assessment

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E. Authorities’ Response

76. The authorities were in general agreement with the conclusions and observations in this assessment. Written comments provided have been incorporated in the report.

Appendix VII. IOSCO Core Principles—Summary Assessment

A. Introduction and Methodology

77. An assessment of the level of implementation of the IOSCO Principles in the Russian securities market was conducted as part of the FSAP in April 2011. The assessment was performed by Andrea M. Corcoran, an external consultant, and was based on the Objectives and Principles of Securities Regulation of 1998 (IOSCO Principles) and the related Assessment Methodology adopted in 2003 and reissued in 2008. The assessment was based on information available as of June 2011.

B. Institutional and Market Structure—Overview

78. The FSFM is the primary authority responsible for the supervision of securities markets in Russia. FSFM is the sole regulator of: solo securities market professionals (brokers, dealers, portfolio managers, and other intermediaries); issuers; collective investments (CIS); CIS management companies and special custodians; exchanges and market infrastructure, such as clearing and settlement arrangements, depositories, and registrars for securities corporate bonds, and other products, including futures. However, the entity within the MICEX Group market complex, which trades foreign currency, is overseen by the Central Bank of Russia (CBR) as is the government bond market. FSFM has certain company law responsibilities, in particular with respect to tender offers, mergers and other combinations. FSFM oversees the public issuance of securities and registers all corporate bonds and equity offers, except for certain short term debt, described as commercial paper. Many securities transactions, however, are conducted within banking structures as opposed to through separate securities broker subsidiaries. FSFM is the regulator for certain of the securities functions performed within banks, such as special custodial functions, brokerage, or asset management. However, FSFM is not the regulator of pooled investment funds offered by banks to their customers (bank managed mutual funds or BMMFs), though it may authorize the management companies. The assets under management in BMMFs are declining and overall, such bank funds are relatively small. The FSFM regulates the contents of disclosures by public companies and non-bank financial institutions engaged in capital markets transactions (professional market participants). The Ministry of Finance (MoF) is responsible for establishing accounting and auditing standards. As of March 4, 2011, FSFM assumed the functions related to insurance supervision. The alignment of responsibilities, leadership of the combined agency, and initial proposals for the distribution of powers and authorities were announced in April. These announcements would give additional authority to the MoF with respect to the issuance of regulations related to prudential matters, such as capital, but preserved the assignment of supervisory and operational functions in that area to the FSFM.

79. FSFM has full licensing authority with respect to the professional market participants subject to its jurisdiction, and can grant, condition, suspend, revoke, or deny licenses, without approval by any other authority within the government. FSFM has administrative powers, including the power to issue secondary legislation or normative decrees, as specifically spelled out in primary legislation, the power to provide interpretations and guidance, and the power to impose monetary sanctions and to compel information from any person. FSFM has substantial authority under all of the laws referenced above and other laws that have been adopted and/or are pending such as the draft law, known as “On Amendments to the Securities Law and to Certain Legislative Acts of the Russian Federation (Prudential Supervision Law).

80. The securities market has grown and become more sophisticated over the years. As in other markets, there was a decline in volume and value in 2008, with recovery in 2009. Although the numbers are volatile, Russia’s equity markets are about mid-size among world markets. As of 2009, OECD reports indicate that Russia’s market capitalization as a percentage of GDP was at an approximate par with several developed countries, such as France, the Netherlands, and Japan, and above that of Germany. The numbers, however, appear to change radically, year on year, and market uncertainty, from global events, elections or other matters, can lead to dramatic changes. There is also some significant cross border foreign direct investment.

81. The number of market participants continues to grow. Nonetheless, less than one percent of the economically active population has individual brokerage accounts and less than 2 percent of GDP is invested in pension and other long term investment vehicles. Private pension funds (non-state funds), which are regulated by FSFM declined in number from 290 in 2005 to 150 in 2010. The collective investment industry is predominantly made up of unit investment trusts. Reports for 2010 disclose about US$41 billion AUM in 1,461 funds distributed among three categories—open end, closed end, and interval. The largest number of funds, constituting more than 33 percent of the dollar amount invested, are real estate funds; these are mostly captive closed end funds used to finance commercial property development, that are disappearing due to the recent withdrawal of a tax benefit. Although there has been an attempt to develop a longer term bond market, most activity is in the shorter range (one to two year durations) and during the height of the crisis some issuers experienced debt servicing issues. In 2010, there were 364 issuers and 663 issues in the corporate bond market. There are 1,800 authorized professional market participants (that is, brokers, dealers, asset managers, special custodians and depositories) distributed within the Russian Federation.

82. The Russian securities markets have been volatile in the last five years, reflecting the inflow and outflow of capital and the crisis. Foreign investment banks report that US$20 billion of foreign investment exited the markets in the first quarter of 2011. This volatility is continuing, and is reflected in the changes in market capitalization in relation to GDP. A large percentage of the securities traded by volume and value are carried out by banks for their own account, as they use equities for collateral, owing to a lack of other alternatives such as long term bonds. The top ten market participants account for almost 50 percent of trading and, in consequence, what impacts banks as large participants directly affects the securities markets and vice versa. RTS, in contrast, noted during interviews that much of its volume, which includes direct access trading, is now retail-oriented.

83. While overall the markets are growing, there are concerns that capital formation is moving offshore and consolidation is occurring. For example, Valars Group, one of Russia’s largest grain trading companies, was planning an IPO on the Warsaw Stock Exchange in May. Consolidation is also occurring, some of it prompted by purchase of private by government-controlled entities; for example Sberbank, recently purchased 80 percent of Troika Dialog, the oldest and largest private investment bank in Russia. At the same time, on November 27, 2010, the Russian Government issued Resolution No. 2101-re-endorsing the Projected Plan/Program for Privatization of Federal Property and Guidelines for Privatization of Federal Property for 2011–2013 (the “Privatization Program”), under which multiple privatizations, including that of a portion of Sberbank are expected to occur. These steps, coupled with other structural changes and modernization of the regulatory system, may strengthen the securities markets if they ensure fair pricing and proper disclosure and shareholder protections.

84. MICEX Group and RTS, the two main Russian exchanges, executed a binding merger agreement on June 29, 2011, following an expression of intent in March. The two entities expect to conclude their combination by year-end. The total value of the combined deal is about US$5 billion, with the majority ownership of 75 percent to be in the shareholders of MICEX. The new exchange will be 50 percent owned by state-controlled institutions, including CBR, Sberbank, VTB and Gazprom, though CBR indicated that it might reduce its stake prior to the deal’s conclusion. The total market capitalization for all equities traded on both MICEX and RTS was about US$1 trillion as of January 2011. MICEX is listed as among the top 20 exchanges per the World Federation of Exchanges. RTS’s largest market is FORTS, or Futures and Options RTS, which settles through a central counterparty (CCP).

85. There is a large number of registered public companies, but only a tiny fraction (less than one percent) is listed on the exchanges. Of these listed companies, the 10 largest issues account for 56.8 percent of market value and over 80 percent of market activity; the 30 largest account for 81.4 percent of market capitalization. Exchanges can admit companies to trading without listing, and also without authorization of the issuer. In 2010, according to FSFM statistics, there were 499 issuers admitted to trading on organized markets.

C. Preconditions for Effective Securities Regulation

86. Securities exchanges and capital markets are contractual and rules-driven ventures. Although some of the rules are embedded in exchange trading platforms, the integrity and equity of the application of the rules and of the conduct of public offerings are critical to maintaining market confidence. Similarly, in that securities are a legally created negotiable form of property interest, the integrity of how those interests are created, held and transferred is critical to their intrinsic value as is the governance structure of the issuers. Russia has invested huge efforts, over a lengthy period, to try to improve the legal and operational framework within which its markets operate. Nonetheless, there remains significant uncertainty about the integrity of the legal system that supports contracts and market rules and as to the expertise of the courts in financial matters. Currently a number of initiatives are underway that would help address these “rule of law”-related issues, including: improved accounting standards, provisions for finality of settlement, better rules of administration, initiatives that move toward the creation of a central depository, enhanced ownership and control reporting, provisions for an investor compensation fund, more intensive monitoring of market abuses and improved laws to address these, better means to enforce the proper conduct of business with retail market participants, and exploration of ways to enhance the availability and fairness of alternative dispute resolution regimes. Such improvements should be aggressively pursued.

D. Main Findings

(i) Principles 1–5, Principles relating to the Regulator: Improvements have been made in certain of the powers and authorities assigned to the regulator and certain regulatory as opposed to supervisory powers and authorities have been reassigned. At the present time, FSFM has the capacity to issue regulations in its remaining areas of competence, subject only to the condition of proper legal structure under the Federal Constitution, in consultation with other governmental entities as appropriate. Prior to the recent changes the FSFM operated substantially on a day-to-day basis, without political interference. Nonetheless, during the transitional period of uncertainty, there was a lack of transparency about ongoing legal initiatives that raised some concerns about whether the impending changes could adversely affect this existing level of regulatory independence. For example, the new alignment, as projected, will explicitly require MoF approval for certain matters. Although such consultation should not be a factor in day-to-day operations and supervision, the actual operational procedures have yet to be clarified.

(ii) Principles 6–7, Principles relating to self-regulation: Although the Russian SROs have the ability to make and enforce binding rules on their members, membership is voluntary and only a third of professional market participants belong. If the FSFM obtains the authority sought under the Prudential Supervision Law, currently in its second reading before the Duma, professional market participants that deal with the retail public will be required to belong to an SRO subject to FSFM oversight. FSFM will be able to use that SRO to improve the development and enforcement of conduct of business and customer fairness requirements and to institute more expeditious dispute resolution and mediation processes. Exchanges and other market operators are required to enforce their rules but are not regarded as self-regulatory organizations under Russian law.

(iii) Principles 8–10, Principles relating to enforcement of securities regulation. New rules to define the offenses of market abuse and insider trading, to require the maintenance of insider lists and to improve the ability to investigate violations against third parties as well as licensees are achievements as is the institution of new real-time trade monitoring capability within the FSFM. However, the sufficiency of these changes to detect and deter misconduct should be tested as they are implemented and cases are brought where warranted. Further, the ability to obtain general bank records for natural persons to conduct securities regulation and to investigate any securities law violation remains an issue. To the extent legal changes are needed to remedy this, they should be aggressively pursued.

(iv) Principles 11–13, Principles for cooperation in regulation: The powers to obtain information and to share it have been augmented since the prior report. Further improvements are pending in consolidated supervision/banking legislation which will remove certain remaining limitations, facilitating intergovernmental communication for financial market oversight. The FSFM should aggressively pursue becoming a full signatory to the IOSCO Multi-lateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information (MMoU). It should also seek to document its cooperative and investigative information sharing arrangements with the CBR and other relevant authorities and to keep relevant performance statistics. (See also Principles 24 and 29.)

(v) Principles 14–16, Principles for Issuers: New disclosure rules requiring material event reporting and ownership and control reporting, which attempt to improve information on indirect and connected ownership and to guide continuous disclosure have been adopted, as has the requirement for preparers and management to be liable for the accuracy of disclosure. Pending legislation would treat Directors as fiduciaries and a new Presidential Decree requires Ministers to step down from the supervisory boards of government-sponsored enterprises. These are sound improvements, which need some testing in practice. Regulatory vigilance in enforcing these requirements should determine whether the requirements are increasing sufficiently the transparency of ownership and related transactions.

(vi) Principles 17–20, Principles for collective investment schemes: The FSFM has legislation that recognizes that CIS are vehicles for retail investment. In this regard it provides a framework of substantial protections. It is now in the course of adding some modernizations, which include more flexibility for sophisticated investors and broader use of derivatives under EU-like requirements for diversification and leverage. FSFM should take steps to ensure that surveillance programs keep abreast of the growth of products and structures in this market. All marketing of mutual funds should be covered by securities requirements.

(vii) Principles 21–24, Principles for market intermediaries; new capital requirements are being phased in albeit planned increases for brokers due in July were cancelled. FSFM is also adding new measures to determine the operational capacity of intermediaries as part of the licensing qualification process and considering an early warning process. These initiatives should be pursued. The legislative ability to appoint an authorized representative from FSFM to operate a professional market participant for which the license has been suspended or withdrawn, or to operate a provisional administration, to manage and/or wind down a distressed firm and to require enhanced risk management and other prudential measures are pending. The FSFM should take into consideration its experience with intermediaries in using these new supervisory powers and should move to update its existing periodic inspections regime/algorithm by adding some risk-based analyses and random checks for records, capital and other compliance requirements. The operation of the new alignment of functions should be kept under review. Prompt steps also should be taken to put into place the authority to create an investor compensation fund and to develop appropriate contingency plans.

(viii) Principles 25–30, Principles for the Secondary Market. New technical capacity to undertake real time surveillance of trading was obtained last year. Experience with the alerts generated through this surveillance facility, and the reporting by exchanges of defined non-standard transactions (potential market abuses), should enable the FSFM to better detect and deter market misconduct and to investigate/and or report suspicious transactions. Ongoing processes to revisit the listing, admission to trading and market structure should be continued to improve price reporting. As measures are adopted to provide the legal underpinning for a central counterparty and rationalization of the securities settlement system, the FSFM should ensure that its own regulatory methods and programs are adjusted so as to supervise the new operations in an effective, comprehensive way including back-testing of the extent to which margin/default coverage is achieved. Contingency and cooperative information sharing arrangements (or a crisis management plan, which addresses various types of crises) should be in place to address market disruption or failure of an intermediary.

Table 9.

Russia: Summary Implementation of the IOSCO Principles

If material changes result from the realignment of powers and authorities to accommodate the transfer of insurance functions and the change in leadership of the FSFM, or otherwise, the rating contained herein may require further assessment.

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