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. Last Updated: 07/27/2016

Study: West Must Abide Bank Shakeout

With Russian banks engaged in a Darwinian struggle for survival, Western aid should be used to help the sector deal with an inevitable consolidation, a study released Tuesday by the European Union's TACIS program said.


"Technical assistance should not resist the natural selection process under way," said Carlo Boffito of the Italian consulting firm, Fintesa Studi Paese that conducted the study. "To the contrary, it should support that restructuring."


Boffito was generally bullish on the outlook for Russia's banks, pronouncing them in a period of "favorable development." But after the moderator of a panel of experts commenting on the report dubbed Russian banks the most "dynamic" sector of the economy, opposition flared from a fellow panelist.


"When [he] said the banking industry was dynamic, I was thinking dynamite-ic was the word," said Klaus Embs, project manager of banking support for KPMG-Frankfurt.


Embs said later he expects up to 1,600 of Russia's estimated 2,500 banks to disappear, reflecting the mixed reviews among Western bankers and analysts of the progress made by Russian institutions.


The five-month, $48,000 study "Russian Financial Sector" scrutinized the country's banking sector development from 1991 to the present, with an aim at how to best apply Western assistance.


Also on Tuesday, EU officials announced the start of the European Banking Advisory Service, an 18-month program to develop sound and efficient banking practices and systems directed at reinforcing public confidence. The program, which involves one-on-one consulting and seminars, is unrelated to Boffito's study.


Since 1991, the EU's TACIS -- Technical Assistance for the Commonwealth of Independent States -- program has committed more than $56 million toward about 200 projects in areas of training and consulting for banks.


But the banking industry, which grew dramatically beginning in 1991, has come under fire for making poor loans, sinking money into non-liquid assets and practicing backward asset-risk management techniques.


More than 300 banks closed their doors amid a liquidity crisis last year, and the crisis of confidence has led to an increase in savings kept at the state savings bank, Sberbank, from 42.5 percent in 1994 to 70 percent in January, Boffito said.


With virtually every analyst predicting a restructuring trend ranging from gradual consolidation to a dramatic crash, Boffito recommended that any technical assistance from the West work within such a consolidation rather than try to prevent it.


Boffito envisioned a three-pronged aid program, including cultural assistance such as lectures to promote rules of conduct and principles, while a strategic level would help banks with their business plans.


The more extensive technical level would involve Western bankers working within Russian institutions to develop new services and operations, as well as establish relationships between East and West.


Overall, Boffito said the Russian banking sector is in the midst of an inevitable yet healthy phase that entails both shake-downs and build-ups. "I think we are now at a period of favorable development as there is a process going on ... where strong banks are getting stronger and weak banks are getting weaker," he said.


But the Italian consultant acknowledged any study is clouded by incomplete and inconsistent statistics. Where Boffito identified difficulties, KPMG's Embs saw the root of the problem.


Refusal by the Central Bank to release comprehensive figures for banks means no one can be sure how many Russian institutions are solvent, he said, and the absence of international accounting standards allows banks to play with their books.


"This means banks do not have to account for the good or the bad," Embs said. "For the good ... because they would have to pay taxes. For the bad ... because they will be closed down."


Responding to a question from a manager of the World Bank's Financial Institute Development Program, who noted that more than 40 banks have submitted audit statements to the two-year program (some performed by KPMG), Embs drew a line between auditing and accounting.


"If the information provided is no good, you wouldn't know it," he said. "If you look at the statements these international audit firms do in Russia, they say basically nothing"


Several Russian bankers railed against Russia's poor legal infrastructure and the Central Bank's omnipotence.


"It looks like an implantation operation," said Anri Amamchyan, deputy chairman of Conversbank, regarding what he considered to the State Duma's piecemeal legislation. "You take a beautiful leg of a beautiful lady and implant it to a monkey," he said. "The monkey will never look like that beautiful lady."


... If the accounting is wrong, the audit is no good."