National countercyclical capital buffer and add-ons to risk weights 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 add-ons to risk weights for mortgage and consumer loans, and corporate FX loans. In the context of moderately growing corporate lending 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 countercyclical buffer and add-ons to risk weights, the Bank of Russia Board of Directors has recognised the following factors.

Credit activity

Growth in the private sector’s debt burden measured as the debt-to-GDP ratio remains below the long-term trend as debts of non-financial organisations on external liabilities and internal FX loans continue to shrink. The total debt of non-financial organisations on external liabilities, internal loans and debt securities remained virtually unchanged after a 0.1% drop in 2018.¹ The value of the credit gap defined as the deviation of the actual debt-to-GDP ratio from the long-term trend stands at −7.1 pp as of 1 January 2019 for private sector liabilities with the external debt factored in.

The credit gap on ruble-denominated debts of households came in at −0.3 pp as of 1 January 2019 (-0.7 as of 1 October 2018). It is expected that given the movements of the retail loans-to-GDP ratio, growth in debt burden of households is set to exceed the long-term trend this year. In order to limit procyclicality risks associated with the increase of households’ debt burden, the Bank of Russia applies add-ons to risk weights.

Effective macroprudential measures

To mitigate systemic risks associated with mortgage loans with a low down payment, in 2018 Q4, the Bank of Russia raised add-ons to risk weights for mortgage loans with a 10-20% down payment extended after 1 January 2019. Loans with a low down payment have an elevated level of credit risk and debt burden per borrower. Such loans accounted for 43.7%² of loans extended in 2018 Q4 (43.4% in 2018 Q3, and 41.4% in 2018 Q2). On the backdrop of the rise in add-ons to risk weights, banks increased the discrepancy in ratios on loans with a low down payment and other loans. The available data suggest that banks raised the rates on loans with a low down payment by 0.2-1.7 pp in January 2019, making such loans less attractive. The Bank of Russia will estimate the effectiveness of these macroprudential measures using the data for 2019 Q1.

Debts on loans in the segment of unsecured consumer lending keep growing at a high pace, which stood at 23.3%³ in the 12 months ending 1 February 2019. The macroprudential measures taken by the Bank of Russia in 2017-2018 helped reduce interest rates for borrowers, maintain high lending standards, and accumulate capital in banks. As the add-ons to risk weights had been raised, banks focused on less risky products and more reliable borrowers. This was among the triggers to reduce rates on unsecured consumer loans and decrease the funding cost.

The measures taken by the Bank of Russia in 2018 Q4 to raise add-ons to risk weights by 30 pp on consumer loans with the EIR of 10-30% extended after 1 April 2019, are expected to contain banks’ lending activity in this segment. This will also be assisted by the fact that new add-ons to risk weights will apply to almost all newly issued consumer loans (the share of consumer loans with the EIR of less than 10% does not exceed 1%).

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.

The share of FX loans in the corporate loan portfolio is reducing further due to, among other things, the add-ons to risk weights on FX loans. The debt on the loan portfolio declined by 12.3%⁴ over the 12 months ending 1 February 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. Over the last 12 months, credit institutions’ capital adequacy⁵ decreased by 0.7 pp to 14.5% as of 1 February 2019.⁶ That said, the effective macroprudential measures form additional capital stock which accounts for 0.6 pp of the banking sector’ capital adequacy. For universal banks, the buffer ranges between 0.2 and 1.2 pp, while in retail banks the range varies between 1.7 and 3.2 pp.

Considering that corporate lending is growing at moderate rates and add-ons to risk weights are applicable in certain lending segments, it has been deemed unreasonable to set the countercyclical capital buffer above zero.

The Bank of Russia Board of Directors will hold its next CCB rate / risk ratio buffer review meeting in May 2019.

¹ Adjusted for FX revaluation.

² According to the quarterly survey of banks which account for over 70% of household loan receivables.

³ 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.

⁴ For credit institutions that were operating as of the last reporting date, including banks that underwent restructuring (adjusted for FX revaluation).

⁵ Stripping out banks under resolution, including with the involvement of the Banking Sector Consolidation Fund.

⁶ As of 1 February 2019, the banking sector’s overall capital adequacy ratio was 12.2%.

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