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. Last Updated: 07/27/2016

Central Bank Cuts Reserve Mandate

Russia's Central Bank said Tuesday it will lower reserve requirements for commercial banks May 1 in a move analysts say is aimed at increasing liquidity in the financial market.


On ruble deposit accounts of up to 30 days, the reserve requirement will fall to 18 percent from the current 20 percent, the bank's press service said.


The amount of money commercial banks are required to allocate to the Central Bank's reserve fund for operating hard-currency accounts will be reduced to 1.25 percent from the current 1.5 percent.


"It will give the banks more breathing space," said Klaus Embs, project manager for banking support at KPMG Frankfurt.


He said the decision would stimulate the flow of money into Russia's cash-strapped financial market without increasing the danger of losing control over inflation.


Separately Tuesday, participants at a parliamentary hearing broadly supported a draft law on insuring individual deposits in commercial banks, but differences emerged over how it should be funded and controlled.


The Association of Russian Bankers welcomed Tuesday's announcement on reserve requirements, although it would like the Central Bank to go further and reduce the requirement for ruble accounts to 10 percent.


"This is a step in the right direction," said association spokesman Alexander Zagradsky, adding that strict reserve requirements were set by the Central Bank during galloping inflation when the banks offered high interest rates.


In case of financial difficulties, banks were not allowed to use the money from the reserve fund, Zagradsky added.


If a bank loses more than 15 percent of its balance currency, the new rules will allow it to use up to 5 percent of the amount held by the Central Bank in the reserve fund, Reuters reported.


The new Central Bank instruction also cancels from May 1 mandatory payments into the reserve fund on so-called Loro bank accounts, as well as payments on all debtors' and creditors' accounts.


Even so, the Central Bank remains intent on maintaining controls over commercial banking.


Tough measures including fines will apply to banks that violate the reserve requirements, said Sergei Aleksashenko, first deputy chairman of the Central Bank, in remarks reported by Reuters.


The overall size of the reserve fund should amount to 28 trillion rubles ($5.8 billion), while the actual sum paid in by the banks totaled only 21 trillion rubles, Aleksashenko said.


In Tuesday's hearings in the State Duma, there was general agreement among bankers, lawmakers and government officials that an insurance deposit system was needed. "No one doubts that such a law is necessary" to protect depositors, said Pavel Medvedev, head of the Duma's banking subcommittee. "Today there is less money in the banks than under people's mattresses."


But differences have emerged over how to construct such a system. An earlier law that failed to pass parliament's upper house, the Federation Council, envisioned that the banks themselves would play the main role in managing an insurance fund -- a scheme strongly opposed by the Central Bank.


Central Bank Deputy Chairman Konstantin Lyubinchenko instead suggested that the fund be controlled by representatives appointed by the bank or the government. In that case, he said, the fund could be supported with profits from the Central Bank. Such financing is opposed, however, by the cash-strapped government.


Under the draft law, banks that run accounts for private clients would have to join the fund and contribute 0.5 percent of their net capital. The banks would further have to pay as much as 3 percent of their total private deposits to the fund on a quarterly basis.


Private deposits up to about $4,100 would be eligible for reimbursement under the law.