Russian national countercyclical capital buffer and risk ratio buffers for credit institutions’ computation of capital adequacy ratios (05.06.2019)

Source: Central Bank of the Russian Federation in English

Information Notice
Russian national countercyclical capital buffer and risk ratio buffers for credit institutions’ computation of capital adequacy ratios
The Bank of Russia Board of Directors has decided to retain the countercyclical capital buffer (CCB) rate for Russian credit institutions at zero per cent of risk-weighted assets and to leave unchanged the risk ratio buffers for mortgage and consumer loans, and corporate FX loans. In the context of moderately growing general credit to the economy and considering that increased risk ratios are applied in several lending segments, it has been deemed unreasonable to set the countercyclical capital buffer above zero.
In making its decision on the national countercyclical buffer and risk ratio buffers, the Bank of Russia Board of Directors has recognised the following factors.
Credit activity
The private sector’s debt burden measured as the debt-to-GDP ratio remains below the long-term trend as, among other things, debts of non-financial organisations on external liabilities and internal FX loans remain stable. The value of the credit gap defined as the deviation of the actual debt-to-GDP ratio from the long-term trend stands at −11.2 pp as of 1 April 2019 for private sector liabilities with the external debt factored in.
The credit gap on ruble-denominated debts of individuals came in at −0.6 pp as of 1 April 2019 (-0.7 as of 1 January 2019). It is expected that growth in the debt burden of individuals determined by the retail loans-to-GDP ratio is set to exceed the long-term trend this year. Debt service ratio1 also grows. Over 12 months, this indicator increased by 1 pp to reach 10% as of 1 April 2019 driven, primarily, by unsecured consumer loans. Debt service ratio on retail loans increased by 0.9 pp over 12 months and amounted to 8.4% as of 1 April 2019. In order to limit procyclicality risks associated with the increase of households’ debt burden, the Bank of Russia applies risk ratio buffers.
Effective macroprudential measures
Debts on loans in the segment of unsecured consumer lending keep growing at a high pace, which stood at 25.3%2 in the 12 months ending 1 May 2019. The measures taken by the Bank of Russia to raise risk ratio buffers by 30 pp on newly issued consumer loans with the EIR of 10-30%, effective from 1 April 2019, are expected to curb risks in this segment. New risk ratio buffers apply to nearly all newly issued consumer loans (the share of consumer loans with the EIR of less than 10% does not exceed 1%).3
Should the debt on unsecured consumer loans continue to grow at an excessive rate, the Bank of Russia may additionally raise buffers on unsecured consumer loans depending on the EIR, taking into account the value of the debt burden ratio of an individual, which banks will have to calculate from 1 October 2019 in accordance with Bank of Russia Ordinance No. 4892-U, dated 31 August 2018.
To mitigate systemic risks associated with mortgage loans with a low down payment, the Bank of Russia raised risk ratio buffers for newly issued mortgage loans with a 10-20% down payment effective from 1 January 2019. Loans with a low down payment have an elevated level of credit risk and debt burden per borrower. On the backdrop of the rise in risk ratio buffers, in January 2019, banks widened the gap in rates on loans with a low down payment and other mortgage loans. Rates on loans with a low down payment are 0.2 to 0.5 pp higher than on other mortgage loans, which makes them less attractive. This measure already resulted in the decrease in the share of loans with down payments ranging from 10 to 20% issued in the first quarter of 2019. Such loans accounted for 40.7%4 (42.9% in 2018 Q4, and 43.4% in 2018 Q3).
The share of FX loans in the corporate loan portfolio is reducing further due to, among other things, the risk ratio buffers on FX loans. The debt on the FX loan portfolio declined by 9%5 over the 12 months ending 1 May 2019. The debt is declining in almost all economic activities.
Bank capital adequacy
Credit institutions continue to report acceptable capital adequacy. Credit institutions are seeking to ramp up their capital amid growing credit activity. From the beginning of 2018, credit institutions’ capital adequacy6 decreased by 0.3 pp to 14.5% as of 1 May 2019.7 That said, the effective macroprudential measures form additional capital stock which accounts for 0.7 pp of the banking sector’s capital adequacy. For universal banks, the buffer ranges between 0.4 and 1.2 pp, while in retail banks the range varies between 1.3 and 3.1 pp. The macroprudential requirements imposed on banks are aimed at managing systemic risks and boosting the Russian financial sector stability.
Considering that general credit to the economy is growing at moderate pace and risk ratio buffers are applicable in certain lending segments, it has been deemed unreasonable to set the national countercyclical capital buffer above zero.
The Bank of Russia Board of Directors will hold its next CCB rate review meeting in September 2019.
1 It is calculated as the ratio of regular household loan repayments to household disposable income. This indicator includes disposable income of all Russian households, including individuals without any loans. Therefore, this indicator is undervalued.
2 Credit institutions’ financial statements as per Form 0409115 (Section 3, Loan receivables on other consumer loans grouped into a homogeneous loan portfolio). For credit institutions operating as of the last reporting date, including banks that underwent restructuring.
3 For consumer loans with the EIR of 30 to 35%, the buffer is 200 pp; for consumer loans with the EIR of over 35%, the buffer is 500 pp.
4 According to the quarterly survey of banks which account for over 70% of household loan receivables.
5 For credit institutions that were operating as of the last reporting date, including banks that underwent restructuring. Adjusted for FX revaluation.
6 Except for banks undergoing resolution, including with the involvement of the Banking Sector Consolidation Fund.
7 As of 1 April 2019, the overall capital adequacy ratio of the banking sector was 12.2%.

05 June 2019
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MIL OSI

National countercyclical capital buffer and risk ratio buffers for credit institutions’ computation of capital adequacy ratios (21.12.2018)

Source: Central Bank of the Russian Federation in English

Information Notice
National countercyclical capital buffer and risk ratio buffers for credit institutions’ computation of capital adequacy ratios
The Bank of Russia Board of Directors has decided that add-ons to risk weights for consumer loans extended from 1 April 2019 of which the effective interest rate (EIR) is 10-30% be increased by 30 percentage points. The decision to increase risk ratio buffers for consumer loans stems from the need to avert excessive growth in household debt burden and boost banks’ resilience to potential systemic risks in the unsecured consumer lending market.
Concurrently, the decision has been made to keep the countercyclical capital buffer (CCB) for Russian credit institutions unchanged at zero per cent of risk-weighted assets. In the context of unevenly growing credit activity and considering that increased risk ratios are applied in several lending segments, it has been deemed unreasonable to set the countercyclical capital buffer above zero.
In making its decision on risk-ratio buffers and the national countercyclical capital buffer, the Bank of Russia recognised the following factors.
Unsecured consumer lending market
Accelerated growth of lending activity in unsecured consumer lending is continued. Outstanding loans increased 21.5% over the past 12 months as of 1 November 20181. Meanwhile, annualised growth paces of outstanding loans2 for the August to October 2018 period were 24.4%.
The acceleration in retail lending is further attested by data as of 1 December 2018. In November, household outstanding loans in rubles gained 2.3%, or 2.0%3 on a seasonally adjusted basis, which exceeds this October’s readings (1.8%, seasonally unadjusted / adjusted). Preliminary data also suggest this acceleration owes its origin to the advances in unsecured lending, in the first place.
The quality of newly issued loans remains acceptable. The proportion in consumer lending portfolios of loans that are over 90 days overdue is shrinking (by 3.5 pp in 12 months to 10.2% as of 1 November 2018). Of loans extended between 2017 and early 2018, the share of such loans is equal or under 2-2.5% as of the 12th months of the loan issuance date4. Having said that, current growth rates of outstanding loans, exceeding nominal household income growth rates, result in higher debt burden of households as the current EIR on consumer loans declines slower. The ratio of regular household loan repayments to5 monetary income of households rose in annual terms in the past 12 months by 0.8 pp to 8.4% as of 1 October 2018. Should current growth rates hold firm, household debt next year is set to beat its all-time high of 9.0% seen in 2014. Growing household debts make banks’ credit portfolios more exposed to macroeconomic shocks, spelling the need for banks to build up appropriate capital buffers. Effective from 1 September, new risk ratio buffers apply to unsecured consumer loans. At the same time, with due regard to the above developments suggesting rising systemic risks in unsecured consumer lending, the Bank of Russia has decided that risk ratio buffers will be subsequently increased according to the following scale:
EIR
10-15%
15-20%
20-25%
25-30%
Current risk ratio buffer
20 pp
40 pp
70 pp
100 pp
New risk ratio buffer
50 pp
70 pp
100 pp
130 pp
Credit activity. Credit activity expansion is mixed across its segments. Based on data on loan portfolios of the banking sector, credit activity is overall below its long-term trend.
Lending to non-financial institutions
The portfolio of loans to non-financial institutions, the largest by outstanding loans, is expanding consistent with overall economic performance. Total outstanding loans of corporations for the 12 months grew 5.9%6 as of 1 December 2018. The period’s total outstanding loans in rubles increased 11.5%, while those in foreign currency dropped 6.0%, highlighting continued shrinkage in the share of foreign currency in credit portfolios. Companies’ external debt, as well as their liabilities under debt securities and national banks’ loans, was overall unchanged over the past 12 months. This debt added 0.5% (as of 1 October 2018)7, sending the non-financial institutions’ debt to GDP ratio down in the period under study by 6 pp to 61%.
Mortgage lending
In the ruble-denominated housing mortgage lending segment, annual growth in outstanding loans totalled 26.0% as of 1 November 20188. On an annual basis, the period saw growth in outstanding loans in the August to October 2018 period decline to 21.9% p.a., in a sign of cooling credit activity.
For all the currently high growth paces of mortgage lending, its growth comes so far without substantial financial stability risks. Aiming to ensure sustainable development of mortgage lending, the Bank of Russia has taken a number of measures since 1 January 2018; they did not however lead to reduction in the share of loans with down payments ranging from 10% to 20%, which in 2018 Q3 was 43.4%9 (41.4% in 2018 Q2 and 41.2% in 2018 Q1). In light of this, the Bank of Russia decided on 1 October 2018 to increase capital requirements for banks issuing such loans from 1 January 2019 (for more details see Financial Stability Review).
Credit-to GDP gaps (according to the Basel Committee on Banking Supervision)
Estimated credit-to-GDP gaps (defined as the difference between the credit-to GDP ratio and its long-run trend) remain in negative territory as the recovery in credit activity across the corporate and retail segments has been mixed. As banks are currently ramping up credit activity in retail lending results, the negative credit gap in relation to households’ debt is declining. Should current retail lending expansion rates prove sustainable, they can push the credit gap into positive territory in the course of next year.
Capital adequacy ratios. Credit institutions continue to report capital adequacy. On the background of growing credit activity, credit institutions’ capital is seeing growth. Over the last 12 months, credit institutions’10 capital adequacy ratio10 N1.0 held firm (14.5% as of 1 November 201811).
Considering that corporate lending is growing at moderate rates and risk ratio buffers are applicable in certain household lending segments, it has been deemed unreasonable to set the countercyclical capital buffer above zero. Therefore, the Bank of Russia Board of Directors’ 1 October 2018 decision remains in force.
The Bank of Russia Board of Directors will hold its next CCB rate / risk ratio buffer review meeting in March 2019.
1 Credit institutions’ financial statements as per Form 0409115 (Section 3, Credit Exposure: Other Consumer Loans, Grouped into a Homogeneous Loan Portfolio). For credit institutions operating as of the last reporting date, including banks that underwent restructuring.
2 Seasonally adjusted.
3 Calculated using Credit Institution Reporting Form 0409101. For credit institutions operating as of the last reporting date including banks that underwent restructuring.
4 According to National Bureau of Credit Histories data.
5 Calculated based on the methodology available on the Bank of Russia website.
6 For credit institutions active as of the latest reporting date including banks that underwent restructuring and excluding banks under resolution. Adjusted for FX revaluation.
7 Adjusted for FX revaluation.
8 Calculated using Credit Institution Reporting Form 0409316. For credit institutions operating as of the last reporting date including banks that underwent restructuring.
9 Based on a quarterly survey of banks accounting for over 70% of households’ outstanding loans.
10 Stripping out banks under resolution including with the involvement of the Banking Sector Consolidation Fund.
11 As of 1 November 2018, the banking sector’s overall capital adequacy ratio was 12.4%.

21 December 2018
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MIL OSI

Countercyclical buffer to capital adequacy ratio and other macroprudential measures of the Bank of Russia (01.10.2018)

Source: Central Bank of the Russian Federation in English

Information Notice
Countercyclical buffer to capital adequacy ratio and other macroprudential measures of the Bank of Russia
The Bank of Russia Board of Directors has decided to retain the countercyclical capital buffer (CCB) rate for Russian credit institutions at zero per cent of risk-weighted assets. In order to mitigate risks associated with the faster growth of lending activity in the segment of unsecured consumer lending, the Bank of Russia has raised risk ratios on loans extended after 1 September 2018. In view of further market developments, measures taken by the Bank of Russia to limit the share of mortgage loans with a small down payment may be tightened. Considering that increased risk ratios are applied in certain lending segments, it has been deemed unreasonable to set the countercyclical capital buffer above zero.
In making its countercyclical buffer decision, the Bank of Russia has recognised the following factors.
Credit activity. Credit activity is expanding at various paces across its segments.
The portfolio of loans to non-financial organisations, the largest by loan receivables, expands at the rate of the economy in general. Total outstanding loans of corporations for the 12 months grew 5.1%1 as of 1 September 2018. The period’s total outstanding loans in rubles increased 10.4%, while those in foreign currency dropped 7.1%, demonstrating that the dedollarisation of the credit portfolio is continuing.
There was further acceleration in growth of lending activity in unsecured consumer lending. Loan receivables increased 19.4% over the last 12 months, as of 1 September 20182. Their annualised growth rate3, the leading indicator of lending activity, amounted to 22.8% per annum in June-August 2018.
Annual growth in loan receivables in the ruble-denominated housing mortgage lending segment totalled 25.2% as of 1 September 20184. Growth in lending in this segment is driven both by banks’ revision of their pricing conditions and easing of down payment requirements. The share of new mortgage loans with the down payment of 10% to 20% stabilised at 42.6% in 2018 Q2 (vs 42.3% in 2018 Q1), although remaining at the historic highs5. Loans extended in 2018 Q2 with the down payment under 10% totalled less than 1.5%.
Against the backdrop of an uneven recovery in credit activity across various lending segments, estimated credit gaps for both corporate and retail lending (defined as the difference between the credit-to-GDP ratio, adjusted for FX revaluation, and its long-term trend) remain in the negative territory. This suggests that credit activity is so far below the long-term trend.
Capital adequacy ratios. Credit institutions are seeking to ramp up their capital amid growing credit activity. Over the last 12 months, credit institutions’6 capital adequacy ratio N1.0 grew on average 0.4 pp reaching 14.5% as of 1 August 20187.
Bank of Russia measures to limit retail lending risks. Although mortgage lending has grown rapidly, the unchanged debt burden of borrowers confirms that the current growth so far comes without substantial financial stability risks. The Bank of Russia’s measures effective 1 January 2018 aimed at sustainable development of the mortgage segment (see the 29 March 2018 press release for further detail) failed to decrease the share of loans with down payments ranging from 10% to 20% but helped stabilise it. Therefore, the Bank of Russia decided to increase the requirements for banks’ capital with respect to such loans extended from 1 January 2019 (see the Bank of Russia’s press release ‘Setting buffers to risk ratios for calculating capital adequacy requirements by credit institutions’ for further detail).
Due to accelerated growth of unsecured consumer lending, the Bank of Russia has raised risk ratios on unsecured consumer loans extended after 1 September 2018 with the effective interest rate (EIR) of 10% to 30%. If growth of loan receivables continues to exceed growth of nominal household income amid current average EIR on consumer loans, households might face higher debt burden.
Higher risk ratios on certain credit claims increase banks’ capital cushion necessary to cover potential losses. Considering that increased risk ratios are applied in certain household lending segments, it has been deemed unreasonable to set the countercyclical capital buffer above zero.
The new macroprudential regulation mechanism of the Bank of Russia will be applied from 8 October 2018. In accordance with that approach, the risk ratios for certain asset types, which are set by Bank of Russia Instruction No. 180-I, dated 28 June 2017, ‘On Banks’ Required Ratios’, are brought to standard values in line with Basel III. The Bank of Russia Board of Directors has set buffers to risk ratios.
The Bank of Russia Board of Directors will hold its next CCB rate review meeting in December 2018.
1 For credit institutions that were operating as of the last reporting date, including banks that underwent restructuring. Adjusted for FX revaluation.
2 Credit institutions’ financial statements as per Form 0409115 (Section 3, Loan receivables on other consumer loans grouped into a homogeneous loan portfolio). For credit institutions operating as of the last reporting date, including banks that underwent restructuring.
3 Seasonally adjusted.
4 Credit institutions’ financial statements as per Form 0409316. For credit institutions operating as of the last reporting date, including previously reorganised banks.
5 According to the quarterly survey of banks which account for over 70% of household loan receivables.
6 Excluding banks undergoing resolution, including with the involvement of the Banking Sector Consolidation Fund.
7 As of 1 September 2018, the overall capital adequacy ratio of the banking sector was 12.2%.

01 October 2018
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MIL OSI

On countercyclical buffer to capital adequacy ratio (04.07.2018)

Source: Central Bank of the Russian Federation in English

Information Notice
On countercyclical buffer to capital adequacy ratio
The Bank of Russia Board of Directors has decided to retain the countercyclical capital buffer (CCB) rate for Russian credit institutions at zero per cent of risk weighted assets. Growth in lending varies across its segments: consumer and mortgage lending shows an acceleration in growth rates, while the rate of growth of non-financial organisations’ debt remains moderate against a declining share of foreign currency in credit portfolios. The Bank of Russia’s recent measures to limit the systemic risks of unsecured consumer lending and support high standards in mortgage lending have yet to make impact on banks’ lending activity. Their impact may be evaluated based on 2018 Q2 data.
In making its countercyclical buffer decision, the Bank of Russia has recognised the following factors.
Credit activity. Credit activity is expanding at varying paces across its segments.
Credit portfolios in the lending to non-financial organisations segment, the largest of all by total outstanding loans, is seeing reduction in the share of foreign currency. As a result, as of 1 June 2018, total outstanding loans of corporations for the 12 months grew 4.3%1. The period’s total outstanding loans in rubles increased 8.5%, while those in foreign currency dropped 5.7%.
There is further acceleration in growth of lending activity in unsecured consumer lending. Loan receivables increased 15.7% over the last 12 months as of 1 June 20182. Their annualised growth paces3, leading indicators for lending activity, amounted to 17.8% per annum in the March to May 2018 period. Further growth potential is possible on the back of reduced interest rates in cash loans — the major segment of unsecured consumer lending.
Annual growth in loan receivables in the housing mortgage lending segment totalled 22.4% as of 1 June 20184. Expanded lending in this segment is driven both by banks’ review of price conditions and the easing of down payment requirements. The share of newly extended mortgage loans with down payments ranging from 10% to 20% edged slightly higher from 42.4% in 2017 Q4 to 44% in 2018 Q1.5 Loans extended in 2018 Q1 with down payments under 10% total less than 1.0%.
Against the backdrop of a mixed recovery in lending across various segments, estimated credit gaps for both corporate and retail lending (defined as the difference between the credit-to-GDP ratio, adjusted for FX revaluation, and its long-term trend) remain in negative territory. This suggests that credit activity is so far below a long-term trend.
Capital adequacy ratios. Credit institutions are seeking to ramp up sources of their capital amid growing credit activity. In the twelve months, capital adequacy (N1.0) went up 0.6 pp to reach 15.1% as of 1 June 2018 (excluding several major banks undergoing resolution including with the involvement of the Banking Sector Consolidation Fund).
Bank of Russia action to limit retail lending risks. Although mortgage lending has been showing growing paces, the unchanged debt burden of borrowers confirms that the current growth so far brings no substantial financial stability risks. The Bank of Russia’s measures effective 1 January 2018 aimed at sustainable development of the mortgage segment (see the 29 March 2018 press release for further detail) had little bearing in Q1 on the proportion of loans with down payments ranging from 10 to 20%. This is driven by a substantial lag between loan application approval and disbursement dates. The efficacy of these measures can be analysed based on Q2 results.
Unsecured loans extended after 1 May 2018 with the effective interest rate between 15% and 25% are subject to increased risk ratios. The efficacy of these measures can be judged based on Q2 results.
Higher risk ratios on certain credit claims increase banks’ capital cushion necessary to cover potential losses. In these circumstances and taking into account the heterogeneous recovery of lending activity, it is not reasonable to set the countercyclical buffer for the capital of Russian credit institutions above zero.
The Bank of Russia Board of Directors will hold its next CCB rate review meeting in September 2018.
1 For credit institutions that were operating as of the last reporting date including banks that underwent restructuring. Adjusted for FX revaluation.
2 Credit institutions’ financial statements as per Form 0409115 (Section 3, Loan receivables on other consumer loans grouped into a homogeneous loan portfolio). For credit institutions operating as of the last reporting date, including banks that underwent restructuring.
3 Seasonally adjusted.
4 Calculated using Bank Reporting Form 0409316. For credit institutions operating as of the last reporting date, including previously reorganised banks. Adjusted for foreign currency revaluation.
5 According to the quarterly survey of banks which account for over 70% of household loan receivables.

04 July 2018
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MIL OSI