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. Last Updated: 07/27/2016

Melikyan Vows to Close Banks

VedomostiCentral Bank Deputy Chairman Gennady Melikyan
The Central Bank will press on with its cleanup of the banking system despite the murder of reformist banking supervisor Andrei Kozlov, the man who took over his role said in an interview Friday.

"We will withdraw licenses from any banks that don't have a real banking business and only deal in dirty money — and we will do it without mercy," Central Bank Deputy Chairman Gennady Melikyan said.

Melikyan said, however, that the regulator did not aim to destroy as many banks as possible and did not set any targets. He said the Central Bank was prepared to help solid banks fix breaches.

"If a bank has a real business, we would try to mend its ways," Melikyan said. "We would give them a couple of months to sort things out and report. If that does not happen, we will take tougher action. I have to say, many understand and accept our policy."

Melikyan also said the country's banking system must grow as quickly as sound risk management will allow to fund investment and economic development.

Melikyan, 58, was appointed head of the Central Bank's banking supervision committee one week after Kozlov was gunned down in September.

Melikyan has yet to become the bank's first deputy chairman, a promotion needed to assume all Kozlov's powers.

Three people have been arrested in connection with the murder, which investigators and politicians believe was a contract killing related to his work.

A former labor minister in the early post-Soviet years, Melikyan joined the Central Bank in 2003 from state-owned Sberbank, where he was deputy chairman.

Melikyan has kept a low public profile and his bureaucratic background dating back to the Soviet era has led some to question whether he would press ahead with Kozlov's policy of weeding out suspicious banks.

The Central Bank has stripped nearly 90 of the country's 1,200 banks of their licenses in the last two years. Nine licenses have been withdrawn since Kozlov's murder.

"Have a look at the organizations we take away licenses from. Can you regard these organizations as banks? I can say — only with great reservations," Melikyan said.

He said one of the banks that had recently lost its license was housed in a basement where one person performed illegal money transfers on a single computer connected to the Internet.

"There is a number of marginal banks which do not do real banking, they are all involved in money laundering and conversion of large sums of money into cash," he said.

Melikyan said that although cash issuance was not an illegal operation in itself, the volume of it was often a signal that a bank was involved in illegal operations.

"When there is a little bank with five employees that issues 15 billion rubles [$560 million] in cash, I smell a rat right away," said Melikyan, who also heads the Central Bank's unit running field checks on banks.

Melikyan said suspect banks run complex schemes involving chains of shell firms and purchases of fictitious shares or goods. He said the main purpose of the schemes was tax evasion.

Melikyan said the deposit insurance system created after a 2004 mini-banking crisis raised banks' transparency and improved internal control and risk management. About 950 banks have so far been accepted into the scheme.

"I think the number of banks in Russia would shrink further but I cannot say how many banks there should be," he said, pointing out that, of Russia's 1,200 banks, the top 20 controlled 90 percent of the banking system's assets.

Melikyan said he was worried about a growing share of bad loans in the banking sector but dismissed analysts' fears that a liquidity crunch caused by a fall in oil prices would deliver a blow to the banking sector.

"When the effective rate on a loan is 40 percent, even if some loans turn bad, the bank is still living in clover," Melikyan said, referring to steep interest rates some banks charge for consumer credit.

Melikyan said many banks were cheating their customers and charging them hidden fees that raise the effective interest rate. "In many cases people don't pay because they think they are being ripped off," he said.

Melikyan also said he was concerned about many banks financing their retail growth through foreign borrowing but said there was no question about imposing restrictions.

"I am seriously worried about external borrowing, especially by state-owned firms. But to ban borrowing without offering an alternative is not suitable," he said.