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. Last Updated: 07/27/2016

Cabinet Wants to Raise Bar for Banks

VedomostiFinance Minister Alexei Kudrin
Russia is raising banks' capital adequacy requirement to 10 percent from 2007, the government announced Thursday, taking another small step on the long road to improving the sector's shaky reputation.

"Our task isn't just to make the banking system more stable, but also to protect deposits and make credit resources more affordable," Prime Minister Mikhail Fradkov said at the televised Cabinet meeting.

International institutions and economists alike say building trust in Russia's fragmented banking system should be one of the country's top priorities.

Capital adequacy is a measure of a bank's capital expressed as a percentage of its risk-weighted credit exposure. The system has been developed to make sure a bank can absorb a reasonable level of losses before going bankrupt.

At the moment, a Russian bank's capital adequacy ratio has to fall as low as 2 percent before the Central Bank can put it out of business.

A second amendment means the Central Bank will be able to step in with temporary administration if the ratio dips below 12 percent, above today's 10 percent to 11 percent.

Although the average figure in Russia is already over 15 percent, Finance Minister Alexei Kudrin said the changes would target banks teetering at the lower end of the scale.

"They will have to pull themselves together. This will be a stimulating, vital measure, which will force these banks to raise their capital," Prime-Tass quoted him as saying at the Cabinet meeting.

Many of Russia's 1,200-plus banks are little more then financing vehicles attached to powerful business groups and hardly a week goes by without one losing its license.

If approved, the law will reduce the number of banks in Russia, helping to make them more manageable, said Paul Timmons of Moscow Narodny Bank.

"With less capital to employ, banks are likely to achieve a lower return on capital and will therefore be compelled to improve their balance sheet dynamics," Timmons said. "That would ultimately result in a wave of consolidation and mergers across the lower-tier banks in their search for higher returns."

A senior Finance Ministry official said the move was aimed at improving confidence in the sector, much needed a after a mini-banking crisis last summer.

A medium-sized bank was stripped of its license for money-laundering, spreading rumors the authorities had a blacklist of banks it planned to close down. A run on deposits forced banks to scramble for cash on the interbank market, prompting the Central Bank to slash reserve requirements.

The new reform represents "a simple increase in the reliability of the banking system," said Alexei Savatyugin, head of the ministry's financial policy department. "Moreover, it is not being done by a straightforward rise in absolute capitalization, which allows us not to liquidate small and medium banks, but to increase their general stability."

State-owned Sberbank, which commands two thirds of retail banking deposits, is already taking action.

It recently issued a benchmark 10-year eurobond aimed at boosting its capital adequacy, which fell to 11.7 percent at the end of September from 15.2 percent at the end of the first quarter of 2004.

(Reuters, Bloomberg)