Bank of Russia leaves unchanged the countercyclical capital buffer (CCB) rate for Russian credit institutions and the risk ratio buffers

The Bank of Russia Board of Directors has decided to keep the countercyclical capital buffer (CCB) rate for Russian credit institutions at zero percent 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 relatively stable as, among other things, debts of non-financial organisations on external liabilities and internal FX loans remain stable. Non-financial organisations total debt on external liabilities, internal loans and debt securities increased by 3.2%¹ over the past 12 months as of 1 July 2019.

The household debt burden is rising²: during the first half of the year, the debt service to income ratio increased from 9.9% to 10.4% driven, primarily, by unsecured consumer loans. The debt service to income ratio on retail loans grew from 8.3% to 8.8% over the first six months of 2019 and came close to the peak values of 2014 (9.3%). 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

The annual growth rates of loan debt in the segment of unsecured consumer lending decreased to 24.5%³ as of 1 August 2019 (from 25.3% as of 1 May 2019), but remains high. Increased risk ratio buffers to new unsecured consumer loans issued from 1 October 2019 will be applied depending not only on the weighted average effective interest rate (EIR), but also on the debt burden ratio of an individual. In this regard, credit institutions may temporarily expand lending in anticipation of the entry into force of the increased risk ratio buffers.

To mitigate systemic risks associated with mortgage loans with a 10-20% down payment, the Bank of Russia raised risk ratio buffers for newly issued mortgage loans 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. As of August 2019, rates on loans with a low down payment are from 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 second quarter of 2019. Such loans accounted for 36.7%⁴ of all mortgage loans (40.9% in 2019 Q1, and 43.2% in 2018 Q4).

Amendments to Bank of Russia Ordinance No. 4892-U dated 31 August 2016⁵ provide for the setting of “floating” borders of the ranges for mortgage down payment and the ratio of the principal amount of debt to the collateral fair value. The adoption of these amendments will enable more efficient implementation of macroprudential policy through setting the borders by the Bank of Russia Board of Directors decision. The Bank of Russia Board of Directors has decided to leave the borders unchanged.

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 7%⁶ over the 12 months ending 1 August 2019. The debt is declining in almost all economic activities.

Bank capital adequacy

The capital adequacy of credit institutions remains at an acceptable level. Credit institutions increased their capital amid growing credit activity: the capital amount⁷ increased from 9.9 trillion rubles as of 1 July 2018 to 10.7 trillion rubles as of 1 July 2019. Credit institutions’ capital adequacy⁷ decreased by 0.4 pp to 14.2% over the 12 months ending 1 July 2019⁸. The effective macroprudential measures form additional capital stock which accounts for 0.7 pp of the banking sector’s capital adequacy (0.5 pp as of 1 January 2019)⁹. For universal banks, the risk ratio buffer ranges between 0.2 and 1.5 pp of the banks’ capital adequacy, while for retail banks the range varies between 2.1 and 3.6 pp.

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

¹ Adjusted for FX revaluation (exchange rate as of 1 July 2019).

² 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.

³ Credit institutions’ financial statements as per Form 0409115 (Section 3, Credit Exposure: 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 According to the quarterly survey of banks (PJSC Sberbank, VTB Bank (PJSC), GAZPROMBANK (JSC), PJSC ROSBANK, JSC UniCredit Bank, JSC Raiffeisenbank).

⁵ The amendments were introduced by Bank of Russia Ordinance No. 5219-U, dated 30 July 2019.

⁶ For credit institutions that were operating as of the last reporting date, including banks that underwent restructuring. Adjusted for FX revaluation.

⁷ Except for banks undergoing resolution, including with the involvement of the Banking Sector Consolidation Fund.

⁸ As of 1 July 2019, the overall capital adequacy ratio of the banking sector was 11.8%.

⁹ If the buffers to risk weights were reduced to zero, the capital adequacy of the banking sector would be higher by 0.7 pp.

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