The procedure for assessing the financial condition of the counterparty. Features of assessing the financial condition of a counterparty bank when working in the interbank market Bank division for assessing the financial position of counterparties

The procedure for assessing the financial condition of the counterparty. Features of assessing the financial condition of a counterparty bank when working in the interbank market Bank division for assessing the financial position of counterparties

05.02.2024 Insulin

Every entrepreneur, when selecting a business partner, asks himself several questions: who is in front of him and how reliable is he, is it a dubious one-day company, a shell company used to carry out gray schemes, or a reliable company, working with which will be profitable and comfortable?

Experienced businessmen have their own methods for assessing the reliability of partners, often based on intuitive instincts, reviews and assessments of other business entities, the possibility of obtaining data from insider sources, etc. However, the likelihood of an error with such “risky” methods is extremely high, and the price of incorrect conclusions is losses, participation in lengthy legal proceedings, and sometimes the loss of your business.

The most accurate assessment is that of professional analysts, since it is based on a proven methodology, and it uses all indicators of the economic activity of a particular company available for calculations.

The assessment algorithm may vary. The most “advanced” companies offer their clients analysis of 40 or more indicators, including:

Liquidity ratio (ratio of accounts receivable to accounts payable, current assets to liabilities, etc.);
Profitability and financial leverage ratio (ratio of equity to assets, profit to revenue of the organization, profit to assets, etc.);
Probability of bankruptcy;
Presence of claims from other counterparties;
The amount of debt on bank loans, taking into account the size of working capital and industry averages;
Presence of claims from tax and other government authorities, etc.

The ratings given for each of the analyzed indicators are summed up and averaged, and as a result, figures are displayed that clearly show the degree of reliability of the company.

However, professionals are well aware that beautiful graphics and pictures are sometimes used solely to attract clients. For an experienced specialist, it is necessary to have information on indicators that are not always determined by ratings on a five-point scale or as a percentage. The operating efficiency and financial stability of the company is clearly visible when analyzing:

Degree of sufficiency of financial resources;
The effectiveness of their attraction and use.

Where can I get the necessary information?

To carry out the assessment, the company's accounting documents, reports, balance sheets, and information on the flow of funds are required. Such information is most often not available to an ordinary entrepreneur. However, this does not mean that it is closed or secret. Some information is published quite legally by Rosstat, and there are also special companies that collect financial information. It is extracted from a variety of sources:

From open banking information;
From the Credit History Bureau;
From official statistics, etc.

As of 2017, Russian analysts have more or less complete information on the financial activities of almost all large and medium-sized companies operating in our country.

The practice of data exchange is quite common in the information market, as a result of which information about the financial condition of a company can be obtained in a fairly short time.

Experience shows that collecting all the necessary information, analyzing it and checking it with employees of companies that do not do this professionally will require a lot of time and unjustified financial costs. And the effectiveness of such work is questionable, which means trusting such information is extremely risky.

Algorithm for assessing the financial position of a company

We emphasize that there is no single correct calculation algorithm. However, a number of accounting indicators will very well show, for example, the level of sufficiency of financial resources.

The main one is the size of revenue. Knowing the approximate turnover of the company and the average profitability in the industry or a specific region, you can easily understand how the company is doing with sufficient funds.

The second indicator is profit. Regular negative indicators in this column should immediately alert you. Since any business sets its goal to obtain it, if the profit is negative, it means the enterprise has a deficit of its own funds, or this company was not created at all for normal economic activity.

The efficiency of resource use is very clearly visible when studying the structure and size of a company's assets. Let's take an ordinary retail chain as an example. The norm for it should be a very high working capital ratio. But real estate, transport and other fixed assets should be as small as possible.

When analyzing this indicator, a manufacturing company should experience the opposite trend. And, for example, a shortage of working capital for a manufacturing company is quite common.

It is also important to take into account industry specifics and the distribution of fixed assets, taking into account the specialization of the enterprise. The presence of a large number of assets that do not generate income is a sign of ineffective management and a sure sign that such a company has financial problems.

Another characteristic sign of the unreliability of a company is a solid turnover, the implementation of non-core operations with a minimum of property.

In the arsenal of financial analysts, in addition to analytical ones, there are also mathematical methods of calculations, which very clearly show how much the company has enough funds and how effectively it is able to attract them.

In this regard, it is customary to use the term “financial stability of the company,” which is determined by a number of mathematical coefficients.

The absolute norm is to use several sources of financing, including equity and borrowed capital, subsidies, etc. But the relationship between them and the ability to maneuver your sources of financing clearly show how things are going for a particular company.

To determine the degree of financial stability of a company, two coefficients are used:

Long-term financial independence;
Maneuverability of equity capital.

The first coefficient is calculated using the following formula:

In this formula:

C k – the value of own sources of financing, which are formed from equity capital, profit, accounts payable, etc.;
Z CD – long-term borrowed funds, that is, long-term loans, deferred tax payments, bonds, bills, etc.;
A is the value of all assets.

The closer this ratio is to one, the better the balanced financial position of the company.

If the indicator does not reach one, then a comparison of the missing value and the company’s liquid assets is required, that is, those that can be quickly sold without harming further activities. As a rule, we are talking about finished goods inventories or accounts receivable. If these indicators are more or less comparable, then the enterprise is normal.

If there is a strong discrepancy between them, the enterprise will definitely need additional sources of financing, and their absence entails the loss of fixed assets, a shortage of working capital, as well as the possibility of bankruptcy of the company.

To determine the degree of maneuverability of equity capital, the following formula is used:

Variable A in is non-current assets, which include fixed assets, intangible assets, long-term financial investments, etc.

This formula clearly shows the amount of own current assets and their share in equity capital. The value of the obtained coefficient is often compared with industry averages. Since the degree of their sufficiency for each industry is different. Approximate correspondence of indicators indicates that the company has enough financing. But sharp deviations from industry average standards indicate the company’s unreliability.

Practice shows that the use of various methods and algorithms for assessing the financial position of a company, which, among other things, complement and check each other, is the most effective strategy in determining the reliability of a particular counterparty.

Who evaluates the financial position of the company

For the accuracy of the assessment, not only modern and practice-tested methods are important, but also specialists who have sufficient qualifications. Most financial analysts are accountants, auditors, and financiers with extensive experience in both government and private institutions.

For a specialist, through whose hands thousands of financial documents have passed, even a superficial glance at the organization’s balance sheet is often enough and he will be able to quite accurately determine what a particular company is.

A detailed audit of the financial statements of such a company will clearly show the goals of the organization’s activities, and even more so the degree of its reliability.

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To assess the financial condition, a credit institution must document information about the counterparty and include it in the counterparty’s dossier. The procedure for maintaining a file is established by the credit institution independently. In this case, a document with a professional judgment about the counterparty must be generated and placed in the counterparty’s file: for legal entities that are not credit institutions - at least once a quarter as of the reporting date; for credit institutions - at least once a month as of the reporting date; for individuals - at least once a quarter as of the reporting date (with documentary evidence of the individual’s income according to a 2-NDFL certificate at least once a year). Sources of information include data from the counterparty's financial statements. To analyze the activities of the counterparty, information can also be used on the volume of its cash flows, their sufficiency to cover the counterparty’s expenses, whether the credit institution has the right to write off funds from the counterparty’s accounts without acceptance in the event of the counterparty’s failure to fulfill its obligations, and on the possibility of foreclosure on the counterparty’s property in an indisputable manner. To make a professional judgment, other available information can be used, for example, credit history, data on the state of the industry in which the counterparty operates, its business reputation, the existence of litigation against the counterparty, etc. Lack of information about the counterparty is considered one of the risk factors. The credit institution independently approves the lists of factors on the basis of which a professional judgment is formed about the quality category, and the amount of the reserve as a percentage of the calculation base used when calculating the reserve for possible losses. Elements of the calculation base of the reserve related to the counterparty in respect of which the credit institution has a loan debt, loan and equivalent debt, can only be classified into the quality category to which the loan debt is classified (except for forward transactions). In this case, the amount of the reserve for possible losses as a percentage of the calculation base, used when calculating the reserve for possible losses, may differ from the amount of deductions used when calculating possible losses on loans, loan and similar debt. For elements of the calculation base of the reserve such as claims for other operations, other economic and financial transactions, contingent liabilities of a credit nature and others, the value of each of which does not exceed 0.5% of the amount of the credit institution’s own funds (capital), an independent reserve may not be formed. Credit institutions can create a reserve for a portfolio of homogeneous claims (credit contingencies) without making a professional judgment on each element separately. Signs of homogeneity are determined by credit institutions independently based on the economic content of the claims under consideration (contingent obligations of a credit nature). A portfolio of homogeneous claims can be formed according to the following elements of the reserve calculation base: - balances on individual personal accounts of balance sheet accounts 30602 “Settlements of credit institutions-principals (committors) for brokerage operations with securities and other financial instruments”, 30605 “Settlements with the Ministry of Finance of Russia for securities papers." 47423 "Requirements for other operations"; - balances on personal accounts of the corresponding balance sheet accounts 60308 “Settlements with employees on accountable amounts” (in terms of shortfall amounts), 60312 “Settlements with suppliers, contractors and customers” (in terms of advances, prepayment of valuables), 60314 “Settlements with organizations - non-residents for business transactions", 60323 "Settlements with other debtors", 60401 "Fixed assets (except land)" (in terms of fixed assets leased); - contractual values of contingent credit obligations. Claims against a counterparty (credit contingencies) that have individual signs of impairment cannot be included in a portfolio of homogeneous claims (credit contingencies). Receivables to the counterparty included in the portfolio of homogeneous claims (credit contingencies) for which individual signs of impairment are identified are removed from the corresponding portfolio of homogeneous claims at the time of receipt of information that gives grounds for a change in professional judgment, with the exception of those whose value does not exceed RUB 1,000 . Requirements not exceeding 1000 rubles. having individual signs of impairment are removed from the portfolio of homogeneous claims at the time of making a professional judgment on the amount of credit risk for the portfolio of homogeneous claims (credit contingencies) at the end of the quarter or reporting year. A credit institution must document its professional judgment on a portfolio of similar claims (credit contingencies) at least once a quarter and place it in the file of the corresponding portfolio of similar claims (credit contingencies).

More on the topic The procedure for assessing the financial condition of a counterparty:

Financial results, assessment of the financial condition and efficiency of the enterprise.
Topic 5. Financial results, assessment of the financial condition and efficiency of the enterprise
Assessment of the financial condition and financial stability of the enterprise

At the present stage of development of the banking system, the most significant for commercial banks are credit risks, which is due to the structure of active operations of banks, among which the issuance of loans predominates. When managing total credit risk, special attention must be paid to the analysis of the financial condition of counterparties in the interbank market. Assessing the financial condition of counterparty banks is an integral part of the activities of any commercial bank when operating in the interbank market and the market for debt obligations, the issuers of which are counterparty banks.

The financial condition of the counterparty bank is the main parameter for making a decision on opening and the volume of the limit for conducting transactions with it. In addition to the financial stability of the counterparty bank, when determining the limit, it is necessary to take into account the risk associated with the type of transactions performed. Commercial banks place temporarily free funds on the interbank market, attract funds from counterparty banks, carry out transactions for the purchase and sale of foreign currency (in cash and non-cash form), carry out transactions with debt obligations and other operations in accordance with the legislation of the Russian Federation. The placement (attraction) of temporarily free funds of commercial banks is carried out using the following financial instruments: interbank loans, interbank deposits, funds in nostro accounts (loro accounts) and bank debt obligations. These transactions are subject to credit risk and require restrictions from the bank.

When working in the interbank lending market, the creditor bank needs to develop and apply its own assessment methods, with the help of which professional judgments are formed about the level of the bank’s financial condition. The use of its own assessment methods is due to the fact that the Bank of Russia formulated only general requirements for assessing the financial condition of banks, and did not offer a standardized approach to assessment. Methods for assessing the financial condition of a bank must comply with the requirements and restrictions imposed on the activities of commercial banks in accordance with banking legislation and regulations of the Bank of Russia.

A special feature of assessing the financial condition of a bank is that the assessment is based on an analysis of the bank’s available financial statements posted on the official website of the Bank of Russia and the credit institution. Published official statements do not fully reflect the financial condition of a credit institution due to the fact that falsification of statements has become widespread in Russian banking practice. Moreover, even if we assume that the balance sheet information is reliable and infallible, conclusions about the general financial position of credit institutions that are identical from a reporting point of view may differ radically. For the most complete and reliable assessment of the bank’s financial condition, in addition to available official reporting, it is also necessary to analyze data from rating agencies, publications in the press and on the Internet, information on the quality of bank management and other informal data.

The result of the assessment is to determine the level of financial condition based on the rating obtained. The level of a bank's financial condition characterizes its ability to exist and break-even, subject to the timely fulfillment of all undertaken obligations and compliance with all regulatory requirements within a given period of time or in an unlimited time period.

When analyzing the financial condition of a counterparty, it is necessary to use both quantitative (formal) information and qualitative (informal) information. Accordingly, indicators reflecting the final assessment of the bank’s financial condition can be divided into two large blocks: financial indicators and business risks.

Financial ratios reflect the financial consequences of all completed transactions and the status of the bank's current operations, as well as, possibly, the projected financial results of future activities. Financial indicators have a quantitative expression and are calculated according to accounting or management accounting data (when assessing the financial condition of the counterparty bank, the analyst mainly uses official reporting, therefore, we are talking only about accounting data).

Let us consider in more detail the methodology for assessing the financial condition of a counterparty bank, in particular the financial indicators used in assessing credit institutions and calculating limits, for the purpose of assessing risks (determining reserves) when the bank carries out operations on the interbank market.

The minimum required list of documents for analyzing the financial condition and establishing a limit on interbank lending includes the following reporting forms (in accordance with the Directive of the Bank of Russia dated November 24, 2016 No. 4212-U “On the list, forms and procedure for compiling and submitting reporting forms for credit institutions to the Central Bank Russian Federation"):

“Turnover statement of accounting accounts of a credit organization” (form according to OKUD 0409101) – monthly;
“Calculation of equity (capital) (Basel III)” (form according to OKUD 0409123) – monthly;
“Information on mandatory standards and other performance indicators of a credit institution” (OKUD form 0409135) – monthly.
“Report on financial results” (form according to OKUD 0409102) – quarterly.

These reporting forms are posted on the official website of the Bank of Russia if credit institutions have given consent to the disclosure of this information. To assess the financial condition of a credit institution over time, a banking analyst needs to analyze the information contained in these reporting forms for the last twelve months.

Additional information for analyzing the financial condition of the counterparty bank may include other forms of reporting (if provided by the counterparty), as well as annual financial statements (according to RAS and IFRS) with an auditor’s report for the last financial year.

The analysis of the bank's financial condition is carried out in stages. At the first stage accounting accounts are grouped according to bank balance sheet items (according to the OKUD form 0409101), which have a general economic content (with reference information for calculating individual financial indicators). Also, “clearing” (balancing) of the balance from technical accounts is carried out (for example, settlements with branches, etc.).

At the second stage indicators are calculated (ratio analysis) characterizing the financial condition of the counterparty. Some of the indicators are calculated based on the items of the analytical balance obtained at the first stage, and some are actual indicators from various reporting forms (for example, the values of mandatory standards). To assess the financial risk of the counterparty bank, a comparative analysis of financial indicators over time is carried out, including:

capital assessment;
liquidity assessment;
asset valuation;
indicators of profitability (efficiency) of the bank.

The group of capital assessment indicators (P1) includes mandatory standards regarding the adequacy of the bank’s own funds (capital) and an indicator of the level of capital immobilization. Capital adequacy requirements are well known and unified in world practice. They reflect the need for capital to perform the function of protecting against unforeseen risks, that is, to cover the bank’s risk-weighted assets. These indicators characterize the bank’s ability to also perform an operational function and affect the bank’s ability to develop itself. The economic content of these indicators is presented in more detail in Table 1.

Table 1

Group of capital assessment indicators (P1)

	Index	Economic content
P1.1, P1.2, P1.3	Adequacy ratio of the Bank's basic/fixed capital/equity (capital) (N1.1, N1.2, N1.0)	The bank’s ability to incur expenses to support its own activities and compensate for losses from realized risks arising in the course of these activities, exclusively from its own sources of funds.
	Level of capital immobilization	The ability of capital to perform a protective and operational function. A high level of capital immobilization reduces the bank’s ability to compensate for losses from banking activities and make investments in the development of banking business, and vice versa.

The group of liquidity assessment indicators (P2) includes mandatory standards for instant, current and long-term liquidity established by the Bank of Russia, as well as indicators characterizing the structure of liabilities (raised funds) (Table 2). Structural analysis allows us to determine the main sources of formation of the bank’s resource base and the timing of raising funds, which allow us to assess the stability and degree of diversification of bank resources.

table 2

Group of liquidity assessment indicators (P2)

	Index	Economic content
R2.1, R2.2, R2.3	Instant/current/long-term liquidity ratio (N2, N3, N4)	The ability of a bank to convert its assets into cash or other means of payment to satisfy claims from creditors. Reflects the degree of consistency of assets and liabilities in terms of demand (repayment) dates and amounts.
	Share of customer funds on demand in attracted funds	The share of the least stable (“cheap”) client resources in the total volume of attracted resources. A high value of the coefficient means a high probability of a liquidity shortage under the influence of negative factors.
	Share of clients' urgent funds (deposits) in attracted funds	The share of stable (urgent, “expensive”) client resources in the total volume of attracted resources. These funds are the main source of placing funds in income-generating assets.
	Share of attracted interbank loans (IBC) in attracted funds	The share of stable (urgent, “expensive”) interbank resources in the total volume of attracted resources. These funds are a source of maintaining the solvency of the balance sheet and ensuring the uninterrupted fulfillment of obligations.
	Share of funds of individuals (on demand and urgent) in total funds raised	The degree of diversification of the resource base and dependence on the funds of individuals. When exposed to negative factors, a “mass flight of depositors” may occur

The group of asset valuation indicators (P3) includes mandatory standards established by the Bank of Russia (in terms of limiting credit risks in certain categories), asset quality indicators (the level of overdue debt and the degree of loan impairment), etc. Certain financial indicators of this group allow you to analyze the structure of active operations bank, assess the degree of their diversification and the bank’s business profile (lending or investment direction). The share of working assets is also assessed and it is determined whether there is a dependence on the resources of the interbank market, i.e. whether the bank is a net lender or a net borrower. More detailed financial indicators are presented in Table 3.

Table 3

Group of asset valuation indicators (P3)

	Index	Economic content
	Concentration indicator of large credit risks (N7)	Limiting the total amount of large credit risks
	Indicator of concentration of risks on its participants (shareholders) (N9.1)	Limitation of the maximum amount of loans, bank guarantees and guarantees provided by the bank to its participants (shareholders)
	Indicator of the total amount of risk for insiders (N10.1)	Limitation of the bank’s total credit risk in relation to all individuals capable of influencing decision-making on issuing a loan
	Ratio of other settlements (by asset) to working assets	A sign of opaque financial reporting and the bank’s use of various fictitious schemes (significant balances in accounts for other assets and their changes in dynamics)
	Share of loan portfolio in working assets
	Share of overdue loans in the loan portfolio (except for interbank loans)	Quality of the loan portfolio for loans to individuals and legal entities (timely repayment of loans)
	Ratio of RVPS to the loan portfolio (except for interbank lending)	Quality of the loan portfolio for loans to individuals and legal entities (degree of impairment, probability of loan repayment)
	Share of overdue debt in working assets	The share of assets that cease to generate regular interest and other income due to deterioration in quality (failure to repay on time), in the total volume of income-generating assets
	Ratio of reserves for possible losses on assets to operating assets	Quality of bank assets exposed to risks (degree of impairment, probability of demand)
	Ratio of overdue debt on assets to equity (capital)	Part of the bank’s own funds (capital) diverted to pay off losses on overdue assets
	Net debt in the interbank market relative to operating assets	Degree of dependence on interbank market resources
	Share of securities in working assets	The degree of diversification of active operations, the bank’s business model (focus on lending or investment operations)
	Share of government securities and bonds of the Bank of Russia in securities	The share of the most liquid securities issued by the state (Bank of Russia). A high coefficient value means the possibility of obtaining additional resources secured by securities.
	Share of cash in working assets	A high coefficient value means the bank may be involved in questionable transactions.

The final group of indicators necessary to assess the financial condition of a credit institution is the group of indicators for assessing profitability (P4). This group characterizes the efficiency of banking activities and the ability of assets to generate profit (Table 4). The bank's profitability over time is one of the indicators of the bank's financial stability.

Table 4

Group of profitability assessment indicators (P4)

In order to assess the financial condition of the counterparty bank when carrying out transactions on the interbank market, the author analyzed and selected 27 indicators that characterize various aspects of the bank’s activities and affect its financial stability: 4 indicators of the capital assessment group; 7 indicators of the liquidity assessment group; 14 indicators of the asset assessment group and 2 indicators of the profitability assessment group. Tables 1-4 present in detail the indicators included in the author’s methodology for assessing the financial condition of the counterparty bank, and their economic content (justification for why these indicators were chosen).

At the third stage each calculated indicator is assigned points on a scale from 0 to 1 (0 – minimum, 1 – maximum score), all calculated indicators have the same specific weight and are taken as one. The assignment of points is considered using the example of indicators of the profitability assessment group (Table 5).

Table 5

Scoring of indicators of the profitability assessment group

Group of profitability indicators	Range of values, %	Point
Return on operating assets


Return on equity (capital) of the Bank

Pi – score of the financial indicator (i can take values from 1 to N);

N – number of calculated indicators.

At the fourth stage non-financial indicators (business risks) are assessed. The assessment is carried out by collecting, studying, analyzing and interpreting other factors related to the activities of the counterparty bank. These factors certainly influence credit risks, but cannot be objectively formalized. The degree of influence of these factors depends on various features of the functioning of the counterparty bank. The main risk factors include the following groups:

risk factors associated with ownership structure and management: transparency of ownership structure, owners, possibility of obtaining financial support;
risk factors associated with corporate governance and business reputation: management experience and management efficiency, credit history of the counterparty, business reputation, information transparency;
risk factors associated with the market positions of the counterparty: position in the banking sector, degree of business diversification, branch network and sales network structure.

Each group of factors includes various indicators, which, like financial indicators, are assigned a score from 0 to 1, while the indicators have different specific weights. The total number of points for the business block is calculated by summing the products of the points obtained for each risk factor and their specific weights. The total number of points for the business block cannot exceed 1 point.

At the fifth stage the final assessment of the counterparty bank is formed. The final assessment of the counterparty is determined as the sum of two assessments: financial and non-financial block, weighted by appropriate weights. The weight of the financial block is assumed to be 0.7, and the non-financial block 0.3. Depending on the received rating value, each credit institution belongs to one of the classification groups (reliability categories):

Rating R1.1 (from 0.85 to 1) – counterparties have a good financial position. Highest degree of creditworthiness. High probability of full and timely fulfillment of your obligations.
Rating R1.2 (from 0.70 to 0.85) – counterparties have a good financial position. High degree of creditworthiness. High probability of full and timely fulfillment of your obligations. One or more signs of instability may appear.
Rating R2.1 (from 0.60 to 0.70) – counterparties have an average financial position. The degree of creditworthiness is slightly above average. Moderate manifestation of risks.
Rating R2.2 (from 0.50 to 0.60) – counterparties have an average financial position. The degree of creditworthiness is average. Moderate manifestation of risks. There is a possibility of a worsening financial situation.
Rating R3.1 (from 0.25 to 0.50) – counterparties have a poor financial position. There are signs of unreliability, instability, and serious negative trends. There is a high probability of failure to fulfill one’s obligations in whole and/or in part. Creditworthiness is bad.
Rating R3.2 (from 0 to 0.25) – counterparties have a poor financial position. There are signs of unreliability, instability, and serious negative trends. Creditworthiness is unsatisfactory. The bank is on the verge of bankruptcy.

Classification groups are presented in order of decreasing creditworthiness and reliability. The resulting rating provides an assessment of the level of the bank's financial condition, which can be used to manage credit risk when carrying out transactions with a counterparty on the interbank market.

In banking practice, the main methods of managing credit risk in modern conditions are reservation, limitation and collateral. In relation to the activities of a commercial bank in the interbank market and the debt market, this method of managing credit risk, such as loan collateral, is practically not used in domestic banking, but reserving and limiting act as universally necessary methods of managing credit risk when carrying out active transactions with counterparty banks .

Based on a summary assessment of the financial condition of the bank, organizations that establish certain financial relations with it make a decision on the possibility and boundaries of such interaction. Thus, the resulting summary assessment of the bank’s financial condition using the considered methodology can be used in the future by the bank’s specialized divisions to set a limit on transactions with a counterparty and reserves in order to minimize credit risk.

Based on the results of the analysis of the counterparty bank, a specialist from the risk analysis department makes a professional judgment on assessing the financial condition of the bank. Banks are analyzed on a monthly basis. Professional judgment contains the following main sections:

Business risk analysis of the counterparty bank.
Analysis of financial performance indicators of the counterparty bank.
Main qualitative indicators characterizing the counterparty bank and its activities.
Mutual requirements
Recommendations for establishing a credit rating and the size of the aggregate limit for the counterparty bank.

Assessing the financial condition of counterparty banks is an integral part of the activities of any commercial bank in the interbank market. The assessment is carried out in order to effectively manage credit risk, balance sheet structure and liquidity of the bank. The interbank market segment plays a key role in ensuring the sustainable functioning of both individual banks and the banking system as a whole.

Bibliography:

Buzdalin A.V. Bank reliability: from formalization to assessment. M.: Book house “LIBROKOM”, 2015. – 192 p.
Pomorina M.A. Methodology for determining the rating of the financial condition of the borrower bank // Bank lending. – 2014. – No. 31. – P. 52-69.
Pomorina M.A. Financial management in a commercial bank: a textbook. M.: KNORUS, 2017. – 376 p.
Shatalova E.P., Shatalov A.N. Assessing the creditworthiness of borrowers in banking risk management: a textbook. M.: KNORUS, 2016. – 166 p.

The purpose of setting limits on counterparty banks is to minimize the risk of non-repayment using financial analysis procedures. For this purpose, counterparty banks are subjected to a standard financial analysis procedure within the framework of the developed concept.

For simplicity, in the future we will call the bank setting the limit “Bank”, and the counterparty bank simply “Counterparty”.

In general, the limit is a function of assessing the financial condition, payment and creditworthiness of the Counterparty, its net assets, the type and duration of the proposed interbank transaction, as well as the own capabilities of the lending Bank. The limit is a measure of limiting the credit risk that the Bank assumes in the event of conducting a particular interbank transaction.

This document contains a number of methodological and technological recommendations developed on the basis of practical experience (we emphasize that practical experience, and not scientific and theoretical research) of banking and non-banking specialists who have been involved in assessing the financial condition and setting limits on interbank transactions in clearing and other credit organizations actively operating in the interbank market.

In the context of declining inflation and falling profitability of basic financial instruments or the absence thereof, many banks are faced with the problem of increasing the efficiency of interbank business by increasing the range of interbank transactions and services, expanding the circle of partners and counterparties of the bank. Interbank business is especially relevant when attracting and placing temporarily free, short-term financial resources; it is a necessary element in managing the liquidity of a commercial bank and, as a consequence, in “assets and liabilities management” in general.

Development and improvement of new methods that most adequately take into account the current stage of development of the banking business and the peculiarities of accounting, as well as the formation of an effectively working analytical unit - in the interests of not only a particular bank, but also the entire banking system as a whole. Reasonable and timely closure of limits on transactions with problem banks allows us to avoid serious shocks in the interbank market. In modern conditions, the role of the financial risk analysis unit and the cost of errors when setting limits for any bank are increasing many times over.

The technologies recommended below are aimed at solving the main, interrelated problems of financial analysis - determining the current solvency and reliability of counterparties, which is especially important in the following cases:

targeted selection of potential counterparties;

when making a fundamental decision on working with a counterparty on any operations related to credit risk;
when calculating limits on counterparties for specific interbank transactions for specific periods.

To carry out work on analyzing counterparty banks, it is necessary to create an appropriate division in the bank. As experience shows, the latter should be realistic regardless of the heads of “active” departments. Direct reporting to the Chairman of the Credit Committee or the Chairman of the Board is highly desirable. Otherwise, a conflict of interest is possible, which can be removed by linking the bank’s income from work in the interbank market with material incentives for the division. Approval of limits, as a rule, is a discrete process, and the receipt of new information and its analysis is continuous, therefore “expert analysts” should have the right to reduce or close limits unilaterally at any time between meetings of the Credit Committee.

For the successful operation of the analysis department, it is necessary, together with the bank’s management, to overcome the misconceptions that:

Analysis technology can be created and implemented quickly;

The division is auxiliary and does not generate income;

We don't need other people's advice if we have our own analysts.

In fact, it takes about a year to organize systematic work, accumulate information and minimal experience.

In fact, the analysis division is the generator of the bank's "active" ("placement") divisions and gives them the opportunity to earn money by increasing the volume of transactions in the money market through new counterparties and dealing, minimizing the risk of losses.

It is advisable to be interested in third-party competent assessments, incl. based on other methods and information. The costs of this information are not so great, but quite justified.

To adequately assess the financial condition of a particular bank and make a decision on allocating resources to it, you should collect a database consisting of a set of calculated indicators-ratios for various banks. It is necessary to be present in this database for those banks that have already been mentioned. it is known that they have experienced or are experiencing difficulties of various kinds. Then, based on these data, using mathematical statistics, it is possible to determine those boundary values of relative indicators by which a bank is cut off as unreliable. This procedure is used to “calibrate” the analytical system. This approach is based on the recognition of the fact that the real mechanisms and laws of development for the entire banking system are the same.

When analyzing the collected database of indicators, you can see that a number of indicators are highly correlated with each other and do not affect the final assessment. Naturally, the smaller the dimension of the indicator space, the easier it will be to carry out clustering, i.e. distribution of banks into groups and determine the boundary (“threshold”) values by which the counterparty bank is identified as unreliable. Reducing the dimension of the space of indicators is a fundamental task, as it greatly simplifies the procedure for making a decision on setting a limit. . The analytical coefficients used by the authors were refined on a database of more than 17,000 bank balance sheets. An approximate idea of the “average” bank and the general level of development of the banking system can be obtained based on the consolidation of all available balance sheets into one “consolidated” general bank balance sheet for one reporting date.

The initiator of the review of the financial condition of the bank with a view to establishing limits can be practically any division of the Bank interested in conducting certain types of transactions with the Counterparty. Initiating unit (" Initiator") submits to the specialized division of the Bank involved in assessing financial risks and setting limits (hereinafter referred to as conditionally - "Financial Risk Department") a standard application with a request to consider the financial condition of the Counterparties specified in the application, the possibility of setting limits and quantitative needs (your proposals) on the expected size of one-time transactions.

The initiating unit appoints from among itself a person responsible for delivering balances on secondary accounts, standards and other necessary forms of financial reporting via banking communication channels in electronic form to the Financial Risk Department. The Initiator provides direct contacts with the Counterparty’s specialists and delivery of the necessary information to the Financial Risk Department.

The basis for making a decision on setting limits on counterparties is the following primary information:

balance on 2nd order accounts;
compliance with Central Bank regulations;
other information about the founders, clients and partners of the Counterparty;
negative and positive information about the counterparty and its founders, behavior in various segments of the financial market, information from periodicals.

Compliance with standards, the presence of positive information from periodicals, as well as the presence of the counterparty in the reliability or creditworthiness ratings of news agencies sufficient conditions to establish a non-zero limit, which has been confirmed more than once. A necessary and, practically, sufficient condition in the technology under consideration for establishing a limit on interbank transactions is, first of all, the presence of balance sheets in the form of a balance sheet for 2nd order accounts and other prudential forms of financial reporting. Other information is considered only as information for information that helps to give the Counterparty an additional assessment and, first of all, an assessment of the quality of management and management technologies of the Counterparty.

The decision-making procedure is expected to be as follows:

1. Based on the balance of 2nd order accounts, a number of ratios are calculated that characterize the financial condition of a given Counterparty - capital adequacy, risk ratio, profitability and liquidity. Their values are compared with threshold values. The results of the first stage indicate whether there is a need to perform the second and subsequent ones.

2. Analyzes the dynamics of development of the Counterparty according to trend.

3. External information about the Counterparty’s behavior in the market is considered.

4. If there is a positive conclusion about the ratios and dynamics of the bank’s development, and there is no negative external information, the bank may be set an initial possible limit. The result of the analysis is a proposal on a possible limit for one-day interbank lending transactions and a general basic limit for the Counterparty. The limit on other types of transactions and terms is established, as a rule, in a certain proportion from the limit on interbank lending transactions.

If necessary (there are doubts about the assessment of the bank’s financial condition - since the balance sheet and standards of the counterparty may be greatly “embellished”), the Financial Risk Department requests additional information about the counterparty in " Economic Security Service" Bank and additional reporting forms from the Counterparty through the responsible person of the Initiator. Direct contact between employees of the Financial Risk Department and specialists of the Counterparty is undesirable in order to avoid insider activity to the detriment of the interests of the Bank.

Let us note that the task of the Financial Risks and Limits Department is not only to conduct a monthly analysis of financial reporting forms, but also to constantly monitor them (see “Practical Recommendations”).

The following levels of analysis are offered in accordance with the technologies:

Preliminary calculation based on balances on second-order accounts as of the reporting date without considering off-balance sheet and off-balance sheet positions and breaking down into ruble and currency components.
A level that allows one to evaluate the dynamics of a bank’s development at the level of balance sheet items and analytical ratios over the past six months - analysis of dynamics by trend.
A detailed snapshot for a specific date, representing a consolidated analytical balance sheet of the bank, broken down into currency and ruble components, detailing off-balance sheet and off-balance sheet items.
At the level of the Moscow region and St. Petersburg, it is feasible to build a system for daily analysis of client ruble payment flows through the RCC system, which allows for a more accurate and factual assessment of the liquidity of the counterparty in terms of the execution of client orders.
An additional assessment of the level of management of the counterparty can be given by analyzing information from specialized agencies, the Central Bank of the Russian Federation and the media (information about the management of the counterparty, its founders and shareholders/shareholders, the largest clients and borrowers of the bank and the main events in the life of the bank, including negative aspects).

In the absence of negative trends in the development of the counterparty, a conditionally positive conclusion about its financial condition, a positive conclusion from its own and third-party experts analyzing criminal and other negative/positive aspects in the life of the counterparty, the limits on interbank transactions are directly calculated.

It is desirable that the methodology for assessing the financial condition and software for analyzing the balances of counterparties make it possible to calculate the preliminary lending limit L.C.(“line of credit”) based on analytical indicators characterizing the condition of the Counterparty.

When calculating the actual base limit RLC(“real line of credit”), obtained based on the credit limit L.C., it is necessary to impose several additional restrictions related, first of all, to the own capabilities of the Bank setting the limit.

We list several possible restrictions on setting the basic limit RLC:

· RLC<=c *Anet , i.e. the established limit on overnight interbank credit transactions cannot be more than a certain, empirically established share c (usually several percent) of the Counterparty’s net assets.

· for super-reliable borrowers (about which below), the basic limit is determined based on the maximum risk per borrower established by the bank:

Where: maxRisk- standard risk value per borrower (according to the Central Bank of the Russian Federation it is 25% of the creditor bank’s equity capital). Note that this value is one of the fundamental internal standards for the bank’s activities. The calculation should be made not according to regulatory capital, but according to net capital. Depending on the strategy and credit policy, the internal regulatory risk per borrower may be (and in our opinion, should be) less than the prudential supervision standard.

· For other categories of borrowers, the basic limit is limited to an amount comparable to the average monthly profit of the bank setting the limit:

RLC<= mProfit

To facilitate the limit approval procedure, the following classification of Counterparties is possible:

R0 - state-owned or systemically important counterparty banks with a high reputation and close ties with government agencies, whose solvency and creditworthiness are beyond doubt . For example, Sberbank of the Russian Federation. The question of the meaning of the limit is only in the needs of the Bank (in “production necessity”).
R1 - counterparties with stable balances, high turnover, and a solid customer base . The estimated LCR limit may be exceeded. It is acceptable to conduct a detailed quarterly analysis of the financial condition of banks in this category.
R2 - stable and dynamically developing counterparties that have had a limit for at least the last 3 months. A slight increase in the limit is possible.
R3 - counterparties whose balance requires monthly monitoring . There is no question of increasing the limit.
R4 - counterparties whose balance requires monthly monitoring, but who have not submitted their balance in a timely manner. You can only raise the question of reducing or closing the limit.
R5 - counterparties in which the bank is interested in making client payments through a Nostro-type correspondent account.
R6 - counterparties with whom the bank does not work, but has an interbank agreement .
R7 - all others (their balances are needed to improve the method) .

Of course, you should not thoughtlessly follow the formulas for calculating the credit limit. Calculation formulas L.C. And RLC are general in nature, since estimates are made on the basis of average statistical data. The limit for individual counterparties can be increased or decreased based on the actual volume of transactions with them and the degree of presence of a given counterparty in a particular sector of the financial market, taking into account the opinion of experts. For ultra-short transactions, it is possible to increase the limit for Counterparties from groups RO, R1, R2.

The formula for calculating the limit for a specific type of operation is:

RLC(i) = k (i)*RLC,

Where k(i)- normalizing coefficient depending on the term and type of operation (IBC = 1, FOREX, SWAP, bill, etc.).

Based on the results of the analysis and calculation of limits, the Financial Risk Department prepares a draft table of limits broken down by counterparties and types of transactions and submits it for consideration by the relevant collegial body of the Bank (about which below).

The table with the draft limits must contain, among other things, a draft for the values of the so-called “General Limit”, since the Bank can simultaneously carry out several types of interbank transactions. Their amount should not exceed the value of the “total limit”. The “total limit” limits the amount of the Counterparty’s current obligations to the Bank. The distribution of amounts by type of operation of simultaneously carried out transactions is decided by the operational management bodies of the Bank in the current order.

The final process of approval of limits takes place at a separate meeting of the relevant working body (Board, Financial Committee or “Credit Committee”) of the Bank, dedicated to setting limits on interbank transactions. It is recommended to hold such meetings separately from discussions of issues related to other problems of the bank’s activities. The time for holding a meeting of the Credit Committee can be reduced on the basis of preliminary approval of the project on limits by experts of the Financial Risk Department with members of the Credit Committee on an individual basis. It goes without saying that the activities of the Credit Committee are regulated by the relevant Regulations. Practice shows that the absence of preliminary approvals can significantly complicate the operational management of the Bank and significantly slow down its activities, since in most cases almost all members of the Bank’s Management Board and heads of its key departments are present at the meeting of the Credit Committee. It is recommended to gradually delegate the appropriate powers to the Financial Risk Department to assess the financial condition of counterparties in order to make the decision-making process on limits effective and to avoid unnecessary controversy.

The approval of limits is documented in the minutes of the meeting of the Credit Committee. The table with limits (hereinafter referred to as the “Table”) is drawn up as an Appendix to the Protocol and is endorsed by all its participants (permanent members and invitees). The table should also contain the names of those responsible for supplying financial reporting forms from counterparties, as well as the name of the country and the date of the last analyzed balance sheet. To avoid unnecessary questions and controversy, it is advisable to insert a column into the Table containing the class assigned by the Financial Risk Department to counterparties - the category of reliability (see "Calculation of the credit limit").

Approximate view of the table:

I approve

Chairman of the Credit Committee

(signature)

Limits on counterparty banks for interbank transactions since "__" ____ 2000

N p.p.

Name

Reg. N

Total limit

MBK-01

MBK-07

MBK-14

MBK-30

Forex

Nostro

SWAP

The answer is svenny

Sberbank

1481

Petrov V.A.

...

The limits and the Table containing them are a commercial secret of the bank, which is directly indicated in the Order for the bank, which contains general provisions on the methodology for assessing financial condition, the procedure for calculating and approving limits on 1-2 sheets (since the methodology is constantly changing and modified for the better ).

Due to the fact that the assessment of financial condition and limits are extrapolated from the previous reporting date until the receipt and processing of the next financial statements, the establishment of “non-zero” limits, the absence of balance sheets or other forms of financial statements of counterparties is, in principle, a sufficient basis for “closing” the limit on transactions with the counterparty who did not submit a balance sheet before the meeting of the Credit Committee.

During periods of crisis aggravation of the situation in the financial markets, all limits are closed or a reserve Table of Limits is unilaterally introduced.

Ideally, an automated banking system (ABS) for registering transactions should contain this Table of Limits in the form of an integrated database and control the limits on transactions and the compliance of their amount with the total limit in automatic mode. For example, with a total limit of 30 million rubles. The counterparty was issued a one-day interbank loan in the amount of 25 million rubles. Then, despite the open limit on FOREX transactions in the amount of 25 million rubles. A transaction in the amount of only 5 million rubles is actually possible, about which the dealer should be given a corresponding warning. Thus, the general limit limits the total amount of the Counterparty's obligations to the Bank for all types of transactions.

To simplify the procedure for approving limits, as a rule, two types of Tables are provided - a table with currently approved limits, open to relevant users, and a table with a draft new Table of Limits, proposed by the Financial Risk Department. Access to the Table-" project"Only the Financial Risk Department has the ability to both read and make changes. The Project Table is not available to other ABS users.

After approval of the Table of Limits, the data from the Project Table with adjustments approved by the Credit Committee are entered into the “working” Table. An electronic message is sent to the relevant users - employees of the Bank by the Financial Risk Department about the entry into force of the new table of limits.

Appendix 1. Flowchart of business processes for setting limits

A..Smirnov, D.Misyulin. "Analytical Balance Sheet of the Bank", "Business Partner", N 12, 1997
D. Misyulin, A. Smirnov, A. Krutov "Remote analysis of the financial condition of a commercial bank. New approaches", "Financier", N 5/6, 1997, pp. 24-28.
A. Krutov, D. Misyulin, A. Smirnov, “Experience in analyzing the financial condition of banks”, “Business and Banks”, N 31, 1997, pp. 1-2.
Internal control system in banks: basics of organization. (Recommendations of the Basel Committee on Banking Supervision, LETTER of the Central Bank of the Russian Federation dated July 10, 2001 N 87-T)
V.T. Sevruk, “Banking risks”, Delo LTD, Moscow, 1994.
Materials of the interbank conference. Organizer - European Trust Bank. http://www.etrust.ru
V.V. Ivanov, "A new approach to solving problems associated with the calculation of interbank lending limits." "Accounting and Banking", N10/2000.

Among the total set of financial risks, the most dangerous for banks are credit risks, which is due, first of all, to the structure of active operations of banks, among which the issuance of loans predominates. When managing the bank's total credit risk, special attention should be paid to the analysis of the financial condition of interbank credit counterparties. This segment of the financial market plays a key role in ensuring the sustainable functioning of both individual credit institutions and the banking system as a whole.

One of the main methods for making a rational decision in interbank lending is the method of remote analysis of the counterparty bank.

Remote analysis refers to the use in the process of interbank lending of technology for studying the financial and economic state of the bank’s counterparties, designed to ultimately assess the possibility of opening unsecured credit lines to counterparty banks. It is assumed that fundamental analysis is used to assess the current state of such banks, and the dynamic characteristics and trends in their activities are determined using technical analysis.

For the purposes of interbank lending, this analysis must be carried out taking into account the bank’s current liquidity, the balance of its assets and liabilities in terms of terms and volumes, it is necessary to analyze the riskiness of assets, and also take into account the impact of other factors on the bank’s liquidity.

Technical analysis requires: a) balance sheets of partner banks for the last six months; b) profit and loss statements; c) a number of applications (standards, off-balance sheet accounts); d) transcripts of individual accounts for the period under review; e) certified auditor's report.

It is advisable to carry out technical analysis according to the following scheme:

1. It is necessary to aggregate balance sheet items by assets, liabilities, and equity. This allows you to break down the balance sheet by liquidity and maturity items, which in turn makes it possible to make a fairly in-depth analysis of the balance of assets and liabilities and liquidity. The bank's assets are grouped according to the principle: from the most liquid to the least liquid. The principle of liquidity in this understanding is implemented on the basis of banking practice and tested in the activities of a number of Moscow banks. In addition, the bank's assets are divided into productive and non-productive (immobilized), and its liabilities - into call and urgent, as well as by the type of organizations from which the corresponding funds were received: from credit and financial, state and non-state commercial non-banking enterprises and organizations. The division of capital (its gradation by levels) is carried out in accordance with international standards.
2. Using the resulting aggregate balance, a ratio analysis is carried out, taking into account such aspects of the bank’s activities as the quality of assets, the level of liquidity, capital adequacy, operational efficiency, and sustainability. Optimal values are determined for all coefficients.

In addition to a technical assessment based on a study of the bank's balance sheet and income statement, an individual assessment of the bank is required, which involves personal contacts with the personnel of the counterparty bank. During such meetings, the specifics of the counterparty’s activities are clarified and documents are requested detailing aspects of its activities that are not reflected in the balance sheet and profit and loss account. During these meetings, the following aspects of the partner’s activities are discussed.

Loan portfolio:

1) the bank’s credit policy;
2) types of lending used by the counterparty bank; credit risk assessment;
3) credit risk management; types of collateral and methods of their assessment (number of secured and unsecured loans - in relative values);
4) the procedure for assessing the borrower; the procedure for making a decision on issuing a loan and approving the limit;
5) structure of the loan portfolio (by economic sectors, types of currencies and terms);
6) problem loans (their number, volume and share in assets), extended loans;
7) activities in the interbank market, a mechanism for setting limits on banks and their monitoring; availability of open credit lines for this bank, including in Western banks.

Investments/securities:

1) the structure of the securities portfolio by type (state, corporate; shares, bonds, bills, and so on); presence of packages of foreign securities (which ones);
2) the bank’s policy in managing investment risk.

Liability structure:

1) the structure of funds raised by maturity and composition of clients (clients with current and current accounts, corporate card accounts, clients - individuals);
2) the bank’s strategy in relation to its client base; the planned change in the quantitative and qualitative composition of the clientele, how it is planned to implement these changes;
3) the structure of the bank’s borrowed funds, attracted interbank loans (by terms); existence of an agreement on the provision of credit lines, their number, volume, schemes, degree of use;
4) structure of bank deposits (by maturity and categories of clients); method of setting interest rates (pricing).

Equity:

1) main founders (participants), their financial condition (if possible);
2) composition of equity capital; structure of bank income and expenses;
3) subsidiaries of the bank, a brief description of their activities;
4) planned changes in the structure of the bank’s own funds, income and expenses.

Market position and planning:

1) the structure of the bank, whether it is part of a financial holding group;
2) assessment of the competitiveness of the bank, the dependence of its activities on the general state of the economy;
3) strategic plans of the bank;
4) planning and budgeting methods used by the bank.

This information allows for a reliable analysis of the bank's activities. Based on such a complete and comprehensive analysis, a report is drawn up reflecting the dynamics and structure of liabilities, the dynamics and structure of equity capital, an assessment of the bank’s liquidity (short-term liquidity and its stability (assessment of highly liquid assets and short-term liabilities) and calculation of the bank’s medium-term liquidity (assessment of the immediate balance of the asset structure and liabilities, study of the gap structure)).

It is also possible to conduct a factor analysis of income, expenses, profits (study of marginal indicators of profitability), the structure of factors detailing the impact on the efficiency of the bank.

After this, the specialists who analyzed the counterparty bank draw up its adjusted balance sheet.

Analytical service specialists monthly compile the so-called internal rating of counterparties, based on the most important indicators of technical analysis. This rating is not intended to make decisions about the bank's acceptance or non-acceptance of credit risks. It is a tool that allows you to track changes in the state of counterparty banks compared to the state when a detailed analysis was made and a decision was made on accepting (non-accepting) credit risks.

This approach aims to find out the dynamic changes in the structure of assets, borrowed and own funds of the bank, to determine the scale of active and passive operations, including:

- highlight certain types of banking operations and assess their significance in the balance sheet structure;
- determine the degree of change in the scale of specific types of operations carried out by the bank;
- track changes in balances on individual balance sheet accounts;
- determine deviations in balance sheet items that have a significant impact on the stability, profitability, productivity of the bank, the liquidity of active and passive items on its balance sheet.