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. Last Updated: 07/27/2016

A Season of Winnowing Ahead

"Russia is a seasonal country," began First Deputy Central Bank Chairman Sergei Aleksashenko, in his address to the "Cooperation" reform club. Several years earlier in the fall, we were expecting a sharp drop in the ruble exchange rate and higher inflation. Now, as inflation has been brought down and the ruble rate stabilized, everyone is awaiting a banking crisis. According to Aleksashenko, there will be no crisis.


This statement, sounding from the mouth of a high-level Central Bank bureaucrat, hardly means that all is well in Russia's banking system. That there will be no crisis means only that a whole series of crises -- or a domino effect like that which occurred last fall, when one bank's inability to fulfill obligations lead to similar problems at a second, and then a third and so on -- will probably be avoided. But then, the banks were tightly interlinked, working on the interbank credit market, and the share of overnight credits was much higher than now. As Alfa-Bank president Pyotr Aven put it, last fall his bank attracted and placed up to $100 million a day in short-term credits; today that figure does not exceed $20 million. Another $30 million are tied up in long-term credits. However, in any case, banks have become much less dependent on each other.


The banks have become equally as detached from what we in our country have come to call the real sector, that is the sphere of production. Russian banks' loans to production are insignificant, wherefore difficulties in the real sector have little effect on the banks. However, it is worth noting the unpleasant experience of Kredo Bank, which temporarily had its accounts frozen by the Central Bank earlier this year after the West-Siberian Metallurgy Plant defaulted on a big loan. In reality, a majority of Russian banks have already suffered losses from industrial financing. About two years ago, there was a widely held misconception that government would support large industrial enterprises all the way and banks made generous loans to them. Now, according to Aven, they are reaping the rewards -- nearly a third of those loans have been written off as losses. Yet another third, he says, are considered problems, that is unreliable debts, while borrowers are meeting their obligations only on the remaining third.


Aleksashenko listed a number of factors that might influence the development of a crisis in the banking sector. However, he placed special emphasis on several, including the exceptional weaknesses in the legal framework for banking affairs. "Commercial banks have had a very powerful influence in the development of our banking legislation," which has become a serious factor for the destabilization of the banking system, he says.


There is still one other problem -- not fatal, but dangerous: the absence of a mechanism for weeding out managers that lead the banks into insolvency. Those familiar with the dozens of tricks for getting around Central Bank instructions are never without work. Having ruined one bank, they move on to another. This has happened on many occasions.


The problems in Russia's banking sector are well known. To their large numbers can be added owners' irresponsibility, poor supervision and insufficient accounting. Then there are a few risk factors that were not mentioned in the first deputy chairman's speech, not the least of which is the fact that our banks are supported by high yields on state securities. What will happen if yields on treasury bills are brought down, as would be required for the development of the country's economy? How many banks, unable to reconcile dropping revenues with costs that are not dropping, will go bankrupt?


It is interesting to examine the role pointed out by Aleksashenko of "improper" signals in the banking system. After Sberbank -- and the government for all intents and purposes -- assumed responsibility for the private accounts at several bankrupt banks, including Tveruniversalbank, one can hardly expect individuals to take seriously the choice of where to deposit their money.If, in the end, the state will always foot the bill, then one would be foolish not to put one's money where the interest is highest, that is into a bank that conducts the riskiest operations. Of course, that means that reliable and conservative banks will have trouble in building a deposit base while risky banks will expand and pop like soap bubbles.


The current banking system is proposing strange stimuli for shareholders. Considering minimum capital requirements, it would cost one approximately $1 million to start up a new bank. First of all, that means there is no point in trying to save an existing bank: If its losses have exceeded the $1 million limit, it is cheaper and simpler to let it die a slow death on the path from license revocation to liquidation. Secondly, run-of-the-mill fraud is enough to justify the cost of setting up a bank for money laundering.


All of these factors are making the banking system more or less vulnerable. However, the real danger, which has already appeared several times on the horizon, is the possibility of massive runs on the banks. Such was the case with the U.S. crisis in 1929. Tveruniversalbank's recent crash followed a similar turn of events. In the run up to presidential elections, depositors withdrew their ruble accounts and bought dollars, which they then put under their mattresses. At that time there was a significant drop in the deposits of corporate clients who were trying to use any means to turn their rubles into dollars and their cash abroad. As it turned out, the margin of safety for the majority of Russian banks is not all that great.It is lucky that after the August 18 round of tax decrees, which included a move to double tax bank deposits, they survived the risk of a 1929-style banking run.


One is left with the impression that most authorities on the subject of banking crises do not completely understand what that term really means. There have been real banking crises -- in the United States in 1929, and in Bulgaria this year. A shutdown of large banks causes a shutdown of the country's payments system, which instantly paralyzes the economy. The weeding out of weak banks is no crisis, but on the contrary is a healthy process. And if your bank turns out among those that have been weeded out, you should not complain. No one forced you to put your money there.