Recommendations

of the XV^th International Banking Congress (IBC-2006) Basel recommendations: approaches and implementation

SAINT-PETERSBURG June 7-10, 2006

The participants of the Congress have noted the positive development of the basic parameters of the bank sector. Interaction between bank sector and economy continue to expand. Consumer crediting is continuing to develop intensively. The efficiency of banking activity increases. Credit institutions are still the main financial intermediaries and they are also very attractive for investment. The value of foreign capital increases at the Russian bank sector. That is important for banking business culture and market competition.

Congress participants gave the positive estimation of formation of the Russian deposit insurance system. Banks have improved their managing procedure and internal control, made the property structure transparent by entering the deposit insurance system. As the result, banks involved to the deposit insurance system became more effective and reliable. That has positively reflected to financial soundness of the bank sector.

At the same time, participants of the Congress noted that the dynamic development of the bank sector is provided with accumulated risks. That’s why it is necessary to pay special attention to the questions of financial soundness of credit institutions, quality of corporate governance, further perfection of risk management and internal control systems, competitiveness, increasing the capital quality and the quality of accounting and reporting, veritable and adequately reflecting of accepted risks.

The solution of above-mentioned questions within the framework of realization the tasks according to the Strategy of development of bank sector of the Russian Federation up to 2008 would define substantially the efficiency of banking business, its stability and its role in economy that was noted by the participants of the Congress. The development of essential risk-oriented supervision, consecutive implementation into Russian practice the recommendations of Basel Committee on banking supervision, including the main principles of effective banking supervision and Basel-II will be the most important direction.

Discussions held at the Congress have resulted in the following recommendations.

Government of the Russian Federation, RF Legislative and Executive Bodies, Bank of Russia:

to accept additional measures in order to accelerate the implementation of changes into legislation, stipulated by the Strategy of development of bank sector of the Russian Federation, also to solve urgent legislative questions that were noted by P. Medvedev, First Vice-Chairman of Committee on credit institutions and financial markets, State Duma of the Russian Federation.

To bring into line the authorities of Bank of Russia on bank risk management, on estimation the activity of credit institutions, including quality of risk management with recommendations of Basel Committee on banking supervision on weak banks (2002).

• In order to carry out the procedure of supervision according to the component 2 ("Organization of the supervisory process") and to realize the component 3 ("Market discipline") of Basel-II to bring changes into current legislation of the Russian Federation regarding:

o granting the authorities to Bank of Russia to establish the differentiated standards on capital adequacy assessment, based on estimation of structure and risk level, the quality of risk management and internal control;

o specifying the authorities of Bank of Russia to establish the requirements for credit institutions on public disclose of actual information, specified by the component 3 of Basel-II ("Market discipline"), also on character of operations of

credit institutions, structure of property, capital, acceptable risks and capital adequacy assessment to their covering;

o granting to Bank of Russia the authority to demand to credit institutions to work out the internal procedure on acceptable risks management and disclosing information;

o granting to banks – members of bank groups and Bank of Russia an opportunity to sent to head banks and to home supervisory institutions the necessity information for efficiently risks management and banking supervision on consolidated base, including the questions of observance of the legislation on oppose legalization (laundering) of fraudulent gains and terrorism financing.

To bring necessity changes into current legislation in order to expand the opportunities of credit institutions in banking assets securitization, to create the mechanism of banking supervision for those transactions and to estimate acceptable risks.

To bring changes into legislation that set criteria on subordinated loans according to international practice.

To accelerate the development of Federal law draft on amendments in Federal legislation «On changes into Federal legislation «On banks and banking activity» and «On the Central Bank of the Russian Federation (Bank of Russia)» in order to improve legal conditions for consolidated risk management.

In order to improve the legal base on internal audit and internal control to make essential changes in corresponding legislative acts (Civil Code, Federal laws "On stock companies," "On limited liability companies", "On banks and banking activity", etc.).

To carry out approaches to internal audit and qualified requirements to internal auditors based on international experience in order to increase the quality of internal audit.

To consider an opportunity legislatively to settle on enrollment of auditorial working period for affirming the certificates of competence of the auditors for those who work in external and internal audit.

To ask the Federal Service of State Statistic and the Federal Service on financial markets to carry out necessary methodology and statistic work in order to have indexes of financial stability recommended by the IMF.

To recommend to the State Duma of Federal Assembly to accelerate to carrying out amendments on banks authorities to cancel banking account contracts unilaterally into Federal law "On oppose legalization (laundering) of fraudulent gains and terrorism financing" in order to improve legal regulation of internal control on oppose legalization (laundering) of fraudulent gains and terrorism financing.

To continue work with the Council on International Accounting Standards (IAS) for obtaining of certificated translation into Russian language of current IAS with all changes, comments for standards, their reissue, and also to providing the easy approach to those materials in order of normative base unification.

To carry out the recommendations for obligatory inclusion into training programs for certificated accountants and auditors the profound study of IAS.

To implement into training programs of higher educational institutions on economic faculties studying of IAS.

To Bank of Russia

To concentrate activity on current banking supervision on further risk-oriented approaches development, including operational, reputation and legal risks in order to develop essential content of supervision and better providing of supervision on all essential risks based on the best international practices.

• To carry out with the participation of banking community approaches for realization of Basel-II recommendations regarding First ("Capital adequacy assessment"), Second

("Organization of the supervisory process") and Third ("Market discipline") Components and publish them for discussion up to the end of 2006.

To perfect the methods of estimation the financial stability of credit institutions, taking into account international practice and approaches specified in the Federal law "On deposit insurance system for physical persons in the Russian Federation."

To carry out approaches for implementation of differentiated supervising on banks, according to the tasks of risk-oriented supervision and to decrease unnecessary administrative liabilities of banks.

To continue work of improving the capital quality of credit institutions.

To continue carrying out of complex estimation of financial stability of bank sector, including stress-testing methods with publishing results. To inform credit institutions about the best international practice of stress-testing methods.

To add a system for monitoring the bank sector financial soundness by regular monitoring of the main bank risks, calculation and analysis indexes of financial stability of bank sector recommended by IMF.

To continue work on developing financial soundness monitoring system of enterprises, in order to have more precisely risks estimating of credit institutions.

To provide measures on implementation supervision on consolidated base also consolidated reporting and risks analysis of bank groups and bank holdings on consolidated base.

To carry out and to offer for discussion up-to-date prudential reporting according to the EU/ТАCIS project "Banking supervision and reporting".

To continue the work to perfect the normative base on provisioning for eventual losses by credit institutions, also on specification of approaches to portfolio reservation, by the estimation of credit risk, pay attention to information that is in credit history of debtors, which should describe the timeliness of repaying earlier liabilities and loan obligations.

To continue the work in order to detail the approaches of estimation credit risk concentration accepted by credit institutions on operations and transactions with affiliated counterparts, groups of affiliated counterparts, also on economy sectors and according to territorial cut. To verify the approaches of estimation credit risk concentration on operations and transactions in bank groups (holding).

To prepare the recommendations on estimation and analysis of liquidity condition for credit institutions based on recommendations of the Basel Committee on banking supervision on managing risk of liquidity losses, normative acts of foreign bodies of banking supervision.

• To work out recommendations to use by credit institutions:

- Outsourcing opportunities;

- To carry out actions in case of other circumstances, to provide risks management actions using by credit institutions Internet-banking technologies;

- To carry out self estimation of management and risk and business reputation lose;

- To perfect the method of estimation the quality of risk management systems and internal control in credit institutions and in bank groups.

To carry out work on improving system of macro-prudential indexes of financial stability of bank sector, published by Bank of Russia, based on international approaches and methodology.

To continue publishing of «Review of the bank sector of the Russian Federation» monthly, also publishing the list of banks which disclosure the information on their activity on the website of Bank of Russia in Internet.

To increase interaction between supervisors in countries of origin and host countries of credit institutions having branches on the territory of foreign states, on the base on agreement with supervisory authorities.

To work together with auditors institutions on financial stability questions of credit institutions according with international recommendations.

To lead work on perfection of approaches to estimate internal control in credit institutions.

To carry out measures on bank sector transition of accounting work to international standards and to implement financial reporting according to IAS in credit institutions and Bank of Russia.

To continue training of Bank of Russia experts on theoretical bases and practical knowledge of IAS, paying special attention on the necessity to use international standards in financial reporting.

To start development on the base of Component 3 of Basel-II approaches to disclosure quantitative and qualitative information (including the structure and capital adequacy assessment, and acceptable risk characteristics), duration of disclosure and procedure of internal control according to issue.

To credit institutions and their associations

To continue work on increasing capitalization of banks and quality of capital of credit institutions.

To develop risk management systems, use methods of stress-testing according to risks structure and market environment.

To pay special attention to risk management issues. To provide additional measures to fulfill the recommendations of Federal Antimonopoly Service and Bank of Russia on disclosure information by consumer crediting.

To provide risk management on consolidated base by credit institutions, which are the head in bank groups and holdings.

To redouble attention on accounting and reporting reliability issues, especially consolidated, equivalent reflection of banks’ activities that have tendencies of rapid development (consumer and mortgage crediting, etc.)

To continue the elaboration of ethic standards and to create control mechanisms for their observance developing and implement them into practice.

To expand the publishing information on credit institutions’ activity on their own websites and on website of Bank of Russia in Internet, in order to increase the transparency of activities.

To carry out and to implement into practice national quality standards of banking activity which should based on unite of best domestic and foreign experience in technology and the organization of banking business according to the recommendations of the Basel Committee on banking supervision and the requirements of current legislation of the Russian Federation.

To implement into practice the approaches to estimation and the control over risks which are outside of Component 1 of Basel-II, exactly: liquidity losses risk, percentage risk on tools that are not connected with trade portfolio. Those approaches are better to use by unite of best domestic and foreign experience, recommendations of Basel Committee on banking supervision.

To estimate the opportunity of implementation into dairy practice of estimating and accepting risks of up-to-date methods, as example, mathematic and statistic.

To continue work on creation necessary databases to estimate risks using up-to-date approaches.

To take part in discussion of draft normative acts of Bank of Russia on banking regulation and supervision.

To carry out work on using the processing approaches in organizing activity and begin to develop suitable standards.

To continue work on self-estimation of corporate governance, risk management and internal control.

To continue cooperation with Bank of Russia on studying, generalizing and implementation of internal audit and control best practice.

To continue work on increasing the quality of financial reporting presenting, according to

the current IAS requirements. To carry out on regular base further training of experts involving into financial reporting forming to take into consideration last changes of IAS standards.