Russian Federation: Financial Sector Assessment Program
Technical Note-Macroprudential Policy

This Technical Note discusses the findings and recommendations made in the Financial Sector Assessment Program for the Russian Federation in the area of macroprudential policy. Financial stability oversight responsibilities are currently shared between the Central Bank of Russia (CBR) and the high-level interagency National Council on Ensuring Financial Stability. In recent years, the CBR has used a number of macroprudential tools to deal with risks, mainly those stemming from retail lending. The CBR has tightened provisioning requirements and increased capital risk weights to curb excessive growth of unsecured consumer lending, which has helped banks better handle credit risk that materialized. However, the CBR law should be amended to provide for a more comprehensive set of macroprudential tools.

Abstract

This Technical Note discusses the findings and recommendations made in the Financial Sector Assessment Program for the Russian Federation in the area of macroprudential policy. Financial stability oversight responsibilities are currently shared between the Central Bank of Russia (CBR) and the high-level interagency National Council on Ensuring Financial Stability. In recent years, the CBR has used a number of macroprudential tools to deal with risks, mainly those stemming from retail lending. The CBR has tightened provisioning requirements and increased capital risk weights to curb excessive growth of unsecured consumer lending, which has helped banks better handle credit risk that materialized. However, the CBR law should be amended to provide for a more comprehensive set of macroprudential tools.

Overall Policy Framework

1. Financial stability oversight responsibilities are currently shared between the Central Bank of Russia (CBR) and a high-level inter-agency National Council on Ensuring Financial Stability (FSC). Given its role as the single financial regulator and supervisor since September 2013, CBR has naturally become a macroprudential authority. Following the creation of the Financial Stability Department in March 2011, CBR established an internal Financial Stability Committee (FSCom) in November 2014 to play a key coordinating role in macroprudential oversight, crisis management, and other financial stability issues, with policy decisions still being made by CBR’s Board of Directors (CBR Board). The government created the FSC in July 2013 as an advisory body that can make recommendations on measures to restore financial stability based on its systemic risk assessment. In February 2015, the FSC was strengthened and has served as an effective platform for inter-agency coordination. Overall progress on strengthening the institutional arrangements for macroprudential policy is documented in Appendix Table 1.

2. Only CBR has a financial stability mandate anchored in law. The CBR has a legal responsibility to support the development and ensure the stability of the banking system, payment systems, and financial markets. Even though the CBR Law does not prescribe all elements of the financial stability architecture, CBR has developed a macroprudential policy framework that appears to be effective, with systemic risk oversight covering the entire financial system. Meanwhile, the FSC was established with a financial stability mandate by government decree (July 2013). More recently, the Ministry of Economic Development (MOED) and the Ministry of Finance (MOF) were also designated as government bodies responsible for ensuring financial stability by another government decree (February 2015), although their precise functions and powers were not specified.

3. CBR has put in place an effective framework to perform its macroprudential oversight function. In CBR’s view, macroprudential policy is the use of primarily prudential tools (largely, microprudential and monetary operations tools) to limit systemic risk, which is the risk that the financial system becomes dysfunctional, with potentially serious negative consequences for the real economy. CBR also considers that liquidity provision is an important element of its policy toolkit for maintaining financial stability. The Financial Stability Department plays a leading role in carrying out macroprudential surveillance, including risk assessments of nonbank financial institutions (NBFIs) and nonfinancial corporates. The Financial Stability Department also has oversight responsibility for central counterparties (CCPs). CBR started publishing Financial Stability Review in 2003.2

Use of Macroprudential Tools

A. Experiences

4. CBR has in recent years made innovative use of macroprudential tools to mitigate identified systemic risks. Since 2007, CBR has dealt with four broad types of risks related to banks’ reliance on foreign funding, excessive growth of unsecured consumer loans, mortgage lending to relatively risky borrowers, and banks’ exposure to exchange rate risks (see Appendix Table 2).

5. Differentiated reserve requirements were implemented to contain banks’ increasing reliance on foreign funding between 2004 and 2008. The amount of foreign liabilities relative to total banking sector assets (net of interbank claims) had steadily risen from 12.7 percent in August 2004 to 23.4 percent in August 2007 (Figure 1). In an attempt to mitigate risks associated with potential reversals of capital inflows, CBR introduced a percent reserve requirement on banks’ liabilities to nonresident banks in August 2006, a level below the reserve requirement on deposits. Between July 2007 and September 2008, CBR used differentiated reserve requirements by imposing a higher rate on banks’ liabilities to nonresident banks, and raised this particular rate from 3.5 to 8.5 percent over time.3 As a result of tightening global financial conditions after the collapse of Lehman Brothers, the reserve requirements were unified and had been eased on a number of occasions to ensure appropriate liquidity conditions in the banking system. In February 2011, differentiated reserve requirements were re-introduced as a precautionary measure, with a higher reserve requirement rate on banks’ liabilities on nonresident legal entities. With no sign of systemic risk, the reserve requirements were applied uniformly again in February 2013.

Figure 1.
Figure 1.

Russia: Banks’ Foreign Liabilities and Reserve Requirements

Citation: IMF Staff Country Reports 2016, 307; 10.5089/9781475538489.002.A001

Sources: CBR; IMF, International Financial Statistics; and IMF staff estimates.

6. Additional provisioning requirements and higher capital risk weights have been used to curb excessive growth of unsecured consumer lending during 2011–13. The annual growth rate of unsecured consumer lending exceeded 50 percent by mid-2012, well above the overall lending growth rate (below 30 percent) (Figure 2). The excessive growth of unsecured consumer lending led to a significant buildup of credit risk that materialized following the economic downturn in 2015. At the same time, effective interest rates for unsecured consumer lending exceeded 50 percent when inflation was around 7 percent, creating distortions in other loan market segments. In particular, banks specializing in mortgage and corporate lending faced growing challenges in attracting deposits to finance their lower margin lending activities. In response to these adverse developments, CBR tightened provisioning requirements and raised capital risk weights for unsecured consumer loans during January 2013–January 2014. The capital risk weights were differentiated based on the level of effective lending rates on loans. In July 2014, caps on effective lending rates were also imposed on various loan types with the adoption of the Consumer Credit Law in December 2013.4

Figure 2.
Figure 2.

Russia: Banks’ Unsecured Consumer Lending

Citation: IMF Staff Country Reports 2016, 307; 10.5089/9781475538489.002.A001

Sources: CBR; Haver Analytics; and IMF staff estimates.1/ Lending to households is mostly denominated in ruble.2/ See Appendix Table 2 for the detail of the measures. The introduction of caps on effective lending rates is also considered a tightening action.

7. Differentiated capital risk weights have been used to mitigate risks associated with high-risk borrowers during the robust growth of mortgage lending in 2012–14. Mortgage lending had been growing around 30 percent year-on-year between late-2011 and early-2015, underpinned by strong overall credit growth and looser capital requirements for mortgage lending to creditworthy borrowers (Figure 3). In May 2009, CBR reduced the capital risk weight from 1.0 to 0.7 for mortgage loans in ruble of less than RUB 50 million, with a loan-to-value (LTV) ratio below 70 percent, and a debt service-to-income (DSTI) ratio below 33⅓ percent.5 The loosening of capital requirements aimed at promoting financial access, with creditworthy borrowers able to obtain financing needed for their home purchases. In October 2011, in order to safeguard financial stability, CBR raised the capital risk weight from 1.0 to 1.5 for mortgage loans of more than RUB 50 million and an LTV ratio above 80 percent. Based on stress testing of banks’ mortgage lending portfolios and their risk profiles, CBR has on several occasions tightened or loosened capital risk weights.6,7 The extensive use of differentiated capital risk weights for mortgage loans reflects the fact that CBR lacks legal power to impose limits on LTV and DSTI ratios.

Figure 3.
Figure 3.

Russia: Banks’ Mortgage Lending

Citation: IMF Staff Country Reports 2016, 307; 10.5089/9781475538489.002.A001

Sources: CBR; Haver Analytics; and IMF staff estimates.1/ Lending to households is mostly denominated in ruble.

8. Macroprudential tools have been used to support the effort to de-dollarize the economy, starting in April 2016. The banking system is exposed to foreign-currency related risks, owing to a generally high level of dollarization in the economy. As of January 2016, foreign-currency loans accounted for 31 percent of total banks loans, while foreign-currency deposits amounted to 41 percent of total deposits (Figure 4). In an attempt to reduce dollarization, CBR has implemented macroprudential measures in addition to the existing limit on banks’ net open foreign-exchange position, which has helped protect banks from sizeable exchange rate fluctuations. In April 2016, CBR started adopting the differentiated reserve requirements approach by applying a higher reserve requirement rate on foreign-currency liabilities to mitigate foreign-currency liquidity risk.8 In May 2016, CBR imposed higher capital risk weights for certain foreign-currency exposures to reflect the greater risk of these exposures owing to exchange rate volatility.

Figure 4.
Figure 4.

Russia: Dollarization

Citation: IMF Staff Country Reports 2016, 307; 10.5089/9781475538489.002.A001

Sources: BIS, Debt Securities Statistics; Haver Analytics; IMF, World Economic Outlook database; and IMF staff estimates.1/ Based on domestic financial institutions’ claims, external debt excluding debt securities, and outstanding debt securities issued domestically and internationally.2/ Assumes that all debt securities issued internationally are denominated in foreign currency.

B. Toolkit

9. CBR’s macroprudential toolkit is based on microprudential instruments. Capital-based tools include sectoral capital risk weights, countercyclical capital buffers (CCBs), capital surcharges on systemically important banks (SIBs), and leverage ratios. Liquidity-based tools9 include liquidity coverage ratios (LCRs), net stable funding ratios (NSFRs), and reserve requirements (available in the context of monetary operations).10 In addition, CBR has the power to set provisioning rules and limits on the open position in foreign currencies, interest rates, and other financial risks. The CBR Law also sets limits on concentration risks.11

10. The CCB, the capital surcharge on SIBs, and the LCR were implemented at the beginning of 2016.

  • CCB. In CBR’s view, the CCB is currently the main countercyclical macroprudential tool. Hence, an inter-departmental Working Group for Monitoring the Credit Cycle and Controlling the Amount of CCB, chaired by a First Deputy Governor, was established to calibrate the appropriate level of the CCB. It makes a recommendation to the FSCom on a quarterly basis, and the FSCom in turn makes a recommendation to the CBR Board, which takes the final decision. The calibration of the CCB is based on a set of indicators such as credit-to-GDP gaps, credit growth rates, and nonperforming loan (NPL) ratios.

  • Capital surcharge on SIBs. CBR has published the list of SIBs, which includes 10 banks accounting for about 60 percent of banking system assets. SIBs are identified based on quantitative criteria such as size, interconnectedness, systemic impact (market share of household deposits), and complexity (scope of cross-border activities). The capital surcharge will be imposed at 0.15 percent of risk weighted assets from the beginning of 2016, with gradual increases to 1 percent by the beginning of 2019.

  • LCR. The LCR is only applied to SIBs, with a minimum rate of 70 percent from the beginning of 2016. The phase-in will follow the internationally agreed schedule. There is no plan to impose the LCR requirement by currencies, but SIBs are required to report LCRs in ruble and all significant foreign currencies on a monthly basis. Given the shortage of domestic high-quality liquid assets such as domestic government bonds, CBR has established the committed liquidity facility (CLF) (option I). The use of high-quality liquid assets in major foreign currencies to cover ruble liquidity needs is also allowed (option II). In addition to the LCR requirement, all banks must fulfill three distinct liquidity requirements on a daily basis (see Footnote 8).

C. Assessment

11. Financial stability has been maintained even in the face of two large shocks—low oil prices and western sanctions. A multi-pronged policy response has helped to keep the financial system stable (as described in the Financial System Stability Assessment report). Macroprudential policies contributed by helping to contain systemic risk related to unsecured consumer lending and proactively monitoring corporate sector vulnerabilities. Overall, the impact of external shocks on the financial system seems to be contained, with some qualifications (Figures 5 and 6).

Figure 5.
Figure 5.

Russia: Developments in Corporate and Household Sectors

Citation: IMF Staff Country Reports 2016, 307; 10.5089/9781475538489.002.A001

Sources: CBR; Haver Analytics; Orbis; and IMF staff estimates.1/ Large companies include all listed companies and non-listed companies with total assets and turnover of at least US$1 million. Smaller companies cover entities with total assets and turnover of at least 0.2 million U.S. dollars.2/ A company is considered to have a low debt servicing capacity if its interest coverage ratio (ICR) is below 1, where the ICR is defined as earnings before interest and taxes (EBIT) over interest expenses.3/ Based on prices of new houses.
Figure 6.
Figure 6.

Russia: Corporate Sector’s Exposure to Exchange Rate Risks

Citation: IMF Staff Country Reports 2016, 307; 10.5089/9781475538489.002.A001

Sources: CBR; Haver Analytics; Orbis; and IMF staff estimates.1/ Large companies include all listed companies and non-listed companies with total assets and turnover of at least US$1 million. Smaller companies cover entities with total assets and turnover of at least US$0.2 million2/ A company is considered to have a low debt servicing capacity if its interest coverage ratio (ICR) is below 1, where the ICR is defined as earnings before interest and taxes (EBIT) over interest expenses.3/ Based on prices of new houses.
  • The oil and gas sector remains profitable due to the cost structure and the tax system. Exchange rate depreciation has helped cushion the revenues of energy companies from lower oil prices. The cost structure is primarily in ruble and the tax system exacts less per barrel as oil prices fall. Russian oil and gas companies are also among the lowest-cost producers globally.

  • Corporate debt servicing capacity has deteriorated, and NPLs have risen. Among the larger corporates, the debt of companies with low debt servicing capacity increased sharply in early 2015. Furthermore, smaller corporates, which largely rely on financing from the domestic banking system, appeared to be in a weak financial position even before the economic downturn. Corporate NPLs have thus increased, particularly with the deterioration in the construction and real estate sector.

  • The credit quality of exposures to households has also worsened, mainly due to increasing NPLs from consumer lending. Excessive unsecured consumer lending in earlier years led to significant materialization of credit risk following the economic downturn. While banks have already seen a sharp increase in NPLs in their consumer lending portfolios, the overall impact remains manageable despite unfavorable macroeconomic conditions. In contrast, there are no signs of material credit risk associated with mortgage lending.

  • Overall, exchange rate risks appear manageable. Despite substantial corporate foreign-currency debt, the impact of large exchange rate depreciation appears manageable. In aggregate, the corporate sector has a small net foreign-currency position vis-à-vis the domestic banking system (about 4 percent of GDP), thanks to large foreign-currency deposits. In addition, forthcoming payments related to external corporate debt (excluding intra-group payments that are typically rolled over) are sufficiently covered by liquid foreign-currency assets held by corporates.

12. Systemic risk related to unsecured consumer lending has been mitigated by macroprudential measures implemented by CBR in recent years. The tightening of provisioning requirements and capital risk weights helped avert a full-blown banking crisis. In CBR’s view, the excessive growth of unsecured consumer lending was the main systemic risk after the global financial crisis. In response, CBR continually tightened provisioning requirements and increased capital risk weights to curb such lending and improve banks’ resilience. These macroprudential measures appear to have been broadly effective, usefully containing the impact of the ongoing materialization of credit risk. In particular, the banking system was in a stronger position to absorb losses as a result of the buffers being built by additional provisions. The slowdown in overall unsecured consumer lending, however, seems to be driven by multiple factors—stricter macroprudential requirements (with some lag), higher than expected credit losses, and caps on effective lending rates. It is noteworthy that loans subjected to higher capital risk weights continued to increase more strongly than loans not affected by the measures (Figure 7).12 Notwithstanding their effects on strengthening banks’ resilience, there is a lack of conclusive evidence that stricter bank capital risk weights or provisioning requirements effectively moderated credit growth. This points to a need for more effective tools, such as limits on the growth of certain lending,13 or the simultaneous application of multiple tools.

Figure 7.
Figure 7.

Russia: Banks’ Unsecured Consumer Lending

Citation: IMF Staff Country Reports 2016, 307; 10.5089/9781475538489.002.A001

Sources: CBR; Haver Analytics; and IMF staff estimates.1/ Adjusted for the break in February 2015 due to the loosening of the capital requirement of unsecured consumer loans in ruble with effective lending rates of 25-5 percent. The capital risk weight for these loans was reduced to 1, the floor level for unsecured consumer lending.

13. Other macroprudential tools used by CBR since 2007 have also helped to mitigate systemic risks.

  • Reserve requirements on banks’ external funding. Even before the macroprudential policy framework was put in place, CBR had imposed higher reserve requirements on banks’ liabilities to nonresident banks during 2007–08. These measures effectively curbed the banking system’s growing reliance on external funding, although an earlier introduction could have helped alleviate the negative impact of the sudden stop of foreign funds during the global financial crisis.

  • Capital risk weights for mortgage lending. Differentiated capital risk weights based on loans’ risk characteristics since 2009 have preemptively contained risks associated with risky lending while supporting the extension of mortgage loans to creditworthy borrowers. This approach reflects CBR’s desire to strike the right balance between development and stability objectives while adhering to the international standards.14 The use of macroprudential tools to deal with risks associated with mortgage lending seems useful, with a minimal increase in NPLs in this lending segment following the economic downturn.

  • Measures to support de-dollarization. CBR’s recent efforts to employ macroprudential tools to support de-dollarization also seem broadly appropriate, as the measures largely aim at reducing banks’ foreign-currency liquidity risk and inducing banks to internalize exchange rate volatility risk associated with their foreign-currency exposures.

14. Notwithstanding these successful efforts to mitigate systemic risks, certain vulnerabilities remain to be addressed. In retrospect, increased banking system vulnerabilities, with declining capital buffers, increasing leverage and deteriorating liquidity conditions, arose concurrently with strong overall credit growth (about 20 percent annually) during 2011–14 (Figure 8). Banks’ ability to obtain funding from CBR may also be supporting balance sheet growth. Inadequate capital buffers led to the reliance on regulatory forbearance (asset classification and loss provisioning, in particular) to help banks withstand the severe shocks. Looking forward, the challenge that banks will face in meeting the LCR requirement on their own may entail a structural mismatch between high-quality liquid assets and potential funding outflows, in part owing to the lack of government debt securities. In addition, the banking system is facing structural vulnerabilities, such as a heavy reliance on short-term funding and large exposures.15

Figure 8.
Figure 8.

Russia: Banking Sector Performance and Credit Developments

Citation: IMF Staff Country Reports 2016, 307; 10.5089/9781475538489.002.A001

Sources: Haver Analytics; IMF, International Financial Statistics, Financial Soundness Indicators database, and World Economic Outlook database; and IMF staff estimates.

15. The economy’s significant dependence on oil makes the financial system vulnerable to large oil price movements. The exposure of the economy to oil prices may significantly affect financial conditions and amplify business cycles. For instance, during the current down-cycle of oil prices, the economy has faced a broad-based materialization of credit risk as a result of the economic downturn. Hence, the indirect impact seems significant, even though the direct impact of low oil prices on the oil and gas industry and the banking system is limited.

16. CBR currently does not have a comprehensive set of macroprudential tools. Russian legal practice requires that provisions for prudential tools (mostly, microprudential in nature) need to be rather explicit, with sufficient details in the CBR Law.16 The CBR Law currently only prescribes a limited number of macroprudential tools (see Appendix Table 3), and does not provide a legal foundation for CBR to use the full set of commonly recognized macroprudential tools, such as limits on LTV and DSTI ratios, as well as limits on the growth of particular credit segments. Moreover, while some prudential tools in the context of Basel III are available (such as leverage ratios and NSFR), they have not yet been implemented.

D. Recommendations

17. Using macroprudential tools to establish adequate buffers could help safeguard financial stability in the medium term. Greater volatility driven by oil price movements may warrant a larger buildup of capital buffers to protect banks against solvency risk as a result of a broad-based materialization of credit risk during the oil price down-cycle following a robust credit expansion during the up-cycle. These capital buffers could be implemented in the context of the CCB or the Pillar 2 under the Basel capital framework, the latter potentially in the context of the internal capital adequacy assessment process (ICAAP). Stress testing could be used to determine the capital buffers needed to withstand a sharp decline in oil prices and its macrofinancial consequences. Furthermore, liquidity tools could be employed to help contain excessive credit growth by ensuring that banks are able to raise their own funds to sustainably support their balance sheet expansion.

18. Calibration of the CCB would benefit from a wider set of relevant indicators to properly evaluate the credit cycle. The credit-to-GDP gap analysis for Russia is generally challenging given ongoing financial deepening and the sensitivity of the economy and the financial sector to oil prices. Additional indicators of overall leverage and liquidity (for example, private sector indebtedness and leverage; LTV and DSTI ratios associated with mortgage and commercial real estate lending; and banks’ reliance on noncore funding) could be useful.17 In addition, the credit cycle analysis should account for the role of oil prices, which could significantly influence potential output and procyclically drive domestic demand and credit.

19. Prudential liquidity requirements could be strengthened to improve banks’ funding structure over time. There seems to be a scope to tighten liquidity ratios (that is, the N2, N3 and N4 ratios) to encourage banks to maintain adequate high-quality liquid assets to meet potential funding outflows and to strengthen their funding structure to rely less on short-term funds. While CBR’s liquidity facilities can effectively backstop banks’ liquidity shortages, adjustments in CBR’s operations framework should be made to ensure appropriate risk pricing. Furthermore, the structure of the CLF should be changed to incentivize banks to manage liquidity risk on their own.

20. Macroprudential tools could support de-dollarization, but their use should be motivated primarily by systemic risk mitigation. Country experiences suggest that de-dollarization process is more successful when the appropriate incentives and preconditions are in place, with two-way exchange rate flexibility among the most important.18 As good progress has been made on this front, macroprudential tools could be used to address foreign-currency liquidity risk and ensure appropriate risk pricing for foreign-currency exposures, while also supporting the effort to de-dollarize the economy. However, adequate attention should be paid to unintended consequences, as policy leakages could be acute, making it more difficult to monitor risks.19 In addition, given that the corporate sector appears to have natural hedges against exchange rate risk, provision of foreign-currency loans should not be prohibited outright. Instead, CBR should opt for a microprudential approach that fosters banks’ underwriting standards (that is, to lend only to individuals and entities with foreign-currency revenues).

21. CBR needs to be equipped with a more comprehensive set of macroprudential tools. The CBR Law should be amended to provide an adequate legal foundation for the development and use of the full range of macroprudential tools on an ex-ante basis (Appendix Table 3 provides a list). An expanded toolkit is necessary as there is no conclusive evidence that stricter bank capital risk weights or provisioning requirements are sufficient on their own. The ability to more effectively constrain the growth of risky lending would help CBR better contain systemic risk. It would be useful to explore whether a fairly flexible provision in the CBR Law would be consistent with the Russian legal tradition, as this would enable CBR to respond more nimbly to various types of emerging systemic risk.20

Institutional Arrangements

A. Current Situation

22. Financial stability oversight responsibilities are shared between CBR and the FSC, with CBR in charge of conducting macroprudential policy. The FSC has served as an advisory body that is (i) responsible for conducting systemic risk monitoring and assessment and (ii) able to make recommendations to government bodies and CBR to take measures to restore financial stability. At the same time, CBR, as the single financial regulator and supervisor, has naturally become a macroprudential authority, with complete responsibilities and powers deriving from its regulatory and supervisory functions for all regulated aspects of the financial system (that is, institutions, markets and infrastructures).21 A general consensus also exists among member agencies of the FSC that the conduct of macroprudential policy should be CBR’s responsibility.

23. The FSC was primarily created as an advisory body for inter-agency coordination of financial stability matters. In July 2013, the government issued a decree to create the FSC, replacing the earlier Working Group to Monitor Financial Market Conditions. The FSC is responsible for conducting systemic risk monitoring and assessment, reviewing the identification methodology and the list of systemically important financial institutions (SIFIs), and developing measures to restore financial stability. The committee was at that time chaired by the Minister of Finance. Notable characteristics of the FSC are/were:

  • Membership was broad and diverse, while members act in a personal capacity. The FSC consisted of 17 members (including the chair), including representatives from CBR, the Deposit Insurance Agency (DIA), the First Deputy Prime Minister’s Office, the MOED, and the MOF.22 Membership was not based on designated positions or levels of seniority within the respective institutions. Hence, members’ views (particularly, of those at the technical level) did not necessarily reflect their institutions’ views.

  • The FSC functions mainly as an advisory body that facilitates inter-agency information exchange. The FSC has the power to request necessary information from government bodies, CBR, and other organizations. However, the FSC had neither permanent committee structures nor a supporting secretariat. Decisions are taken by consensus and recorded in protocols signed by the chair, but these protocols are not publically communicated and the FSC does not report to any authority. The FSC was entitled to make non-binding recommendations, albeit not disclosed publicly, to government bodies and CBR on systemic risk issues and mitigating measures.

  • Discussion at the FSC covers a wide range of macrofinancial issues that may affect financial stability, while recommendations on mitigating measures do not typically constitute macroprudential policy. At a typical meeting, MOF and CBR representatives would give presentations on macroeconomic developments and systemic risk assessments, respectively. Issues discussed at the FSC are fairly broad, such as external corporate debt and associated refinancing risks, volatility of capital flows, and legislative initiatives regarding oversight of CCPs and the bankruptcy regime. Similarly, mitigating measures elaborated by the FSC could be outside the scope of financial sector policies. For instance, one recommendation was that the MOF should allocate its funds at banks more proactively to smooth banks’ refinancing needs.

24. The FSC was recently strengthened, especially in terms of membership, in light of the FSB Peer Review recommendations.23 In February 2015, the government issued a revised decree that effectively enhanced the status and functioning of the FSC. In particular, the FSC has become a high-level inter-agency committee, chaired by the First Deputy Prime Minister and comprising the CBR Governor, Minister of Economic Development, Minister of Finance, and DIA General Director, as well as senior officials from these agencies.24 The FSC now also has the power to make recommendations on a comply-or-explain basis (not disclosed publicly) to government bodies and CBR. This mechanism primarily serves as a means to monitor progress on actions that have been taken by the relevant agencies. The secretariat, led by staff from CBR, the First Deputy Prime Minister’s Office, and the MOF, was created to support the FSC’s work.

25. CBR, as the single financial regulatory and supervisor, has naturally become the macroprudential authority. In September 2013, the Federal Service for Financial Markets (FSFM) was merged into CBR, with the latter taking complete oversight responsibilities for banks, NBFIs, and financial markets. CBR has continually strengthened its macroprudential oversight function, including the establishment of the Financial Stability Department in 2011, the publication of upgraded Financial Stability Review biannually since 2012, and the creation of the FSCom—a high-level internal committee in CBR in 2014.

26. CBR has no exclusive decision-making body for macroprudential policy and uses the FSCom as the main internal coordination platform. Based on the CBR Law, the CBR Board is responsible for all key decisions, including those on monetary policy and financial regulation. The CBR Law also establishes two specialized committees—the Banking Supervision Committee and the Financial Supervision Committee—to carry out day-to-day regulatory and supervisory functions.25 Within the current decision-making structure, the FSCom was created by a CBR regulation to facilitate internal coordination given that financial stability involves several departments. The FSCom is responsible for conducting systemic risk monitoring and assessment, evaluating systemically important financial market infrastructures (FMIs), assessing the financial soundness of significant nonfinancial corporates, and reviewing the draft Financial Stability Review. Additional notable characteristics of the FSCom include the following:

  • The FSCom can make recommendations on matters related to financial stability to the CBR Board, as well as other relevant specialized committees within CBR (that is, the Banking Supervision Committee, the Financial Supervision Committee and the Monetary Policy Committee).26 Essentially, the FSCom can discuss any issues related to financial stability. When a macroprudential measure is needed, the FSCom would first take a strategic decision, initiating an inter-departmental consultation to prepare draft regulations and make other necessary arrangements. The relevant specialized committee would then discuss and finalize how to implement the measure, with a recommendation (including draft regulation) for consideration by the CBR Board. The CBR Board is responsible for the final approval of the measure. In the event that a disagreement emerges at the CBR Board (this has not happened so far), the FSCom would be a platform for resolving conflicting positions of different parties before the CBR Board’s reconsideration of the issue.

  • The FSCom is chaired by the CBR Governor to ensure adequate internal coordination.27 This is particularly important given that prudential tools come under the responsibility of various departments and also in view of the link between monetary and macroprudential policies. Four First Deputy Governors, responsible for financial stability, monetary policy, banking oversight, and NBFI and market oversight, are also members of the FSCom. In addition, inter-departmental working groups are formed to support the design, calibration, and implementation of macroprudential tools.28 The Director of the Financial Stability Department is a member of the Banking Supervision Committee, the Financial Supervision Committee, and the Monetary Policy Committee.

27. CBR has successfully put in place a macroprudential policy framework. CBR has developed the macroprudential policy framework based on its collective responsibilities for ensuring stability of the banking system, payment systems, and financial markets (Article 3 of the CBR Law), supported by its assigned functions in the areas of monetary operations, financial sector regulation and supervision, and liquidity provision to the banking system (Article 4 of the CBR Law). Notwithstanding the lack of a fully prescribed financial stability architecture in the CBR Law,29 CBR has conducted macroprudential policy with a view to maintaining the stability of the entire financial system.

28. CBR has broad powers to obtain data for macroprudential oversight. In addition to the power to collect data from regulated financial entities, CBR is responsible for compiling banking and monetary statistics, balance of payments statistics, and the financial account component of the national account statistics. CBR is the competent authority responsible for exchanging information with foreign counterparts. In addition, CBR has set up a special arrangement to obtain financial information from significant nonfinancial corporates, on a confidential basis.

B. Assessment

29. The current institutional arrangements appear to function well (the main strengths and weaknesses are summarized in Table 2).30 CBR is well-placed to perform the macroprudential oversight function in Russia and has already built a track record in this area. The current institutional arrangements seem to strike a good balance between CBR’s prominent role in macroprudential policy and high level inter-agency coordination. In particular:

  • Effective coordination within CBR has been instrumental in identifying and mitigating systemic risk. The FSCom has played the central role in coordinating macroprudential oversight within CBR especially at the top management level. Cross-departmental coordination at the technical level also appears to be a common practice.

  • The FSC has served as a useful platform for inter-agency coordination. With its current membership (after being strengthened in February 2015), the FSC has become a forum that gives high level policymakers opportunities to exchange views on a wide range of issues related to financial stability, helps expedite the process of legislative changes needed to maintain financial stability,31 and enables CBR to take account of external views.

Table 2.

Main Strengths and Weaknesses of the Current Institutional Arrangements for Conducting Macroprudential Policy

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30. There is some room for further improvement in CBR’s macroprudential policy framework. The current institutional arrangements, though functioning well at the moment, have not yet been fully tested, especially in a situation that calls for strong macroprudential actions. The CBR Board may face difficult choices in pursuing multiple policy objectives.32 In particular, the trade-off between price stability and financial stability remains to be more clearly defined in order to ensure the proper coordination of macroprudential and monetary policy tools. The interactions with other policies also remains to be further elucidated, with appropriate governance structures.33 Regarding accountability, CBR communicates with the public through Financial Stability Review and press releases, including those on changes in macroprudential measures. Consideration could be given to better documenting and more fully disclosing the decision-making process.34

31. The FSC, in its current setup, is performing its intended role as an advisory body. Decision-making based on consensus seems suitable given that the FSC is primarily a forum to exchange views. Moreover, potential interference with CBR’s autonomy seems limited. The strong representation of CBR (Governor and four First Deputy Governors) allows fruitful discussion of all relevant aspects of financial stability, while the participation of the First Deputy Prime Minister (as the chair) and of an Assistant to the President helps to ensure that top policymakers are well-informed, all the more so as the FSC does not have a formal reporting requirement.

C. Recommendations

32. The FSC should continue to serve as an advisory body, but the scope of its responsibilities should be clarified to ensure CBR’s autonomy. While a general consensus exists that CBR should be responsible for conducting macroprudential policy, it would be important to explicitly establish that the FSC does not have the authority to override CBR decisions on the use of macroprudential tools. The FSC’s mandate to review the identification methodology and the list of SIFIs also appears to overlap with CBR’s responsibilities. In principle, CBR could be responsible for identifying SIFIs, but a formal consultation process with the government is needed in light of potential government financial support to SIFIs. The current membership of the FSC seems appropriate for systemic risk monitoring and assessment, but may be less suited to performing the crisis management function.

33. CBR should continue to be in charge of conducting macroprudential policy, but further improvements could help to ensure timely macroprudential actions in the future. Going forward, in parallel to achieving the inflation target, CBR will also need to strike the right balance with safeguarding financial stability. In the near term, regular CBR Board meetings to discuss systemic risk issues, along with the publication of assessments, could take place under a more formalized arrangement, similar to the conduct of monetary policy.35 In the medium term, enhanced governance and accountability of policymaking could be helpful. One potential option is to establish a dedicated macroprudential policymaking body within CBR, supported by a fuller prescription of the macroprudential policy framework in the CBR Law. Changes for consideration include the following:

  • Amend the CBR Law to provide a well-prescribed financial stability framework. It could be useful to provide CBR with an explicit mandate to maintain stability of the entire financial system (institutions, markets and infrastructures).

  • Establish a dedicated policymaking committee within CBR to conduct macroprudential policy.36 This could take the form of a “Financial Policy Committee” (FPC) with appropriate objectives, functions, and powers.37 Such an arrangement could help strengthen governance and accountability of macroprudential policymaking. The FPC would be responsible for systemic risk monitoring and assessment and for decisions on policy measures needed to safeguard financial stability, which authority over tools that are commonly used to mitigate systemic risk.38 The committee could also be assigned the power to make recommendations to other CBR committees to undertake necessary actions, including adjustments of other prudential tools that are microprudential in nature.

  • Enhance accountability through greater transparency. In addition to publication of Financial Stability Review, which has served as the main channel for communicating CBR’s views on systemic risk, records of the committee’s meetings could be published to enhance policymaking transparency. Such records of the meetings would summarize key decisions in the areas of risk assessment and policy. Warnings and recommendations issued by the committee should be made public.39 Views of committee members in a minority could also be recorded, in line with the current practice for the CBR Board regarding decisions on monetary policy.

Technical Capacity for Systemic Risk Monitoring and Assessment

A. Overview

34. Macroprudential surveillance at CBR is primarily the responsibility of the Financial Stability Department. The scope of systemic risk monitoring and assessment covers overall financial soundness of banks, NBFIs and significant nonfinancial corporates, financial market developments, and credit and liquidity risks of the banking system.40 More recently, CBR has developed a systemic risk dashboard to help identify and prioritize risks to support decision-making. Other departments also contribute to macroprudential surveillance. In particular, stress testing of the banking system is carried out by the Banking Supervision Department. With a fairly decent stress testing framework for banks, CBR has regularly conducted solvency and liquidity stress tests to assess banks’ resilience to macroeconomic scenarios and liquidity pressures.

B. Assessment

35. CBR has the necessary technical capacity for systemic risk monitoring and assessment, but additional development is desirable. The analysis presented in Financial Stability Review reflects CBR’s strong analytical capacity. However, it would be useful to expand analytical capacity in the following areas:

  • An early warning system to detect underlying vulnerabilities. While the systemic risk dashboard has served as an effective tool for monitoring risks in financial markets and the banking system, the development of an early warning system would help enhance the capacity to detect underlying vulnerabilities that may lead to a crisis over the medium term. Such an early warning system should aim at assessing vulnerabilities in nonfinancial sectors (for example, corporate, household, fiscal, and external) and conditions in financial and real estate markets (for example, price misalignments).

  • Integrated stress testing capacity to assess the financial system’s resilience. Stress testing could be a useful analytical tool to identify systemic vulnerabilities and assess the adequacy of buffers. An integrated stress testing system should aim to account for second-round effects, solvency-liquidity links and cross-sectoral interconnectedness. Furthermore, the design of stress scenarios would benefit from the development of a macrofinancial model that can account for external sector developments (for example, global financial conditions, commodity prices, and developments in main trading partners) as well as domestic macrofinancial linkages (for example, dollarization, real estate market, and oil-related spillovers).

  • A focus on “connecting the dots” to make an assessment from the system perspective. This entails identifying and linking a number of cross-cutting issues. First, how large do capital buffers need to be to deal with systemic risk while taking banks’ asset quality (asset classification and large exposures) and lending capacity (to support growth) into consideration? Second, how might monetary policy and operations affect the assessment of banking system vulnerabilities, particularly in view of the 2011–14 experience? Third, how should overall liquidity risk be assessed to ensure banks’ proper risk management, especially in view of banks’ reliance on short-term funding, CBR’s liquidity provision, and interbank market fragmentation?

36. CBR generally has access to the data needed for macroprudential surveillance, but certain useful information is currently unavailable. As the financial regulator and supervisor, CBR can readily obtain standard financial soundness indicators and supervisory data from any regulated financial institution. In addition, CBR receives detailed financial information from significant nonfinancial corporates on a confidential basis, which is particularly useful for monitoring foreign-currency liquidity risk. CBR also has access to granular information on mortgage and consumer lending. However, CBR lacks the information needed to form a complete view on the indebtedness and leverage of different sectors and to conduct a comprehensive assessment of corporate and household balance sheets. CBR may also not have complete data on certain shadow banking activities, such as leasing, part of which could lie outside CBR’s regulatory perimeter.41

37. Financial Stability Review could seek to convey key messages more clearly to the general public. Financial Stability Review presents systemic risk assessment by sectors in a forward-looking manner. However, it is at times difficult to understand the relative importance of the many stability concerns raised in the report, and draw appropriate conclusions. The report would also benefit from discussing propagation of risks through relevant macrofinancial linkages and assessing resilience of the banking system to the identified shocks.

C. Recommendations

38. CBR can continue to strengthen its technical capacity for systemic risk monitoring and assessment. Priorities include:

  • Early warning exercise.42 An early warning exercise could help in forming a comprehensive view on financial stability risks. The exercise should also incorporate underlying weaknesses flagged by the early warning system. Furthermore, the analysis of sectoral vulnerabilities could help calibrate macroprudential measures targeted at particular segments.

  • Macroprudential stress testing.43 Stress testing could be conducted for macroprudential surveillance purposes, with no supervisory actions necessarily being adopted based on stress test results. An integrated macrofinancial stress testing framework that accounts for second-round effects, solvency-liquidity links, and cross-sectoral interconnectedness should be developed.

  • “Connecting the dots.” As discussed above, this would aim to ensure that all relevant macrofinancial linkages, including feedback loops between the real and financial sectors, are captured.

39. It would be useful to expand the available information on corporate and household balance sheets. CBR could develop a capacity to compile flow of funds statistics, make an arrangement to receive corporate financial statements for a broader set of companies, and conduct a survey on household finance. In light of the weaker performance of smaller entities, access to corporate financial data with a broader coverage would be important for ensuring effective systemic risk monitoring (see Appendix Figure 2). Going forward, CBR needs to monitor and close data gaps, especially those arising from unregulated financial activities (such as leasing), as well as cross-sectoral and cross-border financial operations.

40. Financial Stability Review could include a clearer overall view of financial stability risks and financial system resilience. To this end, it could highlight the main systemic risks and vulnerabilities up front based on an early warning exercise,44 possibly using a risk assessment matrix of the kind that has figured IMF country surveillance reports. A financial stability map could also help depict changes in multifaceted risks and vulnerabilities (see Figure 9 for examples of financial stability maps). The subsequent discussion could focus more on how risks may be amplified by existing vulnerabilities and propagate through various macrofinancial linkages. and whether the financial system has adequate buffers to withstand the envisaged risks (drawing on stress testing as needed). Finally, Financial Stability Review could discuss policies for safeguarding financial stability.

Figure 9.
Figure 9.

Examples of Financial Stability Maps1

Citation: IMF Staff Country Reports 2016, 307; 10.5089/9781475538489.002.A001

Source: IMF staff estimates.1/ Not based on Russia.
Russian Federation: Financial Sector Assessment Program: Technical Note-Macroprudential Policy
Author: International Monetary Fund. European Dept.