How is the Central Bank going to save banks?

The Central Bank explained how it plans to help banks and other financial institutions survive the crisis. Press releases from the Central Bank are not always easy to understand, so we decided to translate each item into Russian.

“The Bank of Russia will introduce a temporary moratorium on the recognition of negative revaluation of securities portfolios of credit institutions and non-credit financial institutions, which will reduce the sensitivity of market participants to market risk.”

Translation: All banks and non-credit financial organizations (mutual investment funds, non-state pension funds and others ) suffered due to the increase in the key rate and the fall in the ruble exchange rate - the securities in their portfolios fell sharply in price. The decrease in the book value of securities must be compensated from capital, and capital cannot be less than certain standards established by the Central Bank. Now the value of securities can not be revalued until the moratorium is lifted.

“To limit the impact of the revaluation of assets and liabilities denominated in foreign currencies on the prudential standards of credit institutions, the Bank of Russia plans to grant credit institutions a temporary right to use the rate calculated for the previous quarter when calculating prudential requirements for transactions in foreign currency.”

Translation: According to the rules of the Central Bank, banks must transfer a certain percentage of all deposits to special accounts of the Central Bank. This account is in rubles. You need to replenish it once a month and only in rubles, even if the deposits are in foreign currency. Due to the depreciation of the ruble, the situation has developed as follows: the more deposits a bank has in foreign currency, the more rubles it will have to give to the Central Bank. Now banks will be allowed to recalculate these deductions at the rate for the previous quarter (dollar - 36.18; euro - 47.99).

“The Bank of Russia will improve the mechanism for providing credit institutions with funds in foreign currency. As part of the currency repo mechanism, it is planned to hold additional auctions for different periods if necessary. As part of the mechanism for providing credit institutions with loans secured by non-marketable assets (in accordance with Regulation No. 312-P), it is planned to begin providing banks with loans in foreign currency, secured by credit claims in foreign currency to non-financial organizations.”

Translation: Banks will have more opportunities to obtain short-term loans from the Central Bank in foreign currency. They will be able to take out loans, backing up their debt repayment obligations with their own loans issued to companies.

“The Bank of Russia considers the central counterparty on the Moscow Exchange as an important institution for the centralized distribution of liquidity among all participants in the financial market - both credit and non-credit financial institutions. To ensure the stable functioning of the exchange market, the Bank of Russia, if necessary, will provide support to the central counterparty on the Moscow Exchange so that market participants are confident in the reliability of centralized clearing and the continuity of its functions.”

Translation: A central counterparty is an intermediary that helps market participants enter into transactions. For example, banks no longer have to assess the risks themselves in transactions with partners: they can (for money) transfer this function to an intermediary. If the partner fails, the losses will be covered by the central counterparty. The Central Bank believes that this is very important for the normal functioning of the market and promises to support the institution of a central counterparty so that banks are not afraid to cooperate with it.

“In order to expand the ability to manage interest rate risks, the Bank of Russia plans to:

— temporarily (until July 1, 2015) not to apply the limitation on the value of the full cost of a consumer loan (loan) when credit and microfinance organizations enter into consumer loan (loan) agreements;

— increase the range of the standard market deviation of interest rates on household deposits in banks from the estimated average market maximum interest rate to 3.5 percentage points (instead of 2 percentage points currently).”

Translation: The Central Bank was supposed to limit rates on consumer loans from January 1, 2015 - they could not exceed the market average by more than a third. Now the deadline for introducing these restrictions for banks and microfinance organizations (firms that give small loans - “without collateral or guarantee”) has been postponed by six months. In addition, banks will now be able to offer their clients more favorable rates on deposits - previously the Central Bank did not recommend exceeding the maximum rate (the average rate of the ten most profitable offers from the largest banks) by more than 2%, now you can deviate by 3.5%.

“To expand credit risk management capabilities, the Bank of Russia intends to:

— provide credit institutions with the opportunity not to worsen the assessment of the quality of debt servicing, regardless of the assessment of the borrower’s financial situation for loans restructured, for example, in the event of a change in the currency in which the loan is denominated, regardless of changes in the loan repayment period (principal and (or) interest), the interest rate;

— provide credit institutions with the opportunity to decide not to deteriorate the assessment of the borrower’s financial position for the purpose of forming reserves for losses if changes in the financial position are due to the effect of restrictive economic and (or) political measures introduced by certain foreign states (addition to the letter of the Bank of Russia dated October 21, 2014 No. 184-T);

— to increase the period during which a credit institution has the right not to increase the amount of the actually formed reserve for loans to borrowers, the financial position, and (or) the quality of debt service, and (or) the quality of collateral for loans that have deteriorated due to an emergency situation, from 1 year to 2 years.

— increase the period during which a credit institution may not create a reserve for possible losses on loans for the implementation of investment projects, while maintaining other existing minimum requirements for the amount of the reserve, established depending on the number of years, the absence of payments on investment loans, or those received in insignificant amounts;

— cancel the increased risk coefficient in relation to loans provided to leasing and factoring companies - members of the banking group, which includes the creditor bank;

— introduce a reduced risk weighting coefficient for ruble-denominated loans to Russian exporters in the presence of an EXIAR (Export Insurance Agency of Russia) insurance agreement.”

Translation: The Central Bank will not punish banks for the large number of “bad” loans they issue—that is, loans that may not be repaid. Banks will be able not to classify a loan as “bad” if: the debt began to be serviced in a different currency (for example, the loan was issued in dollars, and the bank allowed it to be converted into rubles); the debtor was subject to economic or political sanctions.

When issuing a loan, the bank is required to create a special reserve account in case the debt is not repaid. If the borrower experiences any force majeure circumstances, the bank is obliged to increase the reserve no later than in a year. Now this deferment has been increased to two years.

Banks must also maintain reserve accounts when they lend something to investment companies. Now the Central Bank is giving a deferment on the formation of such a reserve.

There is such an indicator for loans to companies - the risk coefficient: the ratio of possible losses to possible profits. The Central Bank imposes certain requirements on banks regarding the acceptable level of the sum of all risk coefficients. Now the Central Bank allows in some cases not to increase the value of this indicator. Thus, the regulator helps Russian exporters obtain ruble loans from Russian banks.

“In order to maintain the stability of the banking sector in the face of increased interest and credit risks against the backdrop of a slowdown in the Russian economy, the Bank of Russia and the Government of the Russian Federation are preparing measures to recapitalize credit institutions in 2015.”

Translation: Every bank has capital. Its size limits the maximum amount of loans that a bank can issue (this limit is in place to ensure that the banking system is stable and banks do not take on too many risks). The Central Bank and the government promised next year to help banks maintain capital at such a level that lending to companies and citizens would not stop.