Nuriya Kapralou

The rapid pace of digitalisation is disrupting traditional banking operations in Russia, encouraging incumbents to look to new business models.

The boundaries between the banking and retail industries are gradually eroding, as customers seek an easy single-window access to a wide range of financial and non-financial services. Like incumbent banks around the world, Russian banks are facing increased competition not only among themselves and challenger banks, such as Tinkoff, but also from domestic technology giants, such as e-commerce platform Yandex, internet company (which rebranded as VK in October) and mobile network operator Mobile TeleSystems.

While the onset of the pandemic has certainly intensified competition in the banking sector, the large Russian banks had already begun to respond to the changing competitive landscape by moving into non-core activities a few years ago. The domestic regulatory framework has allowed this transition as there were no regulatory limits on the volume of non-core assets that banks can hold.

State-controlled Sberbank, the largest Russian bank and the backbone of the domestic banking sector, was at the forefront of this transformation and completed its rebranding strategy in 2020. It changed its name to Sber and officially turned from a financial institution into IT ecosystem with banking at its core.

Although non-financial business accounted for only 1% of total operating income in 2020, the bank’s strategy envisions that this share will rise to 20–30% by 2030. Along with traditional banking products, Sber offers e-commerce, logistics, entertainment, food delivery, cloud products and other services. VTB, the second-largest Russian bank, is also actively building its own ecosystem.

Causes for concern

The Central Bank of Russia (CBR) is concerned that the new business model diverts banks’ resources away from the primary function of financial intermediation and carries higher risks of regulatory arbitrage. It is also cautious of the effect that quickly evolving financial ecosystems can have on financial stability, competition and consumer choice. The regulator has outlined significant risks within ecosystems themselves, such as operational risk, concentration risk, counterparty risk and liquidity risk, among others.

After three years of warning that regulatory oversight will be toughened, the CBR released a public consultation report in June 2021. The report outlines the proposed risk-weighted approach to capital requirements applied to banks’ holdings of non-core assets. Importantly, these requirements will apply to all non-core assets, even those not included in banks’ financial ecosystems, but, for instance, acquired as collateral.

As of June 2021, Russian banks had Rbs2.4tn ($310bn) worth of non-core banking assets on their balance sheets. These include shares of non-financial organisations, properties, debt-for-equity deals and venture investments, among other things. Equity coverage of these investments has remained low, at 15%, despite the higher risk profile.

In the consultation report, CBR proposes to set a limit on non-core holdings at 30% of a bank’s capital. Full capital deduction will be required if the limit is exceeded. The new regulations will take around two years to finalise and will be phased in over three to five years. The idea is to discourage banks from holding disproportionately large volumes of fixed assets and speed up divestment of non-core assets, such as investments into tech start-ups.

Sale of profitable investments would allow banks to channel capital into new ventures, thus, improving financial intermediation, instead of keeping investment on their balance sheets and expanding their own ecosystems. Effectively, the divestment of non-profitable investments aims to reduce balance sheet risk exposure.

Finding the balance

At the same time, the regulator needs to be flexible in regulating financial ecosystems. The CBR acknowledges that financial innovation helps banks improve product offering and credit assessment. Such innovation also promotes nationwide penetration of financial services. Banks need to expand their customer base by targeting clients in new segments, particularly millennials and Generation Z, as well as access clients in remote parts of Russia where bank branches are scarce.

Therefore, the proposed 30% of capital limit could be changed following public consultations. Definitions, limits and risk weightings are also likely to be fine-tuned to avoid excessive capital burden on banks that carry high volume of fixed assets, such as regional banks, and to allow sufficient time in case of credit restructuring, if non-core assets are used as collateral.

The new regulation is an important step towards proactive prudential regulation in a fast-changing world of financial innovation in Russia. It is hoped that it will help level the playing field between ecosystems maintained by tech companies and those centred around banking operations. Funding for the former is obtained in the open market, while the latter can use cheaper retail deposit funds guaranteed by the state.

In an interview to Russian newspaper Kommersant, CBR’s first deputy governor, Olga Skorobogatova, stated that the central bank welcomes competition among ecosystems. She added: “There should be at least three to five ecosystems and they should be open, preventing market monopolisation.”

Nuriya Kapralou is an independent economic research consultant.


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