The Central Bank of the Russian Federation (Bank of Russia) was founded on July 13, 1990, on the basis of the Russian Republic Bank of the State Bank of the USSR.
Accountable to the Supreme Soviet of the RSFSR, it was originally called the State Bank of the RSFSR.
On December 2, 1990, the Supreme Soviet of the RSFSR passed the Law on the Central Bank of the RSFSR (Bank of Russia), which declared the Bank of Russia a legal entity and the main bank of the RSFSR, accountable to the Supreme Soviet of the RSFSR. The law specified the functions of the bank in organising money circulation, monetary regulation, foreign economic activity and regulation of the activities of joint-stock and co-operative banks.
In June 1991, the Statute of the Central Bank of the RSFSR (Bank of Russia), accountable to the Supreme Soviet of the RSFSR, was approved.
In November 1991, when the Commonwealth of Independent States was founded and Union structures dissolved, the Supreme Soviet of the RSFSR declared the Central Bank of the RSFSR to be the only body of state monetary and foreign exchange regulation in the RSFSR. The functions of the State Bank of the USSR in issuing money and setting the ruble exchange rate were transferred to it. The Central Bank of the RSFSR was instructed to assume before January 1, 1992, full control of the assets, technical facilities and other resources of the State Bank of the USSR and all its institutions, enterprises and organisations.
On December 20, 1991, the State Bank of the USSR was disbanded and all its assets, liabilities and property in the RSFSR were transferred to the Central Bank of the RSFSR (Bank of Russia), which several months later was renamed the Central Bank of the Russian Federation (Bank of Russia).
In 1991-1992 an extensive network of commercial banks was created in the Russian Federation under Bank of Russia guidance through commercialisation of the specialised banks’ branches. The disbandment of the State Bank of the USSR was followed by changes in the chart of accounts, the establishment of a network of Central Bank cash settlement centres and their provision with computer technology. The Central Bank began to buy and sell foreign exchange in the currency market it established and to set and publish the official exchange rates of foreign currencies against the ruble.
In December 1992, as a result of the establishment of a single centralised federal treasury system, the Bank of Russia was no longer required to provide cash services for the federal budget.
The Bank of Russia carries out its functions, which were established by the Constitution of the Russian Federation (Article 75) and the Law “On the Central Bank of the Russian Federation (Bank of Russia)” (Article 22), independently from the federal, regional and local government structures.
In 1992-1995, to maintain stability of the banking system, the Bank of Russia set up a system of supervision and inspection of commercial banks and a system of foreign exchange regulation and foreign exchange control. As the agent of the Ministry of Finance, it organised the government securities market, known as the GKO market, and began to participate in its operations.
In 1995, the Bank of Russia stopped extending loans to finance the federal budget deficit and centralised loans to individual sectors of the economy.
To override the consequences of the 1998 financial crisis, the Bank of Russia took steps towards restructuring the banking system in order to improve the performance of commercial banks and increase their liquidity. Insolvent banks were removed from the banking services market, using the procedures established by the applicable law. Of great importance for the post-crisis recovery of the banking sector was the creation of the Agency for Restructuring Credit Institutions (ARCO) and the Inter-Agency Co-ordinating Committee for Banking Sector Development in Russia (ICC). Thanks to the effective measures implemented by the Bank of Russia, ARCO and ICC, by the middle of 2001 Russia’s banking sector had on the whole overcome the aftermath of the crisis.
The Bank of Russia monetary policy was designed to maintain financial stability and create conditions conducive to sustainable economic growth. The Bank of Russia promptly reacted to any change in the real demand for money and took steps to stimulate positive economic dynamics, cut interest rates, damp down inflationary expectations and slow the inflation rate. As a result, the ruble gained somewhat in real terms and financial market stability increased.
Due to the balanced monetary and exchange rate policies pursued by the Bank of Russia, the country’s international reserves have grown and there have been no sharp fluctuations in the exchange rate.
The efforts made by the Bank of Russia with regard to the payment system were designed to increase its reliability and efficiency for financial and economic stability. To make the Russian payment system more transparent, the Bank of Russia introduced reports on payments by credit institutions and its own regional branches, which took into account international experience, methodology and practice of surveillance over payment systems.
In 2003, the Bank of Russia launched a project designed to improve banking supervision and prudential reporting by introducing international financial reporting standards (IFRS).
The project provides for the implementation of a set of measures, including measures to ensure credit institutions’ credible accounting and reporting, raise requirements for the content, amount and periodicity of information to be published, and introduce accounting and reporting standards matching international good practice. In addition, measures are to be taken to disclose information on the real owners of credit institutions, exercise control over their financial position and raise requirements for credit institutions’ executives and their business reputation.
There are some problems to which the Bank of Russia pays special attention. One of them is that specific risks connected with the dynamics of the prices of some financial assets and the price situation on the real estate market have begun to play an increasingly important role recently. The practice of lending to related parties led to high risk concentrations in some banks, compelling the Bank of Russia to upgrade the methods of banking regulation and supervision by making greater emphasis on substantive (risk-oriented) supervision.
Fictitious capitalisation of banks is another matter of serious concern for the Bank of Russia. To prevent banks from using all sorts of schemes designed to artificially overvalue or undervalue the required ratios, the Bank of Russia in 2004 issued a number of regulations, including the Regulation “On the Procedure for Creating Loan Loss Reserves by Credit Institutions” and the Instruction “On Banks’ Required Ratios.”
As the number of credit institutions extending mortgage loans to the public increased, in 2003 the Bank of Russia issued the Ordinance “On Conducting a One-off Survey of Mortgage Lending,” which set the procedure for compiling and presenting data on housing mortgage loans extended by credit institutions.
With the adoption of the Federal Law “On Mortgage Securities,” credit institutions which ensured the observance of the requirements for the protection of investors’ interests received the lawful opportunity to refinance their claims on mortgage loans by issuing mortgage securities.
In pursuance of the Federal Law “On the Central Bank of the Russian Federation (Bank of Russia)” and Federal Law “On Mortgage Securities,” the Bank of Russia issued the Instruction “On the Required Ratios for Credit Institutions Issuing Mortgage-Backed Bonds,” which specified the calculation and established the values of the required ratios and the values and methodology of calculating additional required ratios for credit institutions issuing mortgage-backed bonds.
In December 2003, the Federal Law “On Insurance of Personal Bank Deposits in the Russian Federation” was adopted. The law stipulated the legal, financial and organisational framework for the mandatory personal bank deposits insurance system, and also the powers, procedure for the establishment and operation of an institution implementing mandatory deposit insurance functions and set the procedure for paying deposit compensation.
At present, an overwhelming majority of banks participate in the deposit insurance system. They account for almost 100% of total personal deposits placed in Russian banks.
In April 2005, the Russian Government and Bank of Russia adopted the Banking Sector Development Strategy for the Period up to 2008, a document which set as the main objective of banking sector development in the medium term (2005-2008) the enhancement of the banking sector’s stability and efficiency.
The principal goals of banking sector development are as follows:
– increasing the protection of interests of depositors and other creditors of banks;
– enhancing the effectiveness of the banking sector’s activity in accumulating household and enterprise sector funds and transforming them into loans and investments;
– making Russian credit institutions more competitive;
– preventing the use of credit institutions in dishonest commercial practices and illegal activities, especially the financing of terrorism and money laundering;
– promoting the development of the competitive environment and ensuring the transparency of credit institutions;
– building up investor, creditor and depositor confidence in the banking sector.
The banking sector reform will help implement Russia’s medium-term social and economic development programme (2005-2008), especially its objective to end the raw materials bias of the Russian economy by rapidly diversifying it and utilising its competitive advantages. At the next stage (2009-2015), the Russian Government and Bank of Russia will attach priority to effectively positioning the Russian banking sector on international financial markets.