Legislating the so-called motivated judgment will help avoid license revocation

6 july 2017 | Rossiyskaya Gazeta

The Bank of Russia intends to expand its right to the so-called professional judgment. This will allow it to conduct audits even in the absence of formal evidence a violation of the law. Those are the proposals contained in a consultative report published by the Bank of Russia. The first bills based on this report are expected to be submitted to the Duma during the spring session.

Daniil Nametkin
Daniil Nametkin
Department for Expert Analytics

"Once the notion of a motivated judgment is enshrined in the law, the Bank of Russia will be able to demand that banks increase their reserves in the event that an increase level of risk is identified even if there is no formal evidence of poor quality of assets or legal violations," Analytical Center expert Daniil Nametkin commented the situation to the Rossiyskaya Gazeta. In his opinion, this will help avoid license revocation in some cases.

According to Mr. Nametkin, the best example is the situation with Tatfondbank. "The Bank of Russia estimated that 65 % of the bank's portfolio was linked to the business of the bank's key owner while the bulk of the borrowers were bankrupt. Thus, the bank had issued loans to 29 companies that were carrying out significant amounts of transactions within the group aimed at moving funds to an offshore company, whose end beneficiary was the ban's owner," the expert said. "As a result, by the time its license was revoked, the hole in the bank's capital was RUB 118 billion and some RUB 220-230 in loans would have been required to bail it out, so the Bank of Russia had no choice but to revoke its license. And yet, in its reports the bank claimed high quality of its loans."

The Bank of Russia already uses motivated judgment identifying persons affiliated with a specific bank and the maximum amount of risk they are exposed to as well as when assessing a bank's reserves and collaterals, the newspaper points out. Now the plan is to introduce this institution into the assessment of the business reputations of the founders, the business plan, and the sources of capital when issuing licenses, in the assessment of assets and liabilities, the quality of risk management and internal control as well as whenever there are grounds to believe that conflict of interest may result in the participants of the financial market to take actions result in clients incurring losses or earning less revenue than they otherwise could have.

Photo: from open sources