Risk-weight add-ons

Pursuant to the new approach, risk-weight add-ons used to calculate credit institutions’ capital adequacy ratios are established by the decision of the Bank of Russia Board of Directors (previously, this required amendments to the effective prudential regulation of credit institutions). The decision of the Bank of Russia Board of Directors on increasing risk-weight add-ons becomes effective no earlier than two months after its publication.

Risk-weight add-ons are applied to certain asset types specified in Bank of Russia Ordinance No. 5782-U, dated 20 April 2021, ‘On the Types and Characteristics of Assets for Which Risk-weight Add-ons are Set and on Applying These Add-ons to the Said Types of Assets for Credit Institutions to Calculate Their Capital Adequacy Ratios’.

This Bank of Russia Ordinance was approved to replace Bank of Russia Ordinance No. 4892-U, dated 31 August 2018, ‘On the Types and Characteristics of Assets for Which Risk-weight Add-ons are Set and on the Methodology for Applying These Add-ons to the Said Types of Assets for Credit Institutions to Calculate Their Capital Adequacy Ratios’. The types of assets for which risk-weight add-ons are applied remained the same. In unsecured consumer lending, add-ons are differentiated depending on a borrower’s DSTI and the effective interest rate (EIR). The risk factors in mortgage lending are DSTI and the loan-to-value (LTV) ratio. For mortgage loans under equity construction contracts, add-ons are set depending on a borrower’s DSTI and the down payment on a loan. A separate category is household foreign currency loans for which higher add-ons are applied as such loans involve the risk of revaluation of liabilities.

In order to reduce the dollarisation and risks associated with foreign currency lending, on 8 October 2018, the Bank of Russia raised risk-weight add-ons for corporate foreign currency loans depending on legal entities’ annual foreign currency earnings. These measures are also applicable to legal entities’ investment in debt securities issued in foreign currency.

The Bank of Russia applies the instrument of macroprudential buffers in an extensive way. Over the period of 2013–2021, capital requirements in the consumer segment changed 13 times and were used to both limit risks during lending expansion periods and support banks in crises. Over the said period, risk-weight add-ons in mortgage lending changed five times. According to the analysis of the effect of the implemented measures on the lending structure, the differentiation of the add-ons has promoted shifts in the structure of consumer lending towards the segments with lower EIRs.

Higher risk ratios for certain credit claims increase banks’ capital buffers needed to cover possible losses. Banks may use these buffers during crisis periods.