CBR sees a great potential for banks to increase purchases of OFZ with the growing budget deficit

MOSCOW, May 26 (Reuters) – Russia’s Central Bank sees significant potential to increase banks’ purchases of OFZ and the regulator plans to evaluate the interest rate risk management practices of large banks as well as develop new approaches to liquidity risk management in the face of rising public debt, the Bank said Central to the financial stability review.

“The example of the crisis in the US shows how important it is for banks to increase the balance of assets and liabilities until maturity, apply a modern approach to the calculation of interest rate risk and liquidity risk,” reads the CBR release.

The crisis of confidence in U.S. banks began as Silicon Valley Bank shares plunged and depositors fled after the bank announced plans to raise capital on March 8 to close a gap in securities sales worth nearly $2 billion. The lender was taken over by regulators on March 10, which in turn led to a drop in shares of other regional banks. New York’s Signature crashed on March 12, and First Republic had lost more than 80% of its market value by mid-March.

The problems of US banks stemmed from the fact that rapidly rising interest rates reduced the value of lenders’ long-term assets, such as home loans and government bonds. Some banks have faced challenges with their vulnerability to the dynamics of cryptocurrencies and the tech sector.

According to the CBR, the imbalance of assets and liabilities by maturity of Russian banks remains above the pre-crisis level. The realization of the interest rate risk in the event of an increase in interest rates by 2 percentage points in rubles may lead to a decrease in the banks’ annual interest income by 4-8%, the Central Bank believes.

In Russia, the majority of state-owned OFZ belongs to the banking sector (65.6% of the volume of securities in circulation).

“After the departure of non-residents, banks increased their share in the OFZ primary market. According to the results of January-April 2023, they repurchased 58.4% of the OFZ volume placed on the primary market. Purchases were made mainly by systemically important banks.

The budget deficit of the Russian Federation in 2023, which, according to the approved plan, should amount to 2.9 trillion rubles, will lead to an increase in the volume of loans on the primary market of OFZ and an increase in the treasury bond market.

In this case, the state can rely on the banks. Systemically important creditors continue to face a shortage of highly liquid assets due to the extension in 2023 of the regulatory easing to comply with the short-term liquidity ratio (N26).

The upcoming exit from the aforementioned easing will contribute to further activation of banks’ demand for OFZ, the NBP believes.

At the beginning of May 2023, the share of OFZ in the assets of the banking sector was 8.3%, the portfolio of OFZ with a fixed coupon (OFZ-PD) was 3.8%.

“Therefore, the banking sector has significant potential for further purchases of OFZ, including OFZ-PD. At the same time, an increase in the OFZ-PD portfolio will lead to an increase in the interest rate risk of the banking book, which is why banks are recommended to take action to obtain long-term sources of financing,” said the regulator. (Elena Fabrichnaya. Edited by Oksana Kobzeva)