Elvira Nabiullina: Establishing a mega regulator for the Russian
financial sector
Speech by Ms Elvira Nabiullina, Governor of the Bank of Russia, at the Federation Council,
Moscow, 15 February 2017.
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Good afternoon, esteemed colleagues, ladies and gentlemen
Today I will speak on the progress to date as regards our efforts to establish a megaregulator
and develop the industries which fall into our remit.
Let me begin with a brief summary of the past economic background for the makings of the
megaregulator.
It would be fair to stay that three years ago all the hardships the Russian banking sector and the
overall economy were set to go through were the very last thing expected. Oil prices were high
and steady then, while the negative impact from the nascent geopolitical developments was yet
to take its toll. As the Russian economy faced the sharp decline in the price of oil in the second
half of 2014, alongside financial sanctions, the Bank of Russia focused on the need to secure
both financial and price stability, as well as financial security. The Central Bank had to take tough
steps to address the impact from the turbulence on financial institutes and their clients. With the
Bank of Russia having by then become the sole regulator of the financial market, we could
approach the overall financial sector in a holistic manner.
The switchover to a floating exchange rate regime, our moderately tight monetary policy stance
and consistent action to cleanse the market of chronically unstable or even criminal financial
institutions helped the financial system quickly adjust to the new environment and stabilise the
situation.
Between late 2014 and early 2015, at the acute stage of the crisis, key impact was expected
from our monetary policy and the programme to support a stable operation of the banking sector
and the financial market overall.
The floating ruble exchange rate the Bank of Russia implemented in late 2014, came to be seen
as an inbuilt stabiliser enabling to reduce, at the time of stress, the influence from external
shocks on the economy, while also providing an overall balancing effect on exporters' and
importers' interests.
Although the scale and duration of the oil price slump, further complicated by sanctions, were
more severe than in 2008-2009, the rate of economic decline was more than twice lower and
unemployment rose only slightly. The key rate rise to 17% at the end of 2014, with its subsequent
gradual reduction, was central to countering a surge in inflation, inevitably triggered by the oil
slump-caused drop in the ruble exchange rate.
As you are aware, inflation for 2016 was record low at 5.4%, while annualised inflation for
January slowed down to 5%. Our plans envision for inflation to reach, in late 2017 and on
schedule, our 4% target. Steadily low inflation is a major factor enabling households and
businesses to make long-term plans; it lays the groundwork for transition to an investment-type
economic development based not only on oil exports, but also on domestic investment. Low
inflation is a means of protection for our citizens against the depreciation of their incomes and
savings.
Incidentally, the rise in the key rate made bank deposits fairly attractive, so in the very challenging
environment of the year 2015 banks showed a record growth in deposits (25%). The banking
system managed to retain its resources and credibility.
At the time our actions included some nonstandard approaches. To name just a few, we
implemented some easing in the regulation of the banking sector and provided foreign currency
refinancing facilities to help companies meet their external debt liabilities when such payments
peaked, given that external financial markets were inaccessible.
Through its cleansing programme for the banking sector the Bank of Russia meant to do away
with weak and unscrupulous players, as well as to stave off the domino effect, when financial
difficulties of individual banks will trigger repercussions in the overall banking system.
The current banking system indicators are almost back to their pre-crisis readings. Banking
sector profit is rising, and so is banking capital stock; growing bad debt is no longer a risk factor.
Banks were able to build up appropriate reserves against bad loans. The rates of lending to the
economy are consistent with the overall economic trends and on course to reach 4-7% in 2017.
Although lending rates are still high, they are beginning to decline and are set to decline further as
inflation recedes.
Let me proceed to report on our efforts to build a megaregulator and the progress to date.
Our efforts were centred on the development of institutes, instruments and infrastructure of the
Russian financial market. While we remain committed to the global financial system as its
fullfledged participant, we seek to create conditions for the domestic financial market to be able to
operate regardless of external political developments.
The financial market can be viewed as a whole through the lens of a megaregulator, so that grey
zones or regulatory arbitrage can be avoided; the megaregulator concept facilitates
improvements in the quality of supervision, enabling a transition to consolidated supervision,
preventing, at the same time, problems at an early stage in financial groups and holding
companies (given that these hold a lion's share of financial system assets).
In 2013, the disbanded Federal Financial Markets Service's functions were transferred to the
Bank of Russia. We assumed responsibility for the regulation of insurance and pension markets,
professional security market participants, investment funds, actuary activities, rating agencies,
microfinance organisations, as well as for the development of financial market infrastructure and
instruments, etc. As a result, the Bank of Russia's remit extended to more than 20 thousand
supervised entities. The list was later further expanded to include pawn-shops and forex dealers.
Over these three years, the Bank of Russia has conducted policies to cleanse and enable
financial recovery of market participants; these efforts are almost complete as regards non-credit
financial institutions. The cleansing in the banking sector is however set to take a few more
years.
Beyond this agenda, the challenging geopolitical environment spells the need for the
megaregulator to provide financial security and lower the Russian financial market's reliance on
external factors. Hence the need to build a fully-fledged domestic financial market infrastructure,
especially in the sectors previously fully reliant on the global market. This is why we set up the
National Payment Card System, re-launched the rating industry, established a national
reinsurance company and advanced a SWIFT-equivalent tool for the domestic market.
The national system of payment cards currently handles all Russian domestic bank card
transactions. The scheme was put in place in spring 2014; Mir, the national payment card, has
been in circulation since late 2015. Since then, as many as 2.5 million cards have been issued,
which can be used in almost 80% of points of sale accepting banking cards. Mir is also used for
cash withdrawal (approx. 98% ATMs accept Mir) or online shopping. In the next two years Mir will
be the system to handle payments to all public sector employees, pensioners, students and
other budget payment recipients.
The State Duma is currently crafting a draft law to specify the timeline when all budget payments
will pass over to Mir. Our intention is to ensure that this transition is as trouble-free to clients as
possible and to give banks sufficient time for preparations, with a compressed time frame
though. The national system of payment cards has also covered the Republic of Crimea, with its
banking system having integrated into the Russian financial system and penetration levels
approaching Russia's average.
Furthermore, in 2016 the Central Bank established a national reinsurance company (NPK),
which is supposed to accept a wide range of risks for reinsurance including, among other things,
those related to home insurance and government contracts. NPK will also provide insurance
protection to companies under international sanctions. The creation of NPK will be instrumental
in enhancing capacities of the Russian reinsurance market, still underdeveloped, with a view to
turn around the situation where most risks are reinsured overseas.
Let me now proceed to comment on the issues of regulation and development of key financial
market sectors.
The Bank of Russia has also been actively targeting the insurance market, seeking to get rid of
weak and unscrupulous players by strengthening requirements for the sustainability of market
participants. Upon obtaining the respective mandate, the Bank of Russia launched a thorough
analysis of insurers' assets. As a result of the above measures, by 1 February, 183 insurance
companies (roughly 40% of the total insurance market) had exited the market. A big portion of
these companies did not have sufficient real assets. Formal compliance with requirements as of
a reporting date is not the only concern of ours. Any insurers should possess real assets in their
balance sheets - to be able to fulfil their obligations at any moment. We view it as a priority for
our supervisory policy. Insurance companies should be able to pay out insurance indemnities.
The Bank of Russia intends to further strengthen requirements for the quality of assets in which
insurers invest their own funds and insurance reserves. At present, we are transitioning to
riskoriented supervision in the insurance sector and introducing the institute for curatorial practice.
A reform in the actuarial industry has been conducted to enhance the quality and status of
actuarial reports used in insurance business. We want to thank you parliamentarians for passing
the respective law.
OSAGO seems to be the most challenging and also the most socially sensitive type of
insurance. Problems in the OSAGO market, where rates have remained unchanged for a
decade, have been piling up for quite a long time. In some regions, OSAGO has turned
unprofitable. The deterioration in the OSAGO market was caused by rising prices for spare parts
following the ruble appreciation. This objective economic factor raised OSAGO rates. At the
same time, the market situation was adversely influenced by non-market factors, such as the
activities of traffic lawyers which have virtually distorted the market in several regions. We
definitely regard consumers' interests as our priority. Therefore, we have applied various
measures to insurers in order to restore the accessibility of OSAGO in distressed regions, given
the overall profitability of this type of insurance. These measures include the launch of OSAGO
policy sales through a single agent and mandatory sales of electronic OSAGO policies starting
this year.
It is now time to put an end to the practice pursued by traffic lawyers who tap insurers for money.
The true aim of such lawyers is to obtain maximum penalties levied on insurers by court orders,
rather than to restore the violated rights of offended parties.
Work is now underway to prepare a bill on the priority of in-kind loss resolution. The bill is being
discussed rather thoroughly and heatedly. We believe that all this will eventually make OSAGO
less attractive for unscrupulous lawyers-intermediaries, and this is the initiative where I count on
your support.
Pension savings market
Efforts were also made to streamline and strengthen non-governmental pension funds. They had
to be turned into joint-stock companies. As a result, as many as 41 non-governmental pension
funds are currently operating in the mandatory pension insurance system (out of 89
nongovernmental pension funds which dealt with mandatory pension savings in 2014).
We introduced a system of guaranteed pension savings. It serves as reliable protection for the
interests of pension fund customers. However, the situation calls for further improvements in the
pension system and its funded component. Therefore, the Central Bank jointly with the Ministry of
Finance have put forward their concept which is currently being discussed in the government. In
our opinion, this concept enables citizens to make a new and beneficial choice, providing good
protection for their rights and making it possible to accumulate more pension funds (in addition to
the state insurance pension).
The operation of microfinance organisations is another highly sensitive social issue. Microloans
are very popular among households. Should legal lenders, capable of issuing express loans in
small amounts and for short terms, disappear, while household demand remains unchanged,
microfinance organisations may be replaced by shadow lenders. Borrowers will be left absolutely
unprotected against tough debt collectors and exaggerated interest charged on their loans. This
market remains flawed, with loud cases surfacing from time to time, when individuals become
suddenly aware that they owe microfinance organisations outrageous amounts in interest,
absolutely inconsistent with the amount of the principle.
Jointly with the parliament, we have carried out considerable work to enhance the protection for
borrowers. The Federation Council initiated this work in order to massively limit the amount of
potential debt for households and to lower lending rates.
We seek to thoroughly clean up this sector. As a result, roughly 4,000 organisations have been
struck off from registers.
Alongside the above efforts, we also initiated a programme to record microfinance organisations,
to rectify the situation where they operated as totally invisible organisations without any official
records in the register.
We sought to either include them in the register or to strike them off from the register, if required
by supervisory findings.
This brings me to the end of my speech. I would like to conclude by saying that we will continue
with our efforts to develop the megaregulator, along key functionalities of the financial market. I
refer to the document that has been drafted for the first time and formulates our strategy for three
years ahead across all areas of financial market development. We have forwarded this
document to the parliament for consideration, and we plan to continue our joint work on it.
Thank you for time.