Financial News: Interview with Alexander Danilov by Interfax Agency

Bank regulation is the subject of intense discussions between the Central Bank and market participants. While the Bank of Russia tightens the screws to protect the system from potential shocks, its supervised entities demand greater freedom and a relaxation of control. Alexander Danilov, Director of the Department of Banking Regulation and Analyst at the Central Bank of the Russian Federation, spoke to Interfax in an interview about the search for balance in regulation, new regulations, and the reform of banking subsidiaries.

– The Central Bank of Russia has returned to the idea of introducing a foreign exchange liquidity standard due to the rise in interest rates on short-term yuan loans in March. The regulator had already discussed introducing the standard two years ago but rejected this idea. Why? And how serious are you about implementing the new standard now?

– At that moment, weighing the complexity of implementation and the potential effect, we considered it unfeasible. However, as life has shown, banks sometimes underestimate risks. In this particular case – they may underestimate their capabilities in covering currency outflows and the depth of the currency market. By and large, banks do not manage their currency positions poorly – assets and liabilities are roughly balanced by volume. But their terms do not always match (for example, assets – long-term loans, while liabilities – currency deposits that may be repaid earlier).From the point of view of liquidity – the ability at the moment to use these currency assets to return foreign currency deposits, the bank does not have it. It has to go to the market and purchase this currency somewhere. But if the market depth is not very large, firstly, it may simply not find the required volume, and secondly, these purchases can significantly influence the volatility of the exchange rate or the level of interest rates on the currency. Therefore, our task is not only to avoid situations when the bank cannot cope with currency outflow independently, but also to reduce the influence of such factors on the currency market.

That is, it is necessary to provide not only the standard itself, which will ensure the bank has an adequate amount of free foreign currency liquidity to cover outflows, but also to establish some reasonable period for restoring the standard. Otherwise, it will turn out that the standard fulfills its function – the bank will cope with the outflow – but its value will deteriorate. And if its immediate compliance is required, the bank will have to go to the market and attract foreign currency already to “treat” the standard. We will get the same volatility in exchange rates and interest rates – this could have been avoided.

A similar structure, where we allow time for the recovery of the norm, is already used in the management of open currency positions. In the regulation of OVP limits, various periods of time are set by the bank for the settlement of temporary “limit breaches” (from 5 to 25 days) depending on the reasons for their occurrence.

– So, the emergence of currency liquidity regulation – is that already a settled matter? Are you now discussing its details?

– Inside the Bank of Russia, there is an understanding that regulations need to be introduced, and its structure is being discussed.

Earlier I spoke about the essence of standards for covering stress outflows and for what purposes they are needed. But maybe we should also think about making another, already structural standard, so that currency assets and liabilities are comparable by volume. In other words, it is not good when banks fund long-term currency assets with short-term attracted funds, even when there is a “short-term” reserve of currency liquid assets. In the future, it may again turn out that the bank will need to purchase currency in a volume exceeding the market’s capacity.

– Are you expecting that this regulation will be applied to systemically important banks or the entire sector, because in fact such cases mainly occurred with large players? And how difficult will it be for banks to comply?

– We haven’t decided yet, we’ll see. We’ll set it up so that there is no problem, especially since we always give banks time for adaptation. Plus, if we provide for the so-called recovery period, that is, the possibility to gradually replenish foreign currency liquidity, this should ease the banks’ burden of meeting the requirement.

Besides technical matters, additional elements of flexibility will need to be considered – for example, so that outflows do not include cases when, under currency obligations, the bank has the opportunity, without client approval, to repay in rubles at the exchange rate rather than in foreign currency.

– In the coming year, we expect a discussion around the new methodology for identifying systemically important banks and differentiating surcharges for systemic importance. What is the purpose of this differentiation, and is the Central Bank ready to abandon this idea if banks provide convincing arguments?

– We believe that differentiation is necessary, it will be. For this, it is necessary to work out legislative changes that allow establishing differentiated surcharges, we plan to do this in 2026-2027. Then prepare changes to the normative acts of the Bank of Russia to establish such differentiated surcharges, this is planned for 2027-2028.

We will calibrate the premium level for systemic importance. Initially, we thought it would be in the range of 1% for smaller SIBs and up to 2.5% for the most systemically important ones. But we will see, as the final decision has not yet been made.

Regarding the implementation timelines. Our final step towards the target level of current Basel capital adequacy surcharges against the capital requirements standards takes place in early 2028. It seems logical to construct a gradual staircase, and the next increase – higher surcharges for systemic importance – should be implemented from 2029. We understand that a sudden implementation of the surcharge could lead to a tightening of lending capacity. We want the economy to develop so that banks can lend. Therefore, we want to make a schedule with gradual step-by-step increases.

– How will the number of systemically important banks change after the new methodology comes into force?

– I note that the new methodology for determining SZO and differentiation are parallel processes. For the first time, we plan to systematically review the list of systemically important banks according to the new methodology in the fall of 2027.

It is not excluded that the number of SZKO may expand. At the moment, theoretically, someone from the market participants could still grow. Thus, it cannot be ruled out that, in the long term, systemically significant individual marketplace banks may emerge, taking into account scale, client base, and growth rates.

– Will only two banks still qualify for the increased surcharge for SZKO?

– This depends on the calibration, on how many groups of systemic importance we make and what the surcharge amount will be for each group.

– So the number of groups – is that also still an open question?

– Yes, by the end of the year we will decide whether to discuss it with the banks. I think there will be a heated discussion there.

– The Central Bank proposes to increase the minimum capital requirements for banks in the future and even issue a consultative report. Could you tell us what new figures for banks with a universal and basic license are being discussed?

– We plan to raise the minimum capital size threefold – for banks with a universal license from 1 to 3 billion rubles, and for banks with a basic license from 0.3 to 1 billion rubles. But we will do this quite gradually according to a schedule, from the beginning of 2028 to the beginning of 2030, so that banks have time to adapt. Initially, we thought to limit the indexation to the inflation level (accumulated inflation from 2018 to 2025 is about 70%). But we realized that a more decisive step is needed. The requirements should create a safety margin so that it will not have to be indexed again in the near future.Capital is an indispensable plus for competitiveness so that the bank has the opportunity to implement modern IT solutions and develop. A significant part of banks either already meet the new requirements or will be able to reach the target values independently through profits; another part – through recapitalization by shareholders. For those who cannot, there is always the option to change the license type. We never push anyone out of the market as a result.

We are also refining the previously presented market option for the merger of banks based on the “alliance” model, where participants mutually guarantee each other, and the coordination of the activities of the merger is managed by a created management company. That is, they act as a single group that covers risks and solves problems together. In this case, the minimum capital requirements will be set for the total capital of the alliance; there will be no increase for the participant banks. Similar conditions will also be provided for participants of banking groups.That is, for a small bank belonging to a group, the requirements will not increase if the group itself meets the requirement for minimum capital at the consolidated level.

– Is there any point in refining it if no one wants to unite yet?

– There really hasn’t been any demand yet. But considering the increased requirements for the minimum capital size, interest may arise. However, again, consolidation is not a “must”, we offer different options; if you want it — use it, if you don’t want it — there are other options as well.

– The Central Bank last summer publishedconsultative reportWith the new methodology for assessing the economic condition of banks, which it uses when classifying credit organizations by risk level and determining the size of contributions to the deposit insurance fund. At what stage is the discussion and which proposals from banks are you ready to support?

– The main observations of the banks are summarized as follows.

First, some have noticed the duplication of other instruments, primarily the internal assessment of capital adequacy procedures (VPODK). To eliminate this, we plan to transfer VPODK from the qualitative block to the quantitative one, into the “Capital” section, and combine all factors affecting adequacy in one place.

Secondly, banks noted that new entities are being introduced, in particular the indicator of high-risk assets (HRA) – these are assets with increased risks, but which are not yet “caught” by the standard reserve regulation. We agree that creating new entities is inappropriate, and therefore we decided to simplify the composition of indicators, including deciding not to introduce HRA. At the same time, we will “sew in” a criterion for classifying credits as HRA into our basic regulation, thereby clarifying which loans we consider risky. We want to live in a system of coordinates where everything is clear and understandable, and there are problems or not.

Small banks also criticized us for the evaluation of franchises. If a bank is not very large, then even with good financial indicators we did not include it in the high group. Such banks have fewer opportunities to profitably attract clients, set better prices, and invest in development. As a result, such players are usually less financially stable, especially in a crisis.After discussing with the market, we will limit the impact of this factor on the final classification group: now even a weak market position will not lead to increased contributions to the deposit insurance system (DIS) if the bank is highly rated by other indicators.

There are still a number of important things that we ourselves have noticed and plan to revise, but we still need to go through internal approval. Therefore, we will announce the details in the report that we plan to publish in June.

– The concept that if a bank belongs to a group with a poor economic situation, it should pay higher contributions to the DGS, was it violated?

– The basic logic remains: the riskier the bank, the more it must pay into the deposit insurance system. If you drive a car and constantly get into accidents, accordingly, you will pay more for insurance. The insurance company calculates the policy cost based on the probability that you will get into an accident. This is fair. The same applies here. At the same time, we are trying to create an incentive to be “excellent,” allowing banks without serious shortcomings to pay less into the deposit insurance fund than they do now.

– Has anything shifted in terms of the implementation timelines?

– Nothing changes in terms of timing. For now, we expect that this year we should adopt the final version of the concept. Its discussion will be one of the topics of the Financial Congress in early July.

In 2027, we plan to prepare regulatory documents in order to implement the new methodology in 2028.

– The Central Bank planned to use the results of the assessment of the economic position (EEP) in the supervisory and regulatory processes. It was assumed that banks with a low EEP would not be able to use the stimulating regulation benefit, participate in the rehabilitation, act as an ASV agent in paying deposits, use advanced operational risk assessments, and open branches abroad. Are you still planning to apply such measures?

– We are still considering exactly which supervisory and regulatory processes absolutely need to keep the link to the OEP. But it will definitely remain in the selection of banks-sanatoriums, agents of ASV when paying deposits or when allowing the opening of branches abroad. At the same time, we will relieve the OEP of the possibility of banks applying benefits for stimulating regulation. We agreed on this with the community last year. As for operational risk, for banks that already use advanced risk approaches, there will be no changes.

– The Central Bank continues to improve the mechanism for stimulating banks to reduce concentration. The discussion has been going on for quite some time. Previously, the Central Bank already published a concept proposing the introduction of an additional fee to the deposit insurance fund for accepting higher concentration risks. What is the main difficulty in approaching this issue? Are plans emerging for the introduction of economic incentives for banks (increased contributions to the DISF) to reduce concentration?

– What has changed fundamentally – we abandoned the idea of introducing a new standard N30. We analyzed and decided that the goals can actually be achieved with the existing tools, that is, they just need to be refined.

We already have regulatory concentrations – N6 and N21. But they are now calculated using risk weights. Conditionally, if a bank issues a loan to some investment class borrower, for which the base risk weight for calculating the capital adequacy ratio is 65%, then with the same risk weight it also counts towards the concentration norm. That is, at a risk weight of 65%, the concentration limit is not 25%, but already 38% of capital. And if the borrower has a risk weight of 50%, this means that risk can be taken up to half of the capital. This is too much. I remind you, our goal is for the risks in banks not to be more than 25% of capital.Therefore, we consider the standards N6 and N21 as “nominal”: a loan was issued for 100 rubles, here are these 100 rubles with capital included, and relate it without any risk weights. In other words, with a standard of 25% and capital of 100 rubles, you can “by one hand” issue no more than 25 rubles.

At the same time, our plans to introduce an economic incentive have not changed. This will be a new contribution to the FOSV for banks that will have increased risks of concentration. We will not use the existing contribution to the FOSV for assessing the bank’s economic position, as it is calculated based on the deposit base of individuals and may be disproportionate to the risk assumed by the bank itself.

We literally recently publishedreport for discussionAbout the changes in the regulation of credit concentration risks, as well as the mechanism of operation of the economic stimulus, where banks can study our plans and further steps in more detail.

– Standard No. 30 was intended only for systemically important banks. But amendments No. 6 and No. 21 will affect all credit institutions.

– Yes, that is another reason why we decided to go the route of modifying existing regulations. In the case of introducing standard N30 for SZKO, the problem of concentration could have shifted towards large systemically important banks. We do not want that.

We are also currently discussing the possibility of canceling the concentration regulation for banking groups at the solo level, leaving it only at the group level, but a decision has not yet been made.

We plan that the new regulation on concentration risk will come into effect in 2028. An important point: this by itself will not solve the problem of increased concentration at the level of individual banks. And until January 1, 2028, some banks, most likely, will not be able to reduce concentration and comply with the regulation due to a number of reasons. And here we intend to make amendments to the law so that the Bank of Russia has the opportunity to require such banks to enter into legally binding plans to reduce concentration.In essence, supervisory measures will not be applied to banks that do not meet the requirements but comply with the plan to reduce concentration, which will reduce their administrative burden.

– Have such tools been used before in regulation or is this a new thing?

– We have tools – for example, a plan for restoring capital size, which we approve for banks “that have exceeded” the capital adequacy ratio requirements (the plan must include measures to increase the capital size and to reduce high-risk assets).

As for the plans to reduce concentration, we have already done some preliminary calculations and consider them realistic. We assess the possibility of other market participants taking on part of the risk themselves, as well as the potential of the companies themselves to attract borrowing on the market through bonds, etc.

Non-compliance with schedules will lead to additional supervisory measures, including restrictions on the growth of the loan portfolio.

– How will contributions and concentration levels be correlated?

– The more you exceed the norm, the more you pay. This will not be a mechanism of constant action – as soon as the banks reach the target concentration values, we will cancel this mechanism.

– And the maximum value of the standard N6 is limited to 25%?

– Yes, 25% will remain for banks with a universal license, and 20% for banks with a basic license, as it is now.

– You said that the Central Bank has calculations by sector. In case of the introduction of the new calculation methodology No. 6, will the sector manage?

– Most banks are managing already now. Many banks manage their risks properly, they all understand and themselves do not allow excessive concentration. The concentration problem, rather, concerns certain major participants – it is simply easier for certain companies to occupy banks that are friendly and affiliated for them. Such banks take on increased risks by lending to these companies at the expense of their own financial stability. This is incorrect, and we should correct this with our regulation.Besides, due to the high concentration we have, the development of capital markets, syndicated lending is slowing down, plus competition is distorted (when increased exposure means loans to “one’s own” at non-market rates).

It should be noted that the new concept of concentration regulation implies not only tightening of requirements, but also providing banks with a number of risk reduction mechanisms. For example, the possibility to consider the concentration on highly reliable guarantors, and not only on borrowers. In addition, we plan that already this year banks will be able to redistribute concentration using instruments such as CDS (credit default swaps) and DFI (digital financial assets).

– The Central Bank will soon have the right to establish regulations governing banks’ investments in cryptocurrency. Previously, the regulator recommended that credit institutions invest conservatively in such instruments, for example, setting a limit of no more than 1% of capital. Will this recommended limit remain in the regulation, or will you set a different threshold?

– The standard will limit risks with a threshold of 1% of the banking group’s capital. At the same time, this exposure will be fully deducted from the capital for calculating the capital adequacy standard. In other words, we are assuming that if the bank suddenly loses its investments in cryptocurrency, it will not feel a strong effect. By the way, according to Basel regulations, banks also have a 1% limit with a risk weight of 1250%, thus they account for the risk of extreme volatility. And we still need to take into account the risk of blocking crypto assets, so it should not be relaxed in this part.

Previously, we wanted to include in the limit not only the bank’s position, that is, its risk, but also the client’s position if the bank acts as a depository, due to possible legal risks associated, for example, with blocking client positions. Now, the draft law stipulates that the bank does not bear responsibility for the client’s position because it cannot manage this risk. Therefore, we excluded the client’s position from the calculation of the normatives; only the bank’s own position will be taken into account.

The bank’s position will be taken into account modulo – the maximum of the long and short positions. The long position is when the bank has invested in cryptocurrency, the short position is when it owes someone cryptocurrency. We will consider the maximum position modulo because, conditionally, if the bank’s cryptocurrency assets are blocked, but it still owes someone, netting will not work here, and the risk materializes.

It is worth noting that we still provide for a certain flexibility. For example, the bank’s positions in crypto assets that do not carry the risk of blocking (for example, exchange derivatives or instruments within local infrastructure, replicating only ownership of cryptocurrency, but with settlements in rubles) can be netted (offset) for the calculation of the limit according to certain rules. The list of instruments for netting is still being finalized.

Important point: the client position in cryptocurrency, as I have already said, we will not include in the limit, but we will consider a certain component of operational risk in it. These risks are associated with hacking and violation of information security, where the bank bears responsibility for the safety of assets. To cover these risks, we plan to apply a risk weight of 50% to the entire volume of the client position. In other words, the bank should be prepared that losses on the client position in cryptocurrency will be about 5%, and it will have to compensate for them.

Is there any statistics on the level of bank investments in crypto assets? Why 1% of the capital?

– This is determined not by statistics, but by our tolerance to such risks in the banking sector. If we potentially allocate more capital to this story for the banking sector, then we will reduce the potential for lending or expose it to risk. We have other priorities – banks must ensure financial stability and finance the development of the economy.

– The Bank of Russia has extended until the end of the first half of 2026 the recommendation to banks to restructure loans for corporate borrowers and individual entrepreneurs facing temporary difficulties. Will you clarify/extend the recommendation again, and will you clarify the planned control values that banks set for companies?

– Yes, we will extend the duration of the recommendation. Based on the discussions with the banks, we also plan to clarify a few things. For example, we will simplify the requirements for the financial sustainability recovery forecast for borrowers who are SME entities. And for borrowers with a contractual activity profile, we will establish separate indicators for the recovery of the financial position. At the same time, it must be admitted that the recommendations are not working very well yet.

– And what’s the problem?

– Some banks do not comply with paragraph 590-P of our regulation, which governs the reservation norms. It states at the level of principles that banks, when forming reserves, must assess the financial position and capabilities of borrowers. However, they do not do this, often recognizing the financial position of a loss-making company with negative cash flows as average. They refer to some prospects for restoring financial stability, future subsidies, government contracts, which are nowhere prescribed and agreed upon by no one.And if banks do not recognize the financial position of clients, then they can restructure loans and not create increased reserves simply on the basis of their motivated judgment without any business plans and schedules for compliance with planned indicators provided by the informational letter of the Bank of Russia.

If banks honestly acknowledged that the financial position of the borrower is poor, they would have to use an information letter in order not to create reserves during restructuring. But then they would need to receive a business plan and monitor that the company follows the schedule for restoring financial stability. Instead, as I have already said, some banks prefer simply to overstate the assessment of the borrower’s financial position.

– For what period do you plan to extend the validity of the information letter?

– We will most likely extend similar provisions to loans provided in the second half of 2026. But in the future, so that banks properly assess risks and supervision does not chase those who abuse, next year we will refine provision 590-P. And we will introduce the so-called barrier factors, that is, limit debt load levels. For example, if the debt/EBITDA ratio is extremely high or there is a negative cash flow, the borrower’s financial condition should be recognized as poor, and it cannot be considered good or average.It is clear that this will not work the same for all industries; somewhere there are specific characteristics and everything needs to be adjusted.

And then, after the introduction of barrier factors, we plan to embed the logic of an informational letter in 590-P so that it works not as a temporary relaxation, but as a permanent regulation. In this way, during the restructuring at banks, there will be an opportunity not to increase the reserves if the situation was initially not hopeless, and the borrower complies with the specific financial indicators of the business plan, gradually improving their position.

– The Central Bank announced a reform of banking subordinated instruments. What changes are you discussing now and in what perspective can they earn?

– We have simplified the concept compared to the initially announced plans. We plan to increase the trigger for the write-off of subordinated debts included in the first-level capital from 5.125% to 6.5% for all banks. It is important to us that this instrument starts working faster. This will allow banks to recover more quickly in conditions if something goes wrong but full stress has not yet occurred. Up to the moment of write-off, with a reduction of any of the three adequacy ratios below the recorded values of N1.1 below 7.5%, or N1.2 below 9%, or N1.0 below 11%, coupon payments will be limited.

In order for investors to be interested in investing in this instrument, we must provide in the law for a mechanism of restoration of subordination after the bank restores financial sustainability. And it is important here to maintain the balance between the interests of shareholders and investors. Specifically, until the moment of restoring subordination, there should be a ban on dividend payments, and if within three years the bank does not settle accounts with the investor, then a restriction on asset growth may be introduced. These incentives are necessary so that the bank nevertheless fulfills its obligations to the holders of subordinated debt.

We will also not demand from the subordinates, considered in the Tier 1 capital, “perpetuity.” It is enough for the term to be at least 10 years. The only thing we will control is amortization, that is, when agreeing on a new issue, we will ensure that there are no peak repayments. By peak repayment we mean a reduction in sufficiency by more than 1 percentage point in one year. That is, the risk that Basel tried to mitigate through the perpetuity of subordinates, we mitigate through the amortization schedule.

In addition, for the investor, we increase the maximum interest rate, it currently cannot exceed 15%. For subordinated with a fixed interest rate, we keep it at 15%, and for instruments with a floating rate, we propose a level of “key rate plus 10 p.p.” We believe that the risk taken by investors should be correspondingly rewarded, and the bank should have the ability to offer such a rate.

– Do I understand correctly that the new requirements for subordinates will apply to new releases? And when do you plan to implement this regulation?

– Naturally, all this will be retrospective, meaning banks will not need to change the terms of already issued subords. We have also decided not to exclude old issues from the capital until the moment of their redemption.

Since many of the innovations are tied to changes in legislation (for example, the possibility of restoring written-off subordinated loans), the new regulation may come into effect by the end of 2027. Banks, of course, would want this to happen sooner because it would facilitate capital replenishment and the application of Basel add-ons. We understand this, so we are thinking about where we can still speed things up. We are currently working on the legal framework of the “single period” concept.The idea is that we promptly introduce new parameters (triggers, limit rate, and interest stop) into constant regulation and allow banks to issue subordinated debt with the stipulation that when we complete legislative changes, primarily regarding restoration, the investor will need to be granted these new rights. We are currently exploring such a possibility.

– It is assumed that sub-orders will be restored with interest taken into account?

– No, without interest.

– What other innovations are planned in the field of subordinated instruments?

– We still have a number of innovations aimed at increasing the autonomy of banks under stress by more active use of subords, as well as increasing investment attractiveness. I will not go into details now, but we will reveal all the parameters in detail in a consultative report, which we plan to publish by the end of June.

Interfax