Russian banks to adopt stricter reserve rules than West

In an announcement earlier today, the head of Russia's Central Bank, Elvira Nabiullina, stated that Russia's banks will be forced to comply with the new Basel III requirements starting on January 1, 2014. Basel III is the newest in a series of financial controls designed to strengthen the balance sheets of banks, in order to hopefully prevent any serious or systemic financial crises arising from a lack of an adequate reserve ratio. (For more detail on the Basel III rules themselves, see this downloadable report from KPMG from 2011, and for more recent news visit this section of the WSJ website).

While this many in America feel the new reserve requirements of Basel III are too stringent, and will harm not the U.S. economy, in particular the financial and housing sectors, in Russia the Basel III rules will actually be more severe than in the West. Ms. Nabiullina announced that the new Central Bank requirements for common equity will be 5 percent, capital assets at 5.5 percent (with an increase to 6 percent beginning January 1, 2015), and aggregate capital at 10 percent, according to an article from Russia Beyond the Headlines (RBTH). RBTH noted that "these requirements will be stricter than the Western ones, which provide for the adequacy of common equity at the level of 4.5 percent."

Basel III to be implemented in Russia - and then some. Image http://goldenageofgaia.com/wp-content/uploads/2013/06/basel-III.jpg

One analyst at VTB Bank, one of the largest banks in Russia, doesn't think that the Russian banking system will have much trouble meeting the tougher rules--mainly because the financial system in Russia is very different, in general, than in Europe or the United States,and credit rules are already tighter. Asset structure in Russian banks is still relatively basic and static, and there is a less favorable attitude towards highly leveraged bank balance sheets. Thus, the medicine of Basel III will be somewhat easier for Russian banks to swallow than their Western counterparts. In combination with the monetary policy of the Russian (and Ukrainian) central bank, and the general aversion to inflation, banks' more rigid credit policies are seen by some as limiting the potential growth of the Russian economy. At the moment, though, the priority throughout Europe, the US, and Russia seems to be stability rather than growth or profits.

However, it is important to note that the new effective date of January 1, 2014 for the Basel III rules is later than the original date, set in October of 2013. Svetlana Pavlova, assistant vice president and analyst at Moody’s, thinks that shifting the dates of Basel III’s implementation in Russia bodes ill for the country's financial sector. Also, the lowering of the capital assets level from the original 7.5% to the new 5.5%, while still strict, is seen by some as a matter of concern.

On the whole, the announcement about the Basel III “In general, capitalization is higher in our banks than in European ones. And this is correct: Considering the higher volatility of the Russian economy and tempo of growth of the banking sector, our banks need to be stronger to match the level of risk,” said Pavlova.

Basel III: rebuilding the capital of the global financial system. Image http://www.eamcap.com/wp-content/uploads/2010/09/Basel-III-capital.jpg

For more on this story, read the full article from RBTH here: http://rbth.ru/business/2013/07/22/banks_to_adopt_basel_iii_standards_in_2014_28277.html