Financial stability is the resilience of the financial system to shocks and its smooth and effective operation.
As in most countries in the world, financial stability in Russia is ensured by the central bank. This function is envisaged by Article 3 of the Federal Law ‘On the Central Bank of the Russian Federation (Bank of Russia)’.
Financial stability risks that might arise for the financial system can be classified into internal and external ones. External risks can include, among others, a global economic crisis, a deterioration of the external economic environment, a decrease in prices for export commodities which are important for the country, and many other circumstances. These are also such developments as trade wars, introduction of sanctions by foreign countries, and disintegration processes happening in today’s world increasingly more often. Internal risks include bubbles, or an overheating in individual markets and a loss of stability by large financial institutions.
The Bank of Russia carries out regular monitoring of systemic risks (of financial institutions, financial market infrastructures, development institutes, and shadow banking) and assesses the stability of financial system organisations, including through stress testing.
The Bank of Russia releases the Financial Stability Review twice a year (in May and November) describing the vulnerabilities of the financial system, analysing potential shocks, and assessing financial institutions’ resilience to these shocks.
The Bank of Russia’s key instrument to maintain financial stability is macroprudential policy which is a set of measures to mitigate systemic risk in the financial market or its individual segments.
Macroprudential instruments are employed to achieve two main objectives:
1. To reduce the vulnerability of the financial system (caused by, for instance, an increase in households’ debt burden and a weakening of lending standards).
Specifically, in October 2019, the Bank of Russia introduced the debt service-to-income (DSTI) ratio measuring a borrower’s debt burden. Banks and microfinance organisations should consider a borrower’s DSTI when making a decision on issuing a loan or a microloan in order to prevent a bubble in the consumer lending market, which is a situation where people lack sufficient income to service their debt.
2. To accumulate capital buffers in the financial system to cover possible future shocks.
In particular, the Bank of Russia applies sectoral risk-weight add-ons to certain types of assets if their credit risk is assessed at a relatively higher level. This means that banks are required to ‘freeze’ a certain amount of their funds in order to be able to cover losses and continue lending to the economy even in a challenging economic situation.
To enhance interagency communication, the National Council for Financial Stability (NCFS) was established in July 2013. The NCFS includes senior officers of the Ministry of Finance, the Ministry of Economic Development, the Deposit Insurance Agency, and the Bank of Russia, as well as representatives of the Presidential Administration. The NCFS discusses financial stability issues and delivers recommendations to the authorities. When the Ministry of Finance, the Ministry of Economic Development or the Bank of Russia receive recommendations from the NCFS, they must report on whether they comply with them or not within the timeframe indicated in the meeting minutes (the comply-or-explain principle).
In 2011, the Bank of Russia established the Financial Stability Department which regularly monitors systemic risks (to credit and non-bank financial institutions, development institutions and shadow banking), elaborates macroprudential policy tools and assesses their effectiveness, supervises and regulates systemically important financial market infrastructure organisations, and participates in the stress-testing of credit institutions, NPFs and systemically important insurance companies.