Bank of Russia Instruction No. 59 of March 31, 1997, “On Penalising Credit Organisations for Violating Prudential Standards”

To implement the supervisory powers granted to it by the Federal Law on the Central Bank of the Russian Federation (Bank of Russia), and to form a comprehensive approach to the use of sanctions and to enhance the efficiency of supervision on this basis, the Bank of Russia drafted Instruction No. 59 of March 31, 1997, “On Penalising Credit Organisations for Violating Prudential Standards,” which was approved by Bank of Russia Order No. 02-139 of March 31, 1997.

The main purpose of sanctions is to amend the activity of a credit organisation to bring its activities into conformity with the standards and requirements set by applicable banking legislation and Bank of Russia regulatory rules.

The instruction provides for the use of two kinds of sanctions against credit organisations: preventive (recommendations) and coercive. Priority is given to preventive measures, that is “painless” means of making credit organisations change their ways.

It is up to the supervisory bodies (Bank of Russia and its institutions) to decide what kind of action will be taken. In making a choice between preventive and coercive measures, a supervisory body should take into account the following factors:

— the nature of the violations committed by the credit organisation;

— the causes of these violations;

— the general financial state of the credit organisation;

— the position of the credit organisation in the federal and regional markets of banking services.

The instruction stipulates the cases in which preventive measures are preferable to coercive ones and vice versa. It also provides for a combined use of preventive and coercive measures.

It recommends using preventive measures as a first step in making the credit organisation change its ways, provided that its management and, if necessary, participants (shareholders) act in a constructive and responsible manner. Preventive measures are recommended to be taken in the following cases:

— when the shortcomings discovered in the activities of a credit organisation do not require the use of coercive measures;

— if, as a result of a comprehensive analysis of the activities of a credit organisation, it becomes clear that it would be better to refrain from taking any coercive measures in the given case.

Coercive measures are recommended when the violations committed by a credit organisation make such measures inevitable and when it is clear that preventive measures alone would not be enough to make the credit organisation change its ways.

When selecting coercive measures, it is necessary to take into account the gravity and number of violations and the extent to which these violations jeopardise the interests of creditors and investors.

The instruction spells out both preventive and coercive measures, stipulates the main conditions of their use and also explains some particularities of sanctioning credit organisations for the violations committed by their branches.

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