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. Last Updated: 07/27/2016

No Quick Fix to Banking Woes

In the last little while, installing temporary administrations at insolvent banks has become a more and more prevalent means for dealing with their financial woes. According to Alexander Turbanov, the Central Bank deputy chairman in charge of supervising this process, 15 banks have already been subjected to such measures.

Central Bank Deputy Chairman Tatyana Artyomova was the first and most successful director of the new form of temporary administration in 1995 and 1996. She headed up the temporary administration at Samara's AvtoVAZbank, which at the time was sinking under the weight of bad loans.

This was the first application of the "Temporary Regulation on Temporary Administration" -- written for the Central Bank in 1994 by the far-sighted lawyer Pyotr Barenboim. By this time, it had become clear that without special intervention, the problems of illiquid banks would not just solve themselves. The long and tortuous demise of the Moscow Inter-regional Commercial Bank, or MMKB, accompanied by uncontrolled embezzling and tumultuous instances of wrongdoing, made this painfully evident.

The Central Bank and its then-chief Tatyana Paramonova might have spent a lot longer deciding whether something should be done in situations like that, had MMKB 's collapse not triggered the crushing August 1995 banking crisis. Among all of those who defaulted in August, the main figures were MMKB's deceived creditors -- Lefortovsky, Mytishchinsky commercial bank and others.

Trying to avoid a similar situation, the Central Bank reacted promptly to the aggravated condition of AvtoVAZbank. The bank's shareholders had called for measures to be taken to avert losses and embezzlement. Responding quickly, the Central Bank ordered Artyomova to dismiss Pyotr Nakhmanovich, chairman of AvtoVAZbank's board of directors. For her efforts, the Central Bank's iron woman should be saluted. Within several days, the temporary management took the bank under its full control, managed to restore it to solvency and to normalize relations with its primary creditors.

One of the Moscow region's largest banks, Unikombank, was the next to require temporary administration. Formed from fragments of the State Bank of the Soviet Union, Unikombank served a large share of the Moscow region's businesses and social structures. Its managers were convinced that such a bank would not be allowed to die. With their controlling share of the bank's stocks, they turned to the Central Bank for a preferential loan. The new Central Bank chairman, Sergei Dubinin, did not respond as expected. The bank's management was dismissed and its affairs were turned over, once again, to Artyomova.

The fact that funds from the regional budget and a significant amount of private deposits -- nearly half a trillion rubles -- were tied up at the bank only served to aggravate the situation. In addition, the president's re-election bid was approaching, and losing the deposits of Moscow region citizens was by no means a way to guarantee its success.

Once again, we must salute Artyomova. This time, she arranged a compromise between the bank's creditors and owners. The situation returned to normal and the temporary administration finished its work.

The temporary administrations' success at AvtoVAZbank and Unikombank prompted the Central Bank to widen its field of attack. It issued orders to install temporary administrations at many banks whose insolvency had resulted from high-risk loans and sweeping real-estate investments.

Tveruniversalbank is a prime, recent example. The bank's oversight department, responsible for maintaining control of the situation at the bank, for some reason never brought its increasingly serious problems to light. Rather than looking for a way to avoid the coming crisis, the department's employees kept sending its management reassuring reports until operations shut down.

However, this time things did not work out and the temporary administration could not save the bank. As head of the temporary administration, Sergei Panov's mistake was that he underestimated the role Tver's branches played in its operations. The temporary administration took over at the bank's central headquarters in Tver, but for several days could not settle on who should be its representative at the Moscow branch -- responsible for a large share of the bank's business. The temporary administration failed to realize that Tveruniversalbank was much like a dinosaur, with its small, nonfunctioning head in Tver, its vital organs in Moscow and a long tail of securities and corporate accounts throughout Russia's regions and the CIS. Apparently therefore, control over the secretaries and aides of the Moscow branch did not make it possible for Panov to lead the bank out of crisis, and only made its problems worse.

In Russia, all enthusiasm is short lived, whether for temporary governments or temporary administrations. Drawn up in a hurry by a talented lawyer, the temporary regulation could not replace the legal basis for bankrupting or temporarily protecting financial institutions. Temporary administrations have produced extremely contradictory results.

Practical experience indicates that the talents and experience of its director are the most important factors in a temporary administration's success. It is understandable that there is a short supply of such talented individuals -- and of course experience is not a manufacturable good. It appears that the Central Bank's farsighted managers understand this and are seeking out other ways to deal with banks threatened by bankruptcy. And so in the face of a looming catastrophe at Agroprombank, one of Russia's largest, the decision was made to hold a tender for the project to sanitize this bank.

It would seem that a certain understanding is developing within the banking community and at the Central Bank -- that temporary administration is only one way to deal with illiquid banks. For instance, the time frame for temporary regulation on temporary administration -- intended to be half a year -- is turning into years. Its author, a leading expert on banking law, long ago pointed out that without a law on bankruptcy for banks, any like measures would be only palliative, and would have no impact on improving the overall health of the banking system.