Ben Aris in Moscow -
Russia's central bank moved in on its latest two victims on February 11, pulling the banking licenses from Moscow-based European Trust Bank (Eurotrust) and Link-Bank.
Eurotrust was already a zombie. The bank stopped taking in new retail customers last November due to the tough economic conditions, the bank said at the time. And Link-Bank was closed down because it was knee deep in dodgy dealings. The Central Bank of Russia (CBR) said its investigators had uncovered RUB20bn ($580m) worth of loans and transfers in 2013 that the bank could not adequately explain. Moreover, Link-bank had ignored CBR rules on provisioning for bad loans and trashed the regulator's corporate anti-money laundering rules.
The closures are the latest examples of the new broom being wielded by the CBR's recently appointed governor, Elvira Nabiullina, who took the helm in June and has already closed 29 banks, leaving a total of 923 banks still functioning at the end of last year.
And more closures will soon come. Stanislav Volkov, director for bank ratings at Expert RA, believes another 50 will be shuttered this year alone. Indeed, Russian President Vladimir Putin was explicit about this goal in a speech in January. "Now we have about 1,000 banks, or slightly less. Of course, it is a large number for our economy," Putin said, noting that the German economy is about the same size as Russia's but only has 250 banks. "It means that some financial institutions must increase their capital and assets in order to feel themselves more secure and fight for the quality of their loan portfolio."
What is so amazing is that both the banks and population at large have taken the new drive so calmly. When the CBR cancelled Sodbiznesbank's licenses in 2004 for money laundering, the first time the regulator had ever cancelled a banking license, it sparked a mini-banking crisis that saw major retail player Guta Bank collapse and threatened to take out top-10 player Alfa Bank as well. But this time barely anyone noticed the demise of Eurotrust or Link-Bank.
The closure of Master bank in November, the first retail bank of any real size to be closed, did send shock waves through the sector. However, Nabiullina called in all the senior bankers to the CBR for a meeting and reassured them that everything was under control and liquidity would be made available to anyone that needed it.
The population was also unsettled by the shuttering of Master Bank, but not that badly. Both Master Bank and the two banks closed in February are covered by the deposit insurance scheme that guarantees the first RUB700,000 ($20,590) of deposits, so most of the bank's customers are unlikely to be affected. "Russia's deposit insurance agency last year paid out a record RUB110bn (€2.4bn) in compensation, depleting the deposit insurance fund by half," says Bank of Finland's Seija Lainela. "The deposit insurance agency, nevertheless, estimates that it will have sufficient funding this year to cover its obligations without having to hike fund contributions of banks."
Still, some Russians have already started moving their accounts to the state-owned banks that dominate the sector, just to be sure, increasing their share of the sector to 53% of total assets by end-2013. At the same time, the CBR has flooded the banking sector with cash: liquidity was at a record high in February. Since the campaign started, the CBR has been offering banks cash through a tide of repo deals and expanded the list of securities that can be swapped for cheap money. The easy and almost unlimited access to money has meant the rest of the banking sector is pretty sanguine about the disappearance of their smaller peers.
Nevertheless, closing so many banks is a tricky thing to pull off. While the bottom 700 banks hold only about 5% of all assets, they are heavily dependent on the interbank market for most of their funding, a crucial piece of Russia's financial infrastructure. If the interbank market freezes, as it did in 2008 and 2004, then it can quickly cause a system-wide crisis.
But it has to be done. The huge number of pocket banks is a massive burden to the regulator, which has to supervise them all - something it in fact fails to do. And as bank profits fall, these outfits are wont to take more and more risks or offer increasingly dodgy services, both of which undermine the stability of the system.
The flip side to the closures is that the big banks are going to be encouraged to grow larger still. In January the CBR drew up a list of 15-30 "systemically important banks" that are presumably thought to be too big to fail (which has since been expanded to a list of 50 names), but will also be supervised even more closely. While several lists of names have been circulated, the CBR has not issued a definitive list yet, mainly because it would be a death sentence for any bank that doesn't find its name on the list.
The next big hurdle will come at the start of 2015 when the CBR says the minimum capital requirement for banks will be increased to RUB300m from the RUB188m in force now. Currently there are 179 banks that don't meet this requirement and Fitch Ratings said in a recent report that half of these banks will probably fail to increase their capital in time and so be forced to close.
Standard & Poor's, another rating agency, noted that the number of offers to sell small banks increased sharply in the second half of last year and expects that trend to grow. But even the bigger banks are under pressure, as effectively the CBR has introduced a killing field for any bank outside the top 50. Banks not only need to beef up, but to identify niches where they can compete with the state's titans such as Sberbank and VTB Bank.
In the middle of February, Bank Saint Petersburg, in Russia's top 30 by assets, closed a deal to buy 100% in Kaliningrad-based Bank Evropeisky that will strengthen its business in Russia's northwest region and allow it to focus more on small and medium-sized enterprises. A few days later, Otkritie Financial Corporation bought out the 14.3% stake in its own retail arm Bank Otkritie held by the World Bank's IFC subsidiary for RUB4.2bn ($123m) and handed it to its merger partner Nomos Bank. Nomos was already easily in the top 50, but Otkritie is not. However, while Nomos is largely a retail player, Otkritie comes with some useful investment banking lines that will round out the combined bank's services and give it a niche serving the medium-sized companies that don't want to open their books to state-owned banks.
More deals are surely in the pipeline.
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