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. Last Updated: 07/27/2016

CB: Banks Overvaluing Assets

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Unable to cope with bankers on its own, the Central Bank has called on lawmakers for help and urged them to pass a law to force bankers to mark down the value of their equity to adjust for losses of capital.

The Central Bank’s proposal is part of a group of amendments known as the "IMF package," sent to the State Duma on Nov. 24 under pressure from the International Monetary Fund.

The problem dates back to 1998, when the Central Bank failed to steer the banking industry through the financial crisis and subsequently failed to clean up the mess left over.

Seventy-four of the nation’s 1,300 banks have bloated equity figures in their books in defiance of the Central Bank’s own regulation No. 245-U that prescribes bankers to mark down the figure by either reducing the quantity of shares or lowering their face value.

"We have no right to force them," a Central Bank source said. "We can bombard them with requests, but we do not choose [their actions] for them."

The changes would increase transparency standards and simplify monitoring.

"In theory, charter capital should guarantee a bank’s obligations," said a Central Bank representative.

It also affects calculations of capital adequacy ratios, used to make express analysis of banks’ financial situation.

The number of commercial banks that refused to file proper reports with the market regulator has fallen from 361 in 1998 to 61 this January. But by October, the figure was on the rise again, with 74 out of 1,298 banks on the Central Bank’s blacklist.

Names of three Western banks’ subsidiaries, including Raiffeisenbank Austria, BNP-Dresdner (Russia) and Turkey’s Ziraat bank (Moscow), appear on the list.

Yevgeny Tutkevich, Raiffeisenbank’s financial director, said that in October the bank submitted documents to the Central Bank in order to reduce the charter capital to the level of its own funds. The difference of 2.5 billion rubles was a result of its mother company’s decision to increase the local subsidiary’s charter capital by $150 million in March 1999.

"Banks all over the world mark down their charter capital to reflect the market value of their equity," Tutkevich said. "After the crisis we had to cover losses posted on treasury bills and forward contracts."

Raiffeisenbank has submitted all documents to the Central Bank to reduce the charter capital from $165 million to $26 million.

The bank’s decision to lower its charter capital could partly be due to its decision to tap the retail market, which requires it to reregister as a joint-stock company.

Given that Raiffeisenbank had to do the paperwork in any case, it probably decided to kill two birds with one stone, industry insiders said.

Subsequently, Raiffeisenbank will increase its equity to $76 million, milking its mother company for a total of $30 million and making a book-keeping entry to account for a $20 million subordinated loan from the European Bank for Reconstruction and Development as part of its equity.

Government-owned banks are no exception to the common trend.

State-owned Rosselkhozbank, incorporated this summer, will have to increase its equity by year-end, said Andrei Cherepanov, press secretary at the bank.

"We have been strictly instructed to meet the standards regardless of the fact that the bank has opened 16 subsidiaries and that it was established only recently," he said.

But banking analysts say that most banks will opt for window dressing because the paperwork related to registration entails costs that far exceed those related to cooking the books.