Our progress / Hot Topics

Financial markets megaregulator

Back to Media

Central Bank`s New Role as Mega-Regulator Positive for The Financial Sector, says S&P

29.08.2013 20:07 / Interfax

The Central Bank of Russia`s new role as a "mega-regulator" overseeing commercial banks and nonbank financial institutions is likely to standardize regulation and reporting among the various entities and could be positive for ratings in the Russian financial sector in the long run, Standard & Poor`s Ratings Services believes.

But positive change brought about by the Bank of Russia’s new role may take time, and new regulations must be strictly followed, says S&P.

The Central Bank of Russia`s new role will not directly influence Standard&Poor`s Russian bank rating, or the institutional component of the Banking Industry Country Risk Assessment (BICRA).

The likely positive effect of the measure will depend on the regulator’s commitment to banking risks control, and not merely levels monitoring, as well as closing loopholes for banks and non-banks.

The agency expects non-banking oversight to tighten in the mid-term. In some Russian non-banking financial market segments, regulation is still weak, and experts consider this a negative factor that affects most non-banks in Standard&Poor`s ratings.

At the same time, the new mega-regulator is likely to focus primarily on internal issues, due to a mass of bureaucratic procedures that accompany the formation process. Also, the transitional period could be marked with much confusion and uncertainty for non-banking financial institutions, especially in the insurance sector, where the Bank of Russia becomes a third regulator in the past five years. Meanwhile, the mega-regulator has the capacity to harmonize various segments of the financial services sector. This involves regulation of currently non-regulated segments (microfinance, leasing and debt collectors), or those outside the regulators’ scope (bank insurance and factoring).

At present, insurance companies, brokers and other non-banks file reports once per quarter, with mush longer reporting periods than banks, who report their balances to the Bank of Russia on a daily basis. Besides, reporting forms for brokers and asset managers normally comply with Russian Accounting Standards (RAS) only and are not always published. The quality of RAS reporting is often lower than IFRS, especially in detailed risks disclosure, accounting for certain types of transactions, asset consolidation and valuation. Insurance companies file IFRS annual reports since 2012, however they continue to use RAS for quarterly reports and do not always publish full reports according to both standards. S&P also states that banks have a much higher level of disclosure even by RAS standards than non-banks.

According to the agency, absence of daily monitoring of non-banks creates more opportunities to violate regulation requirements, since they are adhered to only as of reposting dates, which increases the overall risk level in the financial system and creates a potential to spread the risk to other markets.

When the new regulatory system reaches full capacity, a more controlled financial market environment will be created, say the experts. Also, stronger non-banking oversight parallel to stronger banking oversight could limit loopholes for banks. Experts say, however, that the risk of new regulation being applied randomly or deliberately remains. In BICRA, analysts still rate the institutional system as exposed to ‘very high risk’, and Russia’s banking regulation and oversight quality as ‘weak’ and unlikely to change in the next two years. Consequently, the agency sees the institutional system of Russian insurance as high-risk and regulation as weak. However, successful change in banking/non-banking regulation could increase institutional system transparency in the future.

Russia’s cross-risk level (exposure of banks to non-bank related risks and exposure of non-banks to bank system-related risks) is seen by experts as moderately high. Data on cross-holding and cross-risk exposure in financial services is often fragmented and insufficiently transparent. “We think that loans to leasing companies account for over 5% of Russian banks’ combined corporate loan portfolio. Pension funds account for some 3% of corporate bank assets, insurance companies add another 1.5%, a relatively small percentage. At the same time, risks related to banking sector dependency are much higher for insurance companies and pension funds, since banks are their main destination for deposits and investment”, says the report.

Financial markets megaregulatorProject Group №1