Necessary and sufficient

Mortgage banks will be equal to ordinary ones

The Bank of Russia intends to equalize the rights of mortgage banks with ordinary credit institutions by defining for them a single capital adequacy standard (N1 standard - the ratio of capital to assets). Director of the Department of Banking Regulation and Supervision of the Central Bank Alexey Simanovsky told Prime-TASS yesterday. However, an official decision on this has yet to be made by the Board of Directors of the Bank of Russia. Market participants are pleased with the promised innovation from the regulator and hope that now bankers will issue mortgage-backed securities more often, without resorting to the creation of specialized companies - SPV (Special Purpose Vehicle - a company not legally connected with the securitization organizer, to whose balance sheet the securitized assets).

Currently, Russian credit institutions wishing to issue mortgage-backed securities must have a capital adequacy level of at least 14%. While for ordinary banks the standard is 10% with capital up to 5 million euros and 11% with a larger amount of capital. Banks did not like this inequality very much, so not long ago the Rossiya Banking Association sent a letter to the Central Bank with a request to reduce capital adequacy requirements, explaining that this was causing banks’ business profitability to fall. In addition, credit institutions have to “use off-balance sheet structures (SPV. - Ed. ) to refinance mortgage portfolios. And this leads to the writing off of high-quality assets from the balance sheets of credit institutions.” In other words, banks create a special company - SPV and transfer their mortgage loans to it, for which mortgage securities are then issued. Accordingly, formally the issuer becomes not a bank, but an SPV company. Thus, the bank is not obliged to comply with the Central Bank’s capital adequacy requirements of 14%.

Currently, SPV companies of several Russian banks, in particular VTB, City Mortgage Bank and Gazprombank, have already issued mortgage securities. It is noteworthy that during the period of placement of Gazprombank's securities, its capital adequacy was 11.5%, VTB - 12.4%.

Market participants believe that changes in the Central Bank regulations may lead to the abandonment of SPVs. “Since instruction No. 112-I was issued in March 2004, there has not been a single issue of mortgage securities from the bank’s balance sheet in accordance with the Law “On Mortgage Securities,” notes Sergei Ozerov, financial director of the DeltaCredit mortgage bank. -- Many banks refer specifically to the increased requirements of the N1 standard in this instruction as the main factor hindering the development of this instrument. “I think banks will start using this tool if the Central Bank lowers the standard for banks issuing mortgage-backed securities.”

As the press service of DeltaCredit Bank told Vremya Novostey, “we are waiting for the Central Bank to lower this standard in order to issue Russian mortgage-backed securities from its balance sheet.”

“The N1 standard regulates both the bank’s attraction of resources and the accumulation of loans on its balance sheet. The bank cannot accumulate more loans on its balance sheet than its capital allows, and for successful securitization the volume of the portfolio is important, notes Igor Zhigunov, board member of the City Mortgage Bank. “The reduction of the standard to normal is unlikely to have a significant impact on the number of issues, since we have not yet had a single issue of mortgage-backed securities from the bank’s balance sheet.”

Natalya ROMANOVA, Elena KHUTORNYKH