## _cr11336 — Detailed Assessment Report (targeted BCP assessment), March 30–April 12, 2011 ## Source details **Canonical URL:** [_cr11336 — Detailed Assessment Report (targeted BCP assessment), March 30–April 12, 2011](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11336.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11336.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11336.pdf.json) --- ### Executive summary — scope, methodology, and institutional context - Targeted assessment of the Basel Core Principles for Effective Banking Supervision (BCP) conducted March 30 through April 12, 2011, under the 2006 BCP Methodology by Mr. José Tuya. - Principles reassessed: CPs 5, 6, 7, 8, 9, 11, 12, 18, 23, and 24; other principles carried over from the 2007 DAR. - Sources used: preliminary CBR self-assessment; meetings with CBR heads/staff; review of laws, regulations, supervisory directives, on-site reports and follow-up documents. - Compliance scale: compliant; largely compliant; materially noncompliant; noncompliant. - Institutional framework highlights: - CBR Law and Law on Banks and Banking Activities (BL) assign licensing and supervision to the CBR. - CBR implementing a Development Strategy for the Banking Sector through 2015. - Supervision combines offsite reviews with on-site inspections; territorial offices conduct frequent contact and central staff supervise SIFIs. - Key market statistics (as of January 1, 2011 unless otherwise noted): - Number of banks operating: 1,012 (a decline of 46 from January 1, 2010). - Minimum capital: raised to Rub 90 million as of January 2010; will be raised to Rub 180 million on January 2012. - Asset concentration: the 50 largest banks control 80 percent of assets; the top five (all state-owned) control 48 percent. - Banking system assets: Rub 33,805 billion. - Capital adequacy level: 18.1 percent. - Nonperforming loans (NPL, categories IV and V): 8.2 percent of total loans (down from 9.6 percent on January 1, 2010). - Total loan provisions coverage of NPLs: 102 percent. - Return on equity: 5 percent in 2009; 12.5 percent in 2010. - Macroeconomic context: - Economy contracted by almost 8 percent in 2009. - Recovery started mid-2009, led mostly by domestic consumption supported by policy stimulus. - Growth projected at the 4–4 1/2 percent range in 2010–12. - Accounting and reporting: - Progress toward IFRS convergence; important differences remain (revenue recognition, consolidation, employee benefit and pension accounting, impairment testing, fair value accounting, related party disclosure). - CBR requires supplementary IFRS financial statements from all banks (no publication requirement). - Crisis response and safety nets: - CBR demonstrated capacity to respond to liquidity stresses. - CBR powers include requiring early remedial action, management change and intervention; Russia has a Deposit Insurance Agency since 2005. ### Overall assessment, legal powers, and consolidated supervision - Overall observations: - Some improvement since 2007, but CBR often limited to issuing “recommendations” lacking enforcement power in key areas (corporate governance, related party supervision/identification). - CBR Law and BL do not provide sufficient authority to implement many BCP requirements; proposed amendments pending at the Duma aim to expand powers. - Consolidated supervision and related-party risks: - Narrow legal definitions of related parties impede CBR’s ability to: - identify all lending relationships of each related party; - identify all affiliates to monitor transactions and measure affiliate risk; - capture related risks under lending limits as a percent of capital. - CBR lacks authority to: - establish a comprehensive definition of related parties; - require related-party exposures be on the same terms as non-related parties; - require directors recuse from voting on matters affecting them; - sanction individual Board members at non-intervened banks. - Use of recommendations and moral suasion: - CBR issues letters of recommendations (e.g., on ICAAP/Pillar 2, transactions with related parties) but lacks regulatory enforcement; relies on moral suasion and banks’ awareness that regulations are in process. - Enforcement toolkit limitations: - CBR cannot penalize or sanction individual bank directors at non-intervened banks; cannot suspend shareholders from management participation or dividends; cannot set limits on salaries/bonuses; cannot require additional capital except limited short-term CAR sanctions; cannot require prior supervisory consent for major expenditures or new liabilities. ### Selected reassessed Core Principles — summary of grades and key findings - CP 5 (Major acquisitions): MNC - No ex-ante requirement for CBR approval of domestic investments in nonbank financial institutions; 25 percent aggregate investment limit exists but no pre-acquisition review. - CP 6 (Capital adequacy): LC - Standardized, simplified Basel II approach partially implemented; Instruction 110-I prescribes CARs (10 percent for banks with capital ≥ 180 million rubles; 11 percent for banks with capital < 180 million). - CBR lacks regulatory authority to implement Pillar 2 supervisory review. - Assessment: Largely compliant. - CP 7 (Risk management process): LC - Regulatory framework complex; supports compliance-style supervision but limits professional judgment. CBR uses Directive No. 2005-U and Directive No. 1379-U (weighted point method) for assessments. - CP 8 (Credit risk): LC - Robust reporting and inspection regime; EC3 not complied with due to inability to require related-party lending at market terms or to sanction noncompliance. - CP 9 (Problem assets, provisions and reserves): LC (upgraded from MNC) - Five-category loan classification with specified provisioning ranges (Category I: 0 percent; II: between 1–20 percent; III: between 21–50 percent; IV: between 51–100 percent; V: 100 percent). - Collateral valuation at least once per quarter; collateral liquidity categories and guarantor limits specified. - Assessment: Largely compliant; provisioning implementation issues remain. - CP 11 (Exposures to related parties): MNC - Narrow legislative definitions; inability to link exposures, apply limits, or impose supervisory restrictions; lack of authority to sanction directors individually. - CP 12 (Country and transfer risk): MNC - No general country risk limits or provisioning (except offshore-specific provisioning via Regulation 1317-U and 1584-U); CBR considering amending Regulation 254-P. - CP 18 (AML/CFT): LC - CBR charged with AML/CFT monitoring; mandatory KYC and retention rules; reporting threshold for cash transactions: currently mandatory to check cash transactions over 600.000 R. - Supervisors cannot directly share client transactional information with other supervisors due to privacy laws; can share with FIU. - CP 23 (Corrective and remedial powers): LC - Broad remedial powers exist (Article 74 CBR Law), but inability to sanction individuals is a key deficiency; CBR may impose fines, require restructuring, ban operations, appoint temporary administrators, revoke licenses when mandatory grounds met. - CP 24 (Consolidated supervision): MNC - Consolidated supervision hampered by inability to limit affiliate transactions and request information from holding companies; proposed amendments to extend CBR authority to bank holding companies and to enable consolidated reporting, prudential standards, and wider information exchange. ### Capital adequacy, Pillar 2, and related technical details - Capital adequacy technical points: - Instruction 110-I methodology; different CAR levels (10 percent or 11 percent) depending on capital threshold of 180 million rubles. - Tier I and Tier II composition, deductions, and quantitative limits specified (e.g., subordinated debt limit 15 percent of Tier I; Tier II may not exceed 100 percent of Tier I under certain conditions). - Risk weights groups: Group 1: 0 percent and 2 percent; Group 2: 20 percent; Group 3: 50 percent; Group 4: 100 percent; Group 5: 150 percent. - Loans to related parties carry a risk weight coefficient of 1.3 per Instruction 110-I, Annex 1, section 8957. - Internal models for regulatory capital not permitted. - Pillar 2: - CBR lacks legal authority to implement supervisory review process prescribed by Pillar 2; plans to issue recommendations in Q2 2011 on minimum standards for internal capital assessment (ICAAP/Pillar 2) but cannot oblige banks to implement without legislative changes. ### Supervisory processes, on-site/off-site integration, and tools - On-site and off-site supervision: - Directive No. 2005-U, Instruction 108-I, Directive 1542-U, Letter 169-T, Recommendation 102-T guide inspections; inspections scheduled at least once every 18 months; sampling rule: representative sample of not less than 70 percent of loan volume including 30 largest borrower groups for each inspection. - Bank ratings and categorization: banks assigned to one of five risk categories (Category I/II with subgroups); Directive 766-U and Directive 1379-U used. - Curator role introduced to integrate on- and off-site supervision and to accumulate continuous bank information. - Early Warning System (EWS) forecasts up to six-month capital adequacy using a modified linear regression model. - Supervisory reporting: - Key report forms include Forms 0409101, 0409102, 0409134, 0409153, 0409135, 0409118, 0409125, 0409115, 0409155, 0409302, 0409801, 0409802, 0409803, 0409805, 0409639. - Consolidated reports: Forms 0409801, 0409802, 0409803, 0409805 (quarterly). - AFCB (Analysis of the Financial Condition of Banks) system used nationwide. - Verification, audits, and limitations: - On-site inspections verify reporting; CBR does not have legal authority to require external auditors to promptly notify the CBR or to submit working papers. - Recommendation: amend Law “On Audit Activities” to grant CBR rights to auditors' working papers and prompt notifications. ### Problem assets, provisioning, and related-party exposures — specifics - Loan classification and provisioning: - Categories and provisioning ranges: - Category I—standard loans, 0 percent; - Category II—substandard, between 1–20 percent; - Category III—doubtful, between 21–50 percent; - Category IV—problem, between 51–100 percent; - Category V—irrecoverable, 100 percent. - Collateral valuation: at net realizable (fair) value at least once per quarter; two liquidity categories (first category full value; second category one-half recorded value). - Reporting forms: 0409115 and 0409155. - Supervisor powers: Article 72 and Article 73 permit evaluation and required reclassification/increase of provisions. - Related-party exposures: - Prescribed ratios reported monthly: - N6: single borrower / connected group limit = 25 percent of bank’s capital; - N7: aggregate large credit exposures limit = 800 percent of bank’s capital; - N9.1: aggregate credits to shareholders with > 5 percent limited to 50 percent of bank’s capital; - N10.1: aggregate loans to insiders limited to 3 percent of bank’s capital (applied to physical person, not aggregated with other connected parties). - Regulation 254-P: loan loss reserves required when loan to related party exceeds 1 percent of bank’s capital. - Assessment: CP 11 graded Materially Noncompliant due to narrow definitions and lack of enforcement powers. ### Corrective powers, enforcement measures, licensing and early intervention details - Enforcement measures (where violations do not pose a serious threat): - Monetary fine of 0.1 percent of the minimum size of the charter capital. - Suspend the right of the bank to perform certain operations for up to six months. - Enforcement measures (where serious threat or failure to remedy): - Fine up to 1 percent of institution’s capital; - Demand restructuring and/or resignation of top managers and board members; - Change regulatory requirements for up to six months; - Ban on specific banking operations for up to one year; - Appoint a temporary administrator for up to six months; - Suspend right to reorganize if reorganization would trigger conservatory action; - Change reporting requirements (e.g., per letter 419). - Restrictions on activities where bank is unstable: - Prohibit attracting new/increasing existing deposits from individuals/legal entities; restrict opening correspondent accounts; restrict issuing guarantees, FX transactions, transferring funds to federal budget entities. - Grounds for mandatory revocation (Article 20 BL and related): - Capital adequacy ratio falls below 2 percent; - Bank’s own capital below minimal level set by CBR (subject to grandfathering rules); - Failure to comply with CBR requirements on authorized capital per Law on Bankruptcy of Banks; - Inability to meet depositors’/mandatory payments within 14 days where aggregate amounts due are at least equivalent of 1000 minimum wages. - Fit-and-proper and acquisition vetting: - CBR approval required for acquisitions above 20 percent; ex-post notification required for acquisitions over 1 percent. - Vetting thresholds proposed to be lowered from 20 percent to 10 percent in recommended actions. ### Cross-border cooperation, information exchange, and limitations - Cross-border cooperation: - CBR has concluded 22 MoUs with foreign supervisory agencies and participates in supervisory colleges. - Article 51 CBL forbids provision of individual client transactional information to foreign supervisors — significant barrier; CBR can share client information with the FIU. - Proposed amendments aim to enable exchange of customer-specific information with foreign supervisors. - Host treatment and inspections: - Foreign banks treated same as domestic banks for prudential, inspection and reporting requirements; CBR can impose additional requirements under Article 18 BL. ### Recommended action plan (selected priority actions) - Implement action plans in the Strategy for the Development of the Banking Sector through 2015 (1.1). - Strengthen CBR independence, accountability and political support; provide explicit legal basis for CBR’s role in financial stability (1.2). - Streamline banking regulations to make them more accessible (1.3). - Introduce stronger legal basis for CBR’s use of professional judgment, accompanied by appropriate accountability (1.4). - Remove legal barriers to exchange of individual client information (1.6, 24 and 25). - Strengthen vetting of managers, shareholders and Board members; lower vetting threshold to 10 percent (3; 4). - Require ex-ante CBR approval of acquisitions of domestic nonbank financial institutions (5). - Continue to strengthen bank risk management regulations, Board composition and governance (7). - Continue implementation and enhancement of provisioning standards (9). - Reinforce CBR ability to obtain information on nonbank group entities and broaden definition of related parties; introduce 25 percent limit on exposure to groups of connected debtors (11). - Introduce regulations on provisioning for country and transfer risk (12). - Advance liquidity supervision reforms and require Board approval of liquidity strategy (14). - Prepare methodological recommendations on IT/technology risks (15). - Amend Banking Law to permit follow-up inspections on same topics with safeguards (20). - Implement IFRS-aligned accounting rules and amend Law on Auditing Activity to strengthen audit oversight (22). - Introduce sanctions against individual directors and officers of a bank (23). ### Selected specific assessments (grading excerpts) - Principle 5 — Major acquisitions: Materially noncompliant. - Principle 6 — Capital adequacy: Largely compliant. - Principle 7 — Risk management process: Largely compliant. - Principle 8 — Credit risk: Largely compliant (EC3 non-complied). - Principle 9 — Problem assets/provisions: Largely compliant (upgraded from MNC). - Principle 11 — Exposure to related parties: Materially noncompliant. - Principle 12 — Country and transfer risks: Materially noncompliant. - Principle 18 — AML/CFT: Largely compliant. - Principle 23 — Corrective and remedial powers: Largely compliant. - Principle 24 — Consolidated supervision: Materially noncompliant. _Italicized attribution: Source: Executive Summary and IMF staff assessment contained in the provided chapter (Detailed Assessment Report, targeted BCP assessment), March 30–April 12, 2011._ ### Executive Summary ...................................................................................................... ### Executive Summary ### Introduction - A targeted assessment of the Basel Core Principles for Effective Banking Supervision (BCP) was conducted from March 30 through April 12, 2011, as part of an FSAP Stability Assessment. - The assessment was performed in accordance with the 2006 BCP Methodology and was conducted by Mr. José Tuya, consultant. - Principles reviewed covered major acquisitions, capital adequacy, risk management process, credit risks and provisions, exposure to related parties, abuse of financial services, remedial actions and consolidated supervision. - CP-9 on problem assets and provisioning was upgraded to largely compliant. - CP-11 on exposure to related parties was downgraded to materially noncompliant. ### Scope - The scope included CPs 5, 6, 7, 8, 9, 11, 12, 18, 23, and 24. - Principles 5, 9, 12 and 24 were previously graded materially noncompliant (2007). - Relevant information from the 2007 FSAP was incorporated; principles not covered by the targeted assessment were carried over from the 2007 DAR to the annex. ### Information and Methodology Used for Assessment - Sources used: - A preliminary self-assessment prepared by the CBR. - Meetings with Heads and staff of the CBR supervisory departments. - Review of laws, regulations, and other documentation on the supervisory framework and financial sector developments. - Supervisory directives and guidelines, on-site supervision reports and follow-up documents. - Compliance assessed qualitatively using a four-part system: compliant; largely compliant; materially noncompliant; and noncompliant. - To be "compliant" all essential criteria generally must be met without significant deficiencies. ### Institutional and Market Structure—Overview - The CBR Law and the Law on Banks and Banking Activities (BL) assign licensing and supervision responsibility for banks to the CBR, empowering it to grant banking licenses, approve permissible activities, issue regulations, supervise and enforce compliance. - The CBR is implementing a Development Strategy for the Banking Sector through 2015 to enable supervision by risk and enhance consolidated supervision; the strategy proposes strengthening the CBR’s legal supervisory powers, transparency, asset valuation, and corporate governance. - Supervision combines offsite reviews with on-site inspections; territorial offices conduct frequent contact with bank management and central staff supervise SIFIs. - Legislation to grant the CBR increased professional judgment to implement international best practices without always requiring legislative revision would enhance safety and soundness. - Key market structure and statistics: - As of January 1, 2011 there were 1,012 banks operating in Russia, a decline of 46 from January 1, 2010. - Minimum capital was raised to Rub 90 million as of January 2010 and will be raised to Rub 180 million on January 2012. - The 50 largest banks control 80 percent of assets and the top five (all state-owned) control 48 percent. - As of January 1, 2011 banking system assets totaled Rub 33,805 billion and the capital adequacy level was 18.1 percent. - Nonperforming loans (NPL), defined as loans classified in categories IV and V, amounted to 8.2 percent of total loans, down from 9.6 percent on January 1, 2010. - Total loan provisions currently cover 102 percent of total NPLs. - Return on equity moved from 5 percent in 2009 to 12.5 percent in 2010. ### Preconditions for Basel Core Principles Assessments - Macroeconomic context: - The economy contracted by almost 8 percent in 2009. - A recovery started in mid-2009 led mostly by domestic consumption supported by policy stimulus. - Growth projected at the 4–4 1/2 percent range in 2010–12. - Accounting and reporting: - Progress is being made to converge Russian and international accounting standards but important differences remain (revenue recognition, consolidation, employee benefit and pension accounting, impairment testing, fair value accounting, related party transaction disclosure). - Proposed laws on consolidation and accounting envisage mandatory use of IFRS in consolidated financial statements of banks, listed companies, insurers, pension funds and other public companies. - The CBR requires all banks to prepare supplementary IFRS financial statements, although there is no requirement to publish. - Crisis response and safety nets: - The CBR’s response to financial sector turmoil showed capacity to respond to liquidity stresses. - The CBR has powers to require early remedial action, mandate change of management and intervene in a failed bank. - Since 2005, Russia has a Deposit Insurance Agency. ### Main Findings — Assessment, Analysis and Policy Implications - Overall assessment and legal powers: - Some improvement in compliance with the BCPs is evident since 2007, but the CBR remains limited to issuing “recommendations” that lack enforcement powers in critical areas such as corporate governance and related party supervision and identification. - The CBR Law and the BL do not give the CBR sufficient authority to implement many BCP requirements; proposed amendments to the CBR Law and the BL are pending at the Duma. - Pending legislative amendments would expand the CBR’s supervisory authority to regulate bank holding companies and take supervisory actions to mitigate risks from affiliate operations, including the ability to limit or not allow them, and would expand the definition of control to capture economic dependency. - Consolidated supervision and related-party risks: - Without appropriate regulatory support to conduct consolidated supervision, the CBR cannot efficiently monitor and limit risks created by related party abuse. - Narrow definitions of related parties hinder the CBR’s ability to: - identify all the lending relationships of each related party with the bank; - identify all of the bank’s affiliates to monitor transactions and measure risk from affiliates; and - capture all related risks under lending limits as a percent of capital to limit concentrations. - The CBR lacks authority to: - establish a comprehensive definition of related parties; - require that exposures to related parties be granted on the same terms as those offered to non-related parties; - require that directors recuse themselves from voting on issues affecting them; - sanction individual Board members. - Use of recommendations and moral suasion: - The CBR has issued letters of recommendations on international best practices in risk management and corporate governance (examples include letters on ICAAP/Pillar 2 implementation and on transactions with parties related to a bank). - The CBR lacks regulatory enforcement authority over these recommendations but reports progress through moral suasion and banks’ awareness that regulations are in process. - Risk supervision improvements: - Pursuant to Directive No. 2005-U, bank financial condition assessment is based on quantitative indicators (adequacy/quality of capital, assets, profitability and liquidity) and qualitative indicators (risk management systems, internal supervision, strategic risk management, transparency of ownership). - Projected values for capital and profitability are reviewed using forecast values projected 12 months out based on data for the two previous years and on trend models. - Banks are assigned to one of five risk categories based on these assessments. - Limitations in enforcement toolkit: - Art. 74 of the CBR Law and Art. 20 of the BL provide corrective actions but have limitations. The CBR lacks authority to: - penalize or otherwise sanction individual bank directors at open banks; - suspend some or all of the shareholders from participation in management, including voting or accepting dividends; - establish limits on salaries and bonuses paid to directors and key personnel; - require additional capital levels to be maintained against bank-specific risks, except to impose higher CAR as a sanction for violations of federal law and limited to a six-month period; - require prior consent of the supervisory authority to incur a major expenditure or take on a new liability. - Licensing and acquisitions (CP 5): - The CBR Law does not establish requirements for CBR prior approval for domestic investments in nonbank financial institutions by banks. - Foreign investments by Russian banks require prior CBR approval only when they lead to the establishment of a subsidiary abroad or acquisition of the status of parent company of a non-resident entity. - Domestic acquisition of shares in a bank above 20 percent requires prior CBR approval; acquisitions over one-percent share require ex-post notification to the CBR. - An aggregate 25 percent limit exists on investments in banks and other entities, but bank investments in nonbank financial firms do not require prior CBR approval; the CBR relies on the 25 percent aggregate limit to control that risk. - Licensing regulations should provide for an approval/notification process for bank investments in non-banking institutions to permit the CBR to measure the impact of acquisitions on a bank’s condition and supervisory transparency. *Source: Executive Summary, Detailed Assessment Report (targeted BCP assessment), March 30–April 12, 2011.* ### 26. Capital adequacy rules generally meet Basel II, Pillar 1 guidelines but the CBR lacks ### 26. Capital adequacy rules generally meet Basel II, Pillar 1 guidelines but the CBR lacks ### Capital adequacy and Pillar 2 - The standardized, simplified approach is being implemented. - The CBR lacks the regulatory authority to implement the supervisory review process prescribed by Pillar 2. - Under Pillar 2 the CBR plans to issue recommendations in the second quarter of 2011 on minimum standards for organizing internal procedures for assessing the adequacy of internal capital to cover potential and assumed risks and to provide for future capital needs based on stress testing, strategic plans and risk evaluation. - Without legislation specifically stating the authority of the CBR to stipulate standards for risks and capital management, the CBR may not oblige credit institutions to: - implement said recommendations, - develop internal capital adequacy assessment procedures, and - implement them. ### Risk management framework and supervision by risk - The existing risk management regulatory framework is complex and multi-faceted. - It does not provide the foundation necessary for full implementation of supervision by risk. - The CBR has issued numerous regulations, instructions and recommendations which directly or indirectly support banks’ strengthening their internal risk management processes. - The nature of existing regulations enable a compliance approach to supervision but limit the ability of the CBR to exercise professional judgment to rate the adequacy of risk management systems or Board of Director policies and governance. - Addressing these deficiencies is an area where the CBR is focused but needs amendments to existing legislation. ### Related parties and connected relationships - The concept of related parties has been identified in the regulations and the CBR collects reports on related parties. - The definition of related parties is narrow and based on legal relationships. - Legislation is being reviewed by the Duma that would expand the definition of related parties and allow the CBR to make judgments based on economic relationships or evidence of ability to influence decisions. - The regulatory framework for related party transactions is deficient in that it does not require that lending to related parties be on same terms and conditions as those generally offered to the public. - The CBR has issued recommendations to banks on related party lending; however, they lack enforcement capacity. ### Country and transfer risk - The CBR is considering amending Regulation 254-P to address country and transfer risk. - The current system does not impose country risk limits or provisions, except for operations with residents of offshore centers. - The CBR has issued recommendations to credit organizations on the management of risk country based on the approaches specified in the BCBS document “Management of Banks’ International Lending (Country Risk Analysis and Country Exposure Measurement and Control)” and also includes BCP requirements. - CP 12 MNC: The CBR has not issued guidelines for banks on provisioning for country and transfer risk. ### Information sharing and privacy constraints - The supervisors do not have the authority to directly share client information with other agencies and regulators, at home or abroad, which constitutes a serious deficiency. - However, it can share such information with the FIU. - The CBR is aggressive and very successful in closing banks that are involved in money laundering. - CP 18 LC: The CBR is prevented by privacy laws from sharing account information with other banking supervisors. ### Corrective and remedial powers of supervisors (CP 23) - The legal regime for corrective and remedial actions is clearly addressed in the regulations. - Enforcement powers are broad and clearly spelled out. - The remedial powers of the CBR are deficient in some key areas, such as the inability to sanction Board members and to prevent transactions between the bank and its affiliates. - CP 23 LC: Whilst the CBR has the right to impose fines on the credit institution, it cannot sanction individual bank directors and officers (at non-intervened banks). Appropriate powers should be provided the CBR to administratively sanction (and/or remove if necessary) persons affiliated with banks: this is more efficient and expedient and would have a strong signaling effect to deter others. CBR has announced plans to seek this authority. ### Consolidated supervision (CP 24) - An inability to limit transactions between affiliates, and request information from holding companies limits the ability to conduct consolidated supervision. - Legislation is pending with the Duma to amend the CBR Law and the BL that will extend the supervisory authority of the CBR to cover bank holding companies. - The amendments will also expand enforcement authority over banking groups and bank holding companies by granting the CBR authority to limit transactions between affiliates. - The CBR will be able to dictate the types of consolidated information that bank holding companies will need to provide. - The CBR actively collaborates with foreign supervisors and the amendments will enable the CBR to exchange customer-specific information. - The definition of direct and indirect influence is expanded. - Absent such powers, the ability of the CBR to monitor transactions between affiliates is severely hampered, increasing risks that losses are hidden through affiliate operations or off-balance sheet transfers. - In defining bank holding company the EU standard (to be a bank holding company, over 40 percent of the company’s activities must be in banking) will be applied. - However, in Russia that definition may not be adequate as a large banking group would not be included. The definition should be reviewed and adjusted to the Russian market and ensure that all SIFIs are covered. - CP 24 MNC: In performing consolidated supervision the CBR is unable to capture all related parties and affiliates due to the narrow definition in Russian legislation. The amendments will extend CBR supervisory authority to bank holding companies. ### Summary of reassessed Core Principles (selected) - Only principles 5, 6, 7, 8, 9, 11, 12, 18, 23 and 24 have been reassessed. - CP 5 MNC: There is no requirement that banks seek prior CBR approval to make nonbank domestic investments. The lack of an ex-ante determination of an acquisition’s possible impact on a bank prevents the CBR from being able to limit the exposure to the bank of undue risks. While ex-post the CBR may address risks, it does not meet a critical object of this CP; preventing adverse impacts by an ex-ante review. - CP 6 LC: Russia meets the CP-6 essential criteria and has partially implemented the Basel II standardized simplified approach. Legislation is being drafted to permit Pillar 2 implementation. - CP 7 LC: The CBR is endeavoring to improve the banks’ risk management regulatory regime, strengthen the requirements on the board of directors and define the concept "independent directors." In addition, assess through regulation corporate governance, risk management and audit in banks. - CP 8 LC: The CBR has sufficient legislative and regulatory authority to enable the regular monitoring of banks’ credit risk exposures through a robust reporting and inspection regime. EC3 is not complied with as CBR lacks the regulatory framework to be able to require lending to related parties be done at market terms and sanction banks that do not comply. - CP 9 LC: The CBR continues to strengthen implementation of its provisioning regime. - CP 11 MNC: A narrow definition of related parties and connected relationships prevents the CBR from linking all the exposures and applying limits or imposing supervisory restrictions. In addition, the CBR lacks to authority to sanction directors individually. - CP 12 MNC: The CBR has not issued guidelines for banks on provisioning for country and transfer risk. - CP 18 LC: The CBR is prevented by privacy laws from sharing account information with other banking supervisors. - CP 23 LC: See corrective and remedial powers section above. - CP 24 MNC: See consolidated supervision section above. ### Recommended action plan (selected items) - Only principles 5, 6, 7, 8, 9, 11, 12, 18, 23 and 24 have been reassessed. In order to provide a complete view, grading for the other principles has been carried over from the assessment conducted in 2008. - Key recommended actions (selected): - 1.1. Responsibilities and Objectives: Implement action plans included in the Strategy for the Development of the Banking Sector through 2015. - 1.2. Independence, accountability and transparency: Balanced by appropriate accountability structures, 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. - 1.6, 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: Require ex-ante CBR approval of acquisitions of domestic nonbank financial institutions. - 7. Risk management: Continue to work on introduction of regulations on banks’ risk management, e.g., by strengthening requirements of the BL 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: Continue implementation and enhancement of provisioning standards to ensure an adequate level of loan loss reserves for the banking system. - 11. Exposure to related parties: Reinforce ability of CBR to obtain information on nonbank group entities, including bank holding companies 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 provisioning of 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. *Source: IMF staff assessment contained in the provided chapter.* ### 24. Consolidated supervision Introduce broader powers with regard to bank holding company ### 24. Consolidated supervision Introduce broader powers with regard to bank holding company supervision. 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. ### Recommendation and immediate actions - Introduce broader powers with regard to bank holding company supervision. - 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 - The authorities were in general agreement with the conclusions and observations in this assessment. - Written comments provided have been incorporated in the report. ### Detailed Assessment Report overview - Only principles 5, 6, 7, 8, 9, 11, 12, 18, 23, and 24 have been reassessed. - Description, comments, and grades for other principles have been carried over from the 2007 assessment to the annex of this DAR. - Selection of reassessed principles was based on an analysis of the risks and vulnerabilities of the Russian Federation, prior assessments, country work, and surveillance. ### Principle 5 — Major acquisitions (summary and assessment) - Principle definition: Supervisor has the power to review major acquisitions or investments by a bank, including cross-border operations, and to confirm affiliations/structures do not expose the bank to undue risks or hinder effective supervision. Findings by criterion: - Criterion 1: - Article 61 of the CBR Law and article 11 of the Bank Law: acquisition of more than 20 percent of a banks’ shares requires prior CBR approval and acquisition of over one percent requires a post-notification. - Instruction No. 110-I: mandatory ratio between investment in other entities’ stock and the amount of a bank’s capital is 25 percent. - No requirement that banks seek approval for significant acquisitions of nonbank financial institutions; CBR unable to analyze impact of nonbank investments on the bank’s financial position. - Criterion 2: - Article 35 of the BL: requirements on credit institutions that may have subsidiaries abroad; CBR may establish additional requirements for creating a subsidiary abroad. - Criterion 3: - Supervisor can prohibit major acquisitions/investments (including establishment of foreign branches or subsidiaries) in countries with secrecy laws or regulations prohibiting information flows necessary for consolidated supervision. - Criterion 4: - Supervisor determines that the bank has adequate financial and organizational resources to handle the acquisition/investment. - For domestic nonbank investments there is no pre-acquisition review since approvals/notifications to the CBR are not required; impact assessed post-acquisition through supervisory process. - Criterion 5: - Directive 2332-U requires submission of reports: “Information on the banks investments and his clients—residents” (Form 0409404) and “Information about banks` subsidiaries—non-residents” (Form 0409170). - Statute No. 290-P: bank required to report acquisition of shares in a foreign subsidiary within a month; notify CBR regional office within five business days of subsequent changes in participation; notify within five business days if bank loses status of parent company. - Statute No. 290-P: economic justification for establishing a subsidiary abroad must contain information on the system of risk management on a consolidated basis; CBR can deem project economically unfeasible and refuse approval if requirements not met; to acquire permit to create cross-border subsidiary a bank must provide written consent to an examination of the subsidiary by the CBR. - Criterion 6: - Statute No. 290-P (August 4, 2006) sets requirements to obtain permits to create foreign subsidiaries or to acquire status of parent company in relation to operating nonresident persons, including: - must have operated for not less than three years from the date of state registration; - must comply with requirements imposed on participation in the system for insuring private deposits in banks of the Russian Federation; - must fulfill CBR reserve requirements; - must not have past-due monetary obligations with the CBR; - must not be in debt to the budget. - CBR analyzes business plan, terms of transaction, essential indicators, action program and anticipated results, consolidated risk management system, information on executive managers, and, for acquisitions of operating nonresidents, audited annual balance sheet and most recent balance sheet. - Plan recognized as justified if prospects that the subsidiary will exist for a long time as a financially sound organization. - CBR does not issue permits in states (territories) classified as not participating in international cooperation in anti-money laundering and financing of terrorism. - Domestically there is no approval required to establish nonbank financial subsidiaries and the CBR lacks the authority to limit transactions between affiliates. Assessment: - Materially noncompliant Comments: - Also graded MNC at the last review due to the lack of a requirement that banks seek prior CBR approval to make nonbank domestic investments. - There is an aggregate percentage-of-capital limit of 25 for investments in banks and other entities. - CBR relies on the aggregate limit to monitor/minimize the risk of nonbank acquisitions on the bank. - Lack of an ex-ante determination of an acquisition’s possible impact prevents the CBR from limiting exposure to undue risks; ex-post supervisory remedies do not meet the preventive objective of this CP. ### Principle 6 — Capital adequacy (summary and assessment) - Principle definition: Supervisors must set prudent and appropriate minimum capital adequacy requirements reflecting banks' risks; components of capital defined to absorb losses; internationally active banks must meet applicable Basel requirements. Findings by criterion: - Criterion 1: - Article 62 of the Law on the Central Bank of Russia: CBR authorized to establish ten compulsory standards for banking groups, including towards capital. - Article 67: a bank’s capital adequacy ratio is determined as the ratio between its total capital and the sum of its risk weighted assets. - Article 72: CBR authorized to establish methods for calculating capital and determining ratios for capital, assets and liabilities. - Instruction 110-I, Section 2.2: methodology for capital adequacy ratio. - For banks with a capital of at least 180 million rubles the capital adequacy ratio is 10 percent; for banks with capital less than 180 million, the capital adequacy ratio is 11 percent. - Capital adequacy standards applied on solo level and on banking (consolidated) group level (i.e., up to holding company level). - Consolidated standards consistent with solo level. - Criterion 2: - CBR Regulation 215-P: definition of bank’s capital ("own funds") as sum of principal and supplemental capital, reduced by indicators in sub-sections 4 and 5. - Tier I principal capital elements include: (i) authorized or charter capital; (ii) share premiums; (iii) profit confirmed by an external auditing; (iv) subordinated debt up to 15 percent. - Tier II supplemental capital elements include: (i) reserves from revaluation of bank’s own premises (revaluation may be included in Tier II only once in three years); (ii) current year's profit not yet confirmed by external auditing; (iii) subordinated debt with original fixed term to maturity of over five years; (iv) subordinated debt of over 10 years, whereby the Bank of Russia has the right to suspend payment in favor of creditors. - Deductions from capital include: (i) intangibles; (ii) investment of capital nature in credit institutions of the Russian Federation and in subsidiaries/affiliates; (iii) losses of preceding years and of the current year; (iv) capital formed by investors with inappropriate assets; (v) amount of investments in and value of fixed assets exceeding the amount of a bank’ capital. - Capital adequacy risk weights set by CBR Instruction No. 110-I: - Group 1: 0 percent (e.g., claims on the Bank of Russia) and 2 percent (e.g., cash held in bank vaults and in transit); - Group 2: 20 percent (e.g., debt securities issued by local authorities of the Russian Federation funded in Rubles, claims on banks incorporated in certain OECD countries); - Group 3: 50 percent (e.g., credit claims on the sovereign or Russian Federation constituent members denominated and funded in foreign exchange; credits and claims on central banks or governments with a country score of “3”); - Group 4: 100 percent (all other assets); - Group 5: 150 percent (e.g., claims on central banks and governments of countries rated “7”). - Regulation 215-P, Section 3.11.1: quantitative limits on sources of capital and on the ratio of Tier I to Tier II capital; aggregate amount of subordinated debt may not exceed 15 percent of Tier I capital. - Section 3.11.2: under certain conditions the amount of Tier II capital may not exceed 100 percent of Tier I capital. - Criterion 3: - Instruction 110-I, Annex 1, section 8957: loans to the bank’s related parties deemed higher risk and must be calculated with a risk weight co-efficient of 1.3 (rather than 1.0). - A 150 percent risk weight assigned to loans in jurisdictions rated 7 under the OECD Export Credit Agencies ratings. - In the second-half of 2011, the 150 percent category will also be applied to nonperforming loans. - Capital required for operational and market risk based on the Basel II simplified approach. - Criterion 4: - Required capital ratio reflects individual bank risk profile, including on-balance-sheet and off-balance-sheet risks. - CBR lacks the ability to alter requirements to reflect individual banks' risk taking based on supervisory judgment. - Minimum capital adequacy ratios in Instruction No. 110-I are in all cases higher than the minimum recommended by Basel I. - Appendices 2 and 3 of Instruction 110-I require inclusion of credit risk for conditional credit obligations or off-balance-sheet accounts, including derivative contracts. - Criterion 5: - Instruction No. 110-I applies different bank capital adequacy levels, which in all cases are higher than the minimum recommended by the Basel Committee. - Criterion 6: - Article 73 of the CBR Law authorizes the CBR to inspect credit institutions, instruct correction of violations, and impose sanctions. - CBR has the right to apply up to eight sets of corrective measures under Article 74 of the CBR Law. - Article 20, Section 10 of the BL (395-I): CBR obliged to revoke a bank’s license if capital adequacy ratio falls below 2 percent. - Criterion 7: - Not applicable: CBR does not permit use of internal models for regulatory capital purposes. Assessment: - Largely compliant Comments: - Also graded largely compliant in 2007. - Russia meets CP-6 essential criteria and has partially implemented the Basel II standardized simplified approach. - CBR lacks legal authority to implement Pillar 2. - Subordinated debt is permitted in Tier I with a 15 percent limit. - CBR lacks authority to implement capital limits based on an individual bank’s risk profile. - Legislation is being drafted to amend the CBR Law and permit Pillar 2 implementation. ### Principle 7 — Risk management process (summary and assessment) - Principle definition: Supervisors must be satisfied that banks and banking groups have comprehensive risk management processes (including Board and senior management oversight) proportionate to size and complexity. Findings by criterion: - Criterion 1: - Banks and banking groups required to have comprehensive risk management policies and processes to identify, evaluate, monitor, and control or mitigate material risks. - Supervisor determines adequacy of these processes and can require strengthening if inadequate. - Article 75 of the CBR Law: supervisory body analyzes activities of credit institutions to determine potential situations jeopardizing depositors/creditors and system soundness. - Article 44 of the Deposit Insurance Law: establishes requirements for credit institutions on comprehensive risk management systems. - Assessment of bank risk management systems conducted through weighted point method in Directive No. 1379-U. - Directive No. 1379-U: procedures utilize compliance questions in appendices PU4 and PU5 concerning components of risk management and internal control systems; answers assessed on a four-point scale. Assessment: - (Assessment for Principle 7 not explicitly provided in supplied content; criterion-level descriptions and methods described above.) *Source: _cr11336 - 24. Consolidated supervision Introduce broader powers with regard to bank holding company* ### 1. Yes (permanently, always, to the full extent); ### _cr11336 - 1. Yes (permanently, always, to the full extent); ### Response categories - 1. Yes (permanently, always, to the full extent); - 2. Largely (as a rule, sufficiently completely); - 3. Partially (yes in part, in some cases, insufficiently completely); *Source: _cr11336 - 1. Yes (permanently, always, to the full extent);* ### 4. No (never, under no circumstances). ### _cr11336 - 4. No (never, under no circumstances). ### On-site inspections, supervisory methodology, and legal framework - The CBR conducts on-site inspections of credit institutions under ongoing bank supervisory responsibilities using: - Letter 47-T "On Methodological Recommendations on Conducting Inspections and Assessing Organization of Internal Controls in Credit Institutions". - Letter 26-T "On Methodological Recommendations on Conducting Inspections of the Bank Risk Management System in a Credit Institution (a Branch Thereof)". - Directive No. 2005-U establishes the methodology for supervisory assessment of banks’ activities, including corporate governance; banks are rated from 1–5 based on risk indicators. - When shortcomings in risk management are detected through on- or off-site supervision, the CBR may implement measures provided by the BL and the CBR Law, including ordering corrective actions and recommending improvements. ### Corporate governance, board and senior management responsibilities (Criteria 2–5) - Board and strategy: - Criterion 2: Supervisor confirms banks and banking groups have appropriate risk management strategies approved by the Board; Board ensures policies/processes for risk-taking, limits, and senior management oversight. - Article 11.1 of the BL obliges banks to establish a board of directors. - Directive 1176-U ("On Business Plans of Credit Institutions") requires submission of a business plan including internal principles of risk management. - Recommendation Letter 119-T advises that internal written policies on risk management be approved by the board. - Documentation, reporting, and internal controls: - Criterion 3: CBR assesses that risk management strategies, policies and processes are documented, reviewed, updated, communicated, and adhered to. - Directive 1379-U requires verification that banks use internal written policies on material risks; Directive 1376-U requires monthly report Form 0409639 "Information on Internal Controls in a Credit Institution". - Regulation 242-P requires internal procedures covering accounting, risk management, credit and deposit policies, lending to related persons, interest rate policy, foreign exchange, securities, bank guarantees, AML/CFT internal regulations, and information security. - Capital adequacy and board understanding: - Criterion 4: On-site reviews verify the board and senior management understand the nature/level of risk and relation to capital; 119-T recommends boards authorize priority areas, approve a maximum aggregate risk level (risk-appetite), set risk tolerances and limits, and ensure resources for enforcement and reporting. - Regulation 11-T: board should monitor adequacy of economic capital to risk appetite; Form 0409639 used for monthly submission on internal control documents. - Assessment outcomes: - The CBR verifies presence of full and accurate records of management decisions and their reflection in the bank’s condition. ### Models, information systems, reporting, and product approval (Criteria 6–9) - Models and validation: - Criterion 6: Statute No. 242-P requires the internal control department (reporting to the board) to periodically verify effectiveness of the bank’s methodology (including models) for measuring risks. - 119-T recommends appointment of qualified staff to regularly assess effectiveness of risk models; in practice, only larger banks have such full-time staff. - Information systems and board reporting: - Criterion 7: Banks must have adequate information systems for measuring, assessing, and reporting exposures; CBR receives regular financial and prudential reports (see CP21.1). - 119-T recommends boards receive, in advance of meetings, reports on: financial indicators including capital adequacy; quality of loans and adequacy of reserves; concentrations by sector/borrower/region; assessment of risk management quality; and related-party lending and executive transactions with risk assessment. - Directive 1379-U inspection verifies that banks have regular management reports on size, quality and composition of credits appropriate to size and risk exposure. - New products and board approval: - Criterion 8: 119-T recommends boards approve new banking products and measure consequences against the maximum aggregate level of risk; CBR lacks authority to set required standards in corporate governance, internal risk assessments and internal capital adequacy assessment requirements — standards are recommendations only. - Risk evaluation function segregation: - Criterion 9: Directive 1379-U and 119-T require independence of risk assessment functions from risk-taking; 119-T recommends appointing staff to analyze methods, assess loss potential via modeling/stress testing, and propose risk reduction measures. ### Overall risk standards and CBR assessment (Criterion 10) - The CBR has issued regulations, directives and guidance supporting credit, market, liquidity, interest rate and operational risks. - Assessment: Largely compliant. - Comment: Grading unchanged; required legislation to address prior deficiencies has not been implemented. The risk management regulatory framework is complex; CBR is endeavoring to improve it, but currently cannot enforce guidance issued through supervisory letters. Proposed legislative amendments aim to: strengthen requirements on board functions/composition; define "independent directors"; and permit CBR to assess corporate governance, risk management and audit in banks. ### Credit risk (Principle 8): supervisory approach and requirements - Criterion 1–3: CBR Regulation 242-P requires on-site inspection of internal control system and lending operations; recommendations 26-T, 102-T, 167-T guide inspections and require written procedures addressing credit policy, risk assessment methodology and compliance with CBR requirements. - On-site inspection sampling and focus: - Recommendation 102-T targets a representative sample of not less than 70 percent of the total volume of loans, including at least the 30 largest borrowers groups, for evaluation at each on-site inspection. - Inspectors routinely evaluate Board meeting minutes to assess board engagement in credit risk management. - Required credit policies and controls include: - well-documented strategy and sound policies for assuming credit risk; - criteria and processes for approving new exposures and renewals with appropriate approval authority; - effective credit administration including borrower repayment capacity analysis, monitoring of documentation, covenants, collateral, and asset grading consistent with bank activities or supervisor-prescribed grading; - reporting, problem asset identification, and prudent lending controls, monitoring of exposures relative to limits. - Conflicts of interest and related-party lending: - Regulation 242-P requires employee duties to preclude conflicts of interest; procedures for identifying and monitoring conflicts are required. - The right of directors to vote on approval of their own credits is not expressly prohibited by regulation (see CP11.4); recommendation 102-T advises related-party lending be on market terms but is not enforceable. - Item 3.6 of Regulation No. 254-P requires loan loss reserves when a loan to a related party exceeds 1 percent of the bank’s capital (Tier 1+ Tier 2); loans to related parties must be classified no higher than the third category if borrower financial information is unavailable for more than one quarter. - Supervisor access: - Criterion 4: Regulation 254-P establishes the supervisor’s right of access to information used to evaluate loan quality; in practice CBR’s access to bank records is not impeded. - Assessment for credit risk: Largely compliant. - Comment: The CBR can monitor credit risk exposures and perform periodic on-site inspections but cannot enforce recommendations issued through supervisory letters; EC-3 not complied with because CBR lacks framework to require lending to related parties at market terms or to sanction noncompliance. ### Problem assets, provisions and reserves (Principle 9) - Legal and regulatory basis: - Assessment and monitoring of problem loans and formation of loan loss provisions are set by the Law on the CBR, the Law on Banks, Regulations 254-P and 283-P. - Banks must report monthly to the CBR on asset classification and loan loss provisions. - Classification and provisioning rules (Criterion 10): - All loans and contingent liabilities are classified into one of five quality categories with corresponding loan loss provision ranges: - Category I—standard loans, 0 percent loan loss provision; - Category II—substandard, between 1–20 percent loan loss provision; - Category III—doubtful, between 21–50 percent loan loss provision; - Category IV—problem, between 51–100 percent loan loss provision; - Category V—irrecoverable, 100 percent loan loss provision. - NPLs are considered Category IV and V. - Valuation of collateral and guarantees (Criterion 9): - Collateral must be valued at net realizable (fair) value at least once per quarter. - Collateral is divided into two liquidity categories: first category recognized at full value for provision calculation; second category at one-half recorded value. - Guarantees accepted up to 50 percent of the guarantor’s capital, only if confirmed by an audit. - Reporting and supervisory powers: - Banks submit monthly forms: 0409115 “Information about the quality of loans, loan and equivalent debt” and 0409155 “Information about provisioning.” - Article 72 of the CBR Law and Article 73 grant the CBR power to evaluate asset classification and require reclassification and adjustment of provisions; sanctions authorized under Regulations 283-P and 254-P include orders to increase provisions or reclassify assets. - Assessment: Largely compliant. - Comment: Upgraded from MNC. System meets minimum standards but full implementation issues remain; current provisioning levels are below CBR standards. CBR is requiring increased provisioning during on-site visits and plans further provisioning requirements. ### Exposures to related parties (Principle 11): definitions, limits, and shortcomings - Definitions and reporting: - Related parties concepts exist in Article 4 of Federal Law 948-1, Articles 105–106 of Civil Code, Article 64 of the CBR Law, and Article 4 of the Law on Banks; Instruction 110-I defines related parties as parties capable of influencing decisions that carry credit risk. - CBR evaluates published and IFRS financial statements for related-party information. - Limits and ratios (Criterion 5 and reporting): - Key prescribed ratios reported monthly: - N6: Aggregate size of loans to any one borrower and/or connected group is limited to 25 percent of bank’s capital; - N7: Aggregate large credit exposures limited to 800 percent of bank’s capital. - N9.1: Aggregate credits to shareholders holding more than 5 percent of the bank’s stock limited to 50 percent of bank’s capital. - N10.1: Aggregate size of loans to bank insiders (directors, executive officers) is limited to 3 percent of bank’s capital. (Limit applied to the physical person and not aggregated with other connected parties of the insider.) - Regulation 215-P requires capital be reduced by the amount of total loans and guarantees provided to the bank’s shareholders and insiders (executive officers), less any provisions created. - Regulation 254-P allows portfolio provisioning for small uniform loans subject to a limit in Article 5 of 0.5 percent of a bank’s capital for each such loan. - Supervisory gaps and enforcement: - CBR recommendation 2-T advises internal procedures to prohibit preferential terms to related parties but the CBR lacks authority to penalize noncompliance or to sanction directors personally. - Assessment: Materially Noncompliant. - Comments: Definition of connected borrowers and related parties in legislation is narrow and does not cover economic influence; CBR cannot require submission of related enterprise records above or beside the bank; recommendations are non-enforceable; related-party lending has been a major source of bank failure. CBR has proposed legal amendments including: - Amendment of Article 4 of the BL to broaden definition of ‘related parties’ and define “banking group”, “banking holding” and “other related parties”. - Amendment of Article 72 of the CBR Law to introduce a normative ratio for lending to related parties limited to 20% of a bank’s capital, define “independent credit review process”, and require segregation of origination and monitoring decision-making. - If adopted, CBR would be able to: require identification systems for related-party exposures; determine total amounts; monitor through independent credit review; apply connected party definition to large exposure limits; and introduce “Maximum exposure to a group of connected debtors” limited to 25 percent of a bank’s capital. - The CBR lacks enforcement authority to sanction directors individually. ### Country and transfer risk (Principle 12) - Framework and gaps: - Regulation 242-P and the DIL require internal control systems to address bank risks in general; country and transfer risk are not specifically singled out. - The CBR maintains Regulation 1317-U list of offshore zones and Regulation 1584-U on provisions for operations with residents of offshore zones with prescribed provisioning: - Category III (offshore) provision 50 percent; - Category II provision 25 percent; - Category I no provision required. - No general regulatory limits or provisioning levels are set for country and transfer risk beyond offshore provisions. - Assessment: Materially Noncompliant. - Comment: Grade unchanged. CBR considering amending Regulation 254-P to address country and transfer risk; currently no country risk limits or provisioning except for offshore zones. ### AML/CFT and abuse of financial services (Principle 18) - Legal and supervisory instruments: - Article 7(9) of Law 115-FZ charges the CBR with monitoring AML/CFT law implementation relating to recording/storing/submission of information and internal control organization. - Regulation 242-P requires a high-ranking AML/CFT unit; Regulation 47-T Annex 3 provides a questionnaire for on-site inspectors; CBR has a special AML/CFT compliance unit. - Instruments include Letter 99-T, Regulation 1485-U (training), Regulation 1486-U (requirements for AML/CFT officers), Regulation 321-P (process for submitting AML/CFT information), and Regulation 103-T (inspections under AML Law). - KYC, reporting, and duties: - Regulation 262-P and Regulation 28-I set customer identification and beneficial owner rules; records retained for at least five years. - Mandatory cash transaction check threshold noted: currently mandatory to check cash transactions over 600.000 R. - Reporting suspicious transactions to the FIU must be filed no later than on the working day following detection. - Enforcement powers and cooperation: - CBR can apply measures under Article 74 CBL; Regulation 59-I elaborates remedial toolkit including fines, management replacement, limiting operations, and license revocation for repeated violations. - CBR cooperates with FIU, Ministry of Internal Affairs, and foreign supervisory authorities; MOUs in place for information exchange. - Assessment: Largely Compliant. - Comment: Supervisors cannot directly share transactional bank client information with other agencies and regulators domestically or abroad (serious deficiency); proposed legislation would address this. CBR can share such information with the FIU and is effective in closing banks involved in money laundering. FATF review published in 2008. ### Corrective and remedial powers (Principle 23) - Legal basis and tools: - CBR powers derived from the CBR Law, Law on Banks, Law on Bankruptcy of Banks, Law on Deposit Insurance; supplemented by by-laws including 59-I, 126-I, 279-P, and 226-P. - Early intervention and remedial measures: - Criterion 1: CBR raises concerns early; written orders require boards to submit action plans within 30 calendar days per 126-I; remedial progress tracked via an online “Remedial Measures Database”. Targeted on-site inspections verify completion. AML/CFT violations currently not incorporated into the database. - Criterion 2: Article 75 and Article 74 CBR Law enable intervention, appointment of temporary administrators (Regulation 279-P) for up to six months; in practice, temporary administrators have not been appointed prior to revocation recently. - Criterion 3: Article 74 CBR Law and Article 19 of the Law on Banks provide a range of supervisory tools to require corrective actions and impose penalties. - Procedures on revocation and liquidation: - Regulation 226-P and Directive 1332-U regulate revocation procedures; conservator appointment upon license revocation is mandatory. *Source: _cr11336 - 4. No (never, under no circumstances).* ### 0.1 percent of the minimum size of the charter capital; (iii) suspend the right of the bank to ### _cr11336 - 0.1 percent of the minimum size of the charter capital; (iii) suspend the right of the bank to ### Enforcement powers and remedial measures available to the CBR - Where violations do not pose a serious threat, the CBR may: - charge a monetary fine of 0.1 percent of the minimum size of the charter capital; - suspend the right of the bank to perform certain operations for up to six months. - Where violations pose a serious threat or a bank fails to eliminate violations, Article 74 permits the CBR to: - charge the institution a fine of up to 1 percent of its capital; - demand the institution undertake a restructuring and/or resignation of top managers and members of the board of directors; - change the regulatory requirements for up to six months; - impose a ban on specific banking operations for up to one year; - appoint a temporary administrator for up to six months; - suspend its right to re-organize if a reorganization would trigger conservatory action against the bank; - impose a change in the reporting requirements of a bank (letter 419, dated February 28, 1997). - More generally, the CBR may take actions envisaged by Articles 75 and 76 of the CBR Law when analysis indicates threats to depositors’ legal interests and/or banking system stability. ### Restrictions on bank activities and deposit-taking - If a bank is considered financially unstable or a material threat to depositors, the CBR may restrict the institution from: - attracting new or increasing existing deposits from individuals and/or legal entities, including through sales of its own securities to them, extending new interbank loans and opening deposit accounts to customers who are not shareholders of the bank; - opening accounts with correspondent banks and non-banking credit organizations; - issuing guarantees, performing transactions for the sale and purchase of foreign exchange; transferring funds to the Russian Federation budget entities. - Deposit insurance participation and related obligations: - If a bank is a participant of the Deposit Insurance System and does not comply with DIS participation requirements for three consecutive months, the Bank of Russia shall be obliged to: - require the bank submit a request to terminate its right to attract household deposits; - prohibit the bank to attract (new) household deposits and open new bank accounts until the prohibition on the right to attract deposits is terminated, or the banking license is revoked. - The CBR may prohibit a bank that is not eligible for DIS participation from attracting deposits from individuals; such banks can accept deposits only from legal entities. ### Grounds and mandatory criteria for revocation of banking licenses - The CBR may revoke a bank’s license on any of the ten grounds in the first part of Article 20 of the BL. - Mandatory revocation situations (second part of Article 20) include: - if the capital adequacy ratio of the credit institution falls below 2 percent; - if the amount of the bank’s own capital is lower than the minimal level of capital set by the CBR as of the date of the registration of the bank (this reason shall not be used within the first two years after issuance of the license); - if the bank does not comply within the time established by the Law on Bankruptcy of Banks with CBR requirements on bringing the amount of its authorized capital in accordance with the value of its own funds (capital); - if the credit institution is unable to meet the demands of depositors and/or comply with mandatory payments within 14 days after they become due, provided the aggregate amounts due are at least the equivalent of 1000 minimum wages as set forth in federal legislation. - Beginning January 1, 2007, four new grounds for mandatory revocation were introduced (paragraphs 5-8 of Part 2 of Article 20), each regarding capital falling below prescribed levels where the institution does not apply to change its status to a non-bank credit institution. ### Powers over acquisitions, shareholders and fit-and-proper tests - The CBR may withhold consent to purchase more than 20 percent of a credit institution’s stock where: - the legal entity/buyer has been in business for less than three years; - the buyer’s unsatisfactory financial position has been established, including insufficient equity cash funds (assets) or inadequate net assets to purchase the indicated amount of stock, or the credit institution and buyer have not met mandatory reserve requirements; - the preliminary consent of the antimonopoly agency is lacking, if required; - court decisions establish unlawful actions in bankruptcy or deliberate/fictitious bankruptcy by the purchaser or related group members; - otherwise provided by federal law. - CBR denies consent if a court previously found the purchaser guilty of inflicting losses on any credit institution while serving in senior roles (Instruction No. 130-I). - Current shareholder approval and vetting framework: - Only shareholders with stakes higher than 20 percent are subject to vetting and require CBR permission to acquire such shares; shareholders with interests of more than 1 percent must inform the CBR of their acquisition. - Fit-and-proper criteria and licensing requirements include education, managerial experience, absence of criminal record, and business reputation standards. ### Early intervention, insolvency triggers, and remedial processes - Grounds for taking action to prevent insolvency (article 4 of the Law on Insolvency (Bankruptcy)): - bank was unable to prevent a more than 20 percent reduction in its capital compared to its maximal amount achieved over the last 12 months while also violating mandatory CBR standards; - violates the capital adequacy ratio as established by the CBR; - violates by more than 10 percent the current liquidity requirement as established by the CBR; - permits a decrease in the amount of its capital below the authorized capital at the end of the month. - In accord with Law on Bankruptcy of Banks and Directive 1260-U, if a credit institution’s own capital at the end of the month falls below its (original) authorized capital, the CBR is to direct the credit institution to bring its authorized capital into accordance with own funds. - When bankruptcy criteria are met, the bank must notify the CBR of timing for general meetings, Board sessions, status on large transactions and purchases of shares; the bank’s right to issue dividends is suspended until authorized by the CBR. ### Limitations on sanctions against individuals and recommended enhancements - The CBR can apply remedial actions towards a bank and may order restructuring of the board and/or management, but: - the CBR does not have the right to penalize or otherwise sanction individual bank directors at open (non-intervened) banks, although it may order restructuring of the board and/or management. - Assessment: Largely compliant. - Comments / recommendations: - Articles 74 and 75 do not include key measures recommended by Basel Guidelines for Working with Weak Banks, e.g.: - suspend some or all shareholders from participation in management, including voting or dividends; - establish limits on salaries and bonuses paid to directors and key bank personnel; - require additional capital levels to be maintained against risks specific to the bank; - require prior consent of the supervisory authority to incur a major expenditure or take on a new liability. - Appropriate powers should be provided to administratively sanction and/or remove persons affiliated with banks to improve deterrence and enforcement efficiency. ### Consolidated supervision (Principle 24): scope, powers, current practice and proposed legislative amendments - Legal basis and current practice: - Article 4(9) CBL and Article 4 BL provide basic authority for consolidated supervision. Regulations cited include 191-P, 246-P, 197-P, 327-P, 242-P, 290-P, 2172-U, 2332-U, 1363-U. - Consolidated supervision is performed by the CBR’s territorial offices where the parent of the group is located, performed remotely based on consolidated reports; on-site work is not envisaged for consolidated supervision. - Consolidated reporting and data compiled include group risks, group financial performance, and information on foreign affiliates. - Mandatory consolidated standards applied by the CBR (reported quarterly): - single borrower limit of 25 percent of group own funds (H-6), with a cumulative maximum of 800 percent of own funds; - limits to lending to shareholders of 50 percent, with a maximum per shareholder of 25 percent; - capital adequacy of the group, at 10 or 11 percent, depending on the level of capital of the group; - aggregate lending to insiders of 3 percent of group capital. - Cross-border cooperation and information exchange: - The CBR receives data from foreign regulatory agencies on foreign subsidiaries of Russian groups, host regulator opinions, and provides similar information to foreign regulators, but Article 51 CBL restricts provision of information on individual transactions of credit organizations and their clients to foreign supervisors, decreasing cross-border cooperation effectiveness. - CBR has concluded 22 MoUs on information exchange with foreign supervisory agencies; however, effectiveness requires ability to exchange institution- and client-specific information. - Powers to limit group activities and locations: - The CBR can limit banks setting up establishments abroad and refuse permission if enterprise not viable; no requirement for approval for equity holdings in domestic financial or non-bank enterprises; acquisition of 20 percent or more of another credit institution can be refused under Article 11 BL. - Acquisition of non-financial entities is not subject to approval. - Assessment: Materially noncompliant. - Comments and planned amendments: - The CBR’s authority is currently limited to banks and banking groups; proposed amendments will extend supervisory authority to bank holding companies and nonbank members of a group not regulated by another federal regulator. - Proposed amendments would: - expand CBR authority for holdings: set rules for consolidated reporting, prudential standards, methodology for own funds, and coordinate remedial measures for top entities of banking holdings; - clarify authority to take remedial measures on a consolidated basis, including restrictions on transactions with parent company and other group entities, holdings or affiliated parties, and on non-banking activities that imply higher risk; - secure information exchange capabilities between principal organizations of banking groups, holdings and other participants, including client transactions and correspondents, to eliminate legal conflicts on content of information; - expand CBR’s ability to exchange information with foreign regulators, adding parent entities (holdings) and other group entities to the list of institutions on which the CBR may provide information; - secure the right of the CBR to request from other domestic regulatory agencies information obtained in their supervisory functions, including inspection information. - The Draft Law has been submitted to the Duma. ### Licensing, permissible activities, and supervisory framework (selected highlights) - Minimum initial capital: - Per amendment of January 2007, Article 11 BL sets the minimum initial capital of a bank at the equivalent of € 5 million; banks with lower levels per January 2007 are grandfathered subject to conditions. - Key prudential reporting and ratios: - reporting forms include monthly consolidated and prudential returns; groups report on capital adequacy, risk exposures and foreign exchange risk on a consolidated basis every quarter. - Definitions and controls: - banking groups and bank holdings defined under Article 4 BL; Regulation 191-P defines “consolidated reporting groups” to include non-credit organizations influenced by a principal bank. - Exchange of supervisory information: - Article 51 CBL effectively bars exchange of client information with foreign authorities; an amendment is needed to allow institution-specific and client information exchange to meet international supervisory cooperation standards. *Italicized attribution: Source: _cr11336 (excerpts) — PDF chapter/section provided.* ### 3.3 of Regulation 47-T recommends verification by the inspectors of the independence and ### _cr11336 - 3.3 of Regulation 47-T recommends verification by the inspectors of the independence and ### Internal audit and internal control (Criteria 7 and 8) - Criterion 7: Supervisor determines that banks have an independent permanent and effective internal audit function charged with (i) ensuring that policies and processes are complied with and (ii) reviewing whether the existing policies processes and controls remain sufficient and appropriate for the bank’s business. - The CBR’s rules on internal control foresee an internal audit function separate from internal controls procedures and staff effecting current internal control responsibilities. - Between the monitoring function of the Board and executive management, the independence of the internal control function, and the review functions of the CBR’s on-site inspections, the quality of internal control and internal audit is adequately covered. - Article 42 BL requires that a bank’s external audit also audits the condition of the internal controls, and covers that aspect in its statement to the annual financial accounts of the bank. - Functions performed by the internal audit function in accordance with Chapter 4 of Regulation No. 242-P: - it reviews and evaluates the effectiveness of the internal control system; - it reviews the compliance of the lending institution’s internal documents with regulatory legal acts ; - it reviews internal control processes and procedures; - it reviews systems created for the purpose of complying with legal requirements and professional codes of behavior. - Regulation No. 242-P requires that a lending institution ensure: - staff size, structure, and technical resources of the internal audit function are appropriate to the scale of its activities and the nature of the banking operations and transactions performed; - the internal audit function perform reviews of all areas of a lending institution’s activities; any unit and employee may be the subject of a review; - uninterrupted operation, independence, and impartiality of the internal audit function, and the professional competence of its manager and employees, and to create the conditions for the unhindered and effective performance by the internal audit function of its duties. - Independence of the internal audit function under Regulation No. 242-P must be established by a procedure that ensures the internal audit function: - operates under the direct control of the board of directors (supervisory board); - does not perform activities that are subject to reviews; - at its own initiative reports to the board of directors (supervisory board) on issues that arise in the course of the performance by the internal control function of its duties, and proposals to address them; and it also discloses this information to the individual executive body and collective executive body of the lending institution; - is subject to an independent review by an auditing firm or the board of directors (supervisory board), if such a review is provided for by the lending institution’s charter. - Additional requirements and practices: - an assessment of the internal audit function’s performance of its duties in full, to ensure the unhindered and effective performance by the internal control function of its duties, including supervision of the effectiveness of measures taken on the basis of the results of reviews by individual units and management bodies of the lending institution and measures to mitigate risks that have been identified, are carried out in accordance with Letter 47-T. - Internal Audit unit prepares an audit plan which is to be approved by the Board of Directors of credit institution (Appendix 3 to regulation 242-P). - Assessment: Compliant - Criterion 8: Supervisor determines that the internal audit function: - (i) has sufficient resources and staff that are suitably trained and have relevant experience to understand and evaluate the business they are auditing, - (ii) has appropriate independence including reporting lines to the Board and status within the bank to ensure that senior management reacts to and acts upon its recommendations, - (iii) has full access to and communications with any member of staff as well as full access to records files or data of the bank and its affiliates whenever relevant to the performance of its duties, - (iv) employs a methodology that identifies the material risks run by the bank, - (v) prepares an audit plan based on its own risk assessment and allocates its resources accordingly, and - (vi) has the authority to assess any outsourced functions. - Regulation No. 242-P provisions addressing these criteria (staffing, scope, independence, reporting, and uninterrupted operation) are described above and reiterated in the source text. ### Supervisory approach (Principle 19) — overview and off-site/on-site processes - Principle 19: An effective banking supervisory system requires that supervisors develop and maintain a thorough understanding of the operations of individual banks and banking groups, and also of the banking system as a whole, focusing on safety and soundness, and the stability of the banking system. - Criterion 1: Supervisor has policies and processes in place to develop and maintain a thorough understanding of the risk profile of individual banks and banking groups. - Risk management is assessed by the Bank of Russia as a process of decision making, execution, and control. - Off-site supervision receives and analyzes numerous reports on each bank’s financial condition and prudential requirements using a software system entitled the "Analysis of the Financial Condition of Banks" (AFSB), which since 2006 has been accessible at all 78 territorial offices and 7 Regional offices of the Bank of Russia. - In accordance with Article 75 of the Law on the Bank of Russia, the CBR analyzes activities of banks to determine potential situations which could jeopardize the interests of depositors and creditors and the soundness of the banking system. - The assessment of the system of bank risk management is made using, inter alia, a weighted point method described in Directive No. 1379-U. - The overarching objective of the on- and off-site supervisory analysis is to determine the degree to which a bank is subjected to various risks, identify activities which contribute to increasing risks, determine potential mitigating measures which could be adopted and how changes in indicators may effect the institution going forward. - The Bank of Russia created an early warning system (EWS) which is soon to be integrated into the system of supervisory practice. The EWS software selected uses a model of forecasting up to six-months’ capital adequacy levels at each bank using a modified linear regression method. - Criterion 2: Supervisor monitors and assesses trends, developments, and risks for the banking system as a whole. - The Bank of Russia systematically monitors the overall banking system utilizing a variety of financial and prudential reports provided by banks. - Off-site supervision can identify sensitive risks as reported, determines if the prescribed threshold values are exceeded, and analyzes what such deviations may indicate for the institution or sectoral implications. - The CBR publishes an Annual Report with a chapter on banking supervision, and a separate report on developments in the banking system. - Assessment and monitoring of the financial soundness of the banking sector, including off-site monitoring of banking risks, is carried out by the Bank of Russia’s lead office in Moscow; Territorial offices are promptly informed and conduct more detailed analysis where required; on-site inspections are arranged when potential violations occur and on-site supervision reports its findings through inspection reports and accompanying notes used to finalize judgments and supervisory actions, including sanctions. - Criterion 3: Supervisor uses a methodology for determining and assessing on an ongoing basis the nature, importance, and scope of the risks to which individual banks or banking groups are exposed; methodology should permit relevant comparisons and prioritize supervisory work. - Territorial offices undertake an abbreviated assessment of the financial condition of banks in accordance with Directive 766-U, "On Criteria for Determining the Financial Condition of Credit Organizations". - The assessment is based on two essential criteria -- the bank’s condition of capital and liquidity -- from which banks are classified into: - Category I. Financially stable credit institutions: - Group 1. Banks with no shortcomings in their activities - Group 2. Banks with specific institutional shortcomings - Category II. Problem credit institutions: - Group 3. Banks experiencing serious financial difficulties - Group 4. Banks in critical financial condition - Using these groupings and off-site/on-site information, the Bank of Russia may adopt different supervisory approaches toward higher risk banks, including requesting additional information and more intensive reporting. - The Bank of Russia has the right, utilizing Letter 419, to require a more intensive frequency (even daily) of balance sheet submission, the status of a credit organization's capital and numerous other asset quality related standards as laid out in Directive 1376-U. - Since 2003 stress-testing of the banking sector has been conducted annually by the Bank of Russia for the 200 largest banks; this exercise has since been expanded to include all 1,100+ institutions in country and is undertaken on a bi-annual basis. - Selected results from these stress tests are published in the annual “Banking Supervision Report”. - Since 2005 the Bank of Russia recommended that banks organize stress-testing. The bi-annual stress-testing is supplemented by on-site inspections at each. In a recent survey, 81 percent of 196 respondents used the stress test approach as recommended by the Bank of Russia. - The Bank of Russia has issued Regulation 310-P "On Curators of Credit Organizations." *Source: _cr11336 - 3.3 of Regulation 47-T recommends verification by the inspectors of the independence and* ### introduction of the Curator into Russian bank supervisory practice is slated to contribute to ### _cr11336 - introduction of the Curator into Russian bank supervisory practice is slated to contribute to ### Introduction of the Curator and risk-oriented supervision - The Curator will be the primary contact person of the supervisory authority (both on- and off-site) in the Bank of Russia’s relations with bank management. - The Curator will be responsible to accumulate information on the activities of a bank on a more on-going basis, making it possible to better plan risk-oriented supervision. - A draft Methodological Guide for the Curator of a Credit Organization (or ‘Curator's Ready Reference’ book) has been prepared to support implementation by: - (i) better integrating on- and off-site supervision; - (ii) cataloguing needed information; - (iii) describing the analysis and assessment of the activities of credit organizations required; and - (iv) laying out indicators on current and future financial soundness and the quality of management and internal control. - Estimated adoption time for the regulatory act "On Modes of Supervision of Credit Organizations": the second half of 2008. - A Draft Directive "On Assessment of the Economic Condition of Banks" was expected to be adopted in January 2008 to further integrate off- and on-site approaches. ### Criterion 4–6: Compliance notification, information systems, and supervisory powers - Criterion 4: Compliance with legal and prudential requirements is assessed by Bank of Russia off-site supervision, based on reports combined with on-site inspections. Remedial measures are applied per Article 74 of the Central Bank Law. - Criterion 5: Notification requirements: - Banks that are issuers of securities: Federal Law dated 22/04/1996 No 39-FZ "On the Securities Market". - Other banks: Bank of Russia Instruction 128-I requires notification about changes entailing increases or decreases in the value of assets, financial results, or one-time transactions whose size is 10 percent or more of the value of the bank’s assets as of the date of the transaction. - Directive 1376-U requires banks to notify the Bank of Russia about failure to meet mandatory standards or to form requisite loan loss provisions. - Criterion 6: Information system and reporting frequencies: - Reports received at various intervals: daily, every 10 days, monthly, quarterly, biannually, annually; most reports are monthly. - Off-site monitoring is undertaken within the AFCB (Analysis of the Financial Condition of the Bank) system. - Off-site staff throughout the country have access (on a need to know basis) to AFCB for compiling and analyzing banks’ reporting data. - Assessment for these criteria: Largely compliant. - Comments: Bank of Russia has invested significant human and financial resources in ongoing supervision and has reasonably strong policies and procedures to understand banks’ risk profiles; capacity should continue to be improved. Proposals have been advanced to amend the Central Bank Law to expand staff authority to exercise professional judgment beyond prudential violations. ### Principle 20 — Supervisory techniques: on-site and off-site integration - Structure and activity: - Supervision combines regular receipt of financial and prudential reports with periodic on-site inspections through 78 Territorial offices and 7 Regional offices. - In 2006 Territorial office on-site inspections: total 1837; about 937 inspections at bank headquarters or main offices and 633 at branch offices. - Moscow Territorial office undertook 528 on-site inspections in 2006. - Frequency and planning: - Inspections in credit organizations are conducted by Territorial offices at least once every 18 months in accordance with the “Consolidated Annual Plan for Inspections of Credit Organizations”. - Frequency depends on financial soundness, risk profile, internal controls, frequency of unreliable data, and past inspection results. - The off-site inspection develops on-site inspection terms of reference; scheduled plans can be augmented for bank-specific risks. - On-site process and quality assurance: - On-site inspections follow Instruction 108-I and Directive 1542-U and are prepared using Letter 169-T and recommendation 102-T. - Inspection scopes include governance, risk management, internal controls, related party lending, and comparison of insider loans to market terms. - Decisions to undertake unscheduled inspections can be taken by the Board, Chairman, Banking Supervision Committee, Territorial office manager, or Inspector General of the Main Inspection. - Quality and effectiveness of supervision in Territorial offices and the CBR are evaluated by Banking Regulation and Supervision Department and Internal Audit Department. - Metrics on unscheduled inspections: - Number of unplanned inspections reduced from 839 in 2003 to 416 in 2006. - From the second half of 2005 to the first half of 2007 the number of unplanned inspections as a proportion of the total number of inspections remains unchanged at a level of about 30 per cent. - Assessment: Largely compliant. - Comments: Supervision is integrated nationally but scheduled on-site inspections tend to be compliance (quantitative) oriented; Curator introduction is expected to foster increased cooperation and a more risk-based approach. ### Principle 21 — Supervisory reporting: forms, consolidation, and verification - Legal basis: - Bank of Russia rights to establish mandatory reporting: Articles 4 and 57 of the Central Bank Law; Directive 1376-U describes mandatory reports and procedures. - Key supervisory report forms (used as listed): - "Working Statement for Accounts of a Credit Organization" (Form 0409101); - "Profit and Loss Statement" (Form 0409102); - "Calculation of Equity (Capital)" (Form 0409134); - "Consolidated Market Risk Report" (Form 0409153); - "Information on Mandatory Standards" (Form 0409135); - "Data on Large Credits" (Form 0409118); - "Information about Assets and Liabilities by Call and Repayment Dates" (Form 0409125); - "Information on Quality of Loans, Loan and Equivalent Indebtedness" (Form 0409115); - "Information on Loan Loss Reserves" (Form 0409155); - "Information on Credits and Indebtedness under Credits, Issued to Borrowers of Various Regions" (Form 0409302); - "Report on the Composition of Members of a Banking (Consolidated) Group" (Form 0409801); - "Consolidated Balance Sheet" (Form 0409802); - "Consolidated Profit and Loss Statement" (Form 0409803); - "Report on Mandatory Standards of the Banking (Consolidated) Group" (Form 0409805); - "Report on Internal Control in the Credit Organization" (Form 0409639). - Planned reporting enhancements beginning in 2008: - New forms: "Information on Securities Acquired by a Credit Organization"; "Information on the Credit Risk Level for Financial Instruments Reflected in Off-Balance Sheet Accounts"; "Information on Interest Rate Risk". - Updates in 2008 to forms: Form 0409115, Form 0409118, Form 0409125 to align with IFRS-related principles. - Consolidated reporting: - Regulations governing consolidation: Regulation 191-P; Regulation 246-P; Directive 1270-U. - Consolidated reports are developed based on individual bank reporting forms; key quarterly consolidated reports include Forms 0409801, 0409802, 0409803, 0409805. - The CBR can require consolidated information and subsidiary-level reports per Procedural Directive 30.07.2002 No 191-P. - Verification and external experts: - On-site inspections are used to verify reporting reliability; Recommendation 77-T outlines verification methodology. - In practice, the CBR does not routinely engage external experts for supervisory verification but uses banks’ annual external audits. - The CBR does not have legal authority to require external auditors to promptly notify the CBR of material shortcomings identified during audits. - Assessment: Largely compliant. - Comments and recommended legal changes: - The CBR cannot readily access related group financial information at a vertical (holding or parent) or horizontal (“sister” companies) level; consolidated reporting should require separate filings for each related group holding. - Amendments to the Law “On Audit Activities” should be sought to allow the CBR to receive prompt notice from external auditors and to require auditors’ working papers or replacement where necessary. - Draft 2008 regulations to strengthen audit interaction: drafts for conducting competitive selection of audit organizations and on specific features of conducting inspections by audit organizations. ### Principle 22 — Accounting and disclosure - Regulatory changes and standards: - Directive 1375-U requires reporting based on Bank of Russia Regulation 205-P; beginning January 1, 2008 Regulation 302-P ("On Rules for Performing Accounting at Credit Organizations Located on the Territory of the Russian Federation") came into force to bring reporting significantly closer to IFRS (accrual methods, fair value concepts). - Section 1.12 of 302-P introduces accrual methods and fair value concepts for financial assets and liabilities. - External audit and publication: - Article 42 BL requires annual audited consolidated financial statements for banks, banking groups, and bank holdings; audit by a licensed external auditor once a year. - Banks must publish audited annual statements no later than ten working days after adoption by the shareholders meeting; submit auditors’ report to the CBR three days after adoption. - Regulation 1270-U requires quarterly publication of balance sheet and P&L, information on capital adequacy and provisioning. - Gaps and limitations: - The CBR does not determine auditing standards directly; Ministry of Finance sets auditing standards and licenses auditors. - The CBR cannot reject or rescind appointment of an external auditor nor directly require auditors to submit working papers or prompt notifications of material shortcomings. - Assessment: Largely compliant. - Comments and recommendations: - Regulation 302-P introduces accrual accounting and IFRS-compliant accounting for financial instruments effective January 1, 2008. - A draft accounting law to strengthen convergence between RAS and IFRS is being considered by the Government; Duma considering legislation to strengthen the audit profession. - Recommendation: amend the Law “On Audit Activities” to grant the CBR the right to require auditors to submit working papers to the CBR and to demand auditor replacement where necessary. - Support for CBR’s development of methodological guidelines "Special features of the audit of credit organizations and banking (consolidated) groups". ### Principle 25 — Home-host relationships and cross-border supervision - Information exchange and MoUs: - The CBR has concluded 22 MoUs with home and host supervisors abroad and participates in supervisory colleges; additional MoUs are pending. - Russia has engaged cooperatively with supervisors in United Kingdom, Netherlands, United States, and others. - Constraints and practical cooperation: - Article 51 CBL forbids the CBR to provide client information to other country authorities, creating a significant barrier to cooperation. - The CBR exchanges supervisory information on activities, shareholders, related parties, and issues arising in licensing and supervision contexts with foreign counterparts. - Host treatment and licensing: - Foreign banks in Russia are subsidiaries and are treated the same as domestic banks for prudential, inspection, and reporting requirements. - The CBR can establish additional requirements for credit organizations with foreign investments per Article 18 BL (e.g., approval of managerial staff, additional reporting, minimum charter capital). - On-site access and inspections: - Regulation 108-I and Regulation 105-I provide grounds and specifics for inspections; foreign supervisory requests can lead to unscheduled inspections by the CBR. - Inspections of foreign subsidiaries cannot take place with foreign participation, but parallel or separate inspections by foreign supervisors can occur; main results are shared but full Russian inspection reports are not exchanged. - Consultation before consequential actions: - The CBR will notify home supervisors of minor actions taken against foreign subsidiaries and consult in advance in case of serious remedial actions. - Assessment: Largely compliant. - Comments: The inability of the CBR to share client information under Article 51 CBL is a significant barrier to effective cross-border cooperation. *Source: IMF staff assessment contained in the provided content unit.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11336.pdf_