Major vulnerability factors of the Banking sector and Russian economy

1. Lessons learned from the crisis: the CBR perspectiveM.A. Bezdudny,Head of Banking Sector Analysis and Systemic Stability Monitoring DivisionJune 2010

2. Major Risks Major vulnerability factors of the Banking sector and Russian economy • Macroeconomic factors: • Poor diversification of economy; • High dependence of the budget and corporate financeson energy export; • High dependence of financial marketon 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 System • Main 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

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. Development of the banking sector Public confidence in the banking sector

7. Development of the banking sector Overdue loans

8. Development of the banking sector Loan growth rate and overdue loans dynamic (corporate portfolio)

9. Development of the banking sector Loan growth rate and overdue loans dynamic (retail portfolio)

10. Return on assets and equity,% Development of the banking sector

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 lawadopted, 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 preconditionof these measures is the transfer of ownership to new investors and/or DIA - as of 01.05.10 18 banks undergoinginsolvency prevention measures (their share in the bankassets 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 isnow, 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 rubles • Rosselhozbank- 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

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 oncredit 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 fromthe Bank of Russia on their compliance with the Bank of Russia’s recommendations regarding foreign assets and on-balance positions in foreign currency

16. Lessons of the crisis 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.

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). • 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

19. International cooperating BCBS Working Group • 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.

20. Thank you for your attention!