The Bank of Russia has changed the methodology for estimating the capital of credit institutions

On 26 May, the Bank of Russia approved the alterations to be introduced in the provision on the methodology for estimating the capital of credit institutions. In accordance with this alteration, now banks will be able to increase their fixed capital (tier 1 capital) by means of a number of subordinated loans, which must be long-term (for a period of no less than 30 years), non-cumulative (unpaid interest income on them is neither repaid nor accumulated), as well as provide opportunities for external parties to participate in covering the credit institution’s losses. In this connection, the total volume of subordinated loans with additional conditions, which can be incorporated into capital is restricted by 15% of the fixed capital size.

Thus, the RF CB, in fact, softened its requirement concerning the capital sufficiency of credit institutions. The necessity for this measure was dictated by the growing outstanding debts of banks and, consequently, by the need to create reserves to cover potential losses – which had a negative impact on their financial results and capital. In this connection, it should be understood that such measures essentially provide no solution to the problem of growing outstanding debt as such, and provide banks with no resources for finding any such solution. Rather, they are aimed at preventing any incompatibility between big bank’s reports and the regulator’s requirements, which can be fraught with negative systemic effects on the financial market.

P. V. Trunin – Head of the Department for Monetary Policy