Partial cancellation of easing, new measures to support banks, and certain changes in banking regulation in 2023

In 2022, the Bank of Russia adopted an extensive package of temporary measures supporting credit institutions (CIs) to help them pass through the period of high volatility in financial markets (including the permission to fix the exchange rate and the value of assets for calculating the required ratios) and adjust to longer-lasting structural changes (for instance, the permission not to decrease their assessments of the quality of loans issued to borrowers hit by sanctions).

Two thirds of CIs use these support measures to a greater or lesser extent, but the overall effect on capital for most of them (taking into account the capital cushion accumulated earlier) is moderate. This means that they are prepared to cope with the situation if the majority of the current easing measures are cancelled. Besides, it is essential to phase out the easing measures in due time for CIs to remain properly incentivised to manage their risks.

In this regard, the Bank of Russia plans to cancel some of the measures from the beginning of 2023,¹ extending and partially modifying only those that are still needed, as well as to additionally introduce a number of amendments to the regulation simplifying the recognition of possible losses for CIs and helping them preserve the potential for lending.

The measures are planned to be implemented by the end of 2022. The Bank of Russia Board of Directors will make relevant decisions within its special powers.² Additionally, the Bank of Russia will issue information letters and introduce amendments to regulations. Details will be provided to market participants after the approval of the relevant decisions.  

Measures not to be extended after 2022

• CIs may fix³ exchange rates, the value of securities and assets (for prudential regulation purposes) and the fair value of securities and certain financial instruments (for accounting purposes). This measure will be cancelled owing to the gradual stabilisation of the financial market and considering the introduction of a range of new support measures, including stage-by-stage provisioning for blocked assets, a temporary decrease in the requirements for CIs’ capital adequacy buffers (the details are below).
• CIs are not to be subject to enforcement measures for non-compliance with the limits on open foreign currency positions to reduce risks and incentivise a decrease in the proportion of ‘toxic’ foreign currencies on CIs’ balance sheets.
• CIs may apply a reduced risk weight for the maximum concentration for corporate borrowers, on which a bank has substantially (by over 10 billion rubles) increased the amount of credit claims (the CIs complying with this condition that have used this privilege in 2022 will be allowed to use the reduced risk weight for relevant borrowers through 31 May 2025).
• CIs may apply a reduced risk weight for the capital adequacy ratios and the maximum concentration for systemically important organisations’ working capital loans (for such loans issued through 31 December 2022, the measure will be effective during a year after their issue). Further, the reduced risk weights are planned to be applied for top-priority projects aimed at ensuring technological sovereignty and the structural adaptation of the economy, with the taxonomy of such projects being currently developed by the Government of the Russian Federation.
• CIs may set the maximum interest rate on ruble-denominated subordinated instruments equalling the larger of the two values: either 15% or the Bank of Russia key rate increased by 5 pp — this measure is no longer relevant due to a decrease in interest rates.
• The level of the classification group for assessing the economic situation of CIs and non-bank credit institutions (NCIs), including central counterparties, is allowed not to be downgraded until the classification as of 1 January 2023 inclusive. Beginning from 1 April 2023, the Bank of Russia will determine the classification group according to the normal procedure.

Measures to be extended (including in a modified form)

• Regulatory measures related to provisioning. Loss provisioning for loans, other assets and contingent credit liabilities that arose before 18 February 2022 should be completed according to the requirements of relevant regulations by:
  1. 30 June 2023 — for legal entities (where payments are overdue for less than 90 days);
  2. 30 June 2023 — for non-resident legal entities, claims on which are denominated in foreign currency, even where there are payments overdue for more than 90 days (only for CIs affected by unfriendly states’ blocking sanctions);
  3. 31 December 2023 — for individuals and small and medium-sized enterprises (SMEs) (where payments are overdue for less than 90 days).

If loans are overdue for more than 90 calendar days (except the case specified in subclause 2), this means that there are obvious problems and preferential treatment is not applicable to such loans — provisions for them should be formed as normal.

• Banks may rely on their IRB approaches⁴ when making a decision on non-recognition of a borrower’s default in certain cases pursuant to Regulation No. 483-P⁵ and/or Instruction No. 199-I⁶ that occurred after 18 February 2022 — through 30 June 2023.
• CIs—creditors will not be subject to enforcement measures for using ‘old’⁷ reporting in relation to legal entities—issuers, including CIs—issuers — through 30 June 2023. In relation to other CIs—counterparties, the extension is not needed as CIs will be able to carry out an assessment considering that, from the beginning of 2023, reporting will be disclosed, although in a somewhat reduced form.
• CIs will not be subject to enforcement measures for non-compliance with the maximum concentration for the NCC and the NSD⁸ — through 30 June 2023.

Concurrently, the Bank of Russia is working on amendments to Instruction No. 199-I to exclude funds from the calculation of the maximum concentration if operations or transactions with such funds are limited due to the sanctions as, in such a situation, CIs are actually unable to manage the concentration risk related to such assets.  

• The restriction on disclosure of financial statements will be modified, with the total ban on their disclosure to be replaced for their mandatory disclosure in a reduced form⁹ — from 1 January 2023.
• CIs are allowed not to disclose information¹⁰ that is sensitive to sanction risks, including about CIs’ reorganisation, ownership structure, members of their management bodies and other officials, persons controlling CIs, material facts affecting financial and business operations of a CI that is reorganised through merger, acquisition, or transformation — until 1 July 2023.
• The liquidity ratios for systemically important CIs are eased, namely the list of situations where the actual LCR¹¹ below 100% is not deemed to be a violation will remain expanded and enforcement measures will no be applied for non-compliance with the NSFR¹² — through 31 December 2023.

However, an additional condition is introduced obliging systemically important CIs having their LCR and NSFR below 100% to implement action plans aimed at improving their liquidity level in 2023. Such CIs should avoid a further decrease in their LCR and NSFR relative to the levels as of the latest reporting date, that is, as of 1 November 2022 (LCR) and 1 October 2022 (NSFR), and implement action plans aimed at increasing the actual values of these ratios.

• CIs are allowed to include SME loans of up to 50 million rubles (previously — of up to 10 million rubles) in the portfolio of homogeneous loans (claims) when a borrower’s financial position is assessed as medium, as well as when it is assessed based on banks’ in-house indicators of creditworthiness — through 31 December 2023. Concurrently, the Bank of Russia is working on envisaging the relevant provisions in Regulations No. 590-P¹³ and No. 611-P.¹⁴
• CIs are allowed, when buying back their own Eurobonds¹⁵ with a discount and unable to cancel them, to take into account income from the revaluation of liabilities when calculating their equity (capital) — through 31 December 2023.
• The capital deduction, increased risk ratios and provisions for transactions for buying back shares (stakes) from non-residents will not apply — through 31 December 2023.
• Ratio calculations will leave out country risk assessments for the Russian Federation (including within the market risk calculation) and the Republic of Belarus — through 31 December 2023.
• Working with borrowers, creditors are advised — through 31 December 2023 — to restructure loans (microloans) according to the relevant restructuring programmes, not to charge penalties or fines, to suspend procedures for the eviction of debtors from the housing that has been foreclosed.¹⁶ Besides, such restructured loans will not be considered as a factor worsening a borrower’s credit history.
• No enforcement measures will be applied for non-submission in 2023 of the information about the organisation of ICAAP¹⁷ for 2022 on an individual and consolidated basis.
• For the purposes of Bank of Russia regulations, CIs are temporarily allowed to use international rating agencies’ credit ratings fixed as of 1 February 2022, until they are completely replaced for credit ratings assigned by national rating agencies where needed (the Bank of Russia is working on relevant changes to the regulation).

New measures to support the banking sector

• CIs have the right to form loss provisions for completely blocked assets by instalments¹⁸ during 10 years¹⁹ — through 31 December 2032 — if they are unable to manage such assets due to direct sanction-related restrictions and lack any alternative sources for their recovery (correspondent accounts, interbank loans, other claims on foreign banks, loans and other claims (including those arising from bonds) on borrowers from the countries that have imposed blocking sanctions, investments in subsidiaries in such countries, payments made on Eurobonds blocked in Euroclear/Clearstream, as well as foreign currency accounts with the NSD).
  
  However, instalments will not be allowed for other assets subject to restrictions (Eurobonds where ultimate debtors are Russian legal entities, Russian government Eurobonds and loans to non-residents denominated in unfriendly states’ currencies where there are problems with servicing due to payment agents’ actions) if there are alternative sources for their recovery (for instance, payments in rubles to the benefit of Russian holders, issue of substitute bonds in rubles).
  
  Instalments imply that during these 10 years CIs are to uniformly reduce the net value (that is, net of provisions) of their blocked assets. They may thus decrease it either by gradually provisioning for these assets, or through their settlement (for instance, netting of claims and liabilities where possible; spin-off of such assets into a separate legal entity).
  
  When CIs use instalments, they must fix the value of their assets on their books in rubles at the exchange rate determined according to the procedure established by the Bank of Russia’s regulation on the accounting of blocked assets, which will further on prevent a paper profit or loss from the revaluation.
  
  Additionally, through 31 December 2023, the calculation of the liquidity ratios (N2, N3, and N4) will not include assets if operations and transactions with them are limited due to the sanctions, including partially or fully blocked assets, and the calculation of the capital adequacy ratios will take into account such assets with the risk weight of 100%. Concurrently, the Bank of Russia is working on envisaging the relevant provisions in Instruction No. 119-I.
  
  CIs—settlement depositories and NCIs—central counterparties will need to comply with additional requirements for taking into account blocked assets in the course of the calculation of the required ratios, provisions, and dividend payouts, considering the specifics of their infrastructure functions.
• The requirements for banks’ capital adequacy buffers will be temporarily reduced to zero beginning from 2023 and then gradually restored during five years (including the grace period of one year).²⁰ Regardless of whether banks comply with the said temporary buffers, banks will be able to pay remuneration to their executives in order to keep them motivated to quickly restore CIs’ financial stability.
  
  Nevertheless, to maintain the stability of the sector, profit distribution by banks will be limited, namely it will be totally prohibited if they do not comply with the temporary level of the buffers; allowed in the amount of no more than 50% of the current year’s profit and 0% of previous years’ profit if the ratio is between the temporary level and the target; allowed without any restrictions if banks comply with the target level of the buffers (3.5% for SICIs and 2.5% for BULs).²¹
  
  Overall, this measure will enable banks to recognise losses on troubled assets as the temporary easing is cancelled and problems gradually arise, without serious consequences.
  
  Concurrently, the Bank of Russia is working on envisaging the relevant provisions in Instruction No. 119-I.
• CIs are allowed to make a decision not to deteriorate the assessment of the quality of loans issued to borrowers—servicemen and their family members for them to maintain access to credit. The Bank of Russia is preparing a relevant information letter.
• The regulatory burden on Russian CIs’ capital with regard to short-term (for up to 90 calendar days) deposits with banks in friendly jurisdictions and in Russia denominated in ‘friendly’ currencies will be reduced.²² The Bank of Russia is working on envisaging the relevant provisions in Instruction No. 119-I.
• The calculation base of provisions for CCLs²³ (credit lines, bank guarantees, and others) will be decreased through the establishment for individual financial instruments of credit conversion equivalents reflecting the pace of CCLs conversion into credit claims. The Bank of Russia is working on envisaging the relevant provisions in Regulation No. 611-P.

The reference to the Press Service is mandatory if you intend to use this material.