A federal law providing the Bank of Russia with new prerogatives and imposing new requirements on credit institutions (the “Law”) (here in Russian) came into force, with the exception of some provisions, on 4 July 2016. The Law amends Federal Law No. 86-FZ “On the Central Bank of the Russian Federation (Bank of Russia)” dated 10 July 2002 and Federal Law No. 17-FZ “On Banks and Banking activities” dated 3 February 1996. It is aimed at strengthening the financial regulator’s control over the operations of credit institutions in the secured lending activities sector.
The Bank of Russia’s new supervisory powers
From now on, the Bank of Russia, when determining a credit institution’s amount of capital, will not only assess its assets and liabilities, but also pay attention to the adequacy of its risk reserves.
In order to assess the assets and liabilities of a credit institution, including the adequacy of its risk reserves, the Bank of Russia has the right to examine the assets taken in pledge by the credit institution to secure loans. This means the Bank of Russia can check not only the existence of the pledged assets, but also their legal status and value. In addition, it will get the opportunity to access and monitor the activities of the borrower (pledgor).
The requirements for credit institutions
Credit institutions will be obliged to:
- assist the Bank of Russia in monitoring the activities of the borrowers (pledgors) and inspecting the pledged assets. Сredit institutions will also have to reflect how such assistance will be provided in their internal documents and attend the inspections of the pledged assets at the request of the Bank of Russia; and
- set out in loan and pledge agreements provisions requiring the borrower (pledgor) to submit all the relevant documents and perform any other necessary actions that will (i) enable the Bank of Russia to monitor the activities of such borrower (pledgor) and (ii) allow the authorised representatives of the Bank of Russia to inspect the pledged assets at their place of storage (location). This requirement will come into force on 4 August 2016 for agreements concluded on or after 4 July 2016, and from 31 December 2016 for those concluded before 4 July 2016.
The adoption of this Law clearly stemmed from the need to tighten control over the activities and the financial condition of credit institutions. This is hardly surprising, especially at a time when the number of revoked banking licences is increasing in Russia and against the background of the global trend of strengthening the regulation and recovery of financial markets.
Credit institutions and their legal advisors must now, when drafting loan and pledge agreements (including templates or standard forms), take into account the above requirements, and in particular, the mandatory inclusion in such agreements of the mechanisms to provide the information necessary for the inspection of the pledged assets by the financial regulator. The credit institutions also have to reflect these novelties in their internal documents.