In 2013, the Russian Central Bank (CBR) introduced the Basel III principles, governing the capital adequacy calculations of Russian banks. The principles were aimed at improving the financial standing of Russian lending institutions, and bringing Russian banking regulation closer to international standards. However, the events that have taken place over the past year, such as the imposition of EU and US sanctions and the downgrading of Russia’s sovereign credit rating, have, if not closed international capital markets completely for Russian banks, made access to these markets extremely difficult. In particular, this is true for banking institutions attempting to raise subordinated funding for their regulatory capital. With more and more Russian banks facing the risk of having a low capital adequacy ratio, it has been actively debated in the market whether Russia’s existing Basel III regulations should be amended to provide more flexibility to the banks in order to allow them to fund their regulatory capital.

As a result, the following legislative changes have been recently made to that effect.

New sources of funding of subordinated debt

New regulations have opened new sources of funding capital by Russian banks through subordinated instruments. Firstly, subordinated loans may now be received (and repaid) not only with cash but also with Russian federal government bonds, subject to the approval of the CBR. Secondly, non-state pension funds are now allowed to invest savings into Russian banks’ subordinated debt (for the purposes of Tier 2 capital of such banks) provided that the relevant Russian bank has a credit rating not more than two levels lower than Russia’s sovereign credit rating. Given the fact that these amendments were actively lobbied by the Russian banking community, some appetite toward the subordinated bonds or loans from Russian non-state pension funds should indeed be expected.

Jul-Sep 2015 Issue

Morgan Lewis