## INTRODUCTION (IMF staff report — content unit: _cr16303)

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### Major institutional changes and progress
- Establishment of the Central Bank of the Russian Federation (CBR) as a unified or “Mega Regulator” in 2013.
- Revisions to perimeter of regulation (definition of banking group and bank holding company) aligned with international standards; CBR granted power to impose standards for risk management (RM) and internal controls of banks and banking groups.
- Many impediments to cooperation and supervisory information exchange (domestic and cross-border) largely or wholly addressed.
- Track record limited for very recent reforms; some elements of implementation remain about a year away.

### Banking sector structure and key statistics
- Bank assets amounted to 103 percent of GDP at end-2015.
- Pension funds, insurance, and mutual funds: 3.6, 2.0, and 3.3 percent of GDP, respectively.
- Number of banks fell from 1,311 in 2001 to less than half by end-2015.
- Largest 20 banks account for three quarters of system assets.
- Government-related banks (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 hold 13 percent; specialized and small banks 11 percent.
- Lending concentration: top 10 banks accounted for about 70 percent of lending as of January 2016.
- Many small banks operate in mono-industrial cities and can be regionally systemic.

### Major institutional observations
- Regulatory approach highly rules based; CBR developing a Risk Based Approach (RBA) including risk differentiation and a dedicated SIB supervision division (SIBSD).
- Two supervisory challenges:
  - Shift mindset from violation-finding to forward-looking early intervention.
  - Ensure rules remain relevant; review regulatory canon to remove outdated/overlapping elements.
- Information flow improving but limitations remain: no legal requirement for banks or external auditors to notify CBR in advance of material developments; legal protections for disclosure to CBR lacking.

---

### Regulatory approach, governance, and external auditors
- New powers: CBR can apply Pillar II measures and require ICAAP; Ordinance 3624-U (April 15, 2015) and Ordinance 3883-U (December 15, 2015) key instruments.
- External audit profession: legal framework materially deficient.
  - Supervisor may not reject/rescind appointment of external auditor lacking independence/experience, ensure rotation, meet with audit firm, or require auditors to notify supervisor of serious matters.
- Recommendation: remedy legal deficiencies to enable supervisor engagement with external auditors.

---

### SUPERVISORY FRAMEWORK, RISK MANAGEMENT, AND IMPLEMENTATION

### Development of risk-based supervision and ICAAP/SREP
- CBR developing RBA, including SREP and ICAAP; first full SREP cycle and ICAAP review for SIBs scheduled from 2017.
- Ordinance 3624-U requires banks to have ICAAP; timeline:
  - Systemically important banks (SIBs) to submit ICAAP by end of 2016; CBR to review quality in 2017.
- Pillar 2 powers newly available but Pillar 2 not yet fully implemented in practice.

### Capital adequacy (Principle 16) — framework and figures
- Basel standards: Basel III capital ratios entered into force in 2013; Basel Liquidity Coverage Ratio phased in for SIBs with 100 percent compliance required by January 2019.
- Capital ratio history and changes:
  - Capital adequacy “remained broadly unchanged since March 2015 at about 13 percent” before declining “to about 12 percent in early 2016 as regulatory forbearance was lifted.”
  - CET1: previously 5 percent; CET1 set at 4.5 percent from January 1, 2016.
  - Tier 1 capital adequacy ratio: 6 percent.
  - Total capital adequacy ratio: lowered to 8 percent since January 1, 2016.
- Capital buffer phasing and specific buffer figures (as presented):
  - Capital conservation buffer 2.5%; countercyclical and systemic buffers phased per regulation.
  - Diagram figures preserved: 0.65 percent in 2018; and 1 percent in 2019 (countercyclical buffer timeline references retained from source).
- IRB and internal models:
  - Two IRB approaches permitted (foundation, advanced); as of assessment, no banks had IRB permission; two banks submitted formal applications and 4 expressed willingness.
  - Conditions for IRB: bank asset size > RUB 500 billion; internal validation and model governance requirements per Regulation 483-P and Ordinance 3752-U.

### Liquidity and funding (Principle 24)
- LCR reporting and phase-in schedule (exact):
  - 70 percent—from January 1, 2016;
  - 80 percent—from January 1, 2017;
  - 90 percent—from January 1, 2018;
  - 100 percent—starting from January 1, 2019.
- Instruction 139-I liquidity ratios (exact thresholds):
  - N2 instant ratio: ≥ 15 percent of on-demand liabilities.
  - N3 current ratio: at least 50 percent of one-month liabilities as one-month liquid assets.
  - N4 long term ratio: at least 120 percent of liabilities with residual maturity > one year as liquid assets with residual maturity > one year.
- CBR implementing Basel III liquidity framework for systemic banks; NSFR planned for reporting in 2016 and implementation targeted January 1, 2018.

### Risk management (Principle 15) — key supervisory instruments
- Key instruments and dates preserved:
  - Ordinance 3624-U (April 15, 2015) — RM and ICAAP requirements.
  - Ordinance 3223-U (April 1, 2014) — qualifications for Heads of RM/internal control/internal audit.
  - Ordinance 3883-U (December 15, 2015) — SREP assessment procedure.
  - Regulation 242-P — internal controls.
- Supervisory assessments and gaps:
  - RM strengthened materially but implementation uneven; D‑SIBs more advanced, small/mid‑size banks lag.
  - Risk appetite concept and RM culture development remain work in progress.
  - Recommendation: horizontal review to assess ICAAP implementation and board role; focus onsite resources on RM/internal control.

---

### CREDIT RISK, ASSET QUALITY, PROVISIONS, AND STRESS TESTING

### Credit risk supervision and stress testing (Principle 17)
- CBR performs systemic and portfolio stress tests; Ordinance 3624-U (Chapter 5) imposes stress testing requirements on banks; CBR methodology set out in Ordinance 3883-U.
- Assessment of Principle 17: Compliant.
- Recommendation: introduce formal requirements that credit policies identify size and risk thresholds requiring board or senior management approval.

### Asset quality, loan classification, and provisioning (Principle 18)
- Asset classification categories (Regulation 254-P) and provisioning levels (exact):
  - Quality category I Standard: 0 %
  - Quality Category II Non(sub)-standard: 1–20 %
  - Quality Category III Doubtful: 21–50 %
  - Quality Category IV Problem: 51–100 %
  - Quality category V Bad: 100 %
- Observed developments:
  - Asset quality deteriorated; NPLs grew fast, especially in household sector.
  - Forbearance measures introduced December 2014 expired December 2015; in 2016 some rescheduling rules allowed delayed reclassification until borrower repaid full amount.
  - Collateral valuation (particularly real estate) unreliable; repossession may take up to two years after a court decision in practice.
- Supervisory powers:
  - CBR can require reclassification and increased provisioning per Regulation 254-P.
- Recommendation: accelerate legal amendments to give CBR additional tools on provisioning and collateral valuation.

---

### CONCENTRATION RISK, RELATED PARTIES, AND LARGE EXPOSURES

### Concentration risk and large exposure limits (Principle 19)
- Large loan exposure (CBR statistic): in 2014 grew by 34.9 percent to RUB 19.5 trillion.
- Share of large loans in banking sector assets: 25.1 percent.
- Statutory limits and planned changes:
  - Exposure to single counterparty limit: 25 percent of bank’s capital (to be lowered to 20 percent from January 1, 2017).
  - Aggregate large exposures limit: 800 percent of own funds (eight times).
- Reporting and breaches (exact figures):
  - Number of credit institutions that violated N-6 during reporting year: 122 (69 in 2013).
  - Number that violated N-7: 14 (6 in 2013).
  - N-9.1 calculation by 306 credit institutions as of January 1, 2015 (36.7 percent of total operating credit institutions).
  - N-9.1 breaches as of January 1, 2015: breached by six credit institutions.
- Recommendation: horizontal review of conformity with new statutory ratio N-25 and inclusion of concentration risk in ICAAP and stress testing.

### Transactions with related parties (Principle 20)
- Legal changes since 2015 expanded RP definitions; Article 64¹ (economic linkages) to enter into force in 2017.
- Key weaknesses:
  - Fragmented RP definitions across multiple texts; new regime not implemented before January 2017.
  - No legal requirement that lending to RPs be on same terms as those offered to public; CBR recommendations exist but are nonbinding.
  - CBR lacks authority to impose penalties on directors who personally benefited from favorable conditions.
- Assessment outcome for Principle 20: Materially Non Compliant.
- Recommendations (selected):
  - Strengthen and consolidate RP definition; introduce prohibition of more favorable terms to RPs; require directors to recuse and impose immediate reporting of serious breaches of statutory ratios; extend board approval/write-off rules to all bank forms.

---

### AML/CFT SUPERVISION (CP29) — FINDINGS AND RECOMMENDATIONS

### AML/CFT supervisory findings
- CBR supervision of AML/CFT is intensive and intrusive; non-compliance is a leading cause of sanctions and license revocations.
- Common deficiencies identified by CBR Chief inspectorate:
  - Know your Customer/Customer Due Diligence (KYC/CDD).
  - Identification of the Ultimate Beneficial Owner (UBO).
  - Frequency in updating customer information.
  - Timely Suspicious Transaction Reports (STRs) to the FIU.
  - AML/CFT internal control rules.
  - AML training to employees.
- Market awareness: workshops on AML/CFT Law with professional associations; over 70 letters issued with recommendations.

### Enforcement and capacity
- Enforcement: lack of compliance with AML law accounts for about 25 percent—if not more—of violations; AML-related license revocations notable.
- Recommendation: promote more risk-based approach, apply proportionality in enforcement, strengthen UBO verification, include ML/TF risks in external auditors’ scope, increase targeted AML onsite inspections, consider a national risk assessment.

### Legal and institutional context
- Federal Law 86-FZ (July 10 2002) and Federal Law 251-FZ (July 23, 2013; effective September 1, 2013) define CBR remit; Rosfinmonitoring (FIU) has AML/CFT responsibilities; oversight of AML/CFT conformity in banking sector is exclusive responsibility of the CBR.
- Protection for reporting staff: law can be understood to prevent liability for submitting reports for AML purposes, but explicit exemption language limited.

---

### CRISIS MANAGEMENT, RESOLUTION, DIA, AND PUBLIC SAFETY NET

### Deposit Insurance Agency (DIA) and crisis roles
- DIA roles: deposit insurer and corporate receiver/liquidator of failed banks; entitled to resolve banks participating in deposit insurance.
- Deposit Insurance Fund: as of January 1, 2016, had RUB 56.6 billion.
- Deposit insurance coverage:
  - Insurance compensation raised in 2014 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 number of deposit accounts of individuals and 65.1 percent of total amount of individuals’ deposits.
  - Average deposit: RUB 300,000.
- DIA adopted risk-adjusted differential premium system; premiums set by riskiness starting Q3 2015.

### Licensing, liquidation, and joint inspections
- CBR revoked licenses: 86 credit institutions in 2014 and 93 in 2015.
- As of January 2016, liquidation pending in 288 credit institutions whose banking licenses had been revoked.
- CBR can perform joint inspection with DIA and propose DIA participation in bankruptcy prevention; DIA must decide within 10 days whether to participate and, if participating, propose implementation plan within 20 days.

### Resolution powers and gaps
- Legal amendments require D-SIBs to submit Recovery Plans; CBR may request Recovery Plans from other institutions and is entitled to develop Resolution Plans for D-SIBs.
- DIA seeking bail-in powers (write down/convert unsecured liabilities); current system does not allow bridge banks.
- Recommendation: finalize resolvability and bail-in legal framework; strengthen resolution planning.

---

### ENFORCEMENT, SANCTIONS, AND TRANSPARENCY

### Enforcement toolkit and use (Principle 11)
- Legal basis: Article 73 (inspections) and Article 74 (remedial measures and sanctions) of CBL.
- Examples of measures (preserved language and limits):
  - require elimination of violations; charge penalty up to 0.1 percent of bank’s minimal capital; restrict operations up to six months; charge fine up to 1 percent of paid-up capital; prohibit certain operations for one year; appoint provisional administrator; revoke license.
  - Since Federal Law 484-FZ (December 29, 2014), repeated AML/CFT violations constitute ground for mandatory license revocation.
- Supervisory activity statistics (exact counts):
  - 2014: written notices sent to management of 873 supervised banks; 444 meetings with banks held; orders to eliminate violations applied to 546 banks; fines imposed on 133 banks; restrictions on certain transactions imposed on 209 credit institutions; some transactions banned in 64 banks; 53 banks prohibited from opening branches.
  - 2015: preventive actions applied to 822 banks; 673 credit institutions subject to enforcement actions.
  - Administrative fines levied on banks over past five years:
    - 2015: 212 banks fined;
    - 2014: 133 banks fined;
    - 2013: 171 banks fined;
    - 2012: 192 banks fined.
  - AML/CFT issues were considered in 48 percent of all completed inspections in 2014.
  - 2014 adjudications on administrative offenses: 1,120 cases completed with 319 fines, 539 warnings, 262 closures of cases (numbers include adjudications concerning executives).
- Judicial challenges:
  - 2014: 14 license revocation challenges, one ruled against CBR.
  - 2015: 22 challenges with no overturns.

### Transparency and suggested improvements
- Instruction 59 (March 31, 1997) on penalizing credit organizations is internal and being revised to improve transparency; new instruction expected first half 2016.
- Recommendations: make sanction criteria more transparent; formalize guidelines for administrative fines; explore amendments to extend CBR enforcement reach (e.g., remove one‑year limitation for action against shareholders, augment 30‑day windows), increase sanctions against individuals.

---

### CONSOLIDATED SUPERVISION AND CROSS‑BORDER COOPERATION (Principles 12–13)

### Consolidated supervision (Principle 12)
- Legal basis: CBR powers under CBL Articles 4, 56, 57; BBAL (Article 4) defines banking group and bank holding company with definitions aligned to IFRS.
- Reporting and supervisory instruments: Regulation 3089-U, Regulation 462-P, Regulation 2332-U, Regulation 509-P, Regulation 510-P, Regulation 3777-U, Regulation 3780-U, and related instruments.
- Supervisory practice:
  - Over 120 banking groups in Russia at time of assessment.
  - Coordinated inspections of group members undertaken (counts preserved):
    - Chief Inspectorate coordinated inspections of 14 non-credit financial institutions and 12 credit institutions in 2014; 18 non-credit and 10 credit institutions in 2015.
  - As of December 1, 2015: 740 banks in Russian Federation, 10 SIBs; SIBSD supervises 15 banks representing about two thirds of assets and capital.
- Assessment: Largely Compliant.
- Remaining gaps: practical application of new powers still developing; CBR limited experience visiting foreign operations; cannot require closure of a foreign branch of a Russian bank or prevent acquisition of a non-bank financial entity by a banking group.

### Home–host cooperation (Principle 13)
- CBR concluded 38 formal bilateral arrangements (cooperation agreements, MoUs, SoCs) with foreign supervisors.
- CBR participates in supervisory colleges for major groups (Sberbank, VTB) and others; frequency of colleges: once or twice a year typically.
- Legal obstacle: Article 73 requires bank consent for foreign supervisors’ access to premises of Russian subsidiaries; in practice consent not generally withheld but removal of requirement recommended.
- Assessment: Largely Compliant.
- Recommendations: prioritize MoUs with EU counterparts (e.g., ECB, French authority), reinvigorate college practices, pursue joint inspections and cross‑border crisis planning.

---

### MARKET RISK, IRRBB, OPERATIONAL RISK, AND OTHER THEMES

### Market risk (Principle 22)
- Market risk less developed in Russia; standardized approaches used for regulatory capital; Ordinance 3624-U and Regulation 511-P set qualitative and quantitative requirements.
- Net open position caps: 10 percent per individual currency; 20 percent in aggregate (noted recommendation to re-examine in light of volatility).
- Assessment: Largely Compliant.

### Interest rate risk in the banking book (IRRBB) (Principle 23)
- Chapter 5, Section 5.2 requires stress testing of interest rate movements; Ordinance 3624-U sets IRRBB expectations.
- Assessment: Largely Compliant.
- Recommendation: CBR should focus supervisory attention on IRRBB given limited hedging instrument options.

### Operational risk (Principle 25)
- OR norms are detailed but many remain recommendations rather than binding law; ICAAP requires OR coverage but reporting regime not yet fully implemented.
- CBR lacks authority to establish outsourcing requirements.
- Recommendation: convert CBR OR recommendations into binding instruments and adopt BCBS guidance on OR, business continuity and outsourcing.

---

### SUMMARY ASSESSMENT HIGHLIGHTS AND SELECTED CROSS‑CUTTING RECOMMENDATIONS

- Overall pattern:
  - Major legal and regulatory reforms since 2013 strengthened CBR powers, introduced ICAAP/SREP, enhanced consolidated supervision, and modernized RM expectations.
  - Implementation and supervisory track record are at an early stage for many reforms; effectiveness depends on timely, consistent application and supervisory capacity.
- Selected recommended actions (preserve phrasing and priorities from source):
  - Include language in the CBL to clearly segregate CBR’s safety and soundness duties from other objectives; allow CBR access to banking data older than five years.
  - Introduce legal protection for staff acting in good faith and greater transparency for dismissal procedures.
  - Finalize and implement regulations on resolvability and complete resolution assessments for all banks; consider bail-in and bridge bank arrangements.
  - Remedy legal deficiencies regarding external auditors: powers to reject/rescind auditors, require rotation, and mandate prompt notification to supervisor of material audit findings.
  - Strengthen RP legal framework: consolidate definitions, require arm’s-length terms, require director recusal, and immediate reporting for serious ratio breaches.
  - Accelerate amendments to give CBR tools on provisioning and collateral valuation; address lengthy collateral realization processes.
  - Intensify targeted AML/CFT supervision, promote risk-based approaches, and ensure proportionality and transparency in enforcement.
  - Monitor and evaluate ICAAP/SREP rollout (SIB ICAAP submission by end-2016; CBR review from 2017); perform horizontal reviews of RM, concentration, and ICAAP implementation across banks.
  - Consider extending proportionate liquidity/funding contingency requirements from Regulation 510-P to non-systemic banks.

*Source: IMF staff report — content unit: _cr16303.*

### INTRODUCTION _________________________________________________________________________________ 5

### INTRODUCTION

### Major institutional changes and progress
- Establishment of the Central Bank of the Russian Federation (CBR) as a unified or “Mega Regulator” in 2013.
- Revisions to the perimeter of regulation (definition of banking group and bank holding company) aligned with international standards, facilitating consolidated supervision.
- CBR granted power to impose standards for risk management (RM) and internal controls of banks and banking groups.
- Many impediments to cooperation and supervisory information exchange (domestic and cross-border) have been largely or wholly addressed.
- Track record on some reforms is limited because a number of important changes are extremely recent and are at very early stages of implementation.

### Development of risk-based supervision
- CBR is developing and enhancing its Risk Based Approach to supervision, including:
  - Risk differentiation of the banking system into different groups.
  - Establishment of a dedicated division to supervise systemically important banks (SIBSD).
- New regulations focus on quality of RM and governance, introducing scrutiny of risk appetite in firms.
- Active supervision and assessment of the impact of new regulations is expected to be further developed; some elements of implementation remain about a year away.

### Regulatory approach and challenges
- Regulatory approach is highly rules based, posing challenges to a more forward-looking, early-intervention risk based supervisory regime.
- Two key challenges identified:
  - Shifting supervisory mindset from finding/eliminating violations to incorporating forward-looking early intervention that seeks to avoid violations emerging.
  - Ensuring that the rules remain relevant and appropriate to the prevailing risk environment; opportunity to review regulatory canon for internal consistency and eliminate outdated/overlapping elements.
- In some instances CBR may only be able to recommend changes to firms rather than enforce binding early intervention; monitoring these situations is encouraged to identify possible legislative amendments.

### AML/CFT supervision
- Supervision and Anti-Money Laundering/Countering Terrorist Financing (AML/CFT) regulations have been improved; money laundering/terrorist financing remain national concerns.
- CBR supervision of AML/CFT is intensive and intrusive; CBR has a strong track record enforcing AML/CFT requirements, with lack of compliance being the most frequent reason for sanctions, including revocation of licenses.
- Common deficiencies identified by CBR Chief inspectorate:
  - Know your Customer/Customer Due Diligence (KYC/CDD).
  - Identification of the Ultimate Beneficial Owner (UBO).
  - Frequency in updating customer’s information.
  - Timely Suspicious Transaction Reports (STRs) reporting to the FIU.
  - AML/CFT internal control rules.
  - AML training to employees.
- Market awareness efforts include workshops on practical application of the AML/CFT Law with professional associations.
- Cooperation with other domestic agencies has been successful.
- Further improvements desirable: more risk-based approach to ML/TF in industry and CBR, more proportionality in enforcement, strengthen understanding of ML/TF risks in banks (UBO and PEPs), include ML/TF risks in scope of duties for external auditors.

### Information flow and external auditors
- Communication and flow of information improving but limitations remain:
  - No requirements for banks or professional service providers (external auditors or other experts used by the CBR) to notify CBR in advance, or at all, of material information relevant to soundness and stability of supervised bank.
  - No legal protection available for CBR or professional service provider if a professional third party discloses information; CBR must proactively raise relevant questions to uncover needed information.
  - Need to share responsibility more evenly with banks and external auditors and to establish clear expectations that banks/auditors provide relevant information in a timely manner, even if outside specific inspection scope.
  - Legal protections should be put in place as necessary.

### Legal and supervisory deficiencies identified
- External audit profession:
  - Legal framework materially deficient.
  - Supervisor should have powers to reject or rescind appointment of an external auditor lacking independence or experience, ensure rotation, and meet with audit firm to discuss matters pertaining to a supervised institution.
- Related Parties (RPs):
  - Legal regime streamlined since 2015 but deficiencies remain.
  - Law captures transactions with persons connected to bank and groups, but:
    - No requirement that lending to affiliates be on same terms and conditions as those generally offered to the public; CBR recommendations exist but are nonbinding.
    - CBR lacks authority to impose penalties on directors who personally benefited from favorable conditions.
    - Concept of economic linkages introduced in law but will not be implemented before 2017.
- Country risk and transfer risk:
  - No specific requirements for management of country risk and transfer risk except for exposures to borrowers residing in off-shores centers.
  - Minimum requirements for risk policies, processes and limits need substantial strengthening.
- Major acquisitions:
  - CBL does not require banks to seek prior CBR approval for domestic investments in nonbank institutions, limiting CBR’s ability to measure impacts on bank condition or supervisory transparency on a consolidated basis.
- Operational risk (OR) and outsourcing:
  - Norms for OR are mostly recommendations from CBR; Ordinance on ICAAP obliges banks to have RM strategies including OR but regime not implemented yet.
  - Reporting mechanisms need improvement.
  - CBR lacks authority to establish outsourcing requirements for credit organizations.
- CBR objectives and potential conflicts:
  - CBR has multiple objectives established in law; clarity of purpose for supervisory function is important.
  - External observers may be uncertain whether CBR decisions are influenced by institutional objective for development of the financial sector and its significant stake in the most systemic banking group.
  - For supervisory reputational purposes, authorities could consider a different holding structure for government interests that do not involve the CBR.

### Methodology of the assessment
- Assessment against the Basel Core Principles (BCP) methodology issued by the Basel Committee on Banking Supervision (BCBS) in September 2012; authorities opted to be assessed on the essential criteria.
- Differences noted with prior assessments:
  - Last complete BCP assessment for the Russian Federation conducted in 2007; targeted assessment in 2011 examined 10 CPs.
  - 2012 revision introduced substantive changes, new principles and new essential criteria; revised CPs contain 247 separate essential and additional criteria.
- The revised BCPs strengthen requirements for supervisors, approaches to supervision, and supervisors’ expectations of banks, with a heightened focus on actual use of powers in a forward-looking early intervention approach.
- Assessment process:
  - Review of laws, rules, guidance; extensive meetings with CBR, Ministry of Finance (MoF), auditing firms, and banking sector participants.
  - Authorities provided comprehensive self-assessment and responses; access to staff and confidential supervisory documents and files.
  - Time constraints limited the depth of document study, but authorities facilitated access.
  - Assessment team noted very high quality of cooperation from authorities.
- Proportionality and context:
  - Standards evaluated in context of sophistication and complexity of Russia’s financial system.
  - Proportionate approach underpins CPs: expectations on supervisors and standards imposed on banks should be commensurate with complexity, interconnectedness, size, risk profile, and cross-border operations.
  - An assessment must consider jurisdictional context; results are not directly comparable across countries.

### Institutional and market structure — overview and key statistics
- Banking is the most significant sector of Russia’s financial system; nonbank sector is growing.
- Bank assets amounted 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.
- Russia has the lowest ratio of bank credit-to-GDP among comparator group of Brazil, India, China, and South Africa, but higher access and efficiency and overall financial development higher than the EM average.
- Banking system structure and concentration:
  - Number of banks fell 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 hold 13 percent of system assets.
  - 11 percent of system assets are 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 as the remaining 700+ banks.
  - Many small banks operate in mono-industrial cities and are often systemically important for their regions.

_This content unit: INTRODUCTION (pages and sections as provided)._

### 9.      Despite market stresses since 2013, the authorities’ policy response has supported the

### _cr16303 - 9.      Despite market stresses since 2013, the authorities’ policy response has supported the

### Banking sector soundness and regulatory forbearance
- CBR developed regulatory forbearance measures since the slump in oil prices, the slowdown in global growth and sanctions; these measures “positively helped the banking sector” and “may mean that indicators have been overstated since end-2014.”
- Authorities have been steadily withdrawing these measures with the exception of the FX refinancing operations.
- Capital adequacy:
  - “remained broadly unchanged since March 2015 at about 13 percent” (partly reflecting a recapitalization program),
  - “before declining to about 12 percent in early 2016 as regulatory forbearance was lifted.”
- Liquidity and funding:
  - Loan-to-deposit ratio decreased to 115 percent by end-2015 (returning to the level of mid-2013),
  - Improvement reflects increased retail deposits and use of the reserve fund to finance the budget deficit.
- Nonperforming loans (NPLs) “have increased, but remain below their 2008 peak.”
- Capital issuance increased over 2015, offsetting the decline in retained earnings.

### Profitability
- Bank profitability “has dropped markedly—with the return on assets reaching 0.3 percent at end-2015.”
- Main reasons for the drop in profits: credit losses and declining net interest income.
- Fee income: “Banks’ profitability is generated largely through fees, other non-lending fees and spreads.”

### Nonbank financial institutions (NFIs)
- NFIs play an important role despite being a smaller segment than banks; sector primarily includes insurance companies, private pension funds, and management companies.
- Structure of Nonbank Financial Organizations as of September 30, 2015:
  - Insurance entities: Active Organizations 509; Assets 1,626.70 (In billions of rubles); Capital 429.6 (In billions of rubles)
  - Non-state Pension funds: Active Organizations 110; Assets 2,822.90; Capital 146
  - Mutual investment fund: Active Organizations 1,542; Assets 2,560.30; Capital 2,303.9
  - Microfinance organizations: Active Organizations 3,500; Assets 62.4; Capital 48.4
  - Professional securities market participants: Active Organizations 540; Assets 753.6; Capital 281.4
- Source: CBR.

### Regulatory and supervisory framework
- Since 2014, CBR has become the “mega regulator” of financial markets, absorbing regulatory and supervisory powers for all categories of financial institutions and given an explicit financial stability mandate.
- Basel standards:
  - Basel III capital ratios entered into force in 2013.
  - 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.
- CBR has used different tools for macroprudential policy but “does not have an ex-ante toolkit.” In the past macroprudential instruments were used in an ad hoc manner with no formal triggers.

### Preconditions for effective banking supervision and macroeconomic policy
- Institutional roles:
  - Macroeconomic policy led by CBR (monetary policy) and the MoF (budgetary policy).
  - In mid-November 2014, CBR switched to a floating exchange rate regime.
- Policy normalization:
  - Since end-January 2015, CBR started unwinding the emergency rate hike to 17 percent set in December 2014.
  - “The current policy rate is set at 11 percent and inflation is expected to continue to decrease.”
  - Inflation target: 4 percent, to be achieved by end-2017.
  - “In 2015 alone, the Russian currency lost almost 20 percent of its value vis-à-vis the U.S. dollar.”
- Fiscal considerations:
  - MoF announced review of the Federal budget for 2016; government is considering reductions of budget expenditures compared to figures set in the budget law for 2016 and is looking to sell some of its shares in state-owned companies.
  - “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.”

### Framework for financial stability policy formulation
- The inter-agency National Council on Ensuring Financial Stability (FSC) was created as an advisory body to exchange views and coordinate on financial stability matters.
  - FSC can provide recommendations and request information; 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; comprises senior representatives including CBR First Deputy Governors, the Minister of Finance, Deputy Minister of Finance, Minister and Deputy Minister of Economic Development, and the Managing Director of the State Corporation Deposit Insurance Agency.

### Public infrastructure: business laws and judiciary
- Business laws:
  - Based on Chapter 4 of the Civil Code, 208-FZ Federal Law on Joint Stock Companies, and 14-FZ Law on Limited Liabilities Companies.
  - Major amendments: Federal Law 99-FZ and Federal Law 210-FZ (2014 and 2015) changed company types, increased protection of investors holding Russian local securities, and improved conditions for participation in corporate actions (e-voting, e-proxy voting).
  - Insolvency Law amended in 2014 to incorporate changes in insolvency procedures for credit institutions.
  - 2013 requirement: financial institutions must identify clients, clients' representatives and beneficial owners; definition of “beneficial owner” aligned with FATF Forty Recommendations Glossary.
- Judiciary:
  - Formal independence from legislative and executive powers; regulated by Constitution and codes (Criminal Procedure, Civil Procedure, Administrative Procedure, Arbitration Procedure) and the 1996 Federal Constitutional Law on the Judicial System.
  - February 2014: Supreme Court merged with Supreme Arbitration Court to form a new Supreme Court; current system composed of Constitutional Court, Supreme Court, federal courts, district courts, magistrate courts, military courts and arbitration courts.
  - World Bank Global Competitiveness Report 2014–15 rankings:
    - Judicial independence: 109 out of 144 (119 a year earlier).
    - Efficiency of legal framework in settling disputes: 110.
    - Efficiency in challenging regulations: 99.
    - Protection of property rights: 120.
- Legal professions and appointments:
  - Public prosecutor, investigator, judge, attorney (advokat), and notary are principal legal professions.
  - Prosecutor General appointed/removed by Council of the Federation on recommendation of the President; term of office is five years.
  - Investigative Committee Chairman appointed/dismissed by the President and reports annually to the President.
  - Judges: Supreme Court judges appointed by Council of the Federation upon recommendation of the President; other judges appointed by the President.
  - Lawyers need a license and membership in a regional Bar Chamber to practice as attorneys.

### Collateral realization and accounting framework
- Collateral enforcement:
  - It “may take two years after a court decision” for a credit organization to acquire collateral in the case of loan default, during which collateral may deteriorate and banks may be asked to create reserves.
- Accounting principles:
  - MoF is the official standard-setting body and endorsement body of IFRS.
  - According to Law 208-FZ and Government Decree 107, IFRS are to be applied in Russia based on a Russian translation prepared by the MoF.
  - CBR must approve accounting standards for credit institutions, including RAS.
  - Authorities state RAS are being brought into compliance with IFRS and “will be fully in line by 2017.”
  - RAS require balance sheet, statement of results of operations, statement of cash flow and statement of changes in ownership equity.
- Use of IFRS and RAS:
  - Both IFRS and RAS are used; IFRS are required for consolidated financial statements of the majority of financial entities and those companies whose securities are listed on stock exchanges.
  - All legal entities are required to prepare stand-alone financial statements based on RAS.
- Key differences:
  - RAS never adopted IAS 39 on Financial Instruments (IAS 39 was replaced in July 2014 by IFRS 9 which will be adopted by 2018).
  - Other variations exist in calculation of capital and reserves.
  - Impairment testing of fixed assets was recommended by CBR since 2013 and “in 2016 will become mandatory.”

### External audits
- Auditing Law requires financial companies to perform an annual audit; auditing is defined as an independent check to express an opinion on the reliability of financial statements.
- Requirements on the audit report form, content, and signing procedure set by federal auditing standards.
- Code of Professional Ethics of Auditors adopted by the Audit Council governs audit firm conduct.
- Audit firms and auditors must be independent, comply with audit secrecy, and be members of a self-regulating organization of auditors; must establish internal and external quality assurance systems based on federal standards.
- Market structure:
  - International firms broadly cover IFRS; smaller domestic firms cover RAS.
  - Auditors must obtain an auditor qualification certificate issued by self-regulating organizations of auditors.
  - An audit firm is required to have 50 percent of the collegial executive body as auditors but may participate in tenders with just 2–3 auditors.
  - As of 2014, there are 3,400 certified auditors in Russia.

### Payment and clearing systems, electronic money, and credit bureaus
- Payment systems:
  - BRPS (CBR payment system) is systemic and comprises VER, MER, BESP, and a payment system based on letters of advice.
  - Systemically important payment system: Payment System - National Settlement Depository (PS NSD), part of OJSC MICEX-RTS Moscow Exchange (Moscow Exchange), used for open market, repo, and FX transactions of CBR.
  - Four other important payment systems for consumption: CONTACT, Visa, Golden Crown, and MasterCard.
  - There are another 25 payment systems in operation.
- Strategy and oversight:
  - 2013: CBR adopted the National Payment System Development Strategy with an Action Plan; focus areas included consumer protection, automation of government payments and adoption of ISO 20222 standards.
  - An advisory council headed by the Governor of CBR was formed comprising executive authorities, professional payment services market participants, banking associations and other associations.
- Electronic money and supervision:
  - Electronic money is increasingly important; CBR is enhancing regulation and supervision.
  - 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.
- 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.

*Source: _cr16303 - 9.      Despite market stresses since 2013, the authorities’ policy response has supported the (IMF content unit).*

### 32.      Credit bureaus are supervised by CBR and have been the subjects of reforms to

### Credit bureaus are supervised by CBR and have been the subjects of reforms to strengthen the financial and real sector

### Credit bureaus and credit histories
- CBR supervises activities of credit bureaus under the Federal Law “On Credit Histories.”
- The Federal Law “On Credit Histories” entitles CBR to keep 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.
- Amendments in 2014 and 2015:
  - Abolished the need for borrowers’ consent for credit institutions to send their information to a credit bureau.
  - Provided CBR with a power to request and receive credit history reports from credit bureaus.

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

### Framework for crisis management, recovery, and resolution
- DIA roles and recent assignments:
  - DIA acts as deposit insurer and 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.
- License revocations and liquidations:
  - 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.
- Joint inspection and DIA decision-making:
  - Before any determination on rehabilitation, CBR and the DIA can perform a joint inspection.
  - CBR can ask the DIA to take part in prevention of a bank’s bankruptcy if it threatens depositors or system stability.
  - DIA may refuse participation based on cost-effectiveness and other criteria; at the time of assessment, DIA had not decided how to measure feasibility of participation.
  - DIA can use the deposit insurance fund or, as in the majority of cases, ask for a loan from the CBR for bank rehabilitation.
- Legal and structural reforms:
  - Federal Law 127-FZ on Insolvency amended in 2014 to allow 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:
    - Obligation for Domestic Systemically Important Banks (D-SIBs) to submit Recovery Plans to CBR.
    - CBR option to request Recovery Plans from any other credit institution.
    - CBR entitlement to develop Resolution Plans for D-SIBs.
  - 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.
  - Current system does not allow the creation of a bridge bank.

### Adequacy of systemic protection (public safety net)
- Deposit Insurance Agency (DIA) history and fund:
  - DIA established in 2004; has delivered more than 300 deposit pay-outs since 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.
- Deposit insurance coverage and parameters:
  - 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, 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.
- Funding and premiums:
  - 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
- Ownership transparency and customer identification:
  - 2014 requirement for Russian companies to disclose information on their “beneficial owners” in accounting statements; definition aligned with FATF requirements.
  - Prohibition on maintaining accounts in fictitious names and on 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.
- Governance enhancements:
  - Federal Law 334-FZ of 2014 obliges credit institutions to publicly disclose information on qualifications and experience of management and BoD members.
  - Requirements for goodwill for founders and owners of more than 10 percent of shares, 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.
  - Corporate Governance Code remains voluntary.

### Main findings: supervisory responsibilities, licensing, and supervisory methods
- Responsibilities, objectives, powers, independence, accountability (CPs 1–2):
  - Legal framework provides CBR with necessary powers to authorize banks, conduct ongoing supervision, oversee compliance, and undertake corrective actions.
  - Major reforms increased CBR’s duties and powers, though implementation is not yet fully tested.
  - Concerns: legal protection for staff, transparency of dismissal procedures, and decision-making arrangements to support perceived objectivity and independence.
- Ownership, licensing, and structure (CPs 4–7):
  - Licensing regime appears exhaustive; management and board members must meet fit and proper qualifications, including absence of a criminal record.
  - CBR lowered vetting threshold for significant transfer of ownership from 20 to 10 percent.
  - Suggestion: establish formal procedures for attentive offsite supervision (and onsite inspection if necessary) for newly established banks to ensure compliance with license terms.
  - Weakness: CBL does not require prior CBR approval for domestic investments in nonbank financial institutions by banks, limiting advance assessment of acquisition impact.
- Methods of ongoing supervision (CPs 8–10):
  - CBR has developed risk-based approaches and is introducing the next stage of risk-based supervision.
  - Introduction of SREP based on banks’ internal assessments; first full implementation cycle will begin from 2017.
  - Gaps: resolution assessment and planning; need legal power to require operational or institutional changes based on recovery assessments.
  - Organizational changes: reconfigured on- and offsite supervisory functions; separate division to supervise systemically important banks; methodology (Ordinance 3737-U) in force since July 2015 with annual reassessment; capital buffers applied consistent with Basel.
  - Information access: strong rights, but no requirement for banks to notify CBR in advance of substantive changes or material adverse developments; notification requirements largely retrospective.
- Corrective and sanctioning powers (CP 11):
  - CBR has a wide range of tools and sanctions and a good enforcement track record, including license revocations.
  - Areas for improvement: clarity and transparency in enforcement (especially AML), predictability, consistency, proportionality; AML fines considered excessively low and not deterrent enough.
- Cooperation, consolidated, and cross-border supervision (CPs 12–13):
  - Framework for domestic and cross-border cooperation is satisfactory; close cooperation with Rosfinmonitoring and DIA.
  - Article 73 of CBR legislation requires written consent for a foreign supervisory authority to access premises of a subsidiary established in Russia; in practice this has not been an issue.
  - Cross-border crisis planning and involvement in recovery and resolution plans have seen initial moves.
  - Consolidated supervision framework enhanced since last assessment (powers to act on parent violations, enhanced information exchange, expanded definitions based on IFRS); practical application remains to be demonstrated.
  - Remaining legal gaps: 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):
  - 2013 Articles 11.1 and 11-1-1 clarified BoD roles; 2014 revision of Corporate Governance Code important but non-binding.
  - New regulations give CBR more leverage to monitor and enforce CG issues; current CG regime is piecemeal and mixes binding and optional norms.
  - Several regulations issued in 2015 will not be enforceable before 2017; effective implementation not yet assessable.
  - Governance deficiencies linked to related party transactions and preferential lending to affiliates.
- Prudential requirements, regulatory framework, accounting and disclosure (CPs 15–29):
  - Significant progress in risk management (RM) supervisory and operational framework; Federal Law 146-FZ of July 2, 2013 and Ordinance 3624-U clarified BoD responsibilities and empowered CBR to impose Pillar II measures, including capital add-ons.
  - 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.
  - Implementation perspective is limited because key aspects have not yet been implemented.
  - Capital adequacy:
    - Framework consistent with international standards; updated to include Basel 2.5 and Basel III.
    - Reforms introduced in December 2015, most effective January 2016.
    - All Russian banks subject to Basel capital regulation on both standalone and consolidated levels.
    - Capital buffers (capital conservation buffer, countercyclical buffer, systemic risk buffer) implemented from January 1, 2016.
    - RCAP assessed implementation of capital buffers as compliant with Basel standard.
    - ICAAP/SREP effectiveness remains to be assessed; Pillar 2 not fully implemented.
    - Timetable: systemically important banks (SIBs) will have to submit their ICAAP by the end of 2016 and CBR will start reviewing their quality in 2017.

*Source: IMF Staff Report excerpt (content unit: _cr16303 - 32).*

### 54.      RM standards around credit risk, as with the other risk areas, are still in the process of

### _cr16303 - 54.      RM standards around credit risk, as with the other risk areas, are still in the process of being fully implemented.

### Credit risk supervision and stress testing
- RM standards around credit risk are still in the process of being fully implemented.
- Supervision of credit risk is in a more advanced and developed position than that of other risks due to:
  - Activities of the Chief Inspectorate.
  - Analysis by curators.
  - Work carried out on stress testing.
- CBR performs its own stress tests on portfolios, monitors regional and sectoral trends, and performs considerable cross checking of information on major exposures.

### Asset quality, loan classification, and provisioning
- Asset quality has deteriorated over the past months; NPLs have grown at a fast pace (especially in the household sector).
- Depreciation of the ruble led CBR to take forbearance measures through the issuance of three letters of a temporary nature.
  - These measures were introduced in December 2014 to help banks weather problems stemming from:
    - the decline in global oil prices,
    - the Western sanctions over the Ukraine conflict,
    - and the depreciation of the ruble.
  - Some measures allowed banks to restructure loans without making provisions or not to re-qualify borrowers in a lower category under certain conditions (for example, if the problem of servicing the debt arose from the deterioration of macroeconomic conditions).
  - These regulatory concessions expired in 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.
- It is realistic to assume that a certain portion of rescheduled loans currently sits in a lower loan category.
- Only an Asset Quality Review would permit a clear assessment of the current NPL situation.
- Poor practices detected led to enforcement action; CBR inspections reveal violations during asset quality assessments, including:
  - lending to shell companies,
  - overvaluation of collateral,
  - misreporting,
  - unreliable financial statements.
- Collateral valuation, particularly real estate, is a difficult task in Russia:
  - Appraisals are not reliable and external appraisers have not been trustworthy for many years.

### Concentration risk and large exposures
- The regulatory regime for concentration risk and large exposure limits has been improved.
- CBR has a wide range of powers to address excessive concentration risk, including power to instruct banks to mitigate exposure.
- Much of the progress made will not be measurable before 2017.
  - For RM purposes, SIBs have begun to include the impact of significant risks—including risk concentrations—into their stress testing programs since January 1, 2016 only.
  - For non-SIBs, this approach is set to start on January 1, 2017.
- The definition of economic linkages is not implemented yet, undermining CBR’s ability to oversee the entire spectrum of concentration.
  - Determination of relatedness between customers connected economically will start to be implemented in 2017.
  - The new regime concerning exposures arising from transactions of person(s) connected to the credit institutions itself will not be implemented before January 2017.
- Market participants consider large exposures a matter of concern.
- CBR 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 the banking sector assets remained unchanged over the year and stood at 25.1 percent.

### Country risk and transfer risk
- There are no specific requirements for management of country risk and transfer risk; general RM and internal control regulations apply.
- Country risk is assessed on an ad hoc basis; no specific guidelines or regulations for country or transfer risk outside of the general BCBS principles.
- Minimum requirements for risk policies, processes, and limits are uncertain.
- Several improvements are desirable to bring Russia to a higher degree of conformity, especially in the context of ruble depreciation.

### Related parties (RPs) and related-party transactions
- The framework for transactions with RPs is still weak despite recent progress.
- Since 2015, important amendments introduced to the CBL streamline the legal regime applicable to RPs, including a clearer and broader definition of RP.
- The Banking Supervisory Committee of CBR has a role in deciding relatedness of persons or groups to the credit institution.
- Remaining issues:
  - Definition of RPs arises from a “patchwork” of different legal sources rather than a single non-ambiguous source.
  - The new regime concerning exposures arising from transactions of person(s) connected to the credit institutions will not be implemented before January 2017.
  - The regulatory framework does not require that lending to RPs be on same terms and conditions as those generally offered to the public; CBR recommendations exist but are not binding and thus not enforceable.
  - CBR lacks authority to impose penalties on directors who personally benefited from favorable conditions.

### Market risk, interest rate risk in the banking book
- Bank activities giving rise to market risk are not highly developed; volumes of tradable securities have been low and complex structured products do not feature.
- CBR’s powers to enforce RM and control standards are very new.
- Banks are not authorized to use models for Pillar 1 regulatory capital calculations, but may use economic capital models for internal capital adequacy assessment.
- Until 2014, CBR did not have legal powers to enforce RM and control standards; implementation of new RM standards is at a very early stage with no track record yet.
- Interest Rate Risk in the Banking Book framework has been enhanced, but many new provisions, including emphasis on stress testing, are not yet fully in force.
- Limited hedging instrument options make meaningful stress scenarios and management strategies important for banks.

### Liquidity risk management
- CBR liquidity metrics and RM standards are well developed for systemic banks.
- The criterion for systemic banks includes international activity.
- At the time of the assessment, quantitative and qualitative standards and CBR’s scrutiny of banks with respect to liquidity were transitioning to new standards.
- It is hard to determine the extent to which the new framework is fully in force and actively monitored.
- Full LCR metrics and management standards will not apply to non-systemic banks; it is not clear that CBR will have clear grounds to act if concerned by RM standards of non-systemic banks, notably regarding funding risks.

### Operational Risk (OR), legal risk, and reputational risk
- Supervision of OR: several aspects merit improvement.
- The corpus of norms governing OR is detailed, but except for Ordinance 3624-U and Regulation 242-P on internal controls, most relevant norms are recommendations from CBR and not binding.
  - Examples: Letter 76-T on organization of OR at lending institutions and Letter 92-T on organization of Legal Risk and Reputational Risk.
- CBR has recommended adoption of BCBS Principles for sound management of OR, but recommendations are not enforceable.
- Recommendation: convert CBR recommendations on OR into binding instruments to establish a comprehensive and mandatory OR management framework.

### Internal controls, external auditors, and supervisory powers
- Significant differences exist between supervisor’s powers over internal and external control functions.
- Internal control regulatory framework refreshed in past two years with important new powers permitting CBR to apply RM and internal control standards.
- Material deficiencies in legal framework restrict CBR’s ability to act regarding the external auditor function:
  - Supervisor may not reject or rescind appointment of an external auditor lacking independence or experience or not meeting professional standards.
  - Supervisor cannot ensure rotation of external auditor or meet with the audit firm to discuss matters pertaining to a supervised institution.
  - Auditor may not notify supervisor of serious matters that come to the auditor’s attention.
  - Unclear whether CBR has powers to ensure or directly require board and management accountability for properly prepared financial statements subject to an independent external auditor’s opinion according to international standards.
- Reflecting legal framework weaknesses, CBR’s relationship with the auditing community is restricted; CBR does not currently meet with the audit community except on general matters.

### Disclosure and transparency
- CBR attaches importance to disclosure and transparency.
- CBR is entitled to and has exercised powers to take measures in event of non-disclosure, partial disclosure, unreliable information, failure to conduct required audit, or non-disclosure of consolidated statements and the auditor’s report.
- CBR has exercised its powers under the law when assessing disclosure by banks and banking groups.
- Some disclosure standards are at early phases of implementation.
- The Basel disclosure framework (Pillar 3, Market Discipline) is now in force.

*Source: IMF assessment excerpt (pages 23–25).*

### 65.      With respect to combating money laundering/terrorism financing, CBR has made

### _cr16303 - 65.      With respect to combating money laundering/terrorism financing, CBR has made

### AML/CFT: overall finding and remaining weaknesses
- CBR has made important progress but further improvements are needed.
- Banks are subject to close scrutiny; CBR has been forceful against banks and their management which have committed grave violations of the AML regime.
- Identified areas for improvement:
  - promotion of a more risk based approach to ML/TF issues in both the industry and CBR;
  - use of more proportionality when enforcing the law;
  - raise the level of compliance in banks regarding the verification of the ultimate beneficial owner;
  - inclusion of ML/TF risks into the scope of duties to be performed by external auditors.

### Supervisory remit, legal framework and institutional structure (Principle 1 summary)
- Legal basis and sole responsibility:
  - Constitution of the Russian Federation; Federal Law 86-FZ of July 10 2002 on the Central Bank of the Russian Federation (CBL); Federal Law on “banks and banking activity” (banking law).
  - Pursuant to Article 4 of the CBL and Article 41 of the banking law, the CBR has sole responsibility for banking supervision.
  - Article 56 of the CBL: CBR is the “body of banking regulation and banking supervision.”
- “Mega-regulator” reform:
  - Federal Law 251-FZ of July 23, 2013 (came into effect on September 1, 2013) transferred functions of the FFMS and certain powers of the MoF and Government to the CBR.
  - CBR now oversees banking, securities markets, private pension funds, insurance, micro-finance institutions, etc.
- Other domestic authorities and roles:
  - Federal Service for Financial Monitoring (Rosfinmonitoring, the FIU) prevents and combats ML/TF; oversight of AML/CFT conformity in banking sector is exclusive responsibility of the CBR.
  - DIA (Deposit Insurance Agency) responsible for deposit insurance; cooperation arrangements exist (e.g., joint reviews).
- Transparency and publication:
  - CBR publishes normative acts on its website or in the Official Bulletin; normative acts come into force in 10 days after publication unless another date specified.

Key numeric/legal references (as stated):
- Federal Law 86-FZ (July 10 2002); Federal Law 251-FZ (July 23, 2013; effective September 1, 2013).

### Objectives, potential conflicts and powers to set prudential requirements (Principle 1 EC2–EC4)
- Article 3 of the CBL: CBR purposes include:
  - protect the Ruble and ensure its stability;
  - develop and strengthen the banking system of the Russian Federation;
  - ensure stability of and develop the national payment system;
  - develop the financial market of the Russian Federation (since 2013);
  - ensure stability of the financial market of the Russian Federation (since 2013).
- Comment: some objectives (development, conduct of monetary policy) may not be clearly subordinate to safety and soundness; potential for overlapping objectives and perceived conflicts.
- Powers to set and enforce prudential standards:
  - Articles 57, 62, 64 of the CBL empower CBR to set norms for capital, assets, liquidity, large exposure limits, provisioning, disclosure obligations.
  - Articles 73 and 74 grant enforcement powers (remedial measures and sanctions).
- Pillar 2 / ICAAP power:
  - CBR Ordinance 3624-U on risk and capital management (adopted April 15, 2015) entitles CBR to use Pillar 2 instruments to require a bank to increase its CAR; this power had not been used yet as of the mission; noted implementation timelines in footnote:
    - (i) Credit institutions with assets of RUB 500 billion or more: individual level by December 31, 2015, group by December 31, 2016;
    - (ii) credit institutions with assets of less than RUB 500 billion: individual level by December 31, 2016, group by December 31, 2017.
- Limitations noted:
  - inspected period cannot be more than five years before a year of inspection for certain accounting documents (but primary registration documents retained not less than five years after the financial year under Federal law 402-FZ "About accounting").

### Supervisory independence, governance, accountability (Principle 2)
- Formal independence:
  - Article 1 of the CBL: CBR to fulfill functions independently from other federal bodies and local government.
- Accountability and governance:
  - Accountability to the State Duma and the President; State Duma appoints/dismisses CBR Chairman (five-year term) on proposal of the President.
  - Board of Directors (executive) and National Financial Board (NFB) (non-executive) set by CBL; two ministers (MoF and Ministry of Economic Development) may attend Board with consultative vote.
- Appointments and dismissal:
  - Chairman appointed by State Duma for a five-year term, maximum of three consecutive terms; reasons for dismissal are not required by law to be publicly disclosed.
  - BoD composed of the Chairman and 14 executive members, five-year terms.
  - NFB composed of 12 members with mixed appointments from Federal Council, State Duma, President, Government.
- Legal protection for staff:
  - No special provisions in Russian law providing protection against lawsuits for actions/omissions made in good faith; CBR may support employees in litigation at BoD approval; no case has arisen.
- Assessment: Largely Compliant.
- Recommendations (selected from assessment):
  - Include language in the CBL to clearly segregate CBR’s safety and soundness duties from other assigned objectives.
  - Allow the CBR to get access to banking data older than five years.

### Cooperation domestically and internationally (Principle 3)
- Domestic cooperation:
  - Bilateral agreements and interagency bodies (e.g., Interagency Working Group on Combating Illegal Financial Transactions; Interagency Commission for Combating Money Laundering and Terrorist Financing).
  - Close cooperation with FIU and Tax Authority for AML/CFT; cooperation with DIA for crisis prevention, bank resolution.
- International cooperation:
  - Article 51 of the CBL provides legal basis for exchange of confidential information with foreign supervisors.
  - CBR concluded 38 formal bilateral arrangements (cooperation agreements, MoUs, SoCs) with foreign supervisory authorities; examples include Austria, China, Cyprus, CIS countries, Germany, Hungary, Latvia, Italy, Sweden, Finland, Norway.
  - No MoU with France noted despite presence of Société Générale.
  - In 2014 CBR carried out an inspection of a Cyprian branch of a Russian credit institution.
- Confidentiality and reciprocity:
  - CBR provides information on condition that recipient provides equal protection and does not transfer to third parties without CBR written consent (except court orders in criminal cases).
- Assessment: Compliant.
- Recommendation:
  - Establish a formal mechanism of cooperation with the French Supervisory and Resolution Prudential Authority.

### Permissible activities, use of “bank” and deposit-taking (Principle 4)
- Definitions and exclusivity:
  - Banking law defines credit institutions and categories (banks, nonbanking credit institutions, nonbanking credit institutions for money transferring without opening of account, nonbanking credit institutions—central counterparty).
  - A bank has exclusive right to: drawing of deposits from individuals and legal entities; granting of loans; opening and operation of bank accounts for individuals and legal entities.
  - Article 7 of the banking law: only licensed entities may use the word “bank” or “credit organization” in their name (exceptions: CBR and Bank for Development and Foreign Economic Activity).
- Minimum capital and deposit-taking:
  - Minimum initial capital: at least RUB 300 million.
  - To obtain right to attract individuals’ deposits, a newly registered bank (less than two years since state registration) must have authorized capital of at least RUB 3.6 billion.
- Assessment: Compliant.

### Licensing, fit-and-proper, ownership transparency (Principle 5 and ECs)
- Licensing authority and process:
  - CBR has exclusive right to issue bank licenses (Articles 56, 59 CBL); Banking Supervisory Committee (BSC) makes licensing and revocation decisions.
  - Licensing process: primary vetting by territorial branch, final decision by BSC, publication in CBR Bulletin.
- Licensing criteria and documentation include (non-exhaustive list preserved from source):
  - article of association; information about fitness and propriety of founders; documents on paid in capital; documents confirming sources of funds contributed by individual founders; a business plan with exhaustive description and a two-year financial forecast; questionnaire of candidates to key positions; description of the managing and organizational structure; auditor’s conclusions on authenticity of financial reports of founders; details on premises.
- Fit and proper and managerial requirements:
  - Article 60 CBL, Article 16 banking law, CBR Regulation 408-P set requirements for board and senior management.
  - For RM/internal audit/internal control function heads, CBR Directive 3223-U of April 1, 2014 sets qualifications (e.g., higher education in law, economics or relevant fields).
- Licensing outcomes (numbers and experience):
  - Over past five years, 49 applications for commercial banking licenses received; CBR refused state registration to 25 credit institutions (four of them twice) because of founders’ unsatisfactory standing and non-compliance; eight applications from foreign entities processed.
  - Over past 5 years, 31 newly established credit institutions registered, of which 7 with participation of foreign capital; in all cases CBR did not encounter problems identifying the UBO.
- Shortcomings and recommendations:
  - Minimum managerial experience requirement (one year) considered low; assessors encourage reconsideration of minimum legal requirement.
  - Proposed revision of Federal Law 779566–6 to expand prohibition term for persons guilty of misconduct from five to ten years welcomed.
  - Lack of formal mechanism to monitor progress of new entrants in meeting approved business and strategic goals—recommend establishing follow-up offsite/onsite supervision policies and head office interviews for applicants.
- Assessment: Largely Compliant.
- Recommendations (selected):
  - amend the banking law to establish a life ban from the banking industry of people who have committed gross and recurrent violations (as per draft Federal Law 770566-6);
  - establish formal procedures to subject newly established banks to follow-up offsite supervision and onsite inspection;
  - establish formal mechanism at CBR head office level for interviewing applicants.

### Transfer of significant ownership and change-of-control (Principle 6)
- Definitions and thresholds:
  - No specific statutory definition of “qualifying interest” but understood that acquisition of voting rights above 10 percent is qualifying; CBR Instruction 146-I lowered threshold from 20 percent to 10 percent for vetting.
  - For holdings >1 percent notification required.
- Prior consent requirements (Instruction 146-I / Article 11 banking law):
  - Prior consent needed when holdings reach or exceed thresholds: 10 percent (and subsequent thresholds listed in Instruction 146-I include numerous percentage bands up to more than 75 percent); changes not exceeding 10 percent require notification.
- Enforcement and remedial powers:
  - If control acquired without vetting, CBR can order acquirer to submit formal request; acquirer must correct within 90 days; voting rights limited to 10 percent in the interim; CBR may go to court to nullify/rescind voting rights if order ignored.
- Activity statistics:
  - In 2015, territorial branches issued 337 decisions relating to transfers of ownership, of which 141 were rejected.
- Assessment: Compliant.
- Recommendation:
  - Include explicit requirement obliging banks to notify the supervisor as soon as they become aware of material information which may negatively affect suitability of a major shareholder or controller.

### Major acquisitions and investments by banks (Principle 7)
- Prior approval requirements:
  - Prior CBR consent required to acquire more than 10 percent of shares in a credit institution; notification required for >1 percent and <10 percent.
  - For foreign subsidiaries/establishment abroad, rules in Article 35 and Regulation 290-P; report to CBR within two months of acquisition for foreign subsidiary stakes.
- Gap identified:
  - No requirement for banks to seek prior CBR approval for significant acquisitions of domestic nonbank financial institutions; CBR cannot fully analyze the impact of nonbank investments on a bank’s condition.
- Activity statistics:
  - From 2014 to present (as of mission), CBR took 724 decisions on major acquisitions: 437 approvals, 287 rejections.
- Assessment: Materially Non Compliant.
- Recommendations (selected):
  - Require ex-ante CBR approval of acquisitions of domestic nonbank financial institutions.
  - Subject major acquisitions in non-financial companies to enhanced CBR scrutiny; establish follow-up mechanism to ensure new activities do not expose bank to undue risks.

### Supervisory approach and risk assessment (Principle 8)
- Risk-based methodology and tools:
  - Ordinance 2005-U: methodology for assessing economic position (capital, asset quality, profitability, liquidity) and qualitative indicators (RM, internal controls, strategy, ownership transparency).
  - AFSB (Analysis of Financial Condition of Banks) IT system used for classification, trend analysis and 12-month projections.
  - Quarterly assessment with monthly monitoring; classifications feed supervisory intensity.
- Bank classification groups:
  - Group 1–no current difficulties;
  - Group 2–shortcomings that may lead to difficulties in next 12 months (subdivided);
  - Group 3–shortcomings may threaten interests of depositors/creditors over 12 months;
  - Group 4–existing violations create active threat to depositors/creditors;
  - Group 5–present condition will lead to grounds for license revocation or bankruptcy prevention measures.
- Systemically important banks:
  - Ordinance 3737-U (methodology based on BCBS) identifies systemically important banks; SIBSD (systemically important banking supervision division) created; as of December 1, 2015, 10 banks recognized as systemically important; SIBSD supervises 15 banks representing about two thirds of assets and capital of the Russian banking sector.
- Recovery and resolution:
  - Systemic banks must develop and submit financial stability recovery plans; since 2013 CBR has been receiving recovery plans; as of January 1, 2016, 38 plans submitted (including five prepared by the SIFIs), with recommendations issued on many.
  - Legal powers to compel reorganization and restructuring are limited to situations posing a threat to depositors or financial stability; assessors note CBR lacks power to require operational or institutional changes based on recovery assessment while bank remains compliant.
- Assessment: Largely Compliant.
- Key numeric/legal references:
  - As of December 1, 2015: 740 banks in Russian Federation, 10 SIBs, 140 in "second line" of supervision.

### Supervisory techniques, onsite/offsite integration (Principle 9)
- Curators and authorized representatives (ARs):
  - Curators (Regulation 310-P) provide a single point of contact; ARs appointed to major institutions (assets >= 50 billion rubles or retail deposits >= 10 billion rubles) with wide access and participation rights (non-voting) in meetings.
  - At time of assessment, ARs appointed to 158 banks (including all banks of national or regional significance).
- Inspections:
  - Chief Inspectorate consolidated inspectors; three kinds of inspections: comprehensive, thematic, specialized (Instruction 147-I); minimum inspection cycle every 24 months.
  - 2014: 817 inspections, of which 266 were unscheduled (approx one-third unscheduled).
- Tools and information systems:
  - AFSB system for analysis and classification; “reporting automated workstation” for accessing reporting data; AEND system for monitoring effectiveness of supervisory activity.
- Communication and follow-up:
  - CBR issues written orders with remediation deadlines; remedial Measures Database tracks progress.
- Areas for improvement (assessors’ comments):
  - No general obligation on banks to notify CBR in advance of substantive changes or material adverse developments (except some specific cases like LCR); assessors recommend introducing such notification.
  - Consider rotation practices for ARs; strengthen senior-level engagement with boards; make meetings between inspectors and management/board routine rather than exceptional.
- Assessment: Largely Compliant.

### Supervisory reporting, valuation and use of external experts (Principle 10)
- Reporting powers and scope:
  - Article 57 CBL and Ordinance 2332-U govern reporting; broad set of solo and consolidated reporting forms covering balance sheet, P&L, asset quality, provisioning, large exposures, concentration, LCR, capital (Basel III), related-party, open FX positions, etc.
- Accounting standards:
  - Prudential reporting based on Russian accounting standards (based on IFRS but not fully reconciled); IFRS adoption in progress (e.g., IFRS9 implementation targeted January 1, 2018 for CBR regulations).
- Verification and inspections:
  - Inspections evaluate reliability of accounting/reporting (Instruction 147-I; Letter 77-Т); CBR can instruct audit firms to perform inspections (Regulation 442-P; Ordinance 3463-U) though no such appointments had been exercised at time of assessment.
- Use of external experts:
  - CBR has selection procedures and draft contracts for audit firms (Regulation 442-P); external experts must meet criteria and follow Instruction 147-I; the CBR had not yet used this power but planned to.
  - No explicit legal obligation on external experts to promptly report material shortcomings discovered to CBR (Ordinance 3463-U does grant rights to communicate and requires information at CBR requests, but no explicit prompt-notification obligation).
- Differentiated reporting frequency:
  - Systemic banks have more frequent reporting (weekly, daily or monthly LCR); CBR can require daily reporting in rapid deterioration scenarios.
- Assessment: Largely Compliant.
- Recommendation (assessors):
  - Introduce legislative amendment requiring external experts to promptly notify the CBR of material issues identified when performing work for supervisory purposes.

### Corrective and sanctioning powers (Principle 11)
- Legal powers and instruments:
  - Article 73 CBL empowers inspections and issuance of instructions; Article 74 CBL lists remedial measures and sanctions.
  - Range of measures (examples):
    - instruct bank to correct violations; impose a penalty up to 0.1 percent of bank’s minimal capital; restrict operations up to six months; charge fine up to 1 percent of paid-up capital; prohibit certain operations for one year; instruct “financial rehabilitation measures” including appointing a provisional administrator; revoke license.
    - restrict or suspend performance of certain operations (up to six months); ban certain transactions (up to one year); prohibit payment of dividends; force changes in internal organization; replace bank officials; impose limits on interest rates; place bank under provisional administration for up to six months.
  - Since Federal Law 484-FZ of December 29, 2014, repeated violations of AML/CFT provisions constitute ground for mandatory license revocation.
- Use of measures and statistics:
  - License revocations increased significantly under current Governor appointed June 2013: in first six months of her tenure, 35 licenses revoked vs. three revoked in first half of 2013 under predecessor.
  - 2014–15: 27 banks underwent a resolution process; 45 subject to joint DIA—CBR review (in context of cooperation).
- Process and escalation:
  - Territorial offices have autonomy for certain decisions (banks with capital under RUB 5 billion); major measures reserved to Banking Supervision Committee (BSC).
  - CBR combines administrative compulsory measures and administrative penalties; remedial measures database tracks compliance.
- Assessment: Largely Compliant.

*Source: IMF Detailed Assessment (RUSSIAN FEDERATION) as provided in the supplied content.*

### Chapter IX of the Federal Law on the Insolvency (Bankruptcy) of Credit Institutions with the CBR’s

### Chapter IX of the Federal Law on the Insolvency (Bankruptcy) of Credit Institutions with the CBR’s demand for bringing in line its authorized capital with the law.

### CBR supervisory triggers and capital alignment
- Written orders can result from offsite analysis or bottom-up stress tests indicating emerging issues (for example, capital inadequacy).
- As of January 1, 2015, the number of banks with equity capital less than RUB 300 million was 13.
  - In 2015:
    - 2 banks were reorganized through mergers.
    - 2 banks raised their equity capital above 300 million rubles.
    - 3 banks had their banking licenses revoked.
    - 5 banks changed their bank status to that of a non-bank credit institution.

### Range of corrective measures and legal basis (EC4, EC5, EC6)
- Article 19 of the banking law: CBR entitled to take supervisory measures when a credit institution violates federal laws, CBR regulations or instructions, required ratios, fails to provide information, fails mandatory audit or disclosure, or commits actions creating a real threat to depositors and creditors; measures can apply to parent company in banking groups.
- Article 74 of the CBL: CBR may
  - require elimination of violations,
  - charge a penalty of up to 0.1 percent of the minimum amount of authorized capital,
  - prohibit the credit institution from conducting some banking operations for up to six months (including operations with the parent credit institution).
- Article 189.30 (law on bankruptcy): ability to restrict powers of executive body by subjecting senior management decisions to prior authorization of a temporary administrator; includes transfers of real property under leasing or as collateral and transactions with affiliated and RPs.
- Recent measures extended CBR enforcement powers (including AML/CFT area) and CBR Directive 3229-U of April 5, 2014: for deposit insurance system participants the CBR can terminate the bank’s right to attract funds for deposit from individuals and to open and maintain bank accounts for individuals under specified conditions (Article 48, Part 1 of the federal law on the Deposit Insurance System).
- CBR inspection methodology 26-T of March 23, 2007: inspectors collect information on previous sanctions via reporting form # 0409637 on "Information on Imposed Sanctions....”

- Sanctions against management and officials (EC5):
  - Under Article 74, Part 2, CBR can require replacement of officials and impose limits on compensation or incentive payments for up to three years.
  - List of individuals that can be targeted (Article 60 of the CBL):
    - chief executive officer and his deputies;
    - members of the collegial executive board;
    - members of the BoD (supervisory board);
    - chief accountant and his deputy;
    - chief accountant of a branch.
  - CBR can apply administrative penalties under the CAO (warnings and administrative fines).
  - Article 72, Part 7 (Law on the Central Bank): CBR can impose bans on distributions of earnings, payment (declaration) of dividends, fulfillment of requests by founders for allocation or payment of stake value, repurchase of institution’s stocks; such measures can coincide with suspension of principal and/or interest payments on subordinated credit (deposit, loan) or bonds.
  - CBR can appoint temporary administration for up to six months if managers are not replaced on request.
  - There have been a few recent cases where CBR applied sanctions against managers.

- Ring-fencing and limits on intra-group transactions (EC6):
  - Article 74: CBR can limit operations between a bank and its parent or affiliates for up to six months or prohibit certain banking operations for up to one year.
  - CBR can take measures against parent companies concerning the group as a whole or individual components to protect safety and soundness.

### Cooperation with DIA and resolution-related powers (EC7)
- Article 189.20: CBR entitled to demand financial rehabilitation measures.
- Article 189.45: CBR allowed to demand reorganization by merger or affiliation.
- Notification obligations (CBR to DIA) — CBR shall inform DIA not later than the day following the decision about:
  - issuance of the CBR`s permit for the bank;
  - decision to carry out an inspection on the DIA's proposal;
  - appointment of temporary administration;
  - revocation (annulment) of a license;
  - imposition of a moratorium on meeting creditor’s claims;
  - replacement of a license;
  - imposition of a ban on attracting deposits.
- Article 189.47 (Federal Law 127-FZ):
  - CBR can propose DIA participation in measures to prevent bankruptcy or in settlement of liabilities where bank conditions threaten depositors.
  - Decision on CBR proposal taken by the Banking Supervision Committee of the CBR.
  - DIA must inform CBR of its decision to participate or refuse no later than ten days after receiving CBR’s proposal; refusals must be substantiated.
- If DIA accepts proposal (Article 189.49 of Federal Law 127-FZ):
  - DIA must propose an implementation plan to CBR within 20 days of DIA’s decision to participate.
  - CBR must express adoption/approval or refusal within 10 days thereafter.
- Practical cooperation:
  - DIA and CBR jointly analyze unstable banks to decide on prevention of bankruptcy or liability settlement.
  - According to Article 27 of Federal Law 177-FZ, DIA may propose that CBR inspect a bank or take measures.
  - DIA has not taken a decision on inexpediency of participation in prevention measures as of the report date; DIA refusals to rehabilitate have occurred five or six times (some due to impossibility of selling assets).
  - Between 2011 and 2014, decisions on bankruptcy prevention measures were taken for 15 banks (purchase-and-assumption used in only one case); several remain under rehabilitation. In the majority of cases, banks were acquired by other banks with financing provided by the DIA.
- Laws do not contemplate a bridge bank; discussions with the Minister of Finance on introducing bail-in procedures (to write down or convert unsecured liabilities) could lead to legislative changes in 12 to 18 months.

### Use of supervisory measures and enforcement statistics
- 2014 supervisory activity:
  - written notices sent to management of 873 supervised banks;
  - 444 meetings with banks held;
  - orders to eliminate violations applied to 546 banks;
  - fines imposed on 133 banks;
  - restrictions on certain transactions imposed on 209 credit institutions;
  - some transactions were banned in 64 banks;
  - 53 banks were prohibited from opening branches.
- 2015 supervisory activity:
  - preventive actions were applied to 822 banks;
  - 673 credit institutions were subject to enforcement actions.
- Administrative fines levied on banks over the past five years:
  - 2015: 212 banks fined;
  - 2014: 133 banks fined;
  - 2013: 171 banks fined;
  - 2012: 192 banks fined.
- AML/CFT inspection involvement:
  - Issues related to AML/CTF laws were considered in 48 percent of all completed scheduled and unscheduled inspections of credit institutions.
  - During 2014, consideration of 1,120 administrative offense cases was completed, with:
    - 319 adjudications on imposing fines (including 62 rulings with regards to executives of credit institutions),
    - 539 adjudications on issuing warnings (including 290 rulings with regards to executives of credit institutions),
    - 262 adjudications to close administrative cases (including 75 rulings with regards to executives of credit institutions).

### Assessment and overall judgment
- Assessment re principle 11: Largely Compliant.
- Overview: CBR has a broad and graduated set of enforcement powers and has actively used preventive and corrective measures, including sanctions against banks and, in some cases, individuals. Cooperation with DIA is close and structured by statutory timelines and procedural requirements.

*Source: Chapter IX of the Federal Law on the Insolvency (Bankruptcy) of Credit Institutions with the CBR’s demand for bringing in line its authorized capital with the law.*

### 2015. In 2014 and 2015, the CBR revoked multiple banking licenses (86 and 93 respectively), citing

### _cr16303 - 2015. In 2014 and 2015, the CBR revoked multiple banking licenses (86 and 93 respectively), citing

### Major developments and context
- In 2014 and 2015, the CBR revoked multiple banking licenses: 86 and 93 respectively.
- Cited reasons for revocations and closures: the unsatisfactory quality of banks’ assets, the loss of capital, risky lending practices, and involvement in money laundering activities.
- Explanatory factors for the large-scale revocation of licenses:
  - Reinforcement of the supervisory role and powers of the CBR.
  - Tightening control in general over the banking sector.
  - Stricter requirements, particularly in terms of professional qualifications for banks’ senior management.
- The CBR undertook a large-scale effort to reinforce the banking sector, especially since the appointment of the current CBR Governor.

### Enforcement actions — reported counts and patterns
- Decisions on sanctions are published on the CBR website, disclosing the name of the bank, the type of sanction and the ground for the decision.
- Table-like aggregated count (as presented in source; numeric fidelity preserved):
  - Total number of CI subjected to enforcement actions *)83282267321224373623
- Selected itemized enforcement indicators and counts (numbers preserved exactly as in source):
  - 1 Violation of the requirements for registration, licensing and of expansion activities of the CI 6961114318
  - 2 Failure to comply with regulatory standards for CI activities (one or more) 4128207859
  - 3 Failure to comply with the procedure for calculating the regulatory standard (one or more) 21151413114
  - 4 Failure to comply with the reserve requirements 60145150006
  - 5 Violation of the procedure for formation of the reserves for possible losses 5513974524617662445
  - 6 Providing false statements 178144631211557
  - 7 Violation of the order and timing of statements, as well as of its publication in the open domain 41139941206126
  - 8 Failure to comply with the requirements within the prescribed timeframe 4418386141332
  - 9 Violation of the provisions of Article 189.10 of the Federal Law "On Insolvency (Bankruptcy)" 2012140958
  - 10 Violation of the provisions of Article 189.19 of the Federal Law "On Insolvency (Bankruptcy)" in terms of the implementation of bankruptcy prevention measures 181560204
  - 11 Reduction of equity (capital) 1871604115
  - 12 Violation of the currency legislation of the Russian Federation and the currency regulation and currency control instruments 644526155013
  - 13 Violation of legal provisions in the field of counteraction to legalization (laundering) of proceeds from crime and financing of terrorism, ... 46731936010311510296
  - 14 Inadequate quality of the internal control system 2723103319
  - 15 Violation of the requirements for the development of internal bank regulations 81643828234
  - 16 Formation of the equity (capital) (parts thereof) sources with investors using inappropriate assets 42311303013
  - 17 Violation of accounting and reporting rules 25221611922459112
  - 18 Violation of the requirements of the Federal Law of 27.06.11 No161-FZ "On the National Payment System" or related bylaws 40321835116

### CBR internal processes, discretion and transparency
- All measures described under EC 2 are taken by the CBR at its own discretion, on a case by case basis, and in a collegial fashion.
- Article 74 of the CBL uses “shall have the right to” or “shall be entitled to”, permitting tiered responses depending on severity:
  - Minor violations or banks not posing systemic threat: CBR may discuss remedial options.
  - More serious circumstances: CBR will send an order to instruct the bank to take measures or stop operations.
  - Glaring deficiencies: CBR adopts more forceful decisions.
- Factors considered in deciding measures:
  - (i) the gravity of the violations and their occurrence;
  - (ii) the general financial state of the bank; and
  - (iii) its position in the market (federal or regional level).
- Instruction 59 of March 31, 1997 on “Penalizing Credit Organizations for Violating Prudential Standards”:
  - Stipulates when preventive measures are preferable to coercive ones and vice versa.
  - Recommends preventive measures first if management/shareholders act constructively; coercive measures when violations make them inevitable.
  - Instruction 59 has not been made public and has been an internal document only.
  - Instruction 59 is being revised (reform introduced in 2014) to make enforcement more transparent; the new instruction is expected to be finalized sometime in the first half of 2016.
- Judicial challenges and outcomes (numbers preserved exactly as in source):
  - In 2014, 14 cases of revocation were challenged in justice, one was ruled against the CBR.
  - In 2015, 22 cases took place with no overturn.
  - Orders against credit institutions (regional branches): 23 were challenged in 2014, 2 of which were overturned.
  - In 2015, 3 cases were ruled against CBR out of 46.
- Limitations in Article 74 of the CBL noted by assessors:
  - CBR must send an order to a shareholder to redress a violation no later than 30 calendar days from discovering the violation; CBR order is possible if no more than one year has passed since the violation was committed.
    - This implies violations older than one year cannot be subject to CBR action under this provision.
    - If CBR misses the 30 calendar day window, it is considered to have violated the law and an interested party could sue the CBR for “inaction”.
  - Article 74 limits CBR’s enforcement measures if five years have passed since the violation were committed.
  - The CBR indicated the 30-day window has never been missed and that the five-year limitation has no practical impact because of ongoing supervision and onsite visits every two years.
- Assessors’ view:
  - The one-year limit may provide some form of impunity to negligent shareholders and creates a reputational risk for the CBR if the bank goes bankrupt.
  - The legislator’s intention was to protect shareholders.

### Recommendations on enforcement and transparency (as stated in source)
- Explore possible amendments to the CBL to:
  - permit the 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 the CBR has to send on order to a party who committed a violation; and
  - provide the CBR the possibility to impose changes in banks’ internal organization and structure.
- Complete the revision of Instruction 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.
- Increase number of sanctions against individuals (namely bank’s senior executives, board members and shareholders).

### Consolidated supervision — Principle 12 (EC1): description and findings
- Principle statement: The supervisor supervises the banking group on a consolidated basis, adequately monitoring and, as appropriate, applying prudential standards to all aspects of the business conducted by the banking group worldwide.
- Legal and definitional basis:
  - CBR’s obligation to conduct consolidated and solo supervision flows from the CBL (Articles 4, 56, and 57).
  - CBL requires CBR to exercise supervision over individual banks and banking groups and grants information gathering powers over bank holding companies (BHC).
  - BBAL (Article 4) defines banking group and BHC; definitions of control and influence are taken from IFRS.
  - BBAL definition of BHC (Article 4, as amended in 2013) preserved verbatim in source.
- Powers and reporting:
  - Under Article 57, CBR “shall have the right to request and receive from credit institutions, the parent credit institutions of banking groups and the parent organizations of bank holding companies’ information on the activities of credit institutions, banking groups and bank holding companies ... and demand elucidation of the information received.”
  - Article 57 allows CBR to set regulations binding for bank holding companies for compiling and presenting data required for assessing risks.
- Supervisory organization and universe:
  - The CBR establishes supervisory groups responsible for consolidated supervision that include representatives from different CBR Departments (Section 1.3, Regulation 3089-U).
  - At the time of the assessment there were over 120 banking groups in Russia.
- Key CBR regulations relevant to consolidated supervision (listed in source):
  - Regulation 3089-U re the procedure for supervising banking groups;
  - Regulation 3876-U re disclosure of information for parent banks of banking groups;
  - Regulation 2923-U re disclosure and submission of consolidated financial statements by the parent banks of banking groups;
  - Regulation 509-P on capital, prudential ratios and limits of open FX positions of banking group;
  - Regulation 510-P on the Liquidity Coverage Ratio on a consolidated basis for systemically important banks;
  - Regulation 462-P on consolidated statement and other information on the activity of the banking group;
  - Regulation 2332-U on reporting forms and submissions of banking groups.
- Reporting requirements from parent of the banking group (as stated in source):
  - annually, or in the event of changes or at the CBR’s request: Statement on the composition of the members of the banking group;
  - quarterly: Consolidated balance sheet; Statement on financial results, capital calculation, statutory requirements of BG and open currency positions;
  - monthly: or in the event of non-compliance with the minimum requirements (actual or expected) or at the CBR’s request: Liquidity Coverage Ratio on a consolidated basis for systemically important banks.
- Consolidated risk management standards and guidance:
  - CBR standards articulated in regulations including:
    - Regulation 3624-U and Regulation 3883-U On requirements for risk and capital management and ICAAP assessment;
    - Regulation 242-P on internal controls;
    - Regulation 509-P on calculation of required capital ratios and net open positions;
    - Regulation 510-P with Annex 1 on the sound principles of liquidity RM in systemically important banks;
    - Regulation 3223-U On qualification requirements for significant individuals in the institution, including Head of Risk, Head of Internal Audit Division and Head of Internal Control.
- Supervisory practice for banking groups:
  - Quarterly monitoring of the banking group’s reporting; semi-annual assessment of the banking group based on Regulation 3089-U covering structure, activities (including foreign operations), market position, consolidated balance sheet dynamics and composition, consolidated financial results, equity structure, required ratios, and main risks (credit, liquidity, market and FX risk, OR, contagion risk, reputation risk).
  - Onsite inspection program to confirm understanding; coordinated inspections of members of banking groups to achieve a fuller picture than stand-alone inspections.
- Coordinated inspections (counts preserved exactly as in source):
  - The Chief Inspectorate carried out coordinated inspections of:
    - 14 non-credit financial institutions and 12 credit institutions—in 2014;
    - 18 non-credit financial institutions and 10 credit institutions—in 2015;
    - further coordinated inspections are planned in 2016.
  - Coordinated inspections of banks that were members of the same banking group:
    - In 2014, coordinated inspections of 3 banks that were members of the same banking group;
    - In 2015, 4 such inspections, with 11 further inspections planned for 2016.
- Bank holding companies and reporting:
  - Parent of a BHC obliged to notify the CBR if a BHC is formed, and if a management company of the BHC is formed, including the authority assigned to such a management company (Regulation 3780-U).
  - Parent of a BHC must submit semi-annual reports to the CBR on risks pursuant to BBAL (Article 43) and Regulation 3777-U, including information on the BHC’s risks, statement on structure of the BHC and on the shares in investment funds, and information on the parent organization of a BHC including its responsibilities.
  - On an annual basis, the parent of the BHC submits financial statements and the independent auditor’s (text ends at this point in source).

*Source: _cr16303 - 2015. In 2014 and 2015, the CBR revoked multiple banking licenses (86 and 93 respectively), citing*

### conclusion, (3087-U—on disclosure and presentation of consolidated financial statements by the

### _cr16303 - conclusion, (3087-U—on disclosure and presentation of consolidated financial statements by the parent entities of BHC groups)

### CBR supervisory powers and information requirements
- CBR may require information from parent organizations of BHC groups regarding the activity of these groups, including information about non-bank members and any further necessary explanations.
- CBR may restrict operations between the bank and the members of the wider BHC group, including the parent entity, for up to one year in the event of legal violations.
- As of July 2015 there were 42 BHCs in Russia. The parent entities of these groups (that is 29 companies or about 70 percent of the total number) are active in nonfinancial sectors such as construction, commerce, advertising, food industry, agriculture, and broadcasting.
- Reporting is on a consolidated and standalone basis. The CBR analyses liquidity on a consolidated basis for banking groups.
- BGs’ parent companies are required to submit, quarterly, information on risks, risks assessment, RM, and capital management (Regulation 3876-U).

### Consolidated supervision: scope, standards, and tools (EC2, EC3, EC4, EC5, EC6, EC7)
- Legal basis and prudential ratios:
  - CBL (Article 62) grants CBR power to impose required ratios at group and solo level, including: maximum non-monetary contributions to authorized capital; maximum risk per borrower or group of related borrowers; maximum amount of high credit risks; liquidity ratios; own funds (capital) adequacy ratios; amounts of FX, interest rate, and other financial risks; minimum provisions for risks; ratios for a credit institution to use its own funds to acquire shares of other legal entities; maximum amount of loans, bank guarantees, and sureties to shareholders (members); maximum risk per counterparty.
- Information collection and regulations used by CBR:
  - foreign operations of banks and banking groups—Regulation 2332-U;
  - consolidated supervision reporting—Regulation 462-P;
  - loan loss reserves in respect of residents in offshore zones—Regulation 1584-U;
  - liquidity and LCR on a consolidated basis for systemically important banks from January 1, 2016—Regulation 510-P;
  - qualifications for heads of RM and internal audit/internal controls—Regulation 3223-U;
  - inspection frameworks—Regulation 147-I and Regulation 3463-U.
- Onsite inspections and information access:
  - CBR conducts meetings and onsite inspections to examine internal risk governance documentation and adherence in practice; CBR has right of access to internal documents of banks and banking groups.
  - CBR has not been informed of hindrance experienced by parent banks in obtaining information on their foreign branches and subsidiaries.
  - CBR has limited experience visiting foreign operations; one example noted is a 2014 onsite inspection of a branch in Cyprus coordinated with Cypriot authorities.
- Assessment of local management and host supervision:
  - CBR’s assessment of local management of cross-border operations relies largely on evaluation of risk management and control systems through internal compliance documents and may obtain information via ARs or call management in for meetings.
  - CBR’s approach to assessing effectiveness of host supervision is primarily based on analysis of reports submitted by banks and banking groups (Regulation 2332-U).
- Powers to limit activities and geographic reach:
  - CBR must grant explicit permission for a bank to establish a non-domestic branch (BBAL Article 35); Regulation 290-P lists minimum criteria for permission to create or acquire a foreign subsidiary.
  - CBR will deny permission if requirements are unmet or the proposed subsidiary is in a country classified as non-cooperative for AML/CFT.
  - CBL Article 74 and Article 75 enable CBR to restrict bank activities if interests of depositors or the banking system are endangered; however, CBR lacks power to oblige closure of a foreign branch or subsidiary and cannot directly limit activities or locations of non-bank members of the group.
- Supervisory coverage:
  - CBR supervises individual banks on a stand-alone basis and on a consolidated basis (CBL Articles 57, 57-1, 57-2). CBR applies capital conservation principle (CBL Article 67) to prevent profit distribution to parent entity until minimum capital adequacy met.
  - CBR monitors distribution of capital and liquidity through the group and adjusts supervisory plans at supervisory group meetings.

### Assessment and remaining gaps (Assessment of Principle 12)
- Assessment: Largely Compliant.
- Noted enhancements since prior assessment:
  - powers to act in event of violations by parent entity (CBL, Article 74);
  - enhanced scope of information exchange with non-domestic regulatory agencies (CBL Articles 51 and 51-1);
  - information exchange with domestic regulatory agencies due to merger of sectoral regulators into CBR;
  - expanded definition of direct and indirect influence based on IFRS (BBAL, Article 4);
  - introduction of regime for Bank Holding Groups.
- Remaining issues and limitations:
  - Practical application of recent legal and regulatory changes is still developing; CBR’s track record under new framework is not yet well-established.
  - Cross-border consolidated supervision is mostly undeveloped; assets due to foreign individuals and entities on a consolidated basis represent approximately 10 percent of the banking sector’s assets.
  - CBR does not routinely conduct onsite inspections of foreign establishments, nor has it clearly scrutinized group management abilities to oversee non-domestic interests.
  - CBR has not explicitly considered whether host supervisory authorities’ supervision is effective or sufficient relative to complexity of foreign establishments.
  - Legal gaps: CBR may not require closure of a foreign branch of a Russian bank; CBR may not prevent acquisition of a non-bank financial entity by a banking group—both constrain preventative consolidated supervision.

### Home-host relationships and cross-border cooperation (Principle 13; EC1–EC6)
- Supervisory colleges and teams:
  - CBR has established supervisory colleges for two international banking groups (Sberbank and VTB) and participates in colleges for a further ten international groups (domiciled in Austria, China, Cyprus, Germany, Hungary, India, Italy, Netherlands, and the U.K.).
  - CBR forms a supervisory team (domestic college arrangement) when certain conditions are met per Regulation 3089-U, including presence of a subsidiary in a foreign state supervised by an authorized foreign authority, systemic importance, or identification of significantly negative signs.
  - Representatives of foreign supervisory authorities are included subject to consent (point 1.4, Regulation 3089-U).
- Information exchange and MoUs:
  - Cooperation and information exchange set out in Regulation 3089-U; updated MoU draft includes provisions on resolution and crisis management.
  - Updated MoU annex for resolution signed with the Financial and Capital Market Commission of the Republic of Latvia on October 2, 2015.
  - Practical implementation: regular exchange of information with supervisory authorities in Austria, China, Cyprus, CIS countries (especially Belarus, Kazakhstan, Kyrgyzstan), Germany, Hungary, Latvia; regular high-level and expert meetings; cooperation during supervisory visits and onsite inspections; regular updates of contact lists.
  - Most information exchange in past five years has been bilateral; colleges held regularly for two internationally active Russian banking groups.
  - Usual frequency of supervisory college meetings where CBR is a host-member: once or twice a year.
  - CBR is in process of seeking to establish a MoU with the ECB.
  - Number of signed cooperation agreements and MoUs: 38 such agreements and memoranda.
- Coordination of supervisory activities:
  - CBR engages with foreign supervisors at high and expert levels; more consistent contact where home/host relationships are more significant. Collaborative work arrangements have not been broadly pursued, though MoUs set out how such collaboration would be managed.
  - In some cases, CBR has cooperated with foreign supervisors to develop more effective practices of consolidated supervision.
- Communication strategy and colleges’ scope:
  - MoUs standardly indicate information exchange upon request; concerns relating to parent entity would be notified to other supervisory authorities. MoUs typically include annexed contact lists.
  - Communication strategies for delivering supervisory messages to banks are not explicitly addressed in agreements, though questions from supervised banks have been discussed in college meetings.
- Crisis cooperation and resolution planning:
  - CBR has a framework agreement in place with one host authority on cross-border crisis management and has signed an annex to the MoU with the CBRC on crisis management.
  - CBR has required Recovery Plans from all systemically important banks; methodologies and regulations for resolution planning are under development but active resolution planning work has not yet taken place.
  - Current guidance for recovery plans references CBR recommendations (Letter 193-T) and “On the Methodical Recommendations for the Development of Plans for the Financial Stability Restoration of Credit Institutions,“ September 29, 2012.

*Source: _cr16303 - conclusion, (3087-U—on disclosure and presentation of consolidated financial statements by the parent entities of BHC groups).*

### 2015. Other MoUs are to be updated.

### _cr16303 - 2015. Other MoUs are to be updated.

### Home–host cooperation and cross‑border supervision (Principle 13)
- EC7: Host supervisor’s national laws/regulations require cross‑border operations of foreign banks to be subject to prudential, inspection and regulatory reporting requirements similar to domestic banks.
  - In Russia, a banking subsidiary of a foreign banking group is regarded as a domestic bank and treated as a locally owned bank (CBL Article 56).
  - Supervisory standards, practices, and processes are the same for foreign‑owned and domestically owned banks; supervisory process based on Regulation 2005-U of April 30, 2008.
  - Domestic standards (reporting, inspections) apply to a foreign‑owned branch located in the Russian Federation; Instruction147-I covers onsite inspections of credit institutions (their branches).
  - Russian law does not permit the presence of a foreign owned branch in the territory of the Russian Federation. All foreign owned banks are subsidiaries, incorporated locally and thus subject to national treatment.
- EC8: Home supervisor onsite access to local offices and subsidiaries; home supervisor informs host supervisors of intended visits.
  - Under CBL Article 73, access to premises of credit institutions located on Russian territory is granted to foreign home state supervisory authorities provided written consent of the bank established in the Russian Federation is obtained; foreign supervisor obliged to inform the CBR of results.
  - Arrangements described in standard MoU between the CBR and the supervisory authority from the country of origin of the bank; provisions are reciprocal.
  - CBR has supported foreign authorities in asset quality reviews and met with supervisors visiting representatives of Russian subsidiaries (Netherlands, Turkey). At least one further inspection by a home jurisdiction to a Russian subsidiary was planned in 2016.
  - For cases where the CBR is the home supervisor, the CBR has informed host authorities of visits to local offices/subsidiaries.
- EC9: Supervision of booking offices and prohibition of shell banks.
  - Criterion not applicable to Russia (no existing shell banks).
- EC10: Supervisor taking consequential action consults with the other supervisor before taking such action.
  - Standardized MoU requires authorities to inform each other, in good time and to the extent reasonable, about events that could endanger stability of cross‑border credit institutions.
  - CBR shall notify foreign supervisory authority of administrative penalties imposed or other action taken on cross‑border establishments or parent credit institution if information is important to other authority.
  - No recent (post 2014) experience of such information having been received.
- Assessment of Principle 13: Largely Compliant
- Key comments and policy recommendation:
  - Removal of legislative obstacles to exchange of supervisory information has allowed progress in home–host cooperation.
  - CBR participation in supervisory colleges (as host) exposes it to recent practices; greater opportunities for cross‑border collaboration (joint inspections, inspections of non‑domestic subsidiaries, branches) should be pursued actively.
  - Bilateral and college arrangements with the EU (e.g., MoU with the ECB) should be prioritized; college meetings should be re‑instituted as soon as practicable for domestic banks with cross‑border activity.
  - Initial moves have been made on cross‑border crisis planning and involvement in recovery and resolution plans, but progress is limited to date despite legal provisions and some adjusted MoUs.
  - Specific legal obstacle: CBL Article 73 requires written consent of the bank for foreign supervisory access to premises of a subsidiary established in Russia. Although in practice consent has not generally been withheld, it is recommended that removal of this provision from the CBL be explored.

### Prudential regulations and corporate governance (Principle 14)
- Principle 14 summary: Supervisor determines banks and banking groups have robust corporate governance (CG) policies and processes commensurate with risk profile and systemic importance; covers strategic direction, group structure, control environment, board and senior management responsibilities, and compensation.
- EC1: Laws/regulations establish responsibilities of board and senior management; supervisor provides guidance on sound CG.
  - Multiple regulations, instructions, ordinances, letters, and codes govern CG in banks; some binding, others voluntary.
  - Responsibilities stipulated in Civil Code and Federal Law “On Joint‑Stock Companies” 208 FZ of December 26, 1995 and Federal Law 14-FZ “On Limited Liability Companies” of February 8, 1998; competence of Board detailed in Article 65 of 208 FZ and Article 32 of 14-FZ; Article 4 of Civil Code also refers to CG.
  - Banking law establishes board responsibilities including:
    - approving strategy for managing bank’s risks and capital and procedure for managing major risks;
    - approving procedure for applying risk management (RM) methods and quantitative models;
    - approving procedure for preventing conflicts of interest;
    - approving head of internal audit division and its plan, and wage policy;
    - assessing senior management compliance with approved strategies/procedures based on internal audit reports;
    - establishing committees (e.g., audit and remuneration committees);
    - approving compensation and remuneration policies.
  - Ordinance 3624-U on Risk Management: BoD should (i) approve and oversee strategic objectives, risk strategy, and internal governance; (ii) ensure integrity of accounting and financial reporting; (iii) oversee disclosure and communications; (iv) provide effective oversight of senior management.
  - Regulation 408-P of October 27, 2013 establishes procedures for assessing reputation and qualification of senior positions and requirements for heads of internal control and RM units.
  - CBR Ordinance 3639-U establishes tracking mechanism for qualification/reputation information.
  - CBR Letter 199 of September 13, 2005 “On Modern Approaches to Organizing Corporate Governance in Credit Institutions” recommends BoD authority over internal written RM policies.
  - Regulation 11-T: CG annual self‑assessment questionnaire returned by banks to CBR (addresses distribution of powers, strategy approval, RM coordination, conflicts of interest, relations with affiliated entities, code of ethics, disclosure, internal control monitoring).
  - Instruction 154-I of June 17, 2014 “On the Procedure for Assessing Remuneration Systems of Credit Institutions” sets general principles on remuneration policies and gives more power to the CBR on employee motivation policies.
  - CBR recommended publicly traded joint‑stock companies apply the CG Code per CBR Letter 06-52/2463 of April 10, 2014; the CG Code is voluntary.
  - CBR published Basel Committee recommendations on CG and recommended their application (CBR Letter 14-T of February 6, 2012); CBR Letter 11-T of February 7, 2007 provided CG self‑assessment questions.
- EC2: Supervisor regularly assesses CG policies and practices and requires timely corrective action.
  - Banks’ CG policies assessed in context of RM oversight; RM system inspected as part of onsite assessment per Regulation 2005-U and CBR Letter 26-T.
  - CBR examiners assign banks a rating from 1 to 5 based on risk indicators; onsite examination of internal control system per CBR Letter 47-Т of March 24, 2015 addresses governance, organization, and control functions.
  - Since 2014, CBR annually assesses remuneration systems (Instruction 154-I of June 17, 2014).
  - Where breaches detected, banks required to adopt corrective actions; CBR can issue orders to bring RM/internal control into conformity.
  - In CBR statistics on sanctions provided to mission, there was no sanction in relation to CG per se, but the BoD of 813 banks received in 2015 written notices on shortcoming in banks’ activities, indicating issues of possible lack or insufficient engagement of BoD and top managers.
- EC3: Supervisor determines governance structures and nomination/appointment processes are appropriate; inclusion of experienced non‑executive members and committees where appropriate.
  - Banking law (Articles 11.1 and 16) and Regulation 408-P establish requirements/expectations for governance structures and experienced board members.
  - Regulation 408-P (approved October 25, 2013) implements Federal Law 146-FZ of July 2, 2013 requiring qualification and business reputation checks for managers, BoD members, shareholders owning more than 10 percent, controlling persons, and their managers.
  - Regulation 408-P sets rules for coordinating appointment of managers with CBR and criteria for board members (experience, education, suitability).
  - Banking law requires disclosure of board members’ qualification, work experience, and education on bank websites.
  - When estimating economic position, CBR evaluates board members’ management experience in finance, accounting, or other relevant fields.
  - For SIFIs, CBR assesses whether dedicated committees (audit, remuneration, risk) have been formed and whether they exercise duties in conformity with regulations.
  - CG Code recommends electing BoD members with impeccable reputation and necessary skills and sufficient independent directors; formation of committees such as audit and remuneration.
  - In practice, major banks have established CG structures. Example: one state‑owned bank has a Supervisory Board of 17 directors, 7 of whom are independent directors; it has Audit, HR and Remuneration, Strategic Planning, and Risk Management Committees.
  - CBR reviews voluntary CG questionnaires returned by banks to collect CG practice information.
- EC4: Board members are suitably qualified, exercise “duty of care” and “duty of loyalty.”
  - Requirements found in Article 53 of Civil Code and Article 71 of 208‑FZ “On joint‑stock companies” (act in interests of legal entity in bona fide and reasonable manner).
  - CG Code Articles 2.3 and 2.6 recommend BoD act efficiently, professionally, objectively, and in best interests of company and shareholders, with due care and diligence.
  - CBR has resident inspectors (AR) assigned to banks who may attend board meetings and relevant committees as observers; evidence of AR involvement found in weekly reports (e.g., AR attended BoD meeting approving Remuneration Committee’s policy).
- EC5: Board approves and oversees strategic direction, risk appetite and strategy, corporate culture, conflicts of interest policies, and control environment.
  - Regulation 119-T and Ordinance 3426-U provide guidance reflecting international good practice; banking law (Article 11.1.1), CBR regulations, and Ordinance 3426-U emphasize board role in setting strategies and ensuring risks are managed.
  - Board expected to periodically review risk limits and approve procedures for preventing conflicts of interest and ensure strong control system via periodic reporting.
  - During evaluation of economic position, CBR considers indicators: RM system (PU4), internal control conditions (PU5), management of strategic risk (PU6), and remuneration management (PU7). Examiners address CG questions (e.g., board finance experience, board oversight of risk exposure, remuneration aligned with risk).
  - Inspection files show detailed examiner analysis with substantiation and sources.
- EC6: Board establishes fit and proper standards for selecting senior management, maintains succession plans, and oversees senior management performance.
  - Article 11.1-1 of banking law requires board to assess senior management compliance with approved strategies and procedures.
  - CG Code recommends board responsible for appointing/removing executive body members, ensuring executive bodies act per approved strategy, and monitoring implementation (Articles 59 and 60 referenced).
  - CBR assesses these powers during evaluation of RM framework (Chapter 4 of Ordinance 2005-U of April 30, 2008).
- EC7: Board oversees compensation system, ensuring incentives aligned with prudent risk taking and long‑term objectives.
  - BoD competence includes approval of remuneration policy and control over its implementation; clauses 2.1 and 2.2 of Instruction 154-I of June 17, 2014 establish requirements on percentage ratio between fixed and variable parts for risk‑taking employees and internal control/RM staff.
  - Clause 2.1 of Instruction 154-I: documents setting salaries and compensation for executive body members shall be approved by the board and be appropriate to nature/scope of operations, performance, and level of risks taken.
  - CG Code recommends remuneration systems with short‑term and long‑term incentives and oversight by the board.
  - CBR assesses adequacy of remuneration systems during onsite examinations and can issue orders to eliminate violations.
- EC8: Board and senior management understand operational structure and risks, including structures impeding transparency.
  - Ordinance 3624-U assigns board responsibilities regarding knowledge of business model and ensuring coherent organizational structure.
  - CG Code recommends board determine principles for RM and internal control system and ensure consistency and efficiency.
  - Mission could not find any specific provision requiring the board to understand structures that impede transparency (e.g., special‑purpose or related structures).
- EC9: Supervisor has power to require changes in board composition if individuals do not fulfill duties.
  - Federal Law 146-FZ of July 2, 2013 amended banking law and CBL to strengthen evaluation of business reputation and grant CBR authority to remove unprincipled persons from bank management, maintain a database, and perform ongoing evaluations.
  - If CBR finds a BoD member no longer meets reputation/qualification requirements, CBR can issue an order to replace the member within a particular timeframe (Regulation 408-P of October 25, 2013).
  - CBR entitled to replace bank employees, including BoD members, if a credit institution fails to fulfill CBR’s order to eliminate a violation or if a transaction poses a serious threat to creditors (depositors).
- Assessment of Principle 14: Largely Compliant
- Key comments and policy implications:
  - Russia has taken several initiatives to improve governance in banks over the past years (legal amendments, Regulation 408-P, Instruction 154-I, Ordinances 3624-U and 3426-U, supervisory oversight and onsite assessments).
  - Some CG instruments remain voluntary (CG Code, CG questionnaires); scope for strengthening mandatory requirements and explicit provisions on transparency‑impeding structures was noted.
  - CBR powers to assess and, where necessary, require changes in board composition and compensation systems have been expanded and are used in supervisory assessment and corrective action processes.

*Source: _cr16303 - 2015. Other MoUs are to be updated.*

### introduction in 2013 of Articles 11.1 and 11-1-1 in the banking law is an important step forward as it

### _cr16303 - introduction in 2013 of Articles 11.1 and 11-1-1 in the banking law is an important step forward as it

### Corporate governance (CG): overview and findings
- 2013 introduction of Articles 11.1 and 11-1-1 in the banking law provides a clear articulation of what the role of the BoD should entail, especially with regard to the promotion of CG principles within each credit institution.
- 2014: profound revision of the CG Code was an important step forward, although it remains a non-binding instrument.
- New regulations and ordinances provided more leverage to the CBR to monitor and enforce CG related issues.
- In practice, CG is mainly addressed by CBR examiners through the prism of internal control and RM; CBR focuses on the role and powers assigned to the BoD and how they are exercised.
- Key deficiencies and concerns:
  - The current regime for CG is governed by piecemeal regulations, making it difficult to understand.
  - Norms are of different nature: some binding, others optional (CG Code, CBR Letters) and thus not enforceable.
  - Unclear whether current regulations specifically require a bank’s board to understand the bank’s and banking group’s operational structure that impedes transparency (e.g., special-purpose or related structures). This is important given criminal cases where opaque structures were used to conceal fraudulent operations.
  - Several important CG regulations were issued in 2015, but some will not be enforceable before 2017; the mission could not assess effective implementation.
  - Governance deficiencies are influenced by problems in related areas: related party transactions, lending to affiliates on preferable terms, and directors not recusing themselves when the board votes on their transactions.

- Recommendations (CG):
  - 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 (e.g., special-purpose or related structures).
  - Convert existing CBR recommendations on CG into binding regulations.

*Source: IMF mission report excerpt.*

### Principle 15 — Risk management (RM): summary assessment
- Principle 15 statement: supervisor determines that banks have a comprehensive RM process (including effective board and senior management oversight) to identify, measure, evaluate, monitor, report and control or mitigate all material risks on a timely basis and to assess the adequacy of their capital and liquidity in relation to their risk profile and market and macroeconomic conditions. This extends to contingency arrangements (including robust and credible recovery plans where warranted). The RM process is commensurate with the risk profile and systemic importance of the bank.

- Overall assessment of Principle 15: Largely Compliant.

### RM legal and regulatory developments (key instruments and dates)
- Regulation 2005-U: existing norms governing RM policies.
- Ordinance 3624-U of April 15, 2015: “On the Requirements to the Risk and Capital Management System of the Credit Institution and the Banking Group” — sets detailed principles on RM systems through the ICAAP process, requires establishment of a risk and capital management system (Article 1.1).
- Ordinance 3883-U of December 15, 2015: establishes procedure for the CBR to assess quality of risk and capital management framework and capital adequacy (SREP).
- Federal Law 146-FZ of July 2, 2013: introduced new provisions in both the CBL and the banking law extending the range of CBR powers in RM.
- CBR Letter T-26 of March 23, 2007: guidance to examiners for RM oversight; to be revised to reflect new RM framework.
- Ordinance 3426-U: keystone requirements for RM function in banks.
- Ordinance 3223-U of April 1, 2014: on Requirements for Heads of Risk Management, Internal Control and Internal Audit Services.
- Ordinance 3752-U of August 6, 2015; Regulation 483-P of August 6, 2015: on internal models and IRB approval procedures.
- Ordinance 3883-U: methodology for assessing compliance (SREP).
- CBR Letter 26-T: used for current in-situ verification of board role in RM.

### EC1—EC14: essential criteria findings (selected highlights)
- EC1 (board-approved RM strategies, risk appetite, oversight):
  - Ordinance 3624-U requires the BoD to “take part in the working out, approval and implementation of the ICAAP of the bank.”
  - BoD responsibilities specified: define/approve strategies and RM policies; define internal controls; consider changes at least once a year; be informed via periodic reporting about any violation of limits.
  - Ordinance requires operational limits, stress test consideration, RM involvement in risk appetite definition; RM should be documented and independently reviewed.
  - Note: ordinance does not explicitly require banks to build a sound RM culture.

- EC2 (bank-wide RM processes):
  - Ordinance 3624-U and Regulation 242-P require bank-wide RM policies and processes; internal review at least once a year.
  - Supervisory evaluation of ICAAP structure and use for strategic decision-making; conformity evaluated onsite.
  - Letter T-26 remains guiding methodology pending update.

- EC3 (documentation, review, communication):
  - Ordinance 3624-U requires documentation and at least annual review.
  - Regulation on RM clause 7.3 requires ICAAP documents communicated to relevant employees.
  - CBR examiners verify communication by requesting emails, staff-signature books, and board minutes.

- EC4 (board/senior management informed on risk and capital/liquidity links):
  - Chapter 6 of Ordinance 3624-U specifies reports and frequency to the BoD (annual, quarterly, monthly) including ICAAP results, stress testing, material risks, statutory ratios.
  - CBR Letter 26-T requires examiners to assess board capacity to exercise permanent control and obtain daily information on risks.
  - SREP planned to evaluate ICAAP starting 2017.

- EC5 (internal assessment of capital and liquidity adequacy; supervisor review):
  - Banks must develop strategies and tools for determining adequate capital and liquidity; liquidity RM procedures include limits and reporting of breaches.
  - CBR uses Letter 26-T and Ordinance 3883-U to review internal assessments and assigns banks to five classification groups; groups 3 to 5 trigger special supervisory attention and enforcement measures under Article 74 of Law 86-FZ.

- EC6 (models and validation):
  - Internal models permitted for computing economic capital for credit risk only, under standardized approach; foundation or advanced IRB approaches allowed.
  - Advanced approaches for market risk and OR not applicable in Russia; simplified/basic indicator approaches used.
  - Regulation 483-P (Chapter 14) sets internal validation requirements; Ordinance 3752-U contains approval process.
  - As of report, no banks had permission to use IRB; two banks submitted formal applications; 4 expressed willingness.

- EC7 (information systems adequacy):
  - Ordinance 3624-U requires automated systems ensuring RM and liquidity limits monitoring; Regulation 510-P and Regulation 421-P related to LCR/HQLA systems.
  - CBR examiners evaluate adequacy during onsite inspections.

- EC8 (new products and major initiatives):
  - Ordinance 3624-U Article 3.2 and Article 3.3 require methodology for determining material risks, and preliminary analysis for new financial instruments or markets, including assessment of staff qualifications.
  - Development of new products is a qualitative indicator of risk appetite; procedures must be approved by senior management.
  - Gaps: unclear application to material modifications to existing products and major management initiatives; not explicit that new activities only proceed if sufficient resources; role of RM control function in approval process could be stronger; BoD role could be more explicit.

- EC9 (RM function resources, independence, segregation, reporting):
  - Ordinance 3426-U requires independent RM function with sufficient authority and access to supervisory board/BoD; head meets qualification requirements and reports directly to bank bodies.
  - Internal audit must periodically review RM; head of internal audit must inform board if risk is unacceptable.
  - Unclear whether CBR ensures RM functions are properly resourced.

- EC10 (CRO and dedicated RM unit):
  - Ordinance 3624-U requires a RM department in all credit institutions, overseen by a CRO (Clause 3.6–3.8).
  - Banks must notify CBR of CRO appointment within three days, and removal no later than one day after decision.
  - Regulation does not specify who nominates/revokes the CRO; ordinance text states appointment “shall be appointed at the credit institution” and CBR indicates decision belongs to the BoD.

- EC11 (standards for credit, market, liquidity, interest rate in banking book, OR):
  - Chapters 2–7 of Annex to Ordinance 3624-U define requirements for these risks.
  - Instruction 139-I of December 3, 2012 and Regulation 483-P govern credit risk; Regulation 346-P governs OR; Regulation 510-P and Regulation 511-P (December 3, 2015) govern liquidity and market risk; Instruction 139-I contains domestic prudential liquidity ratios.

- EC12 (contingency arrangements and recovery planning):
  - Banking law (Article 11.1.1) requires contingency and recovery plans be approved by the BoD.
  - CBR Regulation N193-T provides methodological recommendations on recovery plans: structure, stress scenarios, early warning triggers.
  - Recovery plans should be consistent with business strategy, include stress testing, reviewed at least annually, and submitted to the CBR; CBR assesses feasibility during onsite inspections.

- EC13 (stress testing):
  - Regulation 2005-U and Ordinance 3883-U provide guidance for stress testing; Ordinance 3624-U Clause 5.4 requires stress testing in ICAAP for capital assessment, at least once a year.
  - Stress testing must cover all material risks, account for maximum damage events, and include documentation, frequency, scenarios, and reporting to BoD.
  - Banks must regularly assess scenarios, data quality, and assumptions; results used to adjust RM strategies at least once a year.

- EC14 (risk accounting in pricing, performance and new product approval):
  - CBR inspectors check during onsite examinations whether internal pricing, performance measurement, and new product approvals account for risks and whether BoD/management approved new activities.

### Implementation status, progress and remaining gaps
- RM regime strengthened after 2011 BCP update; prior to reforms CBR lacked legal power to set RM requirements.
- Major legal changes:
  - Federal Law 146-FZ of July 2, 2013 extended CBR powers in RM.
  - Ordinance 3624-U (April 15, 2015) introduced ICAAP and strengthened BoD responsibilities.
  - Ordinance 3223-U (April 1, 2014) obligates banks to notify the CBR when head of RM is appointed and sets qualification requirements.
- Implementation timeline and uncertainty:
  - First ICAAP reporting should be submitted to the CBR upon the results of 2016.
  - CBR to assess ICAAP results of the largest credit institutions starting from 2017.
  - Hard to evaluate effective implementation and how CBR will use new powers until ICAAP and SREP are actively applied.
- Other issues:
  - Concept and operational use of risk appetite is a work in progress; unclear whether board or senior management defines risk appetite.
  - Ordinance 3624-U does not explicitly require banks to build a sound RM culture.
  - Variation across banks: D-SIBs more advanced; small and mid-size banks lag.
  - Unclear if CBR pays special attention to resources dedicated to RM and internal control during onsite visits.

- Recommendation (RM supervisory focus):
  - Consider the proportion of resource dedicated to RM—and internal control—in onsite programs.
  - Perform a horizontal review across the system to ascertain the implementation of the new RM system, with emphasis on the role of the board in developing and overseeing the bank’s entire risk profile.

### Capital adequacy (Principle 16) — selected findings and key figures
- Russia updated capital framework to include Basel 2.5 and Basel III; further amended in December 2015, most changes effective January 2016.
- All Russian banks subject to Basel capital regulation on both standalone and consolidated levels.
- Legal basis: CBL Articles 62, 67, 72 authorize CBR to establish capital adequacy ratios and methods.
- Capital adequacy ratios (as described in Instruction 139-I and Ordinance 3855-U):
  - before 2016, Common equity Tier 1 (CET1) was set at 5 percent.
  - CET1 set at 4.5 percent from January 1, 2016 under Ordinance 3855-U of November 11, 2015.
  - Tier 1 capital adequacy ratio is set at 6 percent.
  - Total capital adequacy ratio: initially 10 percent, lowered to 8 percent since January 1, 2016.
- Capital definition and composition:
  - Regulation 395-P defines capital (own funds) as sum of Tier I and Tier II.
  - CET1 comprises common shares and certain preference shares; Tier II includes a set of nine elements (certain preference shares, share premium, current year profit not yet confirmed, subordinated debts, etc.).
  - Deductions before minimum capital include goodwill and other intangibles; losses of current and previous years; investments in own capital instruments (deducted in full); investments in capital instruments of financial entities (deducted in full); deferred tax assets.
- Risk-weight groups (Instruction 139-I):
  - Group 1: 0 percent (e.g., claims on the CBR, CBR bonds, cash, gold).
  - Group 2: 20 percent (e.g., claims against constituents of the Russian Federation; claims secured by guarantees from credit institutions resident of high income countries (OECD or Eurozone)).
  - Group 3: 50 percent (e.g., debt securities issued by local authorities of the Russian Federation; claims on banks in certain OECD countries).
  - Group 4: 100 percent.
  - Group 5: 150 percent (credit claims and overdue claims against central banks or governments of countries with country risk assessment “7”).
- Domestic deviations and transitional aspects:
  - Russia applies more conservative approaches in some areas (broader deductions, full deduction of investments in own capital instruments, general provisions not recognized as Tier 2).
  - CBR allows certain preference shares in CET1 under specified federal laws to mitigate sanctions effects.
  - Some deviations being eliminated starting January 1, 2016 (e.g., treatment of significant investments in capital, risk weights for certain CIS central banks/governments).
- Sector capital ratios:
  - 2014: capital adequacy ratio decreased from 13.5 percent to 12.5 percent due to outpacing growth of RWA.
  - 2015 (CBR discussion): average CAR for entire banking sector rose to 12.9 percent.
- Pillar 2 and supervisory powers:
  - Until 2015 CBR lacked authority to implement Pillar 2 capital charges; Ordinance 3624-U (April 15, 2015) set ICAAP requirements and SREP framework enabling Pillar 2 measures, including capital add-on.
  - Pillar 2 adoption is recent; banks preparing first ICAAP for 2016 reporting; CBR SREP design in progress.
- EC3 (supervisor power to impose capital charge):
  - CBL grants CBR power to impose limits and restrictions; Ordinance 3624-U fills prior gap by enabling Pillar 2 measures.
  - Actual use of powers remains to be assessed as ICAAP and SREP are implemented.

*Source: IMF mission report excerpt.*

### 0.65 percent in 2018; and 1 percent in 2019 (see diagram below).

### _cr16303 - 0.65 percent in 2018; and 1 percent in 2019 (see diagram below).

### Capital adequacy assessment and supervisory focus
- Key numeric references:
  - 0.65 percent in 2018; and 1 percent in 2019.
  - CET1, Additional Tier 1, Tier 2 and buffer layer figures shown on diagram: 13% Countercyclical buffer; 10.5%; 10%; 8%; 6%; 5.5%; 5% CET1; Additional Tier 1 0.5%; Tier 2 4.5%; CET1 4.5%; Additional Tier 1 1.5%; Tier 2 2%; Capital conservation buffer 2.5%; 0-2.5%.
- Supervisory assessment focuses on:
  - (a) potential loss absorbency of instruments in the capital base;
  - (b) appropriateness of risk weights as proxy for risk profile of exposures;
  - (c) adequacy of provisions and reserves to cover expected losses;
  - (d) quality of RM and controls.
- Consequence: capital requirements may vary from bank to bank to ensure appropriate capital relative to risks.

### Use and approval of banks’ internal risk assessments (IRB)
- Supervisor approval conditions if internal assessments are used:
  - (a) assessments adhere to rigorous qualifying standards;
  - (b) cessation or material modification of use or processes/models subject to supervisor approval;
  - (c) supervisor has capacity to evaluate internal assessment process to determine qualifying standards are met;
  - (d) supervisor has power to impose conditions on approvals;
  - (e) supervisor can revoke approval if standards/conditions not maintained.
- CBR implementation details:
  - CBR permits two IRB Approaches: foundation or advanced (advanced approaches to market and ORs not currently applicable in Russia).
  - Market risk and OR capital calculations use the standardized approach and basic indicators approach, respectively.
  - Requirements for internal validation processes set in Chapter 14 of Regulation 483-P of August 6, 2015.
  - Approval process by the CBR contained in CBR Ordinance 3752-U of August 6, 2015.
  - As of the assessment, no banks had been granted permission to use the IRB approach; two banks submitted formal applications and 4 expressed willingness.
- Conditions to obtain IRB permission (Regulation 483-P):
  - Bank asset size should be more than RUB 500 billion (approximately US$6.5 billion as of February 2016).
  - Bank must demonstrate internal capacity to use the IRB method.
  - Bank must have credit RM system, an internal rating system, methodology for developing/operating rating system, and data quality control mechanisms.
  - An independent model validation department required.
  - Internal validation subject to internal audit review at least once a year.
  - Bank must produce an implementation plan specifying roll-out across asset classes and business units.
  - Additional conditions may be set by CBR on a case-by-case basis.
- Model modification and reporting:
  - Banks with IRB permission obliged to report in writing any changes to rating systems at least once every six months (Article 1.18 of Regulation 483-P).
  - Introduction of any material changes requires additional CBR permission (Article 1.17).
  - Regulation 483-P defines materiality criteria (e.g., changes in probability of default estimation methods, mapping internal ratings, methods for assigning grades).

### CBR capacity to evaluate, approve, and enforce IRB use
- CBR validation framework based on documents/information per CBR Ordinance 3752 of June 8, 2015.
- Preliminary tests performed with three major banks.
- Dedicated supervisory group within supervisory department:
  - Comprising fifteen staff from both the SIFI and regulatory departments.
  - Several specialists with economic and quantitative backgrounds assigned to evaluate methodology, perform quantitative tests, and write assessment reports.
  - Three managers with mathematical and economical background responsible for approving staff assessments.
  - CBR in process of hiring external experts with modeling skills to reinforce manpower for IRB validation.
- Enforcement powers:
  - CBR can impose conditions on approvals and revoke approval if bank does not meet qualifying standards or imposed conditions (based on Regulation 3883-U).

### Forward-looking capital management, stress testing, and contingency planning (EC6)
- Supervisor powers:
  - Require banks to set capital levels and manage available capital in anticipation of possible events or adverse market condition changes.
  - Require feasible contingency arrangements to maintain or strengthen capital positions in times of stress, considering risk profile and systemic importance.
- Regulatory provisions and requirements:
  - Articles 12.22 and 12.23 of Regulation 483-P require stress testing methodologies that identify possible events or future changes in economic conditions that could adversely affect exposures and include models for quantification of credit risk parameters.
  - Banks perform stress testing based on their own scenarios and on CBR-proposed scenarios (regulatory stress testing) (Article 12.23 of Regulation 483 P).
  - In-house stress testing at least once a year and upon each material change in external factor conditions; stress testing shall cover all classes of exposure.
  - Stress test results must be reflected in internal documents and submitted for approval by executives and the BoD (Article 12.25 of Regulation 483 P).
  - Stress testing scenario selection must:
    - cover all material risks and areas of activity for the credit institution (banking group);
    - account for events that may cause maximum damage or loss of goodwill.
  - Ordinance 3624-U requires RM systems to include capital planning based on comprehensive assessment of material risks and testing resistance to internal and external risk factors in light of development strategy.
  - Ordinance 3624-U requires banks to determine targeted capital level, planned capital structure and sources, level of capital adequacy according to risk appetite set by the board, and need to raise additional capital per stress test results (Chapter 4).
  - Major credit institutions required to adopt contingency plans for restoring financial stability in event of general economic deterioration.

### Assessment of Principle 16 (Capital adequacy) — findings and challenges
- Assessment result: Largely Compliant.
- Progress noted:
  - Capital adequacy rules generally meet Basel II, Pillar 1 guidelines; earlier lack of legal authority to implement Pillar 2 has been addressed.
  - Key reforms: adoption of CBR Ordinance 3883-U of December 7, 2015 on ICAAP/SREP regime and Ordinance 3624-U of April 2015 (and subsequent amendments) on risk and capital management systems.
  - Reforms in credit risk, market risk, and operational risk frameworks cited (e.g., CBR Instruction 139-I; CBR Regulation 483-P; CBR Regulation 511-P; CBR Letter 69-T).
  - BCBS assessment of domestic adoption of Basel standards (Basel II, 2.5, and III) in 2015/2016 showed preliminary RCAP findings did not raise serious deviations.
- Remaining challenges and issues:
  1. The effectiveness of the new ICAAP/SREP regime remains to be assessed:
     - Pillar 2 not yet fully and thoroughly implemented.
     - ICAAP process under way; CBR completing first SREP cycle.
     - Timetable: SIFIs to submit ICAAP by the end of 2016; CBR to start reviewing their quality in 2017.
     - Pillar II powers not yet utilized; effectiveness to be tested.
  2. Banks need to adapt to the new prudential regime:
     - Requirements for banks include improving understanding of RM approaches, enhancing model quality, data and IT infrastructure, recruiting qualified staff (including modelers), providing training, and adjusting internal policies.
     - No Russian bank has yet received IRB permission, so practical implementation and CBR due diligence under internal model approaches remain unobserved.
- Conclusion: impact of the prudential framework depends on how banks meet obligations and how the CBR monitors and supervises them; critical challenges remain to be evaluated going forward.

### Credit risk supervisory framework (Principle 17) — scope and expectations
- Principle 17 coverage:
  - Supervisor ensures banks have adequate credit RM processes aligned with risk appetite, risk profile, market and macroeconomic conditions, covering full credit lifecycle (underwriting, evaluation, ongoing management).
- Essential Criteria highlights:
  - EC1: Laws/regulations/supervisor require comprehensive bank-wide credit RM processes consistent with risk appetite, systemic importance, capital strength, and market/macro conditions.
    - Key instruments: Ordinance 3624-U (Chapters 1 and 2), Regulation 254-P (provisioning and credit risk assessment), Regulation 483-P (RM systems, CG, internal models), Instruction 139-I (CBR supervision procedure), and methodology in Ordinance 2005-U.
    - CBR determines appropriateness through onsite inspections and offsite reviews.
  - EC2: Board approval and regular review of credit RM strategy; senior management implementation.
    - Ordinance 3624-U requires board approval/review and sets reporting standards to the board.
    - For IRB-approved banks (none yet), Regulation 483-P requires BoD to review CG, internal controls, and RM at least once a year.
    - At assessment time, CBR had two formal IRB applications and was developing internal validation framework (see CP16).
  - EC3: Policies/processes must establish appropriate controlled credit risk environment, including:
    - (a) well-documented strategy and sound policies without undue reliance on external credit assessments;
    - (b) defined criteria and approval authority for new/renewed exposures and prudent underwriting;
    - (c) effective credit administration, borrower analysis, monitoring of documentation/covenants/collateral, and asset grading;
    - (d) effective information systems for identification, aggregation, and reporting to board and senior management;
    - (e) prudent credit limits aligned with risk appetite and capital strength;
    - (f) exception tracking and reporting for prompt corrective action; and
    - (g) effective controls around use of models, data quality, and validation procedures.
  - Relevant provisions:
    - Ordinance 3624-U Annex Chapter 2 (Credit Risk) and Chapter 7 documentation requirements mandate annual documentation review.
    - Regulation 254-P Chapter 3 establishes credit administration and regular credit risk assessment for each exposure.
    - Ordinance 3624-U Chapter 4 Sections 4.12 and 4.14 address information systems.

_Italic: Source — _cr16303 - 0.65 percent in 2018; and 1 percent in 2019 (see diagram below)._

### Chapter 6, Section 6.2.

### _cr16303 - Chapter 6, Section 6.2.

### Controls, ordinances, and model governance
- Credit limits: see Ordinance 3624-U, Chapter 4, Sections 4.12.
- Exception tracking: see Ordinance 3624-U, Chapter 4, Section 4.14 and Chapter 6, Section 6.4.
- Controls around models: Regulation 242-P regarding the organization of internal controls sets standards on the quality, timeliness, control and management of information within the bank and banking group. See Section 3.5.1 in particular.
- Regulation 242-P requires that information shall be provided in a form that takes into account the needs of the specific recipient.

### Offsite function, inspections, and stress testing
- Offsite function:
  - Makes an assessment of the credit risk portfolio to check compliance with the banks’ internal documents.
  - Checks the quality of assets and can lead to investigations into the valuation by banks of their assets.
- Inspectors:
  - First task is to look at procedures: how they are carried out and whether they conform with internal control documents.
  - Perform a range of checks to drill down into the substance of loans, including examining borrowers’ financial statements and payment structures.
  - Subject portfolios to statistical analysis.
  - Check indicators against sectoral and regional averages.
  - Pay particular attention to extension of maturity on credit facilities to substantiate that true credit checks and assessments have taken place and to guard against soft restructuring or evergreening.
- Systemic CBR activities:
  - Conducts stress testing and has in the past conducted portfolio specific stress tests and imposed provisioning requirements when high growth rates in portfolios/sectors are identified.
- Historical note:
  - At the time of the ruble devaluation in December 2014, inspections were carried out on an extraordinary basis to examine open positions, considering both size and structure of exposures.
  - Inspectors judged that management skills in relation to FX risk have been driven up across the sector as a result of the market shock.
  - Many if not most banks with FX portfolios restructured their exposures with clients in 2015.

### EC4 — Monitoring total indebtedness and FX risk
- Supervisory requirement:
  - The supervisor determines that banks have policies and processes to monitor the total indebtedness of entities to which they extend credit and any risk factors that may result in default including significant unhedged FX risk.
- Relevant regulations:
  - Ordinance 3624-U (Annex Chapter 2, Section 2.1) requires procedures for managing risk arising from possible borrower/counterparty failure and shall include the methodology of risk assessment per counterparty, including methodology of assessing the solvency/ financial situation of counterparties (borrowers), loan quality, and determination of the amount of equity (capital) requirements.
  - CBR Instruction 139-I establishes methods of credit risk assessment (or rather statutory ratios for the calculation of maximum amounts of credit risk), but the bank has the latitude to use its own assessment methods (Ordinance 3624-U, Annex Chapter 2, Section 2.2).
  - CBR regulations require that RM processes, practices, procedures, and policies at a bank shall be robust enough to determine and monitor the total indebtedness of entities to which the bank extends credit.
- Infrastructure:
  - As of December 2015, there are 21 state registered credit bureaus which have information that banks can consult to assist them in this process.
- FX risk treatment:
  - As noted in CP22, the CBR treatment of FX risk sets a net open position cap at 10 percent for each individual currency and 20 percent in aggregate.

### EC5 — Conflicts of interest and arm’s-length lending
- Supervisory requirement:
  - The supervisor requires that banks make credit decisions free of conflicts of interest and on an arm’s length basis.
- Relevant regulations and guidance:
  - Regulation 254-P requires a bank’s terms of lending to be consistent with general terms of lending, including general provisions which require the bank to exercise objectivity and impartiality in its credit granting. Requirements in relation to the classification of bad loans make explicit reference to the need for avoiding conflicts of interest for the bank (Section 8.6).
  - While there is no explicit requirement for credit decisions to be free of conflicts of interest and on an arm’s-length basis, the regulation notes potential areas of sensitivity.
  - Internal audit function (Section 3.6) is required to pay particular attention to any exposure to a party connected to the bank if the exposure exceeds one percent of the equity of the bank.
  - Restrictions and limits apply in respect of any lending to a party connected with the bank.
  - Instruction 139-I establishes limits (the N9.1 and N10.1 ratios).
  - Letter 2-T recommends that intercompany/intergroup loans be conducted on an arm’s-length basis.

### EC6 — Board/senior management approval of major or risky exposures
- Supervisory requirement:
  - The supervisor requires that the credit policy prescribes that major credit risk exposures exceeding a certain amount or percentage of the bank’s capital are to be decided by the bank’s board or senior management. The same applies to credit risk exposures that are especially risky or otherwise not in line with the mainstream of the bank’s activities.
- Findings:
  - Banks must set various policies regarding credit risk, including exceptions to policy provisions and reporting lines, in business rules subject to CBR approval.
  - Ordinance 3624-U (e.g., Section 4.2) describes expectations for reports to the board (supervisory board).
  - It is not explicit that particular (e.g., risky or non-standard) exposures need to be reported to the board, but discussions with inspectors indicated that board reporting and policies for which exposures require board approval are a focus of onsite reviews.
  - Checks are routinely performed on the information packages submitted to the boards.
  - Thresholds of approval—namely loans that need board sign-off—attract the attention of the AR, and the AR must track all loans that are in violation of the bank’s internal processes and procedures.
  - Inspectors observed that losses tended to be proportionally higher in relation to board approved loans than to other loan categories.

### EC7 — Access to portfolio information and bank officers
- Supervisory requirement:
  - The supervisor has full access to information in the credit and investment portfolios and to the bank officers involved in assuming, managing, controlling and reporting on credit risk.
- Legal and practical rights:
  - The CBL grants the CBR the right to obtain information from the supervised entities (Article 57).
  - The right of access supports the position of the AR who has the right to attend the Management and risk committees of an institution to which she or he has been appointed.
  - Inspectors have rights under CBL Article 73 to receive and examine accounting reports and other documents of credit institutions (or their branches) and, if necessary, make copies of the corresponding documents to attach them to inspection materials.
  - An AR appointed under CBL Article 76 has the right to participate (without voting rights) in the bank’s management bodies as well as in the committees responsible for credit and asset liability management.
  - The AR shall receive from the bank information and documents relating to the credit institution's lending operations and operations to provide guarantees, and manage assets and liabilities (claims and obligations).

### EC8 — Inclusion of credit risk exposures in stress testing
- Supervisory requirement:
  - The supervisor requires banks to include their credit risk exposures into their stress testing programs for RM purposes.
- Related practice:
  - CBR conducts stress testing at a systemic level and has conducted portfolio specific stress tests and imposed provisioning requirements when high growth rates in portfolios/sectors are identified.

*Source: Chapter 6, Section 6.2 of the provided IMF material.*

### Chapter 5 of Ordinance 3624-U imposes stress testing requirements on banks, and the CBR

### _cr16303 - Chapter 5 of Ordinance 3624-U imposes stress testing requirements on banks, and the CBR

### Stress testing requirements and supervisory methodology
- Ordinance 3624-U imposes stress testing requirements on banks.
- CBR methodology for assessing compliance is set out in Ordinance 3883-U and considers:
  - stress testing scenarios;
  - whether the credit institution (banking group) has stress testing procedures approved by its management bodies, including those determining types of stress testing objectives, frequency, methodology for choosing applicable scenarios, taking stressed environments into account.
- The CBR expects executive boards of banks to take stress test results into account when deciding risk limits.
- Banks’ ability to define meaningful scenarios has improved in recent years, driven in part by adjustment to more stressful economic conditions.

### Assessment of Principle 17
- Assessment: Compliant
- Comment:
  - The assessment does not take into consideration the CBR’s regulations and practices in relation to the identification and management of problem assets, concentration risk, related party lending, or country/transfer risk (these are covered under their respective principles).
  - The CBR combines offsite scrutiny with onsite investigation, performs its own stress tests, monitors regional and sectoral trends, and cross-checks information on major exposures.
  - Chief Inspectorate work, curator analysis, and stress testing place supervision of credit risk in a more developed position relative to other risks.
  - Determination of quality of banks’ credit risk practices and control environment rests on inspections and, where relevant, the position of AR.
  - Recommendation: introduce formal requirements to ensure banks’ credit policies identify size and risk thresholds above which approval must be granted by the board or senior management.

### Principle 18 — Problem assets, provisions and reserves (Assessment: Largely Compliant)
- Principle objective: supervisor determines that banks have adequate policies and processes for early identification and management of problem assets, and maintenance of adequate provisions and reserves.

- EC1 — laws/regulations require banks to formulate policies/processes and regular review:
  - Regulations 254-P and 283-P require banks to formulate policies and processes for identifying and managing problem assets and to regularly review problem assets at individual or portfolio level.
  - Asset classification categories per CBR regulation 254-P (Article 1.7): standard, “non-standard,” doubtful, non-performing and bad loans.
  - NPLs definition: loans classified into categories IV and V on individual basis and homogeneous loans to households (individuals) and SMEs that are 90+ calendar days past due.
  - Classification uses borrower financial position and debt service quality (including days of arrears).
  - Provisioning levels by quality category (per Regulation 254-P):
    - Quality category I (highest) Standard: 0 %
    - Quality Category II Non(sub)-standard: 1–20 %
    - Quality Category III Doubtful: 21–50 %
    - Quality Category IV Problem: 51–100 %
    - Quality category V (lowest) Bad: 100 %
  - Classification is based on “professional judgment” except for portfolios of similar loans (254-P, Article 2.2).
  - Banks must disclose credit policy and provisioning approaches monthly to the CBR.

- EC2 — supervisor evaluates adequacy of grading/classification and provisioning:
  - CBR evaluates bank internal frameworks during onsite exams, checking compliance with Regulation 254-P and 283-P.
  - CBR inspection methodology (Letter 102-T of July 25, 2006) guides onsite loan audits, requiring review of internal credit policies and quality of borrower/collateral information.
  - Failure to submit required information can justify assigning loans to a lower quality category.
  - Russian law does not allow supervisor to engage external specialists for inspection purposes to confirm adequacy of asset classification and provisioning procedures.

- EC3 — off-balance sheet exposures considered:
  - Regulation 283-P (Chapter 3) requires provisions for contingent liabilities, classified by credit equivalence.
  - CBR loan portfolio assessments include off-balance sheet exposures.

- EC4 — timely provisions and write-offs:
  - Regulation 254-P (Article 1.2 and Chapter 8) requires “timely classification” and policies to remove bad loans from balance sheet.
  - Inspectors verify internal procedures, assess realism of repayment/recovery expectations, review internal documentation on lending, restructuring, provisioning and collateral policy.
  - Provisions must be updated for changes in credit risk, principal debt amount (including exchange rate fluctuations), and collateral quality.
  - CBR requests reclassification and provisioning when improper asset classification identified.

- EC5 — early identification and oversight of deteriorating assets:
  - Regulations 254-P and 242-P require appropriate policies/processes and ongoing evaluation.
  - Documentation of professional judgment is required at least once per quarter for loans to legal entities and individuals (monthly for loans to credit institutions).
  - Clause 1.8 of Regulation 283-P contains similar requirements for other assets and contingencies.

- EC6 — supervisor access to asset classification and provisioning information:
  - Banks submit monthly reports per Regulations 254-P and 283-P to CBR regional branches.
  - Three types of monthly reports:
    - Form #117: details on largest loans, interest rate, collateral, capital provision, classification, and restructured loans.
    - Form #118: information on concentration risks, relations with connected parties, borrowers with largest exposures.
    - Form #115: assets broken down by five quality categories, overdue debts, arrear times, and provisions.
  - CBR has full access to information and supporting documentation is reviewed onsite.

- EC7 — supervisor powers to require reclassification or higher provisioning:
  - CBR tests bank treatment of assets to detect circumvention (rescheduling, refinancing, reclassification).
  - Pre-inspection collects information to focus inspections; examiners examine changes to loan terms and borrowers’ sources of funds.
  - Regulation 254-P authorizes CBR to require reclassification and increased provisioning and to apply sanctions (Article 9.3).

- EC8 — valuation of risk mitigants and collateral:
  - Collateral values reported at fair (realizable) value, determined at least once per quarter by bank staff or independent appraiser.
  - Regulation 254-P requires collateral be considered in loan loss provision calculations.
  - Collateral categorized by liquidity: first category recognized at full value, second category eligible at one-half recorded value for reserve calculation.
  - CBR examiners review collateral documentation and appraisals; inspection coverage on average examines about 70 percent of credit portfolio.

- EC9 — criteria for problem asset identification and reclassification:
  - Regulations 254-P and 283-P define impaired loan conditions (Chapter 1 of 254-P).
  - All loans and contingent liabilities classified in one of five categories; CBR views impaired those in Category II or lower.
  - Debt service quality definitions preserved as in Regulation 254-P:
    - Debt service is good if payments are timely and in full; exceptions noted for arrears up to 5 calendar days (legal entities) and up to 30 calendar days (individuals).
    - Debt service is average for restructured loans or arrears up to 30 days (legal entities) and up to 60 days (individuals).
    - Debt service is bad if payments overdue over the last 180 calendar days (legal entities) or more than 60 calendar days (individuals).

- EC10 — board-level information on asset portfolio condition:
  - Regulation 254-P, Section 3.1.3 requires information used to evaluate loans (including borrower financial condition) be made available to the BoD.
  - Regulation 242-P: onsite supervisor determines asset quality information is regularly reported to BoD.
  - CBR recommendation 26-T suggests examiners consider presentation of credit policy implementation to BoD, internal control classification and provisioning justification, and scope/quality/frequency of credit risk reporting to executive board and BoD.

- EC11 — individual valuation/classification for significant exposures:
  - Regulation 254-P allows valuation/classification/provisioning both individually (for larger loans) and on a portfolio basis for smaller uniform loans.
  - CBR establishes a limit in Article 5 of 254-P of 0.5 percent of a bank’s capital for each such portfolio loan.

- EC12 — sectoral/system-level trend and concentration assessment:
  - CBR conducts offsite surveillance and analysis from bank reporting; takes macroeconomic outlook and sector trends into account.
  - Examples: monitoring excessive growth of unsecured consumer loans in 2012–13 and ruble depreciation spillovers prompting temporary forbearance in 2014–15.

- Comments and key developments:
  - Asset quality deteriorated; NPLs grew fast, especially household sector.
  - Temporary forbearance measures introduced December 2014; some measures expired December 2015.
  - In 2016, credit institutions were given an opportunity not to reclassify the borrower until borrower has paid back entire loan amount—implying some rescheduled loans may be in a lower category.
  - Favorable exchange rates allowed conversion of foreign-currency assets (about 25 percent of total sector assets) into rubles using end-September exchange rates (end-2014), preventing significant RWA swelling.
  - Relaxations helped banks save as much as 2 percentage points of their capital adequacy levels, according to the central bank.
  - CBR inspections revealed poor practices: lending to shell companies, overvaluation of collateral, misreporting, unreliable financial statements; enforcement included license revocations.
  - Collateral valuation, especially real estate, is unreliable; external appraisers often not trustworthy and valuation processes are weak nationwide.
  - CBR initiatives:
    - Set up its own dedicated appraiser team and hiring of a certified assessor to assist inspections.
    - Considering an amendment to law to oblige banks to provision loans secured by real estate based on CBR valuation and empower CBR to legally challenge external appraisals.
  - Execution of collateral is lengthy and costly; repossession may take up to two years after court decision in practice; law imposes restrictions (e.g., households with under-age children).
  - Recommendation:
    - Accelerate the process of amending the law to provide the CBR with additional legal tools in the areas of provisioning and collateral valuation.

### Principle 19 — Concentration risk and large exposure limits (Assessment: Largely Compliant)
- Principle objective: supervisor determines banks have adequate policies/processes to identify, measure, evaluate, monitor, report and control/mitigate concentrations; supervisors set prudential limits to restrict exposures to single counterparties or groups of connected counterparties.

- EC1 — bank-wide view and capture of on- and off-balance sheet exposures:
  - Principles laid out in Article 62 of the CBL, CBR Instruction 139-I, Ordinance 3624-U (April 15, 2015), and CBR Letter 26-T; Regulation 2005-U updated for concentration risks.
  - Large exposure definition (Article 65 of CBL): exposure to single customer exceeding 5 percent of bank’s capital is a large exposure.
  - Statutory limit: exposure to counterparty or group of connected counterparties cannot exceed 25 percent of eligible capital; ratio will be set at 20 percent from January 1, 2017.
  - Aggregate limit of all large exposures: eight times the bank’s equity capital (800 percent of own funds).
  - Ordinance 3624-U requires RM frameworks to address concentration risk, assign responsibilities, and develop policies/procedures for identification, measurement, management, monitoring and reporting.
  - Concentration limits apply at group level; subsidiaries’ procedures defined based on group approaches.

- EC2 — information systems to identify and aggregate exposures:
  - Banks must have internal policies/procedures to record and monitor large exposures and submit monthly reports signed by CEO or CFO detailing concentration risks by sector/geography.
  - CBR verifies management information systems offsite and onsite; pre-inspection requests limit summaries and internal RM documents.
  - Regulation 242-P requires internal audit review of procedures and informing BoD of deficiencies; Article 42 of banking law requires external auditors to check internal controls and RM systems.

- EC3 — thresholds, communication, board reporting:
  - RM procedures for concentration risk must be integrated and aligned with capital adequacy; limit structure captured in ICAAP.
  - Ordinance 3624-U: banks should determine risk appetite using indicators (Article 4.4.2) and report material risks including concentration risks to board quarterly (ICAAP reporting, Article 6.4).
  - Onsite inspections confirm policies define and limit large exposures, and RM policies are communicated to staff; ARs have access and can attend board meetings.

- EC4 — regular information on sectoral/geographical/currency concentrations:
  - National register of “high credit risks” maintained per Article 65 of CBL.
  - Specific reporting per Instruction 139-I: monthly detailed information broken down by sector/geography/currency.
  - Key prudential ratios:
    - Ratio N-6: aggregate size of loans to any one borrower and/or connected group of borrowers.
    - Ratio N-7: aggregate large credit exposures limited to 800 percent of capital.
    - Ratio N-25: new statutory ratio entering force January 1, 2017; banks are already reporting under N-25 but breaches not enforceable before 2017.
  - CBR uses ASFB-Analysis of Financial Standing of Banks software for monitoring.

- EC5 — definition and supervisory discretion on "group of connected counterparties":
  - Article 64 of CBL defines related borrowers based on dependency or parent-subsidiary relationships; Instruction 139-I allows consideration of influence over management or election of board members.
  - Revised Article 64 (effective January 1, 2017) extends connectedness to economic linkages where deterioration in one borrower affects another; concept of RPs extended to parties connected to credit institutions.

- EC6 — statutory limits and supervisory monitoring:
  - General statutory limit: exposure to a counterparty or group cannot exceed 25 percent of own funds; lowered to 20 percent from 2017.
  - “Exposures” include on-balance sheet and off-balance sheet items as defined in CBL and instructions.
  - CBR inspection methodology (Letter N-26 T) guides verification of internal systems and implementation; media reports and corporate structures are analyzed.

- EC7 — inclusion of concentration risk in stress testing:
  - Regulation 2005-U contains stress testing provisions; CBR questionnaire (question 7) assesses whether bank has formalized stress test procedures covering main risks.
  - Ordinance 3624-U Chapter 7 requires banks to include impact of significant risk concentrations in stress testing programs, with scenario analysis and reporting to BoD and executive departments to take action where necessary.

- Comments and implementation status:
  - ICAAP Regulation 3624-U (April 15, 2015) introduces new provisions on concentration risk; Regulation 2005-U revised with indices PA5, PA6, PA7.
  - Decision taken to lower maximum limit from 25 percent to 20 percent.
  - Effective implementation not yet fully assessed: SIFIs began including concentration impacts in stress tests from January 1, 2016; non-SIFIs start January 1, 2017.
  - New board responsibilities and quarterly board reporting on concentration risks enforceable from 2017.
  - Definition of economic linkages to identify connectedness is not yet implemented (implementation from 2017), limiting oversight.
  - New regime on exposures to persons connected to the credit institution itself starts January 2017.
  - Market concerns on large exposures; CBR statistics indicate large loan exposure of banking sector grew by 34.9 percent in 2014 (text ends noting this trend).

*Source: IMF Financial Sector Assessment excerpt (Chapter on CBR supervision, Regulations 254-P, 283-P, 3624-U, 3883-U, and related CBR materials, as provided in the source content).*

### 19.5 trillion rubles. The share of large loans in the banking sector assets remained unchanged over

### _cr16303 - 19.5 trillion rubles. The share of large loans in the banking sector assets remained unchanged over

### Key statistics and context
- Total reported amount: 19.5 trillion rubles.  
- Share of large loans in banking sector assets: 25.1 percent.  
- Number of credit institutions that violated the maximum exposure per borrower or group of related borrowers (N-6) ratio during the reporting year: 122 credit institutions (69 credit institutions in 2013).  
- Number of credit institutions that violated the large credit exposure (N-7) ratio during the reporting year: 14 credit institutions (6 credit institutions in 2013).  
- As of January 1, 2015, the maximum value of loans, guarantees, and sureties provided by a credit institution (banking group) to its members (shareholders) (N-9.1) ratio was calculated by 306 credit institutions, or 36.7 percent of the total operating credit institutions (338 credit institutions, or 36.6 percent as of January 1, 2014).  
- N-9.1 ratio breaches as of January 1, 2015: breached by six credit institutions (three credit institutions in 2013).  
- Total number of related-ratio violations reported: 84 violations in 2014, compared with 144 violations in 2013.  
- Number of credit institutions failing to meet the total insider risk (N10.1) ratio requirements in 2014: 16 credit institutions (nine credit institutions in 2013).  
- Example of related-party lending loss: RUB 2 billion ($60 million) hole in a bank’s balance sheet linked to loans to companies affiliated with the bank's owners.  
- Proposed statutory ratio N25: maximum level to be established at 20 percent; proposed date of establishment: January 2017.  
- Statutory limits referenced: N6: 25 percent of bank‘s capital; N9.1: 50 percent of bank‘s capital; N10.1: 3 percent of bank‘s capital.  
- Write-off approval threshold under Joint Stock Companies law and Regulation 254-P: write-off of loans to a shareholder and/or his RPs that exceeds 1 percent of the institution’s capital require prior approval of the BoD.

### Principle 20 — Transactions with related parties (RPs): description and findings
- Legal and regulatory framework:
  - The RP concept is defined across multiple texts (Federal Law 948-1, Article 64 of the CBL, CBR Instruction 139-I), with important amendments introduced since 2015 and further changes (Article 64¹) to enter into force in 2017.
  - Until 2016, the definition of RPs was narrow and mainly based on legal relationships; economic relatedness and possible relatedness to the credit institution itself were not fully captured.
  - CBR Instruction 139-I defines RPs as individuals and legal entities capable of influencing decisions that carry credit risk.
  - Article 64¹ (to enter into force in 2017) expands definitions for legal entities and private individuals related to credit institutions and empowers the Banking Supervision Committee (BSC) of the CBR to decide on relatedness, shifting burden of proof to the credit institution to demonstrate absence of relatedness.
- Supervisory practices and reporting:
  - CBR uses annual (published) financial statements and reporting forms N-6 and N-25 to gather details on transactions with related and affiliated parties.
  - CBR inspectors review “insider loans” during onsite inspections, comparing terms with similar non-insider transactions; loans to RPs are subject to higher risk weight co-efficient of 1.3 (Codes 8956/8957 in Instruction 139-I).
  - Aggregated reporting requirements (CBR Instruction 139-I) include: N6, N9.1, and N10.1 on a monthly basis.
- Key shortcomings identified:
  - Definition of RPs is fragmented across multiple legal sources rather than a single comprehensive statute.
  - New legal measures (including N25 and Article 64¹) will not be implemented before January 2017.
  - No legal prohibition requiring that lending to RPs be on the same terms as to non-related counterparties; CBR guidance exists but is not binding, and CBR lacks power to discipline banks or impose penalties on directors who personally benefited.
  - Uncertainty whether board-approval requirements for write-offs apply equally to banks organized as LLCs.
  - No obligation for banks to report immediately to the CBR any serious breach of statutory ratios N6, N9, N10, and N25 (CBR can request daily reporting if concerns arise).
  - Economic connectedness in the definition of relatedness will not be implemented before 2017.
- Assessment outcome for Principle 20: Materially Non Compliant.  
  - The grade assigned to this CP in 2008 remains the same; concerns with capture of relatedness are reflected in grading of CP20.

### Recommendations related to Principle 20 (from assessors)
- Conduct a horizontal review across the industry to verify degree of conformity with LEL Requirements in light of the new statutory ratio N-25.  
- Instruct the industry to increase efforts in establishing 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 into banks’ RM framework in light of the new ICAAP regime.  
- Strengthen the definition of RPs to be more organic and exhaustive.  
- Establish a legal prohibition for related party transactions performed on more favorable terms than corresponding transactions with non-related counterparties.  
- Include regulation prohibiting directors or other persons with conflicts of interest from participating in decision-making on their own loans.  
- Subject borrowers to obligation to declare any relatedness with the bank.  
- Include in law a provision requiring major shareholders to disclose their “business interests.”  
- Require banks to report immediately to the CBR any serious breach of statutory ratios applicable to RP.  
- Subject banks with LLC status to the same board approval requirements for related-party transaction write-offs as other bank forms.  
- Define in regulation the types of transactions that give rise to RP exposures.  
- Exercise control over observance by credit institutions of calculated maximum risk per person related to a credit institution.

### Principle 21 — Country and transfer risks: description and findings
- Regulatory coverage:
  - Country and transfer risks are not specifically addressed in current regulation except in Ordinance 3624-U (ICAAP) and CBR Ordinance 1584-U (loss provisioning for operations with offshore residents).
  - Regulation 242-P requires internal control systems to address bank risks generally but does not single out country and transfer risk.
  - Regulation 2005-U and Letter 15-1-5/4957 provide guidance and indicators but country/transfer risk are not specifically singled out.
  - Ordinance 3624-U recognizes FX risk among market risk and refers to country risk within concentration risk; it permits indices to measure concentration by country/region.
  - CBR Ordinance 1584-U and Ordinance 1317-U set provisioning rules for operations with offshore residents (Group I: no provision; Group II: 25 percent; Group III: 50 percent).
- Supervisory practice:
  - Country risk is considered within RM and internal control oversight and assessed primarily as a subset of credit risk.
  - Banks’ ICAAP and stress testing are expected to include country/transfer risks, but no explicit detailed requirements exist.
  - Reporting on exposures involving residents and non-residents is captured through a set of reporting forms: Data on Major Loans (0409118); Report of an Authorized Bank on Foreign Operations (0409401); Data on Settlements under Operations between Residents and Non-Residents with Securities, Shares, Equity Interest, and Investments in Assets (0409405); Data on Interbank Loans and Deposits (0409501); Data on Open Correspondent Accounts and Their Balances (0409603).
- Key shortcomings identified:
  - No specific requirements or minimum standards for management of country and transfer risk beyond general RM and internal control regulations.
  - No specific guidelines for provisioning or minimum provisioning levels for country and transfer risks other than offshore zone rules.
  - Country and transfer risk assessment is ad hoc; lack of specific prudential returns or detailed supervisory guidance.
- Assessment outcome for Principle 21: Materially Non-Compliant.

### Recommendations related to Principle 21 (from assessors)
- Establish specific guidelines or regulations for country or transfer risk beyond general RM requirements and risk exposure to offshore residents.  
- Establish specific policies for provisioning for country and transfer risks.  
- Require detailed prudential returns on country risk and transfer risks.  
- Ensure greater supervisory focus—both onsite and offsite—on risks stemming from country (including sovereign) risk and transfer risk.

### Principle 22 — Market risk (summary of regulatory stance)
- Ordinance 3624-U sets qualitative requirements for internal market RM procedures and requires risk appetite to be determined as a combination of quantitative and qualitative indicators. Chapters 1 and 3 of the Annex to the ordinance set out requirements for identifying, assessing, and limiting market risk for the institution as a whole.
- Country and transfer risk and market/liquidity considerations are expected to be considered within the broader ICAAP and RM framework, but specific detailed findings for Principle 22 beyond the ordinance references are limited in this excerpt.

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

### Chapter 6 of the annex to the ordinance, Section 6.2 sets RM requirements to address market

### _cr16303 - Chapter 6 of the annex to the ordinance, Section 6.2 sets RM requirements to address market

### Market risk framework (Principle 22)
- Section 6.2 sets RM requirements to address market liquidity risk and the risk of losses in relation to deterioration in market liquidity.
- Banks are subject to Ordinance 2005-U, which requires supervisors to establish that internal control documents and procedures are in place and are commensurate with the activities of the bank. The inspection process is used to identify if policies, processes and oversight practices are followed. Market risk is not a predominant risk for banks in the Russian banking sector; it is less common for this risk area to be in scope. The CBR determines whether the risk processes are appropriate or deficient through its onsite inspection processes.

#### EC2 — Board oversight and approval
- Supervisor determines that banks’ strategies, policies and processes for market risk management have been approved by the banks’ boards and that boards oversee management to ensure implementation and integration into overall RM.
- Description and findings:
  - Ordinance 3624-U sets qualitative requirements for internal market RM procedures, including requirement to approve respective policies and processes by the bank’s board.
  - Section 2.3 requires the board (supervisory board) of the credit institution to approve: the risk and capital management strategy; the procedure for managing the most material risks and capital of the credit institution; and control over its implementation.
  - Ordinance 2005-U also applies and requires the supervisor to consider the nature of risk oversight within supervised institutions.

#### EC3 — Market risk environment, limits, reporting, and controls
- Supervisor determines that bank policies/processes establish an appropriate market risk environment including:
  - (a) effective information systems for accurate and timely identification, aggregation, monitoring and reporting of market risk exposure to the board and senior management;
  - (b) appropriate market risk limits consistent with risk appetite, risk profile and capital strength, understood by and regularly communicated to relevant staff;
  - (c) exception tracking and reporting processes ensuring prompt action at appropriate levels;
  - (d) effective controls around use of models to identify and measure market risk and set limits;
  - (e) sound policies and processes for allocation of exposures to the trading book.
- Description and findings:
  - Ordinance 3624-U sets qualitative RM requirements in the ICAAP context; expectations around market risk are in Chapter 3 of the main ordinance, Chapter 3 (Market risk) of the Annex; documentation requirements in Chapter 7 of the main ordinance.
  - Main references:
    - (a) Information and reporting: Ordinance 3624-U, Chapter 3, Section 3.1, Chapter 6, Section 6.2.
    - (b) Appropriate limits: Ordinance 3624-U, Chapter 2, Sections 2.1 and 2.2; Chapter 4, Section 4.1 (requirement to set risk appetite).
    - (c) Exception reporting: Ordinance 3624-U, Chapter 4, Section 4.14.
    - (d) Effective controls around limits: Ordinance 3624-U, Chapter 4, Sections 4.12 and 4.14 and Chapter 6, Section 6.2 and Chapter 3 of the annex, Sections 3.2 and 3.4.
    - (e) Trading book boundary: Regulation 511-P Section 1.1.
  - Banks report certain forms to the CBR on daily basis (e.g., 0409701) and report OTC derivatives trades to trade repository, requiring effective information systems.
  - Ordinance 2005-U requires supervisors to examine whether banks have appropriate risk measurement procedures and impose suitable limits. Timely reporting deadlines are not explicitly identified in Ordinance 3624-U or Ordinance 2005-U. Exception reporting addressed in Ordinance 3624-U, Section 4.1.4.
  - Assessors reviewed inspection reports focusing on market risk environment and correct calculation of market risk positions and capital adequacy; features in this criterion were addressed.

#### EC4 — Valuation, independence, and valuation adjustments
- Supervisor determines systems and controls ensure marked-to-market positions are revalued frequently; transactions captured timely; valuation uses consistent and prudent practices and reliable market data verified by a function independent of the risk-taking business units; model-based valuations validated by an independent function; banks to establish policies/processes for valuation adjustments for concentrated, less liquid, and stale positions.
- Description and findings:
  - Ordinance 2005-U assesses internal controls and strategic RM, but Ordinance 3624-U more clearly sets qualitative requirements for internal market RM procedures.
  - Frequency of valuation: Chapter 3 of the annex, Section 3.4 requires the credit institution to establish procedure and frequency of assessing the methodology for determining value of trading portfolio instruments and policy for frequency of assessment of valuation.
  - Independence of valuation process: Chapter 3 of the annex, Section 3.4 requires methodology and sources of market information used for determining value of trading portfolio instruments to be developed independently of divisions responsible for assuming market risk positions.
  - Valuation adjustments for hard-to-value positions: Chapter 3, Section 3.4 requires methodology to assess degree of uncertainty of estimates from models and, if necessary, adjust instrument values assessed using quantitative models. Chapter 7 of the annex sets requirements for monitoring and management of concentrations. CBR Letter 37-T contains guidelines for assessment of accuracy of fair value accounting practices.
  - Use of models for valuation: Chapter 3, Paragraph 3.2 requires bank to comply with requirements to such types of methods in international practice. Use of models for valuation not a widespread practice per assessors.

#### EC5 — Capital and valuation adjustments
- Supervisor determines banks hold appropriate levels of capital against unexpected losses and make appropriate valuation adjustments for uncertainties in fair value.
- Description and findings:
  - Banks were obliged to maintain adequate capital against market risk in accordance with Regulation 387-P until January 1, 2016, when Regulation 511-P “On the Procedure for Credit Institutions to Calculate Market Risk” came into force. Regulation 511-P sets requirement for valuation adjustments for less liquid positions.
  - Chapter 3 of Ordinance 3624-U requires procedures for managing market risk to include determination of capital requirements: banks must determine target capital level, target capital structure, capital sources, target level of capital adequacy, target risk levels and target risk structure based on risk appetite indicators.
  - Chapter 4, Section 4.4.2 requires banks to have indicators of market risk showing the capital value required to cover losses due to changes in financial instruments’ value.
  - Chapter 3, Section 3.4 requires methodologies to assess hard-to-value positions and make adjustments.
  - Chapter 4, Section 4.9.1 requires procedures for capital allocation in respect of market risk.
  - CBR Letter 37-T provides guidelines on monitoring accuracy of fair value accounting practices.
  - A newly established—though not yet fully staffed—division in the CBR on valuation expects to support on- and offsite functions and banks on fair valuation issues.

#### EC6 — Stress testing
- Supervisor requires banks to include market risk exposure into their stress testing programs for RM purposes.
- Description and findings:
  - Ordinance 3624-U, Chapter 5, requires banks to use stress testing methodology based on historical and hypothetical events (scenario analysis) and analysis of sensitivity to changes in key risk factors.
  - Prior to this ordinance, Ordinance 2005-U required the supervisor to consider whether the bank’s stress testing practices are commensurate with its activities.

Assessment of Principle 22: Largely Compliant
- Comments:
  - Market risk is a less developed area in banks’ activities than in some jurisdictions. Banks are not authorized to use models for Pillar 1 regulatory capital calculations; historically volumes of tradable securities have been low and complex structured products do not feature. Banks may use economic capital models in ICAAP as set out in Ordinance 3624-U.
  - Until 2014, CBR did not have legal powers to enforce RM and control standards; the enhanced framework under Ordinance 3624 is valuable but at an early stage of implementation without a track record.
  - The CBR operates a net open position limit system of 10 percent of the regulatory capital for each major currency and 20 percent of the regulatory capital in aggregate. The NOP rule has been in place for over twenty years, during most of which time the currency was very stable. Given recent volatility and banks’ relative inexperience managing such risk, the CBR may wish to re-examine their regulations. In 2008-9 the CBR issued additional recommendations (letters) to credit institutions on FX positions and considered compliance when setting limits for banks’ participation in CBR auctions on unsecured loans; nevertheless, it is recommended the underlying regulations be reviewed.
  - There are instances when one entity within a wider group will carry out market risk activities on behalf of affiliated group members, including bank entities. The assessors note CBR’s program of coordinated inspections for bank and non-bank group entities will be important as market complexity evolves.

### Interest rate risk in the banking book (Principle 23)
- Principle: The supervisor determines that banks have adequate systems to identify, measure, evaluate, monitor, report and control or mitigate interest rate risk in the banking book on a timely basis, taking into account risk appetite, risk profile and market and macroeconomic conditions.

#### EC1 — Legal and supervisory requirements for IRRBB framework
- Laws, regulations, or the supervisor require banks to have appropriate interest rate risk strategy and interest rate RM framework providing bank-wide view, with policies/processes to identify, measure, evaluate, monitor, report, and control or mitigate material sources of interest rate risk. Supervisor determines consistency with risk appetite, profile, systemic importance, market and macroeconomic conditions, and regular review.
- Description and findings:
  - RM requirements for interest rate risk are set out in Ordinance 3624-U. Chapter 1 requires “detection, evaluation, and aggregation” of material risks—individual institution and group-wide—while Chapter 2 requires a system of control (Section 2.1) for material risks, including methods and procedures for RM.

#### EC2 — Board approval and senior management implementation
- Supervisor determines bank’s strategy, policies and processes for interest rate risk have been approved and regularly reviewed by the bank’s board; senior management ensures effective development and implementation.
- Description and findings:
  - Section 2.3 of Ordinance 3624-U requires the board (supervisory board) to approve the RM strategy and procedures for managing most material risks and control over implementation.
  - Board and executive management have responsibilities for setting risk strategy and designing and implementing RM policies and procedures. The ordinance requires at minimum an annual review of strategy, policies, and procedures.

#### EC3 — Measurement systems, models, limits, reporting, and information systems
- Supervisor determines that banks’ policies/processes establish an appropriate IRRBB environment including:
  - (a) comprehensive and appropriate measurement systems;
  - (b) regular review and independent validation of any models used for IRRBB, including review of key model assumptions;
  - (c) appropriate limits, approved by boards and senior management, reflecting risk appetite, profile and capital strength, and regularly communicated to staff;
  - (d) effective exception tracking and reporting for prompt action; and
  - (e) effective information systems for accurate and timely identification, aggregation, monitoring and reporting to boards and senior management.
- Description and findings:
  - Requirements chiefly established in Chapter 5 of the Annex to Ordinance 3624-U.
  - Clause 5.2: methods of interest rate assessment shall cover all material sources of interest rate risk inherent to operations sensitive to interest rate changes.
  - Assumptions used in interest rate assessment (e.g., maturity term and cost of assets or liabilities) must be recorded in ICAAP documents; institutions must analyze sensitivity of results to changes in assumptions and ensure correlation between results and assumptions is intelligible to heads of divisions and executive bodies.
  - Clause 5.3: for limiting interest rate risk, the credit institution shall establish:
    - a system of interest rate risk limits;
    - continuous control of compliance with established limits at the credit institution (subsidiary credit institution);
    - procedures for immediate notification of the BoD (supervisory board) and executive bodies of violations of established limits and when volume of assumed interest rate risk exceeds thresholds in internal documents; and
    - measures for reducing interest rate risk to be taken upon reaching threshold levels established within ICAAP documents.
  - General ICAAP reporting requirements in Chapter 6 of Ordinance 3624-U.
  - Clause 5.4: reports on interest rate risk to BoD and executive bodies shall include:
    - information on current interest rates on the banking market and their changes;
    - information on the volume of interest rate risk for aggregate positions of financial instruments sensitive to interest rate changes;
    - information on compliance of such positions with established limits;
    - stress testing results;
    - opinions (expert assessments) of analysts on interest rate changes in the long term;
    - information on forecast values of indicators for financial instruments sensitive to interest rate changes (for example, forecast of an outflow/inflow of on-demand deposits, or early/full loan repayment); and
    - information on results of interest rate risk measurement by the method(s) used by the credit institution (the parent credit institution of the banking group).
  - Refer to CP 15 in respect of information systems.

#### EC4 — Stress testing scenarios for interest rate risk
- Supervisor requires banks to include appropriate scenarios into their stress testing programs to measure vulnerability to loss under adverse interest rate movements.
- Description and findings: (text ends here in provided content)

*Source: _cr16303 - Chapter 6 of the annex to the ordinance, Section 6.2 sets RM requirements to address market*

### Chapter 5 of Ordinance 3624-U sets out the general expectations for designing stress tests, and

### _cr16303 - Chapter 5 of Ordinance 3624-U sets out the general expectations for designing stress tests, and

### Major theme
- Chapter 5 of Ordinance 3624-U sets out the general expectations for designing stress tests, and

*Source: _cr16303 - Chapter 5 of Ordinance 3624-U sets out the general expectations for designing stress tests, and*

### Chapter 5, Section 5.2 requires stress testing of interest rate movements.

### _cr16303 - Chapter 5, Section 5.2 requires stress testing of interest rate movements.

### Interest rate risk in the banking book (IRRBB) — key finding and supervisory expectation
- Chapter 5, Section 5.2 requires stress testing of interest rate movements.
- See also EC13 of Principle 15, which is also applicable to IRRBB management.
- Assessment of Principle 23: Largely Compliant.
- Findings:
  - The regulatory framework has been enhanced, with greater emphasis on stress testing, but many new provisions requiring banks to improve risk management practices are not yet fully in force.
  - The Russian banking system has experienced sudden interest rate hikes in recent years, increasing the premium on effective IRRBB management.
  - Market constraints: "limited options available to banks in terms of instruments to hedge interest rate risk."
  - Supervisory recommendation: the CBR should focus attention on IRRBB management to ensure banks are forward looking and strategic in planning.
  - Observed supervisory practice: CBR is aware that banks’ stress testing programs are improving in quality through inspections and ARs, but further supervisory attention is advised.

### Liquidity risk framework (Principle 24) — supervisory framework, metrics, and implementation status
- Assessment of Principle 24: Largely Compliant.
- High-level status and implementation timeline:
  - CBR is implementing the Basel III liquidity framework for systemic institutions and is using Alternative Liquidity Approaches (ALA) due to scarcity of HQLA, including:
    - committed liquidity facility (CLF) (Option 1 under Basel), and
    - allowing foreign currency HQLA to cover domestic currency liquidity needs (Option 2).
  - Net Stable Funding Ratio (NSFR):
    - CBR plans to develop NSFR calculation methodology for reporting purposes in 2016.
    - Implementation date in Russia planned for January 1, 2018, in accordance with the Basel timetable.
  - LCR adoption and reporting:
    - Regulation 421-P (2014) sets methodology for LCR calculation on a standalone basis.
    - Largest Russian banks (total assets of RUB 50 billion or more and (or) retail deposits of RUB 10 billion or more) have had to report the LCR since July 2014; first report submitted on August 1, 2014.
    - Regulation 510-P (2015) implements Basel LCR standard and adopts the following phase-in schedule:
      - 70 percent—from January 1, 2016;
      - 80 percent—from January 1, 2017;
      - 90 percent—from January 1, 2018;
      - 100 percent—starting from January 1, 2019.
  - For non-systemic banks: subject to Regulation 139-I, which establishes three liquidity ratios (Instruction 139-I), to be complied with on a daily basis.

- Quantitative liquidity ratio requirements (Instruction 139-I):
  - Instant ratio (N2): must be greater than or equal to 15 percent of on-demand liabilities.
  - Current ratio (N3): requires banks to hold at least 50 percent of one-month liabilities in liquid assets with residual maturity of one month.
  - Long term ratio (N4): requires banks to hold at least 120 percent of liabilities with residual maturity of over one year in liquid assets with residual maturity of more than one year; denominator for N4 includes total capital.

- Supervisory techniques, reporting, and stress testing:
  - LCR calculated and reported separately for operations in rubles and in each significant foreign currency (a currency is significant if on and off-balance sheet liabilities in that currency ≥ 5 percent of total liabilities).
  - Regulation 510-P requires parent credit institutions to:
    - carry out stress tests at least annually or more frequently during periods of stress under short and long-term scenarios, including crisis event scenarios;
    - disclose stress testing results to the CBR;
    - conduct short and long term stress scenarios and use results to fine tune strategy and policies (Annex 1, Paragraph 10).
  - CBR conducts a semi-annual survey among the top 30 banks on FX liquid assets and liabilities (contractual and expected redemption schedules) for systemic risk assessment and foreign currency liquidity planning.
  - Since 2014, CBR carries out regular stress testing on FX liquidity for the 30 largest banks and collects daily interbank market reports to assess liquidity availability, rates, and flows.

- Supervisory guidance and expectations on liquidity risk management:
  - CBR Letters and Ordinances referencing liquidity RM practices and expectations include:
    - Letter 139-T (liquidity management recommendations; includes liquidity stress testing, worst case scenario, contingency plans, FX liquidity by currency);
    - Letter 26-T (onsite inspection instructions to review management-approved written liquidity RM policies and liquidity monitoring practices);
    - Ordinance 3624-U (qualitative requirements for internal risk-management procedures, including liquidity risk; stress testing requirements apply in Chapter 5; Section 6.2 requires procedures to respond to unforeseen liquidity pressures);
    - Regulation 510-P (Annex 1) sets requirements for group-level liquidity RM strategy and monitoring intra-day liquidity for systemic banks;
    - Ordinance 2005-U (quarterly assessments of banks’ economic position, including liquidity).
  - The CBR may ask for more frequent reporting of liquidity positions and conduct special visits to discuss funding and liquidity.

- Supervisory observations and recommendations:
  - The new standards were in force as of January 1, 2016, but at the time of assessment CBR scrutiny of bank compliance under the new LCR regime was at an early stage (three monthly reporting dates under new standard had occurred).
  - Transition: quantitative and qualitative standards and CBR scrutiny were transitioning from Ordinance 2005-U to Ordinance 3624-U and Regulation 510-P; Ordinance 3624-U will be complemented by assessment under Ordinance 3883-U.
  - For non-systemic banks, some practical requirements in Regulation 510-P are not mandatory; assessors recommend the CBR consider extending proportionate requirements from Regulation 510-P to non-systemic banks, particularly on funding and contingency planning.

### Operational recommendations and supervisory priorities (as stated in the source)
- IRRBB and stress testing:
  - CBR should focus supervisory attention on IRRBB management to ensure banks develop meaningful stress scenarios and forward-looking management strategies.
- Liquidity risk:
  - Consider extending Regulation 510-P style funding and contingency requirements to non-systemic banks in a proportionate manner.
  - Enhance business continuity and emergency liquidity requirements for non-systemic banks consistent with Regulation 242-P and Regulation 510-P.
- Implementation monitoring:
  - Given the transitional implementation of Basel III liquidity metrics, the CBR should intensify scrutiny to verify that banks meet new standards as intended.

### Selected regulatory references and supervisory practices (as cited in the source)
- Regulations and ordinances cited (preserve exact identifiers):
  - Regulation 421-P (LCR methodology, 2014)
  - Regulation 510-P (implements Basel liquidity framework, 2015)
  - Instruction 139-I (three liquidity ratios N2, N3, N4)
  - Ordinance 3624-U (On Requirements to Risk Management and Capital Management of Lending Institution and Banking Group (ICAAP), April 15, 2015)
  - Ordinance 2005-U (quarterly assessments)
  - Ordinance 3883-U (assessment framework)
  - Regulation 242-P (business continuity and internal control)
  - Letters: 139-T, 26-T, 119-T, 15-1-4/536, 421-P (Regulation reference), 119-T, 37-T, 26-T (inspection guidance)
- LCR reporting and phase-in schedule (exact values preserved):
  - 70 percent—from January 1, 2016;
  - 80 percent—from January 1, 2017;
  - 90 percent—from January 1, 2018;
  - 100 percent—starting from January 1, 2019.
- Liquidity ratios (Instruction 139-I exact thresholds):
  - N2 instant ratio: ≥ 15 percent of on-demand liabilities.
  - N3 current ratio: at least 50 percent of one-month liabilities as one-month liquid assets.
  - N4 long term ratio: at least 120 percent of liabilities with residual maturity > one year as liquid assets with residual maturity > one year (denominator includes total capital).
- Significant currency threshold for LCR reporting: ≥ 5 percent of total on and off-balance sheet liabilities.

*Source: _cr16303 - Chapter 5, Section 5.2 requires stress testing of interest rate movements.*

### references to AML/CFT deficiencies in their reports. In one case, for example, it was observed that

### _cr16303 - references to AML/CFT deficiencies in their reports. In one case, for example, it was observed that

### EC11 — Protection for reporting staff
- Laws provide that a member of a bank’s staff who reports suspicious activity in good faith either internally or directly to the relevant authority cannot be held liable.
- Description and findings re EC11:
  - The AML law does not explicitly states that banks, their directors, and their employees are exempt from disciplinary, administrative, civil, and penal liability for submitting the information to the competent authorities for the purpose of executing the provisions of the AML law.
  - Article 7, Item 8 of the law (Rights and Responsibilities of Organizations Performing Operations with Monetary Funds and other Assets) can be understood as providing similar protection: submission to the relevant authorities of “reports, information and documents” by personnel of reporting institutions, their directors, and employees is not considered to be a “breach of official, banking, tax, commercial, or communication secrecy,” provided that the transaction is reported for the purpose and based on the procedures of the AML/CFT Law.

### EC12 — Supervisor cooperation with domestic and foreign authorities
- The supervisor, directly or indirectly, cooperates with the relevant domestic and foreign financial sector supervisory authorities or shares with them information related to suspected or actual criminal activities where this information is for supervisory purposes.
- Description and findings re EC12:
  - The CBR cooperates actively with other domestic and foreign relevant authorities.
  - Rosfinmonitoring, while not a financial sector supervisory body, is responsible for “monitoring the implementation by legal entities (and individuals) of AML legislation and maintaining cooperation with the CBR,” resulting in close cooperation with the CBR.
  - The interdepartmental Working Group on Combatting Illegal Financial Transactions (IWG) was established by order of the President of the Russian Federation on July 31, 2014, complementing the Interagency Commission on AML/CFT.
  - Rosfinmonitoring set up a permanent IWG Expert Group comprising representatives of the CBR, other public authorities, and the scientific and professional communities; in 2014, the working group held 13 meetings.
  - The CBR revoked multiple licenses of credit institutions for violations of banking laws, including based on material provided by Rosfinmonitoring.
  - The CBR cooperates with public authorities of the Russian Federation (including Russian regions) and law enforcement agencies.
    - Nineteen reports on transactions and deals of credit institutions and their customers, possibly involving illegal activities, were sent to the Prosecutor General's Office of the Russian Federation.
    - 22 reports on transactions of credit institutions and their customers that did not have apparent economic or lawful purpose were sent to the Federal Financial Monitoring Service.
  - International engagement:
    - The Russian Federation is a member of the FATF, MONEYVAL, and a founding member of the Eurasian Group (EAG).

### EC13 — In-house specialist expertise and communication of ML/TF risks
- Unless done by another authority, the supervisor has in-house resources with specialist expertise for addressing criminal activities. In this case, the supervisor regularly provides information on risks of money laundering and the financing of terrorism to the banks.
- Description and findings re EC13:
  - The CBR chief inspectorate does not have a dedicated AML task force but many—if not all—examiners are qualified to assess AML/CFT compliance issues.
  - The CBR provides regular feedback—through letters of recommendations—to the industry on AML/CFT, especially to attract attention about specific ML schemes detected during inspections or signs of unusualness (example: recommendation regarding ML techniques involving retailers).
  - Training sessions organized in cooperation with the FIU are used to provide information on ML/TF related risks.

### Assessment of Principle 29
- Assessment: Largely Compliant
- Comments / Background:
  - The Russian Federation was subject to a joint evaluation by the FATF, MONEYVAL, and EAG in 2007; the MER was examined and adopted by FATF in June 2008 with ratings at that time: Compliant (C) on 10 recommendations, Largely Compliant (LC) on 13 recommendations, Partially Compliant (PC) on 21 recommendations and Non-compliant (NC) on three recommendations.
  - Russia was placed in a regular follow-up process and subsequently removed from regular follow up in the FATF follow up procedures in October 2013.
  - A new comprehensive AML/CFT mutual evaluation is set for 2018-19, and Russia’s next progress report will be presented to FATF in 2019.
  - According to the FATF 6th Follow-Up Report of October 2013 and the third round written progress report submitted to MONEYVAL of September 2014, the Russian Federation has made important progress correcting deficiencies in the domestic AML/CFT regime.
  - Improvements relevant to CP29 include advances in KYC/CDD and amendments via government regulations and the AML law; lifting certain limitations on the CBR for conducting onsite AML/CFT inspections (amendments to Article 1 of Federal Law 294-FZ by Federal Law 60-FZ of April 2009).

### CBR supervision of AML/CFT — findings and enforcement
- CBR supervision is described as intrusive and intensive:
  - Common deficiencies identified by the CBR Chief inspectorate:
    - KYC/CDD
    - AML/CFT internal control
    - identification of UBO
    - frequency in updating customer’s information
    - timely STR reporting to the FIU
    - AML training to employees
- Resources and capacity:
  - CBR has increased inspection resources for AML purposes over the past years, especially since the merger with the capital market supervisor; CBR’s opinion is that it has enough staff to conduct necessary inspections.
  - Many CBR examiners have been trained to conduct AML supervision.
- Enforcement record:
  - Incompliance with the AML law and CBR regulations account for about 25 percent—if not more—of the total number of violations detected in recent years (the other areas of concerns are in credit risk and accounting).
  - Lack of compliance with money laundering standards is the most frequent reason behind sanctions, including revocation of licenses.
  - From 2013, license revocation has been done at a pace never seen in any country, suggesting a stronger prudential response but also some delays in identifying problems at an early stage.
- Market awareness and outreach:
  - Workshops on practical application of the AML/CFT Law have been organized with professional associations (such as the Association of Russian Banks).
  - Over 70 letters containing recommendations on identifying transactions potentially related to ML/FT carried out through credit institutions have been issued by the CBR.
  - Recommendation to focus awareness raising on other related risks, including those stemming from undisclosed UBOs.

### Notable enforcement case examples and outcomes
- Kemerovo region operation:
  - The CBR revoked the licenses of two credit institutions of the Kemerovo region in 2014.
  - The criminal investigation resulted in criminal charges against one credit institution director and the seizure of approximately RUB 3 billion worth of assets.
- Primorsky Territory operation:
  - Joint work with local law enforcement and CBR branches resulted in a RUB 22 billion decline in the value of suspicious transactions related to siphoning funds into offshore jurisdictions through a Primorsky Territory-based credit institution.

### Areas for further consideration and policy recommendations
- Increase scope and targeting of AML supervision:
  - AML/CFT issues have been part of many full-scope scheduled inspections: 376, 308, and 225 respectively in 2013, 2014, and 2015.
  - Number of targeted—and scheduled—AML inspections was 5 (compared to 224 non-AML full scope inspections in 2015).
  - Number of unscheduled targeted AML onsite visits was 3 in 2015.
  - Recommendation: conduct more focused AML onsite visits to address areas of particular concern.
- Conduct a national risk assessment:
  - While not obligatory under CP 29, assessors consider a national risk assessment valuable to inform the CBR on major threats and vulnerabilities, enabling more effective resource allocation and prioritization.
  - Recommendation: banks should be supported to conduct their own risk assessments; enhance understanding of risks, especially regarding transparency of legal entities (e.g., shell companies) and UBOs.
- Proportionality and transparency in sanctions:
  - Proportionality in using sanctions for AML/CFT breaches is advisable.
  - Statistics on AML sanctions were not broken down by type, making it impossible to determine use of other administrative measures beyond license revocation.
  - Amounts of fines for breach of AML rules are extremely low and not a sufficient deterrent.
  - Recommendation: increase transparency of criteria used to sanction banks to ensure supervisory actions are predictable, consistent, and proportionate.
- External auditors and AML coverage:
  - External auditors fall under the ambit of the MOF, not CBR, and reportedly do not pay attention to RM and internal control for AML purposes — a weakness.
  - MoF recommendations of January 22, 2016: auditors should examine if the bank observes KYC, AML internal control, record keeping requirements, and reports to the FIU any violation of the AML/CFT law — welcomed by the assessment team.

### Summary compliance with the Basel Core Principles (selected entries)
- Core Principle Grade and key comments (selected):
  - 1. Responsibilities, objectives and powers — LC
    - Legal framework provides necessary powers, but responsibilities and objectives of CBR are broad and intertwined.
  - 2. Independence, accountability, resourcing and legal protection for supervisors — LC
    - Governance and accountability measures exist; concerns remain on legal protection for staff and transparency of dismissal procedures.
  - 3. Cooperation and collaboration — C
    - CBR can exchange information and cooperate via MoUs; adequate domestic information sharing arrangements exist.
  - 8. Supervisory approach — LC
    - CBR developing risk-based approaches; early phase of Pillar 2 implementation; needs attention on resolution assessment and planning.
  - 9. Supervisory techniques and tools — LC
    - Careful and scrupulous system integrating onsite and offsite approaches; no requirement for banks to notify CBR in advance of substantive changes.
  - 10. Supervisory reporting — LC
    - Strong powers and moves toward XBRL taxonomy; limited rights to require prompt notification from external experts.
  - 11. Corrective and sanctioning powers of supervisors — LC
    - Broad enforcement arsenal used; more forceful measures against senior executives and board members may be needed; fines, particularly for AML/CFT, are not deterrent enough.
  - 12. Consolidated supervision — LC
    - Framework for consolidated supervision enhanced; CBR at an early stage of fully using the new framework; greater attention needed for groups with foreign establishments.

*Source: _cr16303 - references to AML/CFT deficiencies in their reports. In one case, for example, it was observed that*

### 13. Home-host relationships LC

### 13. Home-host relationships LC

### Supervisory cooperation and crisis planning
- Despite legislative obstacles to the 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 in group-wide recovery and resolution planning for internationally active groups.

### Authorities’ related observations
- 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 13).
- Continue to foster college practices and conclude crisis management and recovery and resolution planning for internationally active banking groups (Principle 13).

---

### 14. Corporate governance LC

### Assessment findings
- The corporate governance (CG) regime is governed by piecemeal regulations that are difficult to understand.
- Norms differ in nature: some are binding, others are optional (CG Code, CBR Letters) and thus not enforceable.

### Recommended actions
- Convert existing CBR recommendations on CG into binding regulations (Principle 14).
- Include 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) (Principle 14).

---

### 15. Risk management process LC

### Assessment findings
- Significant progress in improving the RM supervisory and operational framework.
- Lack of perspective on effective implementation in banks because key aspects have not been implemented yet.

### Recommended actions
- Consider the proportion of resources dedicated to RM—and internal control—in CBR’s onsite programs (Principle 15).
- Perform a horizontal review across the system to ascertain implementation of the new RM system, with emphasis on the role of the board (Principle 15).
- Include in the inspection program for 2017/2018 an analysis of how concentration risks are included in banks’ RM frameworks in light of the new ICAAP regime (Principle 19).

---

### 16. Capital adequacy LC

### Assessment findings
- Significant achievements in fostering the national capital adequacy regime.
- Remaining challenges: impact depends on how banks meet ICAAP obligations and how CBR will monitor and supervise them (SREP).

### Recommended actions
- Finalize and implement regulations on resolvability of banks and complete resolution assessments for all banks (Principle 8).
- The impact of the prudential framework will depend on ICAAP implementation and SREP; these are critical challenges to evaluate going forward.

---

### 17. Credit risk C

### Assessment findings
- CBR has a comprehensive approach combining offsite scrutiny with onsite investigation.
- CBR performs its own stress tests, monitors regional and sectoral trends, and cross checks information on major exposures.

### Recommended actions
- Introduce formal requirements to ensure banks’ credit policies identify size and risk thresholds for board or senior management approval (Principle 17).

---

### 18. Problem assets, provisions, and reserves LC

### Assessment findings
- Fair-value determination is a major issue; concern that collateral valuation does not reflect net realizable value under prevailing market conditions.

### Recommended actions
- Accelerate amending the law to provide CBR with additional legal tools in the areas of provisioning and collateral valuation (Principle 18).

---

### 19. Concentration risk and large exposure limits LC

### Assessment findings
- ICAAP Regulation 3624-U of April 15, 2015 contains new provisions on concentration risk.
- Maximum limit on a bank's exposure to a single counterparty or a group of connected counterparties lowered from 25 percent of the eligible capital to 20 percent.
- Definition of economic linkages is not implemented yet, undermining oversight.

### Recommended actions
- Conduct a horizontal review to verify conformity with Large Exposure Limit Requirements in light of the new statutory ratio N-25 (Principle 19).
- Instruct industry to increase efforts to establish clear understanding of relatedness between customers connected economically (Principle 19).

---

### 20. Transactions with related parties MNC

### Assessment findings
- Important amendments since 2015 to the CBL to streamline the legal regime for Related Parties; law now captures a person or group of people connected to the bank.
- New regime on exposures from transactions of person(s) connected to credit institutions will not be implemented before January 2017.
- Framework does not require lending to RPs to be on same terms as those generally offered to the public.
- CBR lacks authority to impose penalties on directors who personally benefited from favorable conditions.
- Article 64 introduces the concept of economic linkages but will not be implemented before 2017.

### Recommended actions
- Strengthen the definition of RPs; ensure it is organic and exhaustive (Principle 20).
- Establish legal prohibition for related party transactions performed on more favorable terms than corresponding transactions with non-related counterparties (Principle 20).
- Subject borrowers to obligation to declare any relatedness with the bank; include provision requiring major shareholders to disclose their “business interests” (Principle 20).
- Require banks to report immediately to CBR any serious breach of statutory ratios applicable to RP (Principle 20).
- Subject banks with LLC status to prior board approval for RP transactions and write-offs exceeding specified thresholds (Principle 20).
- Define in regulation the types of transactions that give rise to related party exposures (Principle 20).

---

### 21. Country and transfer risks MNC

### Assessment findings
- No specific requirements for management of country risk and transfer risk except for exposures on residents residing in off-shore zones.

### Recommended actions
- Establish specific guidelines or regulations for country or transfer risk and policies for provisioning (Principle 21).
- Require detailed prudential returns on country risk and transfer risks and ensure greater supervisory focus onsite and offsite (Principle 21).

---

### 22. Market risk LC

### Assessment findings
- Banks’ market risk activities are less developed; market volatility (notably FX) may leave some banks more exposed.
- Until 2014, CBR lacked legal powers to enforce RM and control standards; enhanced framework under Ordinance 3624 is at an early implementation stage.

### recommended action
- Consider revising Net Open Position limits in view of recent currency volatility (Principle 22).

---

### 23. Interest rate risk in the banking book LC

### Assessment findings
- Regulatory framework enhanced but many new provisions requiring improved management practices, including greater emphasis on stress testing, are not yet fully in force.

---

### 24. Liquidity risk LC

### Assessment findings
- For systemic banks (which includes all internationally active institutions), CBR liquidity metrics and RM standards are well developed.
- New standards are not fully implemented yet; CBR is beginning scrutiny of compliance.

### Authorities’ comments and milestones
- The liquidity coverage ratio (the LCR) was introduced in compliance with Basel III requirements since January 1, 2016, together with corresponding reporting requirements on the LCR.
- Final RCAP report on LCR implementation in Russia issued by the Basel Committee on March 15, 2016.

### Recommended actions
- Consider extending RM components of Regulation 510-P to the non-systemic sector, proportionately, for funding and contingency requirements (Principle 24).

---

### 25. Operational risk (OR) LC

### Assessment findings
- OR norms are detailed but essentially recommendations by CBR and not binding.
- Ordinance on ICAAP requires banks to have RM strategies including OR, but regime not yet implemented; reporting mechanisms need improvement.
- CBR lacks authority to establish outsourcing requirements for credit organizations.

### Recommended actions
- Convert CBR recommendations on OR into binding instruments to establish a comprehensive mandatory OR management framework (Principle 25).
- Provide guidance based on BCBS documents: “Principles for effective risk data aggregation and risk reporting” (January 2013), “High-level principles for business continuity” (August 2006), and “Outsourcing in Financial Services” (February 2005) (Principle 25).
- Empower CBR to establish outsourcing requirements and issue mandatory requirements (Principle 25).

---

### 26. Internal control and audit C

### Assessment findings
- Regulatory framework refreshed in past two years based on new powers in the CBL (Articles 571 and 572) permitting CBR to apply RM and internal control standards.

---

### 27. Financial reporting and external audit MNC

### Assessment findings
- Deficiencies in the legal framework significantly restrict or prevent CBR from fulfilling criteria of this principle.
- Supervisor may not: reject or rescind appointment of an external auditor for inadequate independence/experience; ensure rotation of external auditor; meet with audit firm to discuss supervised institutions; require auditors to notify supervisor of serious matters.

### Recommended actions
- Urgently remedy legal deficiencies so supervisor can:
  - reject or rescind appointment of an external auditor who lacks independence or meets inadequate standards;
  - ensure rotation of the external auditor;
  - meet with the audit firm on supervised institution matters (Principle 27).
- Introduce legislative amendments to grant CBR power to require external experts to promptly notify CBR of material issues that come to experts’ attention; notification should not be restricted to specific inspection scope (Principle 10 / 27).
- Ensure legal protection for auditor and supervisor in exchange of confidential information; foster closer communication with the auditing community pending legal changes (Principle 27).

---

### 28. Disclosure and transparency C

### Assessment findings
- Some disclosure practices are at early implementation phases.
- CBR ensures regular disclosures on banking sector performance through the banking sector review and attaches importance to transparency measures.

### Recommended actions
- Consider adopting best practice approaches to publish information at aggregate and individual (including group) level, such as time series on bank performance and risk indicators (Principle 28).

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### 29. Abuse of financial services LC

### Assessment findings
- CBR has made significant efforts to implement integrity standards; supervision of AML/CFT is intensive and intrusive and CBR has a track record of enforcement.
- CBR has organized workshops and cooperates successfully with domestic agencies.

### Recommended actions
- Increase intensity of supervision through targeted AML inspections.
- Promote a more risk-based approach to ML/TF issues in industry and CBR.
- Use proportionality when enforcing AML laws and ensure transparency of sanction criteria.
- Ensure external auditors pay attention to AML/CFT issues in their analysis of RM and internal control framework (Principle 29).

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### Cross-cutting recommended actions (selected highlights)

- Principle 1: Include language in the CBL to segregate CBR’s safety and soundness duties from other objectives; allow CBR access to banking data older than five years.
- Principle 2: Introduce legal protection for staff acting in good faith; require public disclosure of reasons for dismissal of Governor of CBR and head of supervisory function; consider ensuring Ministers or ministerial representatives do not participate as observers in board discussions on supervisory regulations.
- Principle 3: Establish a formal mechanism of cooperation with the French Supervisory and Resolution Prudential Authority.
- Principle 5: Amend banking law to establish a life-ban for persons who committed gross and recurrent violations; establish follow-up onsite inspection for newly established banks; formalize applicant interview procedures and ensure group parent monitors new entrants.
- Principle 6: Require banks to notify supervisor as soon as they become aware of material information that may negatively affect suitability of a major shareholder or controlling party.
- Principle 7: Require ex-ante CBR approval of acquisitions of domestic nonbank financial institutions; subject major acquisitions in nonfinancial companies to enhanced scrutiny.
- Principle 9: Introduce formal requirements for advance notification to CBR of substantive changes and material adverse events; introduce policy of rotation for individuals serving as ARs; review CBR communication strategy with banks and internal supervisory processes for flexibility and swiftness.
- Principle 11: Explore amendments to permit CBR to take enforcement measures against shareholders who violated law even if violation is older than one year; augment 30–day timeframe to send orders; provide CBR possibility to impose changes in banks’ internal organization and structure; complete revision of Instruction 59 and formalize guidelines for administrative fines.
- Principle 12: Build on group-wide risk assessment practices, focus on cross-border issues and adequacy of host supervisory practices; introduce legal amendments to permit CBR to close foreign offices within consolidated groups.

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### Authorities’ response (summary)

- Authorities appreciate professionalism of assessment team and acknowledge substantial improvements since prior assessment.
- Creation of a mega-regulator and expansion of Bank of Russia powers have enhanced supervision and information access on banks, groups, and financial conglomerates.
- CBR has expanded professional judgment powers and is committed to further strengthening supervisory framework based on BCP and international best practices.
- Credit risk remains a priority; CBR approved a program to improve supervision and asset valuation and will establish a new department to assess risk in all banks; legal amendments to empower CBR to make own assessments of collateral values are being discussed in parliament.
- CBR recognizes deficiencies in legal framework governing relationships with external auditors; legislative changes (information sharing, auditor requirements) are being discussed in parliament.
- CBR remains committed to implementing new legal definition of RPs on January 1, 2017, and preparing requirements for RP transactions on same terms as public for discussion as banking law amendments.
- On country and transfer risks, CBR considers these partly addressed through general RM requirements, capital risk weights, classification and provisioning for offshore operations; CBR is studying other jurisdictions’ experiences.
- FX risk: CBR notes first regulation on open FX positions (Instruction 41) issued in 1996.
- Liquidity: LCR introduced January 1, 2016; RCAP final report on LCR implementation issued March 15, 2016.
- Many legislative changes enhancing CBR’s risk-based approach are recent and full potential not yet visible in practice; ICAAP and SREP regulations will increase RM intensity and future assessments may benefit from longer implementation.
- CBR views some findings on Core Principle 29 as beyond the scope of essential criteria but will consider recommendations and is preparing an action plan to address FSAP recommendations.

*Source: IMF FSAP assessment excerpt from _cr16303 - 13. Home-host relationships LC.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16303.pdf_