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Exclusive: Russia's finance ministry seeks delay of Basel III reform - letter

MOSCOW (Reuters) - Russian Finance Minister Anton Siluanov has asked the central bank to postpone reforms requiring banks to increase capital buffers under the “Basel III” international financial rules, according to a letter seen by Reuters.

FILE PHOTO: People walk past the Central Bank headquarters in Moscow, Russia February 11, 2019. REUTERS/Maxim Shemetov

The request for the delay focuses on disagreement about how the banks’ risks are assessed, with the central bank saying it will do in-house assessment and the finance ministry arguing it should be based on ratings by domestic agencies.

Siluanov’s request, which had not been previously reported, comes at a time of broader tension between the Russian government and central bank over the banking sector and tools for aiding economic growth.

The central bank’s priority is stability of the financial system, but ministers are worried that economic growth - and households’ real disposable incomes - is stagnating, hitting the Russian leadership’s ratings.

Some ministers have been pressing the central bank to change the way it supervises banks to encourage more lending which will in turn contribute to growth.

The move to increase banks’ capital buffers - part of the Basel III rules developed after the financial crisis of 2008-09 - is likely to have the effect of holding down lending, the chief executive of Russia’s second bank has said.

In the letter dated July 17, Siluanov wrote to central bank governor Elvira Nabiullina saying the introduction of the higher capital buffers in line with the Basel III changes should be tied to the introduction of domestic ratings for the banks.

“We have in mind a postponement of the increase in additions to the requirements of the banks’ capital adequacy,” Siluanov wrote.

Under the central bank’s proposals, banks are already increasing capital buffers as part of the Basel III process and should fully comply during the next couple of years.

No government officials have said how long it would take before domestic ratings can be used as the basis for Basel III changes.

A Finance Ministry source, speaking on condition of anonymity because he was not allowed to discuss non-public correspondence, confirmed the authenticity of the letter.


In an emailed response to Reuters, the central bank said preliminary data shows that its risk assessment would allow the freeing up of banking capital across the system and “give additional opportunities for lending to the real economy sector... in the nearest future.”

“At the same time, the central bank continues work to create conditions for national rating agencies’ ratings usage in the banking supervision in the future,” the central bank said.

Officially, the Finance Ministry declined comment on the letter.

Reuters has not been able to establish which of the rival methods of assessing risk would result in banks having to increase their capital buffers more.

However, Russia’s domestic ratings, whose active development started only a couple of years ago, lack deep statistics on defaults and cover a limited number of companies, said Ekaterina Trofimova, a partner at Deloitte CIS and former head of Russian ratings agency ACRA.

“In these conditions, it’s only possible to apply a combination of the two methods, with a multi-year transition period to the approach of using ratings,” Trofimova said.

In his letter to Nabiullina, Siluanov argued that using rating agencies would produce a better outcome.

He said that under the Basel III changes proposed by the central bank, banks may try to mislead the regulator on their asset quality, seeking to reduce the amount by which they are forced to increase their capital buffers.


Siluanov also said the requirement being planned by the central bank under the Basel III reforms for a borrower to have publicly traded instruments was unacceptable, as the three banking groups the central bank had to rescue back in 2017 were on paper meeting that requirement.

“Implementation of the method announced (by the central bank) ... may lead to the accumulation of risks to financial stability and in the end to the direct losses for society’s prosperity,” Siluanov wrote.

The central bank and some parts of the government are already at odds over economic growth, as the central bank is targeting inflation and opposing the finance ministry’s idea to start spending a rainy-day fund.

Since Basel III calls for setting aside more funds to form the enlarged capital, the banks have repeatedly asked the central bank to postpone the switch to the new rules.

Andrey Kostin, the powerful CEO of state-owned VTB VTBR.MM, has called for domestic ratings to be used when evaluating a borrower's risk, saying they more fairly represent the reality.

For VTB alone, Basel III means increase of the capital by 450 billion roubles. The bank has already partially beefed up its capital and was allowed by the Finance Ministry to cut dividends on last year’s profits so it could afford to comply with the central bank’s switch.

Reporting by Tatiana Voronova and Darya Korsunskaya; Writing by Katya Golubkova; Editing by Christian Lowe and Andrew Cawthorne