Recommendations

of the XVIth International Banking Congress (IBC-2007) Banks: capitalization, soundness, competitiveness

SAINT-PETERSBURG June 6-9, 2007

Since IBC-2006, Russian banking sector development has shown strong positive tendencies. Growth rates of the major indexes were the highest in development history and the indexes have increased in relation to GDP. The importance of the banking sector for the national economy is growing and investors and creditors trust in banks is rising.

IPO’s of the largest Russian banks were very important for the banking sphere and economy. As a result the banking sector base has increased by almost 440 billion roubles, almost 160 thousand individuals became bank shareholders, and Russian and foreign investors actively participated in share placement. Nevertheless, further growth of Russian banking sector capitalization is a rather important issue.

The simultaneous growth of banking business and its complication, the extension of banking products and offered services, including in consumer credit, are accompanied by an accumulation of risks. The priority task is to strengthen the stability of credit institutions, banking groups and the banking sector by perfecting risk management systems and internal control, development of corporative management and transparency. Additional requirements are presented to the quality of banking activity regulation and the banking supervision system.

The Russian banking services market is developing in conditions of heightened competition. Competitive struggle will grow, gradual expansion of foreign capital participation in Russian banking sector, growing interest in Russia by the largest transnational financial corporations is becoming more and more significant. Competitive struggle stimulates general improvement in the quality of banking services and implementation of modern banking technologies. Simultaneously banks should pay more attention to competitiveness.

Discussions held at the Congress have resulted in the following recommendations.

To the Legislative Bodies of the Russian Federation, Government of the Russian Federation, Executive Bodies with participation of the Bank of Russia:

1. In order to further strengthen the national banking system, to increase the level of bank capitalization and competitiveness it is necessary to make active efforts to make alterations to current legislation and in preparation of the draft law, is stipulated:

1.1. In the sphere of capital growth, strengthening of banks economic power

– granting banks the right to attract deposits from private individuals from the date of its registration if the amount of authorized capital of the registered bank is not lower than 100 million euro in its rouble equivalent. Cancellation of the two year trial period for functioning banks if the amount of its own means (capital) is not lower than 100 million euro in its rouble equivalent;

– simplification of procedures of reorganizing credit institutions, with simultaneous increase of their transparency and maintenance of appropriate protection of creditors interests of reorganized credit institutions;

– Perfection of procedures of placing securities by banks accounting for investors interests by preserving control mechanisms over the quality of investment capital;

1.2. In the sphere of banking activity development

– Providing the terms for unification and development of a system for registration of property and property rights;

– Forming of legal conditions for more complex attraction by credit institutions of federal post organizations for carrying out separate banking operation functions;

– legislative regulation of consumer crediting, regulating all essential aspects of interrelations;

– creation of legal conditions of the development of the educational credits system, increase availability of educational credits for citizens of the Russian Federation;

1.3. In the sphere of implementing approaches recognised by international practice of risk management, banking regulation and supervision

– Creation of legal conditions for complex implementation in the Russian Federation of Regulations of Basel Committee on banking supervision “Basic principles of effective banking supervision” and “the International convergence of capital measurement and standards of capital: new approaches “ (Basel II);

– perfection of legal approaches to risk evaluation, including issues of credit risk concentration;

– perfection of legal conditions for carrying out consolidated supervision and risk management on a consolidated base including opportunities of exchange of confidential information within the framework of banking groups and between banking supervision bodies;

–establishment of definition criteria for real owners of credit institutions and disclosure of information regarding them;

– concrete definition of qualifying requirements to credit institutions officials and members of Board of directors (supervisory council) of credit institutions, entitle the Bank of Russia to define criteria of business reputation evaluation;

– establishment of requirement criteria to all affiliated persons of economic societies to provide information on their activity and establish the responsibility of affiliated persons for non granting of that information;

– strengthening the role and increase the responsibility of Board of directors (supervisory council) of credit institutions;

– creation of a mechanism for realization of assets of liquidated credit institutions, increase transparency of liquidating procedures, perfection of procedures of challenging doubtful transactions, giving the right to the Deposit Insurance Agency to challenge actions of debtors of a credit institution;

1.4. In the sphere of financial market development

– maintenance of legal defence of future transactions (derivative financial tools);

– perfection of regulation of procedures of securitization of financial assets;

– maintenance of legislative conditions of creation and order of trust assets in the General funds of banking management;

1.5. In the sphere of refinancing system perfection

–Allotting the Deposit Insurance Agency the function of organization public tenders on realization of objects taking as collateral (assets) under existing loans of the Bank of Russia, not circulating in the Russian Federation on the organized market (bills, rights of demand under credit contracts), accepted as collateral for given credits.

2. In order to provide further development of the deposit insurance system, including definition of terms and the limiting amount of deposit compensation, and also rates of insurance payments and mechanisms of their deductions to make changes into the current legislation, to qualify:

– mechanisms providing implementation of payments to depositors, functions and authorities of Deposit Insurance Agency;

– causes for implementing a ban on attracting deposits from private individuals by a bank– participant of insurance system.

1 In order to create more favorable terms for credit institutions to carry out the legislation on counteracting fraudulent gains and financing of terrorism to expedite work on bringing changes concerning authorities of banks to cancel contracts of a bank account unilaterally.

2 In order to reduce banks administrative costs, take the decision to release them of control over fulfillment of rules on cash operations by organizations.

5. To continue working on the approach of Russian rules of book keeping to IFRS.

To the Bank of Russia:

6. to develop regulatory acts directed at:

6.1. implementation of international approaches of evaluating capital sufficiency of credit institutions determined within the framework of the agreement “International convergence of measurement of the capital and standards of the capital: new approaches” (Basel II), regarding Pillar 1 “Minimal requirements to the capital”.

To speed up the work being carried out with participation of the banking community regarding Pillar 2 (“Supervisory Review Process”) and Pillar 3 («Market discipline») on carrying out regulatory acts projects. To provide for the realization of proportionality and harmonies principles in Pillar 2 and 3 of Basel II.

6.2. implementation into supervising practice of specified approaches to evaluation of financial stability of credit institutions providing united evaluation of bank activity within the framework of supervision and evaluation of conformity of banks to the requirements to enter the deposit insurance system.

6.3. optimization of rules and procedures used for forming authorized capital of credit institutions, including requirements that provide liberalization on payment of authorized capital at primary public assets offering of a credit institution on the open market;

1 creation of a united mechanism for refinancing (crediting) of credit institutions taken as a pledge the property of the formed “uniform maintenance pool”.

2 In order to optimize the structure, volumes and terms of all sort of reporting that granting by banks to develop the regulatory acts, stipulate:

7.1. reflection in the reporting of the character and real risk level accepted by credit institutions for opportunity to use that information for risk management.

7.2. Differentiation of volumes and periodicity of granting reporting by credit institutions to the Bank of Russia based on estimation of the economic position of the credit institution given by the Bank of Russia.

1 implementation of united formats of reporting information for credit institutions (the project on creating a United informational system of support of the activity of the Bank of Russia on regulation and developing of the banking sector).

2 together with other regulation and control bodies to consider the possibility of providing state organizations and departments with necessary information on the activity of credit institutions on the basis of agreements on information interaction with the Bank of Russia in order to reduce informational flows presented by credit institutions to various state organizations, excepting duplicating indexes.

3 To develop the regulatory act of the Bank of Russia which establishes differentiated order for bank supervision, including the question of differentiation of reporting orders according to evaluation of their economic situation.

4 To continue work on consolidated supervision development, including transboundary, also analysis and estimation of risks accepted by banking/consolidated groups and banking holdings on consolidated base.

5 in order to improve transboundary banking supervision to expand interaction with supervising bodies of foreign countries, also on the base of concluded agreements on cooperation in supervision sphere.

6 To develop interaction with audit organizations connected with credit institutions activities and banking/consolidated groups taking into account international recommendations.

7 To continue work on the development of approaches to evaluation of concentration of credit risks of operations and transactions of credit institutions with contractors (borrowers) connected to them, groups of interconnected contractors, and also according to economic sectors and territorial cut. To study approaches to risk supervision of operations and transactions inside a banking group (holding).

8 To continue work directed at increasing the quality of credit institutions capital and barring fictitious capital in the banking sector.

9 To check how banks follow the requirements to inform borrowers on the amount of the effective interest rate.

10 To continue carrying out complex estimation of financial stability of the banking sector on the basis of regular monitoring of basic banking risks, calculation and analysis of financial stability parameters recommended by IMF, stress-testing methods.

11 To continue work on development of the existing system of monitoring for enterprises and use the received information in an effort to manage banking risks and banking supervision.

12 To continue carrying out work on the Real Time Gross Settlements (RTGS) system for fixed-dated payments (“БЭСП system”- interbank electronic urgent payments of the Bank of Russia).

13 To continue the publications by the Bank of Russia of information regarding the banking sector, banking supervision, also on the Bank of Russia’s web site. To consider the issue of further development of transparency of the Bank of Russia activities, on measures to increase the financial literacy of the population, opening a separate unit on the Bank of Russia’s web site intended for non professional users of different ages.

To credit institutions and their associations:

1 To continue work on capitalization increase, also due to IPO among general investors, and the population. To provide high quality capital.

2 To continue further development of risk management systems in view of international practice, to estimate losses adequately, including potential, considering the structure and risk level, and also the perspective condition of the market environment, using for these purposes modern methods of risks estimation, including stress-testing.

3 To take measures on developing work directed at formation of databases necessary for risk estimation using mathematical statistics and the probability theory.

4 To pay special attention to risk management issues concerning fast-growing new segments of banking services and financial markets, also in consumer crediting. Banking associations should consider the issue of the advisability of development of a typical contract of consumer credit.

5 To provide complex approaches to risk management, taking into account their interrelation and interference.

6 To credit institutions being head institutions of banking groups, head organizations (managing companies) of bank holdings to improve procedures of risk management and capital sufficiency, based on up-to-date approaches to risk management, also reflected in recommendations of Basel Committee on banking supervision.

7 To strengthen the attention paid to accounting and reporting reliability issues including consolidated. To increase operational transparency through structural enlargement and efficiency of information published by credit institutions on their operations (on their own web sites, and also on the web site of the Bank of Russia).

8 To continue development of corporate ethics standards, quality standards of banking activity and control mechanisms over their observance, paying special attention to quality of developed standards, to contribute to their voluntary implementation into banking practice, simultaneously not allowing growth of unjustified overloading of banks.

28. To put into practice development of measures and actions, which provide continuity of banking activity in unforeseen situations. To base present work on expert estimations and self

estimations of risk level, corporate management, risk management, internal control and informational security.

9 To participate in programs for increasing the financial literacy of the population.