Essay on the topic of: “Modernization of the supervision system for

commercial banks in Russia”

In recent years, financial transactions have become more and more

complex and universal in nature, various financial products are developing,
securitization is increasing, in addition to which the risks are growing, forcing
the government of many countries to repeat the steps to create independent
control bodies or, in other words, single mega-regulators.
Various forms of supervision of the financial market and the banking
sector have very different forms of manifestation, which are associated with the
peculiarities of national markets, their composition, history and other factors. In
most cases, each country has a body that supervises the banking system, as a
rule, the central banks of European countries (Spain, Italy, Greece, Czech
Republic, Slovakia, Portugal, etc.).
According to statistics from the International Monetary Fund, 80% of
country banking supervision is carried out by the main (central) banks, and in
the rest of the states of the corresponding mixed type (the Ministry of Finance
and Central Banks). The model of a single regulator based on central (national)
banks operates in 13 states. At present, world practice shows four models of risk
management and stability of the banking system. First, the centralized model,
when the regulator is the central bank, whose powers are enshrined in
legislation. Such models exist, for example, in Greece, Spain and Portugal.
Second, a model in which specialized institutions, together with the
central bank and the ministry of finance, perform the oversight function of the
banking sector. For example, in the United States, the oversight function is
exercised by the Federal Reserve System, the Federal Reserve Bank of New
York, the Federal Deposit Insurance Corporation, and the Comptroller of the
Currency.

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 Third, the model is based on the division of oversight functions between
two institutions ("twinpeaks"). One is assigned control of business standards,
the second is engaged in macro and microprudential supervision (Australia,
Belgium, Holland, Great Britain).
Fourth, the model based on the creation of a global mega-regulator of
financial markets, when it can merge with the central bank or exist separately
and independently of it. In Russia, in accordance with the Federal Law "On the
Central Bank of the Russian Federation", the Bank of Russia is a single body
state regulation and supervision of the work of credit institutions. The main
function of the Central Bank of the Russian Federation as a supervisory body is
to ensure the stability of the banking system. It should be noted that in Russia
the discussion about the advisability of creating a single mega-regulator of the
financial market took place even before the crisis in 2007-2009. For example, in
1999, a specialized committee of the State Duma came up with an initiative to
create a single mega-regulator of financial markets, but this initiative never
went beyond its limits.
In 2006, attempts were made to create a bill on a mega-regulator of the
financial market. This was done within the framework of the specialized
committee of the State Duma of Russia, but the consideration and discussion of
the bill was postponed in time.
In general, starting in 2011, a similar model began to be implemented in
parts. For example, the Federal Service for Insurance Supervision became part
of the Federal Service for Financial Markets. The question of creating a
mega-regulator in the financial market came up again and again. In August
2012, during a meeting with the Government, the Ministry of Finance was
tasked with preparing proposals for reforming supervision in the financial
sector. In early November 2012, possible reform options were discussed at
meetings of the Open Government, as well as during working meetings of
experts. Two months later, the Government decided to create a mega-regulator

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based on the Bank of Russia. At the same time, all functions and supervisory
powers were delegated to the Bank of Russia, including because it began to
fulfill all the responsibilities for regulating the financial market that previously
belonged to the FFMS. The FFMS was abolished on September 1, 2013, and its
functions were transferred to the jurisdiction of the Bank of Russia in
accordance with Presidential Decree No. 645 dated July 25, 2013. On March 3,
2014, the Bank of Russia Financial Markets Service (SBRFM) was abolished.
The powers previously exercised by the SBRFD in regulation, control
and supervision in the sphere of financial markets have been transferred to the
established structural divisions of the Bank of Russia. The creation of a unified
mega-regulator system has both pros and cons. The benefits include:
supervision of financial conglomerates on a consolidated basis; thanks to a
one-time monitoring of the entire financial system, threats to systemic risks are
quickly identified; allows you to reduce the possibilities of regulatory
arbitration and optimize the costs of implementing supervisory processes. The
disadvantages include: loss in the effectiveness of supervision during the
transition period; insufficient consideration of the specifics of certain sectors of
financial intermediation and possible conflict of interests; bureaucratization of
decision making and feedback lag; the cost savings may not be as significant.
In our opinion, the decision to create a single mega-regulator of financial
markets was somewhat premature, because: Firstly, conglomerate associations
in the financial sector are not yet so obvious on the Russian market. There is a
clear delineation of market segments, each of which must have a regulatory or
supervisory authority.
We should share the opinion of many authoritative experts and scientists
that in our country there is still no single field for the actions of a common
mega-regulator, as, for example, in Japan or England, where there are financial
conglomerates.

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 Secondly, the financial market in Russia is quite serious segmented. The
level of development and mutual penetration of financial market segments is
low to combine the functions of regulation and supervision over them and create
a single mega-regulator. The main and central segment of the financial market
in Russia is the banking sector. In the developed countries of the world, banking
segments occupy a significantly smaller share in the assets of the financial
system as a whole. Financial products offered on the Russian financial markets
have a simplified structure. There are currently no large financial conglomerates
on the financial market that have a dominant position in several segments of the
financial market at once and represent a complexly structured, universal
business and a wide range of financial products. In Russia, the preservation of
banking, stock, insurance specialization would allow the use of autonomous
regulation and supervision in these segments. It is also necessary to take into
account the fact that within these sectors of the financial market there is a trend
towards disintegration.
For example, in 2011, the regulatory functions in the securities market
were fragmented. Regulation was now carried out by the Ministry of Finance,
and supervision and control by the Federal Service for Financial Markets, which
also exercised control over insurance activities. However, the finance
department usually does not perform this kind of function. This does not
correspond to world practice. Since 2012, the Federal Service for Financial
Markets has again been able to carry out legislation. It is also necessary to take
into account the fact that in order to create a single universal regulator of
financial markets, it is necessary to design general principles of regulation and
supervision in various segments of the financial market, to consolidate these
principles in regulatory documents. In addition, unified standards of regulation
and supervision should be applied to identical transactions of financial
institutions of various types that have their own specifics. The question of how

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the inflation targeting goals and the objectives of ensuring stability in the
financial sector will also be linked remains open.
A serious enough problem for the effective functioning of the
mega-regulator is the emergence of uncontrolled segments of the financial
market based on blockchain technologies. Currently, the status of
cryptocurrencies in the Russian Federation has not been determined.
Nevertheless, operations with cryptocurrencies are carried out and ignoring
them is pointless, especially in the context of the global trend to legalize their
use.
In Russia, the attitude towards cryptocurrencies and operations with them
is rapidly changing. So in 2016, the Ministry of Finance of the Russian
Federation prepared amendments to the Federal Law of July 10, 2002 No.
86-FZ "On the Central Bank of the Russian Federation (Bank of Russia)",
according to which the issuance and circulation of cryptocurrencies is
prohibited. Since some of the legal regulations surrounding bitcoin are still not
fully clear, legislators and regulators still have significant scope for addressing
the challenges that virtual currencies may pose. Taking deposits, maintaining
accounts, managing payment transactions, maintaining balances are all
functions of financial institutions that are of paramount importance to
businesses and consumers. Regulators are wary of addressing some of the legal
issues surrounding the emergence of cryptocurrencies.
So what can regulators do? Based on opinion the famous scientist Mayer
Schonberg and Crowley, we can build four scenarios for the development of
cryptocurrencies:
1. "Virtual Powers": Virtual currency providers will act as regulators by
complying with the terms of their contracts with users in order to prevent cyber
fraud and ensure proper conduct.
2. Banning: Governments may try to block their citizens from using
virtual currencies that do not comply with government restrictions and

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regulations (governments have failed to completely block access to websites
and virtual currencies will not be completely banned).
3. Selective Ban: The government minimizes the impact of virtual
currencies in the real world, for example by banning the sale of goods in the real
world for virtual currency. This measure will also cover the prohibition and / or
criminalization of the use of currency to pay for illegal activities or money
laundering.
4. Election regulation: regulators introduce some restrictions on specific
aspects of virtual currencies such as taxation and regulation of intermediaries.
“Real Promoting Virtual Monetary Self-Government”: Governments are
supporting mechanisms through which virtual currency users can agree and
enforce their own “community standards” and rules of conduct.
Initially, the bill was subject to consideration by the State Duma in
June-July 2016. At the same time, in May 2016, the Ministry of Finance
announced the incompleteness of the current draft law, which does not take into
account all the features of the release and circulation of the cryptocurrency. That
is why it was decided to prepare a new version of the document within a limited
time frame in order to send it further for consideration to the State Duma.
Currently, the question of the regulation of transactions with
cryptocurrencies remains open. In our opinion, a way out of this situation could
be the licensing of the emission of cryptocurrencies, the activities of virtual
exchanges and the storage of virtual currencies. It is best if these efforts
translate into defining the status of bitcoin
and cryptocurrencies in general. In our opinion, the following provisions
should be defined by law:
designation of the status of mining as a cryptocurrency. In the Russian
Federation, there is no consensus regarding the mining of bitcoin and other
coins.

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 determination of the status of a cryptocurrency as an investment asset or
an electronic payment instrument.
development of a licensing procedure for legal entities wishing to use
cryptocurrency. The Russian Federation, as a member of the FATF (anti-money
laundering group), is interested in regulating the circulation of virtual payments.
The main characteristics of cryptocurrency are decentralization and
anonymity. The adoption of the law on bitcoin and cryptocurrency in general
will be able to solve the following tasks:
- Strengthen the fight against financial fraud and the black market;
- to protect market participants;
-provide anti-money laundering;
-create a base for taxation and licensing.
Conclusion
Currently, the world practice has four models of risk management and
stability of the banking system:
- centralized model, when the regulator is the central bank, whose powers
are enshrined in legislation;
- a model in which the function of supervision of the banking sector
carried out by specialized institutions together with the central bank and the
ministry of finance;
- a model based on the division of oversight functions between the two
institutions. One is assigned control over business standards, the other is
engaged in macro- and microprudential supervision;
- a model based on the creation of a global mega-regulator financial
markets, when it can merge with the central bank or exist separately and
independently from it.
The problems of regulating the financial market in Russia are identified,
including the fact that a serious problem for the effective functioning of the
mega-regulator is the emergence of uncontrolled segments of the financial

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market based on blockchain technologies. Currently, the status of
cryptocurrencies in the Russian Federation has not been determined.
The solution to these problems lies in the plane of the adoption of the law
on bitcoin and cryptocurrency, which will be able to solve the following tasks:
- Strengthen the fight against financial fraud and the black market;
- to protect market participants;
-provide anti-money laundering;
-create a base for taxation and licensing.
In conclusion, the cyclical development of the Russian economy is
becoming more and more obvious, a number of financial crises have had a
significant impact on the rate of GDP growth. In this connection, today the most
important instrument for regulating the banking system is the creation by
mega-regulators of a system of procyclical regulation of the banking system
development.

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 Literature and sources
1. Avis O.U. On the relevance of structural reforms in banking system //
Banking. - 2015. - No. 11.
2. A.V. Aksenichev Banking control and supervision in Russia: current state
and development prospects: author. dis. Ph.D. / Aksenichev A.V. - SPb.,
2010.
3. Analytically report "Medium-term forecast of the development of the
financial system of Russia (2010-2015)" [Electronic resource]. Access
mode: http://www.mirkin.ru/_docs/analyt_doclad2010-2015.pdf
4. Paech P. Systemic risk, regulatory powers and insolvency law The need
for an international instrument on the private law framework for netting //
Institute for Law and Finance. Goethe Uneversitat Frankfurt.
Workingpaper #116. Frankfurtammain. 2010.