Bank of Russia leaves unchanged the countercyclical capital buffer (CCB) rate for Russian credit institutions and risk ratio buffers

The Bank of Russia Board of Directors has decided to keep the countercyclical capital buffer (CCB) rate for Russian credit institutions at zero percent of risk-weighted assets and to leave unchanged the risk ratio buffers for mortgage and consumer loans, and corporate foreign currency 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 capital 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 relatively stable as, among other things, debts of non-financial organisations on external liabilities and internal FX loans remain stable. Non-financial organisations total debt on external liabilities, internal loans and debt securities increased by 2.9%¹ over 12 months as of 1 October 2019.

The annual growth rates of loan debt in segment of unsecured consumer lending decreased to 22.6%² as of 1 November 2019 (from 25.3% as of 1 May 2019), but remains high. The household debt burden is rising. Over the first 9 months of 2019, the debt service-to-income ratio³ increased from 9.9% to 10.6% driven, primarilty, by unsecured consumer loans. The debt service-to-income ratio on retail loans grew from 8.3% to 8.9% over the same period and came close to the peak values of 2014 peaks (9.3%). 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

Increased risk ratio buffers to new unsecured consumer loans issued from 1 October 2019 are applied depending not only on weighted average effective interest rate (EIR), but also on the debt burden ratio of an individual. These measures help reduce the growth rate of outstanding loans.

To mitigate systemic risks associated with mortgage loans with a 10-20% down payment, the Bank of Russia raised risk ratio buffers for newly issued mortgage loans effective from 1 January 2019. Loans with a low down payment have an elevated level of credit risk. On the backdrop of the rise in the risk ratio buffers, in January 2019, banks widened the gap in rates on loans with a low down payment and other mortgage loans. This measure already resulted in the decrease in the share of loans with a down payment ranging from 10% to 20% in the total amount of issued loans. In 2019 Q3, the share of such loans decreased by 7.6 pp to total 35.7%.⁴ To maintain balanced growth in mortgage lending and to limit households’ debt burden, in December 2019 the Bank of Russia will publish its consultation paper on risk ratio buffers to discuss this issue with market participants. These buffers will depend on both loan to fair value of collateral and debt burden to income ratio.

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 7.3%⁵ over the 12 months ending 1 December 2019. The debt is declining in almost all economic activities.

Bank capital adequacy

The capital adequacy of credit institutions remains at an acceptable level. Credit institutions increased their capital amid growing credit activity from 10.5 to 11.2 trillion rubles⁶ over the 12 months ending 1 November 2019. Credit institutions’ capital adequacy decreased by 0.3 pp to 14.2%⁶ over 12 months ending 1 November 2019.⁸ The effective macroprudential measures stimulate formation of additional capital stock which accounts for 0.8 pp of banking sector’s capital adequacy (0.5 pp as of 1 January 2019).⁸ For universal banks, the risk ratio buffer ranges between 0.4 and 0.8 pp of the banks’ capital adequacy, while for retail banks the range varies between 0.6 and 4.0 pp.

The Bank of Russia Board of Directors will hold its next CCB rate and risk ratio buffers review meeting in March 2020.

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