Financial Stability Standards to be Recalculated Considering Cryptocurrencies

The Bank of Russia has proposed updating the financial stability standards for professional market participants: in their calculations, they will have to consider digital currencies as a separate type of asset. The new rules will affect brokers, asset managers, forex dealers, and crypto exchanges.

What Changes for Financial Intermediaries

Digital currencies are included in the list of assets used to calculate prudential indicators. These indicators are necessary to assess the stability of companies and to understand whether they have enough resources to cover potential losses.

When determining the size of their own funds, market participants will only be able to consider cryptocurrencies that are allowed to be traded on exchanges. Moreover, their share will be limited: such instruments cannot exceed 25% of the value of the assets taken into account.

Another condition concerns storage and accounting. Digital currencies that a company wants to include in the established limit must be registered in crypto depositories.

Financial Stability: Key Indicators and Calculation

Financial stability shows how dependent a company is on borrowed funds, whether it has enough own resources, and whether it can withstand a decline in revenue, an increase in expenses, or a sharp change in asset values. Its analysis helps to foresee insolvency risks, assess capital structure, and understand how safely a company finances its operations.

Typically, not just one indicator is considered, but a set of ratios. The main ones include the autonomy ratio, financial stability ratio, maneuverability ratio, coverage ratio of own working capital, and the ratio of borrowed to own funds.

The financial stability ratio is calculated as the share of long-term funding sources in the total amount of assets. The formula based on the balance sheet is: financial stability ratio = (equity + long-term liabilities) / balance sheet total. In the lines of the balance sheet, this usually looks like: (line 1300 + line 1400) / line 1600.

For quick assessments, such benchmarks are often used: autonomy ratio --- above 0.5, financial stability ratio --- around 0.8--0.9 and above, maneuverability ratio --- about 0.2--0.5, coverage ratio of own working capital --- above 0.1, and the ratio of borrowed to own funds --- no higher than 1. These values should not be applied mechanically: much depends on the industry, business model, and stage of company development.

Indicators can be absolute and relative. Absolute indicators show amounts in money, such as the size of own working capital or the surplus of sources to cover inventories. Relative indicators are expressed in ratios and help compare companies of different scales or track the dynamics of one company over several periods.

Types of Stability and Practical Analysis

Based on the state of funding sources, four types of financial stability are usually distinguished: absolute, normal, unstable, and crisis. In absolute stability, there are enough inventories to cover with own working capital. In normal stability, the company uses its own and long-term sources. An unstable position indicates dependence on short-term financing, while a crisis situation poses a risk of payment and obligation failures.

The analysis of financial stability begins with the balance sheet and financial reporting: assets and liabilities are compared, key ratios are calculated, dynamics over several periods are examined, debt load, liquidity, and the ability to cover losses are assessed. After that, conclusions are linked to the real actions of the business: investments, loans, inventories, accounts receivable, and capital structure.

Measures that strengthen capital and reduce dependence on expensive debt help enhance resilience: retaining part of the profits in the business, reducing unnecessary borrowing obligations, refinancing loans for a longer term, accelerating the collection of accounts receivable, controlling inventory, reducing fixed costs, and attracting additional equity capital.

In construction, financial stability is approached particularly rigorously because projects are long-term, capital-intensive, and depend on the financing schedule. For construction companies and developers, it is important to ensure that obligations are backed by assets, that there are sufficient own funds, that borrowed money is used for its intended purpose, that operations are break-even, and that projects can be completed without cash gaps.

How Cryptocurrencies Will Affect Capital and Risks

The project also describes under what circumstances and how cryptocurrencies will be considered when assessing credit and market risk in the capital adequacy standard. Essentially, it is about checking whether the own capital of the intermediary can withstand possible losses from operations with such assets.

This is important for the market not only from a regulatory perspective. Cryptocurrencies can affect the balance sheet, the structure of assets and liabilities in accounting, as well as the financial reporting of the company. If the share of risky instruments grows too quickly, the financial leverage and burden increase, which is often referred to in international practice as Debt.

Restrictions on the share of digital currencies in capital should reduce the risk of insolvency. This approach helps to anticipate possible insolvency of intermediaries if the value of crypto assets changes sharply.

Why New Rules Are Needed

The Bank of Russia intends to integrate the risks of digital currencies into the existing regulatory framework. This will allow for a more accurate assessment of the financial position of intermediaries working with crypto assets and support their stability in transactions involving such instruments.

The proposed procedure should make calculations more transparent: cryptocurrencies will no longer remain outside key indicators, and their impact on capital, assets, and companies' ability to cover losses will be taken into account in advance.