Improving the methodology for analyzing the financial stability of the bank in order to increase economic security

Grigor'eva Kristina Vladimirovna Bank of Russia 123007, Russia, g. Moscow, ul. Khoroshevskoe Shosse, 60 kgrigoreva@yandex.ru

The relevance of the topic is due to the significant level of instability that has been occurring in recent years in the entire financial system.  At the same time, the role and importance of the banking sector is increasingly increasing, especially in times of crisis, accordingly, much attention is paid to both the financial stability of the entire banking industry and individual organizations, which is one of the most important factors affecting the economic security of the country.

Increasing the level of economic security of financial organizations, in particular banks, in modern conditions of high turbulence is an important factor for the stable functioning of the Russian financial system. At the same time, the high level of stability of individual financial organizations can act as a factor constraining the negative impact on the entire banking and financial system of the country. Accordingly, the issue of diagnosing the financial stability of banks is relevant in order to early prevent the occurrence of risk factors for the bank to lose its financial stability as a component to increase the level of economic security. Also, the relevance of this issue is confirmed by the policy of the Bank of Russia, which regularly conducts "sweeps" in the banking industry. For 9 years, more than 440 credit institutions have had their banking licenses revoked, which shows the inefficiency of a large number of banks, and the methodology used to analyze the financial stability of the bank needs to be improved and clarified to ensure the stability of the financial system and economic security.

         Currently, there are a large number of different methods that are used to analyze the financial stability of the bank. All of them can be divided into the following groups:

         - methods developed by the Bank of Russia;

         - methods developed by individual authors;

         - methods used by rating agencies;

         - foreign methods.

         To analyze the financial stability of banks, the Bank of Russia applies two main methods fixed at the legislative level: the Instruction of the Bank of Russia dated 11.06.2014 No. 3277-U "On methods for assessing the financial stability of a bank in order to recognize it as sufficient to participate in the deposit insurance system" and the Instruction of the Bank of Russia dated 03.04.2017 No. 4336-U "On assessing the economic situation banks" ^[6].

         For the purposes of risk-based supervision, the Bank of Russia uses both methods, but for different purposes. The first method evaluates the bank's compliance with the criteria for participation in the deposit insurance system, is more simplified, since it uses fewer indicators compared to the other method, and there is also no resulting indicator. The Bank is recognized as financially stable if it meets the criteria for participation in the deposit insurance system.

The second method covers a larger number of indicators compared to the first and has a resulting indicator. At the same time, the assessment is made not for the purpose of determining the financial stability, but the economic situation of the bank. Based on this methodology, all banks are assigned to one of the classification groups. If a bank is assigned to the first classification group, it means that it has no current problems that can prevent it from continuing operations in the future ^[5].

The main disadvantage of this technique is the static nature of the indicators, as well as, accordingly, the possible delay of the results from the real state of affairs. At the same time, the methodology is used for evaluation once a quarter, which also does not contribute to the rapid identification of negative trends in the organization's activities.

The Russian banking system is relatively young and is under development. Accordingly, it is necessary to improve and develop methods for determining the financial stability of banks, including studying foreign experience. The Bank of Russia's bank assessment methodology is similar to the foreign CAMELS methodology.

This technique is one of the most popular foreign techniques developed in 1978 by the Federal Reserve System of the United States of America. The methodology arose as a result of the need to unify the assessment of the financial stability of banks. This technique is easily accessible for understanding, and therefore has gained its popularity. Despite the standardization of methods for assessing financial stability used in the American methodology, the result depends, among other things, on the skill, knowledge and objectivity of analysts conducting these procedures in relation to banks. Some of the indicators of this methodology can be found from external published information, some – based on internal information of the bank. The technique stands for as follows:

- C – this indicator characterizes capital adequacy, also shows whether the amount of capital as a whole is sufficient;

- A – asset quality indicator;

- M – management quality indicator: determination of the quality of management management of a particular bank based on various assessments of performance, including compliance with laws, instructions;

- E – indicators of profitability or profitability of the bank: the methodology uses this indicator to assess the effectiveness of the bank as a whole and whether there is enough profit for development in the future;

- L – liquidity indicator: the methodology determines whether the bank's liquidity level is sufficient to fulfill its obligations;

- S is an indicator of risk sensitivity. A relatively new indicator included in the methodology shows the impact of major market risks on the bank ^{[3, p. 61]}.

Each of the indicators is evaluated on a five–point scale and based on the data obtained, the final indicator is calculated, where one is a bank in which there are no problems, five – the financial stability of the bank is considered unsatisfactory.

The analysis of banks is also carried out by well-known international rating agencies:

1)    Fitch;

2)    Standard & Poor's (S&P);

3)    Moody's.

According to the first method, the analysis of financial stability takes into account a more extensive number of indicators compared to the remaining two. The methodology includes both quantitative and qualitative indicators, for example, indicators characterizing management activities, the direction of risk management and the customer base, and the methodology also takes into account various conjunctural factors. The complexity of the methodology lies in the fact that the set of indicators varies depending on the objectives of the analysis.

The methodology compiled by the rating agency Standard & Poor's (S&P) is similar to the previous methodology, while it has its own characteristics, for example, it takes into account some business features. The agency also requests information from organizations that is available only to internal users for analysis, so the final result according to this methodology can be adjusted for factors that will be unknown to users ^[2].

The latest methodology of the Moody's rating agency is similar to the previous ones, while significant influence is given to corporate governance indicators that affect the outcome of the assessment of the overall credit rating of the organization ^[1].

In the last few years, there has been a tendency for the convergence of foreign and Russian methods. However, the use of completely foreign methods is impossible without significant changes in terms of adaptation to Russian realities.

In Russia, also a few years ago, the rating agency Expert RA JSC created a domestic methodology for ranking banks. This methodology, as well as foreign ones, uses the term "creditworthiness". At the same time, this term indicates the ability of the organization to fulfill its obligations in a timely and complete manner. The analysis is carried out on the basis of all available available information, and the agency also has the right to request additional necessary information.

Both quantitative and qualitative indicators are used in the analysis, for example, business reputation indicators, whether the bank is captive, asset quality, information security, development prospects are taken into account) ^[4].

According to the methodology, credit organizations are divided into categories from those with a high credit rating to organizations with a default status. It is also noted that in this methodology the concepts of "creditworthiness", "financial reliability" and "financial stability" are identified.

The most important task in the framework of the analysis according to the methodology of the domestic rating agency is to determine whether the bank is attractive for investment or not. However, when determining it, the investment attractiveness of Russian regions is taken into account. At the same time, the specifics are as follows: there is a pronounced polarization of regions in the country and most of them are "middle-class", respectively, even with positive changes in the investment climate of the region, this does not affect its assessment in any way due to strong polarization, which artificially "preserves" the position of the region in one place, therefore, the objectivity of the analysis is lost in order to determine the investment attractiveness of the bank.

A comparative table of the considered methods has been compiled.

All the methods considered have their own characteristics, advantages and disadvantages. However, no methodology mentions accounting for the banking business model, that is, the bank's business model, except for the presence of individual indicators in the methods. At the same time, taking into account the bank's business model is an important and integral factor in the analysis of the bank's financial stability, which is confirmed by the statement of the head of the Central Bank of the Russian Federation that there are a sufficient number of banks with an inefficient business model, respectively, it is unclear how such banks will develop in the future from a strategic point of view.  These statements indicate that the methodology used to analyze the financial stability of the bank needs to be improved. Accordingly, the novelty of the presented article consists in the proposal to improve the methodology for analyzing the financial stability of the bank as one of the factors affecting economic security, in terms of including the bank's business model in its analysis.

Each credit institution, and in particular a bank, has its own unique features and peculiarities, however, common features can be identified during the analysis, as well as the division of banks into groups in accordance with their business models is possible due to the existence in the Russian Federation of unified requirements for banks under the legislation. 

The study suggests using the following indicators to highlight common features, such as the size of the bank, its branching, as well as regional presence, as well as the main activity for the bank. Based on these indicators, it is possible to single out the largest banks in the country into a separate group – these are systemically significant credit organizations. At the moment, there are 13 systemically significant banks in the Russian Federation: JSC UniCredit Bank, GPB Bank (JSC), PJSC Sovcombank, VTB Bank (PJSC), JSC ALFA-BANK, PJSC Sberbank, PJSC Credit Bank of Moscow, PJSC Bank FC Otkritie, PJSC ROSBANK, JSC "Tinkoff Bank", PJSC "Promsvyazbank", JSC "Raiffeisenbank" and JSC "Rosselkhoznadzor" ^[7]. Usually, systemically significant credit organizations include such organizations whose bankruptcy can lead to serious consequences not only for the entire banking industry as a whole, but also for the entire financial system of the country, and this outcome will negatively affect the population. The systemically important banks in our country include the largest banks in the system. The main criteria for classifying a bank as systemically significant are mainly its size, as well as the amount of funds raised from the population. To regulate the detail of systemically important banks, special instructions have been created by the Bank of Russia, fixed at the legislative level. At the same time, most often, when difficulties arise in the activities of such banks, they fall under rehabilitation, that is, rehabilitation measures, and not revocation of a license to conduct banking operations. Accordingly, taking into account the specifics of their activities, as well as the size, it is advisable to separate these banks into a separate group.

Other banks other than systemically important credit institutions can be divided by branching, that is, regional banks with a narrow network and other banks with offices in several regions and with a wide customer service network. 

The next criterion is an analysis of banks in terms of products and services provided, as well as an analysis of activities and income from them. Based on these data , the following groups of banks can be distinguished:

1) systemically significant credit organizations;

2) regional banks that are mainly engaged in one area of activity: lending to legal entities or individuals;

3) banks with a wide network and engaged in different areas of activity at the same time;

4) banks engaged in non-traditional activities for banks, for example, interbank lending and investments in securities.

Thus, further work in terms of improving the methodology for analyzing the financial stability of the bank is expected, taking into account the division of banks into the proposed groups to take into account when determining their sustainability of the bank's business models. Further development of these provisions will help identify inefficient banks that may face a threat of termination in the future, and also provides opportunities for operational interaction with such organizations without negative consequences for the banking system and economic security in general.