Abstract
In this paper, the author examines the efficiency of risk weight add-ons introduced by the Bank of Russia depending on borrowers’ debt burden in terms of discouraging high-risk unsecured rouble consumer lending and the effect of these add-ons on banks’ capital adequacy. The analysis is based on open bank reporting data for the period from October 2019 through August 2020. We show that in this time frame, most banks increased their capital. At the same time, the results obtained do not enable us to confirm the hypothesis that this measure has a pronounced effect on the reduction of the risk profile of consumer loan portfolios. We demonstrate that one of the factors that influenced the efficiency of measures introduced by the regulator is the substantially higher profitability of retail lending as compared to corporate lending.
Highlights
This decision, made amid accelerated growth in unsecured consumer lending, pursued two goals (Bank of Russia, 2019a): 1) ‘To discourage the issue of unsecured consumer loans to borrowers whose payment-to-income ratio (PTI) is already high’ by reducing the return on equity; 2) ‘To promote an increase in banks’ capital cushion against losses’ in the event of the materialisation of external or internal risks that may lead to a decrease in household income and a deterioration in the quality of loans
We examine how efficient the measures for introducing PTI were in terms of the Bank of Russia achieving the second of the declared goals, namely, increasing banks’ capital cushion against losses
Since the main purpose of this paper is to study the efficiency of measures for discouraging the issuance of unsecured consumer loans to borrowers with a high september 2021 debt burden indicator value, the description of the method used should begin by defining the level of PTI that is considered high in this paper
Summary
Effective 1 October 2019, within the scope of macroprudential regulation of the unsecured consumer lending segment, the Bank of Russia has introduced risk weight add-ons depending on the values of the borrower’s payment-to-income ratio (PTI; calculated as the ratio of the borrower’s average monthly payments on all credit facilities and loans, including newly issued ones, to his or her average monthly income) and the total cost of loan (TCL). The bank has a significant capital reserve that is substantially higher than the minimum permissible level, and the decision to reduce the riskiness of assets based only on new regulatory requirements seems illogical from the management’s perspective In this case, the agenda will more likely include the question of adjusting the bank’s existing business model towards accepting more risk to use underutilised capital. The econometric analysis conducted on a sample of 57 countries did not enable the authors to identify ‘statistically or economically significant evidence’ of any impact on the housing lending market or the housing market of measures intended to regulate loan offerings by increasing bank costs, including such sectoral measures as risk weight add-ons According to their assessment, in terms of curbing lending, measures limiting the demand for loans on the part of borrowers, such as maximum possible PTI values, are effective.
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