Liquidity squeeze triggered by Russian clamp-down

MOSCOW – The Central Bank of Russia (CBR) revoked the licences of five banks in December, including Investbank, the largest bank headquartered in the exclave of Kaliningrad. Investbank ranked 79 in Russia by tier 1 capital at end-2012 according to thebankerdatabase.com. This brings to 26 the total number of bank licences revoked during 2013. The largest was Masterbank, 46 by tier 1 capital, which lost its licence in November 2013 over alleged moneylaundering and accounting irregularities. Several of the banks that lost licences in December, including Smolensky Bank and Project Finance Bank, had suffered deposit outflows and requested liquidity assistance from the CBR in the weeks leading up to their closure. In addition, two other regional banks – Solidarnost in Samara and Ellipse in Nizhny Novgorod – are receiving financial assistance from the Deposit Insurance Agency (DIA) to prevent collapse. Their existing shareholders may lose control over these banks. Alexander Danilov, financial institutions analyst at credit ratings agency Fitch, said in a report that efforts to clean up the Russian banking sector are positive “in terms of raising governance standards and getting rid of non-viable banks”. However, he warned that these measures could increase the risk of liquidity stresses for mid-sized and regional banks in the short term. “Unprotected depositors and lack of understanding of the deposit insurance system can trigger a bank run, with a subsequent flight to quality having spillover effects on other banks. This risk is exacerbated by retail term deposits being effectively on-demand, subject to losing interest, under the Russian civil code,” said Mr Danilov. The DIA only insures individual retail deposits up to 700,000 roubles (around $21,200), and proposals to increase that cap to 1m roubles have been put on hold. Dependence on interbank funding may be another risk factor, and Mr Danilov said there had been reports of the unsecured interbank market for smaller banks drying up on expectation of further CBR actions. A recent government decree allows the CBR to lend money to the DIA, which currently has reserves to cover just 1.2% of Russian retail deposits. Mr Danilov suggests this decree indicates the likelihood of further bank closures in the near future. Eduard Dzaghityan, an academic at Russia’s Financial University and former banker who is a member of the standing group on banking regulation in the upper house of the Russian federal assembly, also expects bank closures to continue. “The 2013 cleaning differs from the routine in its scope, professional rigor, and hardline policy and, as such, signifies a new approach to handling the soundness of the banking industry. The vast majority of those banks were closed in the second half of 2013 that coincided with the change of CBR’s leadership,” says Mr Dzaghityan. Former economy minister Elvira Nabiullina took the helm at the CBR in May 2013. Mr Dzaghityan believes the reason behind the stricter attitude is the objective of bringing Russia’s banking sector into line with international norms, as signified by the CBR’s determination to apply Basel III. He sees the central bank progressively becoming less tolerant of infringements of conduct requirements (such as money-laundering controls) or prudential requirements (such as capital and liquidity). “Banks could be given less time to resolve their performance shortfalls, while violations and poor adjustments could straight away result in cancellation of their licences,” says Mr Dzaghityan. However, he warns that the CBR should pay attention to systemic damage, especially in underbanked Russian regions. After the closure of Smolensky Bank, the Smolensk region “is now struggling to maintain its economy, having merely two regional banks and a handful of other banks’ branches” providing local credit, he says.