## _cr16308 ## Source details **Canonical URL:** [_cr16308](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16308.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16308.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16308.pdf.json) --- ### Executive summary — recent actions and outcomes - Bank resolution framework updated in December 2014 by consolidating existing resolution regimes and making permanent temporary measures introduced in 2008 (appointment of provisional administrator; conduct of open bank resolution or P&A transaction with DIA participation). - Key legal enhancements included powers to exchange information with foreign resolution authorities and sanctioning managers of failed banks. - Anti-crisis program (late 2014–16) combined liquidity provision, capital support, and temporary regulatory forbearance; deposit insurance coverage was doubled to RUB 1.4 million (about US$ 20,000) per insured depositor. - CBR moved to a free floating exchange rate in November 2014 and tightened monetary policy, including through an emergency 650 bps rate hike in December 2014 to 17 percent. - Resolution and fiscal activity since January 2014: - 28 banks were put into open bank resolution. - 3 banks were resolved by purchase and assumption (P&A) transactions. - The CBR revoked the licenses of 214 credit institutions (214 is as of end-April ,2016). - Deposit insurance payouts amounted to 0.8 percent of GDP (numbers referred to are as of end-April ,2016, unless stated otherwise). - Thirty banks were under open bank resolution at end-February 2016, with total assets amounting to 6.4 percent of system assets. - Open bank resolution utilizing public funds since January 2014 amounted to 1 percent of GDP. - Observed shortcomings: - Many resolved banks were deeply insolvent; reliance on public funds and large creditor losses in liquidation proceedings occurred. - Transparency of asset quality weakened due to the prolonged recession and forbearance measures. ### Crisis preparedness, recovery and resolution planning (RRP) - Legal powers and status: - Since December 2014, the CBR can require D-SIBs and other banks to submit recovery plans and is tasked with preparing resolution plans for D-SIBs (CBR Law Article 57). - CBR is at an early stage of recovery and resolution planning; draft regulations are being prepared for recovery plans, assessment methodology, and resolution planning. - Recommendations: - Consider requiring all banks to submit recovery plans, prioritizing banks identified as being of federal or regional importance. - Prepare resolution plans for these banks. - Amend legal framework to authorize the CBR to require banks to adopt appropriate steps to improve their resolvability. - Phased approach to resolution planning: develop stylized guidance, preliminary reviews, resolvability assessments, and bespoke plans for SOBs that reduce cost to the state and protect critical functions. ### Early intervention and resolution triggers - Existing powers: - CBR has a range of early intervention powers (penalties; instructions; dividend restrictions; rehabilitation plans; replace management; bans; provisional administrator; license revocation) under the Banking Law, CBR Law, Insolvency Law, and AML Law (115-FZ, August 7, 2001). - Issues and recommendations: - Adopt a transparent early intervention framework with mandatory and discretionary supervisory measures as deterioration occurs. - Clarify triggers for entry into resolution to allow use of resolution powers before balance-sheet insolvency and before all equity is wiped out; provide forward-looking indicators of non-viability. - Reconsider the mandatory ban on accepting deposits from natural persons for intervention purposes. - Strengthen legal protection for CBR staff acting in good faith and circumscribe scope of judicial review; eliminate automatic suspension of supervisory actions upon court challenges. ### Institutional framework, coordination, and governance - Roles and decision-making: - CBR is the decision-making authority for supervision and resolution; DIA operationally executes open bank resolution and P&A operations and acts as receiver/liquidator for deposit-taking failed banks. - For resolution measures involving DIA participation, the DIA has veto power over CBR proposals; CBR endorses DIA plans as final decisions. - Recommendations: - Reconsider the decision-making process for DIA participation to avoid hampering timely intervention; consider eliminating DIA veto and vesting sole decision authority in CBR in consultation with MoF and DIA if least-cost or systemic necessity criteria are met. - MoF should have a prominent role in decisions involving public funds; require MoF approval for resolution measures using federal budget funds. - Reconsider DIA Board composition to reduce dominance of federal government and CBR officials as governance and public-fund use evolve. - Domestic and cross-border coordination: - Coordination among safety-net participants effective (bi-monthly FSC, strengthened in February 2015); CBR has powers to share information with foreign authorities and plans new MoUs. - Recommendation: Strengthen cooperation with foreign authorities through Supervisory and Resolution Colleges; establish resolution colleges or expand supervisory colleges to cover RRP. ### Resolution powers, P&A transactions, bridge entities, and statutory bail-in - Gaps identified: - Scope of resolution framework excludes bank holding companies; more than 40 bank holding companies in Russia (as of July 2015) and over 110 banking groups as of end-March 2016. - Powers to establish bridge entities and asset management companies are absent; temporary stay of early termination rights absent. - Practical impediments to P&A usability: use of book value to scope transferable assets; financing constraints; restrictions on deviating from pari passu treatment; lack of preparation time. - P&A design and benefits: - P&A transfers assets to an investor bank; DIF must fill differences if liabilities exceed assets but law restricts DIF financing for P&A under the permanent framework. - Types: Basic P&A; Loan Purchase/Modified P&A (put-back option; profit-and-loss sharing); Whole Bank P&A. - Benefits: prompt access for insured depositors; preserving performing assets in private sector; minimizing disruption; promoting confidence. - Recommended legal and operational changes to improve P&A effectiveness: - Remove financing constraints for P&A transactions; allow DIF to fund negative asset-liability differences subject to payout cost. - Increase flexibility in determining scope of liabilities to be transferred; consider fair value (not book value) for asset transfers. - Allow limited departure from pari passu treatment in exceptional cases subject to “no creditor worse off than in liquidation.” - Provide advance preparation time (bridge bank powers) to enable orderly transfers. - Statutory bail-in considerations: - Introduce statutory bail-in to reduce reliance on public funds, with careful design on triggers, scope, consistency with liquidation hierarchy, and safeguards. - FSB-recommended loss-absorbing instruments: paid-in, unsecured, not subject to setoff/netting, minimum one-year maturity, not redeemable by holder; exclude insured deposits, short-term deposits, derivatives. - Authorities considering a bail-in order example (noted as deviating from liquidation hierarchy): (1) all shares and liabilities to shareholders; (2) subordinated debt; (3) all liabilities to corporate entities exceeding a certain amount; (4) deposits of natural persons exceeding a certain amount — such order may conflict with liquidation hierarchy and require adjustment. - Safeguards: apply “no creditor worse off than in liquidation” to all creditors; equity absorbs losses first; do not impose losses on senior debt until subordinated debt written off entirely. - Authorities planned to develop a draft bail-in bill by end-2016; FSC decided not to include large individual depositors in bail-in scope (footnote). ### Bank bankruptcy, liquidation, and court processes - Current process: - License revocation triggers CBR petition to court within 15 days; court decides to commence liquidation proceedings within one month; provisional administrator manages bank during interim with moratorium on creditor claims (Insolvency Law Article 189.32). - Maximum of one and a half months to commence liquidation after license revocation under current law. - Recommendations: - License revocation should trigger automatic commencement of liquidation proceedings to ensure swift orderly liquidation. - Give bankruptcy receiver stronger powers to transfer assets/liabilities without prior creditor consent to preserve continuity of services. - Expedite P&A transactions without DIA participation; introduce ex post creditor objection procedures where necessary. ### Legal protection, judicial review, and ELA framework - Legal protection: - There are no special provisions shielding the CBR, the DIA, their staffs, or agents from lawsuits for actions taken in good faith; individual employees can be held personally liable. - Recommendation: Provide protection and indemnification for supervisory/resolution staff acting in good faith. - Judicial review: - Current scope permits appeals that suspend execution of supervisory actions; burden of proof on CBR; litigation concerns may delay early intervention or use of forward-looking assessments. - Recommendation: Limit judicial powers to suspend actions; place burden of proof on plaintiff; provide redress via compensation where justified. - Emergency Liquidity Assistance (ELA): - CBR provided systemic liquidity at peak December 2014 amounting to 12 percent of banking sector total liabilities; drawn down to 7 percent of liabilities at end-2015. - Recommendation: Establish an ELA framework: discretionary, for solvent but illiquid institutions, against good collateral, at spread to market rates, time-bound repayment, and seek government indemnities if repayment risk exists. - Market support program: CBR power to guarantee 90 percent of interbank transactions with failed entities (CBR Law Article 46(7), Federal Law No. 167-FZ, June 29, 2015); concerns raised about absence of fee and moral hazard. ### DIA, DIF, funding arrangements, and public finance considerations - DIA functions and funding: - DIA manages DIF, receivership, Pension Savings Guarantee System, Government Recapitalization Program, operational aspects of bank resolution, and receivership of non-public pension funds. - DIF membership: all banks licensed to accept retail deposits; pay quarterly premiums. - DIF had a negative balance of RUB 377 billion in mid-March 2016; long-term CBR loans at 0.1 percent and short-term agent-bank funding used for payouts. - CBR approved a RUB 250 billion credit line to the DIF (mid-March 2016), RUB 137 billion drawn; by end-June 2016 credit line expanded to RUB 420 billion, RUB 372 billion drawn. - Government capital support and CBR lending: - Federal government injected RUB 1 trillion of federal bonds (OFZ) into DIA account; RUB 170 billion used to support nonfinancial enterprises; RUB 830 billion (1.1 percent of GDP) benefited banks. - DIA borrowed RUB 1.2 trillion from CBR via five-year extendable unsecured loans at 0.5 percent (solvency support) and 6 percent (liquidity support); on-lent at 0.01 percent margin against collateral. - Fiscal and operational risks: - CBR loans to DIA are quasi-fiscal; 2011–15 public funds used for DIA participation amounted to 1.6 percent of GDP, of which CBR loans were 98.4 percent. - Recommendation: Discontinue subsidized CBR loans to DIA; federal government should provide such financing or indemnify CBR for temporary CBR financing. - Replace below-market DIA loans with direct capital injections where appropriate to avoid heavy collateralization, restricted restructuring flexibility, and lengthy monitoring. - Medium-term: establish mechanism to recover temporary public financing costs via ex-post levies on the banking industry or resolution funds financed ex ante. - Apply least-cost test amended to include expected recoveries and recourse on receivership. ### Deposit Insurance Scheme (DIF) performance, premiums, and scope - Payouts and timeliness: - DIA made insured deposit payouts in 168 insured events since 2014 related to 1.6 million depositors. - Average payout commencement: 12 days from occurrence of insured event. - Premium policy (risk-based from July 2015): - Quarterly insurance premiums paid in Q1 2016 amounted RUB 25.5 billion, including RUB 0.04 billion on additional rate and RUB 2.12 billion on enhanced additional rate. - 140 banks corresponded to criteria for paying a higher premium for Q1 2016. - From Q2 2016: rates are 0.1 percent (basic), 0.15 percent (basic plus additional), and 0.3 percent (basic plus enhanced). - From Q3 2016: 0.18 percent (basic plus additional), and 0.36 percent (basic plus enhanced). - From Q4 2016: 0.48 percent for basic plus enhanced additional rate. - Coverage and scope: - Coverage doubled to RUB 1.4 million per depositor at end-2014. - Current scope provides full coverage for 99.7 percent of insured depositors and 56.9 percent of the amount of insured deposits. - Consider expanding coverage to non-related party corporate depositors; DIA estimates expansion could increase DIF payouts in 2015 by 10 percent; mission estimates revenue offset could recover cost via 15–20 percent revenue increase from premiums. - Authorities’ concerns: disclosure of beneficial owners for small companies, risk of fraud and multiple coverage, perceptions of bank owners benefiting at expense of uninsured individuals; estimated cost to DIF could increase by 10–20 percent. ### Deposit transfers, operational constraints, and payout speed improvements - Operational impediments: - DIA learns of license revocation only after decision, limiting prior preparation. - Bank IT systems can be destroyed by managers; DIA must rebuild customer-view databases. - Geographic delays: for banks distant from Moscow, more than a day to get DIA expert on site. - Options to speed payouts: - Consider gross-basis insurance coverage without subtracting bank counterclaims; remove need for depositors to file claims. - Consider deposit transfers as alternative to payouts and authorize DIF to fund insured deposit transfers to healthy banks when feasible; transfer of assets with insured deposits can lower DIF outlays if sufficient preparation time exists. ### Depositor preference and creditor hierarchy - Current priority: - Individual depositors, DIA subrogated claims, and CBR subrogated claims are first-priority creditors after current obligations. - Secured creditors rank top among third-priority creditors with respect to pledged assets, ahead of corporate unsecured creditors including corporate depositors. - Recommendations: - Consider a two-tiered depositor preference rule: (i) insured deposits and DIA subrogated claims preferred over uninsured deposits; (ii) both tiers preferred over other senior unsecured creditors to strengthen DIF recovery prospects and statutory bail-in assessments. - If coverage is expanded to corporate entities, include such claims in the first tier. - Authorities concerned changes could reduce recoveries for other creditors and potentially cause social unrest. ### Asset Quality Review (AQR) and capital adequacy - Rationale and findings: - A comprehensive AQR warranted to ensure adequate capitalization, reduce uncertainty, and restore confidence; transparency of asset quality decreased due to recession and forbearance. - Stress tests and BCPs assessment indicated need to improve asset classification, valuation, and related-party lending definitions. - Implementation guidance: - AQR design: focus primarily on loans; onsite file reviews essential; can be run by CBR or third parties; consider independent external auditors for large/complex banks or supervisory-led reviews with independent advisors. - Preparations: formulate remedial strategy and criteria for public fund use prior to AQR; consider phased/risk-based approach prioritizing banks posing highest risk. - Outcomes: require time-bound recapitalization plans for undercapitalized viable banks; prepare orderly resolution plans for non-viable banks. - Credibility: - Ensure rigorous design, transparent disclosure of procedures/results, and independent oversight to sustain market confidence. *Source: EXECUTIVE SUMMARY and technical notes and staff analysis from the IMF staff report contained in the provided PDF content unit _cr16308.* ### EXECUTIVE SUMMARY __________________________________________________________________________ 6 ### EXECUTIVE SUMMARY ### Introduction and recent actions - The bank resolution framework was updated in December 2014 by consolidating existing resolution regimes and making permanent temporary measures introduced in 2008 (appointment of provisional administrator; conduct of open bank resolution or P&A transaction with DIA participation). - Key legal enhancements included powers to exchange information with foreign resolution authorities and sanctioning managers of failed banks. - Anti-crisis program (late 2014–16) combined liquidity provision, capital support, and temporary regulatory forbearance; deposit insurance coverage was doubled to RUB 1.4 million (about US$ 20,000) per insured depositor. - CBR moved to a free floating exchange rate in November 2014 and tightened monetary policy, including through an emergency 650 bps rate hike in December 2014 to 17 percent. ### Recent resolution activity and fiscal impact - Since January 2014: - 28 banks were put into open bank resolution. - 3 banks were resolved by purchase and assumption (P&A) transactions. - The CBR revoked the licenses of 214 credit institutions (214 is as of end-April ,2016). - Deposit insurance payouts amounted to 0.8 percent of GDP (numbers referred to are as of end-April ,2016, unless stated otherwise). - Thirty banks were under open bank resolution at end-February 2016, with total assets amounting to 6.4 percent of system assets. - Open bank resolution utilizing public funds since January 2014 amounted to 1 percent of GDP. ### Effectiveness and observed shortcomings - The resolution framework has been effective in preserving financial stability but could be improved given many resolved banks were deeply insolvent. - Reliance on public funds and large creditor losses in liquidation proceedings were notable outcomes. - Transparency of asset quality weakened due to the prolonged recession and forbearance measures. ### Crisis preparedness and recovery/resolution planning - CBR obtained legal powers in December 2014 to require D-SIBs and other banks to submit recovery plans, and has been tasked with preparing resolution plans for D-SIBs. - The CBR is still at an early stage of recovery and resolution planning. - Recommendations in this area include: - Consider requiring all banks to submit recovery plans, prioritizing banks identified as being of federal or regional importance. - Prepare resolution plans for these banks. - Amend legal framework to authorize the CBR to require banks to adopt appropriate steps to improve their resolvability. ### Early intervention and triggers for resolution - The CBR should consider adopting a transparent early intervention framework with a clearly delineated set of mandatory and discretionary supervisory measures when a bank’s financial situation begins to deteriorate. - Triggers for entry into resolution should be clarified to ensure resolution powers can be used before a firm becomes balance-sheet insolvent and before all equity has been wiped out. - Increasing legal protection for the CBR, the DIA, and their staff and agents, and circumscribing the scope of judicial review, would support timely supervisory and resolution actions. ### Enhancing resolution tools and legal powers - Introduction of the full range of resolution powers and safeguards recommended by the FSB Key Attributes (KAs) would improve effectiveness. - Specific gaps and proposed changes: - Expand scope of resolution framework to enable the CBR to resolve bank holding companies. - Expand CBR powers to facilitate mergers and recapitalization, and business transfers while ensuring continuity of critical functions. - Legal and operational changes critical to make P&A transactions more effective: - Remove financing constraints for P&A transactions; - Increase flexibility in determining the scope of liabilities to be transferred; - Use fair value for transfer of assets. - Revisit statutory bail-in framework to reduce reliance on public funds, taking into consideration financial stability implications and legal risks; ensure shareholder and creditor safeguards, and address: - Triggers; - Consistency with hierarchy of claims in liquidation; - Scope of bail-in-able liabilities. - Bankruptcy and liquidation proceedings could be made faster and more timely. - Consider expanding deposit insurance coverage to include deposits of non-related party corporate entities. ### Funding, DIA financing, and public finance considerations - The mandatory deposit insurance fund (DIF) had a negative balance and the DIA’s own account faced a shortage, causing reliance on public funds to conduct insurance payouts and take resolution measures with DIA participation. - The DIA may request funding from the CBR or the federal government; in practice, the DIA almost exclusively relies on loans provided by the CBR. - Such CBR financing amounts to a quasi-fiscal activity and should be provided by the federal government or, if temporary CBR financing is used, provided with a federal indemnity. - The decision-making process for resolution measures using federal budget funds should require approval of the Minister of Finance. - In the medium term, establish a funding mechanism for recovery of the costs of providing temporary public financing via ex-post levies on the banking industry. - Imposing losses on unsecured creditors would reduce the total need for public funding. - Introduction of a two-tiered depositor preference rule could strengthen DIF financing conditions. ### Asset quality review and capitalization - A comprehensive Asset Quality Review (AQR) is warranted to ensure adequate bank capitalization, reduce uncertainty, and restore confidence. - Prior to the AQR, authorities should: - Formulate a strategy to address weaknesses the AQR may uncover; - Develop criteria for potential use of public funds for banks’ recapitalization. ### Main recommendations (selected, with responsibility and priority) - Revise decision-making process for resolution measures using temporary public (federal budget) funds to require MoF approval; discontinue use of CBR loans to provide financing to the DIA. Responsibility: CBR, DIA, MoF. Priority: Medium term. - Strengthen cooperation with foreign authorities through Supervisory and Resolution Colleges. Responsibility: CBR. Priority: Short term. - Conduct an AQR and formulate remedial strategy. Responsibility: CBR, MoF. Priority: Short term. - Make recovery plans mandatory for all banks, starting with federal or regionally important banks. Responsibility: CBR. Priority: Short term. - Revise law to provide CBR authority to require banks to adopt measures to improve resolvability. Responsibility: CBR, MoF. Priority: Short term. - Adopt a transparent early intervention framework. Responsibility: CBR. Priority: Short term. - Revise law to provide triggers for entry into resolution based on non-viability. Responsibility: CBR, MoF. Priority: Medium term. - Provide CBR with resolution power over bank holding companies. Responsibility: CBR, MoF. Priority: Short term. - Introduce the full range of resolution powers and safeguards recommended by the FSB KAs. Responsibility: CBR, MoF. Priority: Short term. - Implement legal and operational changes to improve P&A usability (remove financing constraints; increase liability transfer flexibility; use fair value for asset transfers). - Revisit statutory bail-in framework with safeguards and clear scope. - Once framework improvements are in place, narrow use of open bank resolution with public funds to cases with broader systemic implications. Responsibility: CBR, DIA, MoF. Priority: Medium term. - Revise procedures to enable speedy liquidation. Responsibility: CBR, MoF. Priority: Medium term. - Establish an ELA framework. Responsibility: CBR. Priority: Short term. - Review use of public funds to finance DIA for resolution purposes to be provided by the federal government; if CBR funds are used, require federal indemnity. Responsibility: CBR, MoF. Priority: Medium term. - Establish funding mechanism for recovery of temporary public financing costs via levies on the banking industry. Responsibility: CBR, MoF. Priority: Medium term. - Consider broadening deposit insurance coverage to deposits of non-related party corporate entities. Responsibility: CBR, DIA, MoF. Priority: Medium term. - Introduce a two-tiered depositor preference rule. Responsibility: CBR, DIA, MoF. Priority: Medium term. - Provide legal protection to the CBR, the DIA, and their staff and agents acting in good faith. Responsibility: MoF. Priority: Medium term. - Circumscribe the scope of judicial review (including eliminating suspension of supervisory actions upon court challenge). Responsibility: MoF. Priority: Medium term. *Source: EXECUTIVE SUMMARY (Technical Note prepared by Edda Rós Karlsdóttir, Mikari Kashima, and Rinku Chandra). * ### 2. Temporary Regulatory Forbearance Measures ### 2. Temporary Regulatory Forbearance Measures ### Purpose and general assessment - Regulatory forbearance can be effective in a crisis if measures are transparent, temporary, and combined with intensive supervision. - The purpose is to avoid pushing adequately managed and otherwise sound banks into failure because of specific weaknesses that are transient and, in some circumstances, caused by external shocks (for example, foreign exchange (FX) volatility). ### Anti-Crisis Program 2014–16 — implementation and oversight - The authorities introduced temporary forbearance as part of a comprehensive policy package in December 2014. - The strategy was appropriately combined with intensified supervision, but transparency of the banks’ asset quality has decreased. ### Box 1 — Forbearance measures and status (as of end-April 2016) - Valuation of securities - Measure: Waive the requirement to recognize negative valuation changes for banks’ securities holdings to limit sensitivity to market risk. - Status: Introduced in December 2014 at October 1, 2014, prices with an expiration date of July 1, 2015. Lifted on July 2, 2015. - Valuation of FX items I - Measure: Allow the use of a fixed exchange rate on the conversion of FX-denominated assets and liabilities that existed before January 2, 2016, to limit the impact of FX depreciation on all prudential ratios (excluding net open FX position limits compiled and met based on the current exchange rates). - Status: Introduced in December 2014 at October 1, 2014, rates, (39 RUB/USD and 50 RUB/EUR corresponding to 25–30 percent below-market rates), with an expiration date of July 1, 2015. The measure was extended to October 1, 2015 (using new rates of 45 RUB/USD and 52 RUB/EUR corresponding to 30 percent below-market rates), and was re-extended to January 1, 2016 (using new rates of 55 RUB/USD and 64 RUB/EUR corresponding to 20–25 percent below-market rates). Lifted on January 2, 2016. - Valuation of FX items II - Measure: Allow the use of a fixed exchange rate for the conversion of FX-denominated assets and liabilities that existed before January 2, 2016, for the calculation of large exposure norms N6 and N21. - Status: Introduced in January 2016 at January 1, 2016, rates (73 RUB/USD and 80 RUB/EUR) with an expiration date of April 1, 2016). By April 1, however, the ruble had appreciated and was below these levels. Therefore, banks did not apply the measure for 2016Q1 prudential reports. Lifted on April 2, 2016. - Loan loss provisioning I - Measure: An existing forbearance measure in the law allows flexibility in classification of loans in extraordinary situations, such as calamities, wars, and so on. Loans affected by the conflict in Ukraine were eligible for this measure, and its application was extended from one year to three years. - Status: Introduced in November 2014 with a deadline for expiration of three years from the start of the extraordinary event. - Loan loss provisioning II - Measure: Allow flexibility in loan classifications and loan loss provisioning for: (1) loans that deteriorated because of economic sanctions and the related economic conditions; and (2) loans restructured as of December 1, 2014. - Status: Introduced in December 2014 with an expiration date of July 1, 2015. The measure was extended until October 1, 2015, and re-extended until January 1, 2016. On January 2, 2016, measure (1) was lifted. Measure (2) was extended to apply to loans restructured in December 2014–15, but discontinued for loans restructured as of January 2, 2016. ### Institutional framework — findings and recommendations - Institutional setting - Finding: The CBR is the decision-making authority for the supervision and resolution of banks and other financial institutions. All supervisory measures are decided solely by the CBR. - Finding: With regard to resolution measures involving DIA participation (either an open bank resolution or a P&A transaction), the DIA is given veto power over the CBR’s proposal for its participation; the final decision to adopt the resolution measure is made by the CBR by endorsing the DIA’s plan for participation. - Operational roles: - The CBR appoints a provisional administrator (except where law provides for the DIA to be the provisional administrator) and oversees measures taken with DIA participation, bankruptcy and liquidation proceedings. - The DIA is responsible for operational aspects of open bank resolution and P&A transactions, and acts as a bankruptcy receiver or a liquidator when the failed bank was licensed to take deposits from individuals. - Recommendation: Reconsider the decision-making process for resolution measures involving DIA participation to avoid potential hampering of timely intervention, particularly when authorities disagree on necessary measures. - Recommendation conditional: Consider eliminating the DIA’s veto power and providing the CBR the power to solely determine resolution measures, in consultation with the MoF and the DIA, provided decisions conform to a least-cost test or systemic necessity and the DIA can fund measures without resorting to public funds (see paragraph 55 about the least-cost test). - Role of the Ministry of Finance (MoF) - Finding: The MoF does not have a direct role in bank resolution but is involved through providing financing to the DIA, and through membership in the DIA’s Board of Directors and non-voting membership in the CBR Board. - Finding: The federal government may provide funding to the DIA’s account for taking resolution measures with DIA participation. - Recommendation: The MoF should have a prominent role in decisions on resolution measures involving the use of public funds; if CBR funding is to be discontinued and the CBR indemnified if CBR funding is necessary, the MoF should take a leading role for temporary public funds used as last resort. - DIA Board composition - Finding: The DI Law provides that the DIA Board shall include 13 members, that is, seven representatives of the Federal Government, five representatives of CBR, and the DIA’s director general (Article 18(1)). Currently, the DIA Board is chaired by the Minister of Finance and includes several high-level federal government officials. - Concern: Large presence of federal government and CBR officials may conflict with operational autonomy of the DIA and raise potential conflicts of interest given government/CBR ownership of some member banks. - Recommendation: Reconsider the composition of the DIA Board to reduce dominance of federal government and CBR officials as the use of public funds and governance structures evolve. ### Domestic coordination and cooperation — findings and recommendations - Coordination effectiveness - Finding: Coordination among safety net participants has proved effective. The MoF is indirectly involved in resolution decision-making through board participation. Bi-monthly FSC meetings and other high-level bilateral meetings provide information flow; the FSC was strengthened in February 2015. - Finding: The CBR has broad authority to share information with the DIA; a 2004 agreement defines the framework for information exchange and coordination between the CBR and DIA. - Practice: Joint inspections by the CBR and the DIA are conducted with emphasis on commitment to depositors, insurance premiums' payment, and development of the deposit database. - Information sharing constraints and recommendation - Finding: Practical constraints exist on sharing information on the timing of license revocation because fraudulent activities by bank owners and managers occur when such actions are anticipated. - Evidence: DIA staff advised that criminal activities by bank owners and managers were detected in more than 80 percent of bank bankruptcies; asset recoveries in liquidation are on average fewer than 10 percent for all creditor claims. - Recommendation: Share information at an earlier stage where feasible; intensify efforts to hold bank owners and managers liable for fraudulent activities so that the negative consequences of fraud outweigh benefits and enable earlier DIA preparation for prompt reimbursement of insured deposits. ### Cross-border coordination and cooperation — findings and recommendations - Legal powers and MoUs - Finding: The CBR was provided stronger legal power to share information with foreign authorities. Under current law, the CBR may share information and documents received from banks, including those that constitute bank secrecy, provided the receiving authority treats it with the same level of confidentiality as the Russian authorities. - Finding: The law explicitly empowers the CBR to exchange information relating to recovery plans (except state secrets) with foreign resolution authorities and strengthened confidential treatment of information shared by foreign authorities. - Practice/plan: The CBR plans to update and enter into new Memorandums of Understanding (MoUs) with foreign authorities to include clauses on notification of resolution measures, measures to protect deposits in a parent institution, cross border liquidity support, and other support measures. - Supervisory and resolution colleges - Finding: The CBR hosts supervisory colleges for two D-SIBs (Sberbank and VTB), but meetings have not been held since 2012. The CBR participates in supervisory colleges for 10 international banking groups, including two foreign D-SIB subsidiaries. - Finding: Information shared through participation in such colleges is of a generic nature. - Recommendation: Establish resolution colleges or expand the scope of supervisory colleges to cover recovery and resolution planning; strengthen cross-border coordination for crisis management and resolution through broader participation in supervisory colleges. - Note: The CBR plans to start discussions on coordination arrangements with relevant foreign authorities once it has adopted regulations on recovery and resolution plans (see paragraph 26). ### Crisis preparedness — financial stability assessment and contingency planning (introductory findings) - Finding: In view of interplay between the real economy and the financial system, jurisdictions should have a robust framework for macroprudential surveillance and the formulation and implementation of financial stability policy. *Source: _cr16308 - 2. Temporary Regulatory Forbearance Measures* ### 18. The CBR has strong technical capacity for systemic risk monitoring and assessment. As ### _cr16308 - 18. The CBR has strong technical capacity for systemic risk monitoring and assessment. As ### Systemic risk monitoring and assessment - The CBR, as regulator of banks, nonbanks, and financial markets, has extensive data and conducts comprehensive risk assessments. - Regular exercises and tools: - Quarterly top-down stress tests for all banks. - Ad-hoc bottom-up stress tests for the largest banks. - A recently developed early warning system provides weekly risk assessments based on over 30 indicators. - Regular stress tests for specific lending segments and for nonbanks. - Surveys for the 30 largest corporates and financial soundness analysis for the 87 largest companies based on IFRS and Russian Accounting Standards reporting, as well as other public sources. - Weekly surveys for short-term liquidity risk assessments and forecasting. - Use and dissemination: - Stress test results and other assessments are discussed within the FSCom and presented to the FSC. - Results are published in CBR’s Financial Stability Review and annual Banking Supervision Report. - A comprehensive set of weekly financial stability indicators discussed among CBR management is an effective monitoring tool. - Note on indicator triggers: - Triggers (caps and floors) are set for each indicator; banks breaching a trigger are categorized as being in a “risk zone” and receive special supervisory attention. ### Asset Quality Review (AQR) and transparency of asset quality - Recommendation: - Conduct a granular and comprehensive AQR to better assess financial conditions of banks, reduce uncertainty, and support confidence. - Rationale: - Stress tests and the Basel Core Principles (BCPs) assessment identified scope to improve asset classification and valuation and expand the scope of the definition of related party lending. - Transparency of banks’ asset quality has decreased following prolonged economic contraction and the use of regulatory forbearance. - Implementation considerations: - The AQR could be conducted by the CBR itself or by a third party. - Prior to the AQR, authorities should formulate a strategy to address weaknesses the AQR may uncover, including developing criteria for possible use of public funds for banks’ recapitalization. - Given the level of effort, the AQR could first be conducted for banks presenting the highest risks to the financial system. ### Macroprudential policy tools and recent measures - Actions taken by the CBR: - Tightened provisioning requirements and increased capital risk weights to curb excessive growth of unsecured consumer lending. - For mortgage lending, adopted differentiated capital risk weights based on loans’ risk characteristics. - In 2016, introduced stricter reserve requirements for banks’ foreign-currency deposits and higher capital risk weights on banks’ foreign-currency loans to reduce dollarization. ### Macrofinancial linkages and buffer guidance - Recommendation: - Complement existing stress tests with additional analysis of macrofinancial linkages (related to oil prices, in particular) and feedback loops between the real and financial sectors. - Buffer guidance: - In the medium term, greater volatility driven by oil price movements may warrant a larger buildup of buffers to protect banks against solvency risk. - Buffers could be implemented via the countercyclical capital buffer under Basel III or Pillar 2 under Basel II. - Reference: CBR Direction No. 3855-U of November 30, 2015. ### Capital quality, Basel III implementation, and loss-absorbency - Developments: - Russia has adopted the Basel timetable for Basel III capital framework. - Changes in definition of eligible capital in January 2016 excluded reciprocal cross holdings and investments in affiliated entities. - As a consequence, the CBR reduced the regulatory minimum capital adequacy ratio from 10 to 8 percent, the level equivalent to Basel guidelines for minimum capital. - The CBR estimates that the stricter definition of capital lowered the sector reported capital by 0.6 percentage points compared with the previous definition. - D-SIB requirements and timelines: - Ten D-SIBs identified based on size, complexity, and systemic interconnectedness. - D-SIBs need to observe the liquidity coverage ratio and the additional systemic capital buffer. - D-SIBs must comply with ICAAP on a solo basis by end-2016 and on a consolidated basis by 2017. - For other banks, the timeline is 2017 for solo and 2018 for consolidated. - The CBR will determine bank-specific capital buffer requirements under Pillar 2 via SREP. - Russia plans to introduce TLAC requirements for Russian subsidiaries of G-SIBs with phase-in starting in 2019; preparations are at a preliminary stage. - Policy considerations on loss-absorbing instruments: - Legal powers must allow authorities to expose eligible loss-absorbing instruments to loss without material legal risks or compensation costs under the “no creditor worse off than in liquidation” principle. - Instruments should be junior in the statutory hierarchy if not contractually subordinated (see paragraph 42 and Box 4). - Authorities may consider a simpler approach of increasing banks’ minimum capital adequacy requirements. ### Supervision of systemic and regionally important banks - Supervision intensity: - CBR intensified supervision of banks of federal and regional importance and D-SIBs. - A special division to supervise the D-SIBs and five other large banks was established in 2013. - CBR has authorized supervisors on site in all D-SIBs and in banks that received government capital support funds. - Scope: - About 140 banks are recognized to be of federal or regional importance and fall within CBR’s second line of supervision. - Significant supervisory decisions for these banks involve CBR head office and management. - It is unclear whether all such banks are systemic from a financial stability perspective, as regional importance criteria are based on impact within a specific region. - Past assessments: - In late 2013, DIA and CBR assessed several banks to determine feasibility of open bank resolution; assessment showed funding needed would exceed DIF’s funding liability in liquidation, so banks were liquidated without causing financial instability (Novokuznetskiy Municipalniy Bank, Smolensk Bank, and Evropeisky Investment Commercial Bank). ### Recovery and Resolution Planning (RRP) - Legal and procedural status: - CBR is designing a new RRP framework based on newly acquired legal powers. - Since December 2014, D-SIBs are legally required to submit financial stability recovery plans; CBR may require other banks to submit recovery plans. - CBR tasked with preparing resolution plans for D-SIBs (CBR Law Article 57). - Draft regulations being prepared: - A regulation setting out the framework for recovery plans. - A regulation stating the CBR’s assessment methodology of recovery plans. - A regulation on the CBR’s resolution planning. - Current practice and recommendations: - Six of the 10 D-SIBs and 34 other banks submitted financial stability recovery plans voluntarily pursuant to a non-binding CBR letter issued in 2012; as of end June 2016, 15 other banks have submitted financial stability recovery plans. - CBR has approved one plan and issued recommendations for revisions on most plans. - CBR 2012 letter follows FSB’s KAs but voluntary nature led to varied content and quality. - Recommendation: In the medium term, all banks should be required to prepare and submit recovery plans, prioritizing banks identified as systemically important in resolution (banks of federal and regional importance and D-SIBs). - Recovery plan requirements should reflect nature, complexity, interconnectedness, substitutability, size, and cross-border operations; smaller banks should have less detailed requirements. - Resolution planning approach: - Phased approach recommended: develop stylized guidance on resolution options; conduct preliminary reviews of bank-specific factors; refine via resolvability assessments. - For an SOB, resolution plans must consider the role of the state as shareholder and, if public funds are to be used, seek to reduce ultimate cost to the state; such plans would focus on protecting critical functions, raising liquidity, divesting non-core assets and business lines, and operational restructuring. - Legal amendments needed: - Amendments are necessary to provide CBR authority to require banks to adopt measures improving resolvability, including changes to business practices, structure, or organization (KA 10.5). ### Early intervention and resolution triggers - Early intervention powers: - CBR has an adequate range of early intervention powers across legislation: impose penalties, issue instructions to eliminate violations, restrict dividend payments, require submission of a rehabilitation plan, replace management, impose bans on certain operations, appoint a provisional administrator, and revoke banking licenses. - Laws cited include the Banking Law, CBR Law, Insolvency Law, and AML Law (115-FZ, August 7, 2001). - Observations and recommendations: - The intensity of CBR intervention depends on case seriousness. - The CBR should consider adopting a transparent regime for supervisory actions with clearly delineated mandatory and discretionary measures as a bank’s situation deteriorates. - The mandatory ban on accepting deposits from natural persons should be reconsidered (recommendation from the 2011 FSAP). - Four key areas for action: - Continue to close legacy problem banks; CBR has stepped up efforts since 2013 to remove weak banks or those involved in dubious transactions. - Further strengthen supervision to ensure accurate financial reporting; CBR audits frequently reveal overstated asset values and significantly less capital than reported, creating “series breaks” in reported capital adequacy. - In light of related-party transactions underlying many failures, consider making related-party deposit, withdrawal, or loan above a certain amount subject to CBR approval for banks below a certain rating. - Strengthen legal protection of CBR and its staff acting in good faith to encourage forward-looking supervision and transition from rule-based to risk-based supervision. - Eliminate suspension of supervisory actions upon court challenges; judicial action currently suspends execution of supervisory actions until court ruling, which can be used by banks to delay execution. In line with international good practice, judicial action should not suspend or reverse early intervention measures taken in good faith (see paragraph 49). - Additional notes: - CBR staff indicated recent Criminal Code amendments making intentional false reporting a criminal offense were already having positive effects. *IMF staff analysis as presented in the source document* ### 34. Plans are underway to strengthen the CBR’s supervisory authority. Draft legislation ### _cr16308 - 34. Plans are underway to strengthen the CBR’s supervisory authority. Draft legislation ### Strengthening CBR supervisory authority - Draft legislation would establish a requirement for banks, external auditors and other professional service providers to pro-actively inform the CBR on matters of material significance to support the CBR in obtaining more accurate information regarding banks’ financial condition. ### Triggers for entry into resolution - Resolution should be initiated when a firm is no longer viable or is likely to be no longer viable, and has no reasonable prospect of becoming so. - The regime should allow for timely and early entry into resolution before a firm is balance-sheet insolvent and before all equity has been fully wiped out. - There should be clear standards or suitable indicators of non-viability to guide entry decisions. - Current framework: - For resolution measures with DIA participation, entry is triggered when there are signs that the financial position is unstable, thus endangering the interests of its creditors (depositors). Instability is considered based on quantitative criteria specified in the law, including breach of the capital adequacy requirements, as well as “availability of other proof of a threat to the interests of creditors/depositors supported by documents.” (Insolvency Law Article 189.47.) - For closure of banks without DIA participation, grounds for license revocation include mandatory and discretionary grounds. Mandatory grounds are based on the financial condition of the bank, but the criteria are relatively late. Discretionary grounds include the bank’s being subject to the CBR’s order multiple times after a breach of law or regulation. - Recommendations: - Explicitly provide in law forward-looking criteria based on non-viability. - Provide further quantitative (objective) and qualitative (subjective and more flexible) resolution triggers to enable use of resolution powers before balance-sheet insolvency and before all equity is wiped out. - Note: “No framework of regulatory intervention or resolution can be effective if the data on which the supervisor relies are fraudulent.” Vigilant implementation of recent regulations on risk management and supervision is critical. ### Scope of resolution regime - Principle: Any financial institution that could be systemically significant or critical if it fails should be subject to a special resolution regime. - Bank holding companies: - Resolution tools and special liquidation/bankruptcy proceedings with modifications currently apply only to banks, not to bank holding companies. - There are “more than 40 bank holding companies in Russia.” Numbers for bank holding companies are as of July 2015. In addition, there are “over 110 banking groups (that is, groups of legal entities that are headed by a bank) as of end-March 2016.” - Authorities should consider introducing resolution powers over the head entities of bank holding companies to allow resolution actions against parent entities (for example, bail-in of parent creditors rather than bank creditors/depositors). - A draft law has been prepared that provides that the CBR and the DIA shall perform an analysis of the financial conditions of legal entities that form part of the same banking group when determining DIA participation; the draft law does not provide the CBR with direct resolution powers over the head of bank holding companies. - Non-bank financial institutions: - There are currently no special resolution frameworks for systemically important financial institutions other than banks. - End-2015 law amendment requires systemically important central counterparties (CCPs) to develop recovery plans, and the CBR to develop resolution plans. - Authorities advised a draft law under discussion would provide for the appointment of the DIA as the bankruptcy receiver and liquidator for insurance firms in bankruptcy and liquidation proceedings. - The CBR has developed an internal assessment methodology for designating domestically systemically important insurers (D-SIIs) and Ordinance No. 3341-U for systemically important FMIs. The CBR has designated “22 D-SIIs (not published) and two systemically important FMIs (published).” - Authorities may consider whether current bankruptcy and liquidation procedures for insurance firms would allow maintenance of critical functions (continuity of insurance policies and prompt insurance payments) through insurance portfolio transfers and run-offs. ### Resolution powers and safeguards - Resolution authorities should have a broad range of powers to: - Achieve continuity of systemically important or critical functions by (a) sale/transfer of all or part of the firm’s business, shares, or assets, directly or through a bridge institution; or (b) an officially mandated creditor-financed recapitalization (bail-in). - Provide orderly closure and wind-down of all or parts of the firm’s business protecting insured depositors, insurance policy holders, and retail customers. - Exercise powers respecting hierarchy of claims while allowing, if necessary and transparent, departures from equal treatment of creditors of the same class to contain systemic impact or maximize value. - Ensure creditors have a right to compensation at least equal to what they would have received in liquidation (“no creditor worse off than in liquidation” safeguard). - Existing CBR powers (other than liquidation and deposit payout): - The CBR can conduct an open bank resolution or a P&A transaction with DIA participation. - Open bank resolution with DIA participation: - Eligibility: CBR can propose DIA participation and financial assistance when the interest of depositors and creditors and/or the stability of the banking system are endangered (Insolvency Law Article 189.47(1)). Internal CBR rules require banks meet criteria of “systemic-ness,” including: - (i) a threat of deposit runs in other banks; - (ii) a threat to operation of the financial market, specific economic sectors, or large employers and taxpayers; - (iii) the need for substantial payouts from the DIF; and - (iv) a risk of defaults among the public and/or a wide range of enterprises and organizations. - Use of public funds by the DIA may be in the form of: - collateralized below-market rate loans to a failed bank or an investor that acquires more than 75 percent of the failed bank’s ordinary shares; or - a contribution to the authorized capital of the failed bank. (Insolvency Law Article 189.49(8)–(12).) - Financial assistance is funded with uncollateralized CBR loans or federal funds. The DIA may acquire part of the failed bank’s bad assets (good bank/bad bank split). - DIA may be appointed provisional administrator with broad powers to override shareholder rights to issue new shares or restructure the resolved bank. - The CBR may write down authorized capital and the provisional administrator may issue new shares overriding pre-emptive rights, resulting in DIA and/or investor acquiring more than 75 percent of ordinary shares. - Determination of acquirer is based on a competitive bid requesting the least financial assistance among bidders that satisfy CBR-required financial status. - P&A transactions with DIA participation: - Eligibility: Where there are signs of instability endangering creditors (depositors), the CBR may request DIA participation. Signs include: (1) evidence from the bank’s own reports and/or as established by the CBR, DIA, or other persons, showing [without doubt] that the bank’s financial condition is (or will be) in breach with the conditions for participation in the DIF; and/or (2) meet the criteria for measures aimed at bankruptcy prevention measures; and/or (3) other documented proof that the interests of creditors/depositors are endangered. - Condition: One condition for DIA participation is that the value of the bank’s assets is sufficient for conducting P&A transactions. Transferred assets must be equal to transferred liabilities. In practice, book value is used to determine equality of transferred assets and liabilities. (Insolvency Law Article 189.51(2) and 189.52(7); CBR guidelines and Instructions 3691-U and 3707-U referenced.) - Use of public funds: DIA can provide support via (i) financing a reverse transfer (put-back option) or (ii) granting a loan for liquidity needs. Funding may be provided by the DIF within payout cost if it does not affect DIF stability (Insolvency Law Article 189.56(4)). If DIF financing is not possible, DIA may provide assistance through its own account with federal budget financing (Insolvency Law Article 189.52(10) and 189.55(2)–(4)). - Appointment of DIA as provisional administrator; transfer powers exercisable without consent of shareholders or creditors. - The acquirer has 14 days to evaluate and choose the assets to acquire and to complete the P&A transaction. (Insolvency Law Article 189.52(1).) - Practical observations: - In systemic or regionally important failed banks, authorities often applied open bank resolution saving the entire bank rather than focusing on continuity of critical functions through partial transfers; this required large public funds. - For non-systemic banks, authorities often liquidated the entire bank and conducted insured deposit payouts. A P&A could be useful as an alternative even for non-systemic banks. - In limited P&A cases, benefits usual to P&A were not necessarily captured (example: Nota Bank P&A in 2015 — P&A occurred two months after provisional administration; moratorium imposed; by the time P&A was announced, 50 percent of insured depositors had already received insurance payouts; borrowers instructed to pay other banks). - Identified impediments to broad use of P&A transactions: - Use of book value in determining scope of transferable assets. - Financing constraints. - Restrictions on deviating from pari passu treatment. - Lack of preparation time prior to bank failure. ### Recommended improvements and additional powers - Adopt the full range of resolution powers recommended in the FSB Key Attributes (KAs) to make resolution less costly while preserving critical functions; this includes broadening and enhancing existing powers and introducing new powers. - Specific recommendations: - Control or operate a bank: During resolution the CBR or a provisional administrator should have broad powers to take control of all decision-making bodies (management board, supervisory board, general assembly of shareholders) (KA 3.2). The administrator should be competent to make any transactions and decisions, override shareholder rights (including approval requirements, forced recognition of losses and write-downs, derogation/limitation of preemption rights). Current broad powers are only provided to provisional administrator when bankruptcy prevention measures are taken with DIA participation. Recommendation: equip the CBR/provisional administrator with the same powers when acting without DIA participation (with the important difference that public funds would not be an option). - P&A transactions: Address legal and operational impediments (book value usage, financing constraints, pari passu restrictions, lack of preparation time). - Statutory bail-in powers: Introduce statutory bail-in to enable recapitalization by imposing losses on existing creditors or converting their claims to equity (KA 3.5). Experience with voluntary bail-in (2015 cases Tavrichesky Bank and Fundservice Bank) informed planning. Authorities are planning to introduce statutory bail-in; triggers, scope and order of bail-in-able liabilities remain under discussion. The legal framework should allow application to all banks but in practice may be best suited for large, complex systemic banks. For less complex, smaller banks, P&A or liquidation may be more suitable. Bail-in framework needs careful design considering creditor hierarchy in liquidation and allowing deviation from pari passu treatment in exceptional cases. Authorities plan to develop a draft bill by end-2016. - Operational caution: - The power of the provisional administrator appointed without DIA participation is limited and requires approval of the Board of Directors and/or general assembly of shareholders to conduct certain transactions, creating reputational risk and contingent fiscal liability. CBR rarely appoints provisional administrators without DIA participation. - Voluntary bail-in examples in 2015 involved writing down capital to “1 ruble,” converting current deposits of large corporate depositors to subordinated long-term deposits (20 and 10 years), below-market rate (0.51 percent) deposits, and temporary ownership by Rossiysky Capital until an investor is found. *Italic: IMF staff report content as provided in the source document.* ### introduction of statutory bail-in would enable the authorities to reduce the use of public ### _cr16308 - introduction of statutory bail-in would enable the authorities to reduce the use of public ### Resolution powers and operational tools - Power to establish bridge entities and asset management companies is absent; such powers would enable the authorities to: - take over and continue operating certain critical functions and viable operations of a failed bank (KA 3.4), and - transfer nonperforming loans or difficult-to-value assets (KA 3.2). - The DIA could currently possibly use its subsidiary, Rossiysky Capital, to perform bridge functions, but it is desirable to provide an explicit legal power to establish bridge entities to enable temporary transfers regardless of ownership stake. - Continuity of critical functions: - Authorities should have the power to require other companies in the same group to continue to provide essential services to the ailing bank, any successor, or an acquiring entity, or to procure necessary services from unaffiliated third parties (KA 3.2). - The residual entity in resolution should be able to temporarily provide such services to a successor or an acquiring entity. - Temporary stay of early termination rights: - The CBR has the power to impose a moratorium based on the occurrence of certain events, but does not have the power to temporarily stay early termination rights that may arise merely from the entry into resolution of the ailing bank (KA 4.3). ### Purchase and Assumption (P&A) transactions — benefits and design (Box 2) - Definition and financing: - In a P&A, an investor bank purchases certain assets and assumes insured deposits and other liabilities of the failed bank. - If the liabilities transferred exceed the assets transferred, then the DIF must provide financial assistance to fill the difference and balance the transaction, but not to exceed the amount needed to reimburse insured depositors in a straight liquidation. - General benefits: - Provides depositors with prompt access to their insured deposits. - Performing assets are quickly transferred to a healthy bank so their value is maintained and remain in the private sector. - May be more attractive to investor banks because assets and liabilities transferred are clearly defined, with limited risk of unexpected liabilities, including litigation. - Promotes confidence, minimizes disruption to customers, and preserves financial stability by reducing the likelihood of a bank run and contagion. - Types of P&A transactions: - Basic P&A: investor takes on limited assets, usually cash and cash equivalents; bank premises optional. - Loan Purchase P&A/Modified P&A: investor acquires selected assets in addition to cash and cash equivalents; incentives can include: - Provide a “put” option on some of the transferred assets allowing return to the resolution authority within a specified period (for example, 60 or 90 days); disadvantage: assets may deteriorate during put back period. - Enter into a (profit and) loss share agreement sharing future losses (and possibly profits); investor may be reimbursed for a percentage of managing expenses; disadvantage: investor must work with resolution authority throughout term. - Whole Bank P&A: acquirer purchases entire portfolio on an “as-is” basis with no guarantees. ### Safeguards and creditor treatment - The resolution framework should be amended to provide for shareholder and creditor safeguards: - Resolution authority should allocate losses through exercise of resolution powers in a way that respects the hierarchy of creditor claims in liquidation and the principle of equal treatment of creditors in the same class (KA 5). - All creditors should be compensated a minimum of what they would have received in liquidation (“no creditor worse off than in liquidation”). - The “no creditor worse off than in liquidation” principle is currently narrowly adopted to apply to first priority creditors in P&A transactions; it should be employed to protect all creditors and for the exercise of all resolution tools. - Departure from pari passu treatment: - The legal framework should permit departure from pari passu treatment only in exceptional circumstances necessary to protect financial stability or to maximize the value of the firm for the benefit of all creditors (KA 5.1). ### Impediments for the use of P&A in Russia (Box 3) - Use of book value in determining scope of assets: - Assets evaluated at book value; acquirer has incentive to acquire only best performing assets, limiting availability of attractive assets. Authorities should consider using fair value rather than book value for evaluation of transferred assets. - Financing constraints: - The DIA may only provide financing for P&A in relation to a reverse transfer of assets or a loan to provide liquidity to the acquirer. - Law does not allow the DIF to finance the difference between the value of transferred assets and transferred liabilities (typical way to fund P&A when insufficient assets). - DIF should be able to fund the negative balance of transferred assets and liabilities subject to the payout cost. - Under the temporary resolution framework introduced in 2008, DIF had power to fund such differences, but that power is not provided under the permanent framework introduced end-2014. - The law allows the CBR to provide loans to the DIA to finance open bank resolutions, but not to finance P&A transactions; this could distort choice of resolution tools in favor of open bank resolution. - Authorities advised draft laws are being discussed to eliminate both funding constraints. - Deviation from pari passu treatment is not allowed except for transfer of insured deposits: - Law generally requires liabilities that fall under the same priority in liquidation to be transferred together; only exception is insured deposits which the DIA may transfer without transferring other first priority creditors. - Broad categorization of third priority creditors in Russia (including secured creditors, corporate depositors, and other corporate unsecured creditors) may pose issues. - Authorities should have flexibility to deviate if it maximizes return to all creditors or is essential for financial stability, subject to “no creditor worse off than in liquidation”. - Currently the principle is provided only in relation to individual depositors; individual depositor would be compensated from the DIF the difference between what would have been received in liquidation regarding the uninsured deposit if the P&A had not occurred. - Lack of preparation time: - P&A requires immediate action after failure (for example, transfer occurs during the weekend); advance preparation is essential. - Advance preparation could be challenging in Russia due to concerns of information leakages leading to fraud or criminal activities. - Use of a temporary bridge bank could be useful to allow necessary time to determine acquirer and value of assets. ### Issues to consider in introducing statutory bail-in (Box 4) - Scope of bail-in-able liabilities should: - include liabilities that can absorb losses without causing disruption to financial stability, and - minimize legal risks. - Type of liabilities: - FSB recommends that instruments determined as loss absorbing capital instruments: be paid in; be unsecured; not be subject to setoff or netting rights; have a minimum remaining contractual maturity of at least one year; and not be redeemable by the holder. - Insured deposits and short-term deposits, liabilities from derivative contracts, and other liabilities that could give rise to financial stability concerns are excluded from the scope of such loss absorbing capital instruments. - Reducing legal risk: - FSB recommends instruments defined as loss absorbing should be subordinated to other liabilities, preferably statutorily or structurally. - Consistency with creditor hierarchy in liquidation: - Losses imposed on creditors should be consistent with priority of claims in liquidation; substantial deviations in bail-in order from liquidation hierarchy can create legal risk or increase likelihood of compensation. - One option under consideration by authorities is to apply statutory bail-in powers in the following order: 1. All shares and liabilities to shareholders (shares, as well as deposits of shareholders); 2. subordinated debt; 3. all liabilities to corporate entities exceeding a certain amount; and 4. deposits of natural persons exceeding a certain amount. - This order largely deviates from creditor hierarchy in liquidation; bailing in ordinary shareholder deposits before subordinated creditors would give certain insider senior creditors less protection than subordinated creditors. - Changes may be necessary to reflect that large depositors, both natural persons and legal entities, would rank lower in creditor hierarchy compared to other depositors. - Exclusion of certain liabilities from absorbing losses: - Authorities can specify which liabilities are loss absorbing and which are not (for example, exclude insured deposits, short-term deposits, liabilities arising from derivative contracts). - If exclusions apply, loss absorbing capital needs to be properly subordinated, preferably statutorily (revising creditor hierarchy in liquidation) or structurally (applying bail-in to non-operating parent entity so as not to require bail-in of depositors). - Safeguards: - Adequate safeguards such as a “no creditor worse off than in liquidation” requirement can mitigate litigation risk. - Principle should apply to all creditors, not only individual depositors. - Equity should absorb losses first, and no loss should be imposed on senior debt holders until subordinated debt has been written off entirely (FSB KA 5.1). - Authorities should generally treat all creditors in the same class equally, but should have limited flexibility in exceptional circumstances to deviate from pari passu treatment if necessary to preserve financial stability and increase repayment for all creditors. - Footnote: Since the time of the FSAP mission, the FSC decided not to include large individual depositors in the scope of bail-in. ### Bank bankruptcy and liquidation proceedings - Authorities should develop procedures to liquidate banks in an orderly manner, rapidly transferring insured deposits and critical banking functions (for example, payment services, trade finance) out of the insolvent estate to continue operating as a going concern before remainder is liquidated. - Current process and recommendations: - Banks are liquidated through court-based proceedings with modifications to general bankruptcy and liquidation proceedings; CBR has control over commencement, oversight via appointment of bankruptcy receiver and liquidator, and reporting requirements to CBR. - It is recommended that liquidation proceedings commence immediately after, or shortly after, license revocation. - Under current law, it could take a maximum of one and a half months to commence liquidation proceedings after license revocation: - After license revocation, the CBR must petition the court for either liquidation or bankruptcy proceedings within 15 days, depending on the bank’s solvency (Banking Law Article 23.1). - The court takes decision to commence liquidation proceedings within one month of petition filing by the CBR. - During interim period from license revocation to commencement of liquidation proceedings, a CBR-appointed provisional administrator manages the bank (Insolvency Law Article 189.32); upon appointment, a moratorium is adopted by the CBR on payment of creditors’ claims. - To ensure swift and orderly liquidation, a license revocation should trigger automatic commencement of liquidation proceedings. - Transfer powers and creditor consent: - Authorities should consider providing the bankruptcy receiver stronger powers to transfer assets and liabilities. - A P&A transaction with DIA participation could be used when conditions regarding economic feasibility are met. - Without DIA participation, prior consent of failed bank’s creditors is necessary to transfer liabilities after acquirer is decided; bankruptcy receiver must provide notice of transfer at least one month prior to supposed transfer date — process is lengthy and not used in practice. - To preserve continuity of services, transfer of assets and liabilities should be conducted at the same time as bank closing, without requiring creditors’ prior consent. - Authorities should consider expediting P&A transactions conducted without DIA participation. - If creditor consent is necessary for creditor protection, authorities could consider introducing a procedure for creditors to oppose the transfer ex post and make the transfer null, retroactive for opposing creditors. ### Legal protection and judicial review - Resolution authority and staff should be protected against liability for actions taken and omissions made while discharging duties in good faith. - Legislation establishing resolution regimes should not provide for judicial actions that could constrain implementation of, or result in reversal of, measures taken by resolution authorities acting within their legal powers and in good faith. - Instead, legislation should provide for redress by awarding compensation, if justified. *Source: IMF staff report content provided in the supplied PDF excerpt.* ### 48. As recommended in the 2011 FSAP, legal protection of the supervisory and the ### _cr16308 - 48. As recommended in the 2011 FSAP, legal protection of the supervisory and the ### Legal protection of supervisory and resolution authorities - Current situation: - "There are no special provisions in Russian legislation for protection of the CBR, the DIA, their staffs, or their agents (for example, bankruptcy receivers, liquidators, and so on) against lawsuits for actions taken and/or omissions made while discharging their duties in good faith." - "The law provides that the head of the provisional administration for managing a credit organization shall be held liable for failure to discharge or for improper discharge of duties." - "Individual employees could be held personally liable for their actions, and there is no indemnification for the costs incurred by individuals for defending against lawsuits." - Recommendation: - "The supervisory and resolution authorities and their staffs and agents should be protected against liability for actions taken and omissions made while discharging their duties in good faith." ### Scope of judicial review and implications for supervisory discretion - Current features and consequences: - "The scope of judicial review is not circumscribed." - "An appeal of a supervisory action suspends its execution, the courts may overturn supervisory and resolution actions based on the merits." - Empirical instances: - "In 2014, 14 cases of bank license revocation were challenged in court, and one was overturned (in 2015, 22 were challenged with no overturns)." - "As for orders against credit institutions (regional branches), 23 were challenged in 2014, 2 of which were overturned. In 2015, 3 cases were overturned out of 46." - Burden of proof and effects: - "The burden of proof is on the CBR to substantiate that the CBR had grounds to take such actions, concerns about litigation may limit the scope in which the CBR may exercise discretionary powers and take a risk-based supervisory approach." - "Litigation concerns may delay the determination to take early intervention measures or to enter into resolution on the grounds of forward-looking assessments (that is, non-viability)." - Recommendation: - "The law should not provide for judicial actions that could constrain the implementation of, or result in a reversal of, measures taken by supervisory and resolution authorities acting within their legal powers and in good faith, with the burden of proof placed on the plaintiff (that is, the bank). Instead, it should provide for redress by awarding compensation, if justified." ### Emergency Liquidity Assistance (ELA) - Principles: - "Central banks should provide short-term liquidity support to the financial system in the event of a liquidity crisis, as a discretionary measure for individual banks as well as for the system as a whole." - ELA conditionality: "provided to solvent banks at a spread to market rates, against good collateral, and with a clear, time-bound repayment plan." "A government guarantee or indemnity should be sought if there is a risk that the bank might not be able to repay on the agreed terms." - CBR experience and scale: - "During the past two years, the CBR’s successful management of systemic liquidity has played a crucial role in maintaining financial stability." - "At its peak in December 2014, provision of liquidity by the CBR amounted to 12 percent of the banking sector’s total liabilities, but the CBR has since significantly drawn down its support (7 percent of liabilities at end-2015)." - Existing market support program: - CBR power to grant partial guarantees to banks and CCPs was introduced: "CBR Law Article 46(7), introduced in June 29, 2015, by Federal Law No. 167-FZ." - Under the arrangement the CBR "guarantees 90 percent of the outstanding amount of interbank transactions with the failed entities." - Program features and concerns: - "The CBR does not impose a fee for this commitment, and any potential losses (between the amount of the guarantee and the amount recovered in liquidation) are borne by the CBR." - "It raises strong moral hazard concerns. The program shifts the majority of the risks associated with such transactions away from market participants to the public sector." - Recommendation: "It would be preferable to address the underlying credit concerns in the market through prudential measures or the application of bank resolution measures." - Recommendation for ELA framework: - "The CBR should consider establishing an emergency liquidity assistance (ELA) framework to meet the needs of individual solvent but illiquid institutions." - Design features: "at the discretion of the CBR and should only be extended once all other funding options have been explored"; "ELA should only be provided to solvent and viable institutions, with adequate collateral and at a spread to market rates"; "Government indemnities should be made available as required." ### Funding firms in resolution — legal framework and practices - Funding sources and segregation: - "Resolution measures may be funded either by the DIF or by the DIA’s own account." - "The DIF may provide financing for resolution measures within the payout cost if such financing would not hamper the stability of the DIF." - "All other financing for resolution shall be provided by the DIA’s own account, either through the appropriation of the federal budget or CBR loans." - "The account for the DIF (funded by industry contributions) and the DIA’s own account are financially segregated, and may not be used to finance the other account." - Historical use of public funds: - "In the past five years, all resolution measures with DIA participation were funded by the DIA’s own account, mainly with the use of CBR loans." - "During 2011–15, public funds used for taking resolution measures amounted to 1.6 percent of GDP, of which CBR loans amounted to 98.4 percent of the total (Figure 2)." - Note on alternative measure: "If replaced with federal funds in the form of direct asset contributions, the amount necessary would be 1 percent of GDP, which is the subsidy embedded in CBR loans of 1.6 percent of GDP." - Loss-absorption and conditions for DIA assistance: - "Use of public funds in resolution is subject to a strict requirement that shareholders and subordinated creditors absorb the first losses." - Open bank resolution conditions include: - "(i) the appointment of a provisional administrator;" - "(ii) an investor or the DIA acquiring at least a 75 percent stake in the bank;" - "(iii) preparation of a restructuring plan that is subject to BSC approval;" - "(iv) restrictions on the remunerations to the former management team;" - "(v) intensive monitoring by the DIA." - "In the event that the DIA becomes a shareholder in the resolved bank, the DIA is obliged to sell the stake in an open tender as soon as it is approached by an interested investor." ### State Corporation Deposit Insurance Agency (DIA) — functions and financial risks - Main DIA functions (financially segregated): - Management of (i) the DIF (2004); (ii) the receivership of failed DIF member banks (2004); (iii) the Pension Savings Guarantee System (2014); (iv) the Government Recapitalization Program (2014); (v) the operational aspects of bank resolution (2008); (vi) the receivership of non-public pension funds (2014). - DIF status and funding: - "All banks licensed to accept retail deposits are members of the DIF and pay quarterly premiums." - "Due to the extraordinarily high number of insured events, the DIF depleted its own funds in 2015, and had a negative balance of RUB 377 billion in mid-March 2016." - Negative balance funding: "long-term CBR loans at 0.1 percent and short-term funding from agent banks managing deposit payouts on the DIA’s behalf to conduct deposit payouts." - DIF informal target: "an informal target of 5 percent of insured liabilities less Sberbank’s." "The DIF is expected to reach its target size in 7 to 10 years." - Government Capital Support Program: - "The federal government injected RUB 1 trillion of capital in the form of federal bonds (OFZ) into a separate account at the DIA." - "Subsequently RUB 170 billion out of the 1 trillion was used to support nonfinancial enterprises, as estimates for capital needs were reduced. Thus, RUB 830 billion (1.1 percent of GDP) benefited banks." - The OFZ instruments "pay a 1 percent margin above OFZ rates, but the banks can, under certain conditions, suspend interest payments and convert the instruments into common equity." - DIA borrowing and on-lending: - "The DIA has borrowed RUB 1.2 trillion from the CBR, in the form of five-year extendable unsecured loans at 0.5 percent (for solvency support) and 6 percent (for liquidity support)." - "The loans are on-lent against collateral to banks undergoing resolution measures at an interest margin of 0.01 percent." - Financial risks to the DIA: - Credit risk: - "The Insolvency Law ranks collateralized claims among third priority claims in bankruptcy, that is, behind deposits of individuals and wage claims of bank employees." - Instances of additional support: "There has been at least one instance where the DIA provided additional support in the form of a 11-year maturity extension of deposit at a subsidized rate, funded by the CBR. The support increased the capital by RUB 100 billion of the investor bank (VTB) in December 2014." - "In the past, the CBR has provided additional funding to the DIA to account for potential credit losses arising from the deterioration of the financial condition of the failed bank." - Maturity risk: - "While CBR loans have a five-year maturity, the DIA typically on-lends with a 10-year maturity. While CBR loans are extendible, the authorities noted that the CBR is not obliged to do so." ### Use of public funds, least-cost considerations, and moral hazard - Legal limitations and practice: - "The law does not restrict the use of public funds to systemic cases, nor require the application of a least-cost test for the selection of resolution measures." - "In practice, however, the authorities have applied a form of a least-cost test and have restricted the use of public funds in resolution to banks considered of systemic and/or regional importance." - Policy recommendations: - Narrow eligibility for public funds: - "The law could be amended to limit the use of public funds to resolution of banks whose failure could have broader consequences to the financial system or to the economy." - "Improvements to the framework for P&A transactions are crucial to enable orderly resolution without relying on open bank resolution." - Amend least-cost test to include expected recoveries: - "When performing a least-cost test, the CBR considers gross cash outlays. If the amount of solvency support necessary to raise a bank’s capital to zero exceeds the DIF’s deposit insurance liability in liquidation, the CBR considers that the least-cost test is not met to perform an open bank resolution, and resolves the bank with the use of P&A transactions or through liquidating the whole bank." - Recommendation: "The test should take into account that the DIF and the DIA have recourse on the receivership, with DIF ranking among first priority claimants." - Restrict subsidized CBR funding to DIA: - "The CBR should not provide subsidized loans to the DIA." - Rationale: "CBR loans to the DIA are unsecured long-term loans at below-market rates (typically 0.5 or 6.0 percent compared to a market rate of 10–11 percent). Such financing to the DIA constitutes quasi-fiscal activities, and thus should be the role of the federal government." - Fiscal implication: "When the scale of the support is significant, the funding could complicate monetary management and contribute to inflation, since the CBR has a limited capital and revenue base and would have to monetize losses." - Recommendation: "The federal government should compensate the CBR for any subsidy/grant provided by the below-market rate loan and guarantee for the credit risk due to the provision of unsecured loans to the DIA." - Replace below-market DIA loans with direct capital: - "To facilitate a swift return of healthy resolved banks to the market, the authorities should consider replacing below-market rate loans with direct capital injections." - Concerns with DIA loans collateralization: - "DIA loans are collateralized with the failed bank’s assets and with collateral provided by the investor and/or a third party related to the investor. This can result in a heavily encumbered balance sheet, restricting the bank’s access to market funding as well as its flexibility to restructure its balance sheet." - "Private investors are unlikely to be willing to provide collateral to cover losses already incurred in the failed bank." - Consequence: "This could leave nationalization (for example, a merger with a SOB) as the only option. If open bank resolution is to be used, the authorities should consider closing the negative balance of the failed banks with grants from the federal budget instead of with subsidized loans." - Expected benefits of grants: "facilitate swift and orderly resolution, a quicker return of the failed bank to a healthy condition, and an enlargement of the investor pool." - Recovering public outlays from industry: - Medium-term options: - "(i) the creation of resolution funds, financed via ex ante contributions from the industry;" - "(ii) the use of public resources, with the ability to recoup any outlays from the industry on an ex post basis." - "The credibility to an ex post arrangement depends on the available fiscal space, which at this time is expected to be adequate." *Source: IMF staff report content unit _cr16308 - 48.* ### Box 6. Use of Subsidized Loans for Solvency Support in Open Bank Resolution ### Box 6. Use of Subsidized Loans for Solvency Support in Open Bank Resolution ### Design of DIA subsidized loans and asset valuation - Solvency support in open bank resolution is funded from the DIA’s own account in the form of below-market rate loans or the purchase of share capital. - DIA loans are collateralized with either the failed bank’s assets or the assets of the investor or a third party related to the investor. - Valuation rules for collateral: - Traded securities: valued at market prices less a 0–5 percent haircut. - Real estate and shares: valued by independent appraisers. - Performing loans: valued at face value less a 5–20 percent haircut. ### Loan terms and implied subsidy - DIA loans are provided with 10-year maturity, 0.51 percent interest rate, and the principal due at the end of the loan term. - At current market funding rates (10–11 percent), the implied subsidy of a loan amounts to 60 percent of its face value. - Cash outlays would be even higher if market-funding rates were to fall. ### Drawbacks and operational effects of the arrangement - Limited access to market funding: - The resolved bank’s highly encumbered balance sheet reduces the bank’s ability to obtain financing from the market. - Less flexibility for balance sheet restructuring: - Large share of collateralized assets and the fact that DIA loans can only be prepaid at par restrict restructuring flexibility. - Early prepayment at par deprives banks of the net-present value gain provided by the loans’ below-market interest rate. - Extensive use of regulatory forbearance: - Under Russian accounting standards, the DIA-loan subsidy is recognized over the maturity of the loan (10 years). - The CBR may exempt the resolved bank from complying with prudential norms during this time; problem assets are reported at book/face value and annual provisions are made only equal to the annual subsidy recognized by the below-market loan. - Lack of incentive to expedite collection of problem assets: - The rehabilitation plan approved by the CBR includes a detailed plan for collection of problem assets. - Recoveries in excess of what is contemplated trigger an early repayment of the DIA loan at par, which deprives the investor of the subsidy provided by the loans’ low interest rate — especially for excess recoveries achieved in the early years of the plan. - Illustrative example from source footnote: if a DIA loan of RUB 100 is provided and the market funding cost is 11 percent, a problem loan recovery of RUB 10 above the contemplated recovery amount would create RUB 2 of profit for the investor and RUB 8 in early repayment of the DIA loan. If made in the first year of the rehabilitation process, the early repayment deprives the bank of RUB 5 in future profits. - Prolonged DIA involvement: - For the maturity of the DIA-loan, the bank is subject to quarterly monitoring by the DIA, including on problem asset recoveries and loan loss provisioning. - Difficulty finding investors for large banks: - These disadvantages make a large systemic bank less attractive to a private investor and thus more difficult to sell to a potential investor. ### Suggested considerations implicit in the analysis - The combination of large cash outlays (implied 60 percent subsidy at 10–11 percent market funding cost), collateralization requirements, restrictive prepayment terms, and long monitoring implies material fiscal and operational costs and incentives that may slow asset recovery and impede market-based restructuring. *Source: Box 6. Use of Subsidized Loans for Solvency Support in Open Bank Resolution — _cr16308* ### Deposit insurance scheme performance and recent changes - Payouts and timeliness: - The DIA has made insured deposit payouts in 168 insured events since 2014 related to 1.6 million depositors. - A payout is commenced on average in 12 days from the occurrence of an insured event. - Risk-based premiums (introduced July 2015): - All banks pay the basic insurance premium on individual deposits. - An additional rate is applied to banks that have collected a deposit or amended an agreement to provide an interest rate exceeding the sector’s average (as determined by the CBR) by 2–3 percentage points. - An enhanced additional rate is applied if (i) the bank has collected a deposit or made an agreement to provide an interest rate exceeding the sector’s average by more than 3 percentage points; or (ii) the bank’s financial condition is below a certain criteria. - Quarterly insurance premiums paid in the 1st quarter of 2016 amounted RUB 25.5 billion, including RUB 0.04 billion—on additional rate and RUB 2.12 billion—on enhanced additional rate. 140 banks corresponded to the criteria for paying a higher premium for the 1st quarter of 2016. - From the 2nd quarter of 2016, the rates are 0.1 percent (basic rate), 0.15 percent (basic plus additional rate), and 0.3 percent (basic plus enhanced additional rate). - The rates will be 0.18 percent (basic plus additional rate), and 0.36 percent (basic plus enhanced additional rate) from the 3rd quarter of 2016, and 0.48 percent for basic plus enhanced additional rate from the 4th quarter of 2016. ### Scope, coverage, and potential expansion to corporate depositors - Scope and recent expansions: - The scope was expanded to include individual entrepreneurs in January 2014. - At end-2014, the coverage was doubled to provide coverage for up to a maximum of RUB 1.4 million per depositor. - The DIA estimates that the changes to the scope and coverage had an impact of increasing the DIF’s payouts in 2015 by 10 percent. - The current scope and coverage of the deposit insurance provides full coverage for 99.7 percent of insured depositors, and 56.9 percent of the amount of insured deposits. - Considerations on expanding coverage to corporate depositors: - Potential benefits: protect small and medium-sized enterprises, reduce real economy impact, expedite deposit payout process, greatly reduce the DIA’s work as a bankruptcy receiver by reducing the number of creditors left in bankruptcy proceedings by 80–90 percent (DIA estimate). - Authorities’ concerns: - Disclosure of beneficiary owners does not apply to small companies, increasing risk of fraud and multiple coverage. - Risk and public perception that owners of failed banks would benefit at the expense of uninsured individuals. - Cost to the DIF could increase by 10–20 percent. - Mission estimate on revenue offset: cost could be recovered by increased revenues from collecting insurance premiums on the corporate deposit base, which will provide for 15–20 percent revenue increase. - Recommendation from mission: consider expanding insurance coverage only to non-related party corporate depositors and seek ways to address identified problems before expansion. ### Reimbursement operational constraints and options - Practical impediments to speeding up payouts: - The DIA is informed of the license revocation only after the decision, preventing prior preparation. - IT systems to produce single-customer view data exist but are sometimes destroyed by bank managers, forcing the DIA to rebuild databases. - For banks far from the DIA head office in Moscow, it can take more than a day for a DIA expert to enter the failed bank and commence reimbursement preparation. - Practices to consider from other countries: - Providing insurance coverage on a gross basis without subtracting the bank’s counterclaims. - Removing the need for claims to be made by depositors for reimbursement. - Potential benefits must be weighed against risks of overpayment due to fraudulent or dubious transactions. - Deposit transfers as an alternative to payouts: - Authorities should consider legal and operational changes to make deposit transfers more usable, including authorizing the DIF to fund the transfer of insured deposits from failing banks to a healthy bank. - Transfer of assets together with insured deposits can considerably reduce DIF outlays and enable earlier access to deposit accounts if conducted with sufficient preparation time. - Authorities noted that in many bankruptcy cases there were no good assets to transfer, which may change as the CBR closes banks with legacy problems. ### Funding, financial position, and premium policy of the DIF - Backup funding arrangements: - The DI Law provides that federal budgetary assets and the government Reserve Fund may be used to secure the financial stability of the DIF. - A legal amendment in 2013 added the CBR as a source of backup funding. - The DIA Board determines whether to request backup from the federal budget or the CBR; to date it had opted to request backup funding only from the CBR. - Credit line and drawings: - As of mid-March 2016, the CBR had approved a credit line to the DIF of RUB 250 billion, of which RUB 137 billion were drawn. - By end-June 2016, the credit line was expanded to RUB 420 billion, of which RUB 372 billion were drawn. - DIF balance and rebuilding: - At mid-March 2016, due to frequent insured events, the DIF had a negative balance of RUB 377 billion. - In addition to the CBR loan outstanding amount of RUB 137 billion, the DIF owed RUB 170 billion to agent banks for deposit payouts, and RUB 70 billion of insured liabilities for a deposit payout that had not yet commenced. - Building the DIF up from its current negative balance to its implicit target level (5 percent of insured liabilities excluding Sberbank deposits) is estimated to take seven to 10 years, depending on the number and size of insured events in the future. - Premium adjustments and policy recommendations: - In April 2016, the DIA board of directors raised the basic rate from the current 0.10–0.12 percent. - DI Law Article 36(4) provides for a maximum quarterly premium of 0.15 percent. - The DIA may increase the basic rate up to 0.3 percent for six months at most within 18 months for the purpose of restoring the DIF (DI Law Article 36(5), 41(4)). - Given the outlook for low sector profitability in the next two years (due to compressed interest margins and large loan loss provisioning), further increases in the insurance premium should be gradual. - Authorities are urged to consider providing federal funds to allow for a faster DIF buildup and to enhance public confidence. - Deposit insurance funds should have the capacity to provide payouts in the event of failures of a few medium-sized banks, but not to withstand a systemic crisis, in which case the government would need to step in. - The extraordinarily high number of insured events in the past two years can be considered a systemic event justifying federal government involvement to support confidence in the deposit insurance system. *Source: Box 6 and accompanying sections on Deposit Insurance Scheme and Depositor Preference — _cr16308* ### Depositor preference and creditor hierarchy - Current priority rules: - Individual depositors are provided first priority after payments for current obligations. - First-priority creditors consist of individual depositors, DIA subrogated claims from reimbursed depositors, and CBR subrogated claims where the CBR reimburses individual depositors when the failed bank is not a member of the deposit insurance system. - Secured creditors rank top among the third-priority creditors with regard to the pledged assets, prior to corporate unsecured creditors, including corporate depositors. - Mission recommendations and considerations: - Consider introducing a two-tiered depositor preference rule so that insured deposits and DIA subrogated claims are preferred over uninsured deposits, and both tiers of deposits are preferred over other senior unsecured creditors — to better ensure recovery of the DIF’s outlay in liquidation and to affect “no creditor worse off than in liquidation” assessments under statutory bail-in. - If insurance coverage is expanded to corporate entities, it is commendable to include such claims in the first tier. - Authorities expressed concern that changing priority may lead to social unrest as other creditors will receive less in liquidation. - Priority of secured creditors: - Under Russian creditor hierarchy in liquidation, secured creditors rank top among third-priority creditors and will only be repaid after individual depositors, DIA subrogated claims, employment wages, and the like are repaid. - This weak protection of secured creditors may impact banks’ ability to obtain secured loans or credit to fund liquidity needs and may limit the likelihood of repayment of CBR ELA or DIA loans extended for bankruptcy prevention if the bank enters bankruptcy proceedings. *Source: Sections on Depositor Preference and Box 7 — _cr16308* ### Annex I. Asset Quality Reviews ### Annex I. Asset Quality Reviews ### Purpose and importance - Asset quality reviews (AQR) are key diagnostic tools to better assess capital adequacy and the economic condition of banks, reduce uncertainty, and support confidence. - Comprehensive AQRs are useful to understand the health of banks’ balance sheets, particularly when asset underperformance becomes systemic and may threaten the long-term viability of the banking system. - In deep economic contractions, excessive debt burdens and the lack of viability of many projects can become apparent; banks may take unrealistic views of underperforming assets to avoid loan loss provisioning, increases in regulatory capital requirements, and funding costs. - AQRs can: - better establish the value of assets against a rigorous standard; - identify whether banks have sufficient financial resources to absorb medium-term losses; - inform decisions on bank restructuring and private sector debt resolution. ### Focus and methodology - Loans, almost always the largest asset item, should be the primary focus of AQRs. - AQRs shed light on the extent to which the loan portfolio can deteriorate and on losses incurred; this depends on: - the scale of deterioration of the macroeconomic environment; - the strength of the bank’s credit administration; - the legal environment for effective resolution of underperforming assets. - Onsite analysis is essential to review individual loan files and to accurately assess the valuation and enforceability of collateral. ### Design, credibility, and transparency - The design and implementation of the AQR must be credible and be perceived as such by market participants. - Credibility is usually achieved through: - a rigorous design; - transparent public disclosure of procedures and results; - engagement of independent third-party expertise to conduct and/or oversee the AQR. - Experts’ tasks may include advising on scope and methodologies, drafting terms of reference, and overseeing the conduct of the AQR. - Note from Figure 1: "AQR features are grouped into elements that affect probabilities of default (PDs) and elements that affect loss given default (LGDs) PDs and LGDs are key inputs into stress tests." (Source: IMF staff.) ### Operational approaches - The AQR can be conducted in one go or in phases, using a risk-based approach to prioritize banks. - For each bank, the review should provide a comprehensive assessment of capital needs that can support decisive supervisory actions. - Two approaches can be considered, individually or combined: - Independent external auditors: - Banks are required to hire independent external auditors (different from their normal auditors) from a pre-approved list of reputable firms to perform the AQR. - Large and complex banks could be required to use international firms or audit partners based in other countries. - Bank supervisors: - Supervisory staff conduct the AQR, with independent external advisors participating in designing the terms of reference, and discussing and challenging the results of the review. - The experts could be domestic and/or international. ### Preparations, follow-up, and remedial action - Before the AQR, authorities should formulate a strategy to address any weaknesses the AQR may reveal. - The strategy should include: - a method for assessing banks’ viability on a forward-looking basis, based on the AQR’s results and, usually, a business plan and possibly stress tests using the results of the AQR as a starting point; - eligibility criteria for banks to receive public solvency support, if justified due to systemic risks and under strict conditions. - Undercapitalized but viable banks should be required to submit time-bound recapitalization plans. - Advance preparations for orderly resolution should be made for banks that are not deemed viable. - Audited accounts often do not pick up the true extent of asset quality problems, as they do not allow for a forward-looking viewpoint. ### Figure 2 — Bank resolution indicators (selected notes and figures) - Sources: DIA, CBR, and IMF. - Notes in figure: - "1/ New and revoked licenses." - "2/ 2015 numbers as of November 25, 2015." - Selected time series and metrics shown in the figure include: - Number of Licensed Credit Institutions (Banks and Non-Banks) and change from previous year. - Number of Banks in DIA Managed Receivership and Liquidation and "In liquidation or bankruptcy at year end" (right-hand scale). - Deposits in Failed DIF Member Banks (In percent of GDP) broken down by depositor type: Other deposits, not insured; Legal entities, not insured; Natural persons, not insured; Natural persons, insured. (Time series 2008–2015 shown.) - Number of insured events (Right Axis) and Number of Bank Resolution With DIA Participation by category: Purchase and assumption; Open Bank Resolution (OBR) initiated; Ongoing OBR at year end. - Estimated Recoveries of Uninsured Deposits of Failed Banks (In percent of deposits in respective priority order): 30.6, 16.3, 16.1, 13.8, 7.9, 2.4, 0.1, 0.7, 18.1, 0.4 - Sources of Funding in Open Bank Resolution (In percent of GDP) components shown over 2008–2015: CBR loans, Federal funds, DIF, Voluntary Bail-In. *Source: Annex I. Asset Quality Reviews, IMF staff.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16308.pdf_