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. Last Updated: 07/27/2016

Bank Sets Rules to Control Market in Promissory Notes

The Central Bank has announced a new set of regulations to rein in the country's unruly market in commercial banks' promissory notes, a move welcomed Friday by major market players and financial analysts.


Under new rules to take effect Oct. 1, promissory notes issued or guaranteed by a bank may not exceed 200 percent of its shareholders' capital. By March 1 next year the ratio will be lowered to 100 percent, Reuters reported.


The Central Bank's move followed the collapse last month of Tveruniversalbank, one of the largest operators on the market. At the time Tveruniversalbank had outstanding bills of some 800 billion rubles (about $1.5 million), or more than 300 percent of its shareholders' capital, which stood at 262 billion rubles as of Jan. 1.


"We welcome all the Central Bank's efforts to regulate this market," said Yakov Dubenetsky, the president of Promstroibank. "They are necessary and perhaps even overdue," he said.


Promstroibank, which is Russia's fifth largest issuer of banks' promissory notes, has issued notes worth some 750 billion rubles, Interfax reported. The bank's shareholders' capital was 776 billion rubles as of July 1.


The other top five issuers were Uneximbank, Sberbank, Vozrozhdenie, and Menatep, the agency reported.


The market in promissory notes, a form of short-term capital for cash-strapped companies, has grown rapidly in the absence of liquidity in the Russian financial markets to reach a total of 17.8 trillion rubles by June 1, according to figures from the Central Bank.


According to the Kommersant Daily newspaper, promissory notes, also known by their Russian name veksels, now amount to 19 percent of M0, or "narrow" money supply, chiefly cash in circulation.


"We are worried that too many kinds of surrogate money are circulating," Dubenetsky said. "Soon every village council will start issuing its own securities," he said.


Andrei Yashchenko, an analyst with United City Bank, said the lack of regulations had not only allowed some banks to pull off high-risk schemes, but also created imbalances in the money markets.


But he thought the move was unlikely to affect larger banks, whose activities are in general inside the new ratios drawn up by the Central Bank. "It is probably more of a preventive measure," in order not to let the situation get out of control, Yashchenko said.