Central Bank of Russia alarmed by dropping capital adequacy

By bne IntelliNews October 5, 2012

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The Central Bank of Russia (CBR) announced on October 4 that it is growing increasingly concerned as the country's lopsided growth impacts capital ratios in the banking sector.

The capital adequacy of the country's banks has fallen by nearly 5 percentage points over the last 18 months, Alexei Simanovsky, first deputy chairman of the CBR, told journalists at a news conference. September saw Tier-1 capital drop to 13.3%, a 1.5 pp fall from the 14.7% of total deposits held by Russian banks at the start of the year, and a massive swing from the 18.1% that opened 2011.

Further than that, several banks are reported to have fallen below the CBR's mandatory minimum of 10%, including state-controlled giant VTB, which in July issued a $1bn perpetual bond to shore up regulatory capital that has been depleted by acquisitions. CEO Andrei Kostin said last month that another such issue could follow soon. Promsyvazbank, which plans to IPO this month, is doing so to shore up its capital base.

Holding enough capital is crucial to cover depositor demands for cash. In theory banks typically only need hold 8% as punters on average never ask for more than $8 out of every $100 on deposit. However, in the more volatile emerging markets - and particularly Russia, where bank customers remain notoriously wary following the huge losses they suffered in the 1998 default - banks have typically held cash reserves in the high teens.

Therefore, falling capital adequacies are especially worrying as the government prepares for a potential return of crisis. The CBR has been busy in the last few weeks shoring up the system. It is lending heavily to the sector and intends to more than double the resources it makes available in the next few years. It is also in the process of beefing up reporting and reserve requirements for deposits and consumer lending.

In the meantime, in a bid to relieve the risk of bank runs, the central bank has been increasing the volume covered by the deposit insurance scheme, raising the maximum to RUB1m ($32,258) from RUB700,000.

Part of the reason the banks are facing this problem is the boom in consumer lending, which was more than 40% up in the first eight months of the year. On the other side of the fence, corporate deposit growth is sluggish as the economy slows. At the same time, international investment in, or lending to, Russia - a major source of liquidity in the past - has dropped off. This lopsided set up means that banks are lending more than they are taking in.

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