Reserve Requirements

Required reserves are the amount of funds that credit institutions are required to hold on their accounts opened with the central bank or in any other form established by the central bank.

In Russia, required reserves are Russian credit institutions’ funds that they must hold on designated accounts opened with the Bank of Russia in the currency of the Russian Federation.

Central banks have been using reserve requirements since their establishment. However, the functions of required reserves have evolved substantially over the years. At the beginning, required reserves performed the single function of insurance in order to protect credit institutions against a bank run. In the middle of the 20^th century, core central banks used required reserves to regulate money supply based on the assumption of the strong correlation between bank reserves, lending and money supply. Throughout the history central banks have been attempting to control cross-border capital flows and affect the structure of banks’ balance sheets via required reserves (recently, for macroprudential purposes as well). Finally, at the turn of the 21^st century, required reserves became one of the main instruments to manage banking sector liquidity and money market interest rates. Nowadays the Bank of Russia believes the key function of reserve requirements is to create conditions for efficient liquidity and money market interest rates management.

Required reserves that credit institutions maintain on correspondent accounts with the central bank serve to form sustainable and foreseeable demand for liquidity both for the separate credit institution and for the banking sector as a whole.

Credit institutions can determine the amount of funds they need to raise from or deposit on money market more precisely as long as they hold the predetermined amount of required reserves on correspondent accounts, which does not depend on payments and settlements. Thus, required reserves encourage banks to operate in money market more actively.

For the purpose of setting the required reserve ratios, central banks tend to ensure an amount of balances on banks’ correspondent accounts exceeding the funds that banks need for payments and settlements. Besides, banks may average their required reserves. This allows both credit institutions and the central bank to ensure resistance to changes in autonomous liquidity factors. Thus, unpredictable liquidity outflows due to the payments to the budget, for instance, allows a credit institution to reduce the balances on its correspondent accounts and avoid raising funds at a high price in money market or from the central bank. Vice versa, in the case of an unexpected inflow of funds, a credit institution may deposit no funds at a low price in money market or with the central bank, but hold them on its correspondent accounts for averaging.

By choosing the level of required reserve ratios, central banks may regulate the amount of a structural liquidity deficit or surplus. Furthermore, central banks may both influence the liquidity situation in general (to conduct one-way liquidity management operations in the medium term) and optimize regular operations’ level.

At the same time, required reserves continue to be a liquidity buffer. For credit institutions, required reserves are a source of funds for payments and settlements during business hours. The opportunity to deviate from the established amount of funds to be maintained on their correspondent accounts owing to the averaging mechanism enables banks to avoid serious problems when processing late payments and settlements. Besides, the central bank can use required reserves as an efficient and urgent instrument to provide liquidity to all credit institutions at once in a crisis.

Pursuant to Article 35 of the Federal Law ‘On the Central Bank of the Russian Federation (Bank of Russia)’, the Bank of Russia’s reserve requirements are one of the main instruments of its monetary policy. According to Article 25 of the Federal Law ‘On Banks and Banking Activities’ a credit institution must comply with reserve requirements. An obligation of credit institution to comply with reserve requirements arises upon the receipt of banking licence.

The Bank of Russia Board of Directors establishes the required reserve ratios, the required reserve averaging ratios, and the procedure for credit institutions’ compliance with reserve requirements, including the procedure for depositing (holding) required reserves with the Bank of Russia.

The procedure for calculating and depositing (holding) required reserves with the Bank of Russia is stipulated by the Bank of Russia Regulation ‘On Credit Institutions’ Required Reserves’ (hereinafter, the Regulation).

Each Russian credit institution must hold its required reserves on its accounts opened with the Bank of Russia in the currency of the Russian Federation. The largest part of required reserves is deposited on correspondent account / correspondent subaccounts (hereinafter, correspondent account), while the remaining part — on special required reserve account (hereinafter, special account).

The total amount of required reserves to be maintained by a credit institution equals to the determined share of its reservable liabilities  established by required reserve ratios.

The total amount of required reserves is calculated during the regulation period (from the 12^th to the 14^th day of a calendar month) by the Bank of Russia’s authorised unit for each credit institution for the reporting period (the preceding calendar month).

Required reserves on correspondent account are maintained with the option of their averaging during the averaging period (which equals to four or five weeks, the schedule for the next year is published in advance). Maintaining the required reserves by averaging means that a credit institution can use these funds for payments and settlements and also that it does not need to ensure the prescribed balance on its correspondent account on a daily basis, provided that it achieves such a balance on average over the averaging period.

Required reserves on special account are deposited for the time between the periods when required reserves are recalculated and readjusted. The regulation period with the recalculation is normally established once a year. Credit institutions’ required reserves are frozen on special accounts and may not be used for payments and settlements. On the other hand, these accounts are not subject to any seizure either.

Required reserves on special account are calculated as follows. First, the total amount of required reserves is determined. Then, one calculates the amount of required reserves to be maintained on correspondent account using the averaging ratio. Finally, the necessary amount of required reserves to be deposited on special account is calculated as the difference between the total amount and the amount of required reserves to be maintained on correspondent account.

During the regulation period with the recalculation, funds are transferred to special account.

During the regulation period without the recalculation the amount of required reserves maintained and averaged on correspondent account is calculated as the difference between the total amount of required reserves and the amount of required reserves that was deposited earlier on special account.

The regulation of required reserves is carried out on a monthly basis. The unscheduled regulation (including with the recalculation) is possible in the following cases:

• based on the Bank of Russia Board of Directors’ decision;
• if requested by a credit institution when the amount of its reservable liabilities decreases by 40% or more of the amount of its reservable liabilities calculated in the course of the last regulation with the recalculation;
• when the amount of required reserves actually deposited on special account exceeds the total amount of required reserves;
• in other defined cases.

The Bank of Russia’s authorised unit send documents to a credit institution in a digital form signed with an electronic signature. If it is technically impossible, the hard copies of the documents are mailed.

Currently, the Bank of Russia accrues no interest on amount of credit institutions’ required reserves.

A credit institution pays a penalty in the following cases:

• should it fail to transfer funds ensuring the sufficient amount of required reserves on special account or when a shortfall is revealed after the end of the regulation period (the amount of funds on special account is below the necessary amount);
• should it fail to fulfil the required reserve averaging (the amount of funds on correspondent account over the averaging period is on average below the necessary amount).

The information on required reserve ratios and required reserve averaging ratios is available on the Bank of Russia website.

For the statistics on required reserves see subsection Banking Sector Liquidity, Monetary Policy Instruments and Other Operations of the Bank of Russia under the Statistics section on the Bank of Russia website.

If you have any questions regarding compliance with reserve requirements, please contact the Monetary Policy Department directly at email: idkp_info@cbr.ru or telephone: +7 (495) 771-45-95.

Concept and categories of reservable liabilities (reserve base)

Reservable liabilities are credit institution’s liabilities in the currency of the Russian Federation and in foreign currency used to calculate the amount of required reserves. The list of the balance sheet accounts, the balances of which are included in the calculation, is determined in Chapter 2 of the Regulation.

For banks with a basic licence, the amount of reservable liabilities is calculated using the reporting compiled and submitted to the Bank of Russia according to Reporting Forms 0409101, 0409302, 0409501, and 0409603 as determined by the Bank of Russia Ordinance ‘On the List, Forms and Procedure for Compiling and Submitting Credit Institutions’ Reporting Forms to the Central Bank of the Russian Federation’.

For banks with a universal licence and non-bank credit institutions, the amount of reservable liabilities is calculated using the data on the average monthly balances of reservable liabilities compiled and submitted to the Bank of Russia pursuant to the Regulation.

Credit institutions’ reservable liabilities differ by currency (the currency of the Russian Federation, currencies of unfriendly countries, other currencies) and source. By the latter the credit institution’s liabilities are categorised as follows:

• the liabilities to non-resident legal entities include liabilities to non‑resident legal entities (including liabilities to non-resident banks), as well as liabilities to non-resident individual entrepreneurs arising under bank (correspondent) account agreements and agreements for raising funds (credit, deposit and other agreements);
• the liabilities to individuals include liabilities to individuals (both residents and non-residents), arising under bank deposit agreements (including those confirmed by savings certificates) and bank account agreements;
• the other liabilities.

In order to reduce the regulatory burden on banks with a basic licence the amount of liabilities in currencies of unfriendly countries is assumed to be zero (due to the small size of such liabilities in the total amount of reserved liabilities in foreign currency).

Reservable liabilities calculation specifics

A credit institution’s liabilities to clearing participants (other than credit institutions) on repo and deposit transactions conducted on the exchange via the credit institution—central counterparty are included in the calculation considering the following. Their amount is calculated using the relevant ratios applicable to the credit institution’s liabilities to all clearing participants on the abovementioned transactions. Thus, required reserves for the transactions shall be formed by the credit institution—ultimate borrower, rather than the credit institution—central counterparty. The credit institution—central counterparty acts as an intermediary between clearing participants and has limited opportunities to pass on the costs to the creditor or the ultimate borrower.

The ratios on transactions involving the credit institution—central counterparty are coefficients ranging from zero to one. They characterise the average ratio of credit institutions’ liabilities on repo and deposit transactions in the currency of the Russian Federation, in currencies of unfriendly countries and in other currencies to clearing participants (other than credit institutions) to the total amount of credit institutions’ liabilities on such transactions.

The values of the ratios are set by the Bank of Russia Board of Directors based on the data received from the credit institution—central counterparty about the amounts of such transactions.

Liabilities excluded from reservable liabilities:

• liabilities to the state corporation Deposit Insurance Agency (hereinafter, the DIA) and/or to investors in accordance with the DIA participation plan;¹
• interbank liabilities on debt securities issued by a credit institution. Their amount is calculated by applying the adjustment factor to all liabilities of the credit institution on the issued debt securities. The adjustment factor is a coefficient ranging from zero to one, set by the Bank of Russia Board of Directors.

¹ Investors in accordance with the DIA participation plan are entities (other than credit institutions) that acquire at least 75% of the bank’s ordinary shares if the bank is incorporated as a joint-stock company (stakes in the bank’s authorised capital providing at least three-quarters of the total number of votes of the shareholders if the bank is incorporated as a limited liability company) as a bank bankruptcy prevention mechanism.

Liabilities can be excluded from reservable liabilities:

• liabilities (that appear as a result of obligations’ fulfillment) on individual clearing and other form of intermediation to other credit institutions (balance account № 30414): for non-bank credit institutions;
• liabilities arising from the settlements on foreign securities that are blocked by international clearing organizations (balance account № 47422): for banks holding universal licence and non-bank credit institutions;
• other liabilities.

Required reserves calculation specifics

The Bank of Russia calculates the total amount of required reserves as follows:

• for banks with a basic licence, using the reporting compiled and submitted with accordance to Reporting Forms 0409101, 0409302, 0409501, and 0409603 taken for the first day of the calendar month following the reporting one;
• for banks with a universal licence and non-bank credit institutions, using the data they compiled on average balances over the reporting period (calendar month) on their balance sheet accounts and identification codes (refer to Appendix 4¹ of the Regulation).

The amount of reservable liabilities (considering the above specifics) is calculated for each of the nine categories (each of the source categories comprises three sub-categories by the currency type). The resulting amounts are multiplied by the relevant required reserve ratios and summed up.

The total amount of required reserves is calculated by deducting from the  total value the balance of cash in the currency of the Russian Federation that is available as of the first day of the month following the reporting one (for banks with a basic licence) or as average for the reporting month (for banks with a universal licence and non-bank credit institutions) within 25% of required reserves on liabilities in the currency of the Russian Federation.

Subsection Main characteristics describes the distribution of total amount of credit institution’s required reserves between its required reserves deposited on special  account and required reserves that are averaged on correspondent account.

The procedure for regulating the amount of required reserves is stipulated in Chapter 3 of the Regulation.

During the regulation period, the Bank of Russia’s authorised unit:

1. Calculates the total amount of credit institution’s required reserves for the reporting period, including the amount of required reserves averaged on correspondent account, and completes Part 1 of the Regulation Notice.
2. In the course of the regulation with the recalculation, identifies insufficient or excessive amount of required reserves on special account.
3. Verifies whether the credit institution maintained the appropriate amount of required reserves on its correspondent account over the expired averaging period, determines the amount of non-performance of required reserve averaging (in the case of non-performance), and completes Part 2 of the Regulation Notice.
4. Sends the Regulation Notice and the data (Appendices 2–4 to the Regulation) to the credit institution.

If the Regulation Notice with the data is prepared in the form of an electronic document signed with an electronic signature according to the Album of Electronic Messages to Exchange Information on Required Reserves that is available in the digital form via the Bank of Russia website.

The single hard copy of the Regulation Notice with the data (if it is technically impossible to send the digital version) should be sent for the credit institution to receive it no later than on the last day of the regulation period.

It is acceptable to send an updated Regulation Notice with the data should the credit institution replace its reporting.

5. In the course of the regulation with the recalculation, refunds excessive amount of required reserves on special account to correspondent account by sending the relevant order that serves as a foundation for a payment order.

During the period of the regulation with the recalculation a credit institution transfers funds via payment order, to its special account to ensure the sufficient amount of required reserves on special account, as specified in the Regulation Notice.

Should a credit institution fail to transfer funds to ensure the sufficient amount over the period of the regulation with the recalculation, the Bank of Russia’s authorised unit writes down the amount of the shortfall from the credit institution’s correspondent account (by sending the relevant order to prepare a collection order).

Should a credit institution submit or replace its reporting/data on average monthly balances after the end of the regulation period, the Bank of Russia’s authorised unit calculates the total amount of required reserves within two business days following the day when the credit institution submitted or replaced its reporting/data on average monthly balances. In this case, the Regulation Notice is not sent, and the insufficient/excessive amount is not to be transferred/refunded. The credit institution pays a penalty if it fails to ensure the sufficient amount of required reserves on special account or perform their averaging after the submission or replacement of the reporting/data on average monthly balances.

If a credit institution fails to comply with reserve requirements, the Bank of Russia’s authorised unit charges a penalty pursuant to Chapter 4 of the Regulation.

Factors that will lead to imposition of penalties:

1. the failure to transfer funds ensuring the sufficient amount of required reserves on special account during the regulation period;
2. the absence of sufficient amount of required reserves on special account, which had been revealed following the submission or replacement of the reporting/data on average monthly balances after the end of the regulation period; or
3. the failure to perform required reserve averaging.

The Bank of Russia’s authorised unit calculates the penalty in accordance with the Clauses 2 and 3 of Appendix 5 to the Regulation.

The penalty is not charged if the amount is smaller than 100 rubles.

If the insufficient amount of required reserves on special account appeared as a result of the failure to transfer funds during regulation period, the penalty is calculated considering double key rate on the last day of the corresponding regulation period ignoring the number of calendar days with insufficient amount of required reserves.

If the insufficient amount of required reserves on special account was revealed following the submission or replacement of the reporting/data on average monthly balances after the end of the regulation period, the penalty is calculated considering double key rate during the period and the number of calendar days with insufficient amount of required reserves.

If a credit institution is penalised for its failure to perform required reserve averaging, the penalty is calculated considering double key rate and the number of calendar days in corresponding averaging period.

The Bank of Russia’s authorised unit sends an order to credit institutions allowing an opportunity to pay the penalty voluntarily. Should a credit institution fail to fulfil this order, the Bank of Russia recovers the penalty from the credit institution through legal proceedings.

The penalty for a failure to comply with reserve requirements is designed to create market incentives for credit institutions to maintain required reserves at the sufficient level. The application of the double key rate is based on the assumption that a credit institution preferred not to borrow the necessary funds at a market rate around the key rate or to deposit funds on money market rather than to maintain required reserves at the prescribed level. Thus, if a credit institution is penalised, it shall pay twice the amount that it has technically saved or earned.