Richard Hainsworth of Global Rating -

Looking back after a crisis can help to determine the validity of analyst statements during the crisis. For a bank, the quickest source of liquidity is the interbank market. If a banking system is suffering liquidity problems, then activity on the interbank market will decline.

Diagram 1 tracks interbank borrowing each month since 2004 to the present, the total (in billions of roubles), the totals for the top (assets as of September more than RUB100bn, approx 20 banks), middle (assets more than RUB10bn, approx 100 banks), bottom (the remainder in the sample, approx 600 active banks) tiers.

Diagram 1

It is clear that the period corresponding to the international liquidity crunch has a dip in the borrowing, but the changes are indistinguishable from normal volatility. Analytically, the interesting feature of this diagram is the rapid growth in interbank borrowing by the middle tier of banks.

Diagram 2 tracks the same groups but from the placements side, viz. the volumes placed by Russian banks. The total borrowed from financial institutions is much larger than the total placed because Russian banks are net borrowers internationally, suggesting the middle tier is increasing its borrowing internationally. Moreover, the almost negligible dip in the borrowing curve for mid-tier banks indicates that foreign counterparties barely slackened their lending to Russian banks during the crunch - a vote of confidence by the international banks.

Diagram 2

However, Diagram 2 does reveal a reason for the rapid rise in interbank interest rates. The top-tier Russian banks cut back their interbank lending quite dramatically, accounting for almost the entire change in the lending behaviour seen in the market due to the crisis. Indeed, drilling down further reveals that Sberbank alone accounts for the bulk of the cutback. Since the top-tier banks are very large suppliers of liquidity, they have a major influence on pricing, and if they change their behaviour it has a massive impact on the rest of the system, particularly on pricing.

Despite the conservatism of the biggest bank(s), the total volume change remained within normal volatility bounds. This is undoubtedly due to the variety of measures that the Central Bank of Russia introduced to increase the effective liquidity of the market. For example, banks are required to hold a proportion of retail deposits with the central bank on a statistical basis. By changing the parameters of the averaging, banks were able to divert more of these deposits for short periods of time.

Given that foreign bank lending seems to have been unchanged, the biggest problems generated for the Russian banking system during the international liquidity crunch seem to have been generated by the biggest Russian bank(s).

Richard Hainsworth is CEO of Global Rating, the leading bank rating agency covering the CIS financial sector.

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