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The Central Bank of Russia (CBR) pulled the operating licence of Master Bank on November 20, claiming it owes depositors almost $1bn and sparking fears of a potential crunch. The action appears part of a wider push to trim the Russian banking sector.

The 41st largest bank in Russia by deposits, according to RIA Novosti, Master Bank is guilty of conducting "large scale suspicious operations" and has violated laws against money laundering and the financing of terrorism, the central bank said in a statement. Russia's Deposit Insurance Agency said that initial estimates suggest depositors are owed around RUB30bn ($914m). The fund will have to reimburse those with less than RUB700,000 in their accounts.

Russian police reported that officers were inside Master Bank's central office, where they were confiscating material in connection with a long-running money laundering investigation. Master Bank is 85% collectively owned by Boris Bulochnik, who also heads the financial organization, RBC Daily reported. His wife, Nadezhda Bulochnik, chairs the board of directors, and their son, Alexander Bulochnik, is a vice president.

The news set off ripples around the Russian banking sector. The country's largest private bank, Alfa, warned clients in a statement not to use Master Bank ATMs. Smaller banks such as Finam and BFG-Credit said that their customers were temporarily unable to use cards to withdraw money or make payments.

Bankers and consumers are all too painfully aware that the 2004 mini-bank crisis, which nearly lead to a systemic meltdown, started exactly the same way. A decade ago, the CBR closed the aptly named Sodbiznessbank for money laundering and stealing its depositors money.

In that instance panic swept through the sector as interbank dealings with smaller banks shut down. Rumours of a CBR black list only exacerbated the problem. The storm quickly gathered momentum and retail giant Alfa Bank had to fight off a run on accounts by flying in $800m of cash to reassure depositors. Guta Bank, another up and coming retail bank, was not as lucky. It collapsed and was eventually taken over by VTB.

This time around bankers took the news more calmly. Flash reports circulated and tweets flew, but by lunchtime most people seem to accept that the bank had been caught doing wrong and that was the end of it.

Bank's stealing their depositors' money is not an uncommon story in Eastern Europe. Last year, Vladimir Anotonov fled to London after his banks in Latvia and Lithuania collapsed, with the Russian revealed to have been helping himself to cash to finance his growing industrial empire.

The closure of Master Bank contains added spice due to the fact that a cousin of Russian President Vladimir Putin has been a board member since 2010. Igor Putin defended the lender last year from money laundering accusations after the homes of top executives were raided by police. The Kremlin has released a statement insisting the president has virtually nothing to do with his cousin, and that Igor Putin's role at Master Bank played no role in the CBR decision.

Too many banks

Elvira Nabiullina, appointed as chair of the CBR in June, has launched a campaign to tidy up the sector and get rid of the smallest outfits. While there are over 900 banks in Russia, the top 50 hold well over 80% of all the banking sector assets. In a nutshell, there are too many banks in the country, and many of the smallest are little more than glorified treasury operations for corporate owners, which take advantage of the sector's privileges. Half a dozen banks have been closed over the last two months.

Master Bank is the 23rd bank to lose its license this year. The CBR said in its statement that there is also a RUB2bn ($60m) hole in the balance sheet, generated by loans made to companies affiliated to the bank's owners.

The CBR also pulled the licence of the much smaller Chelyabinsk-based Bank Uralliga the same day. In October, the CBR demanded it create sufficient reserves for loans handed to a paper mill. The bank fulfilled the obligation, but its capital adequacy fell to just above the mandatory minimum of 10%. The regulator then asked the bank not to open corporate accounts. That sparked panic among depositors, who hold RUB1.318bn in the bank, and the CBR subsequently decided enough was a enough and put it out of its misery.

The closures can also be seen as part of the Kremlin's accelerating anti-corruption drive; Master Bank was out and out robbing depositors, according to the CBR. Russia watchers report that the CBR intends to start the long delayed process of closing down all of the smaller banks in the country gradually over the next two years. The problem for Russia's second-tier banks is that the gap between them and the biggest banks in the cost of borrowing has grown so wide it is almost impossible to do business legally and survive.