## 1. Structure of Nonbank Financial Organizations as of September 30, 2015

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### Overview and market structure
- Banking remains the most significant sector; bank assets amounted to 103 percent of GDP at end-2015.
- Nonbank financial institutions (NFIs) primarily include insurance companies, private pension funds, mutual funds, and microfinance organizations.
- Banking consolidation: from 1,311 banks in 2001 to less than half that number by end-2015.
- The largest 20 banks account for three quarters of system assets.
- Government-related banks (dominated by Sberbank and VTB Group) accounted for 60 percent of system assets at end-2015.
- Top 10 private universal banks hold 16 percent of system assets; foreign-owned banks 13 percent; 11 percent is in specialized and small banks.
- Lending concentration: top 10 banks by assets accounted for about 70 percent of lending as of January 2016.
- Many small banks operate in mono-industrial cities and can be systemically important regionally.

### Key statistics (Table 1)
- Insurance entities: Active Organizations 509; Assets (in billions of rubles) 1,626.70; Capital (in billions of rubles) 429.6
- Non-state Pension funds: Active Organizations 110; Assets (in billions of rubles) 2,822.90; Capital (in billions of rubles) 146
- Mutual investment fund: Active Organizations 1,542; Assets (in billions of rubles) 2,560.30; Capital (in billions of rubles) 2,303.9
- Microfinance organizations: Active Organizations 3,500; Assets (in billions of rubles) 62.4; Capital (in billions of rubles) 48.4
- Professional securities market participants: Active Organizations 540; Assets (in billions of rubles) 753.6; Capital (in billions of rubles) 281.4
- Source indicated in table: CBR.

### Recent sector performance and macro context
- Capital adequacy ratio: about 13 percent since March 2015, then declined to about 12 percent in early 2016 as regulatory forbearance was lifted.
- Capital issuance increased over 2015, offsetting decline in retained earnings.
- Loan-to-deposit ratio decreased to 115 percent by end-2015 (returning to the level of mid-2013).
- Profitability: return on assets reached 0.3 percent at end-2015.
- NPLs have increased but remain below their 2008 peak.
- Macroeconomic context:
  - CBR switched to a floating exchange rate regime in mid-November 2014.
  - Policy rate: emergency hike to 17 percent in December 2014; unwound from end-January 2015; current policy rate reported at 11 percent.
  - Inflation target set at 4 percent, to be achieved by end-2017.
  - In 2015 the Russian currency lost almost 20 percent of its value vis-à-vis the U.S. dollar.
  - 2015 budget deficit required use of the Reserve Fund and GDP growth in 2016 is expected to be negative again.
  - Government debt around 20 percent of GDP.
  - Ministry of Finance announced a review of the Federal budget for 2016, including consideration of reductions in budget expenditures and sales of some government shares in state-owned companies.

### Regulatory and institutional developments
- Since 2014 CBR became the “mega regulator” absorbing regulatory and supervisory powers for all financial institutions and given an explicit financial stability mandate.
- Basel III capital ratios entered into force in 2013.
- Basel Liquidity Coverage Ratio being phased in per Basel timetable for systemically important banks with target 100 percent compliance on January 2019.

*Source: Excerpt from IMF staff assessment document as presented in the chapter titled "1. Structure of Nonbank Financial Organizations as of September 30, 2015."*

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### Collateral realization, accounting, payments, and supporting infrastructure

### Collateral realization efficiency
- It may take two years after a court decision for a credit organization to acquire collateral in a loan default; collateral may deteriorate in value and banks may be asked to create reserves.

### Accounting framework and IFRS adoption
- Financial reporting framework determined and regulated by the state; MoF is official standard-setter and endorsement body of IFRS.
- Under Law No. 208-FZ and Government Decree No 107, IFRS are to be applied in Russia based on a Russian translation prepared by the MoF.
- For credit institutions, CBR needs to approve accounting standards, including Russian Accounting Standards (RAS).
- Authorities state RAS are being brought into compliance with IFRS and will be fully in line by 2017.
- Both IFRS and RAS are currently used:
  - IFRS required for consolidated financial statements of the majority of financial entities and for companies with securities listed on stock exchanges.
  - All legal entities must prepare stand-alone financial statements based on RAS.
- RAS never adopted IAS 39; IAS 39 was replaced in July 2014 by IFRS 9 which will be adopted by 2018.
- Other differences (e.g., impairment testing of fixed assets) recommended by CBR since 2013 and will become mandatory in 2016.
- MoF has not granted any exemptions that apply under IFRS.

### Audit framework and market structure
- Annual audit required by the Auditing Law; audits governed by federal auditing standards and Code of Professional Ethics of Auditors.
- Audit firms/auditors must be independent, comply with audit secrecy, and be members of self-regulating organizations of auditors.
- Audit firm requirement: 50 percent of the collegial executive body must be auditors; firms may bid with just 2–3 auditors.
- As of 2014, there are 3,400 certified auditors in Russia.
- International firms broadly cover IFRS; smaller domestic firms cover RAS.
- Material deficiencies exist in legal framework restricting supervisor powers over external auditors (see recommendations).

### Payment and clearing systems
- BRPS components: VER, MER, BESP system, and a payment system based on letters of advice.
- Other systemically important payment system: PS NSD (part of OJSC MICEX-RTS Moscow Exchange).
- Four payment systems considered important for consumption: CONTACT, Visa, Golden Crown, and MasterCard.
- Another 25 payment systems in operation.
- CBR adopted National Payment System Development Strategy in 2013; focus areas included consumer protection, automation of government payments, and adoption of ISO 20222 standards.
- Supervision covers money transfer operators; 33 payment system operators; payment infrastructure service operators; 35 operation centers; 36 payment clearing centers; 32 settlement centers; 97 electronic money operators; and the Federal State Unitary Enterprise Russian Post.
- Electronic money growing in importance and CBR is enhancing regulation and supervision.

### Credit bureaus and statistics
- Russia has 21 functioning credit bureaus per State Register.
- As of December 2015, credit bureaus kept records of 81.6 million individuals and over 485,000 legal entities.
- Amendments in 2014 and 2015 abolished need for borrowers’ consent for credit institutions to send information to a credit bureau and provided CBR power to request and receive credit history reports.
- CBR keeps the central catalogue of credit histories.
- CBR publishes a range of statistics and analysis; Federal State Statistics Service publishes social statistics; financial sector statistics published monthly.

*Source: _cr16232 - 22.      Efficiency of the system in the realization on collateral could be further improved.*

---

### Crisis management, resolution, deposit insurance, and systemic protection

### Crisis management, recovery, and resolution framework
- CBR and the Deposit Insurance Agency (DIA) have been extensively involved in bank resolution and rehabilitation.
- DIA acts as deposit insurer and corporate receiver/liquidator of failed banks; entitled to resolve banks participating in the deposit insurance system.
- In 2014 and 2015 DIA assigned additional functions: insurance of funds in non-state pension funds and injection of capital to banks.
- During 2015 CBR sent DIA proposals for participation in bankruptcy preventions of 18 banks.
- As of February 25, 2016, 30 banks were under bankruptcy prevention measures.
- CBR revoked licenses of 86 credit institutions in 2014 and 93 in 2015; provisional administrations appointed simultaneously.
- CBR revoked licenses of 61 Deposit Insurance System member banks in 2014 and 75 in 2015.
- As of January 2016, liquidation pending in 288 credit institutions whose banking licenses had been revoked.
- Before rehabilitation determination, CBR and DIA can perform joint inspections; CBR can ask DIA to participate in prevention if bankruptcy threatens depositors or system stability.
- DIA may refuse participation based on cost-effectiveness and other criteria; DIA can use deposit insurance fund or ask for a loan from CBR for rehabilitation.
- Federal Law 127-FZ on Insolvency amended in 2014 to allow bankruptcy prevention at expense of private investors without federal budget, CBR or DIA involvement.
- Amendments require D-SIBs to submit Recovery Plans to CBR and allow CBR to request Recovery Plans from any credit institution; CBR entitled to develop Resolution Plans for D-SIBs.
- DIA is requesting legislative power for bail-in (write down and convert unsecured liabilities) and is looking into assuring deposits from legal entities.
- Currently, system does not allow creation of a bridge bank.

### Deposit Insurance Agency and coverage
- DIA established in 2004; delivered more than 300 deposit pay-outs since inception.
- As of January 1, 2016, the deposit insurance fund had RUB 56.6 billion rubles.
- In 2014, insurance compensation on deposits was raised to RUB 1.4 million for individual deposits per credit institution from RUB 700,000.
- As of January 1, 2016, Deposit Insurance System fully covered 99.7 percent of the number of deposit accounts of individuals and 65.1 percent of total amount of individuals’ deposits in Russian banks.
- Deposits are on average RUB 300,000.
- Deposit Insurance Fund is funded ex-ante with premium contributions; DIA adopted a risk-adjusted differential premium system.
- From the third quarter of 2015, premiums set according to riskiness of institutions.

*Source: _cr16232 - 22.      Efficiency of the system in the realization on collateral could be further improved.*

---

### Supervision, prudential framework, risks, and governance

### CBR powers, inspections, and reporting
- CBR has strong powers and rights of access to information and uses inspections to obtain assurance on substance and quality of information received.
- Developments: dedicated valuation department, move to XBRL taxonomy for supervisory reporting, ability to commission external auditor work for supervisory issues.
- Gaps:
  - No requirement for banks to notify CBR in advance of substantive changes or material adverse developments; notification requirements are almost all retrospective.
  - CBR lacks right to require prompt notification of material issues that come to attention of an external expert unless specifically within scope of commissioned work.

### Corrective powers and enforcement
- CBR has a wide range of tools and sanctions and a good track record in enforcing the law, including revocation of licenses; some sanction decisions are made public.
- Concerns:
  - Perceived lack of clarity and transparency in enforcement (especially AML) and sentiment that banks are disciplined even for minor problems.
  - Amount of fines for AML breaches described as excessively low and not deterrent.

### Consolidated and cross-border supervision
- Legal and regulatory framework for consolidated supervision significantly developed since last assessment; powers to act on parent violations, enhanced information exchange, expanded definitions based on IFRS.
- Practical application is recent and not yet fully demonstrated; cross-border dimension largely undeveloped.
- Remaining legal gaps hinder CBR in some actions (e.g., may not require closure of a foreign branch of a Russian bank or prevent acquisition of a nonbank financial entity by a banking group).
- Home-host cooperation improved; Article 73 requires written consent for a foreign supervisory authority to access premises of a subsidiary established in Russia (branch establishments of foreign banks not permitted); in practice not an issue.

### Corporate governance and disclosure
- 2013 and 2014 reforms clarified Board role and revised Corporate Governance Code (non-binding).
- Current regime is piecemeal: some norms binding, others optional and not enforceable.
- Recent regulations increase CBR leverage to monitor and enforce CG issues; effective implementation pending.
- Disclosure: CBR attaches importance to disclosure and transparency; Basel Pillar 3 disclosure framework now in force.

### Prudential requirements, ICAAP/SREP, capital, and liquidity
- Capital framework updated to include Basel 2.5 and Basel III; amended December 2015 with most becoming effective January 2016.
- CBR implemented capital conservation buffer, countercyclical buffer, and systemic risk buffer from January 1, 2016.
- ICAAP/SREP: introduction underway; effectiveness remains to be assessed. Timetable: SIBs must submit ICAAP by end of 2016; CBR to start reviewing quality in 2017.
- Liquidity: LCR introduced in compliance with Basel III since January 1, 2016 for systemic banks; full LCR metrics and management standards will not apply to non-systemic banks.

### Credit risk, asset quality, provisioning, and concentration
- Credit risk supervision relatively advanced; CBR performs stress tests and monitors exposures.
- Asset quality deteriorated; NPLs have grown fast (especially household sector).
- Forbearance: three temporary letters in December 2014 provided forbearance; these expired December 2015. In 2016 credit institutions given opportunity not to reclassify borrower until borrower repaid entire loan.
- Collateral valuation, particularly real estate, is problematic; appraisals and external appraisers unreliable.
- Large exposures: in 2014 large loan exposure grew by 34.9 percent to RUB 19.5 trillion; share of large loans in banking sector assets 25.1 percent.

### Related party transactions and concentration rules
- Amendments since 2015 broadened definition of Related Parties; Banking Supervisory Committee now plays role in deciding relatedness.
- Remaining issues:
  - Definition arises from a “patchwork” of sources rather than single source.
  - New regime on exposures to persons connected to credit institutions not implemented before January 2017.
  - Framework does not require lending to related parties to be on same terms and conditions as those offered to the public; CBR lacks authority to impose penalties on directors who benefited personally.

### Operational risk, internal/external controls, and auditors
- Operational risk norms detailed but many are recommendations (non-binding); recommendation to convert into binding instruments.
- External audit legal framework deficiencies restrict CBR ability to:
  - reject or rescind appointment of an external auditor for inadequate independence/experience;
  - ensure auditor rotation;
  - meet with audit firm to discuss supervised institution matters;
  - require external experts to notify CBR of material issues that come to their attention.
- Auditor may not notify supervisor of serious matters; CBR’s relationship with auditing community is restricted.

### AML/CFT
- CBR supervision of AML/CFT intensive and intrusive with a record of enforcement.
- Suggested improvements:
  - Promote a more risk-based approach to ML/TF in industry and CBR.
  - Use more proportionality when enforcing the law.
  - Raise compliance on ultimate beneficial owner verification and include ML/TF risks within external auditors’ duties.

*Source: _cr16232 - 47.      CBR has strong powers and rights of access to information and uses its inspection_; _cr16232 - 1. Responsibilities, objectives and powers The legal framework currently in place reasonably_; _cr16232 - 29. Abuse of financial services CBR has made significant efforts to ensure proper_*

---

### Main findings and prioritized recommendations

### Main findings (summary)
- The legal framework provides CBR with broad powers and responsibilities but some functions and objectives appear intertwined.
- CBR has become a “mega regulator,” improving information and supervisory reach across banks and nonbank entities.
- Significant legislative and regulatory reforms enacted recently; practical implementation and enforcement remain works in progress.
- Key supervisory weaknesses include: legal protection for staff, transparency of dismissal procedures, limitations in external auditor oversight, notification requirements for material events, and enforceability of many CBR recommendations.
- Asset quality, collateral valuation, related-party exposures, concentration risk, and AML/CFT continue to warrant high supervisory attention.

### Selected prioritized recommendations (preserve exact wording where provided)
- Principle 1
  - Include language in the CBR Law that would clearly segregate CBR’s safety and soundness duties from other assigned objectives.
  - Allow CBR to have access to banking data older than five years.
- Principle 2
  - Introduce legal protection for staff who act in good faith.
  - Introduce a legal requirement so that the reason for the dismissal of the Governor of CBR and the head of the supervisory function must be publicly disclosed.
- Principle 6
  - Include an explicit requirement obliging banks to notify the supervisor as soon as they become aware of any material information which may negatively affect the suitability of a major shareholder or a party that has a controlling interest.
- Principle 7
  - Require ex-ante CBR approval of acquisitions of domestic nonbank financial institutions.
- Principle 9 / 10 / 11 / 27
  - Introduce formal requirements for banks to notify CBR in advance of substantive changes and material adverse events.
  - Introduce legislative amendments to grant CBR the power to require external experts to promptly notify CBR of material issues that come to the attention of the experts in the course of their work for CBR.
  - Explore amendments to permit CBR to take enforcement measures against shareholders who violated the law even if violation is older than one year; augment 30–day timeframe during which CBR has to send an order; provide possibility to impose changes in banks’ internal organization and structure.
  - Remedy deficiencies so supervisor can reject or rescind appointment of an external auditor lacking independence or experience; ensure rotation; ensure auditor notifies supervisor of serious matters.
- Principle 15 / 18 / 25
  - Increase resources and supervisory focus on risk management and internal control; convert CBR recommendations on operational risk into binding instruments.
  - Accelerate amendments to provide CBR additional legal tools in areas of provisioning and collateral valuation.
- Principle 19 / 20
  - Conduct horizontal review to verify conformity with Large Exposure Limit Requirements; strengthen definition of related parties; establish legal prohibition for related party transactions on more favorable terms than those to non-related counterparties.
- Principle 29 (AML/CFT)
  - Increase intensity of supervision through targeted AML inspections; promote risk-based approach and proportionality; ensure external auditors pay attention to AML/CFT issues.

### Authorities’ response and implementation plans (highlights)
- Authorities appreciate assessment and note smooth collaboration.
- Creation of mega-regulator improved information and supervisory powers.
- CBR committed to further strengthening supervisory framework; legislative amendments under discussion to empower CBR on collateral valuation and auditor requirements.
- CBR to implement ICAAP/SREP, with SIBs submitting ICAAP by end-2016 and CBR reviewing quality in 2017.
- LCR introduced in compliance with Basel III since January 1, 2016; Basel Committee issued final RCAP report on LCR implementation on March 15, 2016.
- Authorities preparing action plan to address FSAP recommendations; some approaches require time for additional study.

*Source: IMF staff report section 29 and Table 3 recommendations; authorities’ response.*

### 1. Structure of Nonbank Financial Organizations as of September 30, 2015 _______________________ 6

### 1. Structure of Nonbank Financial Organizations as of September 30, 2015 _______________________ 6

### Overview
- Banking remains the most significant sector of the Russian financial system, but the role of the nonbank sector has been steadily growing.
- Bank assets amounted to 103 percent of GDP at end-2015.
- Nonbank financial institutions (NFIs) primarily include insurance companies, private pension funds, mutual funds, and microfinance organizations.

### Key statistics (as presented in Table 1)
- Insurance entities: Active Organizations 509; Assets (in billions of rubles) 1,626.70; Capital (in billions of rubles) 429.6
- Non-state Pension funds: Active Organizations 110; Assets (in billions of rubles) 2,822.90; Capital (in billions of rubles) 146
- Mutual investment fund: Active Organizations 1,542; Assets (in billions of rubles) 2,560.30; Capital (in billions of rubles) 2,303.9
- Microfinance organizations: Active Organizations 3,500; Assets (in billions of rubles) 62.4; Capital (in billions of rubles) 48.4
- Professional securities market participants: Active Organizations 540; Assets (in billions of rubles) 753.6; Capital (in billions of rubles) 281.4
- Source indicated in table: CBR.

### Market structure and concentration
- The banking system experienced strong consolidation: from 1,311 banks in 2001 to less than half that number by end-2015.
- The largest 20 banks account for three quarters of system assets.
- Government-related banks (dominated by Sberbank and VTB Group) accounted for 60 percent of system assets at end-2015.
- Top 10 private universal banks hold 16 percent of system assets; foreign-owned banks 13 percent; 11 percent is in specialized and small banks.
- Lending concentration: the top 10 banks by assets accounted for about 70 percent of lending as of January 2016.
- Sberbank and VTB Group together account for a similar share of assets as the remaining 700+ banks.
- Many small banks operate in mono-industrial-cities and can be systemically important regionally.

### Recent sector performance indicators and trends
- Authorities’ policy response since 2013 (including regulatory forbearance) supported banks’ soundness indicators, though forbearance may have overstated indicators since end-2014.
- Capital adequacy ratio: remained broadly unchanged since March 2015 at about 13 percent, then declined to about 12 percent in early 2016 as regulatory forbearance was lifted.
- Capital issuance increased over 2015, offsetting the decline in retained earnings.
- NPLs have increased but remain below their 2008 peak.
- Loan-to-deposit ratio decreased to 115 percent by end-2015 (returning to the level of mid-2013).
- Profitability: return on assets reached 0.3 percent at end-2015.
- Main reasons for decline in profits: credit losses and declining net interest income; fees and other non-lending charges contribute significantly to profitability.

### Regulatory and institutional developments affecting NFIs
- Since 2014, CBR has become the “mega regulator” of financial markets, absorbing regulatory and supervisory powers for all categories of financial institutions, including powers of the former Federal Service on Financial Markets, and given an explicit financial stability mandate.
- Basel III capital ratios entered into force in 2013.
- The Basel Liquidity Coverage Ratio is being phased in according to the Basel timetable for the systemically important banks and is on target to meet the 100 percent compliance on January 2019 as required for Basel compliance.

### Macroeconomic and financial stability context relevant to NFIs
- CBR switched to a floating exchange rate regime in mid-November 2014.
- CBR began unwinding the emergency rate hike (to 17 percent in December 2014) from end-January 2015; the current policy rate is set at 11 percent (as reported).
- Inflation target is set at 4 percent, to be achieved by end-2017.
- In 2015 the Russian currency lost almost 20 percent of its value vis-à-vis the U.S. dollar.
- The 2015 budget deficit required the use of the Reserve Fund and GDP growth in 2016 is expected to be negative again.
- Russia’s government debt remains low, around 20 percent of GDP.
- The Ministry of Finance announced a review of the Federal budget for 2016, including consideration of reductions in budget expenditures and sales of some government shares in state-owned companies.

### Financial stability governance and macroprudential policy
- The National Council on Ensuring Financial Stability (FSC) was created as an advisory inter-agency body to exchange views and coordinate on financial stability matters; the FSC can provide recommendations and request information, and member agencies have to comply or explain.
- FSC composition is approved by the government and is headed by the First Deputy Chairman of the Government of the Russian Federation; it includes senior officials from CBR, the Ministry of Finance, the Ministry of Economic Development, and the State Corporation Deposit Insurance Agency.
- CBR has used macroprudential instruments in an ad hoc manner with no formal triggers and does not have an ex-ante toolkit.

*Source: Excerpt from IMF staff assessment document as presented in the chapter titled "1. Structure of Nonbank Financial Organizations as of September 30, 2015."*

### 22.      Efficiency of the system in the realization on collateral could be further improved. It

### _cr16232 - 22.      Efficiency of the system in the realization on collateral could be further improved.

### Collateral realization efficiency
- It may take two years after a court decision in order for a credit organization to be able to acquire the collateral in the case of a loan default.
- In the meantime, the collateral may deteriorate in value and banks may be asked to create reserves.

### Accounting principles and rules
- The financial reporting framework in Russia is determined and regulated by the state.
- The MoF is both the official standard-setting body in accounting and financial reporting and the endorsement body of the International Financial Reporting Standards (IFRS).
- According to Law No. 208-FZ, and Government Decree No 107, IFRS are to be applied in Russia based on a Russian translation prepared by the MoF.
- In the case of credit institutions, CBR needs to approve the accounting standards, including the Russian Accounting Standards (RAS).
- The authorities state that RAS are being brought into compliance with IFRS and will be fully in line by 2017.
- RAS include the requirement for a balance sheet, statement of results of operations, statement of cash flow and statement of changes in ownership equity.
- Currently, both IFRS and Russian Accounting Standards (RAS) are used in the financial sector.
- IFRS are required for the consolidated financial statements of the majority of financial entities and those companies whose securities are listed in stock exchanges.
- All legal entities, regardless of type, are still required to prepare stand-alone (separate) financial statements based on RAS.
- RAS never adopted IAS 39 on Financial Instruments.
- IAB 39 was replaced in July 2014 by IFRS 9 which will be adopted by 2018.
- Other previous differences, such as the impairment testing of fixed assets, has been recommended by CBR since 2013, and in 2016 will become mandatory.
- The MoF, has not granted any exemptions that apply under IFRS.

### System of independent external audits
- According to the Auditing Law, financial companies are required to perform an audit on an annual basis.
- Auditing is defined as an independent check of the financial statements of an audited entity for the purposes of expressing an opinion on the reliability of said financial statements.
- Requirements on the form, content, and procedure for signing and submitting the audit report are established by federal auditing standards.
- The Code of Professional Ethics of Auditors is adopted by the Audit Council, which is the national body that discusses standards and regulations in field of auditing.
- Audit firms and auditors must be independent of the entity, must comply with audit secrecy, and have to be a member of a self-regulating organization of auditors, which should comply with the rules of the Audit Council.
- An audit firm or individual auditor should establish and comply with rules of internal and external quality assurance system based on federal standards.
- Broadly, the international firms cover IFRS and smaller, domestic audit firms cover RAS.
- In Russia, auditors are required to obtain an auditor qualification certificate issued by self-regulating organizations of auditors.
- An audit firm is just required to have 50 percent of the collegial executive body as auditors but is allowed to participate in a tender with just 23 auditors in its team.
- As of 2014, there are 3,400 certified auditors in Russia.

### Payment and clearing systems
- The payment system comprises CBR payment system (BRPS) and other payment systems operated mainly by credit institutions.
- The BRPS comprises the system for intraregional electronic payments (VER), the system for interregional electronic payments (MER), the Banking Electronic Speedy Payment system (BESP system), and a payment system based on letters of advice.
- The other systemically important payment system is the Payment System - National Settlement Depository (PS NKO ZAO National Settlement Depository).
- The PS NSD is a part of the post-trade infrastructure of OJSC MICEX-RTS Moscow Exchange (the Moscow Exchange) and is used for the open market, repo transactions, and foreign exchange transactions of CBR.
- Four payment systems are considered important for consumption: CONTACT, Visa, Golden Crown, and MasterCard.
- There are another 25 payment systems in operation.
- In 2013, CBR adopted the National Payment System Development Strategy, outlining key elements and an Action Plan.
- Consumer protection issues, automation of government payments and adoption of ISO 20222 standards were some focus areas of the strategy.
- An advisory council headed by the Governor of CBR was formed as part of the NPS development strategy.
- Supervision in the national payment system covers: money transfer operators, 33 payment system operators, payment infrastructure service operators, 35 operation centers, 36 payment clearing centers, 32 settlement centers, 97 electronic money operators, and the Federal State Unitary Enterprise Russian Post.
- Electronic money is increasingly important and CBR is enhancing regulation and supervision.

### Credit bureaus
- Russia has 21 functioning credit bureaus according to the State Register of Credit Bureaus.
- As of December 2015, credit bureaus kept records of 81.6 million individuals and over 485,000 legal entities.
- Shares in some credit bureaus are owned by banks.
- Credit bureaus are supervised by CBR under the Federal Law “On Credit Histories.”
- The Federal Law “On Credit Histories” was amended in 2014 and 2015, abolishing the need for borrowers’ consent for credit institutions to send information to a credit bureau.
- Amendments provided CBR with power to request and receive credit history reports from credit bureaus.
- CBR keeps the central catalogue of credit histories which informs users, subjects of credit histories, and some other persons defined by laws about the location of the credit histories.

### Public availability of basic economic, financial, and social statistics
- CBR publishes a range of statistics and analysis on the economy and the financial sector.
- The Federal State Statistics Service publishes social statistics.
- CBR statistics are regularly updated (e.g., financial sector statistics are published on a monthly basis).
- The Federal State Statistics Service publishes statistics on labor, living standards, education, public health, offences, industry, agriculture, finance, and investments among others.

### Framework for crisis management, recovery and resolution
- CBR and the Deposit Insurance Agency (DIA) have been extensively and increasingly involved in bank resolution and rehabilitation.
- The DIA acts as deposit insurer and is the corporate receiver/liquidator of failed banks and is entitled to resolve banks that participate in the deposit insurance system.
- In 2014 and 2015, the DIA was assigned two additional functions: the insurance of funds in non-state pension funds and the injection of capital to banks.
- During 2015, CBR sent the DIA proposals for participation in bankruptcy preventions of 18 banks.
- As of February 25, 2016, 30 banks were under bankruptcy prevention measures.
- CBR revoked the licenses of 86 credit institutions in 2014 and 93 in 2015 and simultaneously provisional administrations were appointed.
- CBR revoked licenses of 61 Deposit Insurance System member banks in 2014 and 75 in 2015.
- As of January 2016, liquidation was pending in 288 credit institutions whose banking licenses had been revoked.
- Before determination on rehabilitation, CBR and the DIA can perform a joint inspection of the bank.
- CBR can ask the DIA to take part in prevention of the bankruptcy of a bank if bankruptcy threatens depositors or system stability.
- The DIA may refuse participation based on the cost-effectiveness of rehabilitation measures, and other criteria.
- The DIA can use the deposit insurance fund or ask for a loan from the CBR for bank rehabilitation.
- Federal Law 127-FZ on Insolvency was amended in 2014 to improve legal regulation of financial rehabilitation and liquidation of credit institutions.
- The law established the possibility of bankruptcy prevention at the expense of private investors, without involvement of the federal budget, CBR and the DIA.
- Amendments to the Federal Law on Banks and Banking Activities and to the Federal Law on the Central Bank established the obligation for Domestic Systemically Important Banks (D-SIBs) to submit their Recovery Plans to CBR and the option for CBR to request Recovery Plans from any other credit institution.
- CBR is entitled to develop Resolution Plans for D-SIBs.
- The DIA is requesting amendment of legislation to have powers to write down and convert unsecured liabilities (bail-in) and is looking into assuring deposits from legal entities.
- Currently, the system does not allow the creation of a bridge bank.

### Adequacy of systemic protection (public safety net)
- The DIA was established in 2004 and up to date it has delivered more than 300 deposit pay-outs since its inception.
- As of the first of January 2016, the deposit insurance fund had RUB 56.6 billion rubles and covers all credit institutions that attract deposits.
- In 2014, the amount of insurance compensation on deposits was raised to RUB 1.4 million for individual deposits per credit institution from RUB 700,000.
- As of January 1, 2016, the Deposit Insurance System fully covered 99.7 percent of the number of deposit accounts of individuals in Russian banks and 65.1 percent of total amount of individuals’ deposits in Russian banks.
- Deposits are on average RUB 300,000.
- The Deposit Insurance Fund is funded ex-ante with premium contributions from the credit institutions it covers.
- DIA adopted a risk-adjusted differential premium system.
- Starting from the third quarter of 2015, premiums have been set according to the riskiness of the institutions.

### Effective market discipline, transparency, and governance
- In 2014, a requirement for Russian companies to disclose information on their “beneficial owners” in accounting statements was formulated and the definition of beneficial owner was amended to be consistent with FATF requirements.
- It was prohibited to maintain accounts in fictitious names as well as to open or maintain accounts with pseudonyms.
- CBR Regulation 499-P obliges credit institutions to update customer and beneficiary identification information and review the level of risk every time the level of risk changes or at least annually.
- Federal Law 334-FZ of 2014 obliges credit institutions to publicly disclose information on the qualifications and experience of management and the members of the Board of Directors.
- Requirements for goodwill have been established for founders and owners of more than 10 percent of the shares in a credit institution, with a 10-year ban for non-compliance.
- Changes to the Criminal Code establish criminal liability for falsifying financial documents of accounting and reporting of financial organizations, including credit organizations.
- The Corporate Governance Code is voluntary.

### MAIN FINDINGS
- Responsibility, Objectives, Powers, Independence, Accountability (CPs 1–2)
  - The legal framework currently in place provides CBR with necessary powers and responsibilities.
  - CBR has powers to authorize banks, conduct ongoing supervision, oversee compliance with laws and undertake corrective actions to address safety and soundness concerns.
  - Major reforms have been introduced that increase CBR’s duties and powers in many respects, although implementation is not yet tested in all cases.
  - Responsibilities and objectives of CBR are particularly broad and appear to be intertwined, while some functions seem to concur with the objectives related to safety and soundness of the banking system.
  - There are issues of concern notably in respect of legal protection for staff and transparency of dismissal procedures.
  - There is scope for improvements in the arrangements for decision making to better support and communicate the objectivity and independence of CBR to external audiences.
- Ownership, Licensing, and Structure (CPs 4–7)
  - The Russian licensing regime for banks appears exhaustive.
  - Banks’ Management and Board members must meet fit and proper qualifications, including the absence of a criminal record.
  - CBR should establish formal procedures to subject the newly established bank to follow up attentive offsite supervision, and if necessary onsite inspection, to ascertain that the bank is performing according to the terms and conditions of the license.
  - CBR has the power to review, reject, and impose prudential conditions on proposals to transfer significant ownership or controlling interests.
  - CBR vetting threshold for significant transfer of ownership has been lowered from 20 to 10 percent.
  - The legal regime for major acquisitions was found to be weak: CBR law does not establish requirements for banks to seek prior CBR approval when making domestic investments in nonbank financial institutions.
- Methods of Ongoing Supervision (CPs 8–10)
  - CBR has developed its risk based approaches and is in early phases of introducing the next stage of risk based supervision.
  - Introduction of the supervisory review and evaluation process (SREP) based on banks’ own internal assessments will begin full implementation from 2017.
  - CBR is less advanced in resolution assessment and planning; it needs legal power to require operational or institutional changes based on an assessment of the bank's ability to recover.
  - CBR should remain alert to potential regulatory arbitrage and use all forms of information to prevent it.
  - CBR has reconfigured on and offsite supervisory functions and could invest in greater direct contact with Boards as recommended by the Financial Stability Board.
  - Institutions identified as systemically important banks, according to a methodology based on the Basel standard (Ordinance 3737-U), are supervised directly from Moscow rather than through the CBR network.
  - The methodology has been in force since July 2015 and the list of systemically important banks must be assessed and re-issued annually under the terms of the Ordinance.
  - Capital buffers, consistent with the Basel approach, are applied to the systemically important banks.

*Source: _cr16232 - 22.      Efficiency of the system in the realization on collateral could be further improved.*

### 47.      CBR has strong powers and rights of access to information and uses its inspection

### _cr16232 - 47.      CBR has strong powers and rights of access to information and uses its inspection

### Powers, information access, and inspections
- CBR has strong powers and rights of access to information and uses its inspection process to obtain assurance on the substance and quality of information it receives.
- Gaps noted:
  - No requirement for banks to notify CBR in advance of any substantive changes or of material adverse developments; notification requirements are almost all retrospective.
  - CBR lacks the right to require prompt notification of any material issue that has come to the attention of an external expert working for CBR on a supervisory matter unless specifically within the scope of work CBR has commissioned (CBR had not commissioned such external expert work at the date of assessment).

### Corrective and sanctioning powers (CP 11)
- Strengths:
  - CBR has a wide range of tools and sanctions and a good track record in enforcing the law, including revocation of licenses.
  - Certain sanction decisions are made public.
- Areas for improvement:
  - Perceived lack of clarity and transparency in enforcement (especially AML) leading to sentiment that banks are disciplined even for minor problems.
  - Supervisory actions should be predictable, consistent, and proportionate.
  - Amount of fines for AML breaches is described as excessively low and not deterrent enough.

### Cooperation, consolidated, and cross-border supervision (CPs 12–13)
- Framework and arrangements:
  - Framework for collaboration and coordination with domestic and cross-border supervisors is satisfactory.
  - Positive cooperation with Rosfinmonitoring (AML/CFT) and with the DIA (resolution).
  - Removal of legislative obstacles has allowed progress in home/host supervisory cooperation.
- Legal and practical constraints:
  - Article 73 of the law governing the CBR requires written consent for a foreign supervisory authority to access premises of a subsidiary established in Russia (foreign-owned branch establishments are not permitted); in practice this has not been an issue.
  - Initial cross-border crisis planning and involvement in recovery and resolution plans for cross-border groups have begun now that legal provisions are in place.

### Consolidated supervision
- Developments:
  - Legal and regulatory framework for consolidated supervision has been significantly developed and enhanced since the last assessment.
  - Changes include powers to act on parent violations, enhanced information exchange, and expanded definitions based on IFRS.
- Caveats:
  - Reforms are recent; practical application and supervisory practice under the new framework are yet to be substantively demonstrated.
  - Cross-border dimension of consolidated supervision is mostly undeveloped.
  - Remaining legal gaps hindering CBR:
    - Supervisor may not require closure of a foreign branch of a Russian bank.
    - Supervisor may not prevent acquisition of a nonbank financial entity by a banking group.

### Corporate governance (CP 14)
- Progress:
  - 2013 introduction of articles 11.1 and 11-1-1 in the banking law clarifies Board of Directors’ role, especially in promoting CG principles.
  - 2014 profound revision of the Corporate Governance Code (non-binding).
  - New regulations/ordinances increased CBR leverage to monitor and enforce CG issues.
- Limitations:
  - Current regime is piecemeal and difficult to understand; some norms binding, others optional (CG Code, CBR Letters) and not enforceable.
  - Several important CG regulations issued in 2015; some not enforceable before 2017, so effective implementation cannot be assessed.
  - Governance deficiencies influenced by related party transaction issues and lending to affiliates on preferential terms.

### Prudential requirements, regulatory framework, accounting and disclosure (CPs 15–29)
- Risk management regime:
  - Significant progress in improving risk management supervisory and operational framework.
  - Federal law 146-FZ of July 2, 2013 expanded CBR powers and fostered RM processes in banks.
  - Ordinance 3624-U defines board responsibilities for risk profile oversight and empowers CBR to impose Pillar II measures, including capital add-on.
  - Ordinance 3223-U of April 1, 2014 obligates banks to notify CBR when head of RM is appointed and sets qualification requirements for head of RM, internal control, and internal audit.
  - Effective implementation remains uncertain as key aspects have not yet been implemented.

### Capital adequacy and ICAAP / SREP
- Capital framework:
  - Consistent with international standards; updated to include Basel 2.5 and Basel III; amended in December 2015 with most becoming effective January 2016.
  - All Russian banks subject to Basel capital regulation on both standalone and consolidated levels.
  - Capital adequacy standards on consolidated basis broadly consistent with solo level.
  - RCAP assessed implementation of capital buffers as compliant with the Basel standard.
  - CBR implemented the capital conservation buffer, countercyclical buffer, and a systemic risk buffer from January 1, 2016.
- ICAAP / SREP:
  - Effectiveness of the new ICAAP/SREP remains to be assessed.
  - Pillar 2 not yet fully and thoroughly implemented.
  - ICAAP process under way; CBR completing first SREP cycle which will take time before fully operational.
  - Timetable: SIBs must submit their ICAAP by the end of 2016 and CBR will start reviewing their quality in 2017.

### Credit risk, asset quality, and provisioning
- Implementation and supervision:
  - Credit risk supervision is more advanced relative to other risks, supported by Chief Inspectorate activities, curators’ analysis, and stress testing.
  - CBR performs its own stress tests, monitors regional/sectoral trends, and cross-checks information on major exposures.
- NPLs and provisioning:
  - Asset quality deteriorated over recent months; NPLs have grown fast (especially in the household sector).
  - Depreciation of the ruble led CBR to issue three temporary letters in December 2014 providing forbearance measures; these expired December 2015.
  - In 2016 credit institutions were given the opportunity not to reclassify the borrower until the borrower has paid back the entire amount of the loan.
  - Some rescheduled loans may currently sit in a lower loan category; only an Asset Quality Review would permit clear assessment of current NPL situation.
  - Inspections revealed violations: lending to shell companies, overvaluation of collateral, misreporting, unreliable financial statements.
  - Collateral valuation, particularly real estate, is problematic; appraisals and external appraisers have not been reliable for many years.

### Concentration risk and large exposures
- Improvements and limitations:
  - Regulatory regime for concentration risk and large exposure limits has been improved.
  - CBR can instruct banks to mitigate excessive concentration risk.
  - Practical measurability of progress largely post-2016; SIBs began including significant risks (including concentrations) into stress testing from January 1, 2016; non-SIBs from January 1, 2017.
  - Definition of economic linkages not implemented yet; determination of relatedness between economically connected customers set to be implemented in 2017.
  - New regime concerning exposures arising from transactions of person(s) connected to credit institutions will not be implemented before January 2017.
- Key statistics:
  - In 2014, the large loan exposure of the banking sector grew by 34.9 percent to RUB 19.5 trillion.
  - The share of large loans in banking sector assets remained unchanged over the year and stood at 25.1 percent.

### Country risk and transfer risk
- No specific requirements:
  - No specific requirements for management of country risk and transfer risk; general risk management and internal control regulations apply.
  - Country risk assessed on an ad hoc basis; no specific guidelines or regulations beyond general BCBS principles.
  - Minimum requirements for risk policies, processes, and limits for country/transfer risk are therefore uncertain.
  - Several improvements desirable, especially given ruble depreciation.

### Related party transactions
- Progress and weaknesses:
  - Important amendments since 2015 to the CBR Law clarified and broadened definition of Related Parties and streamlined the legal regime.
  - Banking Supervisory Committee of CBR now has a role in deciding relatedness of persons or groups to credit institutions.
  - Remaining issues:
    - Definition of related parties arises from a “patchwork” of different legal sources rather than a single unambiguous source.
    - New regime on exposures to persons connected to credit institutions not implemented before January 2017.
    - Framework does not require lending to related parties to be on same terms and conditions as those offered to the public; CBR recommendations exist but are not binding/enforceable.
    - CBR lacks authority to impose penalties on directors who personally benefited from favorable conditions.

### Market risk, interest rate risk, and liquidity
- Market risk:
  - Bank activities giving rise to market risk are not highly developed; CBR’s enforcement powers on risk management and control standards are very new.
  - Banks not authorized to use models for Pillar 1 regulatory capital calculations but may use economic capital models for internal capital adequacy assessment.
  - Implementation of new risk management standards is at a very early stage.
- Interest Rate Risk in the Banking Book (IRRBB):
  - Regulatory framework enhanced with greater emphasis on stress testing, but many new provisions not fully in force.
  - Limited hedging instruments available to banks, increasing importance of meaningful stress scenarios and management strategies.
- Liquidity:
  - CBR liquidity metrics and risk management standards well developed for systemic banks.
  - Definition of systemic banks includes international activity.
  - At assessment time, quantitative and qualitative liquidity standards were transitioning to new standards; hard to determine full enforcement.
  - Full LCR metrics and management standards will not apply to non-systemic banks; unclear if CBR will have clear grounds to act regarding funding risk management in that sector.

### Operational risk and internal/external controls
- Operational risk (OR):
  - Corpus of norms detailed, but many norms are recommendations (non-binding), except Ordinance 3624-U and Regulation 242-P on internal controls.
  - Letter 76-T and Letter 92-T are recommendations and not enforceable.
  - Recommendation: convert CBR recommendations on OR into binding instruments to establish a comprehensive mandatory OR management framework.
- Internal vs external control:
  - Internal control regulatory framework refreshed with important new powers enabling CBR to apply RM and internal control standards.
  - Material deficiencies exist in legal framework for external auditor function:
    - Supervisor may not reject/rescind appointment of external auditor for inadequate independence/experience or failure to meet professional standards.
    - Supervisor may not ensure rotation of external auditor or meet with audit firm to discuss matters pertaining to supervised institution.
    - Auditor may not notify supervisor of serious matters that come to auditor’s attention.
    - Unclear whether CBR can ensure Board and management accountability for proper financial statement preparation and independent external auditor opinion per international standards.
  - CBR’s relationship with auditing community is restricted; CBR does not typically meet with audit community except on general matters.

### Disclosure and transparency
- CBR’s stance:
  - CBR attaches importance to disclosure and transparency and has exercised powers in cases of non-disclosure, partial disclosure, unreliable information, failure to conduct required audit, or non-disclosure of consolidated statements and auditor’s report.
  - Some disclosure standards are at early implementation phases.
  - The Basel disclosure framework (Pillar 3, Market Discipline) is now in force.

### Anti–money laundering / combating financing of terrorism (AML/CFT)
- Progress and concerns:
  - CBR has made important progress and has been forceful against banks/management committing grave AML violations.
  - Suggested improvements:
    - Promote a more risk-based approach to ML/TF in both industry and CBR.
    - Use more proportionality when enforcing the law.
    - Raise level of compliance in banks regarding verification of ultimate beneficial owner and include ML/TF risks within duties performed by external auditors.

*Source: _cr16232 - 47.      CBR has strong powers and rights of access to information and uses its inspection*

### 1. Responsibilities, objectives and powers The legal framework currently in place reasonably

### _cr16232 - 1. Responsibilities, objectives and powers The legal framework currently in place reasonably

### Responsibilities, objectives and powers
- The legal framework provides necessary powers to authorize banks, conduct ongoing supervision, oversee compliance with laws, and undertake corrective actions to address safety and soundness concerns.
- Responsibilities and objectives of CBR are particularly broad and appear to be intertwined.
- Some functions of CBR seem to concur with objectives related to safety and soundness of the banking system.

### Independence, accountability, resourcing and legal protection for supervisors
- CBR is a respected institution with many governance, accountability, and transparency measures in place.
- Issues of concern include legal protection for staff and transparency of dismissal procedures.
- There is scope to improve decision-making arrangements to better support and communicate CBR’s objectivity and independence to external audiences.

### Cooperation and collaboration
- CBR can exchange information and cooperate with home supervisors over Russian-based subsidiaries of foreign banks through a number of bilateral MoUs.
- Adequate information sharing arrangements are in place with all relevant domestic authorities.

### Permissible activities
- Recent cases of financial pyramids harmed more than nine thousand people.
- According to CBR, in none of these cases did perpetrators use the words “bank” or “banking” to attract and defraud customers.

### Licensing criteria
- The Russian licensing regime for banks appears exhaustive.
- The legal and regulatory framework provides CBR instruments and tools to ensure a sound licensing process.
- Professional qualifications required for applicants could be strengthened.

### Transfer of significant ownership
- The vetting process of CBR for transfer of significant ownership has been significantly improved.

### Major acquisitions
- Regulation does not establish requirements for banks to seek prior CBR approval when making domestic investments in nonbank institutions.

### Supervisory approach
- CBR has developed risk-based approaches since the last assessment and is in early phases of introducing the next stage of risk based supervision using Basel Pillar 2 (ICAAP and SREP).
- CBR is less advanced in resolution assessment and planning.
- CBR needs to remain alert to potential for banks to manipulate the regulatory perimeter and must use all forms of information to prevent regulatory arbitrage.

### Supervisory techniques and tools
- CBR has developed an integrated onsite and offsite supervisory system.
- Existing practices largely meet the principle, but there is no requirement for banks to notify CBR in advance of substantive changes or material adverse developments.
- As risk-based supervision matures, communication and flexibility in the system merit attention.

### Supervisory reporting
- CBR has strong powers and rights of access to information and uses inspections to assure substance and quality of information.
- Developments include a dedicated valuation department, a move to an XBRL taxonomy for supervisory reporting, and legal ability to commission work from external auditors for supervisory issues.
- Except in certain specific circumstances, CBR does not have the right to require prompt notification of a material issue that comes to the attention of an external expert in the course of that expert’s work for CBR on a supervisory matter.

### Corrective and sanctioning powers of supervisors
- The enforcement arsenal is very broad; CBR has used corrective and sanctioning measures ranging from restricting banks’ activities to revocation of licenses.
- More forceful measures against senior executives and board members would be needed at times.
- Amounts of fines, particularly for AML/CFT, are not deterrent enough.

### Consolidated supervision
- Since the last assessment, the legal and regulatory framework for consolidated supervision has been significantly developed and enhanced.
- Transformation of CBR into a “mega regulator” appears to have facilitated systematic information sharing on nonbank group entities and coordinated inspection programs.
- CBR is at an early stage of using the new framework; greater attention is needed for groups with foreign establishments.

### Home-host relationships
- Despite legislative obstacles to exchange of supervisory information, progress has been made in home and host supervisory cooperation.
- A number of colleges are active.
- Little progress has been achieved on cross-border crisis planning or group-wide recovery and resolution planning for internationally active groups.

### Corporate governance
- The current regime for corporate governance is governed by piecemeal regulations, making it difficult to understand.
- Current norms differ in nature: some are binding, others are optional (CG Code, CBR Letters) and thus not enforceable.

### Risk management process
- Russia has made significant progress in improving the risk management supervisory and operational framework.
- Lack of perspective on effective implementation in banks remains because key aspects have not yet been implemented.

### Capital adequacy
- Significant achievements in fostering the national capital adequacy regime have been made.
- Remaining challenges will depend on how banks meet new obligations (ICAAP) and how CBR will monitor and supervise them (SREP).

### Credit risk
- CBR has a comprehensive approach to supervision of credit risk, combining offsite scrutiny with onsite investigation.
- CBR performs its own portfolio stress tests, monitors regional and sectoral trends, and cross checks information on major exposures.

### Problem assets, provisions, and reserves
- Fair-value determination is a big issue, especially in a volatile environment.
- There is concern that existing collateral valuation does not reflect net realizable value given prevailing market conditions.

### Concentration risk and large exposure limits
- ICAAP regulation 3624-U of April 15, 2015 contains new provisions on concentration risk.
- A decision was made to lower the maximum limit on a bank's exposure to a single counterparty or a group of connected counterparties from 25 percent of the eligible capital to 20 percent.
- CBR has a wide range of powers to address excessive concentration risk.
- The definition of economic linkages is not implemented yet, undermining CBR’s ability to oversee the entire spectrum of concentration.

### Transactions with related parties
- Important amendments since 2015 to the CBR Law streamline the legal regime applicable to Related Parties and capture a person or group of people connected to the bank.
- The new regime on exposures arising from transactions of person(s) connected to credit institutions will not be implemented before January 2017.
- The regulatory framework does not require lending to related parties to be on the same terms and conditions as those generally offered to the public.
- CBR lacks authority to impose penalties on directors who personally benefited from favorable conditions.
- In the definition of connectedness, the concept of economic linkages was introduced under the new Art. 64 of CBR Law but will not be implemented before 2017.

### Country and transfer risks
- There are no specific requirements for management of country risk and transfer risk except for exposures on residents residing in off-shore zones.

### Market risk
- Banks’ market-risk-generating activities are less developed than in some jurisdictions.
- Market volatility, notably in foreign exchange, may expose some banks with less market risk management experience.
- Until 2014, CBR did not have legal powers to enforce risk management and control standards.
- Enhanced framework under Ordinance 3624 is valuable but at a very early stage of implementation.

### Interest rate risk in the banking book
- Regulatory framework has been enhanced, but many new provisions requiring improved bank management practices, including greater emphasis on stress testing, are not yet fully in force.

### Liquidity risk
- For systemic banks (which includes all internationally active institutions), CBR liquidity metrics and risk management standards are well developed and reflect this core principle.
- CBR’s understanding and responsiveness on liquidity risk issues commands industry respect.
- New standards are not fully implemented yet; CBR is at the outset of scrutinizing whether banks meet the new standards as intended.

### Operational risk
- Norms governing operational risk are detailed but largely recommendations by CBR and thus not binding.
- Ordinance on ICAAP requires banks to have risk management strategies, including for operational risk, but the new regime is not yet implemented.
- Reporting mechanisms need improvement.
- CBR does not have authority to establish outsourcing requirements for credit organizations.

### Internal control and audit
- The regulatory framework for internal control has been refreshed within the past two years based on new powers in the CBL (Articles 57 1 and 57 2), permitting CBR to apply risk management and internal control standards to supervised institutions.

### Financial reporting and external audit
- Deficiencies in the legal framework significantly restrict or prevent CBR from fulfilling many criteria of this principle.
- Legislation is urgently needed to remedy these concerns.
- Current weaknesses mean the supervisor may not: reject or rescind appointment of an external auditor who lacks independence or experience; ensure auditor rotation; meet with the audit firm to discuss matters pertaining to a supervised institution.
- Likewise, the auditor may not notify the supervisor of serious matters that come to the auditor’s attention.

### Disclosure and transparency
- Some disclosure practices are in early phases of implementation.
- CBR attaches importance to transparency and ensures regular disclosures on banking sector performance through the banking sector review.

*Source: _cr16232 - 1. Responsibilities, objectives and powers The legal framework currently in place reasonably*

### 29. Abuse of financial services CBR has made significant efforts to ensure proper

### 29. Abuse of financial services CBR has made significant efforts to ensure proper

### AML/CFT supervision and market outreach
- CBR supervision of AML/CFT issues is described as intensive and intrusive.
- CBR has a track record of enforcing AML/CFT requirements.
- CBR has raised awareness in the market on AML/CFT issues through workshops devoted to the practical application of the AML/CFT Law with participation of representatives of professional associations.
- Cooperation with other relevant domestic agencies has proven to be successful.

### Recommended actions to improve compliance with the Basel Core Principles
- Principle 1
  - Include language in the CBR Law that would clearly segregate CBR’s safety and soundness duties from other assigned objectives.
  - Allow CBR to have access to banking data older than five years.
- Principle 2
  - Introduce legal protection for staff who act in good faith.
  - Introduce a legal requirement so that the reason for the dismissal of the Governor of CBR and the head of the supervisory function must be publicly disclosed.
  - Consider, through legal amendments if necessary, ensuring that Ministers or ministerial representatives do not participate as observers in Board discussions on regulations that govern banking supervision.
  - Consider, though legal amendments if necessary, transferring the ownership of CBR to a different state body to confirm in a transparent manner that there is no conflict between CBR as a supervisory authority and the other functions and objectives that CBR must fulfill.
- Principle 3
  - Establish a formal mechanism of cooperation with the French Supervisory and Resolution Prudential Authority.
- Principle 5
  - Amend the banking law to establish a life-ban from the banking industry of persons who committed gross and recurrent violations.
  - Establish formal procedures to subject a newly established bank to follow up onsite inspection to ascertain that the bank is performing according to the terms and conditions of the license.
  - Establish formal mechanisms at the CBR head office level for interviewing applicants; specify the content and objective of these interviews.
  - When a new bank belongs to a group, ensure that controlling/parent entity closely follows the performance of the new entrant.
- Principle 6
  - Include an explicit requirement obliging banks to notify the supervisor as soon as they become aware of any material information which may negatively affect the suitability of a major shareholder or a party that has a controlling interest.
- Principle 7
  - Require ex-ante CBR approval of acquisitions of domestic nonbank financial institutions.
  - Subject major acquisitions in non-financial companies to enhanced CBR scrutiny, in particular with respect to the compliance with limits.
  - Explore the possibility to set restrictions for major acquisitions in non-financial sectors deemed to pose particular concern.
  - Establish an explicit provision by which the supervisor determines, where appropriate, that new acquisitions and investments will not hinder effective implementation of corrective measures in the future.
  - Subject any major acquisition to a formal follow up mechanism to ascertain that the new activities acquired do not expose the bank to undue risks.
- Principle 8
  - Finalize and implement regulations on resolvability of banks and complete resolution assessments for all banks.
- Principle 9
  - Introduce formal requirements for a bank to notify CBR in advance of substantive changes to its operation or structure and of any material adverse events.
  - Introduce a policy of rotation for individuals who serve as Authorized Representatives.
  - Review CBR’s communication strategy with banks, to include a greater focus on the relationship with the Board (supervisory board) and to amend instructions and regulations as needed.
  - Review the CBR’s on and offsite internal supervisory processes to ensure maximum flexibility and swiftness of supervisory response.
- Principle 10
  - Introduce legislative amendments to grant CBR the power to require external experts to promptly notify CBR of material issues that come to the attention of the experts in the course of their work for CBR; the information notification requirement should not be restricted to the specific scope of the inspection but should include information that would be relevant to CBR for supervisory purposes.
- Principle 11
  - Explore possible amendments to the CBR Law to:
    - permit CBR to take enforcement measures against shareholders who violated the law or CBR’s regulations, even if the violation is older than one year;
    - augment the 30–day timeframe during which CBR has to send an order to a party who committed a violation; and
    - provide CBR the possibility to impose changes in banks’ internal organization and structure.
  - Complete the revision of Instruction No. 59 on “Penalizing Credit Organizations for Violating Prudential Standards” so that criteria for sanctions used by CBR become more transparent.
  - Establish formalized guidelines for determining the quantum of an administrative fine.
- Principle 12
  - Build on and develop early current practices of group wide assessment of risks and exposures, with particular attention to cross-border issues.
  - Assess the adequacy of supervisory practices in host jurisdictions where Russian subsidiaries and branches are established.
  - Establish an active and intrusive consideration of whether Russian subsidiaries and branches are subject to sufficient scrutiny by their own group management.
  - Introduce legal amendments to permit CBR to close foreign offices within the consolidated banking group.
- Principle 13
  - Continue to foster college practices and conclude crisis management and recovery and resolution planning for internationally active banking groups.
  - Consider legislative amendment to remove the requirement for written consent from a bank to permit a foreign supervisory authority to have access to its offices.
- Principle 14
  - Include in relevant regulation a specific provision requiring a bank’s board to understand the bank’s and banking group’s operational structure that impede transparency (for example, special-purpose or related structures).
  - Convert existing CBR recommendations on CG into binding regulations.
- Principle 15
  - Consider the proportion of resources dedicated to risk management—and internal control—in CBR’s onsite programs.
  - Perform a horizontal review across the system, to ascertain the implementation of the new RM system, with a particular emphasis on the role of the Board towards developing and overseeing management of the banks’ entire risk profile.
- Principle 17
  - Introduce formal requirements to ensure that banks’ credit policies must identify size and risk thresholds above which approval must be granted by the Board or senior management.
- Principle 18
  - Accelerate the process of amending the law to provide CBR with additional legal tools in the areas of provisioning and collateral valuation.
- Principle 19
  - Conduct a horizontal review across the industry to verify the degree of conformity with Large Exposure Limit Requirements in light of the new statutory ratio N-25.
  - Instruct the industry to increase efforts to establish a clear understanding of relatedness between customers’ connected economically.
  - Include in the inspection program for 2017/2018 an analysis of the way concentration risks have been included in banks’ risk management frameworks in light of the new ICAAP regime.
- Principle 20
  - Strengthen the definition of related parties, which appears neither organic nor exhaustive.
  - Establish legal prohibition for related party transactions performed on more favorable terms than corresponding transactions with non-related counterparties.
  - Subject borrowers to the obligation to declare any relatedness with the bank.
  - Include in the law a provision requiring major shareholders to disclose their “business interests.”
  - Require banks to report immediately to CBR any serious breach of the statutory ratios applicable to RP.
  - Subject banks with LLC status to the obligation whereby transactions with related parties and the write-off of related-party exposures exceeding specified are subject to prior approval by the bank’s Board.
  - Define in a regulation the types of transactions that give rise to related party exposures.
  - Exercise control over the observance by credit institutions of calculated maximum risk per person related to a credit institution.
- Principle 21
  - Establish specific guidelines or regulations for country or transfer risk outside of the general risk management requirements and risk exposure to offshore residents.
  - Establish specific policies to address provisioning for country and transfer risks.
  - Require detailed prudential return on country risk and transfer risks.
  - Ensure greater focus of oversight—both at onsite and offsite levels—on risks stemming from country (including sovereign) risks and transfer risks.
- Principle 22
  - Consider revising the Net Open Position limits in view of recent currency volatility.
- Principle 24
  - Consider extending the risk management components of regulation 510-P to the non-systemic sector, in a proportionate manner, for example, in respect of the funding and contingency requirements, to ensure that banks have clear expectations and to assist CBR acting in as timely a manner as possible in the event of deficiencies.
- Principle 25
  - Convert CBR recommendations on OR into binding instruments with a view to establishing a general OR management framework, comprehensive and mandatory.
  - Provide further guidance and requirements based on the BCBS’s documents “Principles for effective risk data aggregation and risk reporting” of January 2013, “High-level principles for business continuity of August 2006, and “Outsourcing in Financial Services” of February 2005, which are applicable to banks and banking groups of all sizes and profiles.
  - Empower CBR to establish outsourcing requirements and issue mandatory requirements in that regard.
- Principle 27
  - Remedy deficiencies in the legal framework so the supervisor has powers to act in the following circumstances:
    - to reject or rescind the appointment of an external auditor who has inadequate independence or experience or who does not meet professional standards;
    - to ensure rotation of the external auditor;
    - to meet with the audit firm to discuss matters pertaining to a supervised institution.
  - Ensure the auditor has the responsibility to notify the supervisor of serious matters that come to the auditor’s attention.
  - Provide legal protection for both the auditor and the supervisor in respect of the exchange confidential information.
  - Prior to legal changes, foster closer communication with the bank auditing community and encourage discussion with audit firms on specific banks having obtained the requisite consent for exchange of information.
- Principle 28
  - Consider adopting best practice approaches of other leading regulatory authorities who publish information not only at the aggregate but also the individual (including group) level, such as time series on bank performance and risk indicators.
- Principle 29
  - Increase intensity of supervision through targeted AML inspections.
  - Promote a more risk based approach to ML/TF issues in both the industry and CBR.
  - Use more proportionality when enforcing AML laws and regulations.
  - Ensure further transparency of the criteria used to sanction banks in the AML area.
  - Ensure that external auditors pay attention to AML/CFT issues in their analysis of RM and internal control framework.

### Authorities’ response and implementation plans
- Appreciation and collaboration
  - The Russian Federation authorities appreciate the assessment team's professionalism and constructive approach and note smooth and efficient collaboration between the CBR and the assessment team.
- Legal and supervisory improvements
  - Creation of a mega-regulator has improved information available to banking supervision on banks, banking groups, and financial conglomerates.
  - Amendments to legislation, including expansion in Bank of Russia powers, have enhanced supervision over banks’ operations with other financial market participants.
  - Powers of the CBR to use professional judgment have been enlarged.
  - CBR is fully committed to further strengthening the supervisory framework based on BCP principles and other international best practices.
- Credit risk and asset valuation
  - Credit risk is highlighted as requiring special supervisory attention amid vigorous build-up of loan portfolios.
  - More attention is being paid to borrowers' business performance, ability to service loans, and quality and adequacy of collateral used to adjust provision values.
  - CBR bank supervision has approved a program for improving supervision and asset valuation.
  - A new department will be established to assess the risk in all banks.
  - Important legal amendments are being discussed in parliament to empower the CBR to make its own assessment of collateral values.
- External auditors and legal framework
  - Authorities recognize deficiencies in the legal framework governing CBR’s relationship and interactions with external auditors.
  - Important legislative changes (on information sharing, requirements for an external auditor) are being discussed in parliament.
- Related parties and country/transfer risks
  - CBR remains committed to implementing the new legal definition of related parties on January 1, 2017.
  - Requirements for banks to enter into transactions with related parties on same terms and conditions as those generally offered to the public will be prepared for discussion as amendments to the banking law.
  - On country and transfer risks, CBR considers country risk partly addressed through general risk management requirements, risk weights in capital adequacy calculations, classification of the borrower, and provisioning of operations with offshore companies; CBR is looking into experience of other jurisdictions to build stronger regulation.
- Market risk and liquidity
  - CBR notes FX risk management is relatively more developed and references Instruction No. 41 (first regulation on open FX positions limits issued in 1996).
  - Liquidity coverage ratio (the LCR) was introduced in compliance with the Basel III requirements since January 1, 2016, together with corresponding reporting requirements on the LCR.
  - This was confirmed in the final RCAP report on LCR implementation in Russia, issued by the Basel Committee on March 15, 2016.
- Implementation timeline and next steps
  - Recent legislative changes enhancing CBR’s risk based approach may not have shown their full potential in practice.
  - CBR regulations on ICAAP and SREP are expected to increase the intensity of risk management; future assessments may benefit from longer implementation in practice.
  - CBR considers findings on Core Principle 29—Abuse of financial services—beyond the scope of the respective essential criteria but will nonetheless take the recommendations into account.
  - The Russian Federation authorities are preparing an action plan to address FSAP recommendations; some approaches require time for additional study.

*Source: IMF staff report section 29 and Table 3 recommendations; authorities’ response.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16232.pdf_