Financial Crime World

Derivatives Market Still Insufficient for Large-Scale Hedging of Interest Rate Risk

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The Bank of Russia’s recent key rate hikes are expected to have a moderate negative impact on the banking sector’s net interest income (NII), with the growth of expenses on borrowed funds likely to occur at a faster pace than the increase in return on assets. This is due to the gap risk, where the lower maturity of liabilities compared to assets poses a challenge for banks.

Gap Risk: A Challenge for Banks

  • The gap risk of the banking portfolio has been estimated to be within the range of 128-317 billion rubles.
  • This gap risk is expected to have a negative impact on NII ranging from 3.5% to 8.8%.
  • The main part of interest rate risk is concentrated in Russian Systemically Important Banks (SIBs).

Housing Market Risks

Residential Real Estate Market

  • Prices have increased by 17.6% in annual terms and 13.6% in the secondary market.
  • However, this growth has been driven largely by preferential mortgage lending programs without a corresponding increase in housing construction.

Mortgage Loan Portfolio Risks

  • The quality of the mortgage loan portfolio remains high, but risks may accumulate if households purchase homes for investment purposes rather than for primary residence.
  • The share of loans with down payments of less than 20% continues to increase, primarily due to loans granted under government programs.

Derivatives and Macprudential Policy

New Macroprudential Add-ons

  • The Bank of Russia has decided to increase macroprudential add-ons to risk weights on mortgage loans with down payments from 15 to 20%, depending on the borrower’s PTI ratio.
  • This new policy will be applied to loans provided from August 1, 2021.

Further Tightening of Macroprudential Policy

  • If real estate prices continue to accelerate or lending standards weaken, the Bank of Russia may consider further tightening of macroprudential policy for mortgage loans.

Household Investments in Foreign Financial Instruments

  • Russian households have been actively investing in securities, with net inflows totaling 282 billion rubles into non-resident shares and 294 billion rubles into resident companies’ bonds.
  • While this trend has advantages, such as increased diversification of household investment portfolios, it also poses risks if it accelerates significantly.

Preventive Measures

  • The Bank of Russia is closely monitoring this trend and considers offering tax incentives related to individual investment accounts for securities of domestic companies as a preventive measure.

Climate Risks

Energy Sector Transition

  • The energy sector is undergoing a significant structural reorganization, with a focus on transitioning from direct fuel use to more efficient sources such as electricity.
  • This shift will depend on decisions made by leading economies to balance energy availability and minimize negative environmental impacts.

Outlook for the Liquid Hydrocarbons Market

  • As the global attention to climate change continues to grow, the outlook for the liquid hydrocarbons market is expected to be shaped by these decisions.

This article was written by [Your Name], a financial journalist with [Your Publication].