Russian Bank Capital Support Program

Two additional provisions intended to stabilize the Russian banking sector accompanied the bank capital support program. Up to 10% of the assets of the National Wealth Fund (0.5% of GDP) could be used to finance large infrastructure projects through banks (IMF 2015). Additionally, the legislation permitted the Central Bank of Russia to inject capital into the largest state-owned bank, Sberbank, which was thus made ineligible for the bank capital support program and held approximately 30% of the system’s assets at the time. The government also replaced subordinated loans it had provided to three state-owned banks during the Global Financial Crisis with preferred shares of up to 0.4% of GDP (IMF 2016).

The Russian government implemented several temporary regulatory forbearance measures, affecting the valuation of securities and foreign exchange assets. Additionally, there were measures designed to provide flexibility for loan loss provisioning related to armed conflict and international sanctions (IMF 2016).

The lower house of the Russian Federal Assembly, the State Duma, passed Law No. 451-FZ on December 19, 2014, and the upper house, the Federation Council, approved the measure on December 25, 2014. This law allowed the Deposit Insurance Agency (DIA) to recapitalize Russian banks by transferring government bonds (OFZ) for subordinated loans and bonds (Federation Council 2014).

The DIA released annual reports that provided updates on the progress of the bank capital support program. Additionally, the regulation of the DIA required it to publicly announce on its website any transfer of government bonds within five working days. This announcement included the total par value of the transferred government bonds, the term of the subordinated debt, and the interest rate on the subordinated debt (DIA 2015).

The DIA required banks that received capital support from the DIA to submit monthly reports to the DIA on their required credit growth targets, with quarterly reports on the other conditions included in the capital support agreements (DIA 2015).

The Accounts Chamber of the Russian Federation (ACRF), an audit institution within the Russian government, released quarterly reports on the progress of the bank capital support program (ACRF 2020). The ACRF did not approve of the DIA’s handling of reports, raising concerns of inaccurate or incorrect data in their reports. In response, the DIA devised a new methodology for report preparation in December 2016 (ACRF 2017a). However, these forms were not approved by the Central Bank of Russia and the ACRF requested that the DIA implement sanctions on banks that provided inaccurate data. Altogether in 2016-17, the DIA (by its Board’s decisions) implemented financial sanctions (fines) on banks that did not comply with the conditions in the contracts for the total amount of 822.9 million RUB. The fines paid by the banks were transferred by the DIA to the federal budget (DIA 2018).

The DIA operated the bank capital support program (IMF 2016). The Board of Directors of the DIA determined eligibility of banks to participate in the program, pending approval from the government of the Russian Federation, which consists of the Prime Minister and their deputies (DIA 2015). It appears that the vast majority of decisions approved by the Board of Directors required governmental authorization. The Board of Directors is comprised of seven representatives from the federal government, five representatives of the Central Bank of Russia, and the director general of the DIA (IMF 2016).

At the time of announcement, the Russian government allocated RUB 1 trillion (1.2% of GDP) to the bank capital support program, although it would later reduce the allocation to RUB 838 billion as a result of lower capital need estimates (IMF 2015). The other RUB 162 billion went instead to nonfinancial enterprises (IMF 2016).

Eligible banks, excluding regional banks, had until June 1, 2015, to accept the capital injection offer from the DIA, and the process should have been finalized by November 1, 2015. Regional banks had until April 1, 2016, to finalize their participation in the bank capital support program (DIA 2015). Some banks received more than one capital injection throughout the existence of the program.

The funding for the bank capital support program came in the form of government bonds (OFZs) included in the 2014 federal budget (IMF 2015).

There were three main categories of banks eligible to participate in the bank capital support program:

• Banks with at least RUB 25 billion in capital (27 banks applicable, 43% of system assets)
• Banks that were directly or indirectly affected by the economic sanctions (four banks)
• main regional lenders (10 banks), which the DIA defines as having at least RUB 5 billion in capital with only the largest bank in each constituent entity of the Russian Federation included in this list (IMF 2015; DIA 2015).

Despite Sberbank being technically eligible under the first category, the bank capital support program excluded it, since it was majority-owned by the Central Bank of Russia. Partly state-owned banks could participate in the program with eight of the 27 banks in the first category falling under this classification and holding 64% of the capital in the entire category (IMF 2015).

Beyond the categorization of eligible institutions, all banks needed to be in full compliance with the prudential regulations of the Central Bank of Russia at the time of the capital injection. Furthermore, consumer loans had to be below 40% of total assets, although legislation raised this limit to 50% in July 2015 (IMF 2016).

On February 2, 2015, the Russian government approved the 27 banks in the first category for participation in the program. The government approved four banks affected by economic sanctions on May 13, 2015. Lastly, the government authorized ten regional banks to participate in the program on August 10, 2015, with RUB 8.47 billion in government bonds allocated to the regional banks (DIA 2016). In total, the DIA preliminarily designated over RUB 856 billion to the banks approved for participation. However, only 34 banks would conclude agreements with the DIA to receive capital support (DIA 2020).

The capital injection to an individual bank could not exceed 25% of the bank’s own capital as of January 1, 2015, unless otherwise established by the Board of Directors. In cases when participants of the recapitalization program belonged to the same banking group, the mother bank of the group determined the amount of funds/bonds that were provided to each, within the limits established by the government for each bank. The DIA regulated that every bank would receive the same percentage of its own capital in support, which the Board of Directors would determine (DIA 2015).

The International Monetary Fund (IMF) noted that every bank would be receiving a capital injection equal to 25% of the bank’s capital and criticized this condition as not well targeted to individual bank’s needs (IMF 2015). However, the documentation from the DIA stated that the capital support could not exceed 25% of the pre-existing capital, rather than a set 25% injection (DIA 2015).

Initially, the DIA only offered to swap OFZs for subordinated debt of the same maturity. However, most banks did not show interest in participating in the bank capital support program based on that offer (Vilenovich 2015). In response, the DIA, after the special law amendments, allowed two additional procedures for recapitalization in April 2015: exchanging OFZs for subordinated debt with a maturity of more than 50 years, eligible for extensions, and swapping OFZs for the preferred shares of banks. While these two options were more attractive to the banks, they posed additional risks to the federal budget due to irregular receipts and shortfalls in budget revenues compared to what was initially proposed (Vilenovich 2015). The vast majority of banks ended up utilizing the original capital injection design.

For partly state-owned banks and banks affected by sanctions, the DIA exchanged OFZs for preferred shares (Tier 1 capital), while the remainder of the banks swapped subordinated debt (Tier 2 capital). Over 60% of the funds in the bank capital support program went to partly state-owned banks (IMF 2016).

The interest rate on the subordinated debt exchanged for OFZs was set at one percent per year greater than the interest rate on the OFZs themselves (IMF 2016). For the banks swapping subordinated debt with a maturity of at least 50 years, the Board of Directors of the DIA would determine the interest rate on the subordinated debt within three months of the maturity of the OFZs (DIA 2015). This date has not occurred yet for any of the banks participating in the bank capital support program, so the specific process for this rate determination is unclear as of this writing.

Research into the Russian bank capital support program did not find any provisions for the allocation of losses for existing stakeholders, beyond the generally dilutive effects of the government injections.

The bank capital support program did not include any debt restructuring conditions.

A bank could not increase the compensation of its executives or raise its overall wage bill for the first three years after recapitalization. The DIA Board of Directors decided the size of the fine (DIA 2015).

Two banks exceeded the payroll restrictions and thus remitted RUB 351 million to the federal budget (ACRF 2020).

The bank capital support program imposed some conditions on recipients of OFZs. First, banks had to commit to increase the total amount of lending in select sectors by at least one percent per month in the first three years after the recapitalization. These sectors included housing, small- and medium-sized businesses, agriculture, manufacturing, construction, and others (DIA 2015). The IMF criticized this provision, stating that specific credit growth targets would increase credit risks and cause poor credit allocation (IMF 2015).

A participating bank also needed to pledge to increase its own capital by at least 50% of the capital injection over the duration of the subordinated loans. The DIA noted that this could be accomplished by issuing new shares and/or by retaining at least 75% of the bank’s profits. This did not apply to partly state-owned banks. Violations of any conditions of the program could result in an annual fine of up to 2% of the capital support (DIA 2015).

Twelve banks failed to meet the credit growth target at points during the three-year period and paid RUB 771 million in fines to the DIA as a result. Three banks violated the condition to privately raise funds and thus paid RUB 290 million in fines (ACRF 2020).

The original legislation and announcement of the bank capital support program did not indicate a set deadline or exit strategy. However, the required DIA disclosures of capital injections did report the maturities of the subordinated debt being purchased. The most recent capital injection took place in May 2017 (DIA 2018).

Research into the bank capital support program did not find any important amendments to relevant regulation.