The Bank of Russia wants to introduce more sensitive financial liability for banks for various violations

The Bank of Russia wants to introduce more sensitive financial liability for banks for various violations, dubious and unfair practices, as well as a high risk profile. The current approach to regulation and supervision is primarily focused on administrative influence. Now the Central Bank wants to reconfigure the assessment of both the risk level of banks and the quality of their management. However, experts and market participants warn that finding a fair balance between the severity of violations and the proportionality of punishment will not be easy.

Non-binary oversight

At a meeting with bankers organized by the Association of Russian Banks (ADB) on March 1, top managers of the Central Bank in their speeches outlined a new direction for supervisory practice. The regulator is going to improve the economic impact on banks by making the risky behavior of bankers “unprofitable”.

“The Central Bank will strive to influence the behavior of market participants not only and not so much by the threat of administrative measures, that is, the use of supervisory response measures up to the revocation of a license, but also by the use of measures of economic influence,” said First Deputy Chairman of the Bank of Russia Dmitry Tulin. “When you have dealing with bona fide market participants – and the absolute majority of them remain – then, of course, you don’t want to apply measures that lead to the closure of a business.”

Now, according to the Central Bank, the system for fulfilling requirements according to standards is “built on a binary principle”: if you comply, everything works; if you do not comply, supervisory response measures are applied. In the most severe version, they lead to exclusion from the deposit insurance system and loss of license. According to the head of the Central Bank, Elvira Nabiullina, the goal of the regulator is “to ensure that banks bear financial responsibility for the increased risk for creditors and depositors and that aggressive behavior in the market and violation of the rights and interests of consumers is unprofitable.”

The main idea is that banks with a high risk profile will have to pay more contributions to the Compulsory Deposit Insurance Fund (CDIF) of the DIA. According to data at the beginning of March 2024, the volume of the Federal Fund for Social Protection was 386 billion rubles. This is a small amount compared to the amount of insured funds, emphasized the head of the DIA Andrei Melnikov in early March. Thus, the volume of deposits subject to insurance at that time was almost 61 trillion rubles, and the amount of insurance liability was 32 trillion rubles, the agency clarified.

The current scale of contribution rates to the Federal Social Insurance Fund was introduced in 2015. Initially there were three rates – basic, additional and increased additional, but in January 2024 the additional contribution rate was abolished. What remained were basic (0.12%) and increased additional (0% until the end of the second quarter). In 2023, banks transferred 235.9 billion rubles to the DIA fund, in 2022 – 211.4 billion rubles. According to IFRS reports, Sberbank’s expenses directly related to deposit insurance in 2023 amounted to 105.1 billion rubles, VTB – 44.8 billion rubles, RSHB – almost 9.8 billion rubles, Sovcombank – 4.1 billion rubles ., MKB – 3.2 billion rubles.

Bankers are primarily interested in how rates will change. But neither the Central Bank nor the DIA have said anything definite about this yet. But it is already quite officially discussed what the size of the bets may depend on.

Zoning regulations

Among the possible mechanisms that are being discussed is linking the rate differentiation mechanism to the implementation of individual standards, the so-called zoned standards with limit and signal values, which are being developed by the Central Bank.

For example, if any mandatory standard is not currently met, the bank may be disconnected from the deposit insurance system, government programs, or lose its license. The regulator’s task is to introduce an economic incentive into the system that increases the costs of violators. It may appear in relation to concentration and advanced liquidity standards, but is unlikely to affect basic capital adequacy and liquidity standards.

The Central Bank revealed what the zoning scheme might look like in February using the example of the new short-term liquidity standard for systemically important banks (may become mandatory in 2026). For example, according to the current liquidity standard, there is no possibility of violating it; in the new one, an “orange zone” appears, if it is in which the bank will pay increased contributions to the DIA.

Another way to establish “material responsibility” is to link the contribution rate to the bank’s risk profile through a system of “supervisory ratings.” This is a new methodology for assessing the economic situation of banks, which is planned to be introduced from 2026. In the second half of 2024, the Central Bank promises to submit a consultation report on the new mechanism. A quantitative block of indicators (equivalent to a credit rating) is currently being tested, and a new approach to assessing the quality of bank management is being discussed.

The use of “old and familiar” assessments of the economic situation of banks for new regulation can create problems, says Managing Director of Expert RA Yuri Belikov: “In terms of financial indicators, they practically did not provide any significant differentiation of credit institutions. And in terms of qualitative indicators – assessments of the quality of management, internal control, AML/CFT – they had a late response to existing problems.” Such assessments, the expert emphasizes, are non-predictive.

In the new “supervisory ratings,” the DIA explained, depending on the ranking of banks by risk level, the rate of contributions to the Fund will be set. At the same time, differentiation of rates is considered as an incentive measure, for example, to lengthen liabilities. The possibility of setting contribution rates for long-term deposits lower than for short-term deposits is being discussed, the DIA confirmed.

Motivation in reserve

According to ADB Vice President Alexey Voylukov, the regulator can also apply differentiation of contributions to the Mandatory Reserve Fund (ORF, bank funds in accounts with the Central Bank). In fact, these are obligations to depositors (both individuals and legal entities), part of which banks must keep in reserve. Currently, the amount of required reserves in relation to ruble borrowing obligations is 4.5% for banks with a universal license and non-profit organizations and 1.0% for banks with a basic license; for “friendly” currencies – 6%, for “toxic” currencies – 8.5%.

Differentiation of contributions to the Federal Reserve is “in principle possible,” agrees Managing Director, Head of the ACRA Financial Institutions Ratings Group Valery Piven: “But this toolkit is more focused on managing the liquidity of the banking system, while contributions to the DIA are used to generate funds that can be used to fulfill the obligations of problem banks.”

Among other things, the Central Bank plans to tighten fines. In particular, this should help combat persistent misselling. The current amount of fines (up to 0.1% of the minimum authorized capital) is “intangible for banks,” said Elvira Nabiullina, so it could be increased to 1% of capital. In 2023, the Central Bank received 325.3 thousand complaints from consumers of financial services, of which 2.3 thousand complaints were about misselling (half as much as in 2022).

As a measure of influence on banks, the Central Bank may change mandatory standards for them, notes Roman Koenigsberg, head of the internal audit and risk management department of the auditing and consulting company FBK: “As an option, introduce surcharges to the capital buffer to make it difficult for banks with inappropriate behavior to pay dividends.”

Despite the fact that the regulator has largely cleared the banking market, unscrupulous practices still occur, experts admit. “The main thing is that the use of the new tools of the Central Bank and its scope are transparent and clear to all market participants; in this case, banks will be able to more clearly understand what they may face and for what,” emphasizes Mr. Voylukov. “There are situations in which the bank, knowing that he faces a small fine, he can commit conscious minor temporary violations. The Central Bank’s new approach will most likely lead to banks not resorting to deliberate violations.”

Efficiency of justice

Market participants are not yet ready to assess how much the regulatory update will change the structure and composition of the sector. This year, three banks have already lost their license (see Kommersant on February 22 and March 23). Currently, there are 320 banks and 37 non-bank credit organizations operating in the Russian Federation. According to the head of the board of directors of Pervouralskbank, Mikhail Bryukhanov, a “more individual and differentiated” approach of the Central Bank to punishing bankers could lead “to a reduction in the number of license revocations and increased confidence in banks.”

The most difficult task for the Central Bank will be to make material motivation at the same time fair, justified and effective. So far, experts cannot say what financial liability should be in order to influence the bank, but not destroy its business. For example, Mikhail Bryukhanov believes that a fine of up to 10% of capital will be materially tangible and effective.

However, “sensitivity to impact” is directly related to the bank’s strategy. According to Roman Koenigsberg, “banks that live one day at a time will try to avoid financial responsibility.” According to him, the most effective instrument of influence is the cessation or temporary restriction of activities, however, for banks focused on honest business, a fine or an increase in the contribution to the Deposit Insurance Fund “may be a signal of the need for speedy correction.”

“The Central Bank will discuss specific approaches and plans with the banking community,” Mr. Tulin assured. According to Mr. Voylukov, the development and implementation of a new approach may take two to three years.

Olga Sherunkova