## _cr16231 — Executive Summary and Key Findings ## Source details **Canonical URL:** [_cr16231 — Executive Summary and Key Findings](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16231.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16231.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16231.pdf.json) --- ### Executive summary — Key findings - Real GDP contracted by 3.7 percent in 2015. - Sharp decline in oil prices and sanctions impaired access to international markets and worsened a pre-existing structural slowdown. - Principal macro-financial risks: a weaker medium-term path for oil prices; intensification of geopolitical tensions and sanctions; further slowdown in growth. - Authorities’ crisis response combined liquidity provision, capital support, and temporary regulatory forbearance and helped keep the banking system stable. - Banking system remains weak and likely to need additional capital: even in the baseline, certain banks will need new capital owing to low profitability and increasing credit losses; required resources increase in stress scenarios but remain manageable. - If public funds are needed for recapitalization, there is sufficient fiscal space provided fiscal policy remains prudent. - Stress tests should be supplemented by a granular and comprehensive Asset Quality Review (AQR). - Systemic liquidity management has been crucial but faces a changing environment: the banking system may move into structural excess liquidity in 2016 owing to the use of the Reserve Fund (RF) to finance the government deficit. - CBR has tools to sterilize excess liquidity; issuance of treasury-bills (t-bills) by the government could help sterilize any structural liquidity overhang. - Since 2013 CBR oversees banking, securities markets, financial market infrastructures, private pension funds, insurance, and micro-finance institutions (transformation into a “mega regulator”). - Bank regulation and supervision improved; further action needed on related party lending, country and transfer risks, operational risks, and supervisory interactions with external auditors. - Securities and insurance regulation require modernization: conflict-of-interest identification, client protection, auditor independence, risk management, and disclosure. - FMIs: NSD should develop business continuity plans to ensure end-of-day settlement; NCC should introduce intraday variation margin calls. - AML/CFT: improvements since 2008; national risk assessment (NRA) needs completion; banks must strengthen customer due diligence on beneficial owners and PEPs. - Macroprudential framework: progress made; tools used mainly in retail lending; legal changes needed to provide CBR with a comprehensive set of macroprudential tools. - Crisis management and resolution: heavy reliance on open bank resolution funded by CBR loans via DIA creates moral hazard and fiscal cost; expand resolution toolkit and discontinue CBR loans to DIA in favor of federal budget financing and a mechanism to recover temporary public financing. - Longer-term development: bank-centric sector with dominant state-owned banks; diversify and deepen securities and insurance markets; comprehensive financial inclusion plan recommended. ### Macroeconomic setting and outlook - 2015: real GDP contracted by 3.7 percent. - Late-2014 policy response: CBR floated the exchange rate and hiked the policy rate by 650 bps to 17 percent. - Inflation: peaked at 17 percent in March 2015 and declined to 7½ percent by April 2016. - Policy rate as of June 2016: 10.5 percent. - Most regulatory forbearance measures lifted on January 1, 2016; some forbearance affected provisions and could not be reversed—stress test adjustments made accordingly. - CBR continues closing mostly small banks in weak condition or in breach of regulations (including AML/CFT). ### Macroeconomic outlook and medium-term prospects (selected projections) - GDP growth (annual percent change): - 2016: -1.2 - 2017: 1.0 - 2018: 1.2 - 2019: 1.5 - 2020: 1.5 - 2021: 1.5 - Consumer prices (period average): - 2015: 15.5 - 2016: 7.5 - 2017: 5.7 - 2018: 4.6 - 2019–2021: 4.0 (each) - Unemployment rate: - 2016: 6.5 - 2017: 6.3 - 2018: 5.6 - 2019: 5.5 - 2020: 5.5 - 2021: 5.5 - General government net lending/borrowing (percent of GDP): - 2016: -3.7 - 2017: -1.6 - 2018: -1.1 - 2019: 0.0 - 2020: 0.4 - 2021: 0.4 - Gross international reserves (billions of U.S. dollars): - 2016: 373.1 - 2017: 387.8 - 2018: 415.2 - 2019: 450.0 - 2020: 491.9 - 2021: 535.1 - Memorandum—Nominal GDP: - 2016: 85,722 (billions of rubles); 1,270 (billions of U.S. dollars) - 2017: 91,376; 1,410 - 2018: 96,186; 1,477 - 2019: 101,582; 1,569 - 2020: 107,213; 1,656 - 2021: 113,186; 1,738 ### Key risks and buffers - Principal downside risks: persistently lower energy prices and intensification of geopolitical tensions. - Factors limiting impact: - Most corporates have enough FX to cover short-term external debt and are hedged against exchange rate risks. - Floating exchange rate, large official FX reserves, positive NIIP of about 20 percent of GDP, and a current account surplus. - Balance sheet currency mismatches seem low. - Public sector debt is low and financing needs are moderate. - Potential growth limited to 1½ percent over the medium term because of weak demographics and slow productivity growth. --- ### Banking System Structure, Performance, and Vulnerabilities ### Financial sector structure and funding - Banking assets amounted to 103 percent of GDP at end-2015. - Pension funds, insurance, and mutual funds assets: 3.6, 2.0, and 3.3 percent of GDP, respectively. - Ratio of bank credit to GDP is low versus comparators. - Concentration and ownership: - Largest 20 banks account for three quarters of system assets; top 10 banks extend about 70 percent of total lending. - SOBs accounted for 60 percent of system assets at end-2015 (dominated by Sberbank and VTB Group). - Top 10 private banks hold 16 percent of system assets; foreign banks hold 13 percent; 11 percent held by specialized and small banks. - Business model and funding: - 70 percent of banking assets are loans; securities (mostly domestic government and corporate bonds) and interbank lending follow. - Banks are mainly funded by deposits of nonfinancial corporations and individuals; capital market funding is very limited. - Three-tiered money market (ownership and credit ratings): Tier I, Tier II, Tier III descriptions as provided in the source. - Most interbank activity at maturities of less than seven days as of February 2016; share of short-term funding reached 50 percent at end-2015. ### Capital, liquidity, asset quality, and profitability (selected metrics) - Capital adequacy ratio broadly stable in 2015 at about 13 percent; fell to 12 percent after forbearance reduced in early 2016. - Loan-to-deposit ratio decreased to 115 percent by end-2015 from a peak of 125 percent. - Household overdue loans: 8.4 percent of total loans by February 2016; corporate overdue loans: 6.5 percent. - Return on assets: 0.3 percent at end-2015. - Connected lending: large exposures stood at 261 percent of capital in February 2016. - Heterogeneous performance: banks in the 21–50 asset-size segment showed negative return on equity of about 25 percent in 2015Q4; two banks in this segment undergoing resolution. - FX and cross-border exposures: - Banks adhere to the overall net open FX position limit of 20 percent of capital. - Net foreign asset position of banks: US$100 billion at end-2015. - Exposure of foreign banks to Russia halved since 2014 to about US$110 billion by end-2015; 40 percent of foreign bank claims concentrated in France and Italy (US$26 and US$19 billion). - Russian banks’ cross-border exposure about US$245 billion at end-2015 (below 20 percent of GDP), two thirds are loans and deposits. ### Key vulnerabilities - Asset quality is the largest risk; unsecured consumer lending in 2011–14 raised retail NPLs; corporate overdue loans rising in construction, real estate, mining, trade, and agriculture. - CBR inspections revealed violations: lending to shell companies, overvaluation of collateral, misreporting, unreliable financial statements. - Nonperforming assets may be higher than reported owing to lower quality of restructured loans, potential under-provisioning, and transfers of distressed assets to affiliated off-balance-sheet entities. - Liquidity risk is contained system-wide but the segmented money market and short-term focus increase vulnerability to liquidity shocks—lower-rated small and medium-sized banks are vulnerable. --- ### Stress Testing, Results, and Capital Needs ### Stress test design and coverage - Tests performed: top-down (CBR), bottom-up (banks), and staff top-down. - CBR TD: five-year horizon, covered 681 banks (Russian accounting standards, stand-alone). - BU: one-year horizon, covered 12 banks (including 10 SIBs) accounting for two thirds of system assets. - Staff TD: five-year horizon, 37 banks accounting for about 82 percent of system assets, consolidated groups, based on IFRS. - Liquidity stress tests by CBR: three scenarios (mild, severe, very severe) with a one-month horizon, assuming no CBR or interbank financing. - Macro stress scenarios calibrated to tail events in the oil price distribution: - V-shaped: oil prices fall to US$19 per barrel; Brent recovers to US$40 in 2020. - L-shaped: oil prices fall to US$25 per barrel and recover more slowly; Brent recovers to US$37 in 2020. - Annual real GDP growth converges to one percent in both scenarios in the medium term. ### Staff adjustments for asset quality - Restructured loans stand at about 30 percent of large loans; one third of restructured loans estimated to be of weaker quality at end-2015. - Migration of such loans increased loan impairment charges by 1 percentage point of total loans. - Under-provisioning accounted for an additional increase in loan impairment charges of 2.2 percentage points. - Overall effect of restructuring and under-provisioning assessed at about 3.3 percentage points. ### Stress test outcomes (selected results) - Baseline: - CBR baseline aggregate capital deficit: 0.3 percent of GDP (to bring all banks to at least 8 percent CAR). - Staff baseline with asset quality adjustment: aggregate capital deficit: 1 percent of GDP. - Tail scenarios: - CBR TD: - Aggregate capital deficit: 2.5 percent of GDP (V-shaped) and 2.1 percent of GDP (L-shaped) by end of five-year horizon. - V-shaped: average system-wide CAR about 9 percent; 140 banks (30 percent of system assets) breach minimum capital requirements. - L-shaped: average system-wide CAR about 10 percent; 108 banks (29 percent of system assets) breach minimum capital requirements. - NPLs increase by 8.1 and 6.5 percentage points cumulatively in the V-shaped and L-shaped scenarios during the first two years. - BU analysis: - Banks’ own assessments are significantly less conservative than CBR’s: over a one-year horizon banks report a capital deficit under the V-shaped scenario that is 40 percent as large as comparable CBR TD exercise; under L-shaped, less than 20 percent as large. - In the baseline, banks report essentially no capital deficit. - Staff TD: - Aggregate peak capital deficit about 4½ percent of GDP during the stress test horizon in both V-shaped and L-shaped scenarios (includes staff’s asset quality adjustment and increase in risk weights from 90 to 100 percent). - Without adjustments, aggregate capital deficit about 2.5 percent of GDP, similar to CBR results. - Cumulative increase in NPLs in 2016 and 2016 is about 12½ percentage points with adjustments and 9.2 percentage points without adjustments. - Some large state-owned, private, and foreign banks breach minimum capital ratios under V-shaped and L-shaped scenarios even without the asset quality adjustment. - Single-factor sensitivity: - Bankruptcy of each bank’s five largest corporate borrowers results in capital deficit in 338 banks (82 percent of system assets), totaling about 2 percent of GDP (described as highly unlikely but illustrative). - Liquidity stress test outcomes (CBR one-month horizon): - Mild scenario: 36 banks (1.7 percent of system assets) show liquidity deficits; total shortage < 0.1 percent of GDP. - Strict scenario: 111 banks (11 percent of system assets) show liquidity deficits; shortage of 0.4 percent of GDP. - Very strict scenario: 181 banks (41.8 percent of system assets) show liquidity deficits; shortage of 2.9 percent of GDP. - Peak deficits occur in different years: 2017 in the V-shaped scenario, and 2019 in the L-shaped scenario. ### Stress testing recommendations - Implement modern, comprehensive, integrated TD and BU methodologies covering banks and affiliated entities. - Develop an “expected loss approach” for credit risk using PD, LGD, and EAD. - Develop a credit registry. - Expand use of TD bank-by-bank stress test results in supervision for capital planning and dividend policy. - Consider possible publication of aggregate TD stress test results in the Financial Stability Review. - Enhance system-wide stress tests for all banks over a three-year horizon. - Conduct stress tests on a consolidated basis to detect downstreaming of problematic assets. - Conduct liquidity stress tests by currency. - Conduct a granular and comprehensive AQR; CBR could conduct the AQR itself if third-party expertise is legally infeasible. - Ahead of the AQR, formulate a strategy to address weaknesses the AQR may uncover, including criteria for eventual use of public funds. --- ### Liquidity Management, Market Instruments, and Operational Framework ### CBR operations and near-term considerations - CBR began reducing liquidity provided to the banking sector in early 2015; reduced liquidity provision in 2015 helped, aided by RF spending. - Possible 2016 structural excess liquidity due to RF financing of the government deficit; sterilization may require coordination with the government. - Money market segmentation could allow short-term CBR refinancing to coexist with aggregate liquidity absorption. - Re-establishing a government t-bill program at the short end of the yield curve recommended to: - Safeguard the CBR balance sheet, - Support transmission of monetary policy, - Separate strategic debt management from short-term liquidity management, - Reinforce MoF role in securities markets. - FX facility (introduced late 2014) was successful in containing FX spillovers to the ruble market; recommended careful withdrawal while retaining flexibility to use it if market-wide strains recur. ### Operational and legal improvements - For long-term operations, CBR should be a market rate taker; eliminate early pre-payment options; improve risk controls for non-marketable collateral; eliminate third-party bank guarantees. - Legally formalize policies governing CBR’s realized capital reserves to underpin central bank solvency and independence. - Deepen the interbank market to encourage banks to self-insure and manage risks; foster covered bond and commercial paper markets. --- ### Financial Sector Oversight, Regulation, AML/CFT, and Macroprudential Policy ### Supervision and regulatory priorities - Since 2013 CBR is a mega-regulator; scope and application of consolidated supervision enhanced; CBR has power to impose standards for risk management. - Five high-priority supervisory improvements: - Strengthen legal framework governing CBR’s relationship with external auditors; CBR lacks adequate powers over external auditors. - Improve notification requirements for material information from banks and external auditors. - Further strengthen legal regime for related parties and implement economic linkages provisions. - Strengthen management of country, transfer, and acquisitions risks; set minimum requirements for risk policies, processes, and limits. - Convert operational risk recommendations into a comprehensive mandatory operational risk management framework. - Securities oversight: adopt a qualitative, principle-based, fully risk-based, proactive regime; address conflicts of interest, client protection, auditor independence, and disclosure regimes. - Insurance supervision: shift from rules-based to transparent risk-based approach; introduce actuarially backed solvency standard and establish core role of actuaries. ### FMIs and payments - Adopt holistic oversight and establish standing coordination committee chaired by top CBR management. - Priorities: - NSD: refined business continuity plan to complete end-of-day settlement in all scenarios. - NCC: introduce intraday variation margin calls for all market segments. - Stronger regulations on protecting client funds collected by e-money operators. - Interoperability of all payment systems. - Reduce CBR residual credit risk by ability to call for additional collateral on liquidation day. - Consolidate legislation and align with the Principles for Financial Market Infrastructures. ### AML/CFT - Legal and supervisory steps taken, including amendments on beneficial owners and PEPs; institutional capacity improved (Rosfinmonitoring and CBR). - Further enhancements needed: - Complete the NRA and adopt prioritized policies to improve understanding of ML/TF risks. - Make beneficial ownership information available, regularly updated, and accurate. - Address deficiencies in PEP definition and low number of STRs; provide guidance on complex structures and PEPs. - Improve timely feedback from Rosfinmonitoring to banks to enhance STR quality. ### Macroprudential framework - Institutional arrangements: oversight shared between CBR and the National Council on Ensuring Financial Stability (FSC); CBR is the macroprudential authority. - Recent actions: tightened provisioning and increased capital risk weights to curb unsecured consumer lending; differentiated capital risk weights for mortgage lending; stricter reserve requirement on non-retail foreign-currency deposits. - Recommendation: amend CBR Law to provide legal foundation for full set of macroprudential tools (e.g., limits on loan-to-value and debt service-to-income ratios) and expand macroprudential toolkit in short-to-medium term. - Additional recommended work: early warning exercises; macroprudential stress testing with second-round effects and solvency-liquidity links; clearer Financial Stability Review communication. --- ### Crisis Management, Resolution, and Funding ### Institutional roles and recent activity - CBR: resolution authority determining entry into resolution and resolution method. - DIA: operational aspects of resolution; may provide financing through DIF or its own account, funded by CBR loans or the government. - Since January 2014: - 28 banks put into open bank resolution using public funds amounting to 1.1 percent of GDP. - CBR revoked licenses of 214 banks, resulting in deposit insurance payouts amounting to 0.8 percent of GDP. - P&A transactions used in only three cases. - Subsidized financing for solvency support often takes the form of DIA long-term collateralized loans at below-market rates (example terms: 10 years at 0.5 percent interest vs market 10–11 percent). Such loans are heavily encumbering and can prolong resolution and subsidize negative balances. ### Recommendations to reduce moral hazard and fiscal costs - Discontinue CBR loans to the DIA; if public funds are needed, finance from the federal budget (medium term). - Establish funding mechanism to recover temporary public financing costs through levies on the financial industry (medium term). - Adopt full range of resolution powers and safeguards recommended by the FSB Key Attributes; implement legal/operational changes to make P&A an effective resolution tool (short term). - Legal changes to widen use of P&A: - Allow DIF to fund negative balance between transferred assets and liabilities subject to least cost test. - Permit authorities to determine scope of liabilities to transfer subject to “no creditor worse off” principle. - Adopt fair value approach for asset transfers. - Use bridge banks and asset management companies to manage overvaluation and fraud constraints. - Consider statutory bail-in powers (bill being drafted) with careful design consistent with creditor hierarchy. - Introduce two-tiered depositor preference to put insured deposits ahead of uninsured deposits and both ahead of other senior unsecured creditors to reduce costs to the DIF. - Strengthen legal protection for resolution authorities and staff; provide for monetary compensation rather than reversal of good faith actions. ### Operational and governance changes - If CBR loans are discontinued, temporary public fund use would require MoF approval; recovery of public outlays from industry should be arranged medium term. - Prefer asset injections to subsidized loans where solvency support is necessary to ensure orderly resolution. - Require early intervention based on strong supervision to avoid deep insolvency and large public outlays. - Ensure explicit budgeting of subsidized SOB activities and oblige government to cover their cost in annual budget; ensure lending rates are not lower than cost of funding. --- ### Financial Inclusion, Structure, and Development Priorities ### Financial inclusion - Account penetration: 67.4 percent of adults. - Variation: large variations in inclusion between urban and rural areas and across income and age groups. - Account usage often limited; lack of appropriate savings products for the underserved. - CBR leading development of a comprehensive financial inclusion strategy requiring endorsement of public and private stakeholders and facilitation of modern electronic financial services. ### Banking sector development and governance - Structure: highly concentrated at the top and fragmented at the bottom; SOBs dominate. - Top individual loan market shares cited (2015): Sberbank, 33; VTB Group, 17; Gazprombank, 7; Otkritie Group, 6; Russian Agricultural Bank, 4; Alfa-Bank Group, 3; Soc Gen Group, 2; Unicredit Bank, 2; Promsvyazbank, 2; Raiffeisen Bank, 1; Others, 24. - Recommendations: - Further gradual privatization as economic conditions permit; secure anchor investors; success depends partly on sanctions developments. - Support less concentrated distribution of bank assets to enhance competition; VTB Group postal banking network could be an alternative to Sberbank in retail markets. - Reassign ownership and a new legal and regulatory framework to increase board effectiveness by reducing government officials and aligning decision-making with commercial objectives. - Enhance financial soundness of SOBs by obliging government to cover cost of subsidized activities in its annual budget and ensure lending rates are not lower than funding cost. - Address conflict of interest where CBR acts as major shareholder and regulator of Sberbank. --- ### Selected FSAP Recommendations (Selected, with timing) - Conduct an AQR to ensure adequate bank capitalization (CBR). Timing: ST/MT. - Enhance stress testing practices, including on a consolidated basis and by currency (CBR). Timing: ST/MT. - Enhance framework to encourage banks to self-insure and manage risks in the market (CBR). Timing: ST. - Review FX repo framework, and formalize lender of last resort (CBR). Timing: ST. - Re-establish t-bill program and coordinate sterilization of excess liquidity (MoF, CBR). Timing: ST. - Require prior approval for banks’ domestic investments in nonbank institutions (CBR). Timing: ST. - Issue requirements for management of banks’ country and transfer risks (CBR). Timing: ST. - Upgrade framework for relations with and use of banks’ external auditors (CBR). Timing: ST. - Strengthen legal framework applicable to related parties (CBR). Timing: ST. - Bring securities and insurance regulation and supervision into line with international standards (CBR). Timing: MT. - Ensure effective implementation of the AML/CFT framework (CBR, MoF, Rosfinmonitoring). Timing: ST. - Adopt legal changes to provide a comprehensive macroprudential toolkit (CBR, MoF). Timing: ST/MT. - Review public fund use to finance DIA; if CBR funds used, federal government should provide indemnity (CBR, MoF). Timing: MT. - Establish funding mechanism to recover temporary public financing costs through levies on financial industry (CBR, MoF). Timing: MT. - Promote legal reforms to increase SOB Board effectiveness and continue gradual privatization of SOBs as conditions permit (MoF, CBR). Timing: MT. *Source: IMF Financial Sector Assessment Program — Executive Summary (CR16231).* ### EXECUTIVE SUMMARY ___________________________________________________________________________ 6 ### _cr16231 - EXECUTIVE SUMMARY ### Executive summary — key findings - The Russian economy is experiencing a protracted recession; real GDP contracted by 3.7 percent in 2015. - The sharp decline in oil prices and sanctions have impaired access to international markets and worsened a pre-existing structural slowdown in growth. - Key macro-financial risks: a weaker medium-term path for oil prices; intensification of geopolitical tensions and sanctions; and further slowdown in growth. - Authorities’ crisis response combined liquidity provision, capital support, and temporary regulatory forbearance and has helped keep the banking system stable. - The banking system remains weak and likely to need additional capital: even in the baseline scenario, certain banks will need new capital owing to low profitability and increasing credit losses; required resources increase in stress scenarios but remain manageable. - If public funds are needed for recapitalization, there is sufficient fiscal space provided fiscal policy remains prudent. - Stress tests should be supplemented by a granular and comprehensive review of banks’ asset portfolios to gauge capitalization needs. - Systemic liquidity management has been crucial but faces a changing environment: the banking system may move into structural excess liquidity in 2016 owing to the use of the Reserve Fund (RF) to finance the government deficit. - The CBR has tools to sterilize excess liquidity; money market segmentation could allow short-term CBR refinancing to coexist with aggregate liquidity absorption. Issuance of treasury-bills (t-bills) by the government could help sterilize any structural liquidity overhang. - With the transformation of the CBR into a “mega regulator,” supervision has been enhanced: since 2013 CBR oversees banking, securities markets, financial market infrastructures, private pension funds, insurance, and micro-finance institutions. - Bank regulation and supervision have greatly improved, but key areas for further action include related party lending, country and transfer risks, operational risks, and supervisory interactions with external auditors. Implementation of risk-based supervision is in progress. - Securities and insurance regulation require further modernization: actions needed in conflict-of-interest identification, client protection, auditor independence, risk management, and disclosure. Insurance supervision remains largely rules-based; transparent risk-based supervision and specialized CBR insurance expertise are needed. - Financial market infrastructures: NSD should further develop its business continuity plan to ensure end-of-day settlement in disruptions; NCC should introduce intraday variation margin calls. - AML/CFT: significant improvements since 2008, but the national risk assessment (NRA) needs completion and banks must strengthen effective implementation of customer due diligence regarding beneficial owners and politically exposed persons (PEPs). - Macroprudential framework: progress made, institutional arrangements appear effective and tools have been used (mainly in retail lending), but the toolkit is limited under existing law and legal changes are needed to provide CBR with a comprehensive set of macroprudential tools. - Crisis management and resolution: decisive efforts are underway to wind down weaker banks, but there is heavy reliance on open bank resolution funded by CBR loans via the Deposit Insurance Agency (DIA), which can create moral hazard and be costlier to the public sector. The resolution toolkit should be expanded to minimize public fund use. It would be desirable to discontinue CBR loans to the DIA and have any public funds for bank restructuring/resolution provided by the federal budget; establish a funding mechanism for recovery of temporary public financing in the medium term. - Longer-term development: the financial sector is bank-centric with dominant state-owned banks; diversification and deepening of securities and insurance markets are needed. Significant variations in financial inclusion exist between urban and rural areas and across income levels; a comprehensive financial inclusion plan is recommended. Further privatization and governance reforms for state-owned banks are desirable. ### Macroeconomic setting and outlook - 2015: real GDP contracted by 3.7 percent. - Late-2014 policy response: CBR floated the exchange rate and hiked the policy rate by 650 bps to 17 percent. - Inflation dynamics: inflation peaked at 17 percent in March 2015 and declined to 7½ percent by April 2016. - Policy rate as of June 2016: 10.5 percent. - Ruble depreciation and a food import ban cushioned some exporters; however, banks faced deposit outflows, liquidity pressures, asset price declines, and deteriorating net interest margins. - Most remaining regulatory forbearance measures were lifted on January 1, 2016; some forbearance measures affected provisions and cannot be reversed—stress test adjustments were made accordingly. - CBR continues closing mostly small banks in weak financial condition or in breach of regulations (including AML/CFT). ### Corporate sector and external positions - Corporate sector adjustment to lower oil prices is uneven: energy exporters’ revenues cushioned by ruble depreciation; energy companies remain profitable due to ruble cost structures and low-cost global position. - The external debt service of major corporations affected by sanctions is covered by liquid external assets. - Weaker segments: smaller firms reliant on domestic bank financing show weaker profitability, higher leverage, and increasing NPLs. - About half of total corporate debt is denominated in FX, but net FX debt to the banking system is 4 percent of GDP. - Short-term external assets exceed short-term liabilities by about US$65 billion. - FX-denominated NPLs have increased only moderately and remain lower than ruble-denominated NPLs. (FX loans are mostly to large and strong corporations; provisioning rates are lower and NPLs tend to rise less than for ruble loans.) ### Anti-crisis measures (late 2014–15) — components and magnitudes - Liquidity management: increases in size and term of CBR ruble facilities, acceptance of non-marketable collateral; FX repo facilities; access to CBR facilities for the CCP at the Moscow Exchange; informal limits on net foreign asset holdings of five large state-owned enterprises. - Capital support: programs funded by the federal budget, the NWF, and the CBR, including a program worth 1.1 percent of GDP implemented by DIA for recapitalization of 30 mainly state-owned banks. - Deposit insurance: scope expanded to include unincorporated entrepreneurs; maximum coverage raised from RUB 700,000 to RUB 1.4 million (about US$ 10,000 and 20,000 at the present exchange rate). - Temporary regulatory forbearance: (i) moratorium on recognizing negative valuation changes for securities portfolios; (ii) permission to price FX-denominated assets and liabilities at October 1, 2014 exchange rates; and (iii) flexibility in loan classification and provisioning. Forbearance measures were adjusted throughout 2015 and considerably reduced by early 2016. - Reducing counterparty risk: enabling partial compensation of losses arising from banks’ claims against banks whose licenses were revoked. ### Banking system stability, liquidity, and supervision - Banking sector: system weak, likely needs additional capital; stress tests indicate capitalization needs under baseline and stress scenarios remain manageable but require granular AQR and portfolio review. - Liquidity: CBR shifted operations from containing systemic liquidity risks to managing consequences of RF use; starting in early 2015, CBR tightened access to ruble repo and secured loan transactions to sterilize government withdrawals from the RF. - Potential 2016 structural excess liquidity due to RF financing of the government deficit; CBR can sterilize excess liquidity but interbank market functioning should be improved so banks can better manage liquidity risks. Re-establishing a government t-bill program could support sterilization. - Supervision: transformation of CBR into a mega-regulator has strengthened oversight; risk-based supervision implementation is underway; remaining supervisory priorities include related party lending, country and transfer risk rules, operational risk oversight, and upgrading external auditor interactions. ### Macroprudential policy and AML/CFT - Macroprudential: considerable progress; institutional arrangements effective; macroprudential tools used mainly in retail lending; legislative amendments recommended to provide CBR with a comprehensive toolkit (short-to-medium term). - AML/CFT: legislative/regulatory frameworks and implementation have improved since 2008; the NRA must be completed and banks need to strengthen customer due diligence on beneficial owners and PEPs. ### Crisis management and resolution — priorities - Heavy reliance on open bank resolution funded by CBR loans to DIA poses moral hazard and fiscal cost. Recommendations include: - Discontinue CBR loans to the DIA and, if public funds are needed, provide them from the federal budget (medium term). - Establish a funding mechanism for recovery of temporary public financing costs through levies on the financial industry (medium term). - Introduce the full range of resolution powers and safeguards recommended by the FSB Key Attributes, and implement legal/operational changes to make purchase and assumption (P&A) an effective resolution tool (short term). - Ensure adequate realized capital through legal amendments as needed (CBR — medium term). ### FSAP key recommendations (selected, with timing) - Conduct an asset quality review (AQR) to ensure adequate bank capitalization (CBR). Timing: ST/MT. - Enhance stress testing practices, including on a consolidated basis and by currency (CBR). Timing: ST/MT. - Enhance framework to encourage banks to self-insure and manage risks in the market (CBR). Timing: ST. - Review FX repo framework, and formalize lender of last resort (CBR). Timing: ST. - Re-establish t-bill program and coordinate sterilization of excess liquidity (MoF, CBR). Timing: ST. - Require prior approval for banks’ domestic investments in nonbank institutions (CBR). Timing: ST. - Issue specific requirements for management of banks’ country and transfer risks (CBR). Timing: ST. - Upgrade framework for relations with and use of banks’ external auditors (CBR). Timing: ST. - Strengthen legal framework applicable to related parties (CBR). Timing: ST. - Bring securities and insurance regulation and supervision into line with international standards (CBR). Timing: MT. - Ensure effective implementation of the AML/CFT framework (CBR, MoF, Rosfinmonitoring). Timing: ST. - Adopt legal changes to provide a comprehensive macroprudential toolkit (CBR, MoF). Timing: ST/MT. - Review public fund use to finance DIA; if CBR funds used, federal government should provide indemnity (CBR, MoF). Timing: MT. - Establish funding mechanism to recover temporary public financing costs through levies on financial industry (CBR, MoF). Timing: MT. - Promote legal reforms to increase SOB Board effectiveness (MoF, CBR) and continue gradual privatization of SOBs as conditions permit (MoF, CBR). Timing: MT. *Source: IMF Financial Sector Assessment Program — Executive Summary (CR16231).* ### 6. The outlook for 2016 is for continued recession, while medium-term prospects ### 6. The outlook for 2016 is for continued recession, while medium-term prospects remain weak (Table 2) ### Macroeconomic outlook and medium-term prospects - GDP contraction of 1.2 percent in 2016 driven by relatively low oil prices and tighter fiscal policy. - Growth expected to turn positive in 2017 due to a more competitive exchange rate and normalization of financial conditions. - Real income growth will remain slow; households continue to reduce their borrowing. - Potential growth limited to 1½ percent over the medium term because of weak demographics and slow productivity growth. ### Key risks and macro buffers - Principal downside risks: persistently lower energy prices and intensification of geopolitical tensions (RAM, Table 3). - Materialization of risks would increase balance of payments pressures and deepen the recession. - Factors that help limit the impact: - Most corporates have enough FX to cover their short-term external debt obligations and are hedged against exchange rate risks. - Russia has a floating exchange rate, large official FX reserves, a positive net international investment position of about 20 percent of GDP, and a current account surplus. - Balance sheet currency mismatches seem low and do not appear to impose a constraint on exchange rate flexibility. - Public sector debt is low and financing needs are moderate. - Deleveraging could reduce investment and output; weak growth will weigh on the financial sector. - Banking sector is relatively small as a share of GDP and significant government participation aids management of systemic stress. ### Financial sector structure - Banks dominate with assets amounting to 103 percent of GDP at end-2015. - Pension funds, insurance, and mutual funds have assets of 3.6, 2.0, and 3.3 percent of GDP, respectively. - Ratio of bank credit to GDP is low versus comparators (Brazil, Turkey, India, China, and South Africa). - Concentration and ownership: - Largest 20 banks account for three quarters of system assets; top 10 banks extend about 70 percent of total lending. - State-owned commercial banks (SOBs) accounted for 60 percent of system assets at end-2015 (dominated by Sberbank and VTB Group). - Top 10 private banks hold 16 percent of system assets; foreign banks hold 13 percent; 11 percent held by specialized and small banks. - Business model and funding: - Seventy percent of banking assets are loans; securities (mostly domestic government and corporate bonds) and interbank lending follow. - Banks are mainly funded by deposits of nonfinancial corporations and individuals; capital market funding is very limited. - Three-tiered money market (ownership and credit ratings): - Tier I: several large, highly rated banks with low deposit funding costs; rely on FX swap market for wholesale ruble liquidity; access to secured and unsecured interbank markets. - Tier II: mid-sized banks without unsecured interbank access; raise FX and ruble in FX swap and repo markets; limited lines with Tier I; use CBR facilities. - Tier III: small banks with low ratings, larger holdings of higher yielding less liquid assets; little or no interbank access; conserve cash buffers and access CBR operations only with high quality collateral. - Liquidity management is short-term focused; most interbank activity at maturities of less than seven days as of February 2016. ### Banking system stability — Performance - Capital and liquidity: - Capital adequacy ratio broadly stable in 2015 at about 13 percent; fell to 12 percent after forbearance was reduced in early 2016 (Table 4). - Loan-to-deposit ratio decreased to 115 percent by end-2015 from a peak of 125 percent. - Asset quality and profitability deterioration: - Household overdue loans reached 8.4 percent of total loans by February 2016; corporate sector overdue loans at 6.5 percent. - Overall NPLs were stable in May–December 2015 due to loan rescheduling and regulatory forbearance. - Return on assets reached 0.3 percent at end-2015. - Net interest margins contracted; net fees and commissions fell; non-interest expenses declined at a lower rate than NII; provisions rose sharply. - Connected lending and concentration: - Large exposures stood at 261 percent of capital in February 2016. - Related party lending may be understated; connected lending and loan concentration pronounced among smaller banks and present in some large banks. - Heterogeneous performance: - Banks in the 21–50 asset-size segment show weakest performance; negative return on equity of about 25 percent in 2015Q4. - Two banks in this segment undergoing resolution. - System profits slightly positive owing to a few largest banks. - FX and cross-border exposures: - Banks adhere to regulatory limits on net open FX positions (total overall limit of 20 percent of capital). - Net foreign asset position of banks reached US$100 billion at end-2015. - Exposure of foreign banks to Russia halved since 2014 to about US$110 billion by end-2015; 40 percent of foreign bank claims concentrated in France and Italy (US$26 and US$19 billion). - Russian banks’ cross-border exposure about US$245 billion at end-2015 (below 20 percent of GDP), of which two thirds are loans and deposits. - Russian subsidiaries operate primarily in Austria, Turkey, and Cyprus. ### Financial spillovers and regulation - Financial spillovers to and from Russia increased substantially over two decades; spillovers from Russia propagate through equity markets more strongly than other EMs; spillovers to Russia from currency markets more than tripled following the GFC. - CBR is implementing Basel III: - Published list of 10 systemically important banks (SIBs). - Begun to phase in the liquidity coverage ratio (LCR). - Lowered Common Equity Tier 1 minimum from 5 percent to 4½ percent and total capital from 10 percent to 8 percent of RWAs to offset Basel III impacts (about 0.6 percentage point) and new capital buffers (0.625 percent for capital conservation and 0.15 percent for the systemic surcharge). ### Key risks and vulnerabilities in the banking sector - Asset quality is the largest risk; unsecured consumer lending in 2011–14 raised retail NPLs; corporate sector overdue loans rising in construction and real estate, mining, trade, and agriculture. - CBR inspections revealed violations: lending to shell companies, overvaluation of collateral, misreporting, and unreliable financial statements. - Nonperforming assets may be higher than reported due to: - Lower quality of restructured loans, - Potential under-provisioning and under-collateralized portfolios, - Transfer of distressed assets to affiliated off-balance sheet entities not subject to consolidated supervision. - System-wide liquidity risk contained but segmented money market and short-term focus increase vulnerability to liquidity shocks; lower-rated small and medium-sized banks vulnerable to liquidity dry-ups. - Market risk, including sovereign risk, appears contained; securities portfolios account for 15 percent of total assets at end-2015, mainly debt securities; indirect sovereign risk via state-owned financial and non-financial corporate sectors likely greater. ### Banking sector resilience — Stress test design - Stress tests performed: top-down (TD) by CBR, bottom-up (BU) by banks, and TD by staff. - TD tests: five-year horizon. - BU test: one-year horizon. - Regulatory capital adequacy minimums used: 4½ percent for Common Equity Tier 1 and 8 percent for total CAR. - Coverage: - CBR TD solvency stress test covered 681 banks based on Russian accounting standards (stand-alone). - BU stress test covered 12 banks (including 10 SIBs) accounting for two thirds of system assets. - Staff TD stress test used publicly available data for 37 banks accounting for about 82 percent of system assets, consolidated groups, based on IFRS. - Liquidity stress tests by CBR: three scenarios (mild, severe, very severe) with a one-month horizon, assuming no CBR or interbank financing. - Macroeconomic stress scenarios calibrated to tail events in the oil price distribution: - V-shaped scenario: oil prices fall to US$19 per barrel. - L-shaped scenario: oil prices fall to US$25 per barrel but recover more slowly. - Brent recovers to US$40 and US$37 in 2020 in the V-shaped and L-shaped stress scenarios, respectively. - Annual real GDP growth converges to one percent in both scenarios in the medium term (half a percentage point below 2020 baseline growth). - Staff adjustments to provisioning in TD stress test: - Restructured loans stand at about 30 percent of large loans; one third of restructured loans estimated to be of weaker quality at end-2015. - Migration of such loans increased loan impairment charges by 1 percentage point of total loans. - Under-provisioning accounted for an additional increase in loan impairment charges of 2.2 percentage points. - Overall effect of restructuring and under-provisioning assessed at about 3.3 percentage points. ### Stress test results and capital needs - Baseline results: - CBR’s baseline estimate: aggregate capital deficit of 0.3 percent of GDP (amount needed to bring all banks to at least the 8 percent CAR minimum). - Staff’s baseline simulations similar to CBR’s absent the asset quality adjustment; with the adjustment staff’s estimate of the aggregate capital deficit is 1 percent of GDP. - Tail scenarios (V-shaped and L-shaped) increase estimated capital needs: - CBR TD exercise: - Aggregate capital deficit reaches 2.5 percent of GDP (V-shaped) and 2.1 percent of GDP (L-shaped) by end of five-year horizon. - V-shaped: average system-wide CAR about 9 percent; 140 banks (30 percent of system assets) breach minimum capital requirements. - L-shaped: average system-wide CAR about 10 percent; 108 banks (29 percent of system assets) breach minimum capital requirements. - NPLs increase by 8.1 and 6.5 percentage points cumulatively in the V-shaped and L-shaped scenarios during the first two years. - BU analysis: - Banks’ own assessments are significantly less conservative than CBR’s. - Over one-year horizon, banks report a capital deficit under the V-shaped scenario that is 40 percent as large as in comparable CBR TD exercise; under the L-shaped scenario, less than 20 percent as large. - In the baseline, banks report essentially no capital deficit. - Staff TD exercise: - Aggregate peak capital deficit about 4½ percent of GDP during the stress test horizon in both V-shaped and L-shaped scenarios (includes staff’s adjustment to initial asset quality and increase in risk weights from 90 to 100 percent). - Without these adjustments, aggregate capital deficit about 2.5 percent of GDP, similar to CBR results. - Cumulative increase in NPLs in 2016 and 2016 is about 12½ percentage points with adjustments and 9.2 percentage points without adjustments. - Some large state-owned, private, and foreign banks breach minimum capital ratios under V-shaped and L-shaped scenarios even without the asset quality adjustment. - CBR has indicated readiness to take appropriate corrective action. *Source: IMF staff analysis contained in the provided chapter/section.* ### 31. The single factor test with the largest impact was the bankruptcy of banks’ five ### _cr16231 - 31. The single factor test with the largest impact was the bankruptcy of banks’ five ### Stress test findings: credit concentration and market risk - The single factor test with the largest impact was the bankruptcy of banks’ five largest borrowers. - The failure of each bank’s five largest corporate borrowers: - Results in a capital deficit in 338 banks (82 percent of system assets). - Totals about 2 percent of GDP. - Described as a highly unlikely event but illustrative of sensitivity to loan concentration. - Market risk tests showed only minor effects due to the small size of securities portfolios. Tests included: - An exchange rate depreciation of 20 percent. - An upward shift in the yield curve by 1,000 basis points for corporate securities and 400 basis points for government securities. - A stock market decline of 30 percent. - A combined FX and interest rate shock. ### Liquidity stress tests (CBR) — scenarios and outcomes - Mild scenario: - 36 banks (1.7 percent of system assets) show liquidity deficits. - Total shortage of less than 0.1 percent of GDP. - Strict scenario: - 111 banks (11 percent of system assets) show liquidity deficits. - Shortage of 0.4 percent of GDP. - Very strict scenario: - 181 banks (41.8 percent of system assets) show liquidity deficits. - Shortage of 2.9 percent of GDP. - Note: "These peak level deficits occur in different years, 2017 in the V-shaped scenario, and 2019 in the L-shaped scenario." ### Recommendations: stress testing, asset quality review, and related improvements - Key priorities for CBR’s stress testing and related capacity: - Implementation of modern, comprehensive, and integrated TD and BU methodologies covering not just banks but also affiliated entities. - Development of an “expected loss approach” for credit risk using probability of default, loss given default, and exposure at default. - Development of a credit registry to provide additional data. - Expanded use of the results of TD bank-by-bank stress tests in the bank supervision process, including for capital planning and dividend policy. - Possible publication of aggregate TD stress test results in the Financial Stability Review. - Enhanced system-wide stress tests for all banks, beginning with the large and medium-sized banks, using macro scenarios and key bank stress test parameter assumptions over a three-year horizon. - Additional recommended stress testing approaches: - Conduct stress tests on a consolidated basis to detect downstreaming of problematic assets by D-SIBs to unconsolidated subsidiaries. - Conduct liquidity stress tests by currency to detect shortages in particular currencies rather than only aggregate shortages. - Asset Quality Review (AQR) recommendation: - Conduct a granular and comprehensive AQR to support stronger bank capitalization, address asset classification and valuation weaknesses, and address related party lending. - CBR could conduct the AQR itself if third-party expertise is legally infeasible. - Ahead of the AQR, authorities should formulate a strategy to address weaknesses the AQR may uncover, including criteria for eventual use of public funds. - The AQR could be initially focused on banks deemed to present the highest risks. ### Liquidity management: operational framework and policy options - CBR actions to date and near-term considerations: - CBR began reducing liquidity provided to the banking sector in early 2015. - Reduced liquidity provision in 2015 helped, aided by RF spending. - Possible need to sterilize financing of the government deficit during 2016–17 may require increased coordination with the government. - Money market segmentation could mean short–term CBR refinancing co-exists with aggregate liquidity absorption. - Strengthening CBR’s operational framework: - For long-term operations, CBR would be a market rate taker. - Eliminate early pre-payment options to encourage broader distribution of liquidity. - Improve risk controls, particularly for non-marketable collateral. - Eliminate third-party bank guarantees as they can mask systemic risk. - FX facility (introduced late 2014): - Instrument was successful in containing FX spillovers into the ruble market. - Recommendation to withdraw it carefully at a pace commensurate with financial stability. - Possible withdrawal actions: changes to pricing, maturity, and access; collateral concentration limits; haircuts based on CBR risk tolerance; required repayment when counterparty FX buffers are restored. - Retain flexibility to use the instrument if market-wide strains recur. - Government and market instruments: - Government could re-introduce benchmark t-bills at the short end of the yield curve to: - Safeguard the CBR balance sheet. - Support transmission of monetary policy. - Separate strategic debt management from short-term liquidity management. - Reinforce Ministry of Finance role in developing securities markets. - Coordinate CBR and MoF on use of t-bills for sterilization of eventual structural excess liquidity. - Prefer t-bills for long-term sterilization to avoid multiple benchmark issuers. - Legal and market-development recommendations: - Legally formalize policies governing CBR’s realized capital reserves to underpin central bank solvency and independent policy capacity. - Deepen the interbank market to encourage banks to self-insure and manage risks. - Reforms to deepen markets should consider: - Continue resolving problematic institutions. - Refrain from using distortionary actions such as CBR guarantees. - Recalibrate facilities to incentivize holdings of marketable liquid assets. - Encourage term market funding. - Foster covered bond and commercial paper markets. ### Financial sector oversight and regulation — institutional and sectoral priorities - Institutional setup: - Since 2013, CBR has transformed into a “mega regulator,” overseeing banks, securities markets, FMIs, private pension funds, insurance, and micro-finance institutions. - Banking supervision developments: - Legislative impediments to supervisory information exchange have been eliminated. - Scope and application of consolidated supervision enhanced. - CBR has power to impose standards for risk management of banks and banking groups. - CBR is developing and enhancing a risk-based approach, including a dedicated division to supervise SIBs and regulations focusing on quality of risk management and governance. - Identified areas for supervisory improvement (five high priority areas from the BCP review): - The legal framework governing CBR’s relationship with the external audit profession is materially deficient; CBR lacks adequate powers with respect to external auditors. - Flow of information has improved but limitations remain; no requirements for banks or external auditors to notify CBR in advance, or at all, of material information relevant to bank soundness and stability. - Legal regime for related parties has been improved, but further action needed; law expanded scope of related parties and introduced economic linkages concept, with implementation not expected before 2017. - Management of country, transfer, and acquisitions risks needs improvement; limited requirements for management of these risks and minimum requirements for risk policies, processes, and limits need strengthening. - Oversight of operational risks needs enhancement; current operational risks are governed by CBR recommendations which should be converted into a comprehensive and mandatory operational risk management framework. - Financial markets oversight: - CBR has adopted IOSCO international standards and pursues a developmental role for nonbank financial markets. - Effective implementation of recent legislative/regulatory changes is yet to be tested. - Further action needed on: identification of conflicts of interest; protection of client interests; auditor independence; management of professional market participants; issuer prospectus and continuous disclosure regimes. - CBR has comprehensive enforcement powers but currently relies on checking compliance with many detailed rules; recommendation to move to a qualitative, principle-based, fully risk-based, proactive regime. - Insurance supervision: - Shift gradually from rules-based to transparent risk-based approach. - Strengthen staff skills and information systems. - Introduce an actuarially backed solvency standard and establish core role of actuaries. - Financial Market Infrastructures (FMIs) and payments: - Adopt holistic oversight; establish a standing coordination committee chaired by top management of CBR. - Key priorities include: - A refined business continuity plan for NSD to complete settlement by end of day in all scenarios. - Introduction of intraday variation margin calls by NCC for all market segments irrespective of settlement cycles. - Stronger CBR regulations on protecting client funds collected by e-money operators. - Interoperability of all payment systems. - Reduction of CBR’s residual credit risk by developing ability to call for additional collateral on the day of liquidation. - Consolidation of relevant legislation and alignment with the international Principles for Financial Market Infrastructures. - AML/CFT: - Important legal and supervisory steps taken, including amendments addressing identification of beneficial owners and PEPs, improved institutional capacity (Rosfinmonitoring and CBR). - Further enhancements needed: - Improve CBR’s understanding of banks’ ML/TF risks and bolster risk-based supervisory tools for targeted inspections. - Make related beneficial ownership information available, regularly updated, and more accurate. - Effective implementation of draft law requiring legal entities to disclose beneficial ownership information is essential. - Address deficiencies in PEP definition, weak implementation of PEP measures by banks, and low number of STRs. - Provide further guidance to banks on identification and verification of beneficial owners in complex structures and PEPs. - Improve timely feedback from Rosfinmonitoring to banks to enhance STR quality and timeliness. - Complete the national risk assessment and adopt prioritized policies and activities to improve understanding of ML/TF risks. ### Macroprudential policies - Institutional arrangements: - Oversight responsibilities shared between CBR and the National Council on Ensuring Financial Stability (FSC). - CBR has become the macroprudential authority given its single-regulator and financial stability mandate. - Recent macroprudential actions: - Tightened provisioning requirements and increased capital risk weights to curb unsecured consumer lending. - Differentiated capital risk weights for mortgage lending based on loan risk characteristics. - Imposed stricter reserve requirement on banks’ non-retail foreign-currency deposits and higher capital risk weights on certain foreign currency exposures to reduce dollarization. - Recommendation: - Expanded use of macroprudential tools could help safeguard financial stability in the medium term. - Additional analysis of macrofinancial linkages to oil price swings is called for, and consideration of larger macroprudential solvency and liquidity buffers, accounting for potential policy leakages. - Macroprudential tools could support dedollarization but should be motivated primarily by systemic risk mitigation. *Source: IMF staff report text provided in the content unit.* ### 57. The CBR Law should be amended to provide for a more comprehensive set of ### 57. The CBR Law should be amended to provide for a more comprehensive set of ### Macroprudential framework - Finding: The current law does not envisage the full set of recognized macroprudential tools, such as limits on loan-to-value and debt service-to-income ratios. - Recommendation: The law should be amended to provide an adequate legal foundation for the development and use of the full range of macroprudential tools on an ex-ante basis. ### Systemic risk monitoring and assessment - Finding: CBR has the necessary technical capacity for systemic risk monitoring and assessment, but additional work would be desirable. - Recommended additional work: - conduct an early warning exercise to detect vulnerabilities; - carry out macroprudential stress testing that accounts for second-round effects, solvency-liquidity links, and cross-sectional linkages; - focus more on “connecting the dots.” - Recommendation for communication: The Financial Stability Review would benefit from a clearer presentation of systemic risks and vulnerabilities, the propagation of risks through macrofinancial linkages, and the resilience of the banking system to shocks. ### Crisis management and resolution — A. Lender-of-Last-Resort - Finding: CBR’s framework for systemic liquidity provision has proven effective. - Recommendations to formalize and strengthen framework: - introduce a discretionary framework to provide temporary direct liquidity support to solvent and viable institutions based on adequate collateral and at a spread to market rates; - establish that all non-monetary policy related lending would fall under this discretionary framework; - provide government indemnities to CBR when it has concerns about the entity, collateral, length, size of support, or exit strategy. - Operational elements to introduce: - an appropriate governance and stakeholder coordination framework to ensure a cohesive and timely response; - “horizon scanning” so that exceptional liquidity needs can be anticipated to the extent possible; - an improved understanding of the underlying need for liquidity along with ex-post monitoring by CBR so that moral hazard is minimized; - an appropriate disclosure and communication strategy agreed among all relevant stakeholders. ### Crisis management and resolution — B. Bank Resolution - Institutional roles: - CBR is the resolution authority responsible for determining entry into resolution and the resolution method to be used. - DIA is responsible for the operational aspects of bank resolution and may agree with or deny CBR’s proposal for its participation, based on the principles of fairness and reasonableness, the bank’s financial position, or the impact on its financial position. - DIA may provide financing, either through the Deposit Insurance Fund (DIF) or on its own account, with funding by CBR loans or the government. - Recent activity and figures: - Since January 2014, 28 banks were put into open bank resolution using public funds amounting to 1.1 percent of GDP. - Over the same period, CBR has revoked licenses of 214 banks, resulting in deposit insurance payouts amounting to 0.8 percent of GDP. - P&A transactions have only been used in three cases. - Identified weaknesses and recommendations: - Many banks entering resolution are deeply insolvent, with a large deficit to be covered by public funds, partly reflecting frequent misreporting of financial information. Recommendation: early intervention based on strong supervision. - Authorities have preferred to save entire failed banks rather than ensure continuity of critical functions through P&A transactions. Recommendation: adopt the full range of resolution powers recommended by the FSB Key Attributes to reduce reliance on open bank resolution and minimize public funds use. - An improved resolution framework with better incentives could be applied to larger banks, though it may not fully address issues in the largest, systemically important banks. - Legal and operational changes to widen use of P&A transactions: - The mandatory DIF may not be used to fund the negative balance between the transferred assets and the liabilities subject to a least cost test. A draft bill is being considered to provide for such funding powers. - Authorities are generally required to transfer all liabilities in the same priority class; recommendation: allow authorities to determine scope of liabilities to transfer subject to the principle that no creditor is worse off than in liquidation. - Assets can only be transferred at face value; recommendation: adopt a fair value approach to increase feasible P&A transactions. - Overvaluation of assets and fraud impede preparation for P&A transactions; recommendation: use a bridge bank to temporarily transfer assets and liabilities to provide time to find an acquirer. - Expanded resolution powers needed: - Strengthen CBR’s power to take control of a bank in resolution so CBR or a provisional administrator can take over decision-making bodies and override shareholder rights, including requirements for approval of particular transactions, forced recognition of losses, and limitation of preemption rights. (Currently, such broad powers are only provided to a provisional administrator appointed when bankruptcy prevention measures are taken with DIA participation.) - Authorities’ plan to introduce statutory bail-in powers could be useful in raising necessary capital for recapitalization, particularly for large and complex banks. Note: A bill is being drafted to provide CBR with the power to conduct a statutory bail-in. The specifics need careful consideration, paying due regard to the consistency with the creditor hierarchy in liquidation and the financial condition of the banking sector. - Consider introducing the power to establish bridge banks and asset management companies; to temporarily stay early termination rights; and to require group entities to provide continuity of services. - Safeguards and compensation: - All creditors should be compensated if they do not receive at a minimum what they would have received in liquidation. - While respecting the hierarchy of creditor claims in liquidation, the legal framework should permit departure from pari passu treatment of creditors in clearly specified circumstances. - Funding and governance of resolution: - Recommendation: discontinue CBR financing of the DIA for resolution. Financing that does not meet the requirements of the central bank’s lender-of-last-resort function should in principle be provided by the federal government. - In the medium term, arrangements need to be made to recover public outlays from the financial industry. - On subsidized loans for solvency support: - Finding: Funding mostly takes the form of DIA long-term collateralized loans at below-market rates. - Example terms: Loans are typically provided for 10 years at 0.5 percent interest (compared to market rate of 10–11 percent). - Drawbacks identified: - Over the maturity, the interest rate difference vis-à-vis market funding provides a subsidy to cover the negative balance and improve capital base, making resolution lengthy with intensive monitoring and regulatory forbearance by CBR. - As loans are collateralized, resolved bank’s assets are heavily encumbered, reducing access to market funding and constraining restructuring. - Recommendation: Asset injections rather than subsidized loans are likely to be more efficient in many cases where solvency support is necessary to ensure orderly resolution. - Decision-making changes if DIA financing changes: - If CBR loans are no longer provided, resolution measures involving the temporary use of public funds would need to be approved by the MoF. - All other resolution measures taken within the least cost test or out of systemic necessity, without resorting to public funds, would be decided by CBR in consultation with the DIA. - Deposit insurance and depositor preference: - Authorities are considering expanding the scope of deposit insurance coverage to certain corporate entities to facilitate payout process and help protect small corporate depositors. - Recommendation: introduce a two-tiered depositor preference rule—which puts insured deposits ahead of uninsured deposits in liquidation, and both of these ahead of other senior unsecured creditors—to reduce costs to the mandatory deposit insurance fund. - Legal protection for resolution authorities: - Recommendation: strengthen legal protection of resolution authorities and their staff and agents against liability for actions taken and omissions made while exercising professional judgment in discharging duties in good faith. - Recommendation: law should not constrain implementation of, or result in reversal of, measures taken by resolution authorities acting within legal powers and in good faith; instead provide for redress through monetary compensation, if justified. ### Banking sector development priorities — A. Structure and Governance - Finding: The structure and governance of the banking system will need to continue to evolve to improve efficiency and stability. - Issues identified: - Large banks (in particular majority state-owned banks) play a dominant role, which may reduce competition and the efficiency of financial intermediation and may involve fiscal costs if problems occur in major SOBs. - Authorities’ approach is gradual, combining further gradual privatization, increased competition, and closure of weak banks, to be implemented over time. - Recommendations: - Further gradual privatization is desirable as economic conditions permit; privatization should wait until the economy recovers from the current deep recession. - Secure anchor investors for successful privatization; success will depend to some extent on developments in sanctions. - Support less concentrated distribution of bank assets to enhance competition and efficiency; VTB Group development of the postal banking network may provide a large-scale alternative to Sberbank in markets for small deposits and other retail financial services. - Increased financial inclusion could support a gradual gain in market share of private banks. - Reassigning ownership and a new legal and regulatory framework could help increase board effectiveness by reducing the share of government officials and aligning decision-making with commercial objectives. - Enhance financial soundness of SOBs by obliging the government to cover the cost of any subsidized activities in its annual budget, and by ensuring that lending rates are not lower than the cost of funding. - Specific institutional concern: - The role of CBR as both the major shareholder and the regulator of Sberbank is an unusual feature; while it has worked reasonably well in practice, the conflict of interest may be an obstacle to a longer-run transition to a more market-oriented and competitive banking system. *Source: _cr16231 - 57. The CBR Law should be amended to provide for a more comprehensive set of (PDF).* ### 77. Financial inclusion varies significantly and a national strategy is needed. Account ### 77. Financial inclusion varies significantly and a national strategy is needed. Account ### Financial inclusion: coverage, gaps, and strategy - Account penetration stands at 67.4 percent of adults. - Account penetration is described as higher than the regional average but somewhat below high-income non-Organization for Economic Cooperation and Development (OECD) countries. - There are large variations in financial inclusion between urban and rural areas and across income and age groups. - Account usage is often limited. - There is a lack of appropriate savings products for the underserved. - The Central Bank of Russia (CBR) is currently leading the effort to develop a comprehensive financial inclusion strategy. - The strategy will require endorsement of a range of public and private stakeholders to be successful, including stakeholders that can facilitate increased use of modern electronic financial services. ### Banking system structure and funding - The banking system is described as highly concentrated at the top and fragmented at the bottom; state-owned banks dominate. - Loan market share of top 10 banks (2015) highlights major players (shares shown in figure; top individual shares cited include Sberbank, 33; VTB Group, 17; Gazprombank, 7; Otkritie Group, 6; Russian Agricultural Bank, 4; Alfa-Bank Group, 3; Soc Gen Group, 2; Unicredit Bank, 2; Promsvyazbank, 2; Raiffeisen Bank, 1; Others, 24). - Banks rely mainly on deposits from individuals and non-financial corporations for funding. - The share of short-term funding reached 50 percent at end-2015. - Household deposits show a moderately concentrated system in the context of somewhat lower efficiency. - Indicators of financial depth (2013): Private-Sector Credit, Pension Fund Assets, Mutual Fund Assets, Insurance Premiums are presented as percent of GDP (Russia vs comparators) in the figures. ### Bank capital, liquidity, and profitability - Capital ratios remained stable due to capital injections and the use of regulatory forbearance to shield risk-weighted assets from the impact of the depreciation. - Liquidity dried up following a strong outflow of retail deposits in December 2014; this was compensated by CBR interventions to support system liquidity. - Since the interventions, confidence returned and liquidity improved amid declining loan-to-deposit ratios. - Net income and profitability trends: - Bank profitability declined sharply since 2010, reflecting lower net interest margins and higher provisions. - Net interest income has declined; net fees and commissions have declined; cost reductions partially offset declines. - Loan impairment charges have not reached 2009 levels. - Capital adequacy and related metrics shown in figures: - Capital to risk-weighted assets and Core capital to risk-weighted assets series (figures) with regulatory minima indicated. - Equity to Total Assets of Russian Banks (figure series). - Bank performance by asset-size segments (2014–15): - Banks in the 21–50 segment remained the weakest performers with two years of negative profits; the system’s overall profits remained positive due to the top 1–5 banks. - Top 20 banks benefited from a capital support program in the third quarter and saw more retail deposit inflows in the fourth quarter than other segments. - Retail loans continued to decline, most prominently in the 21–50 segment. ### Asset quality and sectoral vulnerabilities - Nonperforming loans (NPLs) remain lower than their 2008 peak, but provisions are higher once FX loans, loans to financial institutions, and governmental institutions are excluded. - Overdue ruble loans have increased primarily in the construction and retail trade sectors. - Overdue foreign-exchange loans have risen primarily in the real estate, agriculture, and mining sectors. - Nearly 25 percent of the construction portfolio is overdue (figure caption: "Nearly 25 percent of the construction portfolio is overdue"). - FX loan performance is weak in agriculture, mining, and machinery and equipment portfolios (figures). ### Stress tests and solvency implications - Stress test scenarios (V-shape, L-shape, Baseline) show: - Loan impairment charge increases as loan quality deteriorates. - Interest income decreases due to shrinking margins. - Output declines sharply in adverse scenarios; medium-term growth is modest, reflecting oil price outlook. - Stress test results (V-shaped scenario): - Credit losses peak in the first two years (figure time series 2016–2020). - Capital deficit increases are similar in CBR’s and staff’s stress tests (figures). - Average capital ratios (CBR) bottom out in 2017 and recover by 2020 (figure). - Median capital ratios (staff) breach total capital ratio threshold (CAR Threshold) in 2017, and recover slightly above by 2020 (figure). - Total capital deficit (staff) is about 2½ percent of GDP (CBR and staff), with additional capital charge of about 2 percent of GDP due to asset quality adjustments. - When adjusting for forbearance, median capital ratios (staff) are more affected. - Note in figures: "Note: R=Restructuring; P=Provisioning; RW=Risk Weight. *Includes credit, market, interest, and liquidity risk. **Covers about 80% of total banking assets." ### Selected macroeconomic projections and fiscal indicators (high-level figures from Table 2) - Real GDP projections (annual percent change): - 2016: -1.2 - 2017: 1.0 - 2018: 1.2 - 2019: 1.5 - 2020: 1.5 - 2021: 1.5 - Consumer prices (period average): - 2015: 15.5 - 2016: 7.5 - 2017: 5.7 - 2018: 4.6 - 2019–2021: 4.0 (each) - Unemployment rate: 2016: 6.5; 2017–2021: 6.3, 5.6, 5.5, 5.5, 5.5 respectively (table entries). - General government net lending/borrowing (overall balance, percent of GDP): - 2016: -3.7 - 2017: -1.6 - 2018: -1.1 - 2019: 0.0 - 2020: 0.4 - 2021: 0.4 - Gross international reserves (billions of U.S. dollars): - 2016: 373.1 - 2017: 387.8 - 2018: 415.2 - 2019: 450.0 - 2020: 491.9 - 2021: 535.1 - Memorandum—Nominal GDP (billions of rubles): 2016: 85,722; 2017: 91,376; 2018: 96,186; 2019: 101,582; 2020: 107,213; 2021: 113,186. - Memorandum—Nominal GDP (billions of U.S. dollars): 2016: 1,270; 2017: 1,410; 2018: 1,477; 2019: 1,569; 2020: 1,656; 2021: 1,738. ### Key policy recommendations and risk responses (from RAM and text) - For persistently lower energy prices (High likelihood; High impact): - Keep a floating exchange rate to cushion the shock. - Fiscal policy could temporarily use existing buffers within a medium-term framework that ensures consolidation. - Advance structural reforms to improve economic efficiency and enhance diversification. - For increased geopolitical tensions (Medium likelihood; Medium impact): - Floating exchange rate to cushion shock; FX intervention can counter disorderly market conditions. - Consider an interest rate increase; postpone fiscal tightening if needed. - For a weaker banking system persisting (Medium likelihood; Medium impact): - Require weak banks to submit time-bound recapitalization plans to bring capitalization closer to regulatory minima under an adverse stress scenario. - For weak viable government-related banks, consider precautionary capital injections. - For a sharper-than-expected global growth slowdown (Low/Medium likelihood; Medium impact): - Allow exchange rate adjustment; counter disorderly market conditions with intervention. - Rebuild fiscal buffers and oil savings by tightening fiscal rule if prices are lower. - Advance structural reforms to enhance economic efficiency and diversification. - For continued drop in domestic investment and inward-looking policies (Low likelihood; Medium impact): - Focus on structural and governance reforms to improve the investment climate. - Avoid distortive measures; leverage real exchange rate depreciation while increasing trade openness. *Source: IMF staff report excerpt, Russian Federation (figures, tables, and text provided in the content unit).* ### 1. Institutional Perimeter ### 1. Institutional Perimeter ### Institutions included and market share - Institutions included: - Top 37 - 681 - 12 large banks (including 10 systemically important banks) - Market share: - 81.5 percent - 99.7 percent - 66 percent - Data and baseline date: - Institutions’ public data, up to 3rd Q 2015 - Consolidated banking group, and stand-alone basis - Public data and other data, up to 4th Q 2015 - Stand-alone basis - Institutions’ own data; up to 4th Q 2015 - Stand-alone basis ### Channels of Risk Propagation (methodology and models) - Methodology: - Balance-sheet model (loan impairment charge/ provisions/NPLs) - Supplemental balance sheet analysis of impact of restructuring and under-provisioning - Balance-sheet model (NPLs/provisions) - Banks’ internal models - Satellite Models for Macrofinancial linkages: - Models for credit losses, NPLs, loan impairment charge, pre-impairment income - Satellite model bank by bank using IFRS data - Models for credit losses, NPLs, provisions, pre-impairment income - CBR macro model has second round effects related to the dependency between credit growth and growth of fixed capital investments - Own models - Stress test horizon: - Five years, 2016–20 - Five years, 2016–20 - One year ### Tail shocks — scenario analysis and sensitivity - Scenario analysis: - Macro scenarios are shocks conditioned upon oil price, GDP, exchange rate, inflation, interest rates, unemployment - Baseline, adverse V-shaped scenario, adverse L-shaped scenario (magnitude of shocks derived from adverse oil price scenario plus macro model) - Macro scenarios are shocks conditioned upon oil price, GDP, exchange rate, inflation, interest rates, unemployment - Baseline, adverse V-shaped scenario, adverse L-shaped scenario - Macro scenarios are shocks conditioned upon oil price, GDP, exchange rate, inflation, interest rates, unemployment. - Baseline, adverse V-shaped scenario, adverse L-shaped scenario - Sensitivity analysis: - Not performed by staff - Single-factor shocks are applied; concentration risk: default of top five borrowers; market risks: FX 20 percent depreciation, equity 30 percent decline, interest rate +1000 bps corporate bonds and+400 bps, government bonds - Not performed by banks ### Risks and buffers (risk elements, behavioral adjustments) - Risks/factors assessed: - Credit losses, profitability, income after tax, funding costs, exchange rate - Credit losses, profitability, income after tax, funding costs, market risk, fixed income holdings of banks/sovereigns, exchange rate - Same as authorities TD stress tests - Behavioral adjustments: - Dividend payout can be restricted by CBR. - Dividend payout can be restricted by CBR. - Banks’ internal models ### Regulatory and market-based standards and parameters - Calibration of risk parameters: - NPLs/provisions - RWA according to standardized approach - Risk weights increase from 90 percent to 100 percent in the prudent approach - NPLs/provisions - RWA according to standardized approach - Own methodologies - RWA similar to authorities stress tests - Regulatory/Accounting and Market-Based Standards: - Hurdle rate: Basel III schedule, local regulatory requirements - Hurdle rate: Basel III schedule, local regulatory requirements - Hurdle rate: Basel III schedule, local regulatory requirements - CET1 of 4.5 percent, CAR of 8 percent - CET1 of 4.5 percent, CAR of 8 percent - CET1 of 4.5 percent, T1 of 6 percent, CAR of 8 percent ### Reporting format for results - Output presentation: - Dispersion of capital ratios: median - Capital deficit, system wide - Pass or fail; percentage of assets that fail - Number of banks undercapitalized - Distributions by capital ratio: weighted average - Capital deficit, system wide - Pass or fail; percentage of assets that fail - Number of undercapitalized banks - Capital shortfall, system wide. - Pass or fail; percentage of assets that fail - Number of banks undercapitalized ### Asset quality adjustment - Stress testing methodology: - Adjustment for weak restructured loans and under-provisioning lead to one-off increase in provisions at beginning of stress testing period - Not performed by authorities - Not performed by banks ### Banking sector: Liquidity risk (assumptions and metrics) - Institutional perimeter for liquidity: - Carried out by authorities with agreed scenarios - 681 - Banks included in authorities liquidity scenarios - Market share: - N/A - 99.7 percent - N/A - Data and baseline date: - N/A - Institutions’ public data and other data up to 4th Q 2015 - Stand-alone basis - N/A - Channels of risk propagation (methodology): - N/A - Cash outflow asset discounts and sensitivity analysis for liquidity risk - N/A - Risks and buffers: - N/A - Outflows from liabilities liquidity shock - Discounts on assets - Market liquidity shock - N/A - Buffers: - N/A - Counterbalancing capacity stand-alone - N/A - Tail shocks — size of the shock: - N/A - Bank run and dry up of wholesale funding markets, taking into account haircuts to liquid assets - N/A - Detailed one-period outflow assumptions and haircuts: - Outflows: household deposits-30 percent (10 percent largest bank); legal entities 30 percent; corporate settlement and other accounts-40 percent (20 for largest bank); interbank loans non-resident 50 percent; interbank loans resident 40 percent (20 for largest bank) - Haircut: highly liquid asset, 5 percent; liquid asset 20 percent; low-liquid asset 65 percent - Regulatory standards and reporting: - Regulatory standards: N/A - Amount of liquidity deficit and number of banks with liquidity deficit: N/A - Output presentation: Amount of liquidity deficit and number of banks with liquidity deficit (N/A where indicated) ### Macroeconomic scenarios: Projections, 2015–20 (Table 6) - A. Baseline Scenario (2015–2020): - Real GDP (%): -3.7 -1.0 1.0 1.5 1.5 1.5 - Brent price (USD/bbl, avg.): 53 43 50 54 57 60 - Exchange Rate (RUB/USD, avg.): 61 73 68 64 62 61 - Inflation (%, avg.): 15.5 8.3 7.0 5.0 4.0 4.0 - Short-term Interest Rates (%, avg.): 11.0 8.5 5.5 5.5 5.5 5.5 - Unemployment (%, avg.): 5.6 6.4 6.1 6.0 6.0 6.0 - B. V-Shape Scenario (2015–2020): - Real GDP (%): -3.7 -7.8 2.6 2.9 1.1 1.0 - Brent price (USD/bbl, avg.): 53 19 24 32 36 40 - Exchange Rate (RUB/USD, avg.): 61 100 88 75 71 67 - Inflation (%, avg.): 15.5 15.9 6.1 4.0 4.2 4.2 - Short-term Interest Rates (%, avg.): 11.0 17.7 7.6 5.4 5.7 5.7 - Unemployment (%, avg.): 5.6 9.5 9.2 8.0 7.4 6.9 - C. L-Shape Scenario (2015–2020): - Real GDP (%): -3.7 -5.7 -0.3 1.7 1.1 1.0 - Brent price (USD/bbl, avg.): 53 25 25 29 33 37 - Exchange Rate (RUB/USD, avg.): 61 88 91 83 78 74 - Inflation (%, avg.): 15.5 13.3 5.4 4.1 4.2 4.2 - Short-term Interest Rates (%, avg.): 11.0 15.2 6.9 5.5 5.7 5.7 - Unemployment (%, avg.): 5.6 8.9 9.5 8.6 8.0 7.4 ### Detailed stress test results (selected metrics, Table 7) - Top-down, CBR1/ without asset quality adjustment: - CET1 capital ratio2/: 7.9 8.1 8.1 8.3 8.3 5.9 4.6 5.8 6.3 7.2 6.3 5.2 5.6 6.1 6.7 - Total capital ratio2/: 12.3 12.5 12.6 12.7 12.8 10.6 9.0 10.1 11.0 11.9 11.0 10.2 10.7 11.3 11.8 - Top-down, Staff3/ without asset quality adjustment: - CET1 capital ratio4/: 9.0 8.4 10.1 12.4 14.8 5.4 4.6 5.5 6.2 7.4 6.5 4.8 5.2 5.9 6.5 - Total capital ratio4/: 12.5 12.8 13.3 14.2 16.2 8.7 7.5 8.0 8.4 9.0 9.7 8.1 7.8 8.4 8.8 - Top-down, Staff3/ with asset quality adjustment: - CET1 capital ratio4/: 6.0 5.5 7.2 9.5 11.8 1.6 0.8 1.7 2.3 3.3 2.5 1.0 1.4 2.0 2.6 - Total capital ratio4/: 9.5 9.9 10.3 11.2 13.2 4.5 3.5 3.9 4.2 4.8 5.5 3.9 3.8 4.2 4.7 - Top-down, CBR1/ SumSumSum without asset quality adjustment: - Credit losses5/: 1.2 1.7 0.8 0.6 0.5 4.8 3.4 4.7 1.4 0.9 0.7 1.1 2.8 3.7 1.5 0.9 0.7 0.7 9.6 - Total capital deficit6/7/: 0.1 0.2 0.2 0.2 0.3 0.5 1.5 1.9 2.2 2.5 0.4 1.2 1.6 1.9 2.1 - Top-down, Staff3/ without asset quality adjustment: - Credit losses5/: 2.9 1.9 1.7 1.8 1.8 10.2 6.8 2.1 1.8 2.5 2.5 15.8 5.8 3.5 2.4 2.6 2.5 16.7 - Total capital deficit6/: 0.1 0.2 0.3 0.4 0.4 0.7 1.4 1.7 2.1 2.4 0.4 1.3 1.8 2.3 2.7 - Top-down, Staff3/ with asset quality adjustment: - Credit losses5/: 6.2 1.9 1.7 1.8 1.8 13.5 10.1 2.1 1.8 2.5 2.5 19.1 9.1 3.5 2.4 2.6 2.5 20.0 - Total capital deficit6/: 0.5 0.8 0.9 1.0 1.0 3.8 4.6 4.4 4.3 4.2 3.0 4.0 4.3 4.4 4.4 - Top-down, CBR1/ without asset quality adjustment — No. of banks with capital deficit1/: - 34 36 27 23 19 72 140 76 342 96 210 86 73 51 9 - Share of banks with capital deficit /: 86.8 7.0 6.2 6.1 5.7 19.1 29.7 18.7 5.8 5.4 17.2 28.9 15.5 6.4 4.9 - Top-down, Staff3/ without asset quality adjustment — No. of banks with capital deficit3/: - 7 7 9 9 9 16 20 19 18 16 13 18 19 18 17 - Share of banks with capital deficit /: 88.4 11.8 15.0 15.0 15.0 37.0 40.0 40.0 39.4 38.1 34.8 38.4 39.4 39.4 39.0 - Top-down, Staff3/ with asset quality adjustment — No. of banks with capital deficit3/: - 15 15 15 14 12 27 28 26 25 23 27 25 26 27 25 26 24 - Share of banks with capital deficit /: 83 7.0 37.0 37.0 37.7 37.5 18.7 86.5 86.8 83.5 83.3 44.3 86.5 83.2 83.4 83.3 44.3 - Notes: - 1/ Based on a sample of 681 banks. - 2/ Asset weighted mean. - 3/ Based on a sample of largest 37 banks. - 4/ Median - 5/ In percent of total loans. - 6/ In percent of GDP. - 7/ Includes also market and liquidity risk. - 8/ In percent of sample total assets. ### Appendix I — 2011 FSAP Stability Module Recommendations Status (summary) - Many key recommendations of the 2011 FSAP have been addressed - Context: - At the time of the last FSAP, the economy and financial sector were on the road to recovery following the GFC. The 2011 FSAP noted the authorities’ decisive and broad-based policy response, which successfully supported financial stability during the crisis. Banks’ profitability was improving and stress tests suggested resilience to a variety of sizeable shocks. However, progress toward a more competitive banking system has been slow, as governance continued to be weak and concentration and moral hazard increased. - Actions taken since 2011: - The scope of the regulatory parameter has been widened to banking groups and CBR has been granted information powers in relation to holding companies; the CBR has also been granted the power to impose standards for risk management of banks and banking groups; to use professional judgment in applying laws and regulations; and share without restrictions information with other domestic authorities and foreign supervisors. - Unified legislation was adopted for the resolution of all banks making permanent the temporary resolution powers introduced in 2008, improving coordination (domestic and cross border) and providing greater powers to sanction owners and managers of failing institutions. The legislation does not apply to bank holding companies. - The authorities have strengthened the macroprudential policy framework, including the establishment of a high-level inter-agency advisory body on systemic risk issues and the CBR’s Financial Stability Committee. - The CBR has been empowered to appoint a provisional administrator and wind down distressed securities firms. These powers need to be strengthened further. *Source: IMF staff calculations.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16231.pdf_