Russian national countercyclical capital buffer and risk ratio buffers for credit institutions’ computation of capital adequacy ratios

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 and to leave unchanged the risk ratio buffers for mortgage and consumer loans, and corporate FX loans. In the context of moderately growing general credit to the economy and considering that increased risk ratios are applied in several lending segments, it has been deemed unreasonable to set the countercyclical capital buffer above zero.

In making its decision on the national countercyclical buffer and risk ratio buffers, the Bank of Russia Board of Directors has recognised the following factors.

Credit activity

The private sector’s debt burden measured as the debt-to-GDP ratio remains below the long-term trend as, among other things, debts of non-financial organisations on external liabilities and internal FX loans remain stable. The value of the credit gap defined as the deviation of the actual debt-to-GDP ratio from the long-term trend stands at −11.2 pp as of 1 April 2019 for private sector liabilities with the external debt factored in.

The credit gap on ruble-denominated debts of individuals came in at −0.6 pp as of 1 April 2019 (-0.7 as of 1 January 2019). It is expected that growth in the debt burden of individuals determined by the retail loans-to-GDP ratio is set to exceed the long-term trend this year. Debt service ratio1 also grows. Over 12 months, this indicator increased by 1 pp to reach 10% as of 1 April 2019 driven, primarily, by unsecured consumer loans. Debt service ratio on retail loans increased by 0.9 pp over 12 months and amounted to 8.4% as of 1 April 2019. In order to limit procyclicality risks associated with the increase of households’ debt burden, the Bank of Russia applies risk ratio buffers.

Effective macroprudential measures

Debts on loans in the segment of unsecured consumer lending keep growing at a high pace, which stood at 25.3%2 in the 12 months ending 1 May 2019. The measures taken by the Bank of Russia to raise risk ratio buffers by 30 pp on newly issued consumer loans with the EIR of 10-30%, effective from 1 April 2019, are expected to curb risks in this segment. New risk ratio buffers apply to nearly all newly issued consumer loans (the share of consumer loans with the EIR of less than 10% does not exceed 1%).³

Should the debt on unsecured consumer loans continue to grow at an excessive rate, the Bank of Russia may additionally raise buffers on unsecured consumer loans depending on the EIR, taking into account the value of the debt burden ratio of an individual, which banks will have to calculate from 1 October 2019 in accordance with Bank of Russia Ordinance No. 4892-U, dated 31 August 2018.

To mitigate systemic risks associated with mortgage loans with a low down payment, the Bank of Russia raised risk ratio buffers for newly issued mortgage loans with a 10-20% down payment effective from 1 January 2019. Loans with a low down payment have an elevated level of credit risk and debt burden per borrower. On the backdrop of the rise in risk ratio buffers, in January 2019, banks widened the gap in rates on loans with a low down payment and other mortgage loans. Rates on loans with a low down payment are 0.2 to 0.5 pp higher than on other mortgage loans, which makes them less attractive. This measure already resulted in the decrease in the share of loans with down payments ranging from 10 to 20% issued in the first quarter of 2019. Such loans accounted for 40.7%4 (42.9% in 2018 Q4, and 43.4% in 2018 Q3).

The share of FX loans in the corporate loan portfolio is reducing further due to, among other things, the risk ratio buffers on FX loans. The debt on the FX loan portfolio declined by 9%5 over the 12 months ending 1 May 2019. The debt is declining in almost all economic activities.

Bank capital adequacy

Credit institutions continue to report acceptable capital adequacy. Credit institutions are seeking to ramp up their capital amid growing credit activity. From the beginning of 2018, credit institutions’ capital adequacy6 decreased by 0.3 pp to 14.5% as of 1 May 2019.⁷ That said, the effective macroprudential measures form additional capital stock which accounts for 0.7 pp of the banking sector’s capital adequacy. For universal banks, the buffer ranges between 0.4 and 1.2 pp, while in retail banks the range varies between 1.3 and 3.1 pp. The macroprudential requirements imposed on banks are aimed at managing systemic risks and boosting the Russian financial sector stability.

Considering that general credit to the economy is growing at moderate pace and risk ratio buffers are applicable in certain lending segments, it has been deemed unreasonable to set the national countercyclical capital buffer above zero.

The Bank of Russia Board of Directors will hold its next CCB rate review meeting in September 2019.

¹ It is calculated as the ratio of regular household loan repayments to household disposable income. This indicator includes disposable income of all Russian households, including individuals without any loans. Therefore, this indicator is undervalued.

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 For consumer loans with the EIR of 30 to 35%, the buffer is 200 pp; for consumer loans with the EIR of over 35%, the buffer is 500 pp.

⁴ According to the quarterly survey of banks which account for over 70% of household loan receivables.

⁵ For credit institutions that were operating as of the last reporting date, including banks that underwent restructuring. Adjusted for FX revaluation.

⁶ Except for banks undergoing resolution, including with the involvement of the Banking Sector Consolidation Fund.

⁷ As of 1 April 2019, the overall capital adequacy ratio of the banking sector was 12.2%.

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