IFC Russian Bank Survey 2009 ENG

Russian Banks
Respond
to the Financial Crisis
A Survey of Risk Management Practices
IFC Russia Banking Advisory Project
Moscow 2009
Dr. Judit Burucs, Project Manager
ul. B. Molchanovka, 36/1
Moscow, Russia
Tel (+7 495) 411-75-55
Fax (+7 495) 411-75-56
E-mail: JBurucs@ifc.org
www.ifc.org/rbap
Russian Banks Respond
Moscow 2009
2 2008/2009 A Survey of Risk Management Practices
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2008/2009 A Survey of Risk Management Practices 3
Acknowledgements
The IFC Banking Advisory Project would like to thank the 27 Russian banks who participated
in the survey for their time and honesty in participating in this survey. Their input has
helped give policymakers, bankers, and other stakeholders have a better understanding of
risk management practices in Russian banks and will help shape policy in the years to come.
Likewise, the Finance Academy of the Russian Federation, the Russian Association of Regional
Banks and the North-West Association of Banks provided invaluable input. Contributors to
the report include:
• Yulia Afrakova, Assistant, IFC Russia Banking Advisory Project
• Ekaterina Arsenyeva, Investment Officer, IFC Global Financial Markets
• Denis Bondarenko, Banking Advisor, IFC Russia Banking Advisory Project
• Judit Burucs, Project Manager, IFC Russia Banking Advisory Project
• Sarah Cruikshank Ockman, Consultant, IFC Advisory Services in Europe and
Central Asia
• Alexandra Dzeboeva, Investment Analyst, IFC Global Financial Markets
• Alexei Lunin, Investment Officer, IFC Global Financial Markets
• Patrick Luternauer, Senor Operation Manager, IFC Advisory Services in Europe and
Central Asia
• Natalia Ponomareva, Banking Advisor, IFC Russia Banking Advisory Project
• Svetlana Rumyantseva, Assoc. Investment Officer, IFC Global Financial Markets
• Inessa Tolokonnikova, Portfolio Head, IFC Global Financial Markets
• Kristina Turilova, Deputy Program Manager, IFC Russia Cleaner Production Program
About IFC
IFC, a member of the World Bank Group, creates opportunity for people to escape poverty and
improve their lives. We foster sustainable economic growth in developing countries by supporting
private sector development, mobilizing private capital, and providing advisory and risk mitigation
services to businesses and governments. Our new investments totaled $16.2 billion in fiscal 2008,
a 34 percent increase over the previous year. For more information, visit www.ifc.org.
About the Project

The Russia Banking Advisory Project targets midsize, predominantly regional Russian-
owned banks. The project mainly focuses on banks that are known to IFC, however, the
project is open for cooperation with other banks that meet pre-defined selection criteria. The
project aims to assist these banks to strengthen their internal control and risk management
systems, and to improve their capacity in formulating coherent business strategies with sound
underlying capital management. The second objective of the project focuses on raising public
awareness of risk management systems and capital management planning. A series of public
seminars and information dissemination leverages the resources of the project for educating
the banking sector in the regions of Russia. For more information, visit www.ifc.org/rbap
About our Donor Partners

The Ministry of Foreign Affairs of Finland has since the early 1990's promoted economic
and social development in Eastern Europe and North West Russia through the Finnish
Neighboring Area funding mechanism. This has been done in close cooperation with other
Finnish government departments, non-governmental organizations, private industry, and
educational institutions. Key values pursued by Finland in its neighboring area cooperation
are respect for democracy, human rights and the rule of law. The purpose is to enhance
relations between neighbors, and to promote regional stability and balanced economic and
social development. Special emphasis is placed on the environment, agriculture and forestry,
social welfare and health, the judiciary, energy, transport, education and nuclear safety. For
more information, visit http://formin.finland.fi.
The Agency for International Business and Cooperation is part of the Dutch Ministry
of Economic Affairs. Its mission is to promote and encourage international business and
international cooperation. As a government agency and a partner to private and public sector
organizations, it aims to help them achieve success in their international operations. For more
information, please visit www.evd.nl.
Table of Contents
Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Key Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
1.1 Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
1.2 Survey Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
1.3 Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
1.4 Survey Format . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2. Liquidity Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.1 Liquidity Risk Management Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.2 Liquidity Risk Identification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.3 Liquidity Risk Management Tools . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
2.4 Measuring Liquidity Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2.5 Response to the Liquidity Crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2.6 Liquidity Risk Regulation Follow-Up . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
3. Interest Rate Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
3.1 Interest Rate Risk Management Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
3.2 Elements of Interest Rate Risk Management . . . . . . . . . . . . . . . . . . . . . . . . . . 16
3.3 Interest Rate Risk Identification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
3.4 Interest Rate Risk Management Tools . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
3.5 Measuring Interest Rate Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
3.6 Interest Rate Risk Regulation Follow-Up . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
4. Credit Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
4.1 Credit Risk Management Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
4.2 Internal Regulations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
4.3 Credit Risk Management Tools . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
4.4 Scoring/Rating Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
4.5 Credit Risk Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
5. Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
5.1 Market Risk Management Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
5.2 Market Risk Management Tools . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
5.3 Internal Models Descriptive Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
5.4 Market Risk Regulation Follow-Up . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
6. Operational Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28
6.1 Operational Risk Management Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
6.2 Operational Risk Identification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
6.3 Operational Risk Management Tools. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
6.4 Operational Risk Mitigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
6.5 Operational Risk Regulation Follow-Up . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
7. Risk Management Impact. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31
8. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32
9. Annex . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33
Executive Summary
Russian banks have neither lent to the U.S. subprime market nor traded in derivatives of these
loans, but the global financial crisis has spread to the region, rocking the confidence in these
banks as inter-bank lending has come to a standstill.
Russian banks were not fully prepared for this external crisis, and 25 have already gone bankrupt
or been rescued by the state.
The deepening crisis calls for improved risk management practices worldwide, and Russia is no
exception. Since many of these banks are small – in 2009, only 50 banks out of a total of 1090
have balance sheets that exceed $2 billion – and smaller banks typically have less developed bank
practices than large ones, risk management is a developing discipline.
In November 2008, the IFC Russia Banking Advisory Project decided to conduct a quantitative
survey in order to ascertain whether Russian banks are adhering to international best practices in
risk management; how midsize banks in particular are coping with the crisis; and what products,
interventions, and regulations could improve the risk management infrastructure from the banks’
perspective. Questionnaires from 27 pre-selected regional and non-regional banks were collected
from December 2008 to February 2009.
Key Findings
1 In small and midsize banks, risk governance and organizational

structure conform to best practices on paper but not in
practice.
Based on the Basel principles, the Board of Directors of a bank should approve strategies and
policies with respect to risk management and ensure that senior management takes the steps
necessary to monitor and control these risks consistent with approved strategies and policies.
In Russia, the Board of Directors participates in risk management in 70 percent of small and
midsize banks. About 40 percent of smaller banks have Risk and Audit Committees, while Asset
and Liability Committees (ALCOs) exist in 70 percent of these banks. Some banks that have
established a Risk and Audit Committee do not have ALCOs. In comparison, Credit Committees
exist in almost every bank.
The Institute of International Finance (IIF) recommends that each bank ensures that its Chief
Risk Officer (CRO) can influence key decision makers within the firm, with the mandate to
ascertain that the firm’s overall risk level is consistent with its risk appetite, to provide a thoughtful,
integrated view of overall risks, and to support senior management by identifying emerging risks.
A Risk Management unit exists in almost every bank, but its power is weak in most of Russia’s
smaller banks because it tends to focus only on credit risk management or reporting to the
Central Bank of Russia (CBR).
Treasury takes the lead in managing liquidity, interest rates, and market risks. Typically it combines
front office activity and risk management in contradiction with best practices. Mainly this is
explained by the fact that Russian banks still lack the necessary skills, experience, and resources
relating to certain core aspects of bank governance and management, in particular when applying
state-of-the-art risk management techniques.
2 Thanks to the Central Bank of Russia, every bank has internal

regulations for each type of risk, but banks do not always
recognize the necessity for going beyond these requirements or
using advanced risk management methodologies.
Russian midsize financial institutions seem to be satisfied with the performance of their risk
management systems as long as they meet the basic CBR requirements in the short term. The
monitoring and reporting system of midsize banks are not very well developed because the
banks have no IT systems that support and enhance risk management. Typically these banks
cannot afford advanced IT systems.
3 The crisis has highlighted an urgent need for improved

enterprise-wide risk management procedures.
IIF strongly encourages banks to develop a robust risk culture that is incorporated in every
aspect of the bank’s operations and policies and covering all areas and activities. Accountability
for risk management should be a priority for the whole institution. Most midsize banks trust
the CBR and want to meet this challenge.
Large banks in Russia reported their willingness to improve their risk management systems,
especially in IT and methodology, but half of the smaller banks in Russia still do not see the
need for these systems.
4 Russian banks want more guidelines and funds from

regulators.
The vast majority of banks would welcome bank guarantees and funding opportunities from
regulators, especially long-term funding. Some small and midsize banks in particular would also
like to see more guidelines, credit rating models, and informational resources from regulators.
Some banks made suggestions to regulators in response to the crisis: they included listing swap
opportunities, introducing repos with foreign currency denominated assets, more proactive
regulation of financial market liquidity, and irrevocable deposits. Clearly, Russian banks would
prefer to see their regulators as a resource rather than as inspectors.
Conclusion
At the time of this survey, Russian banks had only just begun to react to the crisis, mainly
by curtailing credits and increasing interest rates to attract new depositors. What is apparent
from the survey findings is that most of the respondents are not forward looking or thinking
long-term with regard to risk management; many respondents did not even answer survey
questions that forced them to think about their future plans. Perhaps most disturbing, given
the likely consolidation in the sector and their recent rapid growth, midsize banks seem the
least interested in improving their risk management tool sets. While this segment is clearly
the future of the Russian banking sector, many will certainly fail without clear guidance and
targeted investments in their people and skills. IT systems also must be bolstered to support
the flexible reporting required to assess risks on a daily and even hourly basis. Russian banks
understand that risk management is essential to prevent losses, but this is a long way from
establishing a true commitment to a strong risk management culture.
1. Introduction
1.1 Overview
After 10 years of accelerated growth the Russian banking sector has been seriously
impacted by the global financial crisis. Russian banks have neither lent to the U.S. subprime
market nor taken on derivatives of these loans, but they were hit hard when the inter-bank
lending market slowed to a standstill and confidence disappeared from the global banking
system.
At the end of 2007 Russia had 1,136 banks, but since mid-2008 25 banks have gone bankrupt
or have been rescued by the state. The credit crisis has forced banks worldwide to take a critical
look at how they manage risk, and this has exposed significant weaknesses in risk management
across the financial services industry. The Russian banking system is dominated by five state-
owned banks which together hold about 46 percent of assets. The largest, Sberbank, still
maintains about a 50 percent share of retail deposits in the country. The other banks are small:
only 50 Russian banks have balance sheets that exceed $2 billion.
1.2 Survey Objectives

In December 2008 the IFC Russia Banking Advisory Project launched a survey on risk
management practices in Russian banks with the aim to identify areas for improvement in
practice as well as in regulations.
The objectives were to understand:
• What internationally recognized and applicable risk management best practices are
midsize Russian banks implementing in their day-to-day activities?
• How midsize banks want to develop their risk management systems?
• Which types of additional products, activities, measures, and regulations are missing?
1.3 Methodology
The survey team set out in November 2008 to
examine risk management practices and diagnose
the strengths and weaknesses of Russian banks in
dealing with the crisis.
Chart 1.3.1 Survey sample by asset size Written responses from 27 Russian banks were
collected from December 2008 to February 2009.
Respondents were domestically-owned private
banks. All banks set up by foreign owners or those
26% 26% linked to the government were eliminated from
Small banks
consideration.
Midsize banks
Despite the small number of banks participating
Large banks and their small share in terms of total assets in the
Russian banking sector (7 percent at the end of
2008), we consider the sample representative.
48% To achieve a balanced sample, banks of different
asset sizes were included in the survey. The sample
consisted of 26 percent large banks (assets of over

Chart 1.3.2 Survey sample by asset size
$3 billion), 26 percent small banks (assets of less
than $300 million), and 48 percent midsize banks
(assets between $300 million and $3 billion).
Moscow
In order to take into consideration regional 19%
26% Far East
peculiarities, we surveyed banks from different
regions of Russia and saw no strong correlations 4%
Northwest
between the responses and bank location. 7%
7% Siberia
All large banks and most midsize banks in the
South
sample have been rated. Of the non-rated banks,
23 percent were midsize banks, as were 100 percent 37% Volga
of the small banks (See Chart 1.3.3). The sample
structure by rating confirms no great dominance
of any grade of banks.
Chart 1.3.3 Survey sample by rating
Most of the respondents were heads of their
bank’s risk management unit (60 percent). In other
cases, answers were collected from chief executives
Large
(15 percent), heads of strategy and planning (15
percent), or internal control (11 percent), who
combine risk management with other control
activities. Rated
Medium
The survey asked 25 questions covering Non Rated
organizational framework, policy and procedures

in general and with respect to each of the following
main types of risk: liquidity, interest rate, credit,
Small
market, and operational.
0% 20% 40% 60% 80% 100%
Chart 1.3.4 Survey sample by rating grade
15%
BB and above
37% 7%
B+
B
19%
Non rated
22%
1.4 Survey Format

The survey report is organized as follows: each major type of risk is examined in greater detail,
with findings and analysis presented for each question posed to the responding banks. Chapter
headings include Liquidity Risk, Interest Rate Risk, Credit Risk, Market Risk, Operational
Risk, and Risk Management Impact. Each chapter on the major risks discusses the framework
and organization of risk management functions in the banks.
2. Liquidity Risk
As the ongoing global financial crisis has shown, how banks manage their liquidity has a
major impact on all aspects of their operations and reverberates throughout a country’s
economy. Only with adequate liquidity can banks compensate for expected and unexpected
balance sheet fluctuations and provide funds for growth. Russian banks, in particular the
larger ones, have a firm grasp on who should be managing liquidity risk and are using stress
testing and other important tools to manage this risk. However, they still lack confidence
when it comes to identifying the primary sources of liquidity risks. In response to the
liquidity crisis, Russian banks have decreased credit disbursements, increased interest rates
on deposits, and turned to their contingency plans. They now seek long-term funding
and informational resources from regulators but do not believe that more regulation and
inspections are the keys to riding out the crisis.
2.1 Liquidity Risk Management Framework

• Banks mostly follow best practices in managing liquidity risk, but the roles of
ALCOs should be strengthened in midsize banks. According to international best
practices, liquidity risk should be managed by a bank’s Asset and Liability Committee
(ALCO), which is responsible for establishing, documenting, and enforcing all policies
that involve asset and liability management, including liquidity risk. The Treasury, in
turn, is responsible for implementing these policies. Large Russian banks responding
to the survey confirmed that this is also the practice in their organizations, with 100
percent responding that ALCOs and the
Treasury play the largest role in their liquidity
risk management structure. The Board of
Directors and top management also play Chart 2.1 Which Departments Take Part in Managing Liquidity Risk?
important roles.
100%
• In midsize banks, risk management is
less systemic. Only 54 percent of these 80%
banks said that their ALCOs manage liquidity
60%
risk, suggesting that either these banks do
not have ALCOs at all or that the ALCOs 40%
are not fulfilling their obligatory tasks in
managing liquidity risk. Management plays 20%
a large role in midsize banks, but this may 0%

be a risk considering all the other duties that
Business
Board of
Directors
Management
ARCO
ALCO
Credit
Committee
Management
Treasury
Finance
Units
Risk
management must shoulder. The same goes

for the business units, where the necessary
knowledge and skills for liquidity risk are as
likely there as not. Encouragingly, almost all Large banks Midsize banks Small banks
small banks (86 percent) stated that ALCOs
play an important role in managing risk for
them.
Chart 2.2.1 What are the Main Sources of Liquidity (Up to 1 year)? 2.2 Liquidity Risk
0% 20% 40% 60% 80% 100% Identification
Interbank market dependency • Banks view deposit withdrawals as their
main liquidity risk for both over and under
Large deposits dependency one year. Although banks were not asked
about deposit withdrawal risk specifically,
Market and asset liquidity risk
large deposit dependency exceeds all other
concerns in the banking sector, as these risks
Loan portfolio concentration
were reported equally by all banks.
Nonperforming loans • Market dependency is a source of worry
for small and midsize banks. Smaller banks
Related party transactions
are more dependent on the financial market in
the short run than large banks since they are
OBS credit exposure
more likely to tap into the interbank market to
Creditworty rating downgrade fund long-term investments, therefore keeping
relatively large positions in securities.
Large banks Midsize banks Small banks
• Banks accustomed to borrowing from
abroad are strongly exposed to downgrade
risk. Banks rated by international agencies are
Chart 2.2.2 What are the Main Sources of Liquidity Risk (Over 1 year)? vulnerable to country and sector downgrades
100% 80% 60% 40% 20% 0% and difficulties raising funds from abroad.
Large banks report more concerns in this
Interbank market dependency
aspect than smaller ones, so the exposure
correlates positively with the size of a bank’s
Large deposits dependency
funding.
Market and asset liquidity risk
• Banks forecast high vulnerability to loan
Loan portfolio concentration
concentration in the short run and to non-
performing loans in the long run. Bank
Nonperforming loans loan portfolios may be an area of liquidity
risk concern in terms of exposure to both
Related party transactions specific and systemic risks. Surprisingly, the
banks reported that SME and retail lending
OBS credit exposure
tended to be of higher quality than corporate
Creditworty rating downgrade loan portfolios, at least during the first stages
of the crisis. However, the likelihood is that
Large banks Midsize banks Small banks the responding banks were shortsighted in
their crisis forecasts. At the time of the survey,
systemic shock was not apparent, suggesting
that the crisis has not yet fully taken hold. This
is partly explained by the varied answers given
by midsize banks. Therefore, it is doubtful that
such banks’ asset quality is higher than in other
banks; they simply have an overly optimistic
outlook given the current circumstances.
2.3 Liquidity Risk Chart 2.3.1 Which Tools do Banks Use to Manage Liquidity Risk Now?
Management Tools
0% 20% 40% 60% 80% 100%
• Basic tools for measuring liquidity risk Daily paysheet and short
are currently used by 85-90 percent of term cash flow schedule
banks. All the tools recommended by the Inflows/Outflows simulation
techniques
authorities are being used internally by Hight liquid assets portfolio
Russian banks. For short-term risks, the maintenance
following tools are being used: daily per Funding matrix based
on perspective terms
sheet and cash flow schedules; for long-
term: funding matrices, liquidity gap analysis Stress testing
and simplified stress testing. Liquidity gap analysis
• In future, the banks plan to use more
Funding planning
sophisticated risk analysis techniques.
Banks intend to improve simulation Inhouse liquidity indicators
techniques of inflows and outflows,
Contingency planning
management of their liquidity cushion,
performance of scenario analysis, and Large banks Midsize banks Small banks
development of a limits system. In-house
indicator analysis and contingency planning
also need to be strengthened. Chart 2.3.2 Which Tools do Banks Plan to Develop
to Manage Liquidity Risk in the Future?
• Large banks are better prepared to deal
with liquidity risk than others. Although 100% 80% 60% 40% 20% 0%
large banks now rely on many different Daily paysheet and short term
cash flow schedule
tools, they are eager to improve further. Inflows/Outflows simulation
Small banks are less equipped but expressed techniques
a willingness to upgrade their liquidity risk Hight liquid assets portfolio
maintenance
management systems in the future. Midsize Funding matrix based on
banks, according to the survey results, perspective terms
are the least interested in improving their Stress testing
liquidity risk tools in the future: they use
Liquidity gap analysis
some techniques but seem reluctant to fill
the gaps in their liquidity risk management. Funding planning
Inhouse liquidity indicators

Chart 2.4 Which Maturity Levels are Used by Banks

2.4 Measuring Liquidity Risk
to Measure Liquidity Risk?
• In all, 40 percent of banks think it is
100%
useless to plan their funding activity over
one year. Though all banks forecast their
80% liquidity positions in the short-term using the
maturity buckets specified by the regulatory
authorities (Form #125), few go beyond the
60% specified requirements.
• The smaller the bank, the shorter its
40% liquidity horizon. For the majority of
small banks (71 percent), liquidity is typically
managed for a one-year period. Most midsize
20%
banks (69 percent) operate on a two-three year
horizon, whereas most large banks (57 percent)
0%
operate on a three-five year horizon.
To 1 year 23 years 35 years 510 years 1020 years Over 20
years • Only a few, mostly larger banks are thinking
long-term. Only 33 percent of Russian banks
manage a 10-year horizon, compared to 8
percent of midsize banks and 14 percent of
small banks.
Chart 2.5.1 How are Banks Responding to the Crisis? 2.5 Response to
0% 20% 40% 60% 80% 100% the Liquidity Crisis
Follow/prepare Contingency plan • Managing lending and deposits are
Russian banks’ two main responses for
Increase frequency of reporting dealing with the crisis. Russian banks have
and ALCO meetings
taken urgent measures, including decreasing
or halting credit disbursements altogether, or
Decrease credit disbursement
retaining or substituting their deposit base.
Credit disbursement based While the large banks could easily halt lending
on depositsincrease and increase interest rates to attract depositors,
Increase the interest
midsize and especially small banks are far less
rates on deposits likely to increase their interest rates, either
because they fear this would send the wrong
Apply to the shareholders
for additionalfunding message to their clients for both deposits and
loans.
• Banks are using contingency planning and
other formal procedures during the crisis
differently according to size. Due to their
wider scope of activity, large banks rely more
on formal contingency plans. Smaller banks
are less likely to follow or have a contingency
plan and rely on their management to manage
the crisis, presumably in a less systemic way.
• Seeking external support is more likely

Chart 2.5.2 How do Banks Plan to Respond to Crises in the Future?
strategic solution to the crisis for large
and midsize banks. Approximately 40
100% 80% 60% 40% 20% 0%
percent of large and midsize banks count
on getting support from their shareholders
Follow/prepare Contingency plan
and syndicated cash injections from
the authorities. Not surprisingly, credit Increase frequency of reporting
disbursements at small banks are much and ALCO meetings
more dependent on their deposit holdings.
Decrease credit disbursement
2.6 Liquidity Risk Regulation Credit disbursement based

on depositsincrease
Follow-Up Increase the interest rates
on deposits
• Most banks do not want more
regulation, but advice from the Apply to the shareholders
regulators. Respondents across the board for additional funding
were unanimous in their aversion to on-site

visits from regulators, and only a handful Large banks Midsize banks Small banks
of small and midsize banks would like to

see more stringent regulation or increased
reporting requirements. Smaller banks Chart 2.6 What do Banks Want from the Regulator
on Liquidity Risk Management?
would also like to see consultative materials
and detailed guidelines on international and 0% 20% 40% 60% 80% 100%
local practices in liquidity risk management.
Turn to more stringent
• Financial support is in high demand. A regulation
large majority of banks would welcome bank

guarantees and funding opportunities from Increase the scope and
frequency of reporting
regulators, especially long-term funding.
Some banks suggested that regulators
Introduce more
should introduce new tools in response to detailed guidelines
the crisis, such as listing swap opportunities,
repos with foreign-currency-denominated Produce consultative
assets, more proactive regulation of financial materials
market liquidity, and irrevocable deposits.
Regularly examine
banks
Provide longterm standby

funding opportunities
Provide guarantees
for the banks liabilities
Extend shortterm
funding opportunities

3. Interest Rate Risk

Large Russian banks have the proper organization structure for managing interest rate risk,
but midsize banks are underutilizing ALCOs. While the banks are using the available tools,
stress-testing needs to be strengthened, especially in small banks. There seems to be confusion
across the board on how to identify interest rate risk, suggesting that more education is needed
in this critical area. Russian banks also need to be encouraged to forecast more long-term
when measuring interest rate risk. Hedging opportunities are high on the list of priorities
that the banks would like to see from the regulatory authorities – only a few would like to see
floating rate lending facilities and all would like more guidance.
Chart 3.1 Which Departments Take Part in Managing Interest Rate Risk? 3.1 Interest Rate Risk
100%
Management Framework
• Banks endeavor to keep control over
80%
interest rate risk in the Treasury or finance
60% department, but more power needs to be
handed to the Risk Management Unit
40% and ALCO. Large banks are following
20%
international best practice by having their
ALCOs and Treasuries lead the interest rate
0% risk management process. Management also
Business
Board of
Directors
Management
ARCO
ALCO
Credit
Committee
Management
Treasury
Finance
Units
Risk
takes part, as do most other units to a smaller

degree. As with liquidity risk, smaller banks
do not necessarily have or use ALCOs – only
46 percent of midsize banks, whereas over
70 percent of small banks responded that
ALCOs play an important role. A special Risk
Management unit takes part in the process in
about 70 percent of all banks.
Chart 3.2 What elements of sound interest rate risk management
does the Bank implement in practice?
0% 20% 40% 60% 80% 100% 3.2 Elements of Interest Rate
Making sound decision
making process Risk Management
Establishing the rules
and procedures
• Larger banks are using almost all the
available tools. In comparison, smaller banks
Establishing limits
are far less likely to disclose information and
implement other crucial aspects of interest rate
Stress testing
risk management such as credible measuring,
modeling, and limit setting. In practice, only
Gap analysis
one-third of small banks and two-thirds of
Regular reporting midsize banks are performing stress tests.
andmonitoring
Internal controls
Disclosing information

3.3 Interest Rate Risk

Identification
• Most of the banks are exposed to
repricing and yield curve risk in Russian Chart 3.3 What are the Primary Sources of Interest Rate Risk?
rubles. Not surprisingly, Russian banks have
100%
larger mismatches in rubles in the short and Ruble US Dollar Euro
long term and are therefore vulnerable to 80%

changes in the refinancing rate and slope of
the yield curve. Dollar and euro exposures 60%
are less significant for smaller banks. 40%

• Banks might not have a clear
20%
understanding about the sources of
interest rate risk exposure. While large 0%
Repricing risk Yield curve risk Basis risk Optionality risk
banks were fairly consistent in their answers,
midsize and especially small banks gave
widely different answers despite the similar
business environment. The findings on
repricing and yield curve risk are more robust,
but basis risk was probably overestimated
by the respondents and optionality risk was
perhaps underestimated.

Management Tools
• Most banks regardless of size monitor
income change risk. The banks pay more Chart 3.4.1 What Tools are Banks Using
to Manage Interest Rate Risk Now?
attention to the influence of interest rate
0% 20% 40% 60% 80% 100%
shifts to income. Basis risk and capital
change risk estimates are used by roughly 40 Repricing gap
analysis
percent and 20 percent on average, although
Basis risk
small banks are more likely than any other analysis
group to perform basis risk analyses (57 Capital requirement
percent). These two tools are not strict approach
requirements from the regulators, which Duration gap
likely explains why they are not used even analysis
though the repricing gap is a static measure Interest rate

exposure limits
and does not give a complete picture.
Stress testing
• Only a few banks have really effective
scenario analysis and limits systems. Large banks Midsize banks Small banks
Most of the banks currently use very simple
tools for measuring interest rate risk and do
not set up limits in their calculations; the
banks which say they do are mostly smaller
banks and about half of larger banks. Only
about 30 percent of the large banks employ

Chart 3.4.2 What Tools do Banks Plan to Use
sophisticated calculations, though some
Manage Interest Rate Risk in the Future?
banks are planning to use more advanced
100% 80% 60% 40% 20% 0%
approaches of stress-testing and set up limits
Repricing gap analysis
in the future.
Basis risk analysis • Banks prefer the simplest scenarios for

measuring interest risk. Parallel shifts for
Capital requirement all currencies by 0-200 basis points and by
approach
200-400 basis points are the most favored
Duration gap analysis scenarios for responding banks rather than
the more accurate non-parallel shifts by
Interest rate exposure currency, primarily because of the difficulties
limits
in forecasting interest rate movements.
Stress testing
However, we contend that the banks merely
follow guidance from regulators without
giving more attention to interest rate risk
methodology than is required.
3.5 Measuring Interest

Rate Risk
• As with liquidity risk, most banks are
Chart 3.5 Which repricing/maturity buckets are used by the Bank short-sighted in terms of interest rate
to measure repricing gaps?
risk management. For small banks, the risk
is typically managed in a one-year bucket,
100%
for midsize banks – two-three years, and for
90% large banks – three-five years. This is partly
explained by the fact that the bank asset and
80%
liability term structure and income changes
70% focus depending on the size of the banks,
but also the fact that smaller banks are simply
60%
less likely to have the analytical resources that
50% larger banks have.
40% • Only a few banks use the standardized

maturity ladder based on Basel principles.
30%
The capital change based on the standardized
20% methodology is measured by mostly large
banks (43 percent); only a small portion of
10%
smaller banks follow the same practice.
0%
UP to 1 year 23 years 35 years 510 years 1020 years Over 20
years


Regulation Follow-Up
• Most banks are looking for consultancy
rather than formal regulation. Only a few Chart 3.6 Which measures should the regulatory authorities introduce
to make the interest rate risk management more effective?
banks responded that formal regulation is
needed to better manage interest rate risk; 0% 20% 40% 60% 80% 100%
most of them (60 percent) would prefer
to see the regulatory authorities focus on Turn to more stringent
regulation
macro economic analysis and scenario
formulation.
Increase the scope and
• The respondents would like the frequency of reporting
regulatory authorities to be more

proactive in developing the financial Produce consultative
materials
markets infrastructure. About 70 percent
of all banks agree on a need for hedging
opportunities to be created as internal Popularize floating rate
lending facilities
market mechanisms are not sufficient.
Only 30 percent of the banks would like
Develop opportunities for
to popularize floating rate lending facilities. hedging interest rate risk
Smaller banks, in particular, are skeptical of
this idea, most probably due to their funding
structure and distrust about the reference
rate assignment.
4. Credit Risk
In Russia, credit risk management is strongly dependent on the size of the bank. As with other
risk types, large banks more actively follow international best practices and use more modern
approaches for credit risk assessment and management. The weakest areas are early warning
systems, stress testing, and crisis planning. Few banks have the appropriate IT support for
credit risk management. From regulators, respondents would like to see guidelines on rating/
scoring systems and the most simple models for quantifying credit risk.
4.1 Credit Risk Management

Framework
• Russian banks have established an
appropriate credit risk environment. The
Chart 4.1 Which Departments Take Part in Managing Credit Risk? Board of Directors, Credit Committees, and
100% Risk Management Division are involvement
in the credit risk management process in all
80%
large banks and the vast majority of smaller
60%
banks.
40%
• Large banks more actively follow best
practice. Most of these banks have Audit and
20% Risk Management Committees: 71 percent
compared to only 23 percent of midsize
0%
banks.
Business
Board of
Directors
Management
ARCO
ALCO
Credit
Committee
Management
Treasury
Finance
Units
Risk
• In small banks, the credit risk management

function is not organized properly. A
considerable portion of small banks recognize
Asset and Liability Committee (71 percent),
Treasury (57 percent) and Finance department
(43 percent) as credit risk management
function elements. However according to
best practice the main area of responsibility
for ALCOs and Treasury is asset and liability
management.
4.2 Internal Regulations

• Internal credit risk management regulations
are solid across the board. All respondents Chart 4.2 Which Internal Regulation do
the Banks Use to Manage Credit Risk?
include the following in their internal
0% 20% 40% 60% 80% 100%
documents: a definition of credit risk,
descriptions of management roles and Risk definition
responsibilities, limits structure and setting Roles and responsibilities
up procedures, and descriptions of risk Risk identification tools

monitoring and control procedures. Risk measuring methodology
• The weakest positions in the internal Models verification procedures
regulation are: models, stress testing, and Limits structure and procedures
crisis planning. On average, only 41 percent Risk monitoring and control
of the banks perform stress testing and Reporting procedures and templates
fewer use models, have model verification Stress testing procedures
procedures, or plan for crises.
Crisis planning

4.3 Credit Risk Management
Tools
• The quality of the credit underwriting Chart 4.3.1 What Tools do Banks Use to Manage Credit Risk Now?
process depends on the size of the 0% 20% 40% 60% 80% 100%
bank. In the area of the simplest elements Credit decision unique
of credit risk management (like collateral for every client
and financial analysis as a base for credit

Standard criteria,
decision), all respondents use these tools. internal rating system
Banks also report that they monitor the
value of collateral and client risk profiles on Current exposure by sector
a regular basis.
Monitors provisions
• Credit limits systems are quite strong. and reserves
Credit decisions in all large banks and most
smaller banks are approved in accordance Monitors credit portfolio
with established credit limits. However, on

average, only 63 percent of the banks take Bank assesses credit
into account possible changes in economic risk exposure…
conditions and assess their credit risk

…at client level
exposure under stress conditions.
• IT is the weakest link. Banks lack the
….at branch level
technical support to generate daily reporting
and early warning signals for credit portfolio
Daily automated reporting,
monitoring. Only 33 percent of the early warning
respondents have the necessary software
and another 63 percent of the banks plan Bad debt classification defined
by for malrules
to introduce it in the future. Banks are
also eager to improve their early warning
systems. Large banks Midsize banks Small banks
• The vast majority of midsize banks want

Chart 4.3.2 What Tools do Banks Plan to Develop in the Future?
to improve their credit risk management
as a whole (compared to only one-third of
0% 20% 40% 60% 80% 100% small banks) and IT solutions (compared
Credit decision unique to less than half of small banks). This is an
for every client encouraging sign since midsize banks are
growing more rapidly compared to large
Standard criteria, internal and small banks. More than two-thirds want
rating system
to improve their bad loan management
(compared to only 14 percent of small banks).
Current exposure by sector In large banks the most important issues
for future improvements are early warning
systems and special IT support.
Monitors provisions
and reserves
Monitors credit portfolio
Bank assesses credit

riske xposure…
…at client level
….at branch level
Daily automated reporting,

early warning
Bad debt classification

defined by formal rules

4.4 Scoring/Rating Systems

• The intensity of scoring/rating Chart 4.4.1 Why do Banks Use Scoring/Rating Systems Now?
approach for measuring credit risk
0% 20% 40% 60% 80% 100%
strongly depends on the size of bank. All
large and most midsize (69 percent) banks We don't use it
use scoring/rating at different stages of the
credit risk management process. However, We don't use it, but
we collect statistical data
71 percent of small banks do not use scoring
at all. Yes, we use it as a credit decision
making tool only
• The most commonly used purposes for
scoring are for making credit decisions Yes, we use it as a basis for the
riskbased limit system
and as a basis for risk-based limit
systems. The banks use the rating/scoring Yes, we use it for the
approach more actively on the retail and riskbased pricing/costing
SME share of their portfolios. …for calculating the riskbased
return of capital
• Only a few banks use rating/scoring Large banks
systems for risk-based pricing, …for capital location
Midsize banks
calculating the risk-based return on
capital, capital allocation, and financial …as a part of financial
forecasting Small banks
forecasting. The main reason for this is
the lack of statistical data (on average, 30
percent of the banks report that they only Chart 4.4.2 Why do Banks Plan to Use
recently started to collect these data). Scoring/Rating Systems in the Future?
• About 50 percent of the banks want to 0% 20% 40% 60% 80% 100%
implement new elements of calculations

based on statistical data in the future. We don't use it Large banks
The most pressing issues for the banks are

Midsize banks
risk-based credit limit systems (59 percent) We don't use it, but we
and risk-based pricing (44 percent) collect statistical data
Small banks
• A majority of large banks (70 percent)
Yes, we use it as a credit
want to use rating systems in the future decision making tool only
for more advanced purposes like capital
allocation and risk-based pricing. Midsize Yes, we use it as a basis for
banks plan to focus on improving their risk- the riskbased limit system
based limit systems (69 percent). Based on

the responses, small banks are disturbingly Yes, we use it for the riskbased
pricing/costing
not eager to improve in this area.
…for calculating the riskbased
return of capital
…for capital allocation
…as a part of financial

forecasting
4.5 Credit Risk Regulation

• Banks need support. Expectations range
Chart 4.5 What do Banks Want from from implementation of some parts of
the Regulatory Authorities on Credit Risk? the Basel II approach (48 percent on
0% 20% 40% 60% 80% 100% average) to producing consultative papers
Make an official translation of
on the credit risk management methods (89
the Basel II section related to credit risk percent). In particular, Russian banks seek
recommendations on how they can develop
Produce consultative papers on the simplest models for assessing Probability
the credit risk management methods
of Default (PD), Loss Given Default (LGD)
and correlations.
Implement some parts of
the Basel II approach
• Smaller banks are still learning and look
to the regulatory authorities for guidance.
Provide recommendation on show the Bank All midsize banks responded that would like to
can develop its own rating/scoring system
receive consultative papers whereas 86 percent
of small banks want to understand how they
…main types of data that have to be collected can develop their own rating systems as well
as how to use the simplest model to calculate
… the simplest model for assessment PD and LGD.
PD, LGD and correlations
• Large banks are improving and using
Large banks Midsize banks Small banks internal ratings. These banks are mainly
looking for recommendations concerning
data that have to be collected for good quality
internal credit rating systems.
5. Market Risk
The approach to managing market risk varies considerably by size of bank, not surprising
given the skill level required for more advanced methodologies. Starting with organizational
structure, midsize banks need to strengthen their ALCOs, which should be responsible for
managing market risks. More information and guidelines on these methodologies would help
the banks develop in this crucial area and help them cope with the increasing complexities of
a bank’s market risk exposures and respective market environments.
5.1 Market Risk Management Framework

• Banks mostly agree on the organizational
structure for managing market risk, Chart 5.1. Which Departments Take Part in Managing Market Risk?
though ALCOs need to be strengthened

100%
in midsize banks. As expected, the
90%
Treasury, Risk Management Divisions,
80%
ALCOs, and Management play the lead
70%
roles in managing risk. According to best
60%
practice, the Treasury is responsible for
50%
taking risk, providing on-site control and
40%
hedging; the Risk Management unit –
30%
methodology, control over the limits, and
20%
reporting; ALCOs supervise the function
10%
at the executive level, approving limits, and
0%
giving oversight on results.
Board of
Directors
Management
ARCO
ALCO
Credit
Committee
Risk
Management
Treasury
Finance
Business
Units
5.2 Market Risk
Management Tools Large banks Midsize banks Small banks
• About 15-20 percent of banks do not use

internal tools for managing risk. While
larger banks seem to have a firm grasp on Chart 5.2.1 Which Tools are Banks Using to Manage Market Risks Now?
managing market risk, smaller banks do not
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
have the skill base and are more risk averse,
therefore they have less need to develop Trading/Banking book
segregation
market risk management tools.
Sensitivity analysis
• P&L monitoring and position limits are
two main tools used by all banks. Banks ValueatRisk calculations
use traditional tools for managing market

Backtesting
risk rather than advanced methodologies.
Even large banks prefer these basic Stresstesting
tools and smaller banks use them almost
exclusively. Monitoring P&L
• VaR-based methodology is somewhat Establishing limits
popular but used voluntary. Banks

prefer historical simulation models or a Large banks Midsize banks Small banks
combination with parametric approach.
Advanced Monte Carlo simulation is used by

Chart 5.2.2 What Tools do Banks Plan to Develop? a small percentage of large banks and midsize
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
banks. The models are mostly supported with
Trading/Banking back-testing but less with setting VaR-based
book segregation limits. At least half of banks are looking to
Sensitivity analysis improve their modeling.
ValueatRisk calculations
• Other bank concerns include trading
Backtesting book segregation, stress-testing, stop-loss
Stresstesting limits. While mostly larger banks are moving
up to the next stage of managing market
Monitoring P&L
risk development, they are encountering
Establishing limits methodological obstacles in exposure
Large banks Midsize banks Small banks identification, loss measuring, and controlling
limits.
5.3 Internal Models

Descriptive Information
• About one-third of banks used VaR-models
Chart 5.3 How Are Banks Using VaR Models?
that are close to Basel requirements.
Three essential components are checked:
0% 20% 40% 60% 80% 100%
independent risk unit, daily calculation, VaR
Independent risk control unit is
in charge of risk management practices parameters (confidence level and number of
observations). However, most showed little
VaR is computed on a daily basis at 99th detail in their responses.
percentile within 10day holding period
• Banks develop VaR for ad-hoc analysis
Sample period exceeds 1 year and is updated
more frequently than quarterly according to their own specific needs.
Basel II requirements are not paramount to
VaR is calculated assuming correlations
between the instruments and risk types
these banks. Some of the common practices
include: special risk units calculate VaR on
Internal model captures the nonlinear price a daily basis for different confidence levels
characteristics of option positions
using data history over one year, VaR is
Internal models are applied to
calculated assuming no correlations between
all market risk types instruments, some portfolios are not covered,
optionality characteristics are left outside the
VaR is multiplied by 3 to measure the capital
requirement behind market risk models, and no Basel multiplication factors
are used.
5.4 Market Risk Regulation Follow-Up

• Banks do not support regulation on
capital requirements based on internal
Chart 5.4 What do Banks Want from Regulators
models approach. Curiously, on average on Market Risk Management?
70 percent of banks are currently used VaR-
0% 20% 40% 60% 80% 100%
based models but only a few of them (about
Admit the VaRbased internal models
30 percent) ask to support this activity at in the capital adequacy requirement
the regulatory level. Most respondents are Provide clear criteria of splitting
fine with keeping the existing standardized the trading and banking book
approach which helps them to accumulate Turn to more stringent regulation on
intraday market risk management
greater trading positions. Other possibilities Introduce requirements for internal
for making their operations and processes auditing of market risk
more transparent also received little Produce detailed guidelines based
on international practice
support.
Introduce practice of surveys on market risk
• Banks welcome any consultancy
Improve legislation to develop
support and legislation improvements. hedging opportunities
As with other types of risk, banks want the
regulator to involve them in a transparent Large banks Midsize banks Small banks
discussion on an ongoing basis. There is

strong support for improving legislation on
hedging instruments.
6. Operational Risk
With all eyes on risk management in banking these days, it is clear that management of
operational risk must be integrated into every aspect of the bank. Whereas policies and
procedures for risk management come from the top originating with the board, it is the
business units, particularly the client-facing units, which must implement the risk framework
on a daily basis. People and IT risks are rated high as concerns for Russian banks and should
be high priorities for investment. While a handful of respondents believe more regulation is
needed, most did not vary from their international counterparts in demanding more support
and guidelines.
Chart 6.1 Which Departments Take Part in Managing Operational Risk?

6.1 Operational Risk
Management Framework
100%
• As prescribed, senior management,
80% Risk management division and business
60%
units are working together on managing
operational risk. All banks report close
40% cooperation on the operational risk
20%
organizational framework and no serious
inconsistencies were found. The Finance
0% Department reports on losses by double
Business
Board of
Directors
Management
ARCO
ALCO
Credit
Committee
Management
Treasury
Finance
Units
Risk
checking the data coming from the business

units, and Treasury is also monitoring
operational risk exposure.

Identification
Chart 6.2 What are the Main Sources of Operational Risk?
• Process risk is a top issue for all large
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% banks. Despite the fact that large banks have
more capacity to improve business processes,
New Products their scale impairs their flexibility to control
their activities, although a large majority of
Employee turnover smaller banks also consider process risk a
significant issue. Similar results were found
Transaction breaks
with new product risk.
• Smaller banks are highly vulnerable to
System downtime employee turnover. Typically, smaller banks
create good career opportunities for entry-
Improper activities level staff but fail to retain skilled personnel,
of branches
who often move to larger banks. This issue
Banking group cannot be underestimated: high turnover
integration leads to higher fraud risk, higher operational
risk, and less efficiency.
• All banks face high IT system risk. As

the risk management landscape becomes
increasingly complicated and the need for
just-in-time information grows, the need for
flexible technology architecture becomes
imperative.

Chart 6.3.1 What Tools are Banks Using to Manage Operational Risk Now?
Management Tools
• Only a few banks have gone beyond the 0% 20% 40% 60% 80% 100%
legal requirements. Process description

Business process description
and data collection are the main type of bank
activities for all banks. Currently some banks Lossevents data collection
report using different types of operational
risk management tools, but the results are Seltassessment survey
scattered and show that most banks have no

Balance scorecards
expertise in operational risk management.
Risk measurement tools
• All banks are eager to improve their
toolsets. Large banks want to improve self- Setting limits
assessments, introducing key risk indicators,
and applying more complicated approaches Scenario analysis/Stress testing
of measuring and controlling risk. Due
to the crisis, more banks are concerned
about performing stress-testing on their Large banks Midsize banks Small banks
operational activities and improving their
formal contingency plans.
Chart 6.3.2 Which Tools do Banks Plan to Develop?
100% 80% 60% 40% 20% 0%
Business process description
Lossevents data collection
Seltassessment survey
Balance scorecards
Risk measurement tools
Setting limits
Scenario analysis/Stress testing

6.4 Operational Risk Mitigation

• Banks believe internal regulation, risk
Chart 6.4 How do Banks Mitigate Operational Risk? identification, and software are essential
for risk mitigation. Banks prefer to look at
0% 20% 40% 60% 80% 100%
their internal capacities to cope with the main
Frequent measurement types of operational risks: process risk, fraud
procedures
risk, and system risk. The role of internal
Regular ARCO or IT control and professional education are also
committee meetings
mentioned by respondents.
Insurance mechanisms
• External risk is covered by insurance. Most
of the banks, especially large ones, report that
Outsourcing opportunities
insurance is typically used to mitigate external
risk factors. Small banks use insurance less.
Comprehensive automation
• 100 percent of large banks vote against
Codification of
business processes
outsourcing. None of the large banks use
outsourcing at all, which is surprising given
current trends in the sector. On the other
hand, 30 percent of smaller banks consider
outsourcing a tool for mitigating operational
risk since outsourcing can help streamline
operations, allowing them to do more with
their smaller staffs.

Regulation Follow-Up
• Banks prefer to view the regulatory
Chart 6.5 What do Banks Want from the Regulator authorities as technical support, rather
on Operational Risk Management?
than as a controller. More than 70 percent
0% 20% 40% 60% 80% 100%
of the respondents request consultancy
and detailed guidelines on modeling, data
More stringent regulation on
operational risk management collection, and other areas of operational risk
management.
Increase the scope and frequency of
reporting on operational risk exposure
• Banks are not comfortable with stricter
regulation although some understand that
more regulation is inevitable. Most banks
Produce consultative materials on
operational risk management are skeptical that more formal requirement
will improve operational risk management.
Produce guidelines on making simple
internal models and
data collection templates

7. Risk Management Impact

Banks have high expectations from improved risk management. While many see it as a tool to
meet regulatory requirements and IFRS, all banks see risk management mainly as a tool to help
control excessive losses. As the financial crisis takes hold in Russia, risk management is sure to
play an increasingly important role.
• All banks agree that risk management
is useful to prevent excessive financial Chart 7.1 What is the Main Impact of Risk Management?
losses. Major losses are considered to be a

0% 20% 40% 60% 80% 100%
main threat to the banking business so the
respondents look to the risk management Meeting mandatory requirements
function to provide control over asset
quality, bank performance, and processes, Getting/stepping up international ratings
and mitigate if not prevent crises.
• Prudential requirements and public Meeting IFRS/CG standards
disclosure are the second major drivers.
Banks are sensitive to the external opinions Supporting efficient capital allocation
of regulators or other end-users of their
data such as shareholders, investors,
counterparties, and rating agencies. If Making control over excessive losses
smaller banks are concerned mainly with
mandatory requirements, larger banks Stabilizing volatility of Bank's earnings
pay closer attention to financial reporting,

shareholders meetings, and rating agency Assigning riskbased price to products
appraisals.
• Internal pinpoints of risk management use Large banks Midsize banks Small banks
are ranked less important. As a result of
improved risk management, banks expect to
receive better capital allocation and to charge
clients more to cover risks. Respondents are
less concerned about the low volatility of
bank earnings in the previous boom market,
though this might have changed since the
survey was taken.
8. Conclusion
At the time of the survey, banks had only recently begun to react to the crisis, mainly by
curtailing credits and increasing interest rates to attract new depositors. What is apparent from
the survey findings is that most respondents are not forward-looking or thinking long-term
about risk management; many respondents did not even answer questions that forced them
to think about their future plans. Perhaps most disturbing given the likely consolidation in the
sector and their rapid growth, midsize banks seem the least interested in improving their risk
management toolsets. While this segment is clearly the future of the Russian banking sector,
many will certainly fail without clear guidance and targeted investments in their people and
skills. IT systems must also be bolstered to support the flexible reporting required to assess
risks on a daily and even hourly basis. Russian banks understand that risk management is
essential to prevent loss, but this is a long way from true commitment to developing a strong
risk management culture.
9. Annex
Detailed Charts
Detailed answers to questions on stress testing
Chart 9.1 Which Types of Scenarios are Banks Testing Now (Liquidity Risk)?
Liquidity Risk
0% 20% 40% 60% 80% 100%
Scenario: liquidiy crisis

on financial mkt
Scenario: run on client base
Scenario: credit defaults
Scenario: downgrade of Bank's

credit rating
Scenario: expansion of
Bank's activities
Chart 9.2 Which Types of Scenarios do Banks Plan to Test in the Future (Liquidity Risk)?
100% 80% 60% 40% 20% 0%
Scenario: liquidiy
crisis on financial mkt
Scenario: run on
client base
Scenario: credit defaults
Scenario: downgrade
of Bank's credit rating
Scenario: expansion
of Bank's activities

Detailed answers to questions on limit setting
Chart 9.3 Which Types of Limit Setting are Banks Conducting Now (Interest Rate Risk)?
Interest 0% 20% 40% 60% 80% 100%
Rate Risk
Net interest margin
Economic capital
Gap/Equity
Chart 9.4 What Limit Setting Methods do Banks Plan to Develop in the Future
(Interest Rate Risk)?
100% 80% 60% 40% 20% 0%
Net interest margin
Economic capital
Gap/Equity

Chart 9.5 Which Types of Stress Testing are Banks Conducting Now (Interest Rate Risk)?
Interest
0% 20% 40% 60% 80% 100% Rate Risk
Shifts by 0200 b.p.
Shifts by 200400 b.p.
Shifts per each

currency
Nonparallel
shifts
Chart 9.6 Which Types of Stress Testing do Banks Plan to Develop in the Future?
100% 80% 60% 40% 20% 0%
Shifts by 0200 b.p.
Shifts by 200400 b.p.
Shifts per each currency
Nonparallel shifts

Detailed answers to questions on VAR methodology
Chart 9.7 Which Types of VaR Models are Banks Using Now?
Market Risk
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Historical simulation
Parametric approach
Monte Carlo simulation
Chart 9.8 What VaR Models do Banks Plan to Develop?
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
Historical simulation
Parametric approach
Monte Carlo simulation

Chart 9.9 Which Types of Stress Testing are Banks Using Now?
Market Risk
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Historical scenarios
Hypothetical scenarios
Chart 9.10 What Stress Tests do Banks Plan to Develop?
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
Historical scenarios
Hypothetical scenarios

Detailed answers to questions on limit setting

Market Risk
Chart 9.11 Which Types of Limits are Banks Setting Now?
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Position limits
Stoploss limits
VaR limits
Sensitivity limits
Concentration limits
Chart 9.12 What Limit do Banks Plan to Set?
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
Position limits
Stoploss limits
VaR limits
Sensitivity limits
Concentration limits

Detailed answers to questions on risk measurement tools
Chart 9.13 What Specific Risk Measurement Tools are Banks Using Now?
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Operational
Risk
Basic indicator
approach
Standardized
Approach/ASA
Advanced
Approach/AMA
Chart 9.14 Which Specific Risk Measurement Tools do Banks Plan to Develop?
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
Basic indicator approach
Standardized
Approach/ASA
Advanced Approach/AMA

Russian Banks
Respond
Moscow 2009
Dr. Judit Burucs, Project Manager
ul. B. Molchanovka, 36/1
Moscow, Russia
Tel (+7 495) 411-75-55
Fax (+7 495) 411-75-56
E-mail: JBurucs@ifc.org
www.ifc.org/rbap

IFC Russian Bank Survey 2009 ENG

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Russian Banks

IFC Russia Banking Advisory Project

A Survey of Risk Management Practices

IFC Russia Banking Advisory Project

The contents of this report are protected by copyright.

© 2009 International Finance Corporation

About the Project

About our Donor Partners

1 In small and midsize banks, risk governance and organizational

2 Thanks to the Central Bank of Russia, every bank has internal

3 The crisis has highlighted an urgent need for improved

4 Russian banks want more guidelines and funds from

1.2 Survey Objectives

consisted of 26 percent large banks (assets of over

organizational framework, policy and procedures

0% 20% 40% 60% 80% 100%

Chart 1.3.4 Survey sample by rating grade

BB and above

1.4 Survey Format

2.1 Liquidity Risk Management Framework

a large role in midsize banks, but this may 0%

management must shoulder. The same goes

Inhouse liquidity indicators

Large banks Midsize banks Small banks

Chart 2.4 Which Maturity Levels are Used by Banks

• Seeking external support is more likely

2.6 Liquidity Risk Regulation Credit disbursement based

were unanimous in their aversion to on-site

of small and midsize banks would like to

large majority of banks would welcome bank

Provide longterm standby

Large banks Midsize banks Small banks

3. Interest Rate Risk

takes part, as do most other units to a smaller

Large banks Midsize banks Small banks

3.3 Interest Rate Risk

long term and are therefore vulnerable to 80%

are less significant for smaller banks. 40%

3.4 Interest Rate Risk

though the repricing gap is a static measure Interest rate

about 30 percent of the large banks employ

Basis risk analysis • Banks prefer the simplest scenarios for

3.5 Measuring Interest

40% • Only a few banks use the standardized

Large banks Midsize banks Small banks

3.6 Interest Rate Risk

regulatory authorities to be more

4.1 Credit Risk Management

• In small banks, the credit risk management

4.2 Internal Regulations

responsibilities, limits structure and setting Roles and responsibilities

up procedures, and descriptions of risk Risk identification tools

• The weakest positions in the internal Models verification procedures

Large banks Midsize banks Small banks

and financial analysis as a base for credit

with established credit limits. However, on

conditions and assess their credit risk

• The vast majority of midsize banks want

Monitors credit portfolio

Bank assesses credit

…at client level

….at branch level