Russian banks to become safer following Basel III implementation
The Central Bank of Russia (CB) has prepared a pleasant New Year's surprise for Russian banks: Basel III, the set of world standards which tightens capital requirements, will be introduced starting 1 January 2014 instead of 1 October of this year as originally planned.
As Central Bank chief Elvira Nabiullina announced, the regulating institution intends to synchronize the introduction of the Basel III requirements with the EU and USA.
The Russian regulator’s gifts do not end here. Under Nabiullina’s leadership, the CB has decided to partially ease the requirements for Russian banks; requirements for common equity will be set at the level of 5%, capital assets at 5.5% (with an increase to 6% beginning 1 January 2015), and aggregate capital at 10%. At any rate, these requirements will be stricter than the Western ones which provide for the adequacy of common equity at the level of 4.5%.
Thus, Russian bankers can breathe a sigh of relief: they have three more months to bring capital in line with the new requirements. In the spring, several bankers had spoken out against Basel III’s arrival to Russia because they were concerned its rules would adversely affect creditization of the economy. So the regulator promised to analyze Russian banks’ preparedness for Basel III and consider a possible postponement.
Banks (even those not spooked by Basel III) welcomed the news from the CB with restrained optimism.
"Delaying Basel’s implementation for one quarter, by itself, does not, of course, fundamentally alter the situation. It only gives banks a little more time to strengthen sufficient capital ratio indicators through the issuance of subordinated instruments and the capitalization of current profit. The lowering of the minimum capital adequacy threshold from 7.5% to 5.5% is much more important. This gives banks considerably more room for managing capital structure," said Mikhail Nikitin, a credit analyst at VTB Capital.
In his opinion, transition to the new rules is not an insurmountable obstacle for most Russian banks.
"In contrast to the banking systems in Europe and the USA, asset structure in the banking sector remains comparatively basic, without the critical dependence of bank capital on hybrid instruments. And, on the other hand, the balance sheet structures are from the financial derivative market. Another aspect is that in Russia the Basel principles are to be implemented as a complete transition to the IFRS without passing through the intermediary stage (Basel II), which implies more complex risk-management procedures in comparison with those used in Russian banks," said the expert.
However, according to many analysts, Russian banks are already fully prepared for innovation. In addition, some experts believe it would have been sensible to stick to the tougher regulations.
In the opinion of Svetlana Pavlova, assistant vice-president and analyst at Moody’s, shifting the dates of Basel III’s implementation in Russia and rejecting the stricter requirements for capital have a negative character to them. According to an analysis conducted by Moody’s, Russian financial institutions are ready for the implementation of the new rules. Even if the earlier, stricter plan had been implemented, only three banks from the top twenty would have been incapable of fully complying.
Now all the largest banks are in accordance with the new version of Basel III. If one of the smaller banks cannot comply with the new regulations, they now have more time to make adjustments. In comparison, in mid-2012 Europe not all banks were prepared for the implementation of Basel III and it is no coincidence that in the majority of countries it is being introduced in several stages.
"The banks were generally ready for the tighter requirements on capital assets (7.5%) that were originally planned. If this had been done, the Russian banking system would become more stable," points out the expert. But thanks to the economic slowdown and lobbying by the banks, the CB decided to impose more lenient requirements on capital.
"In general, capitalization is higher in our banks than in European ones. And this is correct: considering the higher volatility of the Russian economy and tempo of growth of the banking sector, our banks need to be stronger to match the level of risk," said Ms. Pavlova.
On the question of whether creditization of the economy will undergo serious harm as a result of the new rules, the opinions of Basel III’s opponents and those of experts differ to a degree.
"It is clear that no financial institution wants stricter regulation of the financial system. Nevertheless, the banks’ concerns over lending levels suffering as a result of Basel III’s implementation are slightly exaggerated. Regarding consumer lending, it is quite overheated as it is. And the demand for corporate credit has decreased this year," said Ms. Pavlova.