On countercyclical buffer to capital adequacy ratio
The Bank of Russia Board of Directors has decided to retain the countercyclical capital buffer (CCB) rate for Russian credit institutions at zero per cent of risk weighted assets. Growth in lending varies across its segments: While accelerated growth rates are seen in consumer lending, lending to non-financial organisations is still progressing at a moderate growth pace. Aiming to limit the systemic risks of unsecured consumer lending and support high standards in mortgage lending, the Bank of Russia has increased risk ratios.
In making its countercyclical buffer decision, the Bank of Russia has recognised the following factors.
Credit activity. Credit activity is expanding at various paces across its segments.
The lending to non-financial organisations segment, the largest by loan receivables, shows a trend towards a rise in loan receivables in rubles and a slight decline in loan receivables in foreign currency (for credit institutions operating as of the last reporting date, including banks that underwent restructuring). As of 1 March 2018, the annual growth rate of receivables in the portfolio of ruble loans to non-financial organisations stood at 7.5%1. Adjusted for exchange rate revaluation, the portfolio of foreign currency loans to non-financial organisations declined 1.0% in the reporting period.
There was further acceleration in growth of lending activity in unsecured consumer lending. Loan receivables increased 13.2% over the last 12 months, as of 1 March 20182. Credit activity is rising on the back of expansion in both credit card lending (loan receivables up 15.5% in 2017) with the effective interest rate between 20 and 25%, and cash loans (loan receivables up 10.5%)3 with the effective interest range between 15 and 20%. Credit activity is expanding against the backdrop of an overall decline in interest rates, which are tracking the Bank of Russia key rate.
Annual growth in loan receivables in the housing mortgage lending segment totalled 18.3% as of 1 March 20184. Growth in lending activity in this segment is driven both by banks’ revision of their pricing conditions and the ongoing easing of borrower solvency requirements5. This trend is seen across a wide range of banks. The share of new mortgage loans with a down payment under 20% went up 29.4% in Q3 to 42.4% in 2017 Q4. Banks however have kept unchanged borrower solvency requirements over the past 12 months, which is evidenced by the borrower’s steady debt burden (the average Loan Payments to Borrower’s Income indicator).
Against the backdrop of a gradual and heterogeneous recovery in credit activity across various lending segments, credit gap measures (defined as the difference between the credit-to-GDP ratio and its long-term trend) remain negative. This suggests that credit activity is so far below a long-term trend.
Capital adequacy ratios. Credit institutions are seeking to ramp up their capital amid growing credit activity. In 2017, capital adequacy (N1.0) went up 0.6 pp to reach 14.2% (without regard for a number of major banks under resolution including Bank of Russia-funded resolution).
Bank of Russia action to limit retail lending risks. Unsecured consumer lending is gaining momentum, with growth rates accelerating. Surveys suggest banks will seek to deliver yet higher growth rates in the course of 2018. As inflation slows down, the Bank of Russia key rate is declining along with market interest rates. Given that credit institutions’ costs of borrowing are declining, the same effective interest rate is a reflection of the borrower’s higher credit risk. In these conditions, an unchanged scale of risk ratios would suggest regulatory easing. Therefore, on 23 March 2018, the Bank of Russia Board of Directors approved the draft ordinance which provides increased risk weights on consumer loans with the effective interest rate between 15 to 25% extended after 1 May 2018.
Although mortgage lending has expanded at sustainably high paces, the unchanged debt burden of borrowers confirms that the current growth so far comes without substantial financial stability risks. Aiming to prevent the buildup of risks related to loans with a high loan to pledged property ratio and secure sustainable development of the mortgage lending segment, the Bank of Russia has set the risk ratio at 150% for mortgage loans in rubles with a down payment of under 20%, which are extended after 1 January 2018. For mortgage loans in rubles with a down payment of under 10% which were extended after 1 January 2018 the risk ratio shall be 300%. For loans granted after 1 January 2018 as funding under equity construction contracts with a down payment of under 20%, the risk ratio shall be 150%.
Higher risk ratios on certain credit claims increases banks’ capital cushion necessary to cover potential losses. In these circumstances and taking into account the heterogeneous recovery of lending activity, it is not reasonable to set the countercyclical buffer for the capital of Russian credit institutions above zero.
The Bank of Russia Board of Directors will hold its next CCB rate review meeting in June 2018.
| 1 For credit institutions that were operating as of the latest reporting date, including banks that underwent restructuring. |
| 2 Credit institutions’ financial statements as per Form 0409115 (Section 3, Loan receivables on other consumer loans grouped into a homogeneous loan portfolio). For credit institutions operating as of the last reporting date, including banks that underwent restructuring. |
| 3 According to the quarterly survey of banks which account for over 70% of household loan receivables. |
| 4 Calculated using Bank Reporting Form 0409316. According to credit institutions operating as of the last reporting date, including banks that underwent restructuring. * Adjusted for foreign currency revaluation. |
| 5 According to the quarterly survey of banks which account for over 70% of household loan receivables. |
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