Bank of Russia establishes procedure for exiting from liquidity coverage ratio easing and provides irrevocable credit lines

In 2022–2023, the Bank of Russia eased regulatory requirements for systemically important credit institution (SICIs) related to their compliance with the liquidity coverage ratio (N26 (N27) ratio, the LCR), namely reduced the ratio below 100% due to effects from sanctions and systemic stress. This easing enabled SICIs to survive the period of high volatility in financial markets, the rapid outflow of client funds, and the shortening of their maturities. The measure has become irrelevant due to recent market stabilisation and a consistent trend towards growth in funds in accounts of both households (by 17% or ₽5.8 trillion over the last 12 months as of 1 October 2023) and businesses (by 13% or  ₽5.4 trillion).

SICIs are expected to once again maintain the LCR at 100% starting from 1 March 2024. Banks need a short few-month transition period to settle their operational issues. Prior to the above date, SICIs are recommended to maintain their actual LCR values at a level above the actual LCR average calculated as of the reporting dates 1 August 2023, 1 September 2023, and 1 October 2023.

The cancellation of the easing measure will help ensure:

• Better short-term liquidity management by SICIs.
• A level playing field for banks. The use of the easing measure enables SICIs to build up their loan portfolios faster compared to banks maintaining their ratios at required levels. Moreover, relying on the easing measure, banks do not seek to raise more expensive long-term deposits but prefer to attract cheaper short-term facilities to secure higher margins and profits.
• A smoother transition to compliance with the national liquidity coverage ratio which is intended to replace the LCR.

To make it easier for banks to exit from the LCR easing, the Bank of Russia returns to the mechanism of irrevocable credit lines (ICLs).

The regulator will terminate the existing irrevocable credit line agreements with SICIs and inform them when they will be able to enter into new agreements.

The reason is material changes made in the ICL opening procedure:

1. No collateral shall be provided preliminarily for opening ICLs. SICIs shall provide collateral only to draw down funds under ICLs.

2. The commitment fee (in per cent per annum) will be variable. If an ICL is used to increase the actual LCR to 80%, the fee will be 1.5%, whereas the portion of funds used by a SICI to increase the actual LCR from 80% to 100% will be subject to a 0.1% fee.

3. To ensure a gradual rise in the balance sheet liquidity of SICIs using ICLs, their available limits will be progressively reduced. Eventually, SICIs shall ensure the LCR compliance on their own (without ICLs) according to the following schedule:

• over 40% from 1 March 2024
• over 50% from 1 July 2024
• over 60% from 1 January 2025
• over 70% from 1 July 2025
• over 80% from 1 January 2026.

If LCRs of some SICIs are above the said levels but below 100% in the relevant period, such SICIs will be able to receive ICLs in the amounts they actually need to comply with the ratio.

4. To ensure a level playing field, SICIs maintaining the LCR at 80% will be able to receive ICLs in the amounts they need to adhere to the 100% LCR provided they ensure compliance with the ratio at the minimum level of 80% on their own.

5. The regulator will revise maximum available ICL limits for each SICI quarterly based on average values of indicators included in the LCR calculation as of three reporting dates preceding the date of the limit revision. To discourage banks from understating actual values of the ratio until the end of this year, the regulator will set the first maximum available limit based on the LCR actual average as of 1 August 2023, 1 September 2023, and 1 October 2023.

6. As before, the amount of the commitment fee will be calculated based on the maximum available ICL limit set for a bank and charged in advance for the forthcoming quarter rather than for the forthcoming year the maximum available ICL limit is set for.

Concurrently, the regulator will update the LCR calculation methodology. It is supposed to provide for a possibility to use national ratings, the inclusion of collateral under clearing participation certificates in the LCR calculation, and an updated procedure for assessing outflows related to compliance with statutory reserve requirements. This will help the majority of SICIs increase their actual LCR values by several percentage points. The relevant draft has passed the regulatory impact assessment.¹ The amendments are expected to come into force at the beginning of the next year.

The gradual raise in the LCR level to be maintained by SICIs on their own will help them get prepared for complying with the new national liquidity coverage ratio, which is currently under development.  The calculation of the new ratio will include a broader range of assets that may be used as collateral for raising funds in the Russian market. Moreover, it is planned to calibrate outflow rates based on the Russian statistics both upwards and downwards relative to those under the Basel standards. It is important for SICIs to start improving their balance sheet structures to ensure compliance with the new ratio even now, for example, by securing more stable and longer client funds and by accumulating highly liquid assets. The new ratio framework will be presented for discussion before the end of this year. The phased implementation of the new ratio is scheduled to start in 2025, the full implementation — in 2026.

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