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#4' 2004 |
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BANKING CRISIS: HAS BEEN OR YET TO COME? |
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Vladimir Shlyomin
he specter of banking crisis is wandering about Russia. And although practically all experts are confident that a crisis will not and should not happen, their rational arguments fail to reassure depositors. The bigger the sums that Russians entrust banks with and the longer the period of a relatively comfortable life lasts, the stronger the fears are that sooner or later all this will end in a crash.
It is not that difficult to understand the psychological backdrop of disturbing expectations. In July 1998 all government officials, including the Prime Minister and leaders of the Central Bank, were categorically stating that a banking crisis in Russia was just impossible. But in August it did happen: millions of citizens lost their savings, the countrys largest banks collapsed and even the State Savings Bank was forced to violate its obligations to investors.
This time the tension began to make itself felt as a result of actions on the part of the Central Bank, which, while performing its controlling functions, discovered a number of violations in operations by commercial banks and withdrew the license of SodBusinessBank. This event was not the only one. It became known that the bank CreditTrust was facing problems with its solvency, there were a lot of rumors about some ‘black list of banks allegedly compiled by the Central Bank. Long lines of those, who wanted to immediately withdraw their deposits, started getting formed in front of cash machines.
Banks, which until recently were considered quite reliable, suffered from those panicky sentiments as well. In two months the cash outflow at Moscows popular Guta-Bank exceeded $300 million forcing the bank to suspend current payments as well as deposit operations. In just a few days depositors at Alfa Bank withdrew about $200 million from their accounts. In order to dampen the turmoil, the banks managers had to temporarily introduce a 10% commission for an advance contract cancellation by client. There was a considerable reduction of interbank lending volumes. Despite a significant volume of cash on correspondent accounts as a whole, business activity in the market of interbank credits went down: there were far less deals, the revenue from credit placement was small and risks because of general mistrust were high.
Some experts interpreted all this as a sign of the widening crisis and rushed to draw an analogy with events of 1998. However, as a result of measures taken by the Central Bank, the situation gradually started getting back to normal.
The Central Bank declared a further reduction of rates of allocations from 7% to 3.5% - by commercial banks in the Fund of compulsory reservation for borrowed finances, including those in foreign currency. Besides, it decided to undertake a special adjustment of compulsory reserves for credit institutions, which submitted their applications. Appropriate solutions were found for concrete banks as well. In particular, Guta-Bank shareholders reached a basic consensus on selling a 86% stake to VneshTorgBank. This deal, which was initiated and financially backed up by the Central Bank, allowed Guta-Bank to resume its operations.
At present, analysts agree that the tension in the banking sector was groundless and that there are no prerequisites for a large-scale crisis. As Andrei Kozlov, the first deputy chairman of the Central Bank, believes, since August 1998 a lot of things changed: Russias economy has become stable, the banking system has grown stronger. Referring to estimates by the International Monetary Fund and the World Bank Kozlov states that today the Russian banking sector is quite capable of withstanding a blow similar to the financial crisis of 1998.
Among positive trends Kozlov mentions a stronger orientation of commercial banks to servicing needs of the economy that is steadily growing: by the data of the Central Bank, the countrys industry accounts for one third of all credits. Besides, he notes an increased crediting of small businesses and fast expansion of the consumer credit market. In the first six months of this year consumer credits rose by 53% and credits to small businesses went up by 29%.
At the same time, only a few experts regard the Russian banking system as stable. For a long time the system suffered from a lot of different problems, including lack of transparency of balances, deals and capital flows as well as intricacy of relations between managers and owners. Many Russian banks, which started their activity in the years of high inflation and ‘easy money, are not fully prepared yet for effective operations in present conditions characterized by the stabilization of the national currency, reduction of profitability of transactions in financial markets and growing competition, including the one from Western credit institutions, which are becoming more active in Russia nowadays.
All this means that banks should pay much more attention to the management quality, otherwise many of them will risk to find themselves ‘out of play. Analysts cite a lot of reasons for possible bankruptcies. Some see the danger in banks excessive activity in the construction market: as a result of speculations, apartment prices in Moscow and other big cities have increased too sharply, their collapse and, accordingly, the shrinkage of credit mortgages seem quite probable. Others point to the failing efficiency of credit institutions that face decreasing interest rates while costs keep staying at the high level. Still, there are some, who note the deteriorating quality of loan portfolios that may cause major losses in case of unfavorable macroeconomic changes.
The Russian Government is also worried about the state of the banking sector believing that it does not match needs of the successfully developing economy. In order to accelerate modernization of this sector, the Government decided to work out the "Strategy of developing banking sector in 2004 through 2008".
This "Strategy" is aimed at a significant reduction in the number of banks. The emphasis is put on the administrative adjustment: it is proposed to set criteria for the access to the system of deposit insurance and requirements with respect to the amount of minimal capital as well as to create favorable conditions for accelerating and simplifying procedures of acquisitions and mergers.
The Central Bank along with the Finance Ministry proposed to require of banks, which will start operations January 1, 2007, to set amounts of their own capitals equaling no less than 5 million euros. In addition, there is also a proposal to raise the capital sufficiency (the ratio between capital and assets) from 2% to 10 %. For banks with capitalization of less than 5 million euros this standard will be effective from 2005 and from 2007 it will embrace all banks.
Prime Minister Mikhail Fradkov spoke in favor of strengthening the bank control system and increasing their transparency that would help prevent crisis situations. It is possible that there will be a new law that will make banks disclose their actual shareholders, not their figureheads as is the case now. The concept of ‘unscrupulous shareholders is being introduced: they will not be allowed to buy major stakes in credit institutions.
As Prime Minister Mikhail Fradkov stresses, there is a need to accomplish the task of transforming savings into investments. To this end there are plans to create a system of credit bureaus and a bureau to register pledges of movable as well as immovable property.
According to authors of the ‘Strategy, the implementation of measures provided for by this document will allow to increase assets of the banking sector by 2008. The aggregate banking capital, which by the start of 2004 amounted to about 6% of the countrys GDP, will increase up to between 7% and 8% of the GDP by 2008. Credits to the economy will grow from 18% up to between 26% and 28% of the GDP.
Bankers themselves have met the Governments initiatives with understanding but they would like to make some corrections. As Vladimir Rashevsky, the chairman of the MDM-Bank Management Board, says, during preliminary discussions with authors of the ‘Strategy the sides failed to reach a mutual understanding on the reservation question. In his opinion, at present, compulsory reserves are used as a key instrument of the monetary policy and, as such, have a negative impact on the competitiveness of Russian banks as compared with the foreign ones. Pavel Golenkov, the senior vice president of TransCreditBank, notes that the existing rate of allocations equaling 10% in the Fund of compulsory reservation is inadequately high: it reflects the situation that existed two years ago, when the Central Banks refinancing interest rate exceeded 20%. "If allocations are reduced, then, we will get an opportunity to raise banks profitability and interest rates on borrowed funds", says Golenkov.
Commenting on provisions of the new ‘Strategy Alexander Burya, the head of the office for financial and operating risks at the International Industrial Bank, points out that the State should solve the problem of lacking ‘long money through the Central Banks rate policy, limits on the scope of the unilateral abrogation of deposit agreements and encouragement of the populations clearing settlements. As for the competition between Russian and foreign banks, he supports the Governments intention to restrain the expansion of the latter to the Russian market with a ban on opening branches, among other measures.
So, what form should the Russian banking system take so as to prevent repetition of crises? It is obvious that in this respect opinions of the Government and bankers themselves do not coincide. The opponents agree on one thing: they should continue discussing the coming banking reform. The Prime Minister himself also supports their close interaction on this question.
Reference:
The Russian banking system is made up of the Central Bank (Bank of Russia), the Bank of Foreign Trade of the Russian Federation (VneshTorgBank), the Savings Bank of the Russian Federation (SberBank), commercial banks of different types as well as other credit institutions with banking operation licenses. Each and every bank can conduct operations only on the basis of a license granted by the Bank of Russia.
The Bank of Russia owns majority stakes in VneshTorgBank and SberBank. Under the law the State fully guarantees the safety of money deposits and other valuables, which the population entrusts SberBank with, as well as their return at customers request (demand deposit). This is the main difference between SberBank and commercial banks. SberBank carries out almost all operations with cash funds that commercial banks do.
All in all, there are 1320 banks officially registered in Russia. Over half of them are operating in Moscow and the Moscow region.
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