Risky Lenders Told Not to Expect Help

For MTMelikyan speaking at an RSPP meeting Thursday. He said the Central Bank warned against risky lending last year.
Russian banks were told last year that they were engaging in dangerous lending practices, and the Central Bank is prepared to go only so far to help them out of their difficulties now, a senior Central Bank official said Thursday.

"We warned many banks that conditions for borrowing abroad would not always be as favorable and that providing loans at this rate was very dangerous," Gennady Melikyan, Central Bank first deputy chairman, told the banking committee of the Russian Union of Industrialists and Entrepreneurs, or RSPP.

He said Central Bank showed that the country's banks borrowed $70 billion from foreign sources in 2007, and many used these funds to expand their retail portfolios too quickly.

"Increasing the size of their retail portfolios by 50 percent in one year is very dangerous, and we believe that certain banks exceeded limits set out by their own risk management departments," Melikyan said.

A number of measures to help banks weather the financial crisis were discussed at the event, including Central Bank guarantees for counterparty losses incurred by lending on the interbank market, as well as a proposal to allow the Central Bank to issue uncollateralized loans to banks in extreme circumstances. A package containing these measures will be introduced in the State Duma next week.

Despite the commitment to shore up the banking system, Melikyan said the Central Bank did not plan to use budget funds to keep afloat banks that had been lax in their underwriting procedures or ignored risk warnings.

"When crises like this occur, they put things in order, clearing the system of weak players and making it more efficient," he said. "While we will do everything to stabilize the situation, we must not overdo it."

Other measures discussed include the refinancing of loans taken by companies and banks through $50 billion in funds made available through the Development Bank by the Central Bank.

"Clear procedures and criteria for distributing these loans must be developed," said Sergei Vasilyev, deputy chairman of Vneshekonombank, also known as the Development Bank. "It is important that organizations like the Agency for Mortgage Housing Lending are well capitalized to provide banks with liquidity by buying their mortgage portfolios.