Introducing new approaches to credit risk in Russian regulatory framework

Starting from 2019, in the context of developing the regulatory framework encouraging the credit support for the economy, the Bank of Russia has been revising step-by-step the procedure for calculating the capital adequacy ratios of banks and implementing a new standardised approach to credit risk assessment.¹

During the first phase, revisions have been implemented in assessing credit risk for sovereign borrowers based on external long-term creditworthiness ratings. These revisions came into force in June 2019. This makes it possible to reduce the ratios for sovereign borrowers and export guarantee loans from 100% to 50%, i.e. down twice.

In 2019 3Q, a draft new version of Instruction No. 180-I is expected to be published (the anticipated effective date being 1 January 2020), which provides for a differentiated approach to credit risk assessment as part of the requirements for banks and corporate borrowers, depending on the creditworthiness of the borrower and its operating indicators.

As for the requirements for corporate borrowers, the regulator is planning to separate an ’investment grade’ category with a lower risk coefficient of 65% (being presently assessed using the risk coefficient of 100%), provided that the following criteria are satisfied at the same time: they are classed under quality category I or II according to Bank of Russia Regulations No. 590-P, dated 28 June 2017, and No. 611-P, dated 23 October 2017, and the securities of the borrower have been listed on an organised stock market.

The regulator is also planning to set a lower risk coefficient of 85% for the requirements for small and medium businesses, which are assessed on a case-by-case basis (the risk coefficient of 100% is presently used), provided that the requirements for the said borrowers are classified under quality category I or II according to Bank of Russia Regulation No. 590-P and Bank of Russia Regulation No. 611-P, and they have no overdue payments. As for the requirements for small and medium businesses which are assessed on a portfolio basis and which satisfy the criteria established by the current Instruction No. 180-I, the lower risk coefficient of 75% continues to apply.

As for the requirements for banks, an approach will be used according to which the risk coefficients will be set depending on whether the bank is classified as an A (A*), B or C-class defined in the BCBS document¹ based on the level of its creditworthiness, and on whether it complies with the required ratios and minimum capital conservation buffers established in its country of incorporation.

As for short-term requirements for A- and B-class banks (irrespective of the currency of denomination), the risk coefficients of 20% and 50%, respectively, will be used; and for other requirements for А (А*)-class banks the risk coefficient of 40% (30%), and for В-class banks — 75% will be used. The requirements for C-class banks (which do not comply with the required ratios) will be weighted using the risk coefficient of 150%.

The requirements for international development banks (which are not included in the list of the international financial organisations for which, according to the BCBS¹ document the 0% risk coefficient is to be used) will be weighted using the 50% risk coefficient.

At the same time, the regulator will adjust the approaches to credit risk by setting a higher risk coefficient of 400% for investments in speculative unlisted equities of legal entities and by applying a higher risk coefficient of 150% for uncovered overdue loans (provided that the provision of at least 20% has been formed for them), as well as for risk-free contingent commitments with the credit conversion factor being set to 0.1 (instead of 0).

It is expected that, due to the reduction in the total amount of the risk-weighted assets, these approaches will make it possible to free up banks’ capital and to create additional opportunities to finance the real economy. That being said, the total amount of the assets and contingent commitments for which the risk coefficients have been raised, given that a transition period for banks and certain exemptions have been provided for, will not considerably affect the indicators of the banking system.

At the next phase of the implementation of the new standardised approach to credit risk (in 2020, with 1 January 2021 being the effective date), the regulator is planning to revise the approaches to assess mortgage and consumer loans with an expected positive effect on banks’ capital adequacy ratios.

The full versions of the BCBS¹ materials in English are available on the official website of the Bank for International Settlements.

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¹ The Basel Committee on Banking Supervision document ’Basel III: Finalising post-crisis reforms’ (December 2017).

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