Russian Federation: Financial Sector Assessment Program
Detailed Assessment of Observance Basel Core Principles for Effective Banking Supervision (BCP)
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International Monetary Fund. European Dept.
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This paper evaluates observance of the Basel Core Principles for Effective Banking Supervision in the Russian Federation. The legal framework currently in place provides the Central Bank of Russia (CBR) with necessary powers and responsibilities. The CBR may authorize banks, conduct ongoing supervision, oversee compliance with laws, and undertake corrective action to address safety and soundness. Major new reforms increase many aspects of the CBR’s duties and powers, although implementation has not yet been tested in all cases. The Russian licensing regime for banks appears exhaustive. However, the legal regime for major acquisitions was found to be weak.

Abstract

This paper evaluates observance of the Basel Core Principles for Effective Banking Supervision in the Russian Federation. The legal framework currently in place provides the Central Bank of Russia (CBR) with necessary powers and responsibilities. The CBR may authorize banks, conduct ongoing supervision, oversee compliance with laws, and undertake corrective action to address safety and soundness. Major new reforms increase many aspects of the CBR’s duties and powers, although implementation has not yet been tested in all cases. The Russian licensing regime for banks appears exhaustive. However, the legal regime for major acquisitions was found to be weak.

Introduction1

The establishment of the Central Bank of the Russian Federation (CBR) as a unified or “Mega Regulator” in 2013 is an emblem of the far reaching changes to the legal and supervisory landscape in recent years. In addition to the new regulatory architecture, which has itself facilitated greater cross-sectoral oversight in the financial system, a number of previous limitations have been largely or wholly addressed. These changes have permitted the CBR to make substantive progress which needs to be recognized. Past impediments to cooperation and collaboration based on supervisory information exchange (domestic and cross border) have been eliminated; the scope of application of supervision is enhanced as revisions to the perimeter of regulation, based on definition of banking group and bank holding company, are aligned with international standards, thus facilitating the practice of consolidated supervision; and the CBR is now granted the power to impose standards for the risk management (RM) and internal controls of banks and banking groups.

The level of compliance with the Basel Core Principles (BCP) reflects the transitional nature of the supervisory practices in Russia at the time of the assessment. The present report seeks to reflect the considerable regulatory and organizational reforms that the CBR has instituted in the past few years. In considering the current assessment of the BCP, however, it is important to understand that a number of important changes are extremely recent and are at very early stages of being implemented and embedded in revised practices. Track record is not available yet in a number of fields.

The CBR is in the course of developing and enhancing its Risk Based Approach to supervision. The risk differentiation of the Russian banking system into different groups, including the establishment of a dedicated division to supervision of systemically important banks, had already been put into place, in the past few years, illustrating the CBR’s increasing risk focus. Utilizing its new powers, though, the CBR has now issued some landmark regulations that focus on the quality of RM and governance within firms. The new regulation will introduce, for example, important new dimensions in risk supervision, for example scrutiny of risk appetite in firms. The active supervision and assessment of the impact of this new regulation process is still a year away, however.

The regulatory approach in the Russian Federation is highly rules based and this presents some specific challenges to an effective risk based supervisory regime. The first challenge is moving the supervisory mindset and process from one that primarily focuses on finding and eliminating violations and deficiencies to one that also incorporates a forward looking, early intervention approach that seeks to avoid violations emerging. Although recent legislative changes support the CBR’s risk focus, it may be the case that in some instances the CBR will only be able to recommend that firms change their course of action in order to avoid future deficiencies. The CBR is encouraged to monitor such situations with a view to identifying possible future legislative amendments that will put early intervention actions onto a sounder footing. A second challenge in a rules based system is ensuring that the rules remain relevant and appropriate to the prevailing risk environment. While the CBR can be complimented on a very nimble approach in adapting and modifying its regulations, the transition to more risk based practices is a good moment to review the existing regulatory canon for internal consistency and to eliminate elements that may be outdated or overlapping.

Supervision and Anti-Money Laundering and/Countering Terrorist Financing (AML/CFT) regulations have been improved. Money laundering/terrorist financing are still a matter of national concern. In that context, the CBR has made significant efforts to ensure proper implantation of integrity standards in the banking industry. The CBR supervision of AML/CFT issues is intensive and intrusive. The most common deficiencies identified by CBR Chief inspectorate are in the following areas (i) Know your Customer/Customer Due Diligence (KYC/CDD); (ii) Identification of the Ultimate Beneficial Owner (UBO); (iii) frequency in updating customer’s information; (iv) timely Suspicious Transaction Reports (STRs) reporting to the FIU; AML/CFT internal control rules; and (v) AML training to employees. The CBR has also a good track record in enforcing AML/CFT requirements. Lack of compliance with money laundering standards is the most frequent reason for sanctions, including revocation of licenses. The CBR has also raised awareness in the market on AML/CFT issues. Workshops devoted to the practical application of the AML/CFT Law have been organized with the participation of representatives of professional associations. Lastly, cooperation with other domestic relevant agencies has proved to be successful.

Effective communication and flow of information has been improving but some limitations still apply. Some elements of the BCP are not met because there are no requirements for banks or professional service providers, such as external auditors or other experts used by the CBR, to notify the CBR in advance, or at all, of material information that is relevant to the soundness and stability of the supervised bank. In the case of a professional third party, such as an auditor, if information were disclosed there would be no legal protection available for the CBR or the professional service provider. The onus is therefore on the CBR to raise the relevant question at the relevant moment to uncover the information that it needs. The balance of responsibility needs to be shared more evenly with the banks and the external auditors (or professional service providers who may in future carry out inspections on behalf of the CBR). Moreover, there needs to be a clear expectation that the bank and any auditor or professional understands that there is a responsibility to provide the CBR with any relevant information in a timely manner, even if information pertains to a topic that was not specifically defined within the scope of an inspection mandate. Legal protections also need to be put in place as necessary.

Despite legislative improvements there are several areas where further amendments are needed. The key areas are noted below.

The legal framework governing the CBR’s relationship and interactions with the external audit profession is materially deficient. It is important that the supervisor should have powers to reject or rescind the appointment of an external auditor who has inadequate independence or experience or who does not meet professional standards; to ensure rotation of the external auditor of a bank or banking group; and to meet with the audit firm to discuss matters pertaining to a supervised institution.

The legal regime applicable to Related Parties (RPs) has been streamlined, particularly since 2015 but deficiencies remain. From a positive perspective, the law captures not only transactions with persons connected to each other in one way or another but also a person or a group of people connected to the bank. However, the regulatory framework does not require that lending to affiliates be on same terms and conditions as those generally offered to the public. The CBR made recommendations in that regard but they are not binding and thus not enforceable. Additionally, the CBR lacks authority to impose penalties to directors who personally benefited from these favorable conditions. Further, in the appreciation of connectedness, the concept of economic linkages has been introduced in the law but it will not be implemented before 2017.

There are no specific requirements for management of country risk and transfer risk with the exception of exposures to borrowers residing in off-shores centers. As a result, minimum requirements for risk policies, processes and limits need to be substantially strengthened particularly in a volatile environment. In the area of major acquisition, the CBL does not establish requirements for banks to seek prior CBR approval when making domestic investments in nonbank institutions. As a result, the CBR is not in a position to measure possible impacts of acquisitions on a bank’s condition or if the acquisition will not affect transparency of bank’s organizational structures and the ability of the CBR to supervise on a consolidated basis.

In the area of operational risks (OR), the corpus of norms, while detailed, is made essentially by recommendations from the CBR. The Ordinance on ICAAP obliges banks to have RM strategies including for OR but this new regime has not been implemented yet. Reporting mechanisms will also need to be improved. Further, the CBR does not have the authority to establish outsourcing requirements for credit organizations.

The CBR has multiple objectives established in law, and it is important to ensure clarity of purpose for the supervisory function. Although the decision making process of the CBR is well designed to ensure a good focus on prudential issues, it is not transparent to an external observer whether or not the CBR’s decisions might be influenced by its institutional objective for development of the financial sector and also its significant stake in the most systemic banking group of the Russian Federation. For supervisory reputational purposes alone, the authorities could consider a different holding structure for the government interests that do not involve the CBR.

With respect to combating money laundering/terrorist financing, the CBR has made important progress but further improvements are desirable. Banks are subject to close scrutiny and the CBR has been forceful against banks and their management which committed grave violations of the AML regime. There are a few areas where improvements could be made; these include the promotion of a more risk based approach to ML/TF issues in both the industry and the CBR; the use of more proportionality when enforcing the law, the need to strengthen the understanding of ML/TF risks in banks, especially in relation to UBO and politically exposed persons (PEPs) and the inclusion of ML/TF risks into the scope of duties to be performed by external auditors.

Methodology

1. It should be noted that the ratings assigned during this assessment are not directly comparable to previous assessments. The current assessment of the CBR was against the BCP methodology issued by the Basel Committee on Banking Supervision (BCBS) in September 2012. The authorities have opted to be assessed on the essential criteria. The last complete BCP assessment in the Russian Federation was conducted in 2007 and a targeted assessment of the BCPs examined 10 of the core principles (CPs) in the course of the 2011 Financial Sector Assessment Program (FSAP) Stability Module. While grades could be compared between the full BCP assessment of 2007 and the targeted assessment of 2011, the revision to the BCP methodology in 2012 has introduced some substantive changes.

2. In the 2012 revision of the CPs, the BCBS sought to reflect the lessons from the recent financial sector crisis, to raise the bar for sound supervision reflecting emerging supervisory best practices. New principles have been added to the methodology along with new essential criteria (EC) for each principle that provide more detail. Altogether, the revised CPs now contain 247 separate essential and also additional criteria against which a supervisory agency may now be assessed. In particular, the revised BCPs strengthen the requirements for supervisors, the approaches to supervision and supervisors’ expectations of banks. While the BCP set out the powers that supervisors should have to address safety and soundness concerns, there is a heightened focus on the actual use of the powers, in a forward-looking approach through early intervention.

3. The assessment team reviewed the framework of laws, rules, and guidance and held extensive meetings with authorities and market participants. The assessment team met officials of CBR, and additional meetings were held with the Ministry of Finance (MoF), auditing firms, and banking sector participants. The authorities provided a comprehensive self-assessment of the CPs, as well as detailed responses to additional questionnaires, and facilitated access to staff and to supervisory documents and files on a confidential basis. Owing to time constraints it was not possible to make as full a study of the documents as the assessors would have wished but the authorities did everything that was possible to facilitate access.

4. The team appreciated the very high quality of cooperation received from the authorities. The team extends its warm thanks to staff of the authorities, who provided excellent cooperation, including extensive provision of documentation and technical support, at a time when many other initiatives related to domestic concerns and international regulatory initiatives were in progress.

5. The standards were evaluated in the context of the sophistication and complexity of the financial system of the Russian Federation. The CPs must be capable of application to a wide range of jurisdictions whose banking sectors will inevitably include a broad spectrum of banks. To accommodate this breadth of application, a proportionate approach is adopted within the CP, both in terms of the expectations on supervisors for the discharge of their own functions and in terms of the standards that supervisors impose on banks. An assessment of a country against the CPs must, therefore, recognize that its supervisory practices should be commensurate with the complexity, interconnectedness, size, and risk profile and cross-border operation of the banks being supervised. In other words, the assessment must consider the context in which the supervisory practices are applied. The concept of proportionality underpins all assessment criteria. For these reasons, an assessment of one jurisdiction will not be directly comparable to that of another.

6. An assessment of compliance with the BCPs is not, and is not intended to be, an exact science. Reaching conclusions required judgments by the assessment team. Banking systems differ from one country to another, as do their domestic circumstances. Furthermore, banking activities are undergoing rapid change after the crisis, prompting the evolution of thinking on, and practices for, supervision. Nevertheless, by adhering to a common, agreed methodology, the assessment should provide the Russian authorities with an internationally consistent measure of the quality of their banking supervision in relation to the revised CPs, which are internationally acknowledged as minimum standards.

Institutional and Market Structure—Overview

7. Banking represents the most significant sector of the Russian financial system, although the role of the nonbank sector has been steadily growing. Bank assets amounted to 103 percent of GDP at end-2015. Pension funds, insurance, and mutual funds have assets of 3.6, 2.0, and 3.3 percent of GDP, respectively. The financial system also includes microfinance organizations. Russia has the lowest ratio of bank credit-to-GDP among a group of comparator countries composed of Brazil, India, China, and South Africa and it tends to show slightly lower depth in its financial markets. However, Russia shows much greater financial development, reflecting higher access and efficiency than these comparator countries and Russia’s overall financial development is higher than the EM average.

8. The banking system is relatively concentrated at the top but is otherwise fragmented. In its relatively short history, the banking system has experienced a strong concentration phase, going from 1,311 banks in 2001 to less than half that number by end-2015. The largest 20 banks account for three quarters of system assets. Government-related banks, dominated by Sberbank and VTB Group, accounted for 60 percent of system assets at end-2015. The top 10 private universal banks hold 16 percent of system assets, foreign-owned banks 13 percent, and 11 percent is in specialized and small banks. Lending is also highly concentrated: the top 10 banks by assets accounted for about 70 percent of lending as of January 2016. Notably, Sberbank and VTB Group together account for a similar share as the remaining 700+ banks. Many of the small banks operate in mono-industrial-cities and are often systemically important for their respective regions.

9. Despite market stresses since 2013, the authorities’ policy response has supported the banks’ soundness indicators. Given the slump in oil prices, the slowdown in global growth and the sanctions the Russian economy experienced challenging times. In response, CBR developed regulatory forbearance measures that positively helped the banking sector and that may mean that indicators have been overstated since end-2014. However, the authorities have been steadily withdrawing these measures with the exception of the FX refinancing operations. The capital adequacy ratio of banks remained broadly unchanged since March 2015 at about 13 percent, in part reflecting a recapitalization program, before declining to about 12 percent in early 2016 as regulatory forbearance was lifted. Capital issuance increased over 2015, offsetting the decline in retained earnings. Nonperforming loans (NPLs) have increased, but remain below their 2008 peak. Liquidity has strengthened, with the loan-to-deposit ratio decreasing to 115 percent by end-2015 (returning to the level of mid-2013), reflecting increased retail deposits and the use of the reserve fund to finance the budget deficit.

10. Profitability has declined markedly, over the past few years, reflecting demanding market conditions. Bank profitability has dropped markedly—with the return on assets reaching 0.3 percent at end-2015. The main reasons for the drop in profits are credit losses and declining net interest income. Banks’ profitability is generated largely through fees, other non-lending fees and spreads.

11. Although representing a smaller segment of the financial sector than the banks, an important role is played by nonbank financial institutions (NFIs). This sector primarily includes insurance companies, private pension funds, and management companies of various funds.

Structure of Nonbank Financial Organizations as of September 30, 2015

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Source: CBR.

12. Since 2014, CBR has become the “mega regulator” of financial markets, absorbing regulatory and supervisory powers for all categories of financial institutions. CBR took the powers of the former Federal Service on Financial Markets and was given an explicit financial stability mandate. Basel III capital ratios entered into force in 2013 and the Basel Liquidity Coverage Ratio is being phased in according to the Basel timetable for the systemically important banks and is on target to meet the 100 percent compliance on January 2019 as required for Basel compliance.

Preconditions for Effective Banking Supervision

Sound and Sustainable Macroeconomic and Financial Sector Policies

13. Russia’s institutional framework supporting the conduct of macroeconomic policy is led by CBR and the MoF. Monetary policy is conducted by CBR and budgetary policy is conducted within a fiscal framework managed by the MoF. In mid-November 2014, CBR switched to a floating exchange rate regime.

14. CBR is managing ongoing policy normalization. Since the end of January 2015, CBR started unwinding the emergency rate hike to 17 percent set in December 2014. The current policy rate is set at 11 percent and inflation is expected to continue to decrease. The current inflation target is set at 4 percent, to be achieved by end-2017. In 2015 alone, the Russian currency lost almost 20 percent of its value vis-à-vis the U.S. dollar.

15. The MoF announced the review of the Federal budget for 2016. The government is considering reduction of budget expenditures compared to figures set in the budget law for 2016. Also government is looking to sell some of its shares in state-owned companies. The 2015 budget deficit required the use of the Reserve Fund and GDP growth in 2016 is expected to be negative again.2 Russia’s government debt remains low, around 20 percent of GDP.

The Framework for Financial Stability Policy Formulation

16. Authorities have strengthened the institutional framework for financial stability. The inter-agency National Council on Ensuring Financial Stability (FSC) was created as an advisory body for the different authorities to exchange views and coordinate on financial stability matters. The FSC has the authority to provide recommendations and request information. Member agencies have to comply or explain. The FSC’s composition is approved by the government. Currently, the FSC is headed by the First Deputy Chairman of the Government of the Russian Federation and comprises the Advisor to the President of the Russian Federation, the Governor and four First Deputy Governors of CBR (monetary policy, financial stability, banking regulation and supervision, financial market regulation and supervision), the Minister of Finance and Deputy Minister of Finance of the Russian Federation, the Minister and Deputy Minister of Economic Development of the Russian Federation, the Managing Director of the State Corporation Deposit Insurance Agency.

17. CBR has used different tools for macroprudential policy but does not have an ex-ante toolkit.3 In the past, CBR has used macroprudential instruments in an ad hoc manner with no formal triggers.

A Well-Developed Public Infrastructure

System of business laws

18. Business laws in Russia are based on Chapter 4 of the Civil Code, the 208-FZ Federal Law on Joint Stock Companies and the 14-FZ Law on Limited Liabilities Companies. The latest major amendments to business legislation were introduced with Federal Law 99-FZ and Federal Law 210-FZ, from 2014 and 2015 respectively, which changed the types of companies allowed in the Russian Federation, increased the protection of investors holding Russian local securities and improved the conditions for participation in corporate actions (for example by allowing e-voting and e-proxy voting). The Insolvency Law was amended in 2014 to incorporate changes in the insolvency procedures for credit institutions. Other important Federal Laws to register and conduct business are those related to state registration of legal entities and individual entrepreneurs, fundamental principles of Russian legislation on notaries, trade, consumer rights protection and combating money laundering and the financing of terrorism (AML/CFT), as well as the Land code, the Labor Code and the Tax code. One of the most significant changes in these laws was the introduction of the requirement for financial institutions in 2013 to identify their clients, clients’ representatives and beneficial owners and to collect information on their reputation and business purposes. The definition of the “beneficial owner” was also clarified and it currently is consistent with the Financial Action Task Force (FATF) Forty Recommendations Glossary.

Efficient and independent judiciary

19. The judicial power is formally independent from the legislative and the executive powers. The judiciary is primarily regulated by the Constitution of Russia, the Code of Criminal Procedure, the Code of Civil Procedure, the Code of Administrative Procedure, the Code of Arbitration Procedure and the 1996 Federal Constitutional Law on the Judicial System of the Russian Federation. According to the Constitution of the Russian Federation, the judiciary should protect all men (and women) and citizen’s rights and freedoms. In addition, the Constitution confirms that courts alone can administer justice and requires that all judges shall be independent and obey only the Constitution and the law. The courts are financed solely from the federal budget in order to ensure a complete and independent administration of justice. The judicial power is exercised by means of constitutional, civil, arbitration, administrative and criminal proceedings. As a general rule, examination of cases in all courts is open. Judges adopt the Code of Judicial Ethics which asserts the need to guarantee everyone’s right to a fair consideration of a case by a competent, independent and impartial court.

20. There have been changes to the judicial system. In February 2014, the Supreme Court of the Russian Federation, which heads the system of courts of general jurisdiction, was merged with the Supreme Arbitration Court of the Russian Federation, which headed the system of arbitration (commercial) courts, to form a new Supreme Court. Consequently, Russia’s judicial system is now composed of the Constitutional Court of the Russian Federation, the Supreme Court of the Russian Federation, federal courts, district courts, magistrate courts, military courts and arbitration courts. The World Bank Global Competitiveness Report for 2014–15 ranks Russia as 109 out of 144 in judicial independence, while a year earlier it was ranked as 119. In terms of the efficiency of the legal framework in settling disputes and in challenging regulations, Russia ranks 110 and 99 respectively and in the area of protection of property rights, Russia ranks 120.

21. The legal profession is governed by the Constitution, the Law on the Status of Judges, the Law on Attorneys’ Practice and the Bar and the Foundations of the Legislation on Notary. The main legal professions in Russia are the public prosecutor, investigator, judge, attorney (advokat), and notary.

  • The public prosecution service supervises over observance of the legality, law and order in Russia. It consists mainly of the Prosecutor General’s Office of the Russian Federation, the prosecutor’s offices of the subjects of the Russian Federation, city, district and other territorial prosecutor’s offices and military and other specialized prosecutor’s offices.

  • The Prosecutor General of the Russian Federation must be appointed and removed from office by the Council of the Federation of the Federal Assembly of the Russian Federation by the recommendation of the President of the Russian Federation. The Prosecutor General appoints prosecutors of cities and regional districts’ prosecutors’ offices. Prosecutors of the prosecutors’ offices in the federal subdivisions of the Russian Federation are appointed by the President of Russia upon recommendation of the Prosecutor General and as agreed with the respective subdivision. The term of office of the Prosecutor General is five years.

  • The Investigative Committee of Russia is the main federal investigating authority in Russia. From 2011, this committee is not included in the structure of government authorities and only the President of the Russian Federation carries out any control over the Committee. The Chairman is appointed and dismissed by the President without the approval of any body of legislative power and reports annually to the President on its activities.

  • Prosecutors and investigators employed in the prosecution bodies should not be members of any elective or other bodies set up by state authorities and local self-government bodies.

  • According to the Law of Status of Judges, judicial candidates must have a degree in law and a certain number of years of working experience and are selected on a competitive basis. All judges of the Supreme Court are appointed by the Council of the Federation of the Federal Assembly of the Russian Federation upon recommendation of the President of the Russian Federation. All other judges including of military and arbitration courts are appointed by the President of the Russian Federation.

  • Lawyers must have a license to practice law in order to appear in court on criminal matters. Under the 2002 Law “On Attorneys’ Practice and the Bar,” each of the Russian regions has a single bar body called Bar Chamber. Lawyers need to be a member of one of such Bar Chamber to be recognized as an attorney.

22. Efficiency of the system in the realization on collateral could be further improved. It may take two years after a court decision in order for a credit organization to be able to acquire the collateral in the case of a loan default. In the meantime, the collateral may deteriorate in value and banks may be asked to create reserves.

Accounting principles and rules

23. The financial reporting framework in Russia is determined and regulated by the state. The MoF is both the official standard-setting body in accounting and financial reporting and the endorsement body of the International Financial Reporting Standards (IFRS). According to Law 208-FZ, and Government Decree 107, IFRS are to be applied in Russia based on a Russian translation prepared by the MoF. In the case of credit institutions, CBR needs to approve the accounting standards, including the Russian Accounting Standards (RAS). The authorities state that RAS are being brought into compliance with IFRS and will be fully in line by 2017. RAS include the requirement for a balance sheet, statement of results of operations, statement of cash flow and statement of changes in ownership equity.

24. Currently, both IFRS and Russian Accounting Standards (RAS) are used in the financial sector. IFRS are required for the consolidated financial statements of the majority of financial entities and those companies whose securities are listed in stock exchanges.4 Those which do not constitute a group according to IFRS must nevertheless compile stand-alone financial statements in accordance with IFRS. All legal entities, regardless of type, are still required to prepare stand-alone (separate) financial statements based on RAS. The rest of legal entities are not still obliged to apply IFRS nor they have to prepare consolidated aggregated financial statements—therefore they only report standalone financial statements under RAS.

25. Over the years RAS has been converging with IFRS, but as of today there are still some differences between the two standards. The most important difference lies in the fact that RAS never adopted International Auditing Standards (IAS) 39 on Financial Instruments.5 In addition, there are other variations in the calculation of capital and reserves. Other previous differences, such as the impairment testing of fixed assets, has been recommended by CBR since 2013, and in 2016 will become mandatory. The MoF, has not granted any exemptions that apply under IFRS.

System of independent external audits

26. According to the Auditing Law, financial companies are required to perform an audit on an annual basis. In the law, auditing is defined as an independent check of the financial statements of an audited entity for the purposes of expressing an opinion on the reliability of said financial statements. Requirements on the form, content, and procedure for signing and submitting the audit report are established by federal auditing standards. The code of conduct for audits firms and auditors is specified in the Code of Professional Ethics of Auditors adopted by the Audit Council, which is the national body that discusses standards and regulations in field of auditing. Audit firms and auditors should be independent of the entity, must comply with audit secrecy, and have to be a member of a self-regulating organization of auditors, which should comply with the rules of the Audit Council. In addition, an audit firm or individual auditor should establish and comply with rules of internal and external quality assurance system based on federal standards.

27. Broadly, the international firms cover IFRS and smaller, domestic audit firms cover RAS. In Russia, auditors are required to obtain an auditor qualification certificate issued by self-regulating organizations of auditors. 6 An audit firm is just required to have 50 percent of the collegial executive body as auditors but is allowed to participate in a tender with just 2–3 auditors in its team. Bigger audit firms tend to be international firms equipped with more resources and training capabilities.7 As of 2014, there are 3,400 certified auditors in Russia.

Payment and clearing systems

28. The payment system of the Russian Federation comprises CBR payment system (BRPS) and other payment systems operated mainly by credit institutions. The BRPS is considered systemic and comprises the system for intraregional electronic payments (VER), the system for interregional electronic payments (MER), the Banking Electronic Speedy Payment system (BESP system), and a payment system based on letters of advice. The other systemically important payment system is the Payment System - National Settlement Depository (PS NKO ZAO National Settlement Depository). The PS NSD is a part of the post-trade infrastructure of OJSC MICEX-RTS Moscow Exchange (the Moscow Exchange) and is used for the open market, repo transactions, and foreign exchange (FX) transactions of CBR. There are four other payment systems which are considered important for consumption: CONTACT, Visa, Golden Crown, and MasterCard.8 Finally, there are another 25 payment systems in operation.

29. In 2013, CBR adopted the National Payment System Development Strategy, outlining its key elements and an Action Plan with defined timelines for their implementation. Consumer protection issues, automation of government payments and adoption of ISO 20222 standards were some of the areas which were the focus of the strategy. An advisory council headed by the Governor of CBR comprising members of executive authorities of the Russian Federation, professional payment services market participants, banking associations, and other professional associations has been formed as part of the broader NPS development strategy.9

30. Furthermore, electronic money is increasingly important and CBR is enhancing regulation and supervision. Supervision in the national payment system now covers money transfer operators, 33 payment system operators, payment infrastructure service operators, 35 operation centers, 36 payment clearing centers, 32 settlement centers, 97 electronic money operators, and the Federal State Unitary Enterprise Russian Post.

Credit bureaus

31. Russia has 21 functioning credit bureaus according to the State Register of Credit Bureaus. These bureaus process store credit histories and provide credit reports and related services. As of December 2015, credit bureaus kept records of 81.6 million individuals and over 485,000 legal entities. Shares in some credit bureaus are owned by banks.

32. Credit bureaus are supervised by CBR and have been the subjects of reforms to strengthen the financial and real sector. In accordance with the Federal Law “On Credit Histories,” CBR supervises the activities of credit bureaus. The Federal Law “On Credit Histories” entitles CBR to keep the central catalogue of credit histories which informs users, subjects of credit histories, and some other persons defined by laws about the location of the credit histories. The Federal Law “On Credit Histories” was amended in 2014 and 2015 introducing, among other developments, the abolishment of the need for borrowers’ consent in order for the credit institutions to send their information to a credit bureau. Additionally, the amendments provided CBR with a power to request and receive credit history reports from credit bureaus.

Public availability of basic economic, financial, and social statistics

33. CBR publishes a range of statistics and analysis on the economy and the financial sector. The Federal State Statistics Service, the government agency for statistics in Russia, publishes social statistics as well. The CBR’ statistics are regularly updated (e.g., financial sector statistics are published on a monthly basis). The Federal State Statistics Service, whose mission is to collect, analyze, and publish data, publishes statistics on labor, living standards, education, public health, offences, industry, agriculture, finance, and investments among others.

Framework for Crisis Management, Recovery and Resolution

34. CBR and the Deposit Insurance Agency (DIA) have been extensively and increasingly involved in bank resolution and rehabilitation in the past years. Apart from acting as deposit insurer, the DIA also is the corporate receiver/liquidator of failed banks and is entitled to resolve banks that participate on deposit insurance system. In 2014 and 2015, the DIA was assigned two additional functions: the insurance of funds in non-state pension funds and the injection of capital to banks. During 2015, CBR sent the DIA proposals for participation in bankruptcy preventions of 18 banks. As of February 25, 2016, 30 banks were under bankruptcy prevention measures. CBR revoked the licenses of 86 credit institutions in 2014 and 93 in 2015 and simultaneously provisional administrations were appointed. CBR revoked licenses of 61 Deposit Insurance System member banks in 2014 and 75 in 2015. As of January 2016, liquidation was pending in 288 credit institutions whose banking licenses had been revoked.

35. Before any determination on the possibility or desirability of rehabilitation is made, CBR and the DIA can perform a joint inspection of the bank. If there is evidence that the bankruptcy will create a threat to the depositors or to the stability of the banking system as a whole, CBR can ask the DIA to take part in the prevention of the bankruptcy of a bank. Should a bank’s unstable financial position create a threat to the interests of its depositors, CBR can request that the DIA settle the bank’s liabilities. In the case of rehabilitation or prevention of bankruptcy, the DIA may refuse participation based on the cost-effectiveness of the rehabilitation measures, and other criteria. At the time of the assessment, the DIA has not decided how to measure the feasibility of participating in measures aimed at preventing bank’s bankruptcy. The DIA can use the deposit insurance fund or, as has been done in the majority of cases, ask for a loan from the CBR for bank rehabilitation.

36. Federal Law 127-FZ on Insolvency was amended in 2014 to improve the legal regulation of financial rehabilitation and liquidation of credit institutions. The law reformed the insolvency regime for all credit institutions establishing the possibility of bankruptcy prevention at the expense of private investors, without the involvement of the federal budget, CBR and the DIA. Furthermore, the amendments to the Federal Law on Banks and Banking Activities and to the Federal Law on the Central Bank of the Russian Federation established the obligation for Domestic Systemically Important Banks (D-SIBs) to submit their Recovery Plans to CBR and the option for CBR to request Recovery Plans from any other credit institution. CBR is entitled to develop Resolution Plans for D-SIBs. The DIA is currently requesting the amendment of legislation in order to have powers to write down and convert unsecured liabilities (bail-in) and is looking into assuring deposits from legal entities. Currently, the system does not allow the creation of a bridge bank.

Adequacy of systemic protection (public safety net)

37. The DIA was established in 2004 and up to date it has delivered more than 300 deposit pay-outs since its inception. As of the first of January 2016, the deposit insurance fund had RUB 56.6 billion rubles and covers all credit institutions that attract deposits. In 2014, given the events, the amount of insurance compensation on deposits was raised to RUB 1.4 million for individual deposits per credit institution from RUB 700,000. As of January 1, 2016, the Deposit Insurance System fully covered 99.7 percent of the number of deposit accounts of individuals in Russian banks and 65.1 percent of total amount of individuals’ deposits in Russian banks. Deposits are on average RUB 300,000. The Deposit Insurance Fund is funded ex-ante with premium contributions from the credit institutions it covers. Recently, the DIA adopted a risk-adjusted differential premium system. Starting from the third quarter of 2015, premiums have been set according to the riskiness of the institutions.

Effective market discipline

38. Transparency in bank ownership has been a concern but improvements are being made. In 2014, a requirement for Russian companies to disclose information on their “beneficial owners” in accounting statements was formulated and the definition of beneficial owner was amended to be consistent with FATF requirements. In addition, it was prohibited to maintain accounts in fictitious names as well as to open or maintain accounts with pseudonyms. Furthermore, CBR Regulation 499-P obliges credit institutions to update customer and beneficiary identification information and review the level of risk every time the level of risk changes or at least annually.

39. Governance standards are being enhanced. In order to enhance market discipline, Federal Law 334-FZ of 2014 “On Amendments to Article 8 of the Federal Law on Banks and Banking Activity” obliges credit institutions to publicly disclose information on the qualifications and experience of management and the members of the board of directors (BoD). In addition, requirements for goodwill have been established for founders and owners of more than 10 percent of the shares in a credit institution, with a 10-year ban for non-compliance. Changes to the Criminal Code establish criminal liability for falsifying financial documents of accounting and reporting of financial organizations, including credit organizations. However, the Corporate Governance Code is voluntary.

Main Findings

Responsibility, Objectives, Powers, Independence, Accountability (CPs 1–2)

40. The legal framework currently in place provides CBR with necessary powers and responsibilities. CBR has powers to authorize banks, conduct ongoing supervision, oversee compliance with laws and undertake corrective actions to address safety and soundness concerns. Major reforms have been introduced that increase CBR’s duties and powers in many respects, although implementation is not yet tested in all cases. Responsibilities and objectives of CBR are particularly broad and appear to be intertwined, while some functions seem to concur with the objectives related to safety and soundness of the banking system. While many governance, accountability, and transparency measures are in place, there are some issues of concern notably in respect of legal protection for staff and transparency of dismissal procedures. There is also scope for improvements in the arrangements for decision making in order to better support and communicate the objectivity and independence of CBR to external audiences.

Ownership, Licensing, and Structure (CPs 4–7)

41. The Russian licensing regime for banks appears exhaustive. The legal and regulatory framework provides CBR with a set of instruments and tools to ensure that the licensing process is sound. Banks’ management and board members must meet fit and proper qualifications, including the absence of a criminal record. In its licensing process, CBR also informed the mission that all efforts were made to ensure transparency in the ownership structure of applicants. It would be desirable, however, to establish formal procedures to subject the newly established bank to follow up attentive offsite supervision, and if necessary onsite inspection, to ascertain that the bank is performing according to the terms and conditions of the license.

42. CBR also has the power to review, reject, and impose prudential conditions on any proposals to transfer significant ownership or controlling interests held directly or indirectly in existing banks to other parties. In that regard, to address a 2008 FSAP recommendation, CBR vetting threshold for signification transfer of ownership has been lowered from 20 to 10 percent. Further, the Federal Law on the Central Bank of the CBR (CBL) has been amended to empower the central bank to address changes of controls that were not vetted by CBR.

43. The legal regime for major acquisitions was found to be weak. While foreign investments by Russian banks require prior approval by CBR, when they lead to the establishment of a subsidiary abroad, the CBL does not establish requirements for banks to seek prior CBR approval when making domestic investments in nonbank financial institutions. Without such requirement CBR is not able to measure or consider in advance 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 CBR to supervise it.

Methods of Ongoing Supervision (CPs 8–10)

44. CBR has developed its risk based approaches since the last assessment and is in the early phases of introducing the next stage of risk based supervision. The introduction of the supervisory review and evaluation process (SREP) based on banks’ own internal assessments and the integration into the analytical approach of CBR is an important evolution. The first full implementation cycle will begin from 2017. Where CBR is less well advanced is in the field of resolution assessment and planning. It is necessary for CBR to have the legal power to require operational or institutional changes based on an assessment of the bank’s ability to recover. From a forward looking perspective, CBR needs to remain alert to the potential for banks to seek to manipulate the regulatory perimeter and CBR must remain assiduous in using all forms of information available to it so that the potential for regulatory arbitrage does not arise.

45. CBR has reconfigured its organization of on and offsite supervisory functions since the last assessment. The role of the Chief Inspectorate, supplemented by the authorized representative (AR) where one is appointed, is central to confirming the quality of banks’ actual practice. In terms of reinforcing priority messages with the banks, though, CBR could invest in greater direct contact with the boards as recommended by the Financial Stability Board (FSB). More systematic meetings and contact with firms in the context of delivering key findings of inspections should be introduced.

46. Structurally, CBR has been reorganized to support a risk-based focus and has established a separate division to supervise the systemically important banks. Institutions that are identified as systemically important banks, according to a methodology based on the Basel standard (Ordinance 3737-U) are supervised directly from Moscow, rather than through the CBR network. The methodology has been in force since July 2015 and the list of systemically important banks must be assessed and re-issued annually under the terms of the ordinance. Capital buffers, consistent with the Basel approach, are applied to the systemically important banks.

47. CBR has strong powers and rights of access to information and uses its inspection process to obtain assurance on the substance and quality of information it receives. Despite the ability to obtain information and data from institutions, there are some missing elements. There is no requirement for banks to notify CBR in advance of any substantive changes or of material adverse developments. Notification requirements are almost all retrospective. Nor does CBR have the right to require the prompt notification of any material issue that has come to the attention of an external expert in the course of that expert’s work for CBR on a supervisory matter unless it is specifically within the scope of work that CBR has commissioned, although it should be noted that CBR has not yet commissioned work from external experts at the date of the assessment.

Corrective and Sanctioning Powers of Supervisors (CP 11)

48. CBR has a good track record in enforcing the law. It has a wide range of tools and sanctions to choose from and has applied multiple measures over the past years, including revocation of licenses. Certain decisions on sanctions are made public, which is a good practice. There are a few areas for improvement, however. Lack of clarity and transparency in the way laws and regulations are enforced (especially for AML purposes) has been mentioned by market participants, which in turn creates the sentiment that banks are disciplined even for minor problems. CBR supervisory actions should therefore be in most cases predictable, consistent, and proportionate. The amount of fines for AML breaches is also excessively low and not deterrent enough.

Cooperation, Consolidated, and Cross-Border Banking Supervision (CPs 12–13)

49. The framework for collaboration and coordination with domestic and cross-border supervisors is satisfactory. CBR is satisfied with the quality and effectiveness of existing cooperation arrangements, especially with Rosfinmonitoring in the area of AML/CFT and also with the DIA for resolution purposes. Removal of legislative obstacles to the exchange of supervisory information has allowed progress in the field of home and host supervisory cooperation. The legislation governing the CBR (Article 73) contains a potential obstacle to effective home-host practices as a foreign supervisory authority requires written consent to access the premises of a subsidiary established in Russia (foreign-owned branch establishments are not permitted). In practice this has not been an issue, however. Initial moves have also been made in terms of cross-border crisis planning and involvement in recovery and resolution plans for cross-border groups, now that the legal provisions are in place.

50. The legal and regulatory framework in respect to consolidated supervision has been significantly developed and enhanced since the last assessment. Notably, the changes include powers to act in the event of violations by the parent of a banking group, an enhanced scope of information exchange, and expanded definitions based on IFRS. The regulatory and legal changes are, nevertheless, still relatively recent and the practical application and supervisory practice based on the new framework is yet to be substantively demonstrated. The cross-border dimension of consolidated supervision is still mostly undeveloped. Some legal gaps remain and are a hindrance to CBR and relate to the perimeter of the consolidation. First, the supervisor may not require the closure of a foreign branch of a Russian bank. Secondly, the supervisor may not prevent the acquisition of a nonbank financial entity by a banking group.

Corporate Governance (CP 14)

51. Russia has taken several initiatives over the past years to improve governance in banks. The introduction in 2013 of Articles 11.1 and 11-1-1 in the banking law is an important step forward as it provides a clear articulation of what the role of the BoD should entail especially with regard to the promotion of Corporate Governance (CG) principles within each credit institution. In 2014, the profound revision of the Corporate Governance Code was also an important step forward, even though it is still a non-binding instrument. New regulations and ordinances have provided more leverage to CBR to monitor and enforce CG related issues. The current regime for CG is governed by piecemeal regulations, which makes it difficult to understand. Moreover, the current norms are different in nature: some of them are binding, others are just optional (CG Code, CBR Letters) and as such not enforceable. Several important regulations pertinent to CG were issued in 2015, and some of them will not be enforceable before 2017. Thus, the current mission is not in a position to assess their effective implementation. Also, the deficiencies in governance policies are largely influenced by problems found in other areas, for example deficiencies in related party transactions and lending to affiliates on more preferable terms than those applied to non-affiliated parties.

Prudential Requirements, Regulatory Framework, Accounting and Disclosure (CPs 15–29)

52. Russia has made significant progress in improving the RM supervisory and operational framework. In the past, the RM regime was not deemed to be sufficiently robust. To address the situation, CBR initiated and completed several reforms aimed at improving the RM regulatory regime. The most significant changes were made by the Federal Law 146-FZ of July 2, 2013 that included new provisions in both the CBL and the law on banks and banking. The overarching objective was to increase CBR’s powers in relation to RM on the one hand and fostering RM processes in banks on the other. Also, Ordinance 3624-U on risk and capital management is a major step forward as it defines more clearly the responsibilities of the BoD for developing and overseeing management of banks’ entire risk profile and the policies supporting the participation of (independent) directors in overseeing RM decision-making. Equally important, this ordinance empowers the CBR to impose Pillar II measures, including capital add-on. Further, Ordinance 3223-U of April 1, 2014 obligates banks to notify CBR when the head of RM has been appointed and sets the qualification requirements for head of RM, internal control, and internal audit functions, in particular the conditions to be met by the applicants in terms of academic background and professional expertise in relevant fields. There is, however, a lack of perspective on the effective implementation of this new regime in banks owing to the fact that key aspects have not been implemented yet.

53. The capital adequacy regime is consistent with international standards. The Russian framework for capital adequacy has been periodically updated to include Basel 2.5 and Basel III standards and was further amended by a series of reforms introduced in December 2015, most of which became effective in January 2016. All Russian banks are subject to Basel capital regulation on both standalone and consolidated levels. Capital adequacy standards applied on a consolidated basis are broadly consistent with those established on a solo level. Also, the implementation of the capital buffers has been assessed by the Regulatory Consistency Assessment Program (RCAP) as compliant with the Basel standard. CBR has implemented the capital conservation buffer, countercyclical buffer, and a systemic risk buffer from January 1, 2016, in line with the Basel standard. The effectiveness of the new Internal Capital Adequacy Assessment Process (ICAAP)/SREP regime remains to be assessed however. Pillar 2 has not been yet fully and thoroughly implemented. The ICAAP process is under way and CBR is still in the process of completing the first SREP cycle which will take some time before being fully operational. According to the timetable set by CBR, systemically important banks (SIBs) will have to submit their ICAAP by the end of 2016 and CBR will start reviewing their quality in 2017.

54. RM standards around credit risk, as with the other risk areas, are still in the process of being fully implemented. However, work in the field of credit risk, based on the activities of the Chief Inspectorate, coupled with the analysis of the curators and the work carried out on stress testing, puts the supervision of credit risk in a more advanced and developed position than that of other risks. CBR performs its own stress tests on the portfolios, monitors regional and sectoral trends, and performs considerable cross checking of information on major exposures.

55. Loan classification and provisioning are under close scrutiny but the level of NPLs remains a concern. Asset quality has deteriorated over the past months. NPLs have grown at a fast pace (especially in the household sector) and the depreciation of the ruble led CBR to take forbearance measures though the issuance of three letters of a temporary nature. These measures were introduced in December 2014 to help banks weather problems stemming from the decline in global oil prices, the Western sanctions over the Ukraine conflict, and the depreciation of the ruble. Some of these measures aimed to allow banks to restructure loans without making provisions or not to re-qualify borrowers in a lower category, under certain conditions (for example, if the problem of servicing the debt arose from the deterioration of macroeconomic conditions). These regulatory concessions expired in December 2015. However, in 2016 credit institutions were given the opportunity not to reclassify the borrower until the borrower has paid back the entire amount of the loan. In that context, it seems realistic to assume that a certain portion of rescheduled loans currently sits in a lower loan category. Only an Asset Quality Review would permit a clear assessment of the current NPL situation. Poor practices have been detected and led to enforcement action. CBR inspections reveal an important number of violations during assessments of asset quality, including lending to shell companies, overvaluation of collateral, misreporting and unreliable financial statements. Collateral valuation is another challenge. According to the discussion with both CBR and market participants, the valuation of certain collateral in particular, real estate is a difficult task in Russia. Appraisals are not reliable and external appraisers have not been trustworthy for many years.

56. The regulatory regime for concentration risk and large exposure limits has been improved. CBR has a wide range of powers to address situations where banks are taking excessive concentration risk, including the power to instruct the bank to mitigate the risk exposure when the concentration is deemed excessive. However, much of the progress made will not be measurable before 2017. For RM purposes, for example, SIBs have begun to include the impact of significant risks—including risk concentrations—into their stress testing programs since January 1, 2016 only and for non-SIBs, this approach is set to start on January 1, 2017. The definition of economic linkages is not implemented yet, which undermines CBR’s ability to oversee the entire spectrum of concentration. The problem stems from the fact that the determination by CBR—and banks alike—of relatedness between customers connected economically will start to be implemented in 2017. In the same vein, the new regime concerning exposures arising from transactions of person(s) connected to the credit institutions itself will not be implemented before January 2017. It is noteworthy that according to discussions with market participants, the issue of large exposures is a matter of concern. Statistics from CBR on shareholder and insider credit risks confirm the general sentiment. In 2014, the large loan exposure of the banking sector grew by 34.9 percent to RUB 19.5 trillion. The share of large loans in the banking sector assets remained unchanged over the year and stood at 25.1 percent.

57. There are no specific requirements for management of country risk and transfer risk. The general RM and internal control regulations apply. Country risk is assessed on an ad hoc basis as there are no specific guidelines or regulations for country or transfer risk outside of the general BCBS principles. As a result, the minimum requirements for risk policies, processes, and limits are uncertain. Several improvements are desirable in order to bring Russia to a higher degree of conformity, especially in the current context of ruble depreciation.

58. The framework for transactions with RPs is still weak despite recent progress. Important amendments have been introduced since 2015 to the CBL that streamline the legal regime applicable to RPs, particularly through a clearer and broader definition of RP. The role allocated to the Banking Supervisory Committee of CBR in deciding about the relatedness of the persons or a group of persons to the credit institution is another hallmark of progress. There are, however, a series of issues that have not been addressed or are not yet implemented and enforced. The definition of RPs arises from a “patchwork” of different legal sources, as opposed to being founded on a single non-ambiguous one. Further, the new regime concerning exposures arising from transactions of person(s) connected to the credit institutions will not be implemented before January 2017. Lastly, the regulatory framework for related party transactions does not require that lending to RPs be on same terms and conditions as those generally offered to the public. CBR made recommendations in that regard but they are not binding and thus not enforceable. Additionally, CBR lacks authority to impose penalties on directors who personally benefited from these favorable conditions.

59. Bank activities giving rise to market risk are not highly developed, and CBR’s powers to enforce RM and control standards are very new. Historically, the volumes of tradable securities have been low and complex structured products do not feature. Although banks are not authorized to use models for Pillar 1 regulatory capital calculations, they may use economic capital models in the context of their internal capital adequacy assessment. Until 2014, CBR did not have the legal powers to enforce RM and control standards. Implementation of the new RM standards is at a very early stage, and a track record is not yet available.

60. The regulatory framework around Interest Rate Risk in the Banking Book—has been enhanced but many of the new provisions, including a greater emphasis on stress testing, are not yet fully in force. There are, at present, limited options available to banks in terms of instruments to hedge interest rate risk. In this context, it becomes even more important for banks to develop meaningful stress scenarios and build management strategies to allow the banks to withstand any future shocks that might manifest.

61. CBR liquidity metrics and RM standards are well developed for systemic banks. The criterion for the definition of systemic banks includes international activity. At the time of the assessment, quantitative and qualitative standards and CBR’s scrutiny of banks with respect to liquidity was transitioning to the new standards. At this early stage, it is hard to determine the extent to which the new framework is fully in force and actively monitored. The full LCR metrics and management standards will not apply to the non-systemic banks, and for this sector it is not clear that CBR will have clear grounds to act if the supervisor is concerned by the RM standards of the banks, notably in respect to funding risks.

62. Regarding supervision of OR, there are several aspects that would merit improvement. The corpus of norms that govern OR is detailed, but with the exception of Ordinance 3624-U and Regulation 242-P on internal controls, the rest of the relevant norms essentially consists of recommendations from CBR, which by their very nature are not binding. This is the case of Letter 76-T on the organization of OR at lending institutions and Letter 92-T on the organization of Legal Risk and Reputational Risk. CBR has also recommended that the industry adopt the BCBS Principles for sound management of OR, but these recommendations are not enforceable. It is advisable to convert CBR recommendations on OR into binding instruments with a view to establishing a general OR management framework that is comprehensive and mandatory.

63. There are significant differences between the supervisor’s powers in relation to internal and external control functions. The regulatory framework for the internal control environment has been refreshed within the past two years based on important new powers, which permit CBR to apply RM and internal control standards. By contrast, there are material deficiencies in the legal framework, restricting the CBR’s ability to act and be effective in relation to the external auditor function. Current weaknesses in the regulatory framework mean that the supervisor may not: reject or rescind the appointment of an external auditor who has inadequate independence or experience or who does not meet professional standards; ensure rotation of the external auditor; or meet with the audit firm to discuss matters pertaining to a supervised institution. Likewise, the auditor may not notify the supervisor of serious matters that come to the auditor’s attention. Furthermore, it is unclear whether CBR has powers to ensure or directly require that the board and management are held accountable for ensuring that financial statement are properly prepared and subject to an independent external auditor’s opinion according to international standards. In general, and reflecting the weaknesses of the legal framework, CBR’s relationship with the auditing community is restricted. It is not, currently, CBR’s practice to meet with the audit community, except on general matters.

64. CBR attaches importance to disclosure and transparency. CBR is entitled to and has exercised its powers to take measures in the event of non-disclosure of information, partial disclosure or unreliable information, a failure to conduct a required audit, or non-disclosure of the consolidated statements and the auditor’s report on them. CBR has exercised its powers under the law when assessing disclosure by banks and banking groups. Some of the disclosure standards are at early phases of implementation, but the Basel disclosure framework (Pillar 3, Market Discipline) is now in force.

65. With respect to combating money laundering/terrorism financing, CBR has made important progress but further improvements are needed. Banks are subject to close scrutiny, and CBR has been forceful against banks and their management which have committed grave violations of the AML regime. There are a few areas where improvements could be made; these include the promotion of a more risk based approach to ML/TF issues in both the industry and CBR; the use of more proportionality when enforcing the law; and the need to raise the level of compliance in banks regarding the verification of the ultimate beneficial owner and the inclusion of ML/TF risks into the scope of duties to be performed by external auditors.

Detailed Assessment

A. Supervisory Powers, Responsibilities and Functions

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B. Prudential Regulations and Requirements

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Summary Compliance with the Basel Core Principles

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Recommended Actions and Authorities’ Comments

A. Recommended Actions

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B. Authorities’ Response to the Assessment

The Russian Federation authorities truly appreciate professionalism, clear focus, and constructive approach of the assessment team in undertaking the assessment. Thanks to the smooth and efficient collaboration between the CBR and the assessment team, this complex project was effectively completed using limited time and resources dedicated to the exercise.

We are pleased to note that since the previous assessment substantial improvements have been made and this progress is recognized in the Report. Due to the creation of a mega-regulator, banking supervision can obtain more information on the activities of banks, banking groups, and financial conglomerates. Amendments to legislation, including the expansion in Bank of Russia powers, have enhanced supervision over banks’ operations with other financial market participants. Moreover, the powers of the CBR to use professional judgment have been enlarged. The CBR is fully committed to further strengthening the supervisory framework based on BCP principles and other international best practices.

Among the banking risks, credit risk traditionally calls for special supervisory attention. Amid vigorous build-up of loan portfolios by banks, more attention is paid to the actual business performance of borrowers and their ability to service loans, and to the quality and adequacy of collateral used to adjust the value of created provisions. CBR bank supervision has approved a program for improving supervision and asset valuation. A new department will be established to assess the risk in all banks, and important legal amendments are being discussed in parliament to empower the CBR to make its own assessment of collateral values.

However, as some of the reforms are only being implemented, this has affected some of the grades. We recognize that the legal framework governing CBR’s relationship and interactions with external auditors is deficient. Important legislative changes (i.e. on information sharing, requirements for an external auditor) are being discussed in parliament.

CBR remains committed to implementing the new legal definition of RPs on January 1, 2017. Requirements for banks to enter into transactions with RPs on same terms and conditions as those generally offered to the public will be prepared for discussion as amendments to the banking law in order to address the current FSAP recommendation.

As to the management of country and transfer risks, CBR is of the opinion that country risk is partly addressed through general RM requirements, risk weights in the capital adequacy calculations, classification of the borrower, and provisioning of operations with offshore companies. This said, CBR is now looking into the experience of other jurisdictions with this issue and approaches to building stronger regulation.

Regarding FX RM in credit institutions, the CBR believes that it is relatively more developed in comparison with other types of market risk, as the first regulation on open FX positions limits (Instruction 41) was issued by the CBR in 1996, i.e. several years before the introduction of capital requirements for market risk, and since then it has been steadily improved.

As for liquidity risk regulation, the liquidity coverage ratio (the LCR) was introduced in compliance with the Basel III requirements since January 1, 2016, together with the corresponding reporting requirements on the LCR. This was confirmed in the final RCAP report on LCR implementation in Russia, issued by the Basel Committee on March 15, 2016.

Yet, the recent legislative changes enhancing CBR’s risk based approach may not have shown their full potential in practice. Thus the CBR regulations on ICAAP and SREP will increase the intensity of RM, and future assessments may benefit from longer implementation in practice.

CBR is of the opinion that findings and recommendations of the assessment team on Core Principle 29—Abuse of financial services—are beyond the scope of the respective essential criteria. CBR will nonetheless take into account recommendations on the above matter.

The Russian Federation authorities welcome the possibility to enhance both regulation and supervisory practices and are now putting together an action plan to address valuable FSAP recommendations. Some of the approaches recommended for implementation in Russia require time for additional study.

The Russian Federation authorities would like to thank once again the assessment team for fruitful cooperation.

1

This Detailed Assessment Report has been prepared by Katharine Seal, IMF and Pierre-Laurent Chatain, World Bank.

2

CBR, December 2015. Monetary Policy Report. http://www.cbr.ru/eng/publ/ddcp/2015_04_ddcp_e.pdf

3

Financial Stability Board, 2015. Peer Review of Russia.

4

Banks, insurance companies, pension funds, fund management companies, clearing companies, certain state unitary enterprises and state-owned companies.

5

IAB 39 was replaced in July 2014 by IFRS 9 which will be adopted by 2018.

6

In order to obtain the certificate, professional competence of the applicant shall be verified through a qualification examination and the applicant should have a work record of at least three years in auditing or bookkeeping and preparation of the financial statements by the day of the results of the qualification examination.

7

Some of the firms send the audit reports to their Head Quarter offices for a final quality check.

10

In this document, “banking group” includes the holding company, the bank and its offices, subsidiaries, affiliates and joint ventures, both domestic and foreign. Risks from other entities in the wider group, for example non-bank (including nonfinancial) entities, may also be relevant. This group-wide approach to supervision goes beyond accounting consolidation.

11

The activities of authorising banks, ongoing supervision and corrective actions are elaborated in the subsequent Principles.

12

Such authority is called “the supervisor” throughout this paper, except where the longer form “the banking supervisor” has been necessary for clarification.

13

On Amendments to Certain Legislative Acts of the Russian Federation connected with Transfer of Authorities to Exercise Regulation, Control and Supervision of Financial Markets to the Central Bank of the Russian Federation.

14

In this document, “risk profile” refers to the nature and scale of the risk exposures undertaken by a bank.

15

In this document, “systemic importance” is determined by the size, interconnectedness, substitutability, global or cross-jurisdictional activity (if any), and complexity of the bank, as set out in the BCBS paper on Global systemically important banks: assessment methodology and the additional loss absorbency requirement, November 2011.

16

(i) Credit institutions with assets of RUB 500 billion or more shall bring the risk and capital management procedures into compliance with Ordinance 3624 at the individual level by December 31, 2015, and at the level of the banking group by December 31, 2016; (ii) credit institutions with assets of less than RUB 500 billion shall bring the risk and capital management procedures into conformity at the individual level by December 31, 2016, and at the level of the banking group—by December 31, 2017.

17

Please refer to Principle 1, Essential Criterion 1.

18

Principle 3 is developed further in the Principles dealing with “Consolidated supervision” (12), “Home-host relationships” (13), and “Abuse of financial services” (29).

19

“Data Constituting Bank Secrecy” is defined by the Russian Federation in Article 26 of the Banking Activities Law as data on specific transactions and operations of credit institutions and also on transactions and operations of their customers and correspondents received from credit institutions, banking groups and bank holdings and other associations with participation of credit institutions in the course of the discharge of the supervisory functions, including onsite inspections carried out by the CBR.

20

These representatives are authorized to enter any premises of the bank, access any documents, records and information systems of the bank as well as to request and receive from the bank employees any information and documents.

21

When reviewing any of these two types of proposals, the Agency has the right to request additional information regarding the bank’s financial position from the CBR, to make a proposal to CBR or other entities for bankruptcy prevention and to negotiate with management bodies of the bank, its founders (members), and other entities which have contractual relations with the bank on taking measures aimed at preventing bankruptcy or settling the bank’s liabilities.

22

See Rosfinmonitoring activity report 2014.

23

The committee recognizes the presence in some countries of nonbanking financial institutions that take deposits but may be regulated differently from banks. These institutions should be subject to a form of regulation commensurate to the type and size of their business and, collectively, should not hold a significant proportion of deposits in the financial system.

24

On the Procedure for the Adoption of a Decision by the CBR on the State Registration of Lending Institutions and the Issuing of Banking Licenses.

25

This document refers to a governance structure composed of a board and senior management. The committee recognizes that there are significant differences in the legislative and regulatory frameworks across countries regarding these functions. Some countries use a two-tier board structure, where the supervisory function of the board is performed by a separate entity known as a supervisory board, which has no executive functions. Other countries, in contrast, use a one-tier board structure in which the board has a broader role. Owing to these differences, this document does not advocate a specific board structure. Consequently, in this document, the terms “board” and “senior management” are only used as a way to refer to the oversight function and the management function in general and should be interpreted throughout the document in accordance with the applicable law within each jurisdiction.

26

Corporate founders should be registered in accordance with the procedure established by applicable legislation, be in business for at least three years, have a satisfactory financial standing and fulfill obligations to the federal, regional and local budgets during the past three years.

27

For a registration and license.

28

Therefore, shell banks shall not be licensed. (Reference document: BCBS paper on shell banks, January 2003.)

29

On the Procedure and Criteria for Evaluating the Financial Condition of Individuals Who Are Founders (Partners) of a Lending Institution and Individuals Performing Transactions Aimed at Acquisition of Stock (Shares) of a Lending Institution and/or at Establishing Control over a Lending Institution’s Stockholders (Partners).

30

Of June 11, 2014, on Methods for Evaluating a Bank’s Financial Stability for the Purposes of Finding it Sufficient for Participation in the Deposit Insurance System.

31

Please refer to Principle 14, Essential Criterion 8.

32

Of October 25, 2013 «On the Procedure for Assessment of Compliance with Qualification and Reputational Requirements of Persons Cited in Article 11.1 of the Federal Law on Banks and Banking Activities and Article 60 of the Federal Law on the Central Bank of the Russian Federation (CBR) and on the Procedure for Maintenance of the Database Envisaged by Article 75 of the Federal Law on the Central Bank of the Russian Federation.

33

On Requirements for Managers of the Risk Management Function, Internal Control Function, and Internal Audit Function of a Lending Institution.

34

Please refer to Principle 29.

35

On Specific Aspects of the Registration of Lending Institutions with Foreign Investments.

36

FATF, 2008 MER, pages 115–116, paragraphs 508–511.

37

Minimum required experience in Italy is three years (five years for the chairman) for banks. In Germany, “a person shall normally be assumed to have the professional qualifications if he can demonstrate three years’ managerial experience at an institution of comparable size and type of business.” In Spain, suitable professional experience requires at least five years’ experience in banking activities in senior/managerial positions.

38

This proposal is recognized in draft Federal Law 779566-6 “On Amending Certain Laws of the Russian Federation with Regard to Improvement of Mandatory Requirements for Founders (Participants), Governing Bodies and Officials of Financial Institutions” (hereafter draft of Federal Law 770566-6).

39

While the term “supervisor” is used throughout Principle 6, the Committee recognizes that in a few countries these issues might be addressed by a separate licensing authority.

40

CBR Regulation 345-P of 10/27/2009, “On Procedures for Banks’ Disclosure of Information About Persons/ Entities Having Control of or Material Influence on Bank Members of the System for the Mandatory Insurance of Individuals’ Deposits in Russian Federation Banks” (hereinafter, “Regulation 345-P”) and CBR Directive 2005-U of 4/30/2008, “On Assessment of Banks’ Economic Condition” (hereinafter, “Directive 2005-U”) establish that control and material influence with respect to a lending institution exerted by an investor singly or as a member of a group of persons/entities shall be determined in accordance International Financial Reporting Standard (IFRS) 10, “Consolidated Financial Statements,” and IAS 28, “Investments in Associates and Joint Ventures.”

41

Recognized as such in accordance with Federal Law 135-FZ of July 26, 2006, on the Protection of Competition (referred to hereinafter as the Law on the Protection of Competition).

42

Federal Law 177-FZ of December 23, 2003, On Insuring the Deposits of Individuals in Russian Federation Banks (hereinafter, “Law on Deposit Insurance”).

43

Transactions committed in contravention of the law—i.e., acquisition of shares without CBR permission—are null and void.

44

The mission was told by the CBR that amendments made by the Draft of the Federal Law 770566-6 presume the requirement for legal entities (including banks) to seek CBR approval for significant acquisitions in the capital of nonbank financial institutions: including insurance entities, professional participants of security market (registers and depositories), investment funds, clearing companies, non-state pension funds, microfinance organizations).

45

In the case of major acquisitions, this determination may take into account whether the acquisition or investment creates obstacles to the orderly resolution of the bank.

46

Onsite work is used as a tool to provide independent verification that adequate policies, procedures, and controls exist at banks, determine that information reported by banks is reliable, obtain additional information on the bank and its related companies needed for the assessment of the condition of the bank, monitor the bank’s follow-up on supervisory concerns, etc.

47

Offsite work is used as a tool to regularly review and analyze the financial condition of banks, follow up on matters requiring further attention, identify and evaluate developing risks and help identify the priorities, scope of further offsite and onsite work, etc.

48

Please refer to Principle 10.

49

In the context of this Principle, “prudential reports and statistical returns” are distinct from and in addition to required accounting reports. The former are addressed by this Principle, and the latter are addressed in Principle 27.

50

Please refer to Principle 2.

51

Please refer to Principle 1, Essential Criterion 5.

52

Maybe external auditors or other qualified external parties, commissioned with an appropriate mandate, and subject to appropriate confidentiality restrictions.

53

Maybe external auditors or other qualified external parties, commissioned with an appropriate mandate, and subject to appropriate confidentiality restrictions. External experts may conduct reviews used by the supervisor, yet it is ultimately the supervisor that must be satisfied with the results of the reviews conducted by such external experts.

54

The role of these representatives is governed by the following regulations: CBR Regulation 310-P of September 7, 2007, on Dedicated Supervisors of Lending Institutions; CBR Directive 2182-U of February 9, 2009, on the Procedure for the Appointment of Authorized Representatives of the CBR; CBR Directive 2181-U of February 9, 2009, on the Procedure for the Submission of Information and Documents to Authorized Representatives of the CBR by Lending Institutions; CBR Directive 3057-U of September 6, 2013, on the Procedure for the Appointment of Authorized Representatives of the CBR.

55

On the Application of Enforcement Measures against Lending Institutions.

56

On Cooperation among Regional Offices of the CBR in the Application of Measures against Lending Institutions, the Main Offices and Subdivisions of Which Are Located in Different Constituent Territories of the Russian Federation (referred to hereinafter as Directive 2387-U.

57

CBR Regulation 310-P of September 7, 2007, on Dedicated Supervisors of Lending Institutions.

58

Please refer to Principle 1.

59

Federal Law “On Countering the Legalization (Laundering) of Criminally Obtained Incomes and the Financing of Terrorism.”

60

Including operations with the principal lending institution of a banking group, the principal institution of a bank holding company, and the participants in a banking group (bank holding company).

61

This last provision was introduced by the Federal Law 432-FZ of December 22, 2014.

62

Source: CBR annual report.

63

On the Procedure for the Notification of Banks of the Identification of Conditions in their Activities that Will Lead to the Loss of the Bank’s Right to Attract Funds for Deposit from Individuals and to Open and Maintain Accounts for Individuals, the CBR.

64

The DIA cannot refuse to pay the insurance to the bank’s depositors if the bank is part of the deposit insurance system.

65

The number of listed credit institutions in the totals is lower than the total of the sub-items due to several actions being taken against a bank at the same time for several sub-items

66

Please refer to footnote 19 under Principle 1.

67

Please refer to Principle 16, Additional Criterion 2.

68

See Illustrative example of information exchange in colleges of the October 2010 BCBS Good practice principles on supervisory colleges for further information on the extent of information sharing expected.

69

Please refer to footnote 27 under Principle 5.

70

Article 8 of Federal Law «On banks and banking activities» and Ordinance of the CBR 3639-U of May 19, 2015.

71

The CBR assesses internal control system of a systemically important credit institution and will determine whether an audit committee under the board of the credit institution has been formed (Article 5.3 of the Regulation of the CBR 242-P of April 24, 2014). The board of a credit institution with assets of more than RUB 50 billion and (or) with funds raised from individuals as deposits and (or) on bank accounts of more than RUB 10 billion shall form a special body—for example, a remuneration committee consisting of non-executive directors who have qualifications and experience appropriate to make decisions concerning remuneration issues.

72

The OECD (OECD glossary of CG-related terms in “Experiences from the Regional Corporate Governance Roundtables,” 2003, www.oecd.org/dataoecd/19/26/23742340.pdf) defines “duty of care” as “The duty of a board member to act on an informed and prudent basis in decisions with respect to the company. Often interpreted as requiring the board member to approach the affairs of the company in the same way that a “prudent man” would approach their own affairs. Liability under the duty of care is frequently mitigated by the business judgment rule.” The OECD defines “duty of loyalty” as “The duty of the board member to act in the interest of the company and shareholders. The duty of loyalty should prevent individual board members from acting in their own interest, or the interest of another individual or group, at the expense of the company and all shareholders.”

73

“Risk appetite” reflects the level of aggregate risk that the bank’s board is willing to assume and manage in the pursuit of the bank’s business objectives. Risk appetite may include both quantitative and qualitative elements, as appropriate, and encompass a range of measures. For the purposes of this document, the terms “risk appetite” and “risk tolerance” are treated synonymously.

74

Provisions of the Code are based on international practices of CG and on CG principles developed by the Organization for Economic Co-operation and Development (OECD).

75

For the purposes of assessing RM by banks in the context of Principles 15 to 25, a bank’s RM framework should take an integrated “bank-wide” perspective of the bank’s risk exposure, encompassing the bank’s individual business lines and business units. Where a bank is a member of a group of companies, the RM framework should in addition cover the risk exposure across and within the “banking group” (see footnote 19 under Principle 1) and should also take account of risks posed to the bank or members of the banking group through other entities in the wider group.

76

To some extent the precise requirements may vary from risk type to risk type (Principles 15 to 25) as reflected by the underlying reference documents.

77

It should be noted that while, in this and other Principles, the supervisor is required to determine that banks’ RM policies and processes are being adhered to, the responsibility for ensuring adherence remains with a bank’s board and senior management.

78

“On the Procedure for Calculating Credit Risk Based on Internal Ratings.”

79

“On the Procedure for Obtaining Permits for the Use of Bank Credit Risk Management Methods and Credit Risk Quantification Models to Calculate the Capital Adequacy Ratios of the Bank and on the Procedure for Assessing Their Quality.”

80

Also, Regulation 510-P, Annex 1 requires banks to use automated information systems to ensure access to all information required for decisions on the sale of high quality liquid assets for liquidity management purposes. Regulation 421-P, which represents the basis for the LCR calculation according to Regulation 510-P, treats the internal information systems that are used for HQLA management as well.

81

New products include those developed by the bank or by a third party and purchased or distributed by the bank.

82

Article 3.6 stipulates that “the head of the RM department shall be appointed at the credit institution (the parent credit institution of the banking group) and shall be under direct control of the sole executive body of the credit institution (the parent credit institution of the banking group) or its deputy.”

83

See in particular CBR Ordinance 3223-U of April 1, 2014 “On Requirements for Heads of Risk Management, Internal Control and Internal Audit Services of a Credit Institution.”

84

In that case, the duties shall be distributed between these divisions.

85

CBR examiners should among other things evaluate whether the credit institution’s risk and capital management strategy determines stress testing scenarios; whether the credit institution has stress testing procedures approved by the management bodies; whether the stress testing scenario takes account of the stage of the business cycle; whether the board takes account of the results of stress testing in managerial decision making to limit each material risk and estimate the bank’s capital requirements.

86

Sberbank, for example, has described in detail the risk appetite of the group in a document with the title “Disclosure of Information on Accepted Risks, Procedures of Their Assessment, Risk and Capital Management of Sberbank Banking Group for the First Half of 2015 (from January 1 to June 30, 2015).”

87

The CPs do not require a jurisdiction to comply with the capital adequacy regimes of Basel I, Basel II, and/or Basel III. The Committee does not consider implementation of the Basel-based framework a prerequisite for compliance with the CPs, and compliance with one of the regimes is only required of those jurisdictions that have declared that they have voluntarily implemented it.

88

On the methodology of determining the amount of own funds (capital) of the credit institutions (“Basel III”).

89

“On amendments to Article 11 of the Federal law “On Insuring Individuals’ Deposits in Russian Federation Banks” and Article 46 of the Federal Law “On the CBR.”

90

The Basel Capital Accord was designed to apply to internationally active banks, which must calculate and apply capital adequacy ratios on a consolidated basis, including subsidiaries undertaking banking and financial business. Jurisdictions adopting the Basel II and Basel III capital adequacy frameworks would apply such ratios on a fully consolidated basis to all internationally active banks and their holding companies; in addition, supervisors must test that banks are adequately capitalized on a stand-alone basis.

91

Reference documents: “Enhancements to the Basel II Framework,” July 2009 and: “International Convergence of Capital Measurement and Capital Standards: A Revised Framework - Comprehensive Version,” June 2006.

92

In assessing the adequacy of a bank’s capital levels in light of its risk profile, the supervisor critically focuses on, among other things (a) the potential loss absorbency of the instruments included in the bank’s capital base; (b) the appropriateness of risk weights as a proxy for the risk profile of its exposures; (c) the adequacy of provisions and reserves to cover loss expected on its exposures; and (d) the quality of its RM and controls. Consequently, capital requirements may vary from bank to bank to ensure that each bank is operating with the appropriate level of capital to support the risks it is running and the risks it poses.

93

“On the Procedure for Calculating Credit Risk Based on Internal Ratings.”

94

“On the Procedure for Obtaining Permits for the Use of Bank Credit Risk Management Methods and Credit Risk Quantification Models to Calculate the Capital Adequacy Ratios of the Bank and on the Procedure for Assessing Their Quality.”

95

“On the Procedure for Obtaining Permits for the Use of Bank Credit Risk Management Methods and Credit Risk Quantification Models to Calculate the Capital Adequacy Ratios of the Bank and on the Procedure for Assessing Their Quality”

96

“Stress testing” comprises a range of activities from simple sensitivity analysis to more complex scenario analyses and reverses stress testing.

97

E.g., CBR Instruction 139-I of December 3, 2012 “On Statutory Ratios for Banks” on the simplified standardized approach; CBR Regulation 483-P of August 6, 2015 “On Calculation of Credit Risk Based on Internal Ratings-Based Approach” (IRB Regulation).

98

E.g., CBR Regulation 511-P of December 3, 2015 “On the Procedure for Credit Institutions to Calculate Market Risk,” on calculating the market risk capital charge.

99

CBR Letter 69-T of May 16, 2012 “On the Recommendations of the Basel Committee on Banking Supervision Principles for the Sound Management of Operational Risk.”

100

“On the Assessment of Quality of Risk and Capital Management Framework and Capital Adequacy of Credit Institutions and Banking Groups Performed by the CBR.”

101

E.g.: CBR Ordinance 3081-U of October 25, 2013 “On Information Disclosure by Credit Institutions about Their Activities;” CBR Ordinance 3876-U of December 3, 2015 “On Forms, Procedure, and Terms of Information Disclosure by Parent Credit Institutions on Accepted Risk, Risk Evaluation Procedures, and Risk and Capital Management Procedures.”

102

Principle 17 covers the evaluation of assets in greater detail; Principle 18 covers the management of problem assets.

103

Credit risk may result from the following: on-balance sheet and off-balance sheet exposures, including loans and advances, investments, inter-bank lending, derivative transactions, securities financing transactions, and trading activities.

104

Counterparty credit risk includes credit risk exposures arising from OTC derivative and other financial instruments.

105

“Assuming” includes the assumption of all types of risk that give rise to credit risk, including credit risk or counterparty risk associated with various financial instruments.

106

Principle 17 covers the evaluation of assets in greater detail; Principle 18 covers the management of problem assets.

107

Reserves for the purposes of this Principle are “below the line” non-distributable appropriations of profit required by a supervisor in addition to provisions (“above the line” charges to profit).

108

It is recognized that there are two different types of off-balance sheet exposures: those that can be unilaterally cancelled by the bank (based on contractual arrangements and which therefore may not be subject to provisioning), and those that cannot be unilaterally cancelled.

111

The CBR cited the appraisal of the Kremlin that was estimated in 1996 at only US$2 billion.

112

Connected counterparties may include natural persons as well as a group of companies related financially or by common ownership, management, or any combination thereof.

113

This includes credit concentrations through exposure to: single counterparties and groups of connected counterparties both direct and indirect (such as through exposure to collateral or to credit protection provided by a single counterparty), counterparties in the same industry, economic sector or geographic region and counterparties whose financial performance is dependent on the same activity or commodity as well as off-balance sheet exposures (including guarantees and other commitments) and also market and other risk concentrations where a bank is overly exposed to particular asset classes, products, collateral, or currencies.

114

The maximum amount of high credit risks shall not exceed 800 percent of the own funds (capital) of a credit institution (banking group); Article 65 of the CBL.

115

This system of limits shall be brought by the parent company of the banking group to the knowledge of its subsidiaries.

116

The measure of credit exposure, in the context of large exposures to single counterparties and groups of connected counterparties, should reflect the maximum possible loss from their failure (i.e., it should encompass actual claims and potential claims as well as contingent liabilities). The risk weighting concept adopted in the Basel capital standards should not be used in measuring credit exposure for this purpose as the relevant risk weights were devised as a measure of credit risk on a basket basis and their use for measuring credit concentrations could significantly underestimate potential losses (see “Measuring and controlling large credit exposures, January 1991).

117

Such requirements should, at least for internationally active banks, reflect the applicable Basel standards. As of September 2012, a new Basel standard on large exposures is still under consideration.

118

Related parties can include, among other things, the bank’s subsidiaries, affiliates, and any party (including their subsidiaries, affiliates and special purpose entities) that the bank exerts control over or that exerts control over the bank, the bank’s major shareholders, board members, senior management and key staff, their direct and related interests, and their close family members as well as corresponding persons in affiliated companies.

119

Related party transactions include on-balance sheet and off-balance sheet credit exposures and claims, as well as, dealings such as service contracts, asset purchases and sales, construction contracts, lease agreements, derivative transactions, borrowings, and write-offs. The term transaction should be interpreted broadly to incorporate not only transactions that are entered into with related parties, but also situations in which an unrelated party (with whom a bank has an existing exposure) subsequently becomes a related party.

120

In accordance with Federal Law 146-FZ of July 2, 2013 (as amended on December 22, 2014).

121

In accordance with CBR Ordinance 490-U of December 16, 2014, as of January 1, 2016, statutory ratios comprise also the “Maximum risk per entity associated with the bank (group of entities associated with the bank.”

122

See also CBR Regulation 307-P of July 20, 2007 on the procedure for keeping accountancy and presenting information about affiliated persons of credit organizations (with the Amendments and Additions of April 30, 2009, April 27, 2010, and July 19, 2012).

123

In accordance with item 7.3 of Regulation 345-P, control and significant influence are defined in accordance with International Financial Reporting Standard (IFRS) 10—Consolidated Financial Statements, and IAS 28—Investments in Associates and Joint Ventures, which entered into force within the Russian Federation pursuant to Russian Federation MoF Order 217N of December 28, 2015, on the Entry into Force and Repeal of International Financial Reporting Standards Documents within the Russian Federation.

124

An exception may be appropriate for beneficial terms that are part of overall remuneration packages (e.g., staff receiving credit at favorable rates).

125

CBR 2014 BSR.

126

Country risk is the risk of exposure to loss caused by events in a foreign country. The concept is broader than sovereign risk, as all forms of lending or investment activity, whether to/with individuals, corporates, banks, or governments are covered.

127

Transfer risk is the risk that a borrower will not be able to convert local currency into FX and so will be unable to make debt service payments in foreign currency. The risk normally arises from exchange restrictions imposed by the government in the borrower’s country. (Reference document: IMF paper on External Debt Statistics—Guide for Compilers and Users, 2003.)

128

Instruction 124-I does not permit the recognition of all hedging instruments (Paragraph 1.7.2). Furthermore, the instruction introduces a requirement that banks have certainty in relation to their transactions—i.e., “open FX positions can be managed through the purchase and sale of foreign currency and/or any other transactions with financial instruments denominated in a foreign currency if there is every reason to believe that the corresponding transaction will be exercised or there are no reasons that may prevent it from being exercised and which only permits the management of an open position “if there is every reason to believe that the corresponding transaction will be exercised or there are no reasons that may prevent it from being exercised” (Paragraph 2.2).

129

Wherever “interest rate risk” is used in this Principle, the term refers to interest rate risk in the banking book. Interest rate risk in the trading book is covered under Principle 22.

130

The committee has defined OR as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. The definition includes legal risk but excludes strategic and reputational risk.

131

Recommendations on the structure and content of a plan of action aimed at providing for the continuity of activities and/or the recovery of the activities of the credit institution in case of non-standard events and emergencies, as well as for organizing an audit of its feasibility.

132

In assessing independence, supervisors give due regard to the control systems designed to avoid conflicts of interest in the performance measurement of staff in the compliance, control and internal audit functions. For example, the remuneration of such staff should be determined independently of the business lines that they oversee.

133

The term “compliance function” does not necessarily denote an organizational unit. Compliance staff may reside in operating business units or local subsidiaries and report up to operating business line management or local management, provided such staff also have a reporting line through to the head of compliance who should be independent from business lines.

134

The term “internal audit function” does not necessarily denote an organizational unit. Some countries allow small banks to implement a system of independent reviews, e.g. conducted by external experts, of key internal controls as an alternative.

135

In this Essential Criterion, the supervisor is not necessarily limited to the banking supervisor. The responsibility for ensuring that financial statements are prepared in accordance with accounting policies and practices may also be vested with securities and market supervisors.

136

For the purposes of this Essential Criterion, the disclosure requirement may be found in applicable accounting, stock exchange listing, or other similar rules, instead of or in addition to directives issued by the supervisor.

137

The Committee is aware that, in some jurisdictions, other authorities, such as a FIU, rather than a banking supervisor, may have primary responsibility for assessing compliance with laws and regulations regarding criminal activities in banks, such as fraud, money laundering and the financing of terrorism. Thus, in the context of this Principle, “the supervisor” might refer to such other authorities, in particular in Essential Criteria 7, 8, and 10. In such jurisdictions, the banking supervisor cooperates with such authorities to achieve adherence with the criteria mentioned in this Principle.

138

The Russian FIU received over 11 million STRs in 2014 with an estimated value of 160 trillion rubles (59 percent more than in the previous period).

140

The new 2014 law that came into force on January 1, 2015 provides for the determination of a controlled foreign company (CFC), which is a foreign company that is not a Russian tax resident, but is nevertheless controlled by a Russian tax resident. A Russian tax resident will be deemed to be a controlling person of a CFC and shall fall within the ambit of the law if his/her participation or interest in the CFC is at least 50 percent during 2015 and 25 percent thereafter. Profits received by a Russian tax resident from a CFC will thus be subject to taxes with specific qualifications (e.g., double tax agreements).

141

It obliges institutions engaged in transactions with funds or other assets to take reasonable measures for identifying domestic and international organization PEPs, and to apply enhanced due diligence measures if they are considered as posing high ML/FT risks (e.g., need for senior management approval for accepting any relationship with a PEP, identifying source of wealth and funds, and enhanced ongoing monitoring of relationship).

142

Consistent with international standards, banks are to report suspicious activities involving cases of potential money laundering and the financing of terrorism to the relevant national center, established either as an independent governmental authority or within an existing authority or authorities that serves as an FIU.

143

Recommendations for Organization of the Management of Legal Risk and Business Reputation Risk at Lending Institutions and Banking Groups.

144

“Beneficial owner for the purposes of this Federal Law means a natural person who directly or indirectly (through third persons) owns (has a predominant stake of over 25 percent in the capital of) a client being a legal entity or has the possibility of controlling the actions of the customer.” (Federal Law 115-FZ, as amended)

145

In CBR’s opinion, a requirement “to take measure on a regular basis” is equivalent to “conduct ongoing due diligence” in the context of the FATF recommendations.

146

Russia also enacted new legislation designed to combat official corruption and money laundering. On May 19, 2013, new legislation came into force banning senior public officials and executives of state corporations, as well as their spouses and underage children, from setting up bank accounts or holding stocks or bonds overseas.

147

On the “Identification by Lending Institutions of Customers, Customer’s Representatives, Beneficiaries, and Beneficial Owners for the Purposes of Anti-Money Laundering and Combating the Financing of Terrorism.”

148

Federal Law “On Countering the Legalization (Laundering) of Criminally Obtained Incomes and the Financing of Terrorism.”

149

These could be external auditors or other qualified parties, commissioned with an appropriate mandate, and subject to appropriate confidentiality restrictions.

150

“Qualification Requirements for Dedicated Officers at Lending Institutions Responsible for Compliance with Internal Control Rules for the Purposes of Anti-Money Laundering and Combating the Financing of Terrorism and Programs for the Implementation of Internal Controls at Lending Institutions).”

151

“Requirements for the Education and Training of Personnel at Lending Institutions.”

152

FATF Recommendation 5 is now rated LC thanks to new features introduced by Federal law 134-FZ; the most salient aspects are: (i) specific prohibition on maintaining existing accounts in fictitious names; (ii) requirement to conduct CDD in case of a suspicion of ML/TF; (iii) obligation to update annually customers’ information as well as within seven days should any doubt arise about the veracity of previously obtained CDD information; (iv) introduction of a definition of beneficial owner; (v) requirement to establish the nature and intended purpose of business relationship; (vi) obligation for FIs to complete identification of a client, client’s representative and/or beneficial owner before the establishment of a business relationship.

153

Federal Law 176-FZ, which amended the AML/CFT Law (Article 6, Item 1, Sub-Item 2) now requires FIs to pay special attention to business relationships and transactions with persons from or in countries which do not or insufficiently apply the FATF recommendations.

154

See the Rosfinmonitoring activity report for 2014.

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Russian Federation: Financial Sector Assessment Program: Detailed Assessment of Observance Basel Core Principles for Effective Banking Supervision (BCP)
Author:
International Monetary Fund. European Dept.