Central Bank of Russia Deputy Governor Olga Polyakova: We are not making any allowances for difficult times
Olga Polyakova
Photo: The Central Bank of the Russian Federation
The Russian banking sector survived the brunt of the blow from sanctions and stayed firmly on its feet thanks to capital reserves and Central Bank forbearance. Banks quickly adapted to new foreign economic and monetary conditions and even managed to emerge from the shock period without casualties. The Central Bank had not revoked a single banking license in 18 months, but that changed in February, when the Qiwi Bank case showed that the problem of illegal transactions had not gone away, and that the regulator was still prepared to take the toughest of measures. Respectable market players should also get ready to work without concessions from the regulator itself. Central Bank Deputy Governor Olga Polyakova told Interfax in an interview about how the regulator plans to build supervisory work and what changes banks should prepare for.
Q.: Not one license was revoked in 2023, and in general, there was a gap of a year and a half between the latest case involving Qiwi Bank and the previous one. Was this a banking sector achievement, something to give it credit for, or was it some sort of concession on the part of the Central Bank, which was more favorably disposed toward banks, giving them breathing space after a difficult 2022?
A.: The banking sector is entirely stable, and in many ways, of course, this is a result of our pre-pandemic and pre-2022 crisis policies. We were, as a matter of principle, moving towards purging the market of unscrupulous and weak players, and there was a period when we revoked licenses in large numbers. This did not bring us any joy - we always work with great interest with client-centric banks that manage their own risks well.
The lull in license revocations did not mean we turned a blind eye to any problems; this was part of our long-standing liaison with banks designed to improve the banking sector’s financial stability.
Of course, this does not mean that today there are no players who are trying to make money through various not entirely legal operations, trying to offset their losses in the banking business. For example, in breach of the basic principles of AML/CFT, they are conducting operations related to cryptocurrency, online casinos, and so on. This topic is, as they say, on our radar.
Q.: Are there many players currently involved in such operations?
A.: We do not comment on the activities of existing banks, but there are such banks. We solve this problem with our supervisory tools - these include holding meetings and possible restrictions. As a rule, work with banks begins with a discussion of the problems that we see or that the bank may face in the future. And, of course, we advise those that are ready to listen to us and are open with us.
Q.: The Central Bank on February 21 revoked Qiwi Bank’s license for breaking the law and conducting high-risk transactions. So it didn't listen to you? Can you give us more details about these high-risk operations and estimate their volume? Will the Central Bank raise the issue of insuring funds in electronic wallets in view of the Qiwi Bank case?
A.: We worked very closely with Qiwi Bank. We held meetings, discussed problems and convinced them of the need to mitigate risks. And we took measures. But the bank kept finding new ways to circumvent our measures. The problem is that not only did it not listen to us or try to remedy its mistakes, but that every day it created an increasing amount of risk for citizens and the stability of the financial sector.
Qiwi Bank was known not only for its payments service, but also for the services it provided for transactions with crypto exchangers, transfers to the shadow gambling business, transfers of stolen funds in favor of droppers and other illegal financial services.
We have not identified cases of direct material damage to clients, for example, theft from their electronic wallets. However, we have recorded a significant number of cases when the bank issued wallets to people who were completely unaware of it. And these wallets can be used by criminals to conduct all sorts of illegal transactions, compromising innocent people.
The Deposit Insurance Agency, the temporary administrator, is now compiling registers for future payments - both to depositors under the deposit insurance system and to owners of electronic wallets as part of future bankruptcy proceedings, because these funds are not insurable. But the main thing is that our preliminary estimates show that the bank has enough funds to return money to people from their wallets.
For the future, we have to evaluate two important changes to current regulations. The first is insuring people’s funds held in electronic wallets. The second is enhancing the identification procedure when a bank interacts with its clients through third parties, for example, bank payment agents. There’s plenty to think about here.
Q.: What main risks do you see for the banking sector this year? Experts say a large concentration of corporate loans at floating rates is a risk. How are such loans performing now?
A.: The Central Bank does not currently see a deterioration of banks' loan portfolios due to the high key rate. The share of loans with floating rates in the corporate portfolio as of January 1 was 47%, having increased 8 percentage points over the past three years. The growth in the share of loans with floating rates is influenced not only by the desire of banks to hedge their risks, but also by demand from companies.
For now, the quality of corporate loans with floating rates is stable, the share of overdue loans at the beginning of January was only about 1%. If it becomes difficult for borrowers to service the debt, they can always as the bank to restructure it. However, so far we have not seen an increase in the volume of loans with floating interest rates being restructured.
There is a likelihood that after some time the quality indicators for loans of this type will deteriorate somewhat, but I do not think it is critical. This is also reflected in our forecast for banking sector profits, where a higher level of provisions is included.
One of the main challenges for the banking sector is concentration risk. This is because large Russian companies cannot borrow on foreign markets. Some of the debts they had to foreign creditors are being replaced by large Russian banks, and this exacerbates the problem. We believe that tools for reducing concentration risk can be found in the development of the bond market and syndicated lending so that the risk is more evenly distributed across the banking sector.
Q.: This topic has been on the radar for a long time, but somehow it has not received a meaningful response from banks, namely that this market is not very developed, although legislation has been adopted. Why are banks not issuing syndicated loans so actively?
A.: This is probably due to a lack of strong incentives. We plan to draft and publish a plan for changes in the regulation of credit concentration risk this year, which is aimed at gradually reducing these risks over several years.
We plan to abandon the use of preferential risk weights when calculating concentration ratios and we are developing a new approach to identifying entities associated with a bank. In addition, we continue to discuss the possibility of gradually introducing the new N30 concentration ratio for systemically important banks.
This will require banks to take the task of distributing large risks seriously. Now lenders either are not interested in forming syndicates with smaller players or cannot agree on terms among themselves. And when banks understand that the regulator is quite determined regarding the problem of risk concentration, I think then the ice will break in syndicated lending. As you rightly said, the legislative framework for this is in place.
Q.: A question about capital adequacy, a burning issue. The Central Bank gave some respite to banks, resetting all buffers to zero last year. To what extent are banks ready to gradually restore them?
A.: In general, banks are prepared to restore the buffers to target levels. Fewer than ten banks are currently taking advantage of this forbearance. The minimum buffer allowance for maintaining capital adequacy is 0.25 percentage points as of January 1, and the banks mentioned are in compliance with the level with a reserve, and we do not see any risks of non-compliance.
The banking sector has a sufficient capital reserve - about 7.3 trillion rubles as of January 1. The results of supervisory stress testing of systemically important banks in 2023 also confirmed the ability of most of them to cope with stress to a significant extent. According our estimates, the capital adequacy of systemically important lending institutions may decrease overall by 2.9 percentage points based on the results of stress tests, though the percentage should overall be 10.8%, which is significantly above the lower threshold of 8%. The estimates do not account for the measures available to banks to restore their financial stability, namely that the stress effect on capital would be even lower if the measures were implemented.
We are not making any allowances for difficult times, and we are not turning a blind eye to problems. The stability of the financial system remains an absolute priority for us, thus we are exiting this forbearance in a timely manner, so that banks do not forget how to stay afloat on their own. We have already canceled most of the support measures.
Q.: The Central Bank has allowed banks to recognize losses on frozen assets for 10 years. In addition, banks can transfer frozen assets and liabilities to a separate legal entity. Who might like to take advantage of this option?
A.: We have given all banks the opportunity to decide for themselves whether they will take advantage of this. Some have formed almost all provisions for frozen assets, others will create them within 10 years.
Some banks, as you know, use another option – spinning off frozen assets to a separate legal entity. One bank has already gone down this route. A second bank is currently in discussions with us. There are also potentially interested parties who are weighing up whether to do this.
Q.: Now for a question related to stress testing. Can you tell us what stress tests you perform? Are you perhaps introducing any new scenarios to these stress tests after the last two years?
A.: The Central Bank conducts various stress tests that accomplish specific tasks each year, and 2024 will be no exception. For example we have already launched bottom-up supervisory stress tests - banks are now busy doing their calculations and will soon send them to us for verification. Also on the agenda are a climate stress test and a macro-prudential stress test of the financial sector.
The scenarios primarily depend on the testing goals, and I want to say we always set the most realistic scenarios. We usually use macroeconomic scenarios from the monetary policy guidelines or special narrowly focused scenarios for a specific type of stress. For example, this year, we invited banks to test the Bank of Russia’s risk scenario in bottom up supervisory stress testing.
Q.: The Bank of Russia has suggested setting up banking associations to reduce costs and increase the efficiency of small banks. Has there been any progress here?
A.: We have repeatedly said to small banks, you have the opportunity to consolidate your business; unite, strengthen and increase your capabilities and established practices. However, to do this, you need to tell each other honestly about your problems, agree on a price among yourself, agree on who will be responsible for what. We have suggested several options to banks: would you prefer an umbrella model under the auspices of a larger player, or would you prefer an alliance model on a parity basis. However, there are certain conditions on which banks must agree among themselves. So the ball is in their court. No one has come to us thus far to express readiness to unite. The discussion is now occurring on the platform of the Association of Banks of Russia.
Q.: How are banks with a basic license generally faring now?
A.: They’re doing well. Last year they earned a profit of around 6 billion rubles, up from 3 billion rubles in 2022 and 1 billion rubles in 2021.
Q.: The Central Bank planned to discuss differentiating the insurance compensation limit and rates for contributions to the deposit insurance fund with the banking community. Can you tell us exactly what changes the regulator is proposing?
A.: The goal of our initiative is to increase the popularity of deposits that would help banks attract long-term money for lending to the economy. We are considering the possibility of raising the limit of insurance compensation for irrevocable savings certificates and long-term ruble deposits with periods over three to five years in order to make long-term deposits more attractive for people. The matter is being discussed that insurance for them could be up to 2.8 million rubles.
The contributions of banks to the deposit insurance fund for these deposits could be lowered. They would be able to offer returns that are more attractive to their investors owing to the resulting savings. The issue is still relevant and we’ll be talking to these banks soon.
Q.: The Central Bank wanted to differentiate contributions to the deposit insurance fund depending on the supervisory ratings of banks. Please, tell us more about this initiative.
A.: We’re looking into the matter of differentiated contributions to the deposit insurance fund depending on the level of risk and an assessment of a bank's financial stability. We consider it right for banks with high levels of risk to pay higher insurance premiums.
It is important here to configure correctly the tool that we intend to use to evaluate banks; the so-called supervisory ratings. This will be a new method for assessing the economic situation of banks, given that the current method has partially lost its risk sensitivity and needs to be updated.
We’re now testing a new method for scoring banks quantitatively, based on their reporting metrics. Moreover, the regulator is considering the matter of establishing a relationship between the assessment of the economic situation and assessments of the quality of internal procedures for assessing capital adequacy and the results of supervisory stress testing.
We will outline our vision on this issue in a consultative paper, which we plan to discuss with the market in the second half of the year.
Q.: Russia is effectively cut off from traditional channels of interaction with the international community in the area of AML/CFT. Does this create any risks for the Russian financial market? How can they be avoided or mitigated?
A.: Russia was one of five countries that successfully passed the FATF audit in 2019. We were given certain recommendations, and if it had not been for the group’s politicized attitude the report on the progress of the Russian AML/CFT system would have been considered on this platform.
However, this does not mean that we have curtailed international cooperation. I would like to draw attention to the fact that recently there have been several attempts by individual countries to include us in the FATF “gray” and “black” lists, but even so, consideration of this issue was postponed at all meetings.
The Eurasian Group on Combating Money Laundering and the Financing of Terrorism (EAG) allows us to maintain a multilateral format with foreign partners. It has the status of a FATF-style regional body. Through the EAG, we interact with foreign associates representing both the supervisory authorities of the organization’s member countries and other AML/CFT bodies.
Based on the results, I’d like to say we do not see any significant risks for our financial sector due to the reluctance of individual countries to cooperate with Russia in AML/CFT. At the same time, we constantly monitor and analyze “anti-legalization” events taking place in the world in and take them into account in our work.
Q.: The Central Bank has repeatedly extended restrictions on the withdrawal of cash currency by individuals. If the current situation continues, will these restrictions continue to be extended?
A.: The main reason for introducing this restriction is sanctions that prohibit Russian banks from importing cash foreign currency from unfriendly countries. While this ban is in effect, we do not consider it advisable to lift our restriction.
The Central Bank has relaxed restrictions on both the withdrawal of cash foreign currency from deposits (at first only dollars, and later the equivalent of $10,000 in euros could be withdrawn) and on the sale of foreign currency.
We analyze the situation (every six months) before deciding to extend this measure. Generally we are not seeing significant demand to lift the restriction either from clients or banks. We see a major trend towards de-forexation; there is a significant decrease in the volume of foreign currency deposits.
Q.: The State Duma is currently looking at a bill that will oblige systemically important banks to use an approach based on internal ratings when assessing credit risk from January 1, 2030. This approach is currently used by four systemically important banks. Have there been any enquiries from other systemically important banks that want to switch to internal ratings and will be able to do this in the next year or two? And how strong is the Central Bank’s desire right now to extend this to universal banks in the coming years?
A.: Large banks with a universal license can still apply for internal ratings. One bank, not a systemically important one, has already submitted a request and we’ll start validating its models in the near future.
Of the systemically important banks, four now use the approach based on internal ratings both in the corporate and retail segments; some banks came to us for the second time with their models, and we updated and revised their risk weights.
The rest of the systemically important banks understand that this transition is inevitable for them, that it’s a very important job that they must do. As well as the capital they will save when moving to the approach based on internal ratings, they will primarily be improving the quality of risk management assessment and assessing risk more accurately: models are based on specific real data with a depth of at least 10 years associated with the level of losses, probability of default and so on.
The current regulatory act allows banks to use internal ratings to for provisions for retail loans. We are not yet ready to provide such an opportunity for corporate loans, and I think we will be discussing this for quite a while because there a are various subjective reasons for banks to be able to change the level of provisions one way or another.
I hope the Duma will debate the bill on the transition by systemically important banks to the approach based on internal ratings in the near future – we have already drafted the regulatory amendments. Given the expertise we have gained of working with banks to evaluate their models, we understand that the definition of default needs to be worded more precisely, and there are some subtleties with the ratios that banks will need to apply. I hope we’ll have everything ready by the end of this year, and that we can start planning the transition with the banks from 2025. We expect that systemically important banks will have to come to the Central Bank in 2025 and submit a plan - which portfolio segments they will be switching to this advanced approach and when.
Q.: Does the Central Bank monitor Basel regulation? Will you be pushing to integrate any Basel innovations into Russian regulation?
A.: We always look very carefully at international banking regulation practice. We are not excluding ourselves from the international agenda and believe that the use of best global practices has helped us build a robust banking system. The process of modifying certain regulatory requirements, including those to finance transformation projects, is now underway, and there are certain subtleties. But we are not straying from the main principles of risk-based regulation.