Capital Adequacy Stress Test for Russian Banks

The global financial crisis of 2008-2009 showed that the capital is one of the most vulnerable aspects of banks. At the same time, it should be noted that Russia is under serious economic and politic pressure now: enormous fluctuations of ruble exchange rate, a catastrophic oil prices drop, political and economic sanctions by the EU and the US, an outflow of capital from the country. In this situation, the bank's capital is its shield, and then it is higher, the bank is protected better from all kinds of the world economy fluctuations. Russian Central Bank has conducted stress testing of the banking system, however, regulator model assessment were not disclosed. Thus, it is very important for each bank to carry out stress analysis of capital adequacy to be prepared for possible shocks. The aim of our work is to develop a model of stress-testing capital adequacy of Russian banks and to test it on different scenarios of the Russian economy development. The practical part of the study consists of the construction of econometric models that test relation between capital adequacy ratio and macroeconomic indicators (GDP growth, capital flight, inflation, unemployment, etc.) and the internal bank metrics for the three clusters of banks: state, foreign and private business. The time frame of models has been restricted from January 2010 to February 2016. A forecast capital adequacy for different groups of banks based on scenarios of the Russian economy development: basic, optimistic and pessimistic, was made on the basis of the developed models. Calculations have shown that in case of deterioration of global market conditions, some groups of Russian banks will not be able to fulfill requirements of capital adequacy ratios so they need to think about possible sources of compounding additional capital, in particular the authors of the study give banks their recommendations how to address this problem.