Russia narrowly escapes another banking crisis

By bne IntelliNews December 10, 2013

Ben Aris in Moscow -

Russia's banking sector had a narrow escape from another banking crisis in the last week of November following the closure of Master Bank, but the situation remains very fragile. The central bank has stepped into the breach by naming 25 banks that are "too big to fail".

When the Central Bank of Russia (CBR) suddenly announced on November 20 that it was shuttering Master Bank, a major mid-sized retail bank with 3m cardholders, for laundering money and stealing from its depositors it sent a shock wave through the sector.

According to bne sources, major banks cut their limits to small banks on the interbank market, sending rates soaring and temporarily putting a tourniquet on the 800-odd financial institutions' access to their lifeblood.

The move threatened to spark another crisis in a carbon copy of the 2004 mini-banking crisis, but rapid action by the regulator's board of governors nipped the problem in the bud. The CBR is clearly now committed to clearing out the deadwood, while at the same time trying to improve the stability and responsibility of the banks that will remain.

On December 7, the CBR followed up by releasing a list of 25 "systemically" important banks that cannot be allowed to collapse. The decision to name these banks effectively extends the de facto guarantee that has been enjoyed by state-owned behemoths Sberbank and VTB Bank, but also imposes new controls to prevent any system-threatening dodgy dealing.

As the collapse of Lehman Brothers in September 2008 showed, closing a bank is a risky thing to do at any time, let alone when the banking sector is already been tightly squeezed by Russia's abrupt economic slowdown.

Carbon-copy crisis

In the spring of 2004, the CBR caused another financial sector crisis when it abruptly closed the aptly-named Sodbiznesbank - the first time the CBR had revoked a banking licences - also for money laundering and stealing depositors' money. Rumours of a blacklist immediately began to circulate and the interbank market froze as banks stopped lending to each other, quickly turning rumours into reality.

Most of Russia's small banks are little more than glorified treasury operations for their business owners. As they don't have the access to deposits or the cheap central bank funding that the big banks do, most are wholly dependent on the interbank market for funds.

The situation quickly deteriorated. Following a black PR attack by rivals, the owners of first-tier privately-owned Alfa Bank had to fly in $800m in cash to ally fears, loaded onto pallets and shipped to a location outside Moscow by a cargo plane, according to bne sources at the time. And Guta Bank, a large and fast growing retail bank, collapsed. It was bought out by VTB Bank and its retail network (itself the rump of failed Inkombank from the 1990s) became the basis for VTB24, the state-owned banking giant's retail operation.

History came close to repeating itself at the end of November, except the battle-hardened CBR quickly called all the heads of the major banks in on November 27 to meet the newly installed Governor Elvira Nabiullina, who reassured them there were no blacklists and promised easy access to funds to maintain liquidity in the sector.

Her deputies Alexei Simanovsky and Mikhail Sukhov stressed that Master Bank's closure wasn't about a mass revocation of licenses and there is no cause for concern. Nevertheless, the bankers appealed to Nabiullina to make a public statement because depositors, who have lost their life savings at Russian banks several times in the last two decades, were already starting to withdraw cash from their accounts. Two banks in Samara had already halted operations after running out of cash by the time of the meeting.

The statement was made and calm restored. But the situation remains precarious. Russia's deposit insurance agency (DIA) that guarantees the first RUB700,000 ($21,900) of deposits, only has enough funds to cover the collapse of one big top-10 bank or four medium-sized ones in the next tier down.

The fund currently holds a total of RUB185bn ($5.8bn), but the cost of bailing out the depositors of Master Bank will be RUB31bn alone and the DIA also has to compensate depositors at Pushkino Bank to the tune of RUB20bn that was closed the same week. In all, the DIA's funds cover 4.1% of total deposits, below the 5% that the government believes is the minimum comfort level.

The sector is still sailing close to the wind. Banking theory says that banks have to keep $1 of physical cash on account for every $8 they lend - the so-called capital adequacy ratio, or CAR. In Russia the minimum CAR is 10%, but given Russia's volatile economy, for most of the last decade banks have kept close to 20% on account. As the economy slows and banks increase their retail lending, now the only profitable game in town, they have been dipping into their capital to cover these loans: the sector's CAR has shrunk to an uncomfortably low 13% now.

Strategically important banks

The situation is not desperate yet. Between them the CBR and DIA can afford to absorb a dozen more collapses of smaller banks, but they will have to tread cautiously as there is no way either can cope with the collapse of one of the big banks.

In lieu of bailout funds, the CBR has decided to pay more attention to the systemically important banks. In October the regulator set up a new department to oversee these banks and has just released a list of 25 banks that are in effect "too big to fail". The list includes the obvious state-owned candidates like Sberbank, VTB Bank and Gazprombank, and is rounded out by the privately owned Globex Bank, Vozrozhdnie Bank and ING Bank.

These banks are considered the backbone of the system. The list will be updated each year and all will be closely watched. Together, they account for 73% of the assets of the Russian banking system, the same share of total deposits, and more than two-thirds of the interbank lending market.

The idea is to improve the stability of the system, but lying behind the rhetoric are cases like Sodbiznesbank, Master Bank and, more frighteningly, that of Bank of Moscow. Bank of Moscow was closed in the aftermath of the 2008 crisis after its managers looted hundreds of millions of dollars. The bank's CEO, Andrei Borodin, fled Russia after a warrant was issued for his arrest and now lives in luxury in London. He has consistently denied any wrongdoing and claimed the VTB takeover was engineered for political reasons.

The bank was eventually rescued by VTB Bank, but the state-backed $14bn bailout necessary to clean up its balance sheet was larger than the bailout necessary to help the entire sector in the depths of the 2008 crisis. What the "better supervision" of this new system actually means is "stopping bank managers stealing".

List of strategically important banks from CBR

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