Sustained volatility: navigating the balance between challenges and opportunities

In the context of regulatory change and increasing capital requirements, including the introduction of additional capital conservation buffers, banks are seeking ways to optimize capital management, including through advanced risk measurement approaches. Some respondents aim to achieve optimization not only on a standalone basis, but also at the group level.

Seventy-nine percent of respondents already use or plan to adopt the Basel III Standardized Measurement Approach ILM[2] for operational risk assessment. Fifty-four percent apply or intend to apply the IRB approach.

Major banks that have already adopted the IRB approach report improvements in capital adequacy ratios, and average capital savings of approximately RUB 1.7 trillion[3] per institution.

New regulatory requirements for the IRB approach have posed several challenges for banks:

1. Banks that have already transitioned to the IRB approach under Bank of Russia Regulation 483-P must now adapt their credit risk management systems to meet the updated standards.
2. Banks preparing for the transition face a host of new priorities.
3. The Bank of Russia has announced plans to mandate the adoption of the IRB approach by SIFIs in the near future, prompting banks to mobilize resources and align their methodologies, systems, data, internal documentation and processes with the new regulatory framework.

Successful adoption of new technologies depends on high data quality and a robust technological foundation. After major international software providers pulled out of Russia, banks were compelled to shift to domestic software or develop in-house solutions. Budgeting for import substitution varies depending on the bank’s size and readiness for the mandated transition to domestic platforms.

Several additional challenges complicate this transition: 

• Fully replacing foreign software requires significant investment.
• There are no mature domestic alternatives for key software modules. Banks are focusing on maintaining current IT infrastructure, client solutions, and urgent regulatory priorities, such as adopting IRB models.
• The Bank of Russia permits temporary use of foreign software as long as data is stored within Russia and there is an action plan to migrate to domestic software by 2025–2027. 

Russia’s National Development Goals target at least 80% import substitution among players in key sectors of the economy by 2030, with up to 95% adoption of domestic solutions planned for state-owned corporations and companies.

Artificial intelligence remains a key innovation in the banking sector. The technology is already widely used to automate document analysis, risk assessment, transaction monitoring, credit scoring, model validation, customer inquiry handling, and fraud prevention. 

While AI helps optimize processes, its uncontrolled deployment—or implementation by employees lacking adequate expertise—can lead to systemic errors in lending, discriminatory scoring practices, data breaches, and other serious implications violating ethical principles of AI use. Instances have already emerged where excessive automation has compromised service quality and eroded customer trust in financial institutions.