Brokers May Face More Control

The Central Bank's regulatory powers should extend to brokerages and investment firms, the first deputy head of the Central Bank said in an interview published Tuesday.

The Central Bank holds sweeping powers over Russia's banking sector, which numbers some 1,200 banks, while a less influential markets watchdog, the Federal Service for Financial Markets, monitors other financial institutions.

"Obviously, together with the Federal Service for Financial Markets, we need to supervise investment firms and they in turn should have access to our liquidity," Alexei Ulyukayev said in an interview with Itogi magazine. "Otherwise, we will face problems in the future." The Russian market has lost around half of its value this year, exposing domestic weaknesses and dousing hopes that the country can decouple from developed economies.

An exodus of foreign investors, who dominated trade in Russian stocks, left domestic investment firms, as well as banks with rapidly declining assets, after the war with Georgia in August.

The firms actively used stocks in repo transactions, in which they received cash but were saddled with the obligation of buying back securities at a given date. If a repo deal is not completed in time, the lender may dump the stocks in the market.

Investment firms, such as KIT Finance and Renaissance Capital, which do not have direct access to the Central Bank's funds, as well as some banks where securities made up a large part of assets, were the first ones to be hit.

"An attempt to separate commercial and investment banking in our environment … does not work. It seems to me that if a player works in the market and carries out market transactions … he should get the Central Bank's license," Ulyukayev said.

The Central Bank already dispatched one of its top people, former deputy chairman Konstantin Korishchenko, to head the country's largest stock exchange MICEX, and gave him the mandate of establishing better control over the repo market.

Ulyukayev said the Central Bank was aware of commercial banks' exposure to stocks but did not have the breakdown of assets held by affiliated firms such as brokerages, mutual funds and asset management firms.

"In one case we see what is going on, in another we do not. We need to see everyone, otherwise uncontrolled risks emerge," he said.

The Central Bank had warned some banks about the risks linked to excessive trade in securities, according to Ulyukayev, who said it would use a selective approach when deciding whether a helping hand should be extended to a particular firm.

"We will apply a tougher approach to those who carried out excessively risky policy," Ulyukayev said.

Former head Oleg Vyugin had pushed for a sweeping reform of the financial services sector to create a giant regulator which would monitor all financial institutions. Vyugin quit the watchdog after the idea was rejected.