## 1. Developing a Permanent Resolution Regime for Russia ## Source details **Canonical URL:** [1. Developing a Permanent Resolution Regime for Russia](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11335.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11335.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11335.pdf.json) --- ### Introduction: crisis background and immediate responses - Banking boom and freeze: - Domestic bank credit rose to approximately 400 percent over the four years prior to the crisis. - Interbank lending froze in the fall of 2008 after the collapse of Lehman Brothers; Russia’s segmented unsecured interbank market led to a system wide liquidity crisis. - Depositor runs: - Approximately 8.6 percent of deposits were withdrawn from August to November 2008. - Key crisis measures targeting the banking sector: - Recapitalization and guarantees: - Government and the CBR recapitalized three state owned banks (Vnesheconombank (VEB), Vneshtorgbank (VTB) and Sberbank). - VEB provided subordinated loans to VTB bank, Rosselkhozbank and fifteen other banks. - The State Mortgage Agency (AHML) was recapitalized. - These capital injections amounted to Rub 1409 billion. - Government announced Rub 300 billion of guarantees of bank loans to key non-financial corporations. - Support to corporates and markets: - VEB buying Russian stocks and shares and refinancing external debt of Russian corporations (up to $50 bn); CBR intervention to slow Ruble depreciation. - Liquidity provision and safety net: - Temporarily lowered required liquidity reserve ratios; widened access to CBR refinancing facilities (including corporate bonds as eligible collateral); auctioning government deposits; extending unsecured CBR loans to banks with a minimum credit rating; CBR guarantees of interbank loans. - Insured deposit coverage increased from Rub 400,000 (approximately $15,700) to Rub 700,000 (approximately $27,500). - CBR and DIA given temporary powers to resolve failing systemic banks; DIA used these powers to deal with eighteen failing systemic banks; funded by a Government grant and CBR loans. ### Summary of recommendations (key findings and policy prescriptions) - Overarching objectives: - Minimize the risk of banking crises recurring. - Address moral hazard arising from extensive state interventions. - Institutional coordination: - Assign clear mandates to allocate consistent policy objectives, functions, instruments and powers for each authority. - MoF working group may be appropriate for coordination but needs clear objectives for financial stability and crisis preparedness and should include the DIA. - Macro- and microprudential supervision: - Enhance micro-prudential supervision and develop macroprudential tools and governance arrangements to reduce system wide imbalances (examples: rapid bank lending growth; build-up in foreign currency exposures). - Early intervention and supervisory regime: - Adopt a transparent regime for supervisory action with a clearly delineated set of increasingly demanding mandatory (plus discretionary) measures as a bank’s regulatory position deteriorates. - Create a transparent scale of actions at pre-determined triggers (example: freeze on deposit taking after two quarters of losses; mandatory revocation of banking license if CAR falls below two percent). - Permanent bank resolution regime and early intervention powers: - CBR should be able to appoint the DIA as official administrator at a sufficiently early stage for all banks when quantitative or qualitative triggers are met. - Streamline ILaw, CBR Law, BLaw and proposed legislation into a single piece of legislation empowering the DIA as official administrator with powers including P&A transactions. - Systemic risk test and protection for DI fund: - Decisions on official administration tools versus liquidation/payout should be taken on a least-cost basis. - OBA tools (loans to purchasers/investors, capital injections, nationalization) restricted to grave systemic threats and decided at very high authority levels. - Management responsible for failure should be removed; DI fund contribution limited to what it would have incurred in liquidation; remainder provided by government. - Early warning and DIA powers: - DIA to receive more advanced notice before CBR revokes a license and be empowered to conduct joint audits with the CBR. - Create a “watch-list” of problem banks based on pre-agreed criteria; DIA should be notified by the CBR of banks placed on, or reviewed for placement on, the list. ### Institutional framework and coordination arrangements - Legal and institutional gaps: - No explicit assignment of responsibility to any agency for overall financial stability and systemic risk monitoring in existing legal framework. - Roles of major agencies: - MoF: drafts and implements national policy and legal regulation for financial markets. - CBR: microprudential regulator; objectives include maintaining stability of the Russian banking system and protecting interests of depositors and creditors. - DIA: state corporation managing mandatory deposit insurance; October 2008 given temporary powers to prevent bankruptcies of banks in the mandatory DI system (AM Law powers through 31 December 2011). - FSFM: federal executive body for regulation and supervision of financial markets (except banking and auditor activity); in March 2011 supervision of insurance sector subsumed under FSFM. - Recent institutional steps: - Dec-2010: Inter-Agency working group under the Presidential Council created; headed by Deputy Minister of Finance; members include MoF, Ministry of Economic Development, CBR, FSFM and others. - Mar-2011: CBR established a Financial Stability Directorate. - Recommendations to strengthen coordination: - Working group should agree on a road map for crisis management, meet regularly (e.g., quarterly), be responsible for crisis planning and preparedness (including simulations), and clear legal/operational hurdles to information exchange. - Include DIA directly in the inter-agency working group. - Reconsider inclusion of private sector entities (e.g., PricewaterhouseCoopers Audit) due to confidentiality/conflict-of-interest concerns. ### Macroprudential policy: rationale and priorities - Objective: limit systemic financial risk. - Russia’s vulnerability: - Two systemic crises in the last decade (1998 and 2008) with differing causes; shared characteristics include build-up in foreign currency exposures, lack of visibility of lending to related counterparties, concentrated exposures, and overstated capital ratios. - Factors that may exacerbate future credit bubbles: - Financial system accounts for only 80 percent of GDP, suggesting further growth. - Importance of the resources sector which may exacerbate economic cycles via mineral price fluctuations. - Proposals to promote Russia as an international financial centre requiring internationally active banks of certain size and complexity. - Imperative: - Develop a macroprudential framework to identify and address systemic imbalances before they materialize; macroprudential policy complements sound prudential supervision and appropriate macroeconomic policies. ### Stress testing and Financial Stability function - CBR stress-testing program: - Stress tests carried out since 2003; results published on CBR website. - Frequency: twice a year after 2006; increased to quarterly in October 2008; monthly in 2009 at peak of the crisis. - Methodology: top-down, unified shock applied to balance sheets of all banks affecting credit, market and liquidity risk; then considers interbank crisis and interconnectedness effects. - Uses: check resilience of individual banks, orient supervision, and monitor systemic stability; non-public reports shared with government provide risk-warnings and rankings with severity grading. - Financial Stability Directorate: - Intends to combine stress testing with payment system information, function as alert mechanism and coordination venue for macroprudential action. - Director has a seat on both the Supervision Committee and the Monetary Policy Committee. - Plans to extend top-down stress tests to non-bank institutions. ### Use and expansion of macroprudential instruments - Instruments used by the CBR: - Differentiated reserve requirements for obligations denominated in foreign currency and non-residents (introduced in 2007 and reversed in 2008). - Interest rate policy aimed at “mitigating the risk of a sudden capital outflow.” - Lowered provisioning standards during the crisis to stimulate credit in the downturn. - Imposed limits on net open foreign exchange positions. - Proposed legislation outside mandate (e.g., Tax Code amendment to make foreign currency borrowings less attractive). - Recommendation: - CBR should continue to play a leading role in developing macroprudential tools, with appropriate governance structure and tool identification for the Russian context. - Options under consideration (no international consensus): - countercyclical capital buffers under Basel III; - time-varying LTV, debt-to-income (DTI) and loan-to-income (LTI) caps; - time-varying limits on currency mismatches; - time-varying limits on loan-to-deposit ratios; - time-varying caps and limits on exposure or credit growth (e.g. to real estate); - time varying leverage limits; - regulatory policies for SIFIs to increase loss absorption capacity and intensified supervision. ### Inter-agency coordination and information sharing - Issues and recommendations: - Existing MoUs provided a framework but proved ineffective during the crisis; legal restrictions on information sharing exacerbated problems. - Revisit the MoU between the CBR and the DIA to require earlier provision of information to the DIA; employees should be subject to confidentiality requirements. - Establish a formal MoU between the CBR (and DIA) and the MoF for clear information exchange in a crisis. - Pass legislative amendments pending before the Duma to remove restrictions on information sharing (relating to banking secrecy) quickly. ### Supervisory early intervention of problem banks - Current legal toolkit: - Authorities empowered to impose penalties, issue instructions, restrict dividend payments, require rehabilitation plans, replace management, ban operations, appoint an official administrator, and revoke banking licenses (CBR Law Arts 72 to 74). - Need for reform: - Significant state support and forbearance during the crisis increased moral hazard; a structured consolidated corrective action regime is recommended. - Recommended framework: - Adopt a transparent Prompt Remedial Action framework with mandatory and discretionary measures tied to quantitative thresholds relating to capital and liquidity, and qualitative triggers. - Include liquidity-based triggers as leading indicators and make more automatic use of CAMELS-based ratings. - Caveat: framework ineffective if supervisory data are fraudulent. - Appendix I (illustrative CAR-based stepped corrective actions): - Adequately capitalized: Groups 4 or 5 but CAR > 10 percent — Mandatory: no capital distribution or management fees causing capital to fall below 10 percent. - Undercapitalized: 8 percent < CAR < 10 percent — Mandatory: suspend capital distributions; require financial rehabilitation plan; prior approval for branches/acquisitions; Discretionary: require recapitalization, restrict affiliate transactions, restrict new deposit rates, restrict certain operations up to six months, restrict asset growth. - Significantly undercapitalized: 4 percent < CAR < 8 percent — Mandatory: as above plus financial restructuring plan; Discretionary: replace managers; penalties; ban new branches for a year; power to appoint official administrator if CAR falls to e.g. 7.5 to 5 percent; ban certain banking operations up to one year. - Critically undercapitalized: 2 percent < CAR < 4 percent — Mandatory: same as significantly undercapitalized; penalize managers; prohibit payments on subordinated debt; require appointment of official administrator within 90 days. - Closed: CAR ≤ 2 percent — Mandatory: withdrawal of the license. ### Emergency Liquidity Assistance (ELA): practice, outcomes and institutionalization - CBR ELA actions and timeline: - Eased access to liquidity from late 2007 and intensified after Lehman (Sep-2008). - Expanded Lombard list to assets rated B-/B3; accepted non-resident securities, shares and non-marketable assets. - Reduced haircuts, reduced required reserve ratio from pre-crisis 4.5 percent/4.0 percent to 0.5 percent for both by mid-2009; allowed more reserve averaging. - Lengthened duration of OMOs and standing facilities to a maximum of twelve months by Dec-2008. - Began accepting loans secured by non-marketable assets and guarantees Nov-2007, extended to 365 days by Jan-2009. - Introduced unsecured loans Oct-2008, extended maturities to 12 months by May-2009. - Oct-2008: partial guarantee of losses on interbank transactions if counterparty license revoked during crisis. - Quantitative outcomes: - Stock of liabilities of credit institutions to the CBR rose from Rub 300 billion in June 2008 to Rub 4.2 trillion in Jan-2009 (about 10 percent of GDP). - CBR reduced net international reserves by about US$120 billion to fund FX liquidity. - By early 2011 gross liabilities to credit institutions fell to about Rub 500 billion. - By mid-2011 liquidity facilities to be restored to pre-crisis conditions except loans to Sberbank and DIA and placement of deposits in troubled institutions. - As of Jan-2011 no more unsecured loans were granted, but unsecured lending remains a permanent feature of CBR’s toolkit. - Market outcomes: - Overnight interbank rate declined to 2.8 percent per annum by Feb-2011, from a peak of 28 percent in late Jan-2009. - Credit institutions’ access to funding from abroad fell from US$200 billion before the crisis to US$150 billion in early 2011; since June 2009 credit institutions have been net creditors vis-à-vis non-residents. - Spread between interbank rate paid by investment grade and non-investment grade banks rose to 9 percent in 2009, declining to less than 1 percent by late 2010. - Interbank market remained concentrated: 15 banks accounted for 50-60 percent of the market. - Assessment of ELA effectiveness: - Legitimacy: measures fell under CBR mandate; legal basis existed. - Transparency: CBR improved disclosure and complies with Code of Monetary and Financial Policy Transparency criteria. - Operational focus: targeted impaired interbank market; avoided direct operations with non-financial private sector. - Coordination: CBR made a 5-year loan to the DIA; Government provided liquidity support via deposits and subordinated loans. - Risk management and moral hazard: CBR strengthened collateral management but assumed higher risk through unsecured lending, non-marketable collateral, and partial guarantees. - Outcome as of April 2011: overwhelming majority of liquidity operations repaid with relatively minor losses, even though unsecured loans accounted for almost half of the ELA. - Institutionalizing ELA — comparative practice and issues: - Comparative examples: Canada (explicit statements distinguishing standing facilities, ELA, systemic risk financing), Norway (explicit lender of last resort policy), United States (no formal public future liquidity-crisis management statement post Dodd-Frank), United Kingdom (general statement; disclosure weighed against systemic effects). - Issues for CBR: - Better risk management: high-risk operations (unsecured or non-marketable collateral) suggested to be left to government or require government guarantees. - Transparency: consider clearer ex ante policy vs. retaining flexibility; consider ex-post disclosure of ELA operations by institution. ### Solvency support: amounts, instruments, and institutional roles - Public sector capital support during the crisis: - Capital injections amounting to Rub 505 billion (1.3 percent of GDP) to several government-owned banks, mortgage and leasing companies, and VEB. - Subordinated loans from VEB or the CBR totaling Rub 904 billion (2.2 percent of GDP). - Government announcement of Rub 300 billion of guarantees of bank loans to key non-financial corporations. - DIA and CBR support and outcomes: - CBR extended a five-year loan to the DIA. - DIA used Russian Federation’s cash contribution of Rub 200 billion to support new investors and directly recapitalize banks. - Total financing by the DIA (as at February 1, 2011) reached Rub 346 billion, including Rub 131 billion in loans from the CBR and Rub 215 billion in loans from initial capital contribution of the Russian Federation to the DIA’s capital. - Of this amount: Rub 304 billion is outstanding; Rub 43 billion has been repaid in cash; plus Rub 96 billion in assets and Rub 20 million in interest. - DIA directly injected capital into six banks; two were effectively nationalized by the DIA. - Rescue operations: - From Sep-2008 onwards, CBR and MoF jointly rescued six banks considered systemically important at the federal or regional level. - Two of these banks (KIT Finance and Rossisky Capital) subsequently received further support from the DIA under AM Law powers. - Policy recommendations on solvency support: - Solvency support framework should allow the state (or a state agency) to enter rapidly and legally into transactions buttressing solvency and execute them rapidly. - To minimize moral hazard, solvency support should be complemented by prompt remedial action and resolution frameworks, loss attribution to shareholders then unsecured creditors, removal of Board/senior management where appropriate, restrictions on management compensation and dividends, and plans to secure new capital from shareholders with clear exit strategy for official support. - Mission recommends solvency support be provided by the Russian government rather than the CBR; if CBR provides support it should be backed by a government guarantee. - Legislative amendments recommended to provide legal underpinnings for solvency support. ### Orderly and Effective Resolution: AM Law and DIA experience - Pre-crisis limitations: - Tools prior to the crisis (freeze on new deposits; mandatory license revocation for CAR below 2 percent or inability to make mandatory payments longer than fourteen days) were neither sufficiently early nor effective. - Official administration appointment was constrained and rarely used. - Emergency legislation and AM Law (temporary powers through end-2011): - When a bank is considered financially unstable, CBR may invite DIA to participate in rescue; DIA assesses and proposes action plan approved by CBR and DIA Executive Board; DIA becomes official administrator to carry out plan. - AM Law powers include joint on-site audits, financial assistance to investors, acquisition of shares, organizing auction sales of pledged assets, P&A transactions, and acquiring assets. - DIA outcomes since late 2008: - Eighteen systemically important banks resolved using AM Law powers: - Thirteen banks sold to new investors with DIA financial support. - In four cases DIA directly acquired shares; in two cases DIA became full owner. - DIA required to sell its shares when investor becomes available; has done so in four cases; plans to merge the two banks it fully owns. - Three banks resolved using P&A with DIA loans to purchasers. - DIA P&A criteria: deposit liabilities exceed US$70 million; good assets constitute not less than 70–80 percent of transferred assets; P&A is least costly for DI fund. - Example: JSCB MZB (CJSC) P&A to Bank of Moscow OJSC; DIA granted Rub 1.8 billion two-year loan collateralized by transferred assets — loan fully repaid. - Costs and moral hazard: - Measures maintained financial stability but supported some shareholders and uninsured creditors. - Shareholders completely written off (or written down to 1 ruble) in nine of eighteen resolutions, including three P&A transactions. - In at least two cases DIA funds exceeded insured liabilities. - Temporary legislation planned to be made permanent end-December 2011; powers apply only to systemic banks, risking moral hazard by creating asymmetry between systemic and non-systemic banks. ### Restructuring under Official Control: recommended permanent regime and tools - Recommendation: introduce a single, strengthened regime for restructuring banks as a going concern under official administration; consolidate ILaw, BLaw, CBR Law and proposed legislation into one law providing for DIA appointment as official administrator. - Key features: - Triggers: - CBR able to appoint DIA at an early stage for all banks when quantitative or qualitative triggers are breached (e.g., capital or liquidity ratios below a fixed percentage; threat to financial stability; likely insolvency; unsafe/unsound practice; threat to depositors/creditors). - Objectives and tasks of official administrator: - Take over decision-making bodies and managerial control; access all relevant information and premises. - Assess financial situation, preserve asset values, establish new balance sheet; design and implement restructuring plan; if not viable, prepare for orderly liquidation. - Restructuring tools (chosen on least-cost basis): - Rapid recapitalization without pre-emptive rights of existing shareholders (AM Law Arts 7 & 8). - Write down capital or convert subordinated debt into equity. - Transfer of assets and liabilities (P&A) to third-party acquirers with possible use of a bridge bank (AM Law Art 9). - Merger with another bank. - Bank-debt restructuring. - Additional measures to mitigate systemic OBA needs: - Recovery and Resolution Plans (RRPs, "living wills") for ex ante preparedness and to incentivize structural changes. - Bridge banks to preserve key liabilities and good assets while allowing time for sale. - Continue to follow BCBS and FSB developments on bank debt restructuring. ### Systemic risk test for Official Bank Assistance (OBA) and DIA–CBR coordination - OBA principles: - OBA tools (loans to purchasers/investors, capital injections, nationalization) restricted to grave systemic threats; decision at very high government level. - DI fund contribution limited to what it would have incurred in liquidation; remainder by government. - DIA–CBR coordination and early intervention: - DIA should receive more advanced notice before CBR license revocation and have powers to conduct joint audits. - “Watch-list” of problem banks to be created with pre-agreed criteria; CBR to notify DIA of placements/reviews. - Proposals supported in proposed legislation include allowing DIA staff to handle secret information, improving DIA remote analysis and investor identification, and allowing P&A transfers to more than one acquirer. ### Liquidation framework and CBR involvement - ILaw governs bank insolvency. - CBR role on license revocation: initiate liquidation proceedings and appoint an official administration (headed by a CBR employee, may include DIA employees). - Liquidator and trustee arrangements: - Liquidator for banks with a licence to accept household deposits is the DIA; other banks use court-appointed trustees accredited with the CBR. - CBR audits liquidator activities, sets reporting rules, accredits trustees, approves interim and final liquidation balance sheets, and performs CBR payouts to depositors of bankrupt banks not in the DI scheme. - Proposed ILaw amendments recommended: - Non-cash settlements with creditors during bankruptcy proceedings. - Prompt transfer of assets and liabilities of the bankrupt bank to an operational bank. - Defined procedures for transfer of balance assets after settlement with creditors to shareholders. - Ensuring safekeeping and integrity of information relating to a bank’s property and liabilities. - Imposing criminal liability on directors and management for falsification of accounts, statements and reports. ### Cross-border coordination - CBR actions and constraints: - CBR has 32 bilateral MoUs and 2 letters of cooperation with foreign supervisors; participates in supervisory colleges (member of five). - Information-sharing restrictions (banking secrecy in CBR Law and BLaw) impede effectiveness; proposed legislative amendments pending before Duma to remove restrictions and allow on-site examinations of cross-border establishments. - Additional mechanisms to consider: - Mutual recognition of foreign insolvency/reorganization decisions subject to non-discriminatory treatment and reciprocity. - Ex ante burden sharing arrangements to enable quick action while protecting sovereign rights and domestic depositors/creditors. ### Deposit Guarantee Scheme (DI scheme): structure, performance and funding - Purpose and participation: - Protect household depositors, strengthen public confidence, encourage savings; participation mandatory for banks that accept household deposits. - DIA performance during crisis: - Pay-outs to insured depositors in more than fifty cases; payouts achieved within seven to fourteen days after bank closure and receipt of depositor claims. - Coverage: - 100 percent of total deposits per depositor with a bank, net of liabilities, up to a maximum of Rub 700,000. - Coverage equates to about 2.2 percent of per capita GDP (assuming gross payout), aligning with international average levels of about two times per capita GDP. - Compared to an 80:20 metric, Russian DI fully covers 99 percent of retail deposits by number and about 70 percent of retail deposits by value. - Ex ante funding and targets: - Initial property contribution: Rub 2 billion from the Russian Federation. - Premiums: paid quarterly by member banks on a uniform flat rate; maximum rate reduced from 0.15 percent to 0.1 percent of insured deposits in Sep-2008. - Fund size as at January 1, 2011: Rub 122.7 billion, about 4.4 percent of total covered deposits excluding Sberbank, or 1.8 percent including Sberbank. - Mission suggestion: build up fund to approximately 2–3 percent including Sberbank, or approximately 5–6 percent excluding Sberbank. - In case of fund deficit: premium can be increased for two quarters during an eighteen month period to 0.3 percent per quarter. - Provisions exist for funding from the Reserve (Stabilization) Fund or the federal budget if shortfall occurs. - Depositor preference and DI fund use in resolution: - DIA has subrogated high-ranking priority over failed bank’s estate as part of first priority creditors (DI Law Art 13 and ILaw Art 36). - Use of DI Fund for restructuring (P&A) permitted only if least-cost compared to liquidation and if fund soundness not affected (AM Law Art 10). - During the crisis DIA did not need to use DI fund as restructuring tool; funds used were from investors, the CBR, or the Federal Budget. - Co-insurance: - CBR considering re-introduction of co-insurance (e.g., 90 percent coverage) to address moral hazard. - Mission recommends refraining from re-introducing co-insurance, citing international experience where even small uncovered portions led deposit runs; alternative is to refrain from increasing Rub 700,000 coverage for an extended period so inflation reduces real coverage toward the 80:20 metric. - Mandatory ban on deposit-taking: - Current rule: bank failing to comply for six consecutive months with mandatory ratios established by CBR triggers ban on accepting household deposits and opening individual accounts (DI Law Arts 44 & 48). - Moratorium expires in July 2011; draft law before Duma considers making moratorium permanent. - Mission recommends revisiting automatic mandatory ban and allowing CBR or DIA discretion to assess reasons for non-compliance and take proportionate action. - Other recommended reforms to DI scheme: - Extend coverage to individual unincorporated entrepreneurs. - Consider paying retail depositors on a gross rather than net basis once coverage declines in real terms. - Grant DIA direct enforcement powers (e.g., issue directions, impose fines) rather than relying on CBR to impose sanctions. ### Legal protection for supervisory agencies and employees - Recommendation: - Civil liability should accrue only in event of gross negligence or willful misconduct by supervisory agencies or employees. - Rationale: enable supervisors to exercise professional judgment in crisis without threat of lawsuits; align with BCP and international best practice. - Russian legal context: - Legislation does not explicitly provide protection against civil suits for supervisory agencies and employees; actions can be taken against supervisory agencies (e.g., Article 50 of the CBR law). - Civil Code and Labour Code provide mechanisms for redress and recovery from employees in certain circumstances. - Recovery thresholds: - Agencies can recover losses from employees under Paragraph 1 of Article 1081 (Civil Code) and Article 238 (Labour Code); recommended threshold for recovery is gross negligence or willful action. - International examples preserved from source: - Belgium: supervisory immunity except in event of fraud or gross negligence (Article 68 of the Law of 2 August 2002 on Financial Services). - United Kingdom: immunity unless act/omission in bad faith (Banking Act 1987); similar in Ireland (Section 25A Central Bank of Ireland Act 1997). - Luxembourg: liability only for gross negligence (Article 20 of Law of 23 December 1998). - Singapore: protection for MAS staff against suits for acts/omissions in good faith (Section 22 of Monetary Authority of Singapore Act). ### Appendix II — Selected timeline entries (crisis-related policy measures and statuses) - Aug-08: - Increase in CBR collateralized lending (repos, lombard loans, credit against untraded collateral). Volume of repo credits peaked at around 750bn in Jan-2009; at end-2010 outstanding repos were about zero. Status: Repaid. - Sep-08: - Lowering of selected nonprimary CBR policy rates; RR lowered to a flat rate 0.5 percent in Oct-2008. Status: Largely reversed. - CBR intervenes to support the ruble; Large scale FX sales continued through Jan-2009. Status: Ended. - Unsecured CBR deposits provided to VEB and state banks to purchase four failing banks; VEB received RUB 260bn in deposits from CBR. Status: In effect. - Deposit insurance cover increased from Rub 400,000 to Rub 700,000; coinsurance abolished. Status: In effect. - Powers of DIA temporarily extended to restructure problem banks (law to expire by end-2011). Status: In effect. - Oct-08: - Introduction of uncollateralized-lending facility; lending peaked close to ruble 2 trillion in Feb-2009; all loans repaid by end-2010. Status: Repaid. - Deposit insurance and DIA capital injections and CBR guarantees implemented. Statuses vary (In effect, Partially repaid, Ended). - Feb-09 to Jul-09: - Relaxation of collateral and policy rates followed by gradual reversal; possibility for recapitalization via OFZs introduced (not used). Statuses: Partly reversed/Partly undone/n.a. *Source: _cr11335* ### 1. Developing a Permanent Resolution Regime for Russia............................................................23 ### 1. Developing a Permanent Resolution Regime for Russia ### Introduction: crisis background and immediate responses - Domestic bank credit to the corporate and household sectors rose at an unsustainable level of approximately 400 percent over the four years prior to the crisis. - Interbank lending froze in the fall of 2008 following the collapse of Lehman Brothers; Russia’s segmented unsecured interbank market meant a system wide liquidity crisis developed. - Depositor runs: Approximately 8.6 percent of deposits were withdrawn from August to November 2008. - Key crisis measures directly targeting the banking sector: - Recapitalization: Government and the CBR recapitalized three state owned banks (Vnesheconombank (VEB), Vneshtorgbank (VTB) and Sberbank). VEB provided subordinated loans to VTB bank, Rosselkhozbank and fifteen other banks. The State Mortgage Agency (AHML) was recapitalized. These capital injections amounted to Rub 1409 billion. In addition, the Government announced Rub 300 billion of guarantees of bank loans to key non-financial corporations. - Support to corporates and markets: VEB buying Russian stocks and shares and refinancing external debt of Russian corporations (up to $50 bn); CBR intervention to slow Ruble depreciation. - Liquidity provision: temporarily lowering required liquidity reserve ratios; widening access to CBR refinancing facilities (including corporate bonds as eligible collateral); auctioning government deposits; extending unsecured CBR loans to banks with a minimum credit rating; CBR guarantees of interbank loans. - Safety net and resolution powers: insured deposit coverage increased from Rub 400,000 (approximately $15,700) to Rub 700,000 (approximately $27,500). CBR and DIA were given official powers (temporary) to resolve failing systemic banks, including funding new investors, recapitalizing/nationalizing banks, and transferring assets and liabilities to third parties (P&A). DIA used these powers to deal with eighteen failing systemic banks; funded by a Government grant and CBR loans. ### Summary of recommendations (key findings and policy prescriptions) - Two overarching objectives going forward: - Minimize the risk of banking crises recurring. - Address moral hazard arising from extensive state interventions. - Institutional coordination: - Intra-agency cooperation was initially ad hoc; clear mandates should be assigned to allocate consistent policy objectives, functions, instruments and powers for each authority. - The MoF working group may be an appropriate vehicle for coordination but needs clear objectives for financial stability and crisis preparedness and should include the DIA. - Macro- and microprudential supervision: - Enhancing micro-prudential supervision is a priority, but insufficient alone. The CBR should develop macroprudential tools and governance arrangements to reduce system wide imbalances (examples: rapid bank lending growth; build-up in foreign currency exposures on bank balance sheets). - Early intervention and supervisory regime: - Early identification of problem banks and prompt remedial action is important to mitigate moral hazard. - Adopt a transparent regime for supervisory action with a clearly delineated set of increasingly demanding mandatory (plus discretionary) measures as a bank’s regulatory position deteriorates. - Create a transparent scale of actions at pre-determined triggers (e.g., freeze on deposit taking after two quarters of losses; mandatory revocation of banking license if CAR falls below two percent). - Permanent bank resolution regime and early intervention powers: - Official administration: CBR should be able to appoint the DIA as official administrator at a sufficiently early stage for all banks (not just systemic) when quantitative or qualitative triggers are met (examples: capital falls below a fixed percentage of required CAR; threat to financial stability; likely insolvency; unsafe/unsound practice; threat to interests of depositors/creditors). - Streamline existing provisions in ILaw, CBR Law, BLaw and proposed legislation (making AM Law official powers permanent) into a single piece of legislation empowering the DIA as official administrator with powers including P&A transactions. - Stringent systemic risk test and protection for deposit insurance fund: - Decisions on deployment of official administration tools versus liquidation and payout of insured deposits should be taken on a least-cost basis. - OBA tools (loans to purchasers/investors, capital injections, nationalization) should be restricted to cases posing a grave systemic threat, with decisions taken at very high authority levels. - Management responsible for failure should be removed in such circumstances. - Contribution of the deposit insurance fund should be limited to what it would have incurred in liquidation; remainder to be provided by government. - Early warning and DIA powers: - DIA should receive more advanced notice before CBR revokes a license and be empowered to conduct audits of problem banks jointly with the CBR. - Create a “watch-list” of problem banks based on pre-agreed criteria; DIA should be notified by the CBR of banks placed on, or reviewed for placement on, the list. ### Institutional framework and coordination arrangements - Legal and institutional gaps: - No explicit assignment of responsibility to any agency for overall financial stability and systemic risk monitoring in existing legal framework. - Roles of major agencies: - MoF: federal agency responsible for drafting and implementing national policy and legal regulation for financial markets (budget, taxation, insurance, currency, banking, government spending, auditing, accounting and financial statements). - CBR: microprudential regulator responsible for bank regulation and supervision; functions and objectives set out in the CBR Law; principle objectives include maintaining stability of the Russian banking system and protecting interests of depositors and creditors. - DIA: state corporation to manage mandatory deposit insurance system; in October 2008 given additional temporary powers to prevent bankruptcies of banks in the mandatory DI system for the purposes of maintaining banking system stability and protecting depositors and creditors (AM Law powers through 31 December 2011). - FSFM: federal executive body for regulation and supervision of financial markets (except banking and auditor activity); in March 2011 supervision of insurance sector subsumed under FSFM and FSIS became part of FSFM. - Recent institutional steps: - December 2010: Inter-Agency working group under the Presidential Council (Working Group to Monitor Financial Market Conditions) created; headed by Deputy Minister of Finance; members include MoF, Ministry of Economic Development, CBR, FSFM, Federal Antimonopoly Service, Federal Service for Financial Monitoring, PricewaterhouseCoopers Audit and the Presidential Administration. - March 2011: CBR established a Financial Stability Directorate to monitor emerging risks across sectors. - Recommendations to strengthen coordination: - The working group should: - Agree on a road map for crisis management with clarity on individual agency roles and responsibilities. - Meet regularly (e.g., quarterly or more frequently as needed) to assess systemic risks and formulate strategies. - Be responsible for crisis planning and preparedness, including simulations. - Ensure legal and operational hurdles to information exchange are cleared. - Include the DIA directly in the inter-agency working group (DIA currently interacts via the CBR only). - Reconsider inclusion of PricewaterhouseCoopers Audit in the working group given potential confidentiality and conflict-of-interest concerns; consider excluding private sector entities from a systemic risk monitoring/capacity group. ### Macroprudential policy: rationale and priorities - Objective: limit systemic financial risk. - Russia’s vulnerability: - Two systemic crises in the last decade (1998 and 2008) with differing causes: 1998 driven by fiscal instability/sovereign default; 2008 a bank lending boom and bust. - Shared characteristics: build-up in foreign currency exposures on bank balance sheets; lack of visibility of lending to related counterparties and concentrated exposures; high reported capital ratios that later proved overstated. - Factors that may exacerbate future credit bubbles: - Relatively low penetration of the financial system—the Russian financial system accounts for only 80 percent of GDP, suggesting further growth as the system matures. - Importance of the resources sector which may exacerbate economic cycles via mineral price fluctuations. - Proposals to promote Russia as an international financial centre requiring internationally active banks of certain size and complexity. - Imperative: - Develop a macroprudential framework capable of identifying and addressing systemic imbalances before they materialize. - Macroprudential policy complements (but does not replace) sound prudential supervision and appropriate macroeconomic policies. *Article: 1. Developing a Permanent Resolution Regime for Russia (excerpts).* ### 20. The CBR has already been taking steps in this direction. ### _cr11335 - 20. The CBR has already been taking steps in this direction. ### Stress testing and Financial Stability function - CBR stress-testing program: - Carried out stress tests in the banking sector since 2003; results published on its website. - Frequency: twice a year after 2006; increased to quarterly in October 2008; monthly in 2009 at the peak of the crisis. - Methodology: top-down, unified shock applied to balance sheets of all banks affecting credit, market and liquidity risk; then considers a crisis in the interbank market and interconnectedness effects. - Uses: check resilience of individual banks, orient supervision, and monitor systemic stability. - Non-public reports: shared with the government; provide risk-warnings and rankings with severity grading. - Financial Stability Directorate: - Intends to combine existing stress testing with information from settlements and payment system department. - Plans to function as an alert mechanism and coordination venue for macroprudential action. - Director has a seat on both the Supervision Committee and the Monetary Policy Committee. - Planned extension: staff reported plans to extend top-down stress tests to non-bank institutions which may present a systemic risk. ### Use and expansion of macroprudential instruments - Instruments already used by the CBR: - Differentiated reserve requirements for obligations denominated in foreign currency and non-residents (introduced in 2007 and reversed in 2008). - Interest rate policy aimed at “mitigating the risk of a sudden capital outflow.” - Lowered provisioning standards during the crisis to act against the cycle and stimulate credit in the downturn. - Imposed limits on net open foreign exchange positions. - Proposed legislation outside mandate (e.g., amendment to the Tax Code to make foreign currency denominated borrowings less attractive). - Recommendation: - Given systemic importance of banking sector and synergies of an agency uniting monetary policy and supervision, the CBR should continue to play a leading role in developing macroprudential tools. - Consideration should be given to appropriate governance structure within the CBR and identification of tools appropriate for the Russian context. - Options under consideration (no international consensus): - countercyclical capital buffers under Basel III; - time-varying LTV, debt-to-income (DTI) and loan-to-income (LTI) caps; - time-varying limits on currency mismatches; - time-varying limits on loan-to-deposit ratios; - time-varying caps and limits on exposure or credit growth (e.g. to real estate); - time varying leverage limits; - regulatory policies for SIFIs to increase loss absorption capacity and intensified supervision. ### Inter-agency coordination and information sharing - Existing situation and lessons: - Inter-agency MoUs provide a clear framework but proved ineffective during the crisis; Russia’s legal restrictions on information sharing exacerbated the problem. - CBR is reviewing MoUs with other agencies following institutional changes (FSFM and FSIS merger). - Recommendations to improve coordination: - Revisit the MoU between the CBR and the DIA to require earlier provision of information to the DIA; employees should be subject to confidentiality requirements. - Establish a formal MoU between the CBR (and DIA) and the MoF to provide a clear basis for exchange of information and clarity on content to be exchanged in a crisis. - Pass legislative amendments pending before the Duma to remove restrictions on information sharing (relating to banking secrecy) quickly. ### Supervisory early intervention of problem banks - Current legal toolkit: - Authorities empowered by various legislation to impose penalties, issue instructions, restrict dividend payments, require rehabilitation plans, replace management, ban certain operations, appoint an official administrator, and revoke banking licenses (CBR Law Arts 72 to 74). - Need for reform: - Significant state support and forbearance during the crisis increased moral hazard; a more structured and consolidated corrective action regime would help mitigate moral hazard going forward. - Recommended framework: - Adopt a transparent Prompt Remedial Action framework with clearly delineated mandatory and discretionary measures as a bank’s regulatory situation deteriorates. - Use a scale of mandatory actions at pre‑announced triggers tied to quantitative thresholds relating to capital and liquidity, and qualitative triggers (non-compliance, unsafe or unsound practices, threats to depositors). - Tailor triggers to the Russian context: CBR staff note a “series break” where audited banks can drop from CAR above 10 percent to close to 0 percent due to overstated asset values; therefore include additional liquidity-based triggers as leading indicators. - Make more automatic use of CAMELS-based ratings to identify weak banks for earlier closer supervision and audits. - Caveat: no system of regulatory intervention can be effective if supervisory data are fraudulent. ### Crisis management tools — emergency liquidity assistance (ELA) and related operations - Principles and challenges: - Central banks should provide liquidity in a liquidity crisis, generally at penalty rates and against good collateral with intensified supervision to limit moral hazard; in severe crises many central banks widen collateral and ease conditions, accepting more risk to limit contagion. - CBR actions and timeline: - Starting late 2007, CBR eased access to liquidity and intensified support after Lehman (September 2008). - Easing existing instruments: - Expanded Lombard list to include assets with ratings of B-/B3 (down from BB/Ba2), non-resident securities, shares and non-marketable assets. - Reduced haircuts on repos and increased correction factors. - Reduced required reserve ratio from pre-crisis 4.5 percent for corporate deposits and 4.0 percent for individual deposits to 0.5 percent for both by mid-2009; allowed more reserve averaging. - Lengthened duration of OMOs and standing facilities in stages, reaching a maximum of twelve months by December 2008. - New instruments: - November 2007: began to accept loans secured by non-marketable assets and guarantees for up to thirty days, extending maturity to three hundred and sixty-five days by January 2009. - October 2008: began to extend unsecured loans for a maturity of five weeks, then extended maturity of these loans to 12-months by May 2009. - Counterparty risk mitigation: - October 2008: provided a partial guarantee of losses on interbank transactions if the license of the counterparty was revoked during the crisis. - Quantitative outcomes and timing: - Stock of liabilities of credit institutions to the CBR rose from Rub 300 billion in June 2008 to a peak of Rub 4.2 trillion (about 10 percent of GDP) in January 2009. - CBR reduced its net international reserves by about US$120 billion to help fund demand for foreign exchange liquidity. - By early 2011, CBR’s gross liabilities to credit institutions had fallen to about Rub 500 billion. - By mid-2011, CBR’s liquidity facilities to be restored to pre-crisis conditions, except for loans to Sberbank and the DIA and placement of deposits in troubled institutions. - As of January 2011 no more unsecured loans were granted, but unsecured lending is now a permanent feature of CBR’s toolkit. - Market and interbank outcomes: - By February 2011 the overnight interbank interest rate declined to 2.8 percent per annum, down from a peak of 28 percent in late January 2009; bid-ask spread returned to pre-crisis levels. - Credit institutions’ access to funding from abroad fell from US$200 billion before the crisis to US$150 billion in early 2011; since June 2009 credit institutions have been net creditors vis-à-vis non-residents. - The spread between interbank rate paid by investment grade and non-investment grade banks rose to 9 percent in 2009, declining to less than 1 percent by late 2010. - Interbank market remained highly concentrated: 15 banks accounted for 50-60 percent of the market. - Assessment of ELA effectiveness: - Legitimacy: measures fell under the CBR mandate to preserve stability of the ruble and payment system; legal basis existed in laws, statutes, or new legislation. - Transparency: CBR improved disclosure and complies with Code of Monetary and Financial Policy Transparency criteria. - Operational focus: measures targeted impaired interbank market directly and indirectly; avoided direct operations with non-financial private sector to minimize credit risk. - Coordination: CBR made a 5-year loan to the DIA; government provided liquidity support via deposits and subordinated loans and shifted to an expansionary fiscal stance; CBR supervision enabled monitoring and placement of resident supervisors in institutions receiving unsecured loans. - Risk management and moral hazard: CBR strengthened collateral management (more stringent quality factors for loans in category 2, limited maturity of loans against loan-book collateral to 90 days, accepted foreign securities); nonetheless, central bank risk increased via unsecured lending, non-marketable collateral, and partial guarantees. - Outcome as of April 2011: overwhelming majority of liquidity operations repaid with relatively minor losses, even though unsecured loans accounted for almost half of the ELA. *Source: _cr11335 - 20. The CBR has already been taking steps in this direction.* ### 34. Going forward, the CBR has made ELA a permanent feature of its institutional ### 34. Going forward, the CBR has made ELA a permanent feature of its institutional framework ### Emergency Liquidity Assistance (ELA): disclosure, practice, and international comparisons - The CBR states in its guidelines for monetary policy for 2011–13 that it "stands ready to provide similar assistance" but "provides no further details on how it might provide this assistance." - A public disclosure of the intent to provide ELA is described as "very sensible" because credit institutions will expect similar operations in future crises and the central bank would damage its credibility by denying the possibility. - Comparative country practices: - Canada: Bank of Canada publishes an explicit statement of legal authority and limits of emergency lending operations, distinguishing among: - a standing liquidity facility (overnight collateralized lending at a penalty interest rate to cover official settlement shortfalls), - ELA (collateralized lending for up to 6 months to cover temporarily liquidity shortfalls in banks that supervisors deem to be solvent), - systemic risk financing (direct liquidity lending when the Bank of Canada publicly declares a systemic risk). - Norway: Norges Bank publishes a lender of last resort policy stipulating emergency liquidity support to address threats to financial stability; all emergency lending must be backed by sound collateral. - United States: The U.S. Federal Reserve has not published a formal future liquidity-crisis management statement, partly because Dodd-Frank redistributed emergency lending responsibility among the Fed, the FDIC and the U.S. Treasury; the new Financial Stability Oversight Council may clarify allocation once regulations are approved. - United Kingdom: Bank of England issues a general statement that in exceptional circumstances it acts as "lender of last resort"; it weighs public disclosure against potential systemic consequences and may decide to publicize liquidity assistance once secrecy is no longer needed. - Issues for the CBR to consider in institutionalizing ELA: - Better risk management: - The crisis decision to accept unsecured lending and non-marketable collateral and guarantees exposed the CBR to considerable risk. - Suggestion: leave high-risk operations (unsecured or non-marketable collateral) to the government, or require government guarantees for such loans, to avoid large losses that could weaken CBR capital and long-term credibility. - Transparency: - CBR could weigh current disclosure stance (similar to Bank of England) versus clearer ex ante policy (as in Canada). - A clear public commitment to certain rules could strengthen credibility and contain pressure for inappropriate and non-transparent actions. - Retaining flexibility in crisis response details is also noted as valuable given unique aspects of crises. - Consider ex-post disclosure of ELA operations by institution to help ensure objective distribution among credit institutions. ### Solvency support: amounts, instruments, and institutional roles - During the crisis, public sector capital support included: - Capital injections amounting to Rub 505 billion (1.3 percent of GDP) to several government-owned banks (including VTB), mortgage and leasing companies, and VEB. - Subordinated loans from VEB or the CBR to state and private banks (including Sberbank and VTB) totaling Rub 904 billion (2.2 percent of GDP). - Government announcement of Rub 300 billion of guarantees of bank loans to key non-financial corporations. - DIA (Deposit Insurance Agency) and CBR support: - The CBR extended a five-year loan to the DIA to help fund measures supporting banks. - DIA used the Russian Federation’s cash contribution of Rub 200 billion to support new investors and directly recapitalize banks. - Total financing by the DIA (as at February 1, 2011) reached Rub 346 billion, including Rub 131 billion in loans from the CBR and Rub 215 billion in loans from the initial capital contribution of the Russian Federation to the DIA’s capital. - Of this amount: Rub 304 billion is outstanding; Rub 43 billion has been repaid in cash; plus Rub 96 billion in assets and Rub 20 million in interest. - DIA directly injected capital into six banks; two were effectively nationalized by the DIA. - Rescue operations: - From September 2008 onwards, CBR and MoF jointly rescued six banks considered systemically important at the federal or regional level (these banks received solvency support via VEB or other banks such as CJSC Gazenergoprombank, OJSC Promsvyazbank and JSCB National Reserve Bank (OJSC)). (Footnote lists the six banks.) - Two of these banks (KIT Finance and Rossisky Capital) subsequently received further support from the DIA using powers under the AM Law. - Policy recommendations on solvency support: - Solvency support framework should allow the state (or a state agency) to: - enter rapidly and in a legally robust manner into transactions buttressing solvency (recapitalization, guarantees, etc.), and - execute those transactions rapidly. - To minimize moral hazard, solvency support should be complemented by: - a robust prompt remedial action framework and resolution framework; - attribution of losses first to existing shareholders and then to unsecured creditors; - removal of the Board and senior management where appropriate; - restrictions on management compensation and payment of dividends to shareholders; - plans to secure new capital from shareholders with a clear exit strategy for official sector support. - The mission recommends solvency support should be provided by the Russian government rather than the CBR to protect CBR balance-sheet exposure. If the CBR provides solvency support, it should be backed by a government guarantee. - Legislative amendments are recommended to provide legal underpinnings for solvency support. ### Orderly and Effective Resolution: legal powers, AM Law, and DIA experience - Pre-crisis limitations: - Available tools prior to the crisis included a mandatory freeze on banks taking new deposits and mandatory revocation of a banking license for CAR below 2 percent or inability to make mandatory payments for longer than fourteen days — deemed neither sufficiently early nor effective. - Official administration powers were limited: an official administrator could be appointed by the CBR only after license revocation, violations, or inability to satisfy creditors or prevent capital reduction of 30 percent, etc.; appointment periods and powers were constrained and rarely used. - Emergency legislation and AM Law: - Temporary legislation passed in October 2008 empowered the DIA to restructure and resolve failing banks; AM Law powers were through 31 December 2011 (temporary). - Under the AM Law, when a bank is considered by the DIA to be financially unstable, the CBR may invite the DIA to participate in rescue; DIA assesses, proposes an action plan approved by CBR and the DIA Executive Board; DIA becomes official administrator to carry out the plan. - AM Law powers allow the DIA to: - Conduct on-site audits jointly with the CBR when necessary; - Provide financial assistance to parties to acquire shares/equity interest in a bank (investors); - Provide financial assistance to a bank or banks to acquire all or parts of assets/liabilities of the failing bank; - Acquire shares/equity interest in a failing bank; - Organize auction sales of assets pledged as collateral for a bank’s obligations; - Perform functions of official administration including acquiring assets of the bank or undertaking P&A transactions involving an acquiring bank. - DIA outcomes since late 2008: - DIA and CBR used AM Law powers to resolve eighteen banks considered systemically important at federal or regional level. - Thirteen banks were sold to new investors with DIA financial support to investors. - In four cases, DIA directly acquired shares; in two cases DIA became full owner. - DIA is required to sell its shares when an investor becomes available and has done so in four cases; it plans to merge the two banks it fully owns. - Three banks were resolved using P&A transactions with DIA loans to purchasers. - DIA’s criteria for P&A: deposit liabilities exceed US$70 million; good assets constitute not less than 70–80 percent of transferred assets; P&A is the least costly option for the DI fund. - Example: JSCB MZB (CJSC) P&A resulted in assets and liabilities purchased by Bank of Moscow OJSC (BOM); individual depositors and first priority creditors received claims in full; household deposits continued to operate; shareholders sustained losses equal to share value; DIA granted a loan of Rub 1.8 billion for two years to BOM (collateralized by transferred assets) — loan fully repaid, but BOM subsequently rescued by VTB. - Costs and moral hazard issues: - Measures maintained financial stability but supported some shareholders and uninsured creditors. - Shareholders were completely written off (or written down to 1 ruble) in nine of eighteen resolutions, including three P&A transactions. - In at least two cases, DIA funds exceeded insured liabilities. - The temporary legislation is planned to be made permanent when it expires end-December 2011; however, powers apply only to systemic banks, which risks exacerbating moral hazard by creating late triggers/tools for non-systemic banks and early triggers/a wide range of tools for systemic (large) banks. ### Restructuring under Official Control: recommended permanent regime and tools - Recommendation: introduce a single, strengthened regime for restructuring banks as a going concern under official administration; streamline and merge ILaw, BLaw, CBR Law and proposed permanent legislation into one piece of legislation providing for DIA appointment as official administrator. - Key features to include: - Triggers: - CBR should be able to appoint DIA as official administrator at a sufficiently early stage (before actual insolvency) for all banks, not just systemic ones, when quantitative or qualitative triggers are breached. - Example quantitative triggers: capital or liquidity ratios below a fixed percentage of that required by the regulator. - Example qualitative triggers: threat to financial stability; bank is or likely to become insolvent; unsafe/unsound practice; threat to interests of depositors/creditors. - Objectives and tasks of official administrator: - Take over powers of all decision-making bodies and managerial control; access all relevant information and premises. - Roles: (i) assess financial situation, preserve asset values, establish a new balance sheet; (ii) design and implement a restructuring plan; if restructuring not viable, prepare for orderly liquidation. - Restructuring tools (decision on tool versus liquidation should be taken on a least-cost basis): - rapid recapitalization of the bank without pre-emptive rights of existing shareholders (AM Law Arts 7 & 8); - write down capital or convert subordinated debt into equity; - transfer of assets, liabilities and combined portfolios (P&A) to third-party acquirers with possible use of a bridge bank (AM Law Art 9); - merger with another bank; - bank-debt restructuring. - Additional recommended measures to mitigate systemic OBA needs: - Recovery and Resolution Plans (RRPs, "living wills") to identify ex ante measures for firm and authorities to improve recovery/resolution preparedness and incentivize structural changes. - Bridge banks to preserve key liabilities and good assets while allowing time for sale of operations; add bridge banks to permanent resolution regime. - Bank debt restructuring: continue to follow international developments (BCBS and FSB) and consider adoption of aspects for Russian banks, particularly systemic institutions. *Source: IMF staff report excerpt (paragraphs 34–49 and Box 1).* ### 50. To mitigate the risks of moral hazard, there should be a stringent systemic risk ### _cr11335 - 50. To mitigate the risks of moral hazard, there should be a stringent systemic risk ### Systemic risk test for Official Bank Assistance (OBA) - OBA tools (loans to purchasers and investors, capital injections, nationalization) should be restricted to cases that pose a grave systemic threat. - A clear process should entail a decision taken at a very high level by the government. - DI fund contribution limited to what it would have incurred in liquidation; the remainder of funds must be provided by the government. - Box 1: mission’s proposal for developing a permanent resolution regime for Russia (Box content referenced in source). ### DIA–CBR coordination and early intervention - The DIA should receive more advanced notice before a license is revoked by the CBR. - DIA should have powers to conduct joint audits of problem banks with the CBR. - A “watch-list” of problem banks should be created with banks assigned based upon pre-agreed criteria; CBR should notify DIA of any banks placed on or reviewed for placement on the list. - Proposals supported (some included in proposed legislation): - Allow DIA staff and the institution to handle secret information. - Improve DIA’s method for remote analysis of problem banks and identifying potential investors. - Allow transfer of a problem bank’s assets and liabilities (P&A) to more than one acquirer. ### Liquidation framework and CBR involvement - Liquidation framework recognizes unique bank features (protect deposits, lending, payment services) and enables rapid transfer of insured deposits and critical banking functions out of the insolvent estate prior to traditional liquidation. - Insolvency law for banks is the ILaw. - CBR involvement in liquidation: - Upon revocation of a licence, CBR must initiate liquidation proceedings and appoint an official administration (headed by a CBR employee and may include DIA employees). - Right to file bankruptcy petition: bank, its creditors, depositors, and the CBR. Liquidator for banks with a licence to accept household deposits is the DIA; other banks use court-appointed trustees accredited with the CBR. - CBR audits liquidator activities, sets reporting rules, accredits court-appointed trustees, approves interim and final liquidation balance sheets, and performs CBR payouts to depositors of bankrupt banks not in the DI scheme. - Proposed amendments to the ILaw supported by the mission include: - Non-cash settlements with creditors during bankruptcy proceedings. - Prompt transfer of assets and liabilities of the bankrupt bank to an operational bank. - Defined procedures for transfer of balance assets after settlement with creditors to shareholders. - Ensuring safekeeping and integrity of information relating to a bank’s property and liabilities. - Imposing criminal liability on directors and management for falsification of accounts, statements and reports. ### Cross-border coordination - Cross-border resolution complexity requires the early intervention and resolution framework to reflect that banks are increasingly part of international groups. - CBR efforts: - MoUs: CBR has entered into 32 bilateral MoUs and exchanged 2 letters of cooperation with foreign bank supervisors. In absence of MoU, CBR can cooperate via ad-hoc requests. - Bilateral meetings with home-country supervisors of parent banks and countries where Russian banks operate. - Supervisory colleges: CBR is a member of five supervisory colleges; formed a supervisory college for VTB bank regarding Russian banks with foreign subsidiaries. - Information-sharing restrictions impede effectiveness: banking secrecy provisions in the CBR Law and BLaw restrict requesting/providing information on credit organizations and clients and require assurance of confidentiality; information on accounts, deposits, or specific transactions cannot be shared; CBR and DIA can be held liable for divulgence of banking secrets, including compensation for damage. - Proposed legislative amendments to remove restrictions on sharing of information are pending before the Duma; amendments will also allow on-site examinations of cross-border establishments (Russian subsidiaries) by the home authority. - Additional mechanisms to consider: mutual recognition of foreign insolvency/reorganization decisions subject to non-discriminatory treatment and reciprocity; ex ante burden sharing arrangements to enable quick action during crises while protecting sovereign rights and domestic depositors/creditors. ### Deposit Guarantee Scheme (DI scheme): structure and performance - Purpose: protect rights and legitimate interests of household depositors, strengthen public confidence, encourage household savings. Participation is mandatory for all banks that accept household deposits. - DIA experience: pay-outs to insured depositors in more than fifty cases during the crisis; payouts triggered upon revocation of a bank’s license by the CBR or imposition of a moratorium by the CBR on honoring creditors’ claims. - Payout timing during crisis: achieved within seven to fourteen days after bank closure and receipt of depositor claims. - Coverage: 100 percent of total deposits per depositor with a bank, net of liabilities, up to a maximum of Rub 700,000. - Coverage equates to about 2.2 percent of per capita GDP (assuming gross payout), aligning with international deposit insurance average levels of about two times per capita GDP. - Compared to an alternative metric balancing protection and moral hazard (full protection for approximately 80 percent of depositors but only 20 percent of deposits by value), Russian DI fully covers 99 percent of retail deposits by number and about 70 percent of retail deposits by value. ### Ex ante funding and suggested targets - Funding: initial government contribution plus quarterly premiums from member banks. - Initial property contribution: Rub 2 billion from the Russian Federation. - Premiums: paid quarterly by member banks on a uniform flat rate; maximum rate reduced from 0.15 percent to 0.1 percent of insured deposits in September 2008. - Fund size as at January 1, 2011: Rub 122.7 billion, about 4.4 percent of total covered deposits excluding Sberbank, or 1.8 percent including Sberbank. - Mission suggestion: build up fund to a target of approximately 2–3 percent including Sberbank, or approximately 5–6 percent excluding Sberbank. - In case of fund deficit: premium can be increased for two quarters during an eighteen month period to 0.3 percent per quarter. - Provisions exist for funding from the Reserve (Stabilization) Fund or the federal budget if shortfall occurs. ### Depositor preference and DI fund use in resolution - DIA, through subrogation, has high-ranking priority right over failed bank’s estate as part of the pool of first priority creditors (DI Law Art 13 and ILaw Art 36). - Subrogated claims are satisfied as first priority creditor claims in bankruptcy, helping recover pay-outs and minimize final insurance cost. - Use of DI Fund for bank restructuring (P&A transactions) permitted only if least-cost compared to liquidation pay-out and if fund soundness not affected (AM Law Art 10). - If insured liabilities passed to acquirer exceed assets transferred (negative transfer balance), DIA uses DI Fund to make up the difference minus any premium paid by purchaser; DI Fund contribution can be recovered in liquidation and satisfied among first run creditors. - During the crisis, DIA did not need to use DI fund as a restructuring tool; funds used were from investors, the CBR, or the Federal Budget. (DI Fund would have been exposed if recoveries were insufficient to repay CBR loans.) ### Co-insurance - CBR considering re-introduction of co-insurance to address moral hazard by having insured depositors bear part of loss (e.g., 90 percent coverage). - Mission recommends refraining from re-introducing co-insurance, citing international experience where even small uncovered portions led depositors to run. - UK example: queues at Northern Rock partly due to depositors withdrawing small deposits to receive 100 percent rather than lose co-insurance; parliamentary committee concluded co-insurance adds complexity and does not work. - European Commission required EU countries to remove co-insurance from deposit insurance schemes. - Alternative moral hazard management: do not increase Rub 700,000 coverage for an extended period and allow inflation to reduce coverage over time toward the 80:20 metric. ### Mandatory ban on deposit-taking under DI Law - Current rule: a bank failing to comply for six consecutive months with mandatory ratios established by the CBR (including ratios related to profits) is deemed non-compliant with DI scheme membership, triggering a ban on accepting household deposits and opening individual accounts (DI Law Arts 44 & 48). - Mission concern: mandatory ban may cause hardship (e.g., banks with small persistent losses that would not fail) and unintended financial stability consequences. - Moratorium in force expires in July 2011; draft law before the Duma considers making the moratorium permanent. - Mission recommendation: revisit the automatic mandatory ban promptly; if moratorium not made permanent, revise directives to allow CBR or DIA more discretion to assess reasons for non-compliance and take proportionate action based on depositor risk. ### Other recommended reforms to DI scheme - Coverage: recommend extending deposit insurance to individual unincorporated entrepreneurs to ensure small entrepreneurs have quick access to working capital after bank failure. - Gross vs. Net payouts: once coverage declines in real terms, consider paying retail depositors on a gross rather than net basis to avoid incentivizing withdrawal of deposits to service loans; deposits may still be offset against past-due and non-performing loans. - Enforcement powers: DIA lacks meaningful enforcement powers under DI Law and must ask CBR to impose sanctions. Mission recommends giving DIA direct enforcement powers (e.g., power to issue directions or impose fines for breaches of DI Law provisions). *Source: Excerpt from the IMF mission report contained in the provided PDF.* ### 71. A strong crisis management framework should include provisions which ### _cr11335 - 71. A strong crisis management framework should include provisions which ### Legal protection for supervisory agencies and employees - A strong crisis management framework should include provisions which sufficiently protect the agencies such as the CBR, DIA and the MoF as well as its employees in the employment of the respective tools to address the crisis. - Employees of supervisory agencies should be able to exercise their professional judgment and take the necessary action where the circumstances require, and should not be inhibited by the threat of lawsuits against their actions. - Liability in the context of crisis management may occur when: - the supervisory authority failed to take any action notwithstanding the knowledge of serious problems in the bank; - measures were inadequate in response to the problems; or - a shareholder of a bank challenges the appointment of an official administrator or certain restructuring measures. - Recommendation: liability should accrue only in the event of gross negligence or willful misconduct on the part of the supervisory agency or its employees. - Rationale: limiting liability to criminal activity, gross negligence or bad faith could clarify in advance to potential plaintiffs that cases based on ordinary supervisory judgment would have no chance of success. ### Russian legal framework and current liabilities - Russian legislation does not explicitly provide for legal protection against civil suits for supervisory agencies and their employees; instead it explicitly provides that action can be taken against supervisory agencies. - Specific provisions cited in Russian law: - Article 50 of the CBR law provides that the CBR shall bear responsibility for its actions. - Art 20 of ILaw provides that the interim official administrator can be liable if he fails to or improperly performs his duties. - Art 25 of ILaw provides that shareholders who overall hold no less than 1percent of authorized capital can claim with the arbitration court against the CBR for damages caused by an unjustified institution of official administration. - Article 15 of the Civil Code of the Russian Federation provides that a credit organization may claim compensation for loss, including damages caused by the CBR or its officials in the implementation of their supervisory duties. - The Russian Civil Code requires civil action to be taken against the entity and not the individual employees. - Russian Civil Code Article 1068: redress for injury inflicted by the employee during the performance of labour (official) duties. - Russian Civil Code Article 1069: injury inflicted by State and local self-government bodies and their officials shall be subject to redress at the expense of the state treasury of the Russian Federation or the respective subject of the Russian Federation. ### Recovery from employees and thresholds - The agency can recover losses from the employee in certain circumstances to prevent abuse of immunity. - Russian provisions enabling recovery: - Paragraph 1 of Article 1081 of the Civil Code: a person compensated for the loss caused by another person (an employee or officer), has a right of recourse to that person. - Article 238 of the Labour Code of the Russian Federation: the employee must reimburse to the employer the direct actual loss caused to the employer. - Recommended threshold for recovery: gross negligence or willful action. ### IMF mission recommendation and BCP alignment - In line with BCP and international best practices, the mission recommends that civil liability should accrue only in the event of gross negligence or willful misconduct on the part of the supervisory agency or its employees. - Box 2: Legal Protection Principles and Country Examples - BCP Principle 1: there should be legal protection for supervisors; Core Principles Methodology elaborates protection for the supervisory authority and its staff against lawsuits for actions taken and/or omissions made while discharging their duties in good faith, and protection against costs of defending such actions/omissions. - Country examples (legal thresholds preserved as in source): - Belgium: law provides that supervisory bodies and personnel shall not be liable for any decision, act or behavior in the exercise of their statutory tasks, except in the event of fraud or gross negligence. - United Kingdom: neither the Bank of England nor any of its staff members or board members can be held liable for any act or negligence in discharging the BOE’s statutory duties, unless it appears that the act or omission was done in bad faith. Same position in Ireland. - Luxembourg: supervisory authorities can only be held liable if the damages incurred are caused by gross negligence in the choice of and use of the methods deployed for the exercise by the authority of its public duty. - Singapore: the Monetary Authority of Singapore, its directors, officers and employees are protected against actions, suits or other legal proceedings for acts done or omissions made in good faith. - Legal citations preserved from source: - Belgium: Article 68 of the Law of 2 August 2002 on Financial Services - United Kingdom: Banking Act 1987 - Ireland: Section 25A Central Bank of Ireland Act 1997 - Luxembourg: Article 20 of Law of 23 December 1998 - Singapore: Section 22 of the Monetary Authority of Singapore Act ### Appendix I — Illustrative prompt remedial action framework (stepped corrective actions by CAR bands) - Triggers (by CAR band) and corresponding mandatory/discretionary actions (text preserved): - Adequately capitalized - Groups 4 or 5 but CAR > 10 percent. - Mandatory: No capital distribution or payment of management fees which would cause capital to fall below 10 percent. - Undercapitalized - 8 percent < CAR < 10 percent - Mandatory: 1. Capital distributions and management fees suspended 2. Financial rehabilitation plan required 3. Prior approval for new branches, acquisitions, new lines of business - Discretionary: 1. Require recapitalization by issuing capital or selling to another firm 2. Restricting transactions with affiliates 3. Restricting rates on new deposits 4. Restrict for a period of up to six months certain operations carried out by credit organizations 5. Restrict asset growth - Significantly undercapitalized - 4 percent < CAR < 8 percent - Mandatory: 1. Same as Undercapitalized 2. Financial restructuring plan required. 3. At least two of the five discretionary provisions under Undercapitalized including (1). - Discretionary (in addition): 6. Replace managers of the bank 7. Penalties on managers/directors 8. Ban the opening of new branches for a year 9. Power to appoint a official administrator if CAR falls to e.g. 7.5 to 5 percent, including powers to undertake a P&A, and to revoke license 10. Ban for a term of up to one year banking operations of the credit organization which are permitted under the issued license - Critically undercapitalized - 2 percent < CAR < 4 percent - Mandatory: 1. Same as significantly undercapitalized. 2. Penalize managers and/or restrict compensation of management 3. Prohibit payments on subordinated debt 4. Require appointment of official administrator within 90 days - Discretionary: All of the above - Closed - CAR ≤ 2 percent - Mandatory: Withdrawal of the license for banking operations. - Note: Many of these powers are available under the CBR Law, BLaw, ILaw and AM Law. Proposed reform: encompass them in a consolidated corrective action regime with a stepped scale of mandatory and discretionary actions by the supervisory authority. ### Appendix II — Timeline of crisis-related policy measures (selected entries and statuses) - Aug-08 - Increase in CBR collateralized lending (repos, lombard loans, credit against untraded collateral) - The volume of repo credits peaked at around 750bn in January 2009, and then declined rapidly. At end-2010, outstanding repos were about zero. - Status: Repaid - Sep-08 - Lowering of selected nonprimary CBR policy rates (minimum auction repo and refinancing rates unchanged); Lowering of reserve requirements - RR were lowered from 8.5 percent for liabilities to corporate nonresidents and 5.5 percent for other liabilities in September 2008, to a flat rate 0.5 percent in October 2008. From May, 2009 RR were gradually raised again. - Status: Largely reversed - CBR intervenes to support the ruble in the face of large-scale capital flight - Large scale foreign exchange sales continued though january 2009. - Status: Ended - Short selling and margin trading suspended at stock market - Status: Largely ended - Unsecured CBR deposits provided to VEB and state banks to purchase four failing banks - VEB received RUB 260bn in deposits from CBR. - Status: In effect - Increase in limits for deposit auctions by the Ministry of Finance for 2008 - Depositing limits were increased from RUR 625 billion to RUR 1.55 trillion. However actual placement only reached a maximum of 874 billion Rubles (on October 22). - Status: Ended - Elimination of haircuts for OFZ and OBR collateral used for REPO auctions - Status: partly reversed - Oct-08 - Introduction by CBR of uncollateralized-lending facility - Lending under this facility peaked at close to ruble 2 trillion in February 2009, and all loans were repaid by end-2010. - Status: Repaid - Phasing of quarterly VAT payments allowed over a 3-month period, to reduce liquidity squeeze - Status: In effect - Lowering bank contributions to the deposit insurance system - Status: In effect - Deposit insurance cover increased from Rub 400,000 to Rub 700,000, coinsurance abolished - Status: In effect - Powers of DIA are temporarily extended, inter alia allowing it to restructure problem banks - Powers were given to the CBR/DIA to intervene early in case of a systemic threat and apply a range of tools including financing new investors, nationalization, and transferring assets and liabilities. Law to expire by end-2011 - Status: In effect - DIA receives capital injection from the MoF and access to uncollateralized CBR credit - Status: In effect - Oct-08 (continued) - CBR guarantees interbank transactions, if counterparty's licence is revoked - During October-November 2008 the CBR concluded agreements with 17 banks and VEB. - Status: Expired End-2010 - Several banks are resolved via intervention from the Deposit Insurance Agency - Status: Done - Moratorium on DIA provisions obliging members to meet minimum capital and profitability standards - To expire July 2011 - Recapitalization of VEB to help it support the financial system - VEB received ruble 450bn in 10-year deposits from the NWF, as well as a ruble 175bn "stock market stabilization deposit." - Status: in effect - Recapitalization of Sberbank (by CBR) - Sberbank receives Rub 500 of subordinated loans for a term of 10 years at 8% p.a. - Status: Partially repaid - Provision of capital to banks by CBR and VEB through 5-11 year subordinated loans - Beneficiaries included Sberbank and VTB, among other banks. - Status: Ended - Extension of the REPO facility to low-rated banks (category 4 and 5) on a case-by-case basis - Status: In effect - VEB purchases shares and bonds issued by Russian companies - Placements totaled Rub 129.4bn as of 12-1-2009 - Status: Ended - Nov-08 - Increase in key policy rates to stem capital flight - The CBR refinancing rate was raised stepwise from 11 percent in August 2008, to 13 percent january 2009. From, April 2009, rates were gradually lowered again. - Status: Undone - Start of gradual ruble devaluation (through january 2010) - The ruble was allowed to depreciate by 30 percent between Nov 2008 and Jan 2009. - Recapitalization of State Mortgage Agency (by MoF) - Status: Done - Dec-08 - Extension of max. maturities to up to 12 months for repos, lombard, and untraded-collateral credits. - Status: Largely reversed - Relaxation of provisioning requirements - Status: Partly reversed - Feb-09 - Relaxation of CBR collateral requirements - Status: Partly reversed - Start of gradual reduction of policy interest rates - From April 2009 through May 2010, the refinancing rate was lowered from 13 percent to a low of 7.75 - Status: Partly undone - Jul-09 - Introduction of possibility for recapitalization of banks by MoF via injection of OFZs - The possibility has not been used. - Status: n.a. *Source: _cr11335 - 71. A strong crisis management framework should include provisions which* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11335.pdf_