## Executive Summary — IMF Financial Sector Assessment (content unit: _cr1096)

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### Overview
- Since the 2003 FSAP, the Russian financial system has strengthened and deepened, reflecting favorable macroeconomic conditions, growing consumer confidence, investor demand, and the strengthening of the legal and regulatory framework.
- Banks still dominate the system but capital markets have deepened and an insurance sector has begun to emerge.
- The system has weathered the global credit crunch that began in mid-2007, but banks’ funding models pose an immediate challenge as global markets remain weak.

### Liquidity and Funding Risks
- Retail deposits are concentrated in the largest state bank and domestic capital markets are thin; some banks are dependent on foreign sources for funding and substantial funding concentration remains in the smaller banks.
- Segmentation and structural weaknesses in the interbank market expose the system to potentially serious liquidity problems if private confidence weakens or foreign appetite for Russian exposure declines.
- CBR responses:
  - Banks have met debt service through syndicated loans and rolling over maturing debt.
  - The CBR has responded effectively to liquidity pressures.
  - Suggested enhancements:
    - more intensive monitoring of liquidity positions and projections of individual banks’ liquidity needs;
    - discussions with bank managers and boards about likely responses to further illiquidity;
    - development of bank-by-bank contingency plans.
- Ministry of Finance recommendation:
  - introduce cash management systems, coordinated with the CBR, to smooth intra-month overnight interest rate volatility associated with tax collections.

### Credit Risk (Greatest Challenge)
- Credit growth and composition:
  - Bank assets grown at annual rates of about 40 percent since 2004.
  - Loan portfolios increased almost 50 percent in both 2006 and 2007.
  - Household loans increased by 57 percent in 2007 (after 75 percent in 2006 and 91 percent in 2005) and represent one quarter of total customer credits.
  - Household debt-to-income ratio: 12 percent at end-2006, up from 3 percent at end-2003.
  - Mortgage loans increased five-fold by end-2006 and 65 percent in 2007; mortgage share in total consumer loan portfolios has grown to 25 percent; loan-to-value ratios reportedly reach over 90 percent in some cases.
  - Loan dollarization: fell from 35 percent (four years prior) to 27 percent of all loans at end-2007; 13 percent of credit to resident individuals is denominated in foreign currency.
- Concentration and related-party risks:
  - Exposure to the five largest borrowers exceeds 50 percent of capital for over half of the banking system.
  - Credit to shareholders in some banks exceeds the limit of 50 percent of capital and may be underreported.
- Provisioning and capital:
  - Provisions are low at 3.4 percent of gross loans.
  - Adoption of less discretionary provisioning rules could reduce reported capital, in some cases by almost half.
  - If banks implemented more conservative provisioning (near upper end of ranges), reported bank capital would be reduced by almost half.
  - A phased program of capital strengthening combined with close monitoring is warranted given potential difficulty raising capital.

### Market Risk
- Securities portfolios represented about 13 percent of assets at end-2007 and are dominated by corporate bonds (equity holdings can be significant).
- Banks maintain long open positions in foreign exchange; banks’ net open position increased twofold in 2007 compared with 2004–2006 levels.
- Interest rate risk is potentially significant for some banks; data limitations prevent detailed analysis.
- Market risk is less of a concern than credit and liquidity risk given securities holdings relative to capital, but increased exposure—particularly by state banks and foreign banks—underscores need to improve market risk monitoring.

### Data, Monitoring, and Stress Testing
- Reported resilience may be overstated due to weaknesses in loan classification and provisioning; reported capital ratios have fallen since 2003 because of strong asset growth and could be overstated.
- CBR monitoring:
  - Has improved but could be strengthened by improved internal coordination between off-site supervision and research department.
  - Better transfer of information from on-site supervisors and development of stress tests based on macroeconomic scenarios would improve systemic monitoring.
- Data limitations impede analysis:
  - lack of information on related party exposures and beneficial ownership;
  - interest rate risk significance is poorly assessed due to data gaps.
- Programmed strengthening of data collection is warranted.

### Stress Testing — Design, Scenarios, and Key Results
- Top-down tests used end-2006 data and single-factor shocks; no full macroeconomic scenario (including oil shock) was developed.
- Key top-down scenarios and outcomes:
  - Credit risk shock: increase in NPLs (categories IV and V) to 13.7 percent from 10.8 percent (based on 1998–2006 experience) would reduce system capital by about half; many banks would fall below minimum capital though no bank would become insolvent under that single test.
  - Combined market risk shock: 15 percent devaluation, 30 percent fall in equities, 20 percent fall in bond prices would reduce system capital by about six percentage points, largely from bond price risk.
  - Liquidity shock: withdrawal of 20 percent of retail deposits met by selling liquid assets at a discount; all banking groups could meet the withdrawal but the shock reduces bank capital by five percentage points on average; medium and small banks suffer sharp capital reductions while large banks weather the shock.
- Top-down stress test methodological recommendations:
  - Link shocks to macroeconomic scenarios.
  - Include interest rate risk at different maturities on trading and banking books.
  - Carry out gap analysis on effective maturities incorporating wholesale funding and concentration risk.
- Bottom-up tests (five large banks, 40–41 percent of assets) findings:
  - Credit risk is the key risk.
  - Exposure to market risk varies dramatically across banks.
  - Interest rate exposure: some banks might lose 20–30 percent of capital from a parallel 500 basis point upward shift in the yield curve.
- Provisions-based sensitivity:
  - Using lower capital (after full provisioning to upper ranges) as starting point, credit risk and market risk tests would eliminate the system’s capital; liquidity shock would leave the system severely undercapitalized.

### Regulation, Supervision, and Problem Bank Resolution
- Progress since 2003:
  - CBR supervisory staff strengthened.
  - Accounting rules closer to IFRS effective January 1, 2008 for credit institutions; full IFRS implementation requires passage of law on consolidation before publication of consolidated IFRS reporting.
  - CBR has issued guidance on corporate governance and internal controls and made progress on AML/CFT.
- Areas needing strengthening:
  - Loan-loss provisioning regulations hinder clear view of real capitalization.
  - Supervision focuses on formal compliance with quantitative limits rather than risk-oriented, forward-looking assessment.
  - Opaque beneficial ownership and nontransparent group affiliations persist.
- Problem bank resolution:
  - Framework effective for smaller banks but may be insufficient for medium-sized or larger banks.
  - Recommended powers for CBR:
    - authority to intervene at an early stage (e.g., require shareholder recapitalization);
    - ability to intervene before capital falls below a predetermined level—such as 4 percent of risk weighted assets—and then sell parts or all of the bank to qualified purchasers;
    - broaden options to sell the franchise of a failed bank to interested investors.
  - Contingency planning should include procedures to exchange real-time information among CBR departments and authority to require restructuring or resolution plans for illiquid but solvent banks.
- Deposit insurance:
  - DIA functions as a paybox and does not have an active role in resolution.
  - Coverage: Rub 400,000 (US$17,000) including a 10 percent copayment for amounts exceeding Rub 100,000.
  - Review of features, particularly coinsurance, could be warranted.
- Corrective powers and limitations:
  - CBR has wide remedial powers but cannot restrict voting rights of shareholders, limit payments to shareholders and directors, nor directly sanction individual directors and officers in nonintervened banks.
  - Legislative work ongoing to address these aspects.

### Capital Markets
- Equity market size and structure:
  - Stock market capitalization rose from approximately 17 percent of GDP at end-2003 to over 100 percent by end-2007.
  - Total world market value of Russian companies (including foreign listings and ADRs/GDRs): $1.2169 trillion as of end-June 2007.
  - Free float estimates range from 20–35 percent.
- Trading and infrastructure issues:
  - MICEX controls approximately 90 percent of reported trading volume but includes equity repo transactions, potentially overstating trading volumes by 50–60 percent.
  - OTC trading not measured and may be equal to or greater than daily reported trading.
  - Clearance and settlement fragmented; central counterparty and centralized securities and clearance system needed.
- Corporate bond market:
  - Corporate bonds outstanding grew from ½ percent of GDP at end-2000 to 3.5 percent of GDP at end-2006.
  - Mid-2007 international turmoil reduced number and size of corporate bond offerings.
- Regulatory enhancements:
  - FFMS created with expanded regulatory authority; effective January 2008 established higher capital adequacy requirements for market participants.
  - FFMS requires additional resources and enforcement powers (e.g., higher fines, powers to obtain documents, compensation authority, online market access for surveillance).

### Insurance Sector
- Sector status:
  - Insurance sector underdeveloped but expanding; total insurance assets only 1 percent of GDP at end-2006.
  - Nonlife premium income grew by 21 percent in 2006.
  - Life insurance premiums collapsed due to regulatory action reducing tax evasion; beginning to show growth from a small base.
- Supervisory gaps and recommendations:
  - FSIS supervision improved; weak insurers are being closed.
  - Legal gaps: missing powers to respond to emergencies, apply rules on ownership changes, determine fit and proper status of controllers, directors, and officers.
  - Suggested reforms:
    - upgrade insurance law to include fit and proper criteria;
    - strengthen FSIS regulatory authority and capacity, including power to issue technical directives and emergency actions;
    - bring minimum capital of insurance companies to EU standards;
    - develop actuarial accreditation and strengthen reinsurance quality requirements.
  - Interim measures: publish insurer ability-to-pay ratings and enhanced disclosure of gross premium, net premium and claims, expenses, net assets, and reserves/provisions.

### Main FSAP Recommendations (selected)
- Immediate stability priorities:
  1. Begin tightening loan-loss provisioning standards to foster appropriate levels of bank capitalization (¶22).
  2. Review banks’ liquidity estimates and develop contingency plans (¶14–19).
  3. Continue to develop the lender-of-last-resort function by broadening the range of nonmarketable assets eligible as collateral, along with appropriate supervisory oversight and prudential safeguards (¶53).
  4. Further strengthen risk-based supervision and build off-site capacity through developing the CBR’s financial stability analysis function by introducing stress tests based on macroeconomic scenarios (¶26, 37–41).
- Medium-term structural priorities (selected):
  5. Strengthen transparency and disclosure; improve data quality and availability including through IFRS implementation and better corporate governance (¶30–32, 42–43, 49, 62–63).
  7. Establish the legal concept of “beneficial owner” to address weaknesses in bank licensing, large exposures, consolidated supervision, and market transparency (¶30, 42–43, 49).
  9. Strengthen remedial action and bank resolution frameworks by introducing prompt corrective actions and giving the CBR powers for early intervention, including sale of failing banks (¶54–56).
  10. Strengthen prudential oversight of securities markets and capacities of the FFMS (¶46–48).
  14. Create a central clearing and settlement system, and rationalize and automate custodian arrangements (¶64–66).
  15. Upgrade the insurance law to include fit and proper criteria (¶50).
  17. Bring minimum capital of insurance companies to EU standards (¶50).

### Macroeconomic Risks and Selected Indicators
- Macroeconomic position:
  - Given robust growth, balance of payments and fiscal surpluses, and substantial international reserves, Russia is well positioned to deal with macroeconomic shocks, but risks from renewed macroeconomic instability exist.
  - GDP growth exceeded 8 percent in 2007.
  - Annual broad money growth reached about 50 percent by end-2007.
  - Inflation rose to almost 12 percent year-on-year in December (above end-year target of 8 percent).
  - Current account surplus expected to narrow and may become a deficit as early as in 2011.
- Selected macro and financial indicators (series highlights):
  - Real GDP (2003–2009, Actual/Est./Proj./Proj.): 7.3 7.2 6.4 7.4 8.1 7.8 7.3
  - Nominal GDP (in billions of U.S. dollars): 431 592 764 989 1,290 1,855 2,306
  - Gross international reserves (in billions USD): 76.9 124.5 182.2 303.7 476.4 660.7 828.8
  - External debt (in billions USD): 186.0 214.5 257.2 310.6 459.6 558.8 685.1
  - Average risk weighted capital adequacy ratio: 15.5 percent (end-2007)
  - Profitability: ROA of 3.0 percent, and ROE of 22.7 percent (system averages cited)
  - Total NPLs: around 2.2 percent of total gross bank loans (system aggregate cited)
  - Provisioning: 3.4 percent of total gross loans (system aggregate cited)

### Selected Stress Test Findings (summary)
- Under credit shock raising categories IV and V to 13.7 percent:
  - the banking system would lose over 50 percent of capital;
  - about 200 banks, accounting for over half of banking system assets, would lose over 50 percent of capital.
- Full provisioning to maximum and mid-level for category II would reduce system-wide capital by 48 percent:
  - State banks would incur 59 percent of capital loss; large private banks 48 percent.
  - 337 banks, accounting for about 69 percent of banking system assets, would lose over 50 percent of capital.
- Combined market risk shock would result in a 6 percent loss of bank capital system-wide; no bank group becomes undercapitalized but individual institutions could lose up to 100 percent of capital.
- Liquidity/ depositor flight scenarios:
  - Medium and small banks are very sensitive to funding concentration; top five creditors often account for more than 200 percent of their capital.
  - A “flight to quality” shock would be devastating for this subgroup.

### Supervision, Accounting, and Governance Measures
- Accounting and auditing:
  - From January 1, 2008, bank accounting standards were brought significantly closer to IFRS, including use of the accrual method.
  - CBR requires all credit institutions to prepare supplementary IFRS financial statements but does not require publication; publication of IFRS consolidated reporting will be required only when law on consolidation is passed by the Duma.
- Supervisory approach:
  - Recommendation to shift from compliance‑based to risk‑based supervision with professional judgment, bank peer grouping, and strengthened legal protection and accountability for supervisors.
- Consolidated supervision:
  - Legal amendments recommended to broaden scope to include nonbank holding companies, mandate disclosure of ultimate beneficiaries, and authorize CBR to inspect or mandate external audit of consolidated groups and require consolidated prudential reporting.

*Source: IMF staff report excerpt (content unit: _cr1096).*

### Executive Summary ......................................................................................................

### Executive Summary

### Overview
- Since the 2003 FSAP, the Russian financial system has strengthened and deepened, reflecting favorable macroeconomic conditions, growing consumer confidence, investor demand, and the strengthening of the legal and regulatory framework.
- Banks still dominate the system but capital markets have deepened and an insurance sector has begun to emerge.
- The system has weathered the global credit crunch that began in mid-2007, but banks’ funding models pose an immediate challenge as global markets remain weak.

### Liquidity and Funding Risks
- Retail deposits are concentrated in the largest state bank and domestic capital markets are thin; some banks are dependent on foreign sources for funding and substantial funding concentration remains in the smaller banks.
- Segmentation of the system and structural weaknesses in the interbank market expose the system to potentially serious liquidity problems should private confidence weaken or foreign appetite for Russian exposure decline.
- Thus far, banks have been able to meet debt service through syndicated loans and rolling over maturing debt.
- The CBR has responded effectively to liquidity pressures, but its tools for financial sector stability could be strengthened by:
  - more intensive monitoring of the liquidity positions and projections of individual banks’ liquidity needs;
  - discussions with bank managers and boards of directors about their likely response to further illiquidity; and
  - development of bank-by-bank contingency plans.
- The Ministry of Finance could introduce cash management systems that, in coordination with the CBR, would help smooth volatility of the overnight interest rate associated with tax collections.

### Credit Risk (Greatest Challenge)
- Credit risk, arising because of rapid credit expansion, poses the greatest challenges.
- Credit growth to households has been rapid; this is a high-risk segment given poor information on borrowers and untested bank risk management systems.
- While expanding profitability, this lending expansion could lead to a buildup of unrecognized credit risk.
- Adoption of less discretionary provisioning rules by banks could reduce reported capital, in some cases by almost half.
- A phased program of capital strengthening combined with close monitoring of its implementation is warranted given potential difficulty raising capital in the current environment.

### Market Risk
- Exposure to market risk has grown in some banks.
- Market risk is less of a concern than credit and liquidity risk, as securities holdings remain moderate in relation to capital levels.
- Banks maintain long open positions in foreign exchange but the relatively small size of unhedged positions limits potential exposure to currency risk.
- Interest rate risk is potentially significant for some banks, although data limitations prevent a detailed analysis.
- Increased exposure to market risk—particularly by state banks and foreign banks—underscores the need to improve market risk monitoring.

### Data, Monitoring, and Stress Testing
- Banks’ resilience to shocks may be overstated by reported financial data; reported capital ratios have fallen since 2003 due to strong asset growth and could be overstated because of weaknesses in loan classification and provisioning.
- The CBR’s monitoring of systemic risk has improved but could be further strengthened by improved internal coordination between the off-site supervisory department and the research department.
- Better coordination, along with more fluid transfer of information from on-site supervisors and development of stress tests based on macroeconomic scenarios, would improve the CBR’s capacity to monitor buildup of risks and vulnerabilities at a systemic level.
- Notwithstanding improvements, data limitations impede analysis and monitoring of risks: lack of information on related party exposures and beneficial ownership limits credit risk assessment; interest rate risk significance is poorly assessed due to data gaps.
- A programmed strengthening of data collection is warranted.

### Regulation, Supervision, and Problem Bank Resolution
- Banking supervision has improved since the 2003 FSAP; CBR supervisory staff has been strengthened and the introduction of CBR accounting rules based on IFRS principles in January 2008 will improve management information and disclosure.
- Full implementation of IFRS still requires passage of the law on consolidation, currently before the Duma.
- The CBR has issued guidance on corporate governance and internal controls and made progress on AML/CFT issues.
- Areas for strengthening:
  - Regulations on loan-loss provisioning hinder a clear view on the real level of bank capitalization.
  - The principal focus of supervision remains formal compliance with quantitative limits, which can constrain early identification of real financial risks and potentially slow supervisory response.
  - Opaque beneficial ownership and nontransparent group affiliations persist, making it difficult to assess intra-group exposures and associated risks.
- The problem bank resolution framework has been effective for smaller banks but may not be sufficient to resolve medium-sized or larger banks.
  - The CBR would benefit from authority to intervene in weak banks at an early stage to contain resolution costs in larger, more complex cases and limit disruption to creditors, including depositors.
  - A broader range of options to sell the franchise of a failed bank to interested investors could be an important resolution tool.
  - Efforts are warranted to broaden public awareness of the details of deposit insurance, including a description of coverage, to avoid public confusion in the event of a failure.

### Capital Markets
- The size of the equity market has grown dramatically but remains highly concentrated in the ten largest companies and constrained by a small free float that ranges between 20 and 35 percent.
- Further development requires better disclosure by companies and market participants, stronger and more secure market infrastructure, and further development of nonbank financial institutions.
- Since 2003, the regulatory and legal framework for capital markets has been strengthened:
  - The Federal Financial Markets Service (FFMS) was created with expanded regulatory authority covering derivatives markets, collective investment schemes, and pension funds, and responsibility for disclosure of mergers, acquisitions, and tender offers of public companies.
  - The FFMS has issued regulations covering collective investment schemes and, effective January 2008, established higher capital adequacy requirements for market participants.
  - Further strengthening is needed and the FFMS requires additional resources to discharge its broader responsibilities.

### Insurance Sector
- The insurance sector is underdeveloped but expanding rapidly, making regulatory challenges significant.
- Supervision by the Financial Sector Insurance Service (FSIS) has improved considerably since the previous assessment, and weak insurers are being closed.
- Constraints:
  - FSIS’s ability to attract and retain necessary staff to cope with industry complexity and continued consolidation is constrained.
  - The insurance law is missing critical elements, including powers to respond to emergency situations, apply rules on ownership changes, and determine the fit and proper status of controllers, directors, and officers.

### Main FSAP Recommendations (Box 1)
Immediate stability priorities
1. Begin tightening loan-loss provisioning standards to foster appropriate levels of bank capitalization (¶22).
2. Review banks’ liquidity estimates and develop contingency plans (that conform to CBR recommendations under preparation, ¶14–19).
3. Continue to develop the lender-of-last-resort function by broadening the range of nonmarketable assets eligible as collateral, along with appropriate supervisory oversight and prudential safeguards to avoid excessive access to emergency liquidity (¶53).
4. Further strengthen risk-based supervision and build off-site capacity through developing the CBR’s financial stability analysis function by introducing stress tests based on macroeconomic scenarios (¶26, 37–41).

Medium-term structural priorities
5. Strengthen transparency and disclosure; improve data quality and availability for the financial sector including through IFRS implementation, better corporate governance and disclosure of securities transactions (¶30–32, 42–43, 49, 62–63).
6. Introduce cash management by the Ministry of Finance, in coordination with the CBR, in order to smooth the intra-monthly volatility of the overnight interest rate resulting from monthly tax collections (¶60).
7. Establish the legal concept of “beneficial owner” to address weaknesses in bank licensing, large exposures, consolidated supervision, and overall market transparency (¶30, 42–43, 49).
8. Provide for development of consolidated supervision of banking groups based on appropriate methodologies (¶42–43).
9. Strengthen the remedial action and bank resolution frameworks by introducing prompt corrective actions and giving the CBR powers for early intervention, including the sale of failing banks (¶54–56).
10. Strengthen prudential oversight of the securities markets by implementing pending legal and regulatory reforms and strengthening the capacities of the FFMS (¶46–48).
11. Increase enforcement authority against insider trading/market manipulation (¶46).
12. Improve market transparency through the mandatory listing of active stocks, separate disclosure of repurchase transactions, and continuing to improve reporting of over the counter (OTC) transactions (¶32).
13. Implement regular oversight of SROs (¶51).
14. Create a central clearing and settlement system, and rationalize and automate custodian arrangements (¶64–66).
15. Upgrade the insurance law to include fit and proper criteria (¶50).
16. Strengthen FSIS regulatory authority and capacity, including by allowing it to issue technical directives and emergency actions (¶52).
17. Bring minimum capital of insurance companies to EU standards (¶50).

### I. Risks to the Financial System — Macroeconomic Risks (Selected Points)
- Given robust economic growth, balance of payments and fiscal surpluses, and substantial international reserves, the Russian economy is well positioned to deal with macroeconomic shocks.
- GDP growth exceeded 8 percent in 2007, well above most estimates of potential.
- Annual broad money growth reached about 50 percent by end 2007.
- Inflation rose to almost 12 percent year-on-year in December; above the end-year target of 8 percent.
- Without renewed macroeconomic stabilization, Russia’s real exchange rate may overshoot its sustainable path.
- The current account surplus is expected to narrow and may become a deficit as early as in 2011.
- Given planned fiscal relaxation and oil-related revenue leveling off, the fiscal surplus will also fall, increasing dependence on international capital markets.

### Financial System Structure and Size
- The Russian financial system is small by international standards and dominated by banks: total assets of banks were 54 percent of GDP at end-2007, compared with over 200 percent in France, Germany, and Japan.
- Commercial banks are the main component of the Russian financial sector, comprising about 90 percent of total financial assets.
- Insurance companies, pension funds, and mutual funds account for a roughly equal share of the remainder.

*Executive Summary — IMF Financial Sector Assessment*

### 6.      The banking system is dominated by state-owned banks. State-owned banks—

### _cr1096 - 6.      The banking system is dominated by state-owned banks. State-owned banks—

### Banking system structure and size
- State-owned banks account for over one third of total banking assets and nearly 60 percent of household deposits and are dominated by six large banks.
- Large Russian private banks account for over one third of banking assets and increasingly rely on foreign borrowing.
- Foreign-controlled banks account for about 17 percent of banking assets and have a low share of deposits and finance their credit expansion with foreign borrowing.
- Small Russian banks and nonbank credit institutions account for about ten percent of banking system assets and report high capital-to-asset ratios but low profitability.
- Banks represent 91 percent of financial system assets in 2006; mutual funds 3 percent; pension funds 2 percent; insurance 4 percent.

### Nonbank financial sector and insurance
- Total assets of nonbank financial institutions amount to 9 percent of total financial sector assets or 5.8 percent of GDP.
- Constraints on expansion: lack of a broad investor base, relatively underdeveloped life insurance and pension companies, and lack of comprehensive information disclosure by issuers.
- At end-2006, total insurance assets amounted to only 1 percent of GDP.
- Nonlife premium income grew by 21 percent in 2006.
- Life insurance premiums collapsed in recent years due to regulatory action reducing tax evasion, but "real" life premiums are beginning to show rapid growth from a very small base.

### Credit risk: recent growth and composition
- Bank assets have grown at annual rates of about 40 percent since 2004.
- Loan portfolios increased almost 50 percent in both 2006 and 2007.
- Household loans increased by 57 percent in 2007 (after 75 percent in 2006 and 91 percent in 2005) and now represent one quarter of total customer credits.
- Household debt-to-income ratio was 12 percent at end-2006, up from 3 percent at end-2003.
- Mortgage loans increased five-fold by end-2006 and 65 percent in 2007; mortgage share in total consumer loan portfolios has grown to 25 percent; loan-to-value ratios reportedly reach over 90 percent in some cases.
- Loan dollarization fell from 35 percent (four years prior) to 27 percent of all loans at end-2007; 13 percent of credit to resident individuals is denominated in foreign currency.
- Exposure to the five largest borrowers exceeds 50 percent of capital for over half of the banking system.
- Credit to shareholders in some banks exceeds the limit of 50 percent of capital and may be underreported.

### Liquidity risk and funding
- Retail deposits represent, on average, 30 percent of bank liabilities but are concentrated in the state-owned banks (mostly Sberbank).
- For some small banks, the twenty largest depositors can account for over half of customer funding.
- Nonresident funding equaled 24 percent of liabilities at end-2007, up from 11 percent at end-2004.
- Foreign borrowing and bond issuance exceeded $40 billion in 2006 and 2007.
- External debt (in billions of dollars): Total 2004: 213.5; 2005: 257.2; 2006: 310.6; 2007: 459.6.
  - General government: 2004: 97.2; 2005: 71.1; 2006: 44.7; 2007: 37.4.
  - Monetary authorities: 2004: 8.2; 2005: 11.0; 2006: 3.9; 2007: 9.0.
  - Banks: 2004: 32.3; 2005: 50.1; 2006: 101.2; 2007: 163.7.
  - Other: 2004: 75.7; 2005: 125.0; 2006: 160.7; 2007: 249.6.
- Since mid-2007, access to the Eurobond market has remained limited and domestic bond market volume decreased in late 2007 and early 2008.
- Syndicated and bilateral loans were used by some banks to rollover maturing debt.
- Most banks are not expected to experience liquidity shortages in the near term, though credit growth is likely to slow.

### Market risk
- Securities portfolios represented about 13 percent of assets at end-2007 and are dominated by corporate bonds (equity holdings can be significant).
- Interest rate risk can be significant for some banks given limited use of hedging instruments; data limitations prevent detailed assessment.
- Banks maintain long open positions in foreign exchange; banks’ net open position increased twofold in 2007 compared with 2004–2006 levels.

### Strengths and vulnerabilities of banks
- Rapid growth supported strong profitability; reported capital remains adequate in most banks but capital has been falling as a share of assets.
- Provisioning rules may mask undercapitalization; provisions are low at 3.4 percent of gross loans.
- If banks booked provisions near the upper bound of the regulatory range, reported bank capital would be reduced by almost half.
- State-owned banks would lose almost 60 percent of their end-2006 capital under such an adjustment; large private banks would lose close to half of their capital.
- Expanding the definition of NPLs to include "doubtful" loans would increase the NPL ratio to 10.3 percent.
- Rapid credit growth has compressed margins and is placing pressure on profitability; funding pressures are likely to increase cost of funding and depress profits going forward.

### Risk management and data limitations
- The largest banks have improved internal procedures and moved toward international practice but face lack of data and qualified staff.
- Beyond the top 200 banks, risk management practices are still developing.
- Credit bureaus introduced in 2004 are growing but collect limited information and are not widely used; the CBR’s Central Catalogue of Credit Histories allows each bank to set up its own database and does not provide incentives for data sharing.
- Borrower authorization requirements limit the data included in credit bureaus.

### Stress testing: design and results (end-2006 baseline)
- Stress tests used single factor shocks based on end-2006 data; no macroeconomic scenario (including oil shock) was developed.
- Tests included deterioration in credit quality, liquidity withdrawals, and fluctuations in the exchange rate and securities prices.
- Credit risk shock:
  - Defined as an increase in NPLs (loans classified in categories IV and V) to 13.7 percent from 10.8 percent (based on experience during the period 1998 to 2006).
  - This would reduce the system’s capital by about half, and many banks would fall below the minimum capital requirement although no bank would become insolvent.
- Combined market risk shock:
  - Assumed a 15 percent devaluation, 30 percent fall in the value of equities, and 20 percent fall in bond prices.
  - Would reduce the system’s capital by about six percentage points, largely reflecting large banks’ exposure to bond price risk.
- Liquidity shock:
  - Assumed a withdrawal of 20 percent of retail deposits to be met by selling liquid assets at a discount.
  - All banking groups could meet the withdrawal with their own resources; the shock reduces bank capital by five percentage points on average while only marginally reducing liquidity ratios.
  - Large banks easily weathered the shock; medium and small banks would suffer a sharp reduction in capital. No group of banks became insolvent.

*Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr1096.pdf*

### 29.      As noted above, provisions may be understated. If banks implemented more

### 29.      As noted above, provisions may be understated. If banks implemented more

### Provisions and top-down stress tests
- If banks implemented more conservative provisioning policies (i.e., made provisions near the upper end of the broad ranges), reported bank capital would be reduced by almost half.
- Using this lower level of capital as a starting point for the stress tests:
  - The credit risk and the market risk tests would eliminate the system’s capital.
  - The liquidity shock would leave the system severely undercapitalized.
- The tests used end-2006 data; in early 2007 two large state banks increased their capital through Initial Public Offerings (IPOs), boosting their pre-shock capital ratios from about 13 to 20 percent.

### Bank-level (bottom-up) tests and risk exposures
- Complementary tests were conducted with five large banks accounting for 40 percent of the banking system assets.
- The exercise focused on sensitivity to credit, liquidity, foreign exchange, interest rate, and equity and bond price risks.
- Key findings:
  - Credit risk is the key risk to the system.
  - Exposure to market risk varies dramatically across banks.
  - Interest rate exposure identified as a potential risk: some banks might lose 20–30 percent of bank capital in the event of a parallel upward shift in the yield curve by 500 basis points.
- Recommendation: include interest rate risk at different maturities on the trading book and interest rate risks on the banking book in the top-down stress tests.
- The authorities plan to continue cooperating with banks on bottom-up stress testing.

### Data considerations and reporting limitations
- Data limitations hinder risk monitoring and management in banks.
- Banks do not report consistently according to IFRS, constraining risk monitoring and limiting international comparability of bank balance sheets.
- Additional data gaps:
  - Lack of information on credit bureaus, related parties, and beneficial ownership limits risk assessment.
  - Data on interest rate risks may understate stress testing results.

### Capital markets — size, liquidity, and investor base
- Equity market growth:
  - Stock market capitalization rose from approximately 17 percent of GDP at end-2003 to over 100 percent by end-2007.
  - Capitalization reflected both price appreciation and a sharp increase in company listings.
  - Regulations required Russian companies to place at least 30 percent of any new stock issues in local markets and imposed a 35 percent limit on overall foreign placements.
  - The total world market value of Russian companies (including foreign listings and American and Global Depository Receipts) was $1.2169 trillion as of end-June 2007.
  - Estimates of free float range from 20–35 percent of market capitalization but are difficult to confirm because of limitations measuring indirect ownership.
- Trading volume reporting issues:
  - The Moscow Interbank Currency Exchange (MICEX), which controls approximately 90 percent of reported trading volume, includes equity repo transactions, overstating trading volumes by as much as 50–60 percent.
  - OTC trading is not measured but may be equal to or greater than daily reported trading.
  - These shortcomings hamper price discovery, undermine governance, and limit monitoring of insider trading.
- Corporate bond market:
  - Corporate bonds outstanding grew from ½ percent of GDP at end-2000 to 3.5 percent of GDP at end-2006 but remain low by international standards.
  - The turmoil in international credit markets in mid-2007 led to reductions in the number and size of Russian corporate bond offerings in 2007.
- Investor base and market structure:
  - The equity investor base is reported to be split evenly between foreign and domestic investors; domestic investors are primarily high net worth individuals.
  - Foreign investor segment also includes Russian investors investing through off-shore accounts.
  - Russian institutional investors are relatively small but beginning to play a more visible role.
  - Banks dominate investment in the domestic bond market.
- Broker-dealers and settlement:
  - Broker-dealers file monthly capital reports with the FFMS and weekly reports with the exchanges but do not calculate net capital on a daily basis.
  - Firms are not required to alert the FFMS if their capital is close to the required minimum.
  - Clearance and settlement system is not centralized; RTS and MICEX are developing central counterparty systems based upon contractual agreements that can be subject to legal challenge.
  - A central securities and clearance system is needed to mitigate risks.

### Institutional investors and pension funds
- Private pension funds:
  - There are 265 private pension funds with a total of more than five million contributors and one million pensioners.
  - Market dominated by the top 10 occupational funds, which hold approximately 80 percent of total nonstate pension funds (NPF) assets.
  - Growth limited by lack of public awareness, distrust of financial instruments, and tax implications; expected to grow as employers include pension schemes in compensation packages.
- Investment funds and institutional investors are growing from a low base.

### Insurance sector — issues and recommended reforms
- Entry and competition:
  - Foreign insurers are present but entry rules limit foreign insurers to 25 percent of capital employed; easing of entry rules may be needed to facilitate sector expansion.
- Solvency, supervision, and taxation:
  - Given industry growth, capital and solvency requirements will need to be strengthened.
  - A more risk-based solvency regime could be introduced and stronger supervision of asset quality is needed.
  - Application of the VAT on brokers’ commission may lead some industrial transactions to be processed abroad to avoid such charges; this discriminatory tax should be reviewed.
  - Brokers should be allowed to receive commission from insurers but this should be disclosed to the relevant policyholders.
- Specific supervisory gaps:
  - Key insurance supervisory practices not incorporated in the law include:
    - Rules relating to the fit and proper status of owners, directors, and managers.
    - The right to approve changes in ownership and control of an insurer.
    - The ability of the supervisor to respond to immediate threats to an insurer without referring to the Ministry of Finance.
    - Adequate oversight of reinsurance arrangements.
    - Rules on the use of derivatives and consumer protection.
  - Asset risk is not adequately measured under the simplified EU solvency I formula used.
  - Basis for educating and accrediting actuaries needs urgent establishment and promulgation.
  - Current reinsurance per risk retention levels in Russia are probably excessive by international standards (although adequate on a per event basis); reinsurer quality requirements could be strengthened.
  - Capital requirements are relatively modest compared to other large emerging market economies and less than EU requirements for direct insurance.
- Interim measures and supervisory strengthening:
  - As an interim step, insurers could be rated on their ability to pay claims to provide consumers guidance.
  - The Financial Sector Insurance Service (FSIS)—the insurance industry supervisor—or an industry SRO should publish sufficient data to enable analysis (at a minimum: gross premium, net premium and claims, expenses, net assets, and reserves/provisions).
  - FSIS could be granted powers to issue purely technical directives within the existing policy framework to respond quickly to an evolving financial environment.
  - Develop an institutional strengthening plan covering staff recruitment, training, remuneration needs, database and analytical platform, and management information system.

### Regulation, supervision, and structural reforms
- Banking supervision:
  - Since the 2003 FSAP, banking supervision has been strengthened but faces a critical challenge in shifting from a rules-based framework to a risk-oriented approach.
  - The CBR plans to introduce a professional judgment approach allowing supervision on a more risk-oriented basis through appointment of bank portfolio managers.
  - Required changes for risk assessment framework include legal protection for supervisors (except for misconduct) and clearer specification of responsibilities of directors of banks and banking groups.
  - Supervisory focus should be tailored by bank peer groupings: smaller banks—financial viability, management, transparency; larger banks—qualitative assessment, forward-looking risk measures.
  - Steps for successful implementation: (i) communicate reasons for new approach; (ii) compile and disseminate risk management standards; (iii) allocate appropriate staff resources; (iv) implement accountability framework; (v) adopt viability tests and phased, mandatory strategies for problem banks; (vi) assure staff quality and organizational responsiveness.
- Consolidated supervision:
  - “Upward consolidation” to supervise a nonbank holding company of a banking group is currently not possible.
  - CBR has insufficient powers to trace and estimate risks from ultimate beneficial owners and related parties; minimum prudential standards cannot be applied on a consolidated level.
  - Rules for related party exposure need strengthening, allowing the CBR to presume interconnections even if not formally established.
  - Legal amendments needed to enable effective consolidated supervision include:
    - Broadening scope to include nonbank holding companies and mandate disclosure of ultimate beneficiaries.
    - Reporting compliance with prudential standards on a consolidated group basis.
    - Authorization for the CBR to (a) inspect or mandate an external audit of a consolidated group; (b) require deduction from capital of excessive risk; (c) prohibit opaque and unsupervisable structures; and (d) provide means to insulate banks and banking groups from conglomeration risks.
- Coordination and cross-border cooperation:
  - Coordination among FFMS, CBR, and FSIS needs enhancement; coordinated action facilitated by minimum levels of transparency.
  - Banking law prohibits sharing of client information directly by supervisor; FIU can obtain client information but supervisor cannot provide it unilaterally to the FIU.
  - CBR has concluded 22 memoranda of understanding with home supervisors of foreign banks, participates in supervisory colleges, and cooperates closely with the Netherlands, United Kingdom, and United States, but legal restrictions limit exchange of client information.
- Capital markets supervision and enforcement:
  - Since the last IOSCO assessment in 2003, framework strengthened but FFMS requires additional enforcement authority.
  - Securities law should define and prohibit insider trading and market manipulation; gaps in FFMS powers to obtain documents and records during investigation must be closed.
  - The maximum fine for violations under current law (approximately US$1,500) is too low to deter illegal conduct.
  - FFMS could be authorized to require compensation for defrauded persons and must be able to work closely with foreign regulators.
  - FFMS should upgrade market surveillance to obtain online, real-time access to MICEX, RTS, OTC, and foreign markets and acquire analytical software to aggregate and monitor trading in a single security on all markets.
  - Triggers for exception reporting by RTS and MICEX could be reexamined.
  - Prudential regulations for market professionals should be upgraded: require firms to calculate working capital on a daily basis and notify FFMS when capital approaches legal minimums; grant FFMS authority to appoint a temporary receiver or trustee to protect investor assets; create “suitability standards” for market professionals making investment recommendations to retail investors.
  - Public company disclosure improvements needed: mandate ownership disclosure by officers, directors, and controlling shareholders; require disclosure of beneficial rather than nominal ownership; authorize FFMS to instruct public companies to restate or correct false or misleading public disclosures.

### Lender of last resort and bank resolution
- Lender of last resort and collateral:
  - CBR response to August 2007 turmoil confirmed ability to deal with systemic liquidity stress; further enhancements may be warranted.
  - CBR expanded the list of eligible Lombard collateral in September–November 2007.
  - CBR has considered expanding its collateral base further to include a broader set of eligible marketable securities.
  - Acceptance by the CBR of nonmarketable assets from banks to collateralize credit should be combined with heightened supervisory oversight and clear triggers for bank intervention.
- Bank resolution and supervisory enforcement:
  - CBR has powers to require some early remedial action, change management, and intervene in a failed bank.
  - In the past two years, measures to prevent insolvency have been applied in 125 banks by their shareholders and management as either required by the legislation or enforced by the CBR.
  - In practice, the CBR has relied on violations of anti-money laundering legislation rather than soundness and safety grounds to close banks.
  - Over the last two years, the CBR has withdrawn licenses from 115 banks and liquidation procedures have been completed for 106.

*Source: IMF staff report excerpt (content unit: _cr1096 - 29. As noted above, provisions may be understated. If banks implemented more).*

### 56.      The resolution framework would be strengthened if the CBR had the authority

### _cr1096 - 56.      The resolution framework would be strengthened if the CBR had the authority

### Bank resolution and early intervention
- The CBR should have authority to require shareholder recapitalization at an early stage of capital depletion.
- If shareholders cannot recapitalize, the CBR should be able to intervene before bank capital falls below a predetermined level—such as 4 percent of risk weighted assets—and then sell parts or all of the bank to qualified purchasers.
- Economic sanctions could strengthen enforcement if applicable to directors and managers; current banking law prevents the CBR from imposing such sanctions and the responsibilities of directors in governing banks and banking groups are not clearly spelled out.

### Contingency planning and resolution powers
- Contingency planning should be strengthened to allow policymakers to focus on appropriate policy responses rather than resolution process details.
- Such plans should include:
  - procedures to exchange real-time information among relevant CBR departments;
  - the CBR needs authority to require restructuring or resolution plans for illiquid but solvent banks; and
  - the CBR should be authorized to conduct purchase and assumption transactions or sell the failed bank to viable third parties.

### Deposit insurance
- The Deposit Insurance Agency (DIA) functions as a paybox and does not have an active role in problem bank resolution.
- Coverage level: Rub 400,000 (US$17,000) including a 10 percent copayment for amounts exceeding Rub 100,000.
- A review of the deposit insurance features, particularly coinsurance, could be warranted given recent European experiences.
- Efforts could be enhanced to ensure depositors fully recognize the extent of coverage and solvency of the system.

### Anti‑Money Laundering and Combating the Financing of Terrorism (AML/CFT)
- Minor shortcomings identified in criminalization of money‑laundering and terrorist financing: incomplete coverage of offenses and lack of criminal liability for legal persons.
- Confiscation systems judged effective; problems identified in freezing terrorist assets regime, including overreliance on the judicial system and issues with delisting and unfreezing procedures.
- Legal framework for cross‑border declaration of currency should be better integrated into the law.
- The Financial Intelligence Unit performed effectively; minor shortcomings in other law enforcement authorities.
- Coverage
  - All required financial institutions and certain nonfinancial institutions are fully covered by the AML/CFT regime, but weaknesses exist.
  - Weaknesses in customer due diligence, including lack of clarity on beneficial ownership.
  - Lawyers, notaries, and accountants are covered by a less strict, incomplete, and ineffectively implemented regime; trust and company service providers are not covered.
  - Loopholes that could permit criminal ownership of financial institutions have not been closed.
- Supervision and enforcement
  - CBR’s AML/CFT inspections assessed positively, but legal limitations on frequency of inspections and sanctioning power were noted.
  - AML/CFT supervision of other sectors deemed ineffective.
- International cooperation provisions appear robust, but inadequate statistics preclude evaluation of practical effectiveness.

### Market infrastructure and systemic liquidity management
- The CBR effectively manages systemic liquidity, monitoring daily liquidity needs and projecting requirements; system proven robust during market turmoil.
- Excess reserves held by banks remain significant; reducing precautionary balances could include strengthening payment system infrastructure.
- Monthly tax collections cause strong intra‑month overnight interest rate volatility; shift to a quarterly VAT payment schedule may create significant liquidity pressures.
- Recommendation: Ministry of Finance could introduce cash management systems coordinated with the CBR to smooth fluctuations.

### Interbank market structure
- The interbank market is thin and segmented; large state-owned and large private banks hold most liquid assets and lend to more illiquid, smaller banks primarily via collateralized (repo) interbank market.
- Not all market participants’ needs are met; easing constraints could involve improved governance and transparency, wider distribution of liquid assets, and improved laws/regulations for interventions and liquidations.

### Accounting, auditing, and reporting
- Progress made aligning Russian accounting standards with IFRS, but substantive differences remain on:
  - revenue recognition;
  - consolidation;
  - employee benefit and pension accounting;
  - impairment testing;
  - application of fair value measurement; and
  - related‑party disclosure requirements.
- Accounting standards for credit institutions effective from January 1, 2008, are closely aligned with IFRS.
- Since 2004, the CBR requires all credit institutions to prepare supplementary IFRS financial statements but does not require publication; publication of IFRS consolidated reporting will be required only when a law on consolidation is passed by the Duma.

### Capital markets infrastructure and securities processing
- Capital markets infrastructure is fragmented and inefficient; MICEX and RTS differences raise costs and contribute to fragmentation (MICEX ruble‑denominated with prepayment; RTS dollar‑denominated without prepayment).
- Secondary market trading limited by high transaction costs, clearance and settlement risks, and perceptions of weak investor rights protection.
- At end-2006, there were 67 licensed securities registries; many require manually signed transfer forms, increasing operational risk and errors.
- Neither MICEX nor RTS has been legally designated a central counterparty, limiting legal protection for clearance and settlement; planned contractual arrangements among member firms may face legal challenge in a market failure.

### Summary assessment of supervision and sector statistics
- Banking supervision has strengthened significantly since 2003 and is of high quality, well resourced, with professional staff.
- The CBR exercises supervision based on the Statute of the Central Bank, the Law on the Central Bank, and the Law on Banks and Banking Activity, using 78 regional offices.
- Key statistics and system structure:
  - Number of institutions: some 1,200 institutions.
  - Balance sheet total of credit institutions: roughly Rub 20 trillion at end-2007.
  - Average risk weighted capital adequacy ratio: 15.5 percent.
  - Profitability: ROA of 3.0 percent, and ROE of 22.7 percent.
  - Liquidity covers around 73 percent of short term liabilities.
  - Total NPLs: around 2.2 percent of total gross bank loans.
  - Provisioning: 3.4 percent of total gross loans.
- Areas for further strengthening:
  - Develop systems for assessing soundness of acquisitions and for country transfer and repayment risk.
  - Tighten loan classification and provisioning (current provisions range for doubtful and problem loans of 20 to 100 percent considered too large).
  - Shift supervision from compliance‑based to more risk‑based approach.
  - Legal amendments needed for adequate consolidated supervision powers.
  - Consider ways to lower regulatory and supervisory burden while maintaining good working relationships with banks and CBR staff.

*IMF staff report excerpt as provided in the source content.*

### 82.      Banks’ consolidated financial statements shall be audited once per year by a

### _cr1096 - 82.      Banks’ consolidated financial statements shall be audited once per year by a

### Auditing and accounting standards (CP 22)
- Banks’ consolidated financial statements shall be audited once per year by a licensed external auditor.
- The audit report shall express an opinion whether the statements present a true and fair view of the financial condition of the group or institution.
- Banks’ mandatory published financial statements are prepared according to Russian accounting standards (RAS).
- From January 1, 2008, bank accounting standards were brought significantly closer to IFRS, including use of the accrual method.
- Separately from the legal requirement, the CBR requires banks to prepare accounts based on IFRS, and encourages publication.

### Corrective and remedial powers of supervisors (CP 23)
- The CBR has a wide range of remedial and intervention powers for banks not in compliance with legal or regulatory standards, or engaging in unsafe or unsound practices:
  - Measures range from a simple communication to the bank, to cease and desist orders, temporary administration and license withdrawal.
- Limitations of CBR powers:
  - The CBR is unable to restrict the voting rights of shareholders, limit payments to shareholders and to directors and senior staff, and cannot directly sanction bank directors and officers.
- Ongoing legislative work:
  - The CBR and the Ministry of Finance are jointly preparing amendments to the Banking Law and Central Bank law to address these aspects.

### Consolidated and cross-border banking supervision (CP 24–25)
- Consolidated supervision:
  - In certain aspects, the CBR’s rules on consolidated supervision do not meet internationally accepted approaches and the Basel requirements.
  - The CBR and the Ministry of Finance are amending the law to strengthen the CBR’s authority with regard to bank holding companies, including sanctions, clarification of the CBR’s powers to take actions against banks for violations within the group, removing certain legal barriers against information exchange within groups, and the right of the CBR to request information from other domestic agencies.
- Home-host relationships and cooperation:
  - Home-host relationships mostly focus on relations with home supervisors of foreign banks in Russia, as Russian banks have few establishments abroad.
  - Arrangements have been concluded with a significant number of foreign supervisory agencies, but cooperation, although in practice good, is limited by the legal restrictions on exchanging client information.
  - The CBR has concluded 22 MOUs.
  - The CBR has participated in a number of supervisory colleges and cooperates closely with a number of home regulators, such as the U.K., U.S., and the Netherlands.
  - Foreign regulators have visited Moscow to perform inspections of subsidiaries of their banks.

### Summary compliance with the Basel Core Principles — key findings (Table 1)
- 1.1 Objectives: Publicly disclosed laws and regulations clearly set out the CBR’s supervisory responsibilities.
- 1.2 Independence: The CBR exercises its functions independently of other federal bodies, regional or local authorities; CBR staff can exercise their duties without interference from the industry or political pressure.
- 1.3 Legal framework: The regulatory and supervisory functions of the CBR are based in law.
- 1.4 Enforcement powers: The CBR has an adequate range of remedial powers.
- 1.5 Legal protection: CBR staff cannot be sued individually for the exercise of their duties.
- 1.6 Information sharing: CBR exchanges information with other state agencies; the CBR has concluded 22 publicly disclosed MOUs on information exchange with foreign supervisory agencies. The Central Bank Law effectively bars the exchange of client information with foreign authorities.
- 2 Permissible activities: The law defines permitted activities. The use of the name “bank” is prohibited to nonlicensed institutions.
- 3 Licensing criteria: The CBR is submitting amendments to tighten the requirements for the senior managers, Board members, and the founders (shareholders) of credit institutions. Licensing criteria are broadly in line with good practice.
- 4 Ownership: The grounds of refusal of preliminary permission for the acquisition of bank shares broadly correspond to international practice. The CBR refuses permission if the acquirer is unsuitable according to the law.
- 5 Investment criteria: Domestic acquisitions by Russian banks do not require prior permission of the CBR.
- 6 Capital adequacy: The regulations on capital adequacy are in line with international good practice.
- 7 Risk Management: The CBR has issued numerous regulations which require that banks have internal risk management processes, including credit risk.
- 8 Credit risk: The CBR evaluates banks' credit policies, monitoring practices and how violations reported and dealt with.
- 9 Problem assets, provisions and reserves: The provisioning regulations are unusually flexible, in particular for seriously impaired assets, and allow banks too much leeway, potentially leading to underprovisioning and unclear statement of capital.
- 10 Large exposure limits: The CBR has defined large exposures and set limits.
- 11 Related party exposure: The CBR has defined related party exposure and set limits. However, it does not at this time have powers to require submission of related enterprise records from entities above or beside the bank in the group structure.
- 12 Country and transfer risk: The CBR does not impose country risk limits or provisions, except for operations with residents of offshore zones. The CBR is preparing recommendations to banks on country risk.
- 13 Market risks: CBR has laid down rules for market risk based on Basel requirements.
- 14 Liquidity risk: The CBR has laid down adequate rules on liquidity risk.
- 15 Operational risk: The CBR has issued recommendations on operational risk. It is preparing recommendations for inspection of IT systems.
- 16 Interest rate risk: The CBR has issued interest rate risk regulations, and has issued additional recommendations on IRR in line with international practice.
- 17 Internal control and audit: The CBR has issued extensive internal control and audit rules.
- 18 Abuse of financial services: The supervisors do not have the authority to directly share client information with other agencies and regulators, at home or abroad, but can share such information with the Financial Intelligence Unit. The CBR aggressively closes banks that are involved in money laundering.
- 19 Supervisory approach: The CBR analyzes numerous periodic reports on each bank’s financial condition and prudential requirements, and follow up through extensive on-site work.
- 20 Supervisory techniques: The CBR uses a combination of off-site and on-site work, and has a strong on-site workforce, as well as elaborate manuals, although more scope for professional judgment would further enhance the process.
- 21 Supervisory reporting: The CBR has built an extensive system of prudential reporting.
- 22 Accounting and disclosure: As corporations, banks are required to issue annual statements compliant with Russian accounting standards. The CBR additionally requires banks to prepare IFRS statements and recommends banks to publish these.
- 23 Corrective and remedial powers: The CBR disposes of an adequate range of remedial powers, including license withdrawal. However, it cannot sanction individual bank directors and officers (at nonintervened banks).
- 24 Consolidated supervision: In order to obtain more complete data on the activities of a bank on a consolidated basis, the CBR is working to improve the regulatory base of consolidated regulation and the implementation of conservative methods of consolidated risk assessment in regulatory practice.
- 25 Home-host relationships: 22 MOUs have been concluded. Parallel or separate inspections by foreign supervisors can take place. The central bank law forbids exchange of client information to other country authorities.

### Recommended Action Plan — selected recommendations (Table 2)
- 1.1 Responsibilities and Objectives:
  - Implement action plans included in the Strategy for the Development of the Banking Sector and the Guidelines for State Monetary Policy in 2007.
- 1.2 Independence, accountability and transparency:
  - Consider a higher level of representation of the CBR in the National Banking Council, request stronger political support for the CBR’s work in the banking sector, and provide an explicit legal basis for the CBR’s role in financial stability.
- 1.3 Legal Framework:
  - Commence a project to streamline banking regulations, to make them more accessible to banks and supervisors.
- 1.4 Legal Powers:
  - Continue work to introduce a stronger legal basis for the CBR’s use of professional judgment in its work, accompanied by appropriate accountability.
- 1.5 Legal Protection of Supervisors:
  - Prepare a written CBR guideline to confirm that the CBR will finance the legal defense of individual officials, from the beginning of the procedure, in advance, not just reimbursement after the fact.
- 1.6, 24 and 25 Cross border cooperation:
  - Remove unwarranted legal barriers against exchange of individual client information.
- 3 Licensing criteria:
  - Strengthen vetting of senior managers, shareholders, and Board members, allowing for the use of professional judgment by the supervisor, i.e., lowering the vetting threshold to 10 percent of shares, versus the current 20 percent.
- 4 Transfer of Significant Ownership:
  - Lower threshold for the vetting of shareholders to 10 percent from 20 percent.
- 5 Major acquisitions:
  - Introduce vetting of domestic acquisitions by domestic banks, not just acquisitions abroad.
- 7 Risk management:
  - Continue to work on introduction of regulations on banks’ risk management, e.g., by strengthening requirements of the Banking Law with regard to the functions and composition of the banks’ Boards of Directors, and amending the Central Bank Law to allow the CBR to issue regulations on bank governance.
- 9 Problem assets, provisions and reserves:
  - Tighten provisioning requirements to make them more precise, by limiting the range of provisioning values per classification.
- 11 Exposure to related parties:
  - Reinforce ability of CBR to obtain information on nonbank group entities, including holdings and “sister” companies. Amend Article 4 of Banking Law to broaden definition of related parties. Introduce 25 percent limit on exposure to “groups of connected debtors.”
- 12 Country and transfer risks:
  - Introduce regulations on country and transfer risk.
- 14 Liquidity risk:
  - Continue work to introduce a new approach to liquidity supervision, and issue new recommendations or regulations to banks, including that the Board of a bank approve the liquidity strategy.
- 15 Operational risk:
  - Continue work to prepare methodological recommendations on IT and technology risks.
- 20 Supervisory techniques:
  - Amend the Banking Law to permit follow-up inspections of a bank on the same topic, with appropriate safeguards to prevent the supervisory burden.
- 22 Accounting and auditing:
  - Implement the new accounting rules, which are more closely IFRS based. Amend the Law on Auditing Activity and issue CBR recommendations on audits of banks and consolidated groups.
- 23 Corrective and remedial powers:
  - Introduce sanctions against individual directors and officers of a bank.
- 24 Consolidated supervision:
  - Introduce broader powers with regard to bank holding companies, and “sister” companies. Continue to improve the database on consolidated groups. Continue to work with the Ministry of Finance to update the main provisions of the rules on supervision on a consolidated basis.

### Authorities’ response — CP 9 (loan loss provisions) and CP 18 (information sharing)
- CP 9 (loan loss provisions):
  - The authorities broadly disagree with the evaluation of CP 9 in two respects and argue current methodology is more conservative than previously used approaches.
  - Factors influencing current system for formation of loan loss provisions:
    - need to develop risk-oriented supervision, including prudential requirements for banks with respect to credit risk assessment;
    - need to select banks in the deposit insurance system; and
    - need to implement the principles and approaches of International Financial Reporting Standards (IFRS) in the bank accounting.
  - Outcomes cited by authorities:
    - generally positive result of the bank selection in the deposit insurance system, based on assessment of assets in accordance with Regulation No. 254-P; and
    - more conservative loan loss provisions compared to the previously used procedure, and also compared to the results of formation of provisions within the framework of approaches envisioned by the IAS (IFRS) 39.
  - Specific numeric claim:
    - Provisions created under the current requirements are approximately 10 percent higher than the provisions created in accordance with the previously applied approaches and in line with IAS (IFRS) 39.
  - The CBR agrees with the need to improve the method for formation of loan loss provisions regarding Criterion 10 but considers the overall CP 9 assessment overstated because it overweighted a single criterion.
  - The CBR highlights reasons the assessors’ view may not fully reflect practice, including:
    - practical conservative outcome from the methodology;
    - discussion with international experts including TACIS in 2003–2005;
    - allowance for professional judgment by both banks and the supervisor (CBR);
    - compromise between IFRS and supervision approaches;
    - existence of other regulations that narrow subjective approaches; and
    - concern that narrowing provisioning ranges could either require more categories or lead to mechanical increases in provisioning requirements.
  - The CBR states it is continuously working on improving the methodology and practice of formation of loan loss provisions aimed at gradual implementation of more conservative approaches.
- CP 18 (Abuse of financial services / information sharing):
  - Regarding compliance with criterion 12 of CP 18, the CBR states there is a mechanism within the Russian AML/CFT system for exchange of information on activities of credit organizations under surveillance (including data on operations of credit organizations and their clients) with foreign financial sector supervisory authorities.
  - Direct cooperation on information with foreign banking supervision authorities is accomplished through memoranda of understanding in the area of banking supervision, and absent these, on the basis of individual requests.
  - The CBR can conduct cooperation on information that falls under banking confidentiality through a mechanism of international cooperation of national agencies for financial surveillance.
  - The CBR notes positive evaluations:
    - Based on the results of the second round of mutual assessments of governments that are members of FATF, the Russian system of cooperation of supervisory and other authorized AML/CFT bodies was rated positively.
    - The system also received a high grade in the report of the Select Committee of Experts for Evaluation of Anti-Money Laundering Measures of the Council of Europe (Moneyval) as a result of the second round of evaluation of the Russian Federation.

### Key statistics on provisioning indicators (2006 and 2007)
- Provision for Loan Losses/Total Loans (percent):
  - Russia: 4.1 (2006) 3.9 (2007)
  - Ireland: 0.4 (2006) ... (2007)
  - Dominican Republic: 2.4 (2006) 2.2 (2007)
  - Georgia: 1.7 (2006) 1.8 (2007)
  - Philippines: ... (2006) ... (2007)
  - Armenia: ... (2006) ... (2007)
  - Canada: ... (2006) ... (2007)
  - Croatia: ... (2006) ...
  - Tajikistan: ... (2006) ...
  - Romania: ... (2006) ...
  - Portugal: ... (2006) ...
  - Peru: ... (2006) ...
- Provisions to Nonperforming Loans 1/ (percent):
  - Russia: 81.8 (2006) 83.7 (2007)
  - Philippines: 75.0 (2006) 74.8 (2007)
  - Armenia: 64.3 (2006) 66.6 (2007)
  - Canada: 55.3 (2006) 47.8 (2007)
  - Croatia: 61.5 (2006) 58.9 (2007)
  - Tajikistan: 24.7 (2006) ...
  - Romania: 32.0 (2006) ...
  - Portugal: 80.0 (2006) ...
  - Peru: 251.4 (2006) 246.5 (2007)
- Footnote on calculations:
  - 1/ Provided indicator values for Provisions to nonperforming loans were calculated based on the data on provisions formed for overdue loans. For the calculation of indicator of total amount of provisions the indicator value was 343 for 2006 and 293.4 for 2007.

*Source: IMF staff assessment as contained in the provided content unit.*

### 96.      The CBR has made substantial progress since the 2003 FSAP to strengthen its

### 96.      The CBR has made substantial progress since the 2003 FSAP to strengthen its

### Progress and remaining needs
- The CBR publishes Banking Supervision and Financial Stability Reports, has increased the amount of information provided on its website, and carries out vulnerability analysis, including analysis of trends, cluster analysis, and annual stress testing.
- CBR has participated in the IMF pilot on FSIs.
- As the financial system becomes more sophisticated and open, CBR needs more advanced tools for analysis, especially for credit, liquidity, and funding risks.
- Further strengthening of financial stability analysis capabilities is needed through:
  - better coordination among CBR departments;
  - streamlining bank reporting forms;
  - more frequent engagement with banks on stress testing.
- Currently, the CBR carries out an annual survey on stress testing and publishes guidelines on its website.

### Stress testing framework and data
- Top-down stress tests used the CBR model with the size of shocks agreed between the FSAP team and the authorities; tests focused on single factor shocks.
- A macroeconomic scenario was discussed but left for further improvement due to data limitations and lack of capacity in the CBR to link macroeconomic variables and relevant risk factors.
- The existing CBR model covers most key areas of credit, liquidity and market risks; results are presented annually in the Bank Supervision Report.
- Stress tests were based on end-2006 individual bank prudential reports.
- Bottom-up stress tests were conducted by five large banks; these banks represent 41 percent of banking system assets.

### Stress test scenarios and assumptions
- Credit risk sensitivity approaches:
  - (a) an increase in provisioning to the maximum of the recommended range per risk category; and
  - (b) corporate portfolio: increase in loans with provisions over 50 percent or asset classification categories IV and V to 13.7 percent (or 1.65 standard deviations using data from 1998 to 2006); household portfolio: doubling of NPLs leading to categories IV and V increasing to 8 percent of assets.
  - Both scenarios assumed a 50 percent haircut on collateral.
- Provisioning recommended ranges used: Up to 1 percent for category I assets; 10 percent for category II assets (middle of the recommended range of 1–20 percent); 50 percent for category III assets; and 100 percent for categories IV and V.
- Liquidity risk assessment (model limitations meant only depositor withdrawal assessed):
  - reduction of retail and current corporate deposits by 30 percent;
  - withdrawal of corporate time deposits by 5 percent;
  - 5 percent haircut on highly liquid assets and 20 percent haircut on liquid assets;
  - two scenarios for interbank market: access at rates higher by 1,000 basis points, and no access to the interbank market.
  - Funding concentration risk assessed by share of top five creditors as percent of total liabilities.
  - Gap analysis on effective maturities was not carried out (necessary data not collected).
- Contagion analysis: a bank that lost over 25 percent of capital under a combined shock is assumed to affect the banking system directly via interbank counterparties and indirectly via propagated liquidity difficulties.
- Market risk shocks:
  - devaluation/revaluation of 15 percent;
  - drop of 30 percent in stock market;
  - price drop of 20 percent on all debt instruments.
  - Shocks calibrated using historical data and expert judgment.
- Interest rate risk at different maturities on the trading book and interest rate on the banking book were not assessed (authorities do not collect the necessary data).

### Key results
- Credit risk is the main concern for banks.
- Under the shock increasing loan categories IV and V to 13.7 percent based on historical experience, the banking system would lose over 50 percent of capital.
  - About 200 banks, accounting for over half of banking system assets, would lose over 50 percent of capital.
- State banks are the most vulnerable group:
  - group-weighted average capital adequacy would fall from 12.7 percent to 3.2 percent (this fall partially mitigated by IPOs by two state banks in early 2007).
  - Based on mid-2007 data including these IPOs, average capital adequacy of state banks would drop from about 20 percent per shock to slightly above 10 percent.
- Large private banks are the second most vulnerable group.
- Credit concentration:
  - top five borrowers by bank account for more than 50 percent of bank capital in 84 percent of banks accounting for 90.6 percent of bank assets.
  - Under Pillar II of Basel II this concentration would have solvency effects.
- Full provisioning to the maximum level for each category and mid-level for category II would reduce system-wide capital by 48 percent.
  - State banks would incur 59 percent of capital loss; large private banks 48 percent.
  - 337 banks, accounting for about 69 percent of banking system assets, would lose over 50 percent of capital.
  - System would become undercapitalized, with state banks well below the minimum capital adequacy requirement (not taking account of the 2007 IPOs).
- Depositor-induced liquidity risk:
  - Medium and small banks are sensitive to funding concentration risk; top five creditors often account for more than 200 percent of their capital.
  - A “flight to quality” shock would be devastating for this subgroup.
  - State banks would incur the largest absolute loss of liquidity due to the highest share of deposits in funding, but high share of liquid assets mutes overall liquidity impact; reduction in capital for this group would be 9.3 percent, with overall liquidity remaining high.
- Interbank market domino effect scenario:
  - banks controlled by foreign capital: about 18 percent of capital affected (mitigated by possible parent support);
  - large private banks: about 16 percent of bank capital affected.
- Combined market risk stress test for the system as a whole would result in a 6 percent loss of bank capital.
  - No bank group becomes undercapitalized, but a number of individual institutions would lose up to 100 percent of their capital.
  - Most exposed: foreign and large private banks.
  - Most of the shock came from the discount of bond portfolios.
  - Direct currency risk impact negligible (less than 1 percent of capital on both devaluation and revaluation).
  - Stock market risk limited at 2 percent of capital.
- Bottom-up results (five large banks representing 41 percent of system assets) broadly support top-down results and highlight differences:
  - confirmed credit risk as key risk and significant credit concentration (one bank with top five credit exposures at about 100 percent of its capital);
  - exposure to market risk varies dramatically (one bank lost about 30 percent of its capital compared to about 8 percent for the group average);
  - interest rate risk on the balance sheet appears to be growing; some banks reported a loss of up to 30 percent of capital for a parallel upward shift of 500 basis points.

### Main methodological recommendations
- Credit risk:
  - Strengthen assumptions behind shocks, including detailed analysis of potentially vulnerable loans still in categories I–III (for example restructured loans).
  - Link risk factors to macroeconomic scenarios.
  - Begin collection and implementation of credit risk VAR models for supervisory analysis to support long-term Basel II implementation.
- Liquidity risk:
  - Carry out gap analysis on effective maturities incorporating all assets and liabilities to include wholesale (domestic and foreign) funding sources and concentration risk.
- Market risk:
  - Strengthen stress testing by analysis at the financial group level.
  - Over time, as banking and trading book distinctions blur, incorporate this in market risk tests.
- Bottom-up stress testing:
  - Increase discussion and cooperation between the CBR and individual banks on methodology, plausibility of shocks, and review of stress test results.
  - Particularly important for liquidity and market risk where banks possess more timely and accurate information.
  - Discuss liquidity stress test results together with banks’ contingency plans.

### Macroeconomic links and further work
- Further progress is needed on linking macroeconomic variables and risk factors used in stress testing.
- CBR has begun work in this area and further work is needed to establish the impact of macroeconomic variables on risk factors so macroeconomic scenarios can be analyzed through stress testing.

*Source: IMF staff and CBR material as presented in the provided content.*

### APPENDIX II. MACROECONOMIC AND FINANCIAL SECTOR INDICATORS

### APPENDIX II. MACROECONOMIC AND FINANCIAL SECTOR INDICATORS

### Real economy
- Real GDP (2003–2009, Actual/Est./Proj./Proj.): 7.3 7.2 6.4 7.4 8.1 7.8 7.3
- Consumer prices
  - Period average: 13.7 10.9 12.7 9.7 9.0 14.6 13.8
  - End of period: 12.0 11.7 10.9 9.0 11.9 14.1 13.5
- Gross investment (percent of GDP): 20.8 20.9 20.1 21.3 24.6 25.2 27.2
- National savings (percent of GDP): 29.0 30.9 31.1 30.9 30.6 33.3 31.8
- Nominal GDP (in billions of U.S. dollars): 431 592 764 989 1,290 1,855 2,306
- Per capita GDP: US$ 6,897 (2006)

### Public sector
- General government (commitment basis)
  - Overall balance: 1.4 4.9 8.2 8.3 6.8 6.8 4.4
  - Primary balance: 3.1 6.1 9.1 9.1 7.4 7.3 4.9
  - Nonoil balance: -3.9 -2.9 -4.6 -4.5 -3.9 -7.2 -7.6
- Public debt: 31.6 23.1 14.2 9.1 7.3 7.8 8.4
- Public debt, foreign exchange denominated (in percent of total): 74.5 74.3 76.8 52.5 47.4 25.6 17.0

### Money
- Base money (annual percent change): 49.6 24.9 31.7 39.6 33.1 31.4 28.3
- Ruble broad money (annual percent change): 50.5 35.8 38.5 48.8 47.5 42.6 38.5
- Credit to the economy (annual percent change): 43.0 46.3 34.6 48.8 49.3 44.8 36.3

### External sector
- Merchandise exports, fob (in billions USD): 135.9 183.2 243.8 303.6 355.5 522.4 561.6
  - of which oil: 53.7 78.3 117.2 147.0 173.7 293.4 322.6
- Merchandise imports, fob (in billions USD): -76.1 -97.4 -125.4 -164.3 -223.4 -312.9 -389.6
- External current account (in billions USD): 35.4 59.5 84.4 94.4 78.3 150.1 106.4
- External current account (in percent of GDP): 8.2 10.1 11.0 9.5 6.1 8.1 4.6
- External debt (in billions USD): 186.0 214.5 257.2 310.6 459.6 558.8 685.1
- External debt (in percent of GDP): 43.1 36.2 33.7 31.4 35.6 30.1 29.7
- Public external debt (in billions USD): 106.0 105.6 82.1 48.6 46.4 37.1 32.9
- Public external debt (in percent of GDP): 24.6 17.8 10.7 4.9 3.6 2.0 1.4
- Foreign direct investment inflows (in billions USD): 8.0 15.4 12.9 32.4 52.5 45.3 49.0
- Foreign direct investment inflows (in percent of GDP): 1.8 2.6 1.7 3.3 4.1 2.4 2.1
- Gross international reserves (in billions USD): 76.9 124.5 182.2 303.7 476.4 660.7 828.8
  - In months of imports 1/: 8.9 11.4 13.3 17.4 20.2 20.5 20.9
  - In percent of short-term debt: 128.4 198.0 160.6 175.2 281.3 376.9 442.3
- Exchange rate
  - Regime: Managed float
  - Rubles per U.S. dollar, period average: 30.7 28.8 28.3 27.2 25.6 23.9 23.7
  - Real effective exchange rate (average percent change) 2/: 3.0 7.8 8.7 9.5 5.7 6.1 7.0

### Social indicators
- Life expectancy at birth: 58.9 (males, 2005), 72.4 (females, 2005).
- Poverty (population below poverty line, percent): 15.8 (2005)

*Source: Russian authorities; World Development Indicators 2006; and Fund staff estimates (as of June 2008 for latest projections).*

### Financial system structure (selected years)
- Total assets of credit institutions (2004, 2006, 2007)
  - 2004: Assets (Rub bn) 7,136.9; Percent of Total Assets 89.9; Number 1,299
  - 2006: Assets (Rub bn) 14,045.6; Percent of Total Assets 90.1; Number 1,189
  - 2007: Assets (Rub bn) 20,241.1; Number 1,136
- State-owned banks
  - 2004: 2,719.3 (34.3 percent), Number 21
  - 2006: 5,306.6 (34.0 percent), Number 31
  - 2007: 7,936.4, Number 24
- Private banks
  - 2004: 4,377.1 (55.1 percent), Number 1,228
  - 2006: 8,651.5 (55.5 percent), Number 1,112
  - 2007: 12,209.6, Number 1,068
    - Domestic private banks
      - 2004: 3,838.2 (48.4 percent), Number 1,187
      - 2006: 6,954.1 (44.6 percent), Number 1,048
      - 2007: 8,727.2, Number 983
    - Foreign majority-owned 2/
      - 2004: 538.9 (6.8 percent), Number 41
      - 2006: 1,697.4 (10.9 percent), Number 64
      - 2007: 3,482.3, Number 85
- Nonbank credit institutions
  - 2004: 40.4 (0.5 percent), Number 50
  - 2006: 87.5 (0.6 percent), Number 46
  - 2007: 95.0, Number 44
- Nonbank financial institutions (selected components, 2004 and 2006)
  - Unit investment funds (PIF): 2004: 108.9 (1.4 percent); 2006: 420.5 (2.7 percent), Number 641
  - General bank management funds (OFBU): 2004: 3.6 (0.0 percent); 2006: 16.8 (0.1 percent), Number 138
  - Private pension funds: 2004: 215.8 (2.7 percent); 2006: 509.9 (3.3 percent)
  - Insurance companies (premiums): 2004: 471.6 (5.9 percent); 2006: 602.1 (3.9 percent), Number 918

*Source: Central Bank of Russia, Rosstat, Federal Insurance Supervision Service (FSSN), National Managers League, Federal Financial Markets Service, Cbonds, Tsentr Razvitiya (Center for Development). 1/ Excludes leasing companies. 2/ Majority foreign-owned.*

### Financial soundness indicators (selected series)
- Capital adequacy
  - Regulatory capital to risk-weighted assets: 19.1 19.1 17.0 16.0 14.9 15.5 15.3
  - Capital to assets: 14.0 14.6 13.3 12.7 12.1 13.2 13.4
- Asset quality
  - NPLs (cat. IV-V) to total gross loans 1/: 5.6 5.0 3.8 3.2 2.6 2.2 2.1
  - NPLs (cat. III-V) to total gross loans: 13.6 12.3 10.8 ...
  - Loan loss reserves to total gross loans: 6.3 5.9 5.3 5.0 4.1 3.4 3.3
  - Large exposures to capital 2/: 228.6 241.0 242.8 239.8 240.6 211.9 211.2
- Sectoral distribution of loans to total loans (selected entries)
  - Industry (manufacturing, extraction, utilities): manufacturing 16.3 14.6 13.5 13.8; extraction 3.5 3.9 3.1 2.7; utilities 2.3 2.0 1.7 1.7
  - Agriculture 4/: 2.2 2.4 2.7 3.0 3.6 3.8 3.8
  - Construction: 4.4 4.4 4.5 4.6 4.9 6.0 6.1
  - Trade and public dining 5/: 21.6 20.6 18.8 23.9 19.6 18.0 18.3
  - Transport and communication: 4.6 5.1 4.8 4.0 3.7 3.7 3.7
  - Others: 22.4 22.7 24.9 22.8 21.3 23.3 23.0
  - Individuals: 8.0 11.5 16.2 19.6 23.9 24.8 24.7
    - Of which mortgages: -- -- 0.5 1.0 3.0 5.1 5.5
- Profitability
  - Return on assets: 2.6 2.6 2.9 3.2 3.2 3.0 2.9
  - Return on equity: 18.0 17.8 20.3 24.2 26.3 22.7 21.1
- Liquidity
  - Liquid assets to total assets: 39.1 36.1 30.3 27.3 26.7 24.7 23.9
  - Liquid assets to short-term liabilities: 90.6 90.4 78.0 73.8 76.8 72.9 68.7
- Market risk
  - Net open position in FX to capital: 0.0 -0.2 0.6 -0.8 .06 2.2 2.1
  - Risk weighted exposure:
    - FX risk to capital: 18.5 8.4 5.8 5.8 5.3 3.6 3.5
    - Interest rate risk to capital: 6.9 9.9 13.3 13.3 19.3 24.3 26.8
    - Equity position risk to capital: 11.7 12.4 12.6 14.4 20.4 10.8 10.4
- Other
  - Foreign exchange loans to total loans: 38.5 34.8 29.9 31.5 28.8 26.6 26.6
  - Foreign exchange deposits to total deposits 3/: 43.8 33.9 31.2 28.7 20.4 17.0 23.2

*Source: Central Bank of Russia. 1/ 2002–03 data for categories III and IV, the definition used in that period. 2/ Calculated as the amount of large credit risk to capital. 3/ The 2008 data include certificates of deposit and savings certificates. 4/ Since 2005 data on agriculture are presented as agriculture, fishing, and forestry. 5/ Since 2005 data on trade and public dining are presented as wholesale and retail trade; repair of motor vehicles and motorcycles.*

### Summary balance sheet of the banking system (in billions of rubles)
- Total assets (2002–March 2008): 4,145.3 5,600.7 7,136.9 9,750.3 14,045.6 20,241.1 21,323.4
- Highly liquid assets: 808.8 1,102.1 1,119.6 1,205.1 1,722.3 2,209.7 1,810.9
  - Cash: 91.2 137.9 196.3 263.4 368.5 501.7 412.9
  - Accounts at CBR: 416.8 658.6 695.5 684.1 955.6 1,294.7 1,056.8
  - Correspondent accounts at banks: 300.9 305.6 227.8 257.5 398.2 413.3 341.2
  - Securities: 779.9 1,002.2 1,086.9 1,539.4 1,961.4 2,554.7 2,252.5
    - Government bonds 1/: 412.8 447.0 435.6 492.0 537.2 580.3 1,563.9
    - Corporate bonds: 89.8 178.1 317.0 544.5 803.9 1,093.7 ...
    - Equities: 68.7 115.8 140.9 292.8 391.0 629.6 430.1
  - Discounted bills of exchange: 200.8 261.3 193.4 210.1 229.2 251.1 258.5
- Loans: 2,148.8 3,048.0 4,463.8 6,371.1 9,440.5 14,260.1 16,110.9
  - Household loans: 141.2 298.4 616.5` 1,174.9 2,059.5 3,234.6 3,190.6
  - Corporate loans: 1,654.0 2,385.0 3,268.7 4,274.8 5,966.2 9,046.2 10,253.4
  - Interbank loans: 291.4 263.7 425.8 668.0 1,035.6 1,418.1 1,921.7
- Other assets: 407.7 448.5 466.6 634.7 921.4 1,216.6 1,149.2
- Liabilities (2002–March 2008): 3,492.8 4,766.4 6,130.7 8,430.1 12,262.6 17,431.9 18,377.3
  - Customer deposits: 2,194.5 2,999.6 4,151.5 5,818.9 8,467.3 12,053.1 12,896.2
    - Deposits of individuals: 1,060.7 1,558.5 2,026.7 2,817.1 3,881.8 5,263.8 5,313.6
    - Corporate deposits: 276.7 312.5 564.0 936.4 1,543.5 2,584.7 3,611.7
  - Dues to banks: 315.4 525.3 737.1 1,086.4 1,730.5 2,807.4 2,999.2
  - Securities issued: 450.6 634.5 644.2 749.2 1,018.1 1,176.1 1,126.1
  - Other liabilities: 532.3 606.9 597.9 775.6 1,046.6 1,395.3 1,355.8
- Capital and reserves: 652.5 834.3 1,006.1 1,320.2 1,783.0 2,809.2 2,946.1

*Source: Central Bank of Russia. 1/ Data for March 2008 includes government and corporate bonds.*

### Insurance sector (2006, selected indicators)
- Insurance penetration and density (2006)
  - Russia: Premium Volume (in USD million) 21,504; Insurance Penetration (Premium in percent of GDP) 2.3; Insurance Density (Premium per capita, USD) 150.9; Population (in millions) 142.5
  - Brazil: Premium Volume 30,390; Insurance Penetration 2.8; Insurance Density 160.9; Population 188.9
  - Czech Republic: Premium Volume 5,304; Insurance Penetration 3.8; Insurance Density 519.6; Population 10.2
  - India: Premium Volume 43,032; Insurance Penetration 4.8; Insurance Density 38.4; Population 1,119.5
  - Kazakhstan: Premium Volume 627; Insurance Penetration 0.9; Insurance Density 42.3; Population 14.8
  - Poland: Premium Volume 11,947; Insurance Penetration 3.5; Insurance Density 310.3; Population 38.5
  - Ukraine: Premium Volume 2,739; Insurance Penetration 2.8; Insurance Density 59.6; Population 46.0
  - G-7 average: Premium Volume 440,519; Insurance Penetration 10.1; Insurance Density 3,799.1; Population 128.2
  - Source: Sigma Swiss Re.
- Gross insurance premiums (2004–2006, USD million; percent changes)
  - Life: 2004: 3,549; 2005: 896; Percent Change 2005: -75; 2006: 586; Percent Change 2006: -35
  - Accident and private health: 2004: 1,837; 2005: 2,260; Percent Change 2005: 23; 2006: 2,813; Percent Change 2006: 24
  - Property 1/: 2004: 5,316; 2005: 6,558; Percent Change 2005: 23; 2006: 8,349; Percent Change 2006: 27
  - Liability: 2004: 424; 2005: 574; 2006: 356; Percent Change 2006: 15
  - MTPL: 2004: 1,708; 2005: 1,899; Percent Change 2005: 11; 2006: 2,341; Percent Change 2006: 23
  - Total: 2004: 12,843; 2005: 12,187; Percent Change 2005: -5; 2006: 14,690; Percent Change 2006: 21

*Source: IMF. 1/ Property is the major source of financial scheme insurance.*

### APPENDIX III. IMPLEMENTATION OF RECOMMENDATIONS FROM THE 2003 FSAP

### APPENDIX III. IMPLEMENTATION OF RECOMMENDATIONS FROM THE 2003 FSAP

### I. BANKING SYSTEM

- Tighten the definition of capital and transparency of ownership structures.
  - Beginning early 2003, the Bank of Russia required its regional branch offices to evaluate the economic sources of capital and subordinated debt. When risks appear excessive, the Bank of Russia can require (i) a reduction in authorized capital; (ii) introduction of new investors, or (iii) creation of reserves against possible losses.
  - With the introduction of the Deposit Insurance Law, the Bank of Russia strengthened its ability to monitor the ownership structure of commercial banks. The Law establishes requirements for participation in the deposit insurance system by banks that have a Bank of Russia permit. Requirements for participation include (i) the bank’s accounting and reporting statements are found to be reliable by the Bank of Russia; (ii) the bank must meet prudential requirements established by the Bank of Russia; and (iii) the bank’s financial viability is found by the Bank of Russia to be adequate.
  - In accordance with the Law on Deposit Insurance, the Bank of Russia is required to evaluate the transparency of a bank’s ownership structure and the adequacy of information about persons who have a direct or indirect influence on decisions made by a bank’s management bodies. The Bank of Russia must also evaluate the importance of offshore banks. The Bank of Russia also performs a similar evaluation when reviewing petitions from banks to expand their banking activity.
  - The Bank of Russia monitors the ownership structure if shareholder shares are modified. The Bank of Russia must approve the acquisition of more than 20 percent of the stock of a commercial banks lending by a single legal entity or individual or group of legal entities.

- Address the uneven playing field in part caused by the large size of Sberbank and by the 100 percent guarantee of household deposits for state banks.
  - Since January 11, 2005 Sberbank has been part of the deposit insurance system. Thus, as of January 1, 2007, from the standpoint of guarantees for household deposits Sberbank is operating under the same conditions as other lending institutions that are participants in the deposit insurance system.

- Hold Sberbank to the same standards as other banks operating on a fully commercial basis with a hard budget constraint.
  - Current legislation in the Russian Federation and regulatory acts of the Bank of Russia establishes the same requirements for all lending institutions operating in the country, including Sberbank.

- Develop medium-term options for Sberbank in the context of a comprehensive strategic review.
  - Sberbank was operating in accordance with the Conceptual Framework for the Development of Sberbank of Russia up to 2005, which it devised and which was approved by the Sberbank Supervisory Board, with the participation of representatives of the Bank of Russia, and by the annual general shareholders’ meeting.

- Close (or restrict licensing to no longer allow soliciting of household deposits) those banks which are nonviable, overburdened with connected lending, or in transgression of supervisory norms.
  - In 2006, the Bank of Russia revoked licenses of 62 lending institutions compared with 40 in 2005.

- Ensure that only viable banks enter into the proposed mandatory deposit insurance scheme.
  - The Law on Deposit Insurance requires that banks participating in the deposit insurance system meet the following requirements: (i) minimum capital adequacy levels, (ii) fit and proper bank management and its operational and risk management, (iii) minimum profitability levels, and (iv) minimum liquidity levels. All bank accepting retail deposits must be a member of the deposit insurance system. As of January 1, 2007 there were 934 banks participating in the mandatory deposit insurance system.

### II. PAYMENT SYSTEMS

- Adopt a revised payments system concept paper and submit it to a limited period of public consultation before the launch of a properly managed and resourced project. Develop an RTGS system operating on centralized principles, with appropriate liquidity and operational risk management features.
  - The Plan of Measures for 2007 for the Establishment of a Real-Time Gross Settlement System of the Bank of Russia (RTGS System) has been drafted and approved, and it sets forth a mandatory list of measures and deadlines for their implementation. Specifically, objectives were defined in Regulation No. 303-P “On the Real-Time Gross Settlement System of the Bank of Russia” of April 25, 2007; rules for the performance of settlements through the RTGS were set in Directive No. 1822-U “On the Procedure for Effecting Payments and Performing Settlements in the Real-Time Gross Settlement System of the Bank of Russia” of April 25, 2007; and identification codes were established in Directive No. 1824-U “On Amendments to Bank of Russia Regulation No. 225-P” of May 6, 2003 “On the Directory of Bank Identification Codes of Settlement Participants Effecting Payments through the Settlement Network of the Central Bank of the Russian Federation (Bank of Russia)” of May 2, 2007.

- A number of steps have been taken to implementation of the RTGS system. Specifically:
  - A centralized technical infrastructure was established that contains fail-safe and crash-proof components and regional branch offices of the Bank of Russia;
  - introduction of an electronic settlement system (more than 99 percent of payments are effected using electronic technology);
  - 97.2 percent of Bank of Russia branch offices participating in the electronic settlement system;
  - introduction of uniform formats for Bank of Russia electronic bank messages; and
  - standardization of accounting and operating systems for the processing of bank information.

### III. CORPORATE GOVERNANCE

- Increase transparency of ultimate ownership and control structures.
  - The Bank of Russia strengthened oversight of corporate governance through enactment of the deposit insurance system. Legislation was also amended, lowering the threshold for the acquisition of stock in lending institutions that requires notification of the Bank of Russia from 5 percent to 1 percent.

### IV. INSOLVENCY REGIME

- Establish a new creditor reporting agency to promote greater access and transparency to credit information on borrowers.
  - Federal Law No. 218-FZ “On Credit Histories” was adopted on December 30, 2004. It defines the procedure for the formation, compilation, and presentation of credit histories (credit reports), requirements for credit bureaus, and the rights of a subject of a credit history. There are currently 23 credit bureaus in Russia that have been entered in the state register of credit bureaus, the majority of which are located in Moscow and St. Petersburg.
  - The Federal Law does not establish any restrictions on the total number of credit bureaus that may be established, but it introduces a number of requirements that credit bureaus must meet. Manager and deputy managers must not have been convicted of economic crimes and partners need to be fit and proper.
  - A credit bureau need not obtain a special license to operate but is required to have a license to perform operations related to the technical protection of confidential information. The Federal Service for Technical and Export Control (FSTEC) is responsible for licensing operations related to the technical protection of confidential information.

*Source: APPENDIX III. IMPLEMENTATION OF RECOMMENDATIONS FROM THE 2003 FSAP*

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