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. Last Updated: 07/27/2016

State Plans to Rescue Big Banks




The Central Bank plans to use state funds to bail out large private banks that it deems too important to fail, according to a draft of its rescue plan for the banking system published Wednesday.


Kommersant Daily newspaper on Wednesday published a document titled "Program for the Restructuring of the Russian Federation's Banking System. TheOct. 5 draft."


A source in the Central Bank, who asked not to be identified, confirmed that the document was authentic but said the plan was provisional.


The Central Bank's restructuring plan provides for splitting Russian banks into four groups:


?sound banks that are mostly small- and medium-sized


?basically sound banks that have short-term liquidity problems


?insolvent banks that have no future


?very large banks that are insolvent but cannot be closed because of their economic and social significance.


The Central Bank plans to single out the most viable banks from categories one and two and make an effort to recapitalize them, attract foreign investors to them and strengthen their management.


Banks in group three are to be stripped of their licenses before July, 1999 and liquidated.


Banks in group four, however, are to be restructured by setting up "new, 'healthy' banks with the participation of the state and creditors, alongside the 'old' banks."


The new banks will inherit the best assets but few of the liabilities of the old banks.


It is not clear which banks fall into this category, but Central Bank chairman Viktor Gerashchenko said on Tuesday that SBS-Agro, Russia's second largest bank in terms of assets before the crisis, would have to be saved despite its problems.


In addition, a Center for Restructuring the Banking System is to be set up this month to take over some liabilities from ailing banks, deal with a large part of their bad loans and provide management services to the sector.


Gerashchenko said last week the World Bank had in principle agreed to provide "several hundred million dollars" for the restructuring of the banking system, as well as some technical assistance.


The World Bank's Moscow office declined to comment on this prospect Wednesday.


Margot Jacobs, a banking analyst with United Financial Group, praised the Central Bank's plan for promising to punish at least some bank owners and managers for their imprudent policies.


But, she said, "We have to see to what extent the Central Bank is willing to walk the walk and not just talk the talk about firing incompetent managers and reducing old shareholders' part in the banks' capital."


The plan hints that shareholders will lose their stakes in insolvent banks.


It gives few details, however, apart from a suggestion to let foreign creditors take shares in Russian banks to clear their debts.


Jacobs was skeptical. She said foreign banks with a strategic interest in expanding their presence in Russia might be interested but not before a deal was reached on restructuring the domestic debt on which Russia defaulted in August, which is one of the biggest holes in the balance sheets of Russian banks.


The Central Bank plan promises that a deal restructuring the treasury bills will be completed by the end of this month.


"There is a bit of a chicken-and-egg problem: The Central Bank wants foreign banks to help restructure the sector, but the foreign banks would like to see some restructuring before they get involved," Jacobs said.


The new banks' will be owned and managed by a mixture of old shareholders, creditors of the old bank and new investors.


The assets and liabilities of the new bank will be separated from the financial-industrial group to which the old bank belonged.


Loans and obligations to such related parties will stay with the old bank, where only a core staff will remain to deal with the debts and other pre-liquidation matters.


A Moscow banking analyst who asked not to be identified said the plan recognized that many problems in Russia's banks were caused by deals in which shareholders and managers used fake loans to strip assets from the bank for their own benefit.


"The plan admits that some managers put their interests above those of their banks and depositors," he said. "In fact, some of the managers were little more than criminals. Where is the guarantee that this will not be repeated in the future?"


Analysts also doubted the Central Bank's ability to recapitalize commercial banks.


"Where would the money come from?" said Andrei Galperin, head of client services at the Rinaco Plus brokerage.


The Central Bank could just print rubles to recapitalize banks, but analysts said that would be highly inflationary.