Reducing the adequacy ratio was not enough for banks

The Bank of Russia has reduced the capital adequacy standard for banks when securitizing mortgage loans. According to the Central Bank, this will allow banks to more actively increase their mortgage portfolios by attracting cheap financing within the country. The bankers themselves, however, say that the Central Bank has lifted only one of many restrictions on the issuance of mortgage securities.

Yesterday, the "Bulletin of the Bank of Russia" published changes to the Central Bank's instruction #112-I "On mandatory standards for credit institutions issuing mortgage-backed bonds." Now banks wishing to issue mortgage-backed bonds within the country and without intermediaries will not need to comply with the equity adequacy ratio of 14% - the Bank of Russia has reduced it to 10-11%, depending on the size of the bank’s equity capital. The amendments will come into force in mid-July.

The purpose of the amendments is to expand the access of mortgage lending banks to attract long-term financing within the country. According to the Bank of Russia, this will help reduce mortgage rates and transfer securitization of mortgages from offshore companies to the Russian market.

Currently, securitization of mortgage loans is carried out through the sale of loan pools to special purpose vehicles (SPVs) registered in offshore zones. Within the country, securitization was carried out by Gazprombank and the Agency for Housing Mortgage Lending (AHML) through agency companies registered in Russia. In both cases, banks bear the costs of creating and organizing the activities of agent companies. Conducting securitization directly, bypassing intermediary companies, was hampered by the excessive capital adequacy standard established by the Central Bank.

The innovation approved by the Central Bank removes this obstacle. “Reducing the capital adequacy standard will bring Russian regulation in this area closer to the Basel recommendations and will help small banks more actively increase their mortgage portfolios,” says Alexander Chernyak, CEO of ATTA-Mortgage.

However, major players expected more from the Central Bank. They considered the measures taken by the Central Bank to be only one of the steps towards ensuring that on-balance sheet securitization in Russia became in demand in practice. “The problem of an inflated standard was not the only one preventing the issuance of mortgage bonds in Russia from the balance sheet of banks,” says Denis Grishukhin, deputy director of the department of structured products of AHML. “The vast majority of banks will not receive a rating for such securities when issued from the balance sheet that is higher than the rating of the bank itself, which makes it ineffective this operation." In addition, according to some market participants, balance sheet securitization, unlike securitization through SPV, does not solve the bank’s liquidity problem, which arises due to the difference in the maturities of assets and liabilities.

Experts note that the Central Bank's innovation will not make securitization cheaper for the issuer and less risky for the investor. “In the absence of competent legislation on collateral, the risks of investors during securitization in Russia are great,” says Igor Zhigunov, head of the sales department of the City Mortgage Bank. “An additional problem is created by the lack of a clear mechanism for the issuer’s liability in the event of default on the mortgage loans securing the bonds,” adds Ilya Zibarev, head of the mortgage lending unit at Alfa Bank. “As a result, with balance-sheet securitization in Russia, financing will cost the bank more than with cross-border securitization.”

Svetlana Kommersant-Dementieva

The Central Bank tried to reduce the cost of mortgages