Lessons learned from the crisis: the CBR perspective

M.A. Bezdudny,Head of Banking Sector Analysis and Systemic Stability

Monitoring Division

June 2010

2

Major vulnerability factors of the Banking sector and Russian economy

Major Risks

Macroeconomic factors: •Poor diversification of economy;•High dependence of the budget and corporate finances on

energy export;•High dependence of financial market on speculative capital flows.

Banking sector factors:•Existing deficit of long-term resources;•Dependence on foreign borrowing; •Sharp increase in risks during credit expansion due to poor

diversification of economy and high level of risk on related parties.

3

Global Financial Crisis and its Influence on the Russian Banking

SystemMain channels of influence:

•drastic and significant deterioration of foreign borrowing conditions

(for the most reliable Russian corporations and banks)/ closing of the

international credit market for the rest of Russian borrowers;

•outflow of private capital from Russia (net outflow more than

-180,5 bln. dollars in over year (01.07.2008 – 01.07.2009 ))

(estimate);

•drop in prices of Russian exports and slow-down of economic

activity;

•dramatic fall in stock indices.

4

Capital outflow

-140

-120

-100

-80

-60

-40

-20

0

20

40

60

Iq 2008 IIq 2008 IIIq2008

IVq2008

Iq 2009 IIq 2009 IIIq2009

IVq2009

Iq 2010

bln

. U

SD

Net inflow/outflow of private capital

5

Global Financial Crisis and its Influence on the Russian Banking

System

At early stages of the crisis the combination of these factors resulted

in acute shortage of liquidity in the banking system, exacerbated by

confidence crisis.

But Russian banks, basically, did not take risks typical to the largest international banks:

•Russian banks did not open significant positions in "toxic" instruments, they did not expand their activities into foreign markets that were later affected by the crisis;

•Russian banking system did not depend much on the activities of banks with foreign capital, parent companies of which suffered from the crisis.

6

Public confidence in the banking sector

Development of the banking sector

-7,0

-5,0

-3,0

-1,0

1,0

3,0

5,0

7,0

%

Monthly growth rates of individual deposits, %

Monthly growth rates of individual deposits with maturity exceding 1 year, %

7

Development of the banking sector

Overdue loans

1792

,1

2674

,9

3885

,9

5452

,9

8030

,5

1611

5,5

1610

3,5

1652

6,9

1228

7,1

1,3

7,4

2,71,9

1,1 1,3

3,2

3,7

6,8

1,1

2,1

6,4

1,8 1,6 1,5

1,3

0,9

6,1

0

4 500

9 000

13 500

18 000

1.01.

03

1.01.

04

1.01.

05

1.01.

06

1.01.

07

1.01.

08

1.01.

09

1.01.

10

1.05.

10

bln

.ru

bl.

0

2

4

6

8

%

Loans and other funds provided to non-financial organizations and households (incl. overdueloans),bln rubles,(left scale)Share of overdue loans in the loans to households, % (right scale)

Share of overdue loans in the loans to non-financial organizations, % (right scale)

8

Loan growth rate and overdue loans dynamic (corporate portfolio)

-4,9-5,3-6,8-6,5

0,32,83,2

47,1 44,142,0

12,019,724,5

27,9

34,7

37,934,3

36,8

15,35,7

8,4

-100

0

100

200

300

400

500

600

700

1.09.

08

1.10.

08

1.11.

08

1.12.

08

1.01.

09

1.02.

09

1.03.

09

1.04.

09

1.05.

09

1.06.

09

1.07.

09

1.08.

09

1.09.

09

1.10.

09

1.11.

09

1.12.

09

1.01.

10

1.02.

10

1.03.

10

1.04.

10

1.05.

10

bln

.ru

bl

-10

0

10

20

30

40

50

60

70

%

Past dues in FX loans, bln. Rubles (left scale)

Past dues in Ruble loans, bln. Rubles (left scale)

Annual growth of lending (in % over 12 months prior to reporting date) (right scale)

Development of the banking sector

9

Loan growth rate and overdue loans dynamic (retail portfolio)

-6,3-9,9

-5,9-1,5

50,751,0

47,440,9

35,234,0

28,4

-12,0

3,0

-11,6

7,9

14,0

21,0

-11,0-12,2 -11,2 -8,7

-50

0

50

100

150

200

250

bln

.ru

bl.

-15

0

15

30

45

60

75

%

Past dues in Ruble loans, bln. Rubles (left scale)

Past dues in FX loans, bln. Rubles (left scale)

Annual growth of lending (in % over 12 months prior to reporting date) (right scale)

Development of the banking sector

10

Return on assets and equity,%

Development of the banking sector

0,90,7

0,3

3,3 3,13,0 2,9

3,02,9 2,9

2,4

1,8 1,3

0,56,04,9

2,2

26,3 25,623,8

22,3 22,7 21,1 21,4

18,3

13,3

10,0

3,60

1

2

3

4

%

2

8

14

20

26

%

Return on assets (left scale)

Return on equity (right scale)

11

Measures to Overcome the Crisis

• Easing the monetary policy.

• Significant improvement of refinancing system.

• Increase in the insurance compensation on individual deposits in the DIS member-banks.

• Enhanced monitoring and increased promptitude of supervision.

• Dealing with weak banks.

• Changes in the system of banking regulation.

12

Framework of Dealing with Weak Banks

Insolvency prevention measures - a new law adopted, providing the right of the Deposit Insurance Agency (DIA) to implement, upon the proposal of the Bank of Russia, measures to prevent bank insolvency; - a major precondition of these measures is the transfer of ownership to new investors and/or DIA - as of 01.05.10 18 banks undergoing insolvency prevention measures (their share in the bank assets was 2.5%)

Transfer (P&A transaction) of a problem bank’s assets and liabilities (fully or in part) to an investor (investors)   Delicensing (70 banks were delicensed from 1.09.08 to 01.05.10 their share in the banking system assets was 0,6%)

While dealing with a weak bank, the systemic significance of the bank, including its regional significance, is taken into account.

13

Bank Capitalization Issues• The liquidity situation is now, by and large, settled; capitalization problem is

gaining importance• Substantial amendments were introduced into legislation with the view to

simplification and acceleration of capitalization procedures as well as M&A procedures. At the same time minimum capital requirements (180 mln rubl for all banks existing after 01.01.2012) were put up.

• Granting subordinated loans to: - state banks Sberbank of Russia - 500 bln rubles (200 bln rubles repayeded to Bank of Russia)

VTB - 200 bln rublesRosselhozbank - 25 bln rubles

- private banks – the state provides up to 15% of a bank’s capital if the private

investors provide no less than the same amount Total subordinated loans reached more 900 bln. rubles

• Further measures on extension of subordinated loans (placement of deposits, bond issuing) are being elaborated now, including measures aimed at increasing Tier I capital

14

Capital adequacy (1)

Capitalization of the banking sector

4620,6

4597,3

20,220,9

15,5

400

800

1200

1600

2000

2400

2800

3200

3600

4000

4400

4800

1.01.031.01.04

1.01.051.01.06

1.01.071.01.08

1.01.091.01.10

1.05.10

bln

.ru

bl.

0

4

8

12

16

20

24

%

Own funds (capital), left scale

Capital adequacy ratio(right scale)

15

Some Changes in the Regulation

• Decrease of reserve requirements: down to 2.5% on every category of liabilities subject to reservation (in September 2008 they were 5.5% to 8.5% - depending on the category of liabilities)

• More balanced recognition of losses from the drop in the market value of securities: banks were granted the right of one-off change in their accounting policy for 2008, including permission to transfer securities from the trading to the investment portfolio

• Alleviation of requirements on credit risk assessment, temporarily in 2009: - providing for wider use by banks of professional judgment while assessing the

quality of restructured loans;- eased requirements on assessment of debt service quality depending on the

duration of overdue debt, assessment of quality of restructured loans as well as loans made to repay loans granted earlier

Setting up the dependence of limits on banks’ participation in auctions on unsecured loans from the Bank of Russia on their compliance with the Bank of Russia’s recommendations regarding foreign assets and on-balance positions in foreign currency

16

Main reasons of the strong impact of the crisis on the Russian banking sector were, basically, internal. They include:

• operations, most probably, connected with financing of the bank

owners;

• operations with financial instruments highly subjected to market factors, executed, inter alia, via third parties;

• operations with “opaque” borrowers or counterparties that are actually intermediaries;

• a separate factor substantially reducing stability both at macro-and microlevels is risk concentration.

Lessons of the crisis

17

Exiting from anticrisis measures?

1. After liquidity stabilization the Bank of Russia’s Board made a decision to reduce twice credit risk limits and to increase minimum ratings (given by three national rating agencies and necessary for access to “non-traditional” liquidity source such as uncollateralized loans form the Bank of Russia).

2. The program of subordinated loans from Vnesheconombank is completed.

3. In the second half-year the Bank of Russia’s regulation №2156-U (that allowed banks to take more balanced, to some extent more liberal, decisions on provisioning) will be substituted by a new regulation that will partially return the standard provisioning requirements.

18

Growth of Funds Received from the Bank of Russia and their Share

in the Total Funding

0

600

1200

1800

2400

3000

3600

4200

1.09.

08

1.10.

08

1.11.

08

1.12.

08

1.01.

09

1.02.

09

1.03.

09

1.04.

09

1.05.

09

1.06.

09

1.07.

09

1.08.

09

1.09.

09

1.10.

09

1.11.

09

1.12.

09

1.01.

10

1.02.

10

1.03.

10

1.04.

10

1.05.

10

bln

.ru

ble

s

0

2

4

6

8

10

12

14

%

Loans, deposits and other funds received from the Bank of Russia (left scale)

Share of loans, deposits and other funds received by credit istitutions from the Bank ofRussia in the balance sheet total (right scale)

The maximum amount of loans, deposits and other funds received from the Bank of Russia was equal 3 653,6 bln. rubles with the share of 12,3 % in the total

balance sheet (on 1.02.09)

19

International cooperating

• Basel Committee on Banking Supervision created a number of subgroups for new concepts of supervision processes elaboration, first of all corresponded to:

• capital requirements strengthening, especially for big banks;

• development of macro prudential approaches including countercyclical capital buffer and dynamic regulation of loan and loss provisions;

• improvement of liquidity regulation approaches;

• development of market risk estimation approaches;

• elaboration of more precise mathematical methods for credit risk estimation.

BCBS Working Group

20

Thank you for your attention!