Bankers Get Wish For Extra Liquidity

A crisis of confidence shaking the banking sector appeared to ease Wednesday as the interbank lending rate slid by the end of the day, following a government pledge to provide greater access to funds for the country's three largest banks.

The Central Bank moved further Wednesday evening, lowering the reserve requirements on individual accounts from 5.5 percent to 1.5 percent.

The lack of confidence — which has been fueled in part by problems at investment bank KIT Finance — raised fears that some smaller banks could fold and of the prospect of a run on banks by nervous depositors.

The actual interbank overnight lending rate — the rate for short-term loans banks were asking from other banks — slipped to 10.8 percent on Wednesday from 12.6 percent the day before, after an announcement by the Finance Ministry that it was extending the period over which Sberbank, VTB and Gazprombank could draw government money from one week to "three months and more."

The ministry said Wednesday that it had also increased the total funds available to the banks by 282 billion rubles ($11 billion), bringing the total to 1.1 trillion rubles.

"With foreign borrowing stopping, we must soften the impact with additional funds, which will stabilize the situation," Finance Minister Alexei Kudrin said on state television Vesti-24.

The Central Bank injected 365 billion rubles into the banking sector at two repo auctions Wednesday.

The Finance Ministry and the Central Bank are planning to take further steps to provide more liquidity by the end of the week, the ministry said in a statement.

Evening television news reports showed President Dmitry Medvedev and Prime Minister Vladimir Putin meeting to discuss "socio-economic" issues Wednesday, but provided no specifics on the content of the meeting.

Concerns over the possibility of a debilitating credit crunch had plagued the market for much of the day.

"The Russian banking system is in a crisis of confidence," Alfa Bank said in a note to investors. "The lack of trust is substantially boosting demand for state support."

At the root of the mistrust were the plunge in values on the equity market and the troubles at the investment bank KIT Finance, which said Tuesday that it was unable to meet its obligations to a number of other banks.

The Alfa Bank statement said the market freefall had left banks wondering whether other institutions in the sector were hiding losses.

Officials at Aton, Otkritie and Alor Group offered assurances Wednesday that their brokerages were free of the difficulties faced by KIT Finance.

KIT Finance said in a statement Wednesday evening that it was in final stages of talks with Leader Asset Management for a sale of a controlling stake in its company, Interfax reported. The Leader web site lists the Gazfond pension fund and Gazprombank as major shareholders.

The statement said Gazprombank and VTB would provide Leader with funding to complete the deal.

Part of KIT Finance's difficulties might have resulted from aggressive trading practices, the risk of which was only multiplied by a liquidity shortage on the markets.

"Unlike the majority of Russian banks, KIT Finance had a business strategy that aimed at active involvement in securities trading, which brings higher returns on investment than retail or corporate lending operations, but carries higher risks," said Oksana Lossevskaya, a banking analyst with Glitnir Securities.

This strategy was successful in 2006 and 2007, when the market was growing, but became risky with the current turmoil on global capital markets, she said.

"The rumor is that they sold put options on the RTS, and when it went down they were at a huge loss," said Erik De Poy of Alfa Bank.

"If they made large bets and defaulted, they have to take the blame. It's not clear whether or not they were exceeding the limits set by the regulator, and if they were, where the oversight was."

Lossevskaya said the current liquidity crunch on international markets had turned regular liquidity problems on the Russian market into a bigger problem, requiring help from the Central Bank and Finance Ministry.

"An autumn liquidity squeeze in the financial sector has been anticipated by the market for some time. The banks usually experience a shortage of short-term funding at the end of first and third quarters, when the largest tax payments are made by the banks," she said. "This year, the situation on the market has become more difficult than in previous years because of the limited access to foreign funding."

The Central Bank did offer more help, announcing in a statement released in the evening that it was lowering the banking reserve rate for ruble-denominated accounts from 5.5 percent to 1.5 percent, Interfax reported.

The move by the Central Bank to lower the reserve rate — the portion of all deposits banks are required to maintain in a federal reserve fund — had been called for in the Alfa Bank note earlier in the day.

Central Bank Chairman Sergei Ignatyev said that the move would free up another 300 billion rubles ($11.7 billion) for banks.

Second tier banks might benefit most from the move, as they are the ones at greatest risk under the current shortage of funds, said Andrei Shastitko, director of the Economic Analysis Bureau, a think tank. He added that these banks were much less likely to benefit from direct government help.

"It's good that banks have been tightening the screws on mortgages in the last half year," he said.

Kudrin said in televised comments Wednesday that he expected the three big banks that were granted increased access to the funds would provide credit for smaller players in the sector.

The Central Bank has the funds to step in and rescue failing banks, said Clemens Grafe, chief economist at UBS, but had to be careful such moves did not end up backfiring.

"They have to do it in a way that doesn't make every bank raise its hand and say, 'We have problems and we want money from the Central Bank,'" Grafe said.

Grafe also addressed the danger of a run on banks, saying this was unlikely but that the government had an important role to play in assuring individual depositors that their money was in no danger in order to head off any possible panic.