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. Last Updated: 07/27/2016

Bill Hands Central Bank Control of Bankruptcies

A draft law on bankruptcy of financial institutions now working its way through parliament would give the Central Bank unprecedented powers in deciding which banks to save and which to let sink.

The bill passed second and third readings in the State Duma, parliament's lower house, last week, and seems certain to speed through the upper house, the Federation Council. The president likely will sign the bill into law, given lobbying by the Central Bank and the banking industry, experts said.

The law will grant the Central Bank and its chairman, Viktor Gerashchenko, increased maneuverability in dealing with faulty financial institutions.

"The idea of the law is that the Central Bank controls the process of bankruptcy of banks," said Maxim Tikhonov, an associate with the law firm of Baker & McKenzie. "It will be up to the Central Bank how to steer a bank out of trouble."

The law lists five criteria to identify financial institutions that qualify for preventive measures against bankruptcy. Since the crash of the ruble and evaporation of the treasury-bill market in August, most Russian banks would meet at least one of these.

Among the eight financial options at the Central Bank's disposal in bailing out banks will be postponing these banks payments on loans and credits, disbursing credits at a rate no higher than the refinancing rate, and even forgiving banks' debt.

According to banking experts, the law is designed so as to give commercial banks and the Central Bank sufficient time and several recovery opportunities before a bank can be declared bankrupt by an arbitration court.

For instance, the law states that when a claim has been filed in court by a bank's creditor f including depositors f to have the bank declared bankrupt, the court must first ask the Central Bank for an opinion on revoking the bank's license. Only after this could bankruptcy proceedings begin.

The Central Bank would then have one month to respond to the court's opinion. If the Central Bank decided not to revoke the bank's license, the court could not satisfy the creditor's claim.

In addition to implementing specific financial measures to prop up ailing banks, the new law, if enacted, would allow the Central Bank to demand that the bank undergo reorganization, which in most cases would mean a merger with another bank. Or, it could call for a temporary administration over the bank's operations.

According to Tikhonov, troubled banks usually resist temporary administrations because allowing them means admitting mistakes that led to problems. However, the new law would offer banks an incentive to let the Central Bank take over: A bank under temporary administration would be able to impose a three-month moratorium on meeting its creditors' claims.

Many experts said the law would be an improvement on the current situation.

"[The law] brings some order to the system, especially given the fact that the existing law on bankruptcy of enterprises couldn't always be used in relation to banks," Tikhonov said.

Still, he said, questions remain about the cost of implementing the legislation.

In its current form, the bill contains no specific information about the size of bank debts that could be forgiven or the credit limit that troubled banks could receive from the Central Bank. Eleanora Sergeyeva, a lawyer with Chadbourne & Parke, said details would follow the law's enactment.

"The question is who will prepare these regulations," she said.