Financial Markets: Increasing Complexity, Maintaining Stability

3–5 July 2019, ST. PETERSBURG

    Heading for Growth

    The Governor of the Bank of Russia, Elvira Nabiullina, speaking at the International Financial Congress in St. Petersburg, said that the Bank of Russia was confident that the Russian economy had potential to grow. In her view, some of the tools that the Bank of Russia can use to support economic growth in the country are introducing soft constraints on lending for mergers and acquisitions (M&A), rectifying systems that evaluate credit risks and using incentivized regulation, investing the Bank’s funds in general digital infrastructure within the financial sector, and launching a kind of ‘regulatory guillotine’ in its field of work. 

    The International Financial Congress (IFC), which is being held by the Bank of Russia and the Roscongress Foundation on 3–5 July in St. Petersburg, is Russia’s main banking and financial forum. In 2019, the Forum’s main focus is non-standard measures for financial regulation, which the Bank of Russia refers to as ‘macroprudential regulation’. Along with Elvira Nabiullina, a range of speakers appeared at the IFC’s opening plenary session, including Claudio Borio from the Bank for International Settlements (BIS) and Richard Portes from London Business School. On the eve of the Bank of Russia’s conference, they actively discussed how to create opportunities for central banks in developing countries while slowing global growth and stabilizing macro conditions in their economies. 


    In her statement, the Governor of the Bank of Russia noted that “we clearly find ourselves in a risk-free environment at the moment” but following the Government’s transition to a ‘fiscal rule’, stabilizing inflation and ‘cleaning up’ the financial market (yesterday, the Bank of Russia announced it was planning to restructure Otkritie Bank), fresh challenges are turning out to be more insurmountable than previous ones. Economic growth is sluggish, household income “is barely growing”, and “people don’t feel as if economic stability is giving them a better quality of life”. Moreover, Ms. Nabiullina identified the risks of implementing national projects aimed at raising living standards in Russia, mainly the lack of preparedness in the corporate sector to invest in those measures. “Private investment does not equate to low-interest loans from banks under state guarantees,” she insisted (although a significant proportion of state-affiliated businesses would disagree). She also noted that the Government wishes to use the Bank of Russia’s macroprudential regulatory instruments to increase corporate lending. Whereas ‘structured’ measures affect different elements of the financial sector market, macroprudential measures change the framework of the structure itself. 


    According to Ms. Nabiullina, the use of those measures is essentially “attempting to dish out cheap money to mask structural problems”. The Bank of Russia believes that macroprudential policy should not be used to that end: such measures do not increase the potential for economic growth and a transition to that kind of policy would undermine financial stability. Moreover, the Bank of Russia recalls that ‘trade wars’ (an umbrella term used by the Governor of the Bank of Russia to cover the sanctions against Russia) and the market volatility they cause are not off the agenda. 

    Under those conditions, innovation (to which the Bank of Russia refers and is attempting to rewrite its mandate in order to support growth) should be considered with the utmost caution.


    For its part, however, the Bank of Russia is ready to adopt several structural measures to increase the potential for economic growth: yesterday Ms. Nabiullina announced the main provisions of this programme, and, paradoxically, that the main medium-term measure announced by the bank is macroprudential. 


    The Bank of Russia will not extend the two-year moratorium on the launch of a new system aimed at assessing banking risks involved in lending. In particular, the bank will increase loan provisions for M&A by the end of the year. The same measure had previously been postponed upon requests made by banks. Such loans will relate to the third quality category with a calculated reserve of 21%.  Exceptions have been outlined, which will also adapt limitations according to the realities of state economics. The reserve will decrease when investing in entrepreneurial capital as part of the FTP, in strategical endeavours and where state guarantees are available. Nonetheless, limits on lending for M&A transactions is a fairly obvious response from the Bank of Russia to a proposal to limit lending to individuals for the sake of hypothetically growing corporate loans. Additionally, the Bank of Russia is generally committed to applying macroprudential measures as incentives, under one clear condition: it will not be required to treat them as a way of stimulating growth. Despite this reservation, the Bank of Russia is prepared to make big changes. Ms. Nabiullina spoke about the strong potential for green shares (subsidized by the Ministry for Industry and Trade). The Bank of Russia supports such projects which are taking place worldwide and are aimed at pursuing social as opposed to commercial aims.


    The second measure is the readiness of the Bank of Russia to treat financial markets as a part of a business limited in size (and investment in GDP growth) by state regulation. Given that it will be introduced as of 2021, the regulation of banking and financial markets will not form part of the ‘regulatory guillotine’, but the Bank of Russia itself is prepared to take steps to simplify state regulation of the sector: they have established a working group which will assess the possibility of voiding irrelevant and redundant requirements. Moreover, it is willing to go a step further. At the IFC, the possibility of transferring some of the supervisory powers in the banking sector to banking associations as part of self-regulation was discussed. 


    Furthermore, the regulator is ready to step down checks on the financial state of banks and repeal a number of standards, including standard H10.1, which has become obsolete following the introduction of the H25 standard (an accrued limit for lending for all insiders, which is also seen as a compromise considering the ever more complex economic structure and lack of stimulation of organic growth). Strengthening the Bank of Russia and digitalizing supervision will reduce the cost of state regulation for the sector.


    Lastly, the Bank’s third set of structured measures are provisionally aimed at the market. The Bank of Russia will continue developing the market’s digital infrastructure, including the marketplace, biometrics and fast payment systems.Ms. Nabiullina recognized that what is happening is not purely a market phenomenon:These projects themselves are way of transforming the market; sometimes the market benefits from it, and sometimes it doesn’t.” Nonetheless, the Bank of Russia will continue to develop this type of infrastructure. In part, this is clearly an attempt by the regulator to support a very high level of digitalization, and in part it is an antimonopoly policy. The Bank of Russia, as a non-commercial bank, prefers to be monopolistic in its sector so as to prevent the formation of monopolistic infrastructure by large state-owned banks, namely Sberbank.


    Ms. Nabiullina also suggests that creating this kind of environment will support market innovation, including Fintech. As it has done in previous years, the Bank of Russia will prepare to change the regulatory paradigm and license not so much the legal entities, but types of services. For example, during the IFC, the Governor of the Bank of Russia declared her willingness to discuss Fintech licences (following in the footsteps of Hong Kong and Switzerland, which license virtual banks and financial companies) and non-bank licences for banking operations for digital payment systems. One of the vulnerabilities of the Bank of Russia under new conditions is the high concentration of capital in the financial sector and a convergence of macroprudential policy and prudential measures for key players: supervisory actions taken against one large structure affect the market as a whole. However, this topic, which is also relevant to EU countries, was not discussed at the IFC even during subject-matter discussions. 


    At the same time, the Bank of Russia, it seems, will not work to support future GDP but will make current GDP grow even faster by using standard monetary policy. At a press conference in St. Petersburg, Ms. Nabiullina talked in sufficient detail about the intentions of the Bank of Russia in July to review the possibility of lowering the key rate not only by 0.25 percentage points (pp) but by 0.5 pp (Kommersant, 4 July). In practice, this should clearly be considered as an additional reduction in the time that the Bank of Russia will take to adopt a neutral monetary policy to mere months. If this is the case, the topic of the IFC 2019 will automatically become more relevant and macroprudential regulations will grow in importance.  

    Dmitry Butrin, St. Petersburg