Bank of Russia to launch collateral reform in banking
The mega-regulator intends to encourage banks to focus on assessing loan quality and their counterparties’ credit quality, rather than on collateral. A banking sector based on secured lending is essentially akin to a pawnshop. This type of banking fails to meet today’s challenges and does not ensure the appropriate level of lenders’ resilience. The reform will also address the problem of withdrawal of assets including property and securities accepted as collateral. This is outlined in the public consultation report titled ‘Improving the regulation of collateral’, the Bank of Russia releases for discussion with market participants.
Stage one of the reform will see a changed approach to the creation of loss provisions taking into account pledged assets. At the next stage, three to five years into the reform, the regulator will expand its current supervisory toolkit. In particular, there are plans to specify the implementation of a ban on changes / termination of collateral agreements, as a novel supervisory response. This regulatory mechanism would complement the list of measures as per Article 74 of the Federal Law ‘On the Central Bank of the Russian Federation (Bank of Russia)’. Under review is also the potential regulatory requirement for a Bank of Russia approval of recognition of pledged assets for loss provisions.
Aiming to improve the supervisory framework, the Bank of Russia will seek feedback from market participants on the need for disclosure of the regulator’s actions. It is contemplated that information related to regulatory decisions introducing a ban / restriction on certain banking operations will be made public. Based on findings as to the practice and effectiveness of such ban disclosure, a gradual expansion of this rule as regards other supervisory measures is not ruled out at a later stage.
Alongside mandatory disclosure, banks would also be held accountable for violations of restrictions on certain banking operations.
This whole pack of measures is intended to enhance lenders’ overall market discipline.
The reviewed approach to assessing collateral for a loan is seen as a logical extension of the Bank of Russia's efforts to enhance banking regulation, driven by the need to boost the sector’s resilience. Once put into practice, the regulatory innovations under study will pave the way for a systemic overhaul of collateral regulation.
