Financial System: Sustainability for Growth A roundtable on Overhauling Banking Supervision: First Results 7 June 2018

The Bank of Russia has taken a number of steps to stabilize the banking sector NOT EXHAUSTIVE Adopted systemic measures to identify banks with poor financial health and reduce banks’ involvement in dubious transactions Introduced regulations for bank groups and holding companies Increased risk ratios for FX loans Announced the first application of a new financial recovery process for banks involving their capital increase by the Bank of Russia through the Banking Sector Consolidation Fund Increased risk ratios for unsecured consumer loans 2013 2014 2015 2016 2017 2018 Introduced a number of requirements under Basel III, including a capital assessment framework1 Prepared guidelines to evaluate internal capital adequacy assessment processes (ICAAP, Basel II) Began the transition from regional to centralized oversight of lending organizations Issued the first license to apply the IRB approach2 (Basel II) Wider use of informed judgement when carrying out supervisory activities (in identifying parties related to a bank) Developed of a supervision framework based on commensurate regulation: Introduced two types of banking licenses (universal and basic) with differentiated capital requirements 1 Capital adequacy ratio (N1) replaced with three new ratios 2 An approach to credit risk assessment based on internal ratings SOURCE: Bank of Russia; press reports

The applied measures have improved the situation in the banking market The banking market’s cleansing from unviable credit institutions has not only enabled sustainable players to consolidate their positions and grow assets but has also increased the overall transparency of the banking market, including through reducing the proportion of captive banks The reduced profitability of the banking sector has been influenced by a slowdown in the Russian economy and particularly by the gradual transition of banks to less risky behavior in response to the Bank of Russia’s consistent efforts to rehabilitate the banking sector Combined assets of the banking sector, RUB trillion Return on capital, % xx Active credit institutions 923 534 +50,5% -7,1 pp 86,4 15,2 57,4 8,1 2013 20181 2013 20181 Proportion of captive banks’ assets in the combined assets of the banking sector, % Return on assets, % Captive banks excluding banks under resolution 19,2 1,9 16,6 -2,6 pp -1,0 pp 0,9 9,3 4,4 2013 2018 2013 20181 1 As at the last date available 1 May 2018 SOURCE: Bank of Russia

A survey by the Bank of Russia on the level of satisfaction among credit institutions The Bank of Russia surveyed 47 credit institutions, assessing the level of interaction with the banking supervisor. The average score result indicates that credit institutions are generally satisfied with the level of interaction, but see some opportunities for further improvements 1. Understanding the goals of supervision, average score (1 – completely disagree, 3 – completely agree) The bank’s management understands the goals and objectives of the banking supervisor 2,9 The bank’s management understands key risks identified by the banking supervisor 2,9 The bank’s management understands which actions are expected from the bank to mitigate identified key risks 2,9 The bank’s management understands the division of responsibilities for supervision and control over financial market players among the various functions of the Bank of Russia 2,6 Each supervisory function coordinates its engagements with the bank 2,5 2. Interaction with the supervisor’s employees, average score (1 – completely disagree, 3 – completely agree) The banking supervisor’s employees have a good understanding of the bank’s current business model and market niche 2,8 The banking supervisor’s employees have a good understanding of the bank’s growth strategy 2,8 The bank’s management is satisfied with its interaction with the banking supervisor’s employees 2,8 The bank’s management can promptly obtain explanations on banking supervision requirements on the bank 2,6 The banking supervisor’s employees adequately explain the purpose of information requests made to the bank 2,4 Reasonable deadlines are typically set to prepare requested information 2,0 Ø 2,6 SOURCE: Bank of Russia

The banking supervisor is currently focusing on increasing the stability of the banking sector Qualitative analysis of business models used by credit institutions and strategic risk analysis Commensurate regulation and control over capital increase Analysis of the Internal Capital Adequacy Assessment Process (ICAAP) Detailed assets assessment, including collateral quality and property value Stress testing used during the supervision process to assess the financial stability of credit institutions and viability of financial recovery plans Assessment of business continuity plans for credit institutions and IT systems (with potential inclusion in the ICAAP assessment criteria) SOURCE: Bank of Russia

We are proposing a number of topics related to the further improvement of banking supervision in Russia Discussion topics Regulation changes in banking supervision. Competition and stable development in the banking market The evolution of supervision at the Bank of Russia. Banks’ perspective Informed judgement and advisory supervision Stress testing and an optimal format of engagement Stability assessment approaches for different categories of banks Disclosure of material measures