Putting Banking on the Books

It seems 1995 may be best known as the year of codification. The first part of the Civil Code took effect Jan. 1, 1995, and ideally will be followed by other basic laws -- on securities, joint-stock companies and banks.

In the area of banking legislation, 1995 has been a comparatively productive year -- thus far. Although President Yeltsin vetoed a draft law that would have amended the law on banks and banking activities, he did sign a new federal law on the Central Bank, which should have a significant effect on banking regulation and may resolve some of the jurisdictional conflicts between the Duma and the president.

The most significant aspects of the new law relate to the definition of management bodies of the bank, the division of control over the Central Bank between the president and the State Duma, the restrictions on change-of-ownership of banks and the introduction of various liquidity and risk-management requirements.

The division of control over the Central Bank appears to reflect a draw between the president and the Duma after months of confrontation. The law states that the Central Bank is accountable to the Duma, the lower house of parliament, and sets forth what is meant by accountability: the appointment and removal of the Central Bank chairman on the president's recommendation, the appointment and removal of the board of directors and various reporting requirements.

Of equal interest are provisions for restrictions on change-of-ownership for banks and other credit institutions licensed by the Central Bank. The acquisition of more than 5 percent of the equity in such institutions requires notification of the Central Bank, and the acquisition of more than 20 percent requires the bank's prior discretionary approval.

Respecting liquidity and risk management, the new law sets forth a number of requirements, some of which take effect Jan. 1, 1996. But various limits on the amount of credit that may be extended by a bank to a single debtor or to its stockholders -- or other equity holders -- and the use of funds for purchases of securities, come into effect in the year 2000.

It is hoped that the new draft law on banks and banking activities will contain additional liquidity and risk-management requirements.

It is likely that foreign investment in Russian banks will continue to be restricted in the long-term. The new law on the Central Bank provides that acquisitions by nonresidents are regulated by federal laws, presumably a reference to restrictions placed on foreign ownership of Russian banks set forth in existing legislation -- which limits such ownership to a percentage of the total capital in credit institutions.

The draft law on banks and banking activities -- vetoed by Yeltsin -- also contains restrictions reflecting current legislation as well as additional, less-substantive restrictions.

In the meantime, perhaps investors can take comfort knowing that, despite the existence of broadly divergent views on the appropriate role of privatization, state regulation, foreign investment and economic reform, legislators continue to work out compromise legislation -- a sign of Russia's growing political and economic stability?

Maryann Gashi-Butler, a partner at White & Case, has been practicing Russian law for four years.