OREANDA-NEWS. March 17, 2009. The Bank of Russia will allow Russian banks to form up to 15% of its Tier 1 capital using long-term subordinated loans. “The idea is being addressed now to allow banks via a statutory act to record 30-year subordinated loans as part of Tier 1 capital”, a source at the Central Bank said. A rise in reserves on the back of overdue debts due to lower client creditworthiness has eaten into profits and capitals of Russian banks. The source noted that under international accounting standards the mechanism for recording subordinated loans as part of Tier 1 capital has been successfully implemented. In addition, it can include both loans and securities.

The minimum repayment period for such loans should be agreed with the regulatory authorities in order to avoid deterioration of a bank’s financial condition, a source said. “For instance, such loans could be repaid in five or ten years”. The Bank of Russia has no plans to impose limitations on sources of subordinated loans.

The source added that banks will be able to raise subordinated loans both from their shareholders and third-party investors, including the state. “This is not necessarily a subordinated loan converted into shares, for Russian banks it is rather common loans, securities are not at issue either, since this market is not developed in Russia”. The source said that the idea is being finetuned now.