Russian Federation: Selected Issues
Author: International Monetary Fund
Publication Date:
30 Sep 2004
eISBN:
9781451833119
Language:
English
Keywords:
ISCR; CR; Russia; tax; bank owner; bankruptcy legislation; bank bankruptcy procedure; a number of phantom bank; bank capital; Correspondent banking; Commercial banks; Mortgages; Deposit insurance; Stress testing; Global
Download PDF (270.6 KB)

This Selected Issues paper for the Russian Federation reviews trends in private capital flows to Russia by decomposing the flows into its subcomponents. Russia became a net lender to the international banking system, as a complement to the prolonged period of large current account surpluses. The nonbank corporate sector in Russia began to have better access to both bank and nonbank sources of external finance, with improving investor perceptions and a favorable external environment. The relatively lackluster performance of equity issuances and foreign direct investment has been an outcome of both global and local factors.

Abstract

This Selected Issues paper for the Russian Federation reviews trends in private capital flows to Russia by decomposing the flows into its subcomponents. Russia became a net lender to the international banking system, as a complement to the prolonged period of large current account surpluses. The nonbank corporate sector in Russia began to have better access to both bank and nonbank sources of external finance, with improving investor perceptions and a favorable external environment. The relatively lackluster performance of equity issuances and foreign direct investment has been an outcome of both global and local factors.

III. The Russian Banking System: Recent Developments38

Banks’ performance has benefited from the strong macroeconomic environment, but credit and liquidity risks are increasing as balance sheets expand rapidly. While the CBR has made progress in implementing FSAP recommendations to strengthen supervision, significant structural weaknesses remain, and the weak framework for bank resolution has hampered efforts to address problems forcefully. Recent steps to tighten supervision triggered some turmoil in the banking sector in early July, which was calmed by prompt actions by the authorities. The subsequent rapid approval by the Duma of a strengthened bank bankruptcy law in late July suggests a growing recognition that banking reforms need to be accelerated while the macroeconomic environment remains favorable.

A. Background

1. Russian banks continued to benefit from the strong macroeconomic environment in 2003. Strong and prolonged growth in GDP and real incomes, in combination with increased economic and political stability and generally sound economic management, led to rapid deposit growth. Deposits increased by 2 percent of GDP during 2003, largely reflecting growth in ruble time deposits as the gradual ruble appreciation during most of 2003 encouraged a reversal of foreign currency substitution. Rapid deposit growth, as well as foreign borrowing, financed a credit boom. As a result, credit to the economy expanded by 46 percent, to 22 percent of GDP. Banking system assets grew to 42 percent of GDP.39

Russia: The Size of the Banking System

(End of period, in percent of GDP)

article image
Sources: CBR; IFS statistics; and Fund staff estimates.

2. Several financial soundness indicators improved on the back of the strong macroeconomy, although rapid growth in banks’ balance sheets introduced some risks(Table 1). Based on Russian Accounting Standards (RAS), banks continued to show improved profitability and asset quality.40 Bank capital increased by 40 percent as the Central Bank of Russia made efforts to enforce capital requirements. During the 12 months ended December 2003, foreign exchange risks declined as banks narrowed their net open positions in foreign exchange to reduce losses from the persistent ruble appreciation. The strong external environment was reflected in banks’ loan portfolios. Access to international capital markets for the resource-extracting export industry encouraged a diversification of loan portfolios away from industry and trade. Strong growth in domestic demand, however, fueled a boom in retail and mortgage lending, albeit from a small base.

Table 1.

Russia: Financial Soundness Indicators 1/

(In percent)

article image
Source: Central Bank of Russia.

Credit and depository institutions.

3. The banking system remains dominated by state controlled banks, although Sberbank’s share has been declining. Four of the top five banks by assets are state-owned41 or state-controlled banks. As of end-2003, these banks constitute 37 percent of banking system assets and credit to the economy, 50 percent of deposits, and 68 percent of household deposits. With increasing competition from other banks, however, Sberbank’s dominance of the banking system has been declining. In the 12 months ended May 2004, its share of household deposits declined by 6 percentage points to 61 percent and its share of credit to the economy declined by 1½ percentage points to 26¼ percent. The 32 fully foreign-owned banks usually target high-income and large corporate clients. The 1,200 private Russian banks are mostly small and fragmented. Almost three-fourths of them have capital below EUR 5 million, and onethird have capital below EUR 1 million. Only about 15 of them are large enough to have shares of 1–5 percent of system assets or deposits. Many of the smaller banks are regional banks or providers of niche services, including the facilitation of illegal activities.

Russia: Structure of the Banking System, End-2003

(In percent of total; unless otherwise indicated)

article image
Sources: CBR; and Fund staff estimates.

Includes Sberbank and VTB as well as state-controlled Gazprombank (owned by Gazprom Group) and Bank of Moscow (63 percent owned by Moscow government).

In addition, includes Alfabank.

B. Risks to the Banking System

4. There are signs that the rapid growth in bank balance sheets has increased some risks (Table 1). Competition is increasingly resulting in declining net interest margins. In 2003, trading gains related to the boom in stock and bond market prices masked weaknesses in the underlying profitability of many banks. Such trading gains, which accounted for onethird of revenues in 2003, are unlikely to be sustainable. Especially among the 30 largest banks, growth in capital did not keep up with asset growth. These pressures have encouraged many banks to enter new markets and target new clients.

5. Stress tests show that credit risks to the banking system have increased. The CBR conducts regular stress tests of the 200 largest banks, based on a similar, but somewhat less conservative methodology than that used by the Financial Sector Assessment Program (Box 1).42 For end-2003, the CBR found that a shock like the 1998 crisis would entail losses from credit risk of about 4 percent of GDP. While the estimates are not fully comparable due to different methodologies, this is higher than the estimate in the FSAP of 3.4 percent for end-2001 data. Applying the FSAP methodology to end-2002 data, staff estimated losses of 4½ percent of GDP for the 38 largest banks.

Russia: Comparison of Results of Stress Tests for Credit Risk 1/

article image
Sources: CBR; FSAP; and Fund staff estimates.

See box 1 for a description of the methodology of versions 1 and 2.

6. With rapid deposit growth financing a credit boom, liquidity risk has increased, although overall liquidity is high by international standards. The share of total assets that are liquid has declined as the loan portfolio has expanded, resulting in lower coverage of deposits and shortterm funding. Liquidity stress tests, based on aggregate maturity gaps, show an increased exposure to liquidity risks, as the negative asset gap at one month or less has increased. Aggregate numbers, however, mask large variations among banks, and liquidity risks may be concentrated in a small number of banks. Circumvention of prudential requirements on liquidity could also mean that exposures are larger than reported in banks’ balance sheets.

Russia: Liquid Assets to Customer and Short-Term Funding

(In percent)

article image
Source: Bankscope.

For 2002, based on 38 banks and for 2003 based on 12 banks for which data based on IFRS were available.

Sberbank, VTB, Gazprombank.

Sample of 15 large North American and European banks.

Sample of 22 banks in 2002 and a subset of 18 in 2003 from the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, and Slovakia.

Stress Test for Liquidity Gap up to One Month

article image
uA03fig01

Liquid Assets/Total Assets 1/

Citation: IMF Staff Country Reports 2004, 316; 10.5089/9781451833119.002.A003

uA03fig02

Liquid Assets/Customer & Short-Term Funding 1/

Citation: IMF Staff Country Reports 2004, 316; 10.5089/9781451833119.002.A003

1/ The box around the median shows values for the second and the third quartile. The top and bottom bars show maximum and minimum values.

7. The CBR estimates that market and interest rate risks increased somewhat during 2003. Booming stock and bond markets encouraged banks to raise their exposure to these assets. Nevertheless, risks stemming from equity exposure remain small, and the CBR estimates that even the most extreme stress test would not lead to losses exceeding 5 percent of capital. The credit boom has also increased interest rate risk, but such a risk is likely to remain small, given the still-limited exposure.

8. Many Russian banks may lack the capacity to accurately price and manage their risks. A number of private banks have been engaged in building business according to best market practices and have invested heavily in risk management systems. Many banks, however, still have poor corporate governance and weak accounting and audit practices that hinder effective risk management.

9. The macroeconomic risks arising from the banking system are likely manageable in the current strong fiscal and external environment, given the low level of monetization of the economy. With a projected federal government surplus of 3 percent of GDP in 2004, the budget could absorb the loss from a large shock to the banking system, comparable to the stress test estimates of 4–4½ percent of GDP, without running an immediate risk of a fiscal crisis. International reserves amounting to more than 83 percent of bank deposits and 57 percent of total broad money would be available to buffer effects of a deposit run on the exchange rate.

C. Structural Weaknesses of the Banking System

10. Banks’ balance sheets are highly concentrated, although many banks have made efforts to reduce concentrations and entered new markets. Large loan exposures increased during 2003 to 241 percent of capital. For the highest rated banks, Standard & Poor’s estimates that the ten largest loans average about 40 percent of total loans and almost 150 percent of total equity.43 As before, many of the large loan exposures are to related parties, often concentrated in one industry. The FSAP calculated that sectoral concentration and related lending can lead to additional losses in case of default (about 1.4 percent of GDP in addition to the losses reported above). Liability concentration is also significant as many banks are part of industrial-financial groups.44 Of the 13 private Russian banks among the top 20 banks, 12 are related to industrial-financial groups in the resource-extracting sector and the remaining 1 to a industrial-financial group in the IT and telecommunications sector. Nevertheless, many banks reduced their balance sheet concentrations during 2003, as banks’ profits from their traditional lending were squeezed by increased corporate access to international capital markets, abundant liquidity, and falling interest margins. To broaden their client base, several banks entered mortgage lending (Box 2), consumer lending, and lending to small and medium-sized enterprises. Interest margins in these markets are often still wide as they are just beginning to develop.

Methodology of Stress Tests

Credit risk stress test

The credit risk stress test of the FSAP was based on the end-2001 accounts of 64 banks, representing 75 percent of banking system assets. The stress test used financial statements based on International Financial Reporting Standards, if available, or according to RAS converted into IFRS-comparable accounts. The FSAP team used two versions of the test to assess losses under a macro-style stress scenario similar to the 1998 historical shock. One version used each bank’s peak in its nonperforming loan ratio in the nine months after the initial August 1998 shock and assumed that a large macroeconomic shock would lead to similar nonperforming loan ratios for each bank as during the 1998 crisis. This is the version of the stress test discussed in the Financial System Stability Assessment (FSSA) (IMF Country Report No. 03/147). A second version assumed that a large macroeconomic shock would lead to nonperforming loan ratios for all banks of 20 percent (equivalent to one standard deviation above the observed mean for the 12 largest banks audited by banking supervisors in fall 1998). This version was based on the approach used by staff during the 2001 Article IV mission and was useful in comparing how projected losses had evolved. Under both versions, fixed assets were assumed to lose 30 percent of their value and off-balance-sheet items were converted into loan equivalents and correspondingly shocked in the same way as loans and securities. The first version of the stress test yielded an estimated loss from a large macroeconomic shock of 3.4 percent of GDP, the second an estimated loss of 3.7 percent of GDP.

The staff’s update for the 2004 Article IV consultation was based on the end-2002 accounts of 38 banks, representing 70 percent of banking system assets. It used the financial statements according to IFRS and followed the second version of the FSAP stress test. Corresponding data are not yet available for end-2003.

The CBR’s stress test was based on the end-2003 accounts of 200 banks, representing about 88 percent of banking system assets. The test used financial statements based on IFRS accounts for the 16 largest banks and based on RAS accounts for other banks. The CBR generally followed the first version of the FSAP stress test with the important exception of the treatment of loan loss reserves. The FSAP stress test exercise assumed that true nonperforming loans before the shock were the full amount of loan loss reserves. The CBR assumed that the true nonperforming loans before the shock were as reported by banks and loan loss reserves were available to absorb part of the losses.

The estimates of losses are constrained by data quality and based on a static snapshot. Substantial underreporting of nonperforming loans in the unaudited data used in the staff update may lead to an underestimation of actual credit risk. Additionally, although the shock was modeled using sectoral-average data during the 1998 crisis, a bank-by-bank approach would have been preferable but was not possible due to data constraints. Bearing in mind these caveats, we believe that the estimates adequately reflect qualitative trends.

Liquidity stress test

The liquidity stress test uses the consolidated banking system balance sheet based on RAS accounts for end-2002 and end-2003. It is assumed that 30 percent of total deposits are withdrawn within one month and that a 30 percent “haircut” is applied to government securities that could be sold to increase liquidity.

The results of the stress test are conditioned by the assumptions and constrained by the quality of the underlying data. In particular, schemes to circumvent prudential requirements may lead to an underestimation of liquidity risk. Bearing in mind these caveats, we consider the methodology acceptable for showing trends between end-2002 and end-2003.

11. Circumvention of prudential requirements is common. Lending through nominee companies is used to formally comply with prudential norms on large exposures and can overinflate capital. A 2003 CBR study found that 20 percent of a sample of 638 banks reported overinflated capital. Triangles of indirect lending to final borrowers through other banks are used to formally meet exposure limits to single borrowers, as well as liquidity requirements.

12. Poor governance and weak accounting and auditing rules complicate the CBR’s assessment of banks’ activities and enforcement of prudential norms. Poor corporate governance and inadequate auditing result in uneven quality of banks’ financial statements. Up-to-date financial statements are available only according to RAS, which tend to overestimate capital and assets and impose less stringent definitions for capital ownership and connected-party transactions. About 200 banks publish financial statements compliant with International Financial Reporting Standards (IFRS), but usually with significant lags and only on an annual basis. Given the rapidly changing nature of the environment, such lags make it difficult to form a timely and accurate assessment of the system.

13. Weak bank bankruptcy legislation and legal procedures have made it difficult to liquidate banks. While the CBR has the authority to revoke bank licenses, this does not always result in bank liquidation. As a result, a number of “phantom banks” that have lost their licenses have yet to be liquidated. Court suspension orders often delay the start of the liquidation process. When a case does proceed to court, it is often held up because of congestion in the judicial system. Liquidation itself, which is done by a court-appointed liquidator (i.e., judicial liquidation), has a mixed record: there are often complaints about the professionalism of liquidators, and, in the past, amicable settlements have watered down the priority rights of household depositors, resulting in smaller payouts.45 As a result, the liquidation process has proved highly ineffective, slow, and costly.

The Mortgage Market

The Russian mortgage market is a compromise between the European and U.S. models. Any bank (currently about 20, mainly in the Moscow region) may issue mortgage loans to house buyers and may refinance them by issuing mortgage-backed securities (MBS), provided it complies with additional prudential requirements. The stringency of these additional prudential requirements is designed to discourage general commercial banks from issuing MBS and to encourage the creation of specialized “mortgage banks.” For longterm financing, MBS may be issued by mortgage or commercial banks directly or through special-purpose vehicles that bundle mortgage loans. The State Mortgage Agency, created in 1997, was intended to play a similar role, bundling and refinancing mortgage loans extended by state-owned regional mortgage agencies.

While mortgage lending has grown rapidly, it is still small and often unattractive to both borrowers and lenders. Residential mortgage lending is about 1 percent and construction lending about 4 percent of banks’ loan portfolios. There are a number of reasons for the small size of the mortgage market:

  • Borrowers are discouraged by high interest rates (averaging a fixed 10–20 percent for a typical ten-year foreign currency loan); the need to declare salaries; and the need to declare true taxable housing values with collateral registration.

  • Lenders are still forced to rely largely on household deposits and capital for long-term funding because of the still incomplete legislation regarding mortgage-backed securities. Additionally, regional mortgage agencies provide loans that are fully guaranteed by regional governments, at less than half the market interest rate. These agencies are also subject to significantly weaker prudential requirements. Moreover, mortgage legislation is still unclear. A law on mortgage lending was passed in 1998 and a law on MBS was passed in November 2003, but the priority of claims is unclear in case of a conflict between the law on mortgage lending and the civil code. The judicial process for mortgage collateral seizure is long and costly. Only in Moscow is there a reasonably comprehensive and up-to-date real estate registry to prevent the fraudulent sale of property and to protect bona fide purchasers of real estate and those financing such purchases. Despite these difficulties, however, the experience of several mortgage banks suggests that default rates were almost zero, even during the 1998 crisis.

  • On the supply side, the development of new housing is constrained by poorly functioning land markets; opaque systems for issuing building permits; monopolistic local construction markets; and inadequate provision of utilities.

MBS are not likely to become widely used in the near future. The cost of issuing such securities requires large volumes of mortgage loans and makes the MBS unattractive to most banks. MBS issuance by private mortgage banks is further hindered by stringent prudential regulation similar to that on commercial banks. The State Mortgage Agency suffers from capacity constraints and poor governance and has so far not been able to develop a marketable MBS.

The authorities are aware that legislative, supervisory, and institutional measures are required to strengthen the mortgage market. The housing supply constraints need to be removed to ensure that increased mortgage lending does not simply fuel price increases. The authorities have developed for consideration by the Duma a large package of legislative amendments that addresses many of the legislative weaknesses. At end-July 2004, the Duma passed several elements of the package, in particular those relating to taxation. The amended legislation needs to be supported by the courts to streamline the foreclosure process. Also, the establishment of effective credit bureaus would help banks manage risks and strengthen prudential supervision. In addition, the distorting interest subsidies of regional mortgage agencies need to be replaced by more efficient down-payment subsidies for low-income households; the State Real Estate Title Registry should be modernized, computerized, and updated; and legal obstacles to mortgage registration need to be removed.

14. Reflecting these weaknesses, Russian banks are generally rated “speculative” and considered riskier than their transition country peers (Appendix I). While short-term prospects are usually assessed positively, given buoyant macroeconomic conditions, the significant structural risks constrain ratings.

D. Prudential Regulation and Supervision

15. In June 2004, the government adopted a banking sector strategy for 2004–07 designed to address many of the weaknesses identified in the FSAP and highlighted above. Bank resolution processes are to be improved through tightened legislation. Bank supervision is to be shifted toward risk-based supervision and strengthened through increased use of qualitative judgment by supervisors; expanded supervision on a consolidated basis; tightened procedures for connected lending; enforcement of definitions of bank capital; and stricter fit-and-proper criteria for bank owners and managers. A key element of the authorities’ banking sector strategy is the introduction of deposit insurance to level the playing field for state and private banks and to leverage stronger bank supervision. The scheme will come into effect on January 1, 2005. By April 2005, the CBR plans to complete reviews of all 1,140 banks that have applied for entry into the deposit insurance scheme and to make monthly announcements of accepted banks as the work progresses. The FSAP cautioned that this staggered admission may create risks of destabilizing runs on fundamentally sound banks. In response to the run on two large private sector banks in early July, interim deposit insurance was extended to all banks (see below). Noticeably absent, however, is an explicit strategy for the state-owned banks, especially Sberbank, whose deposits are still fully guaranteed by the state or the CBR.46 A review of Sberbank’s role is not planned until it becomes a full member of the deposit insurance scheme in 2007.

16. The authorities have already taken steps to strengthen regulation and supervision. First, the CBR has substantially strengthened prudential regulation to increase the transparency of banks’ capital and ownership and to address weaknesses identified in the FSAP. Second, the CBR, together with the ministry of finance, is more rigorously enforcing anti-money-laundering and counter-terrorist-financing (AML/CFT) rules. Third, enrollment in the deposit insurance system is guided by strict checks of strengthened prudential requirements for applicants: any bank that has not been accepted into the insurance scheme by end-September 2005 will have its license to take household deposits revoked.

17. The CBR has introduced new regulations to increase the transparency of banks’ capital and ownership in line with the FSAP’s recommendation to tighten the definition of capital and strengthen fit-and-proper requirements for bank owners and managers:

  • In February 2003, the CBR issued instructions that introduced the notion of “improper” assets that inflate capital fictitiously. The new regulation allows the CBR to audit and impose sanctions on banks that are suspected of showing inflated capital.

  • In July 2003, amendments to the law on banks and banking were approved that tightened fit-and-proper requirements for bank owners, including net asset adequacy and liquidity ratios.47 New owners of banks are required to undergo an assessment of their eligibility as bank owners based on these requirements.

  • Effective February 2004, the CBR strengthened the requirements for establishing loan loss provisions, moving them toward IFRS.

18. The CBR has taken several initiatives to further improve the transparency of financial statements, which also help address problems of nontransparent corporate ownership structures:

  • In 2003, the CBR tightened supervision of transactions with offshore banks. New regulations prohibit transactions with most banks in countries identified as high risk because of their legal and governance environment.

  • Effective April 2004, the CBR introduced revised prudential requirements allowing for motivated judgment by CBR supervisors, one of the major recommendations in the FSAP, and reducing incentives for window dressing. Banks are required to comply with prudential standards on a daily basis, and noncompliance has been redefined as noncompliance over 5 business days in any 30-day period. This is expected to reduce room for end-month window dressing. Off-balance-sheet items need to be fully reported to reduce incentives for schemes to evade risk assessments.

  • The CBR has taken steps to move toward IFRS accounting for financial statements, as recommended in the FSAP. New regulations require banks, from October 2004 onwards, to report their accounts for monitoring purposes (and from 2006 onwards for supervision purposes) according to RAS converted into IFRS format. From end-2004 onward, banks’ accounts will have to be audited. A move to full IFRS accounting and auditing for banks is not anticipated in the near term because of capacity constraints on banks and the auditing profession. Whether the revised accounting standards improve the transparency of financial statements will depend on banks’ willingness to comply with the general principles underlying IFRS accounting, as well as on the professionalism and independence of auditors.

19. To accelerate bank resolution procedures, the CBR revised merger and acquisition regulations in July 2003, and the Duma passed amendments to the bank bankruptcy law in July 2004. Registration procedures for bank mergers were shortened from six to four months and for bank acquisitions from six to three months. Several administrative requirements for mergers and acquisitions were removed. At end-July 2004, the Duma passed amendments to the bank bankruptcy legislation to move liquidation toward an administrative process (i.e., liquidation by the deposit insurance agency); these amendments could accelerate bank resolution and were supported by the FSAP. The amendments also strengthen the personal liability of bank owners and managers and simplify bank bankruptcy procedures.

20. Strengthening the banking system will be particularly important in light of the new foreign exchange law. From mid-2005 onwards, domestic banks will face competition from foreign banks, as depositors will be allowed to open deposits in foreign banks. The new foreign exchange law also removes administrative barriers to capital flows, such as permit requirements, but instead allows the CBR to impose unremunerated reserve requirements on capital flows. The CBR has indicated that moderate reserve requirements on a broad range of capital in- and outflows will be imposed in August 2004. To administer reserve requirements and monitor capital flows, an elaborate system of special accounts will be introduced which may impose considerable administrative cost.

E. Recent Events in the Banking Sector

21. Efforts to address long-term underlying weaknesses recently triggered some turmoil in the banking system. On May 12, 2004, the CBR withdrew the license of Sodbusinessbank, a midsized bank, for violations of anti-money-laundering legislation. Rumors that other banks might be affected led to the closure of interbank credit lines to all but the largest banks and a spike in interbank interest rates. In early June, Credittrust, a bank thought to have the same owner as Sodbusinessbank, defaulted on a bond payment, suspended operations, and opted for voluntary liquidation.

22. Throughout June, tight interbank market conditions affected small and medium-sized banks despite steps by the CBR to boost liquidity. In mid-June, the CBR cut the required reserve ratio on corporate and foreign currency deposits by 2 percentage points to 7 percent; expanded the list of collateral eligible for transactions with the CBR; and reduced the refinance rate by 1 percentage point to 13 percent. Nevertheless, four small banks suspended operations in the second half of June, and one small bank’s license was withdrawn for violation of anti-money-laundering legislation. Additionally, a midsized bank restricted deposit withdrawals.

23. Rumors in early July about problems at larger banks undermined depositor confidence and culminated in the suspension of operations at one bank and a deposit run on another. On July 6, Gutabank, the 22nd-largest bank, suspended operations after it had lost deposits equivalent to one third of its balance sheet. This was followed by a two-day run on Alfabank, the largest private bank, after several of its ATM machines ran out of funds. Alfabank’s owners provided $800 million to support the bank, and Alfabank imposed a 10 percent fee on early deposit withdrawals to stem the run.

24. The authorities acted promptly to calm depositors. The CBR brokered a takeover of Gutabank by state-owned Vneshtorgbank (VTB), the second-largest bank, financed with a $700 million CBR loan to VTB. The CBR also reduced reserve requirements further to 3½ percent effective July 7 (a liquidity injection of 8½ percent of base money), and on July 10, the Duma passed a law introducing interim deposit insurance for all banks. The additional deposit insurance, which is effective from August 2004 to end-2006, has broadly the same coverage of household deposits as the main deposit insurance law approved in December 2003; however, it is financed and administered by the CBR rather than the deposit insurance agency. The review process of all banks for entry into the main deposit insurance scheme will be completed as previously planned and, as banks qualify, they will be transferred into the main deposit insurance scheme. Banks that do not qualify will lose their license to attract new retail deposits by end-September 2005, but their existing deposits will be insured by the interim deposit insurance scheme.

25. These measures have been successful in calming the situation. By July 9, the run on Alfabank had subsided, and, by July 17, the penalty on early withdrawals had been lifted. On July 19, VTB paid Rub 1 million (about $35,000) for Gutabank, including for some of the industrial assets of Gutabank’s parent group, and, ten days later, Gutabank was fully operational again. The CBR has since withdrawn four small banks’ licenses without repercussions in the interbank markets or among depositors.

F. Conclusions

26. The main conclusions are the following:

  • Banks’ performance has benefited from the strong macroeconomic environment. Credit and liquidity risks are increasing as balance sheets expand rapidly, but they remain manageable, given Russia’s low level of monetization and strong fiscal and external positions.

  • Despite progress in implementing FSAP recommendations to strengthen prudential regulation and supervision, significant structural weaknesses remain. These include highly concentrated balance sheets; substantial, albeit declining, connected lending; frequent circumvention of prudential norms; poor governance; and weak accounting practices. The system remains dominated by state-owned banks, especially Sberbank.

  • Efforts by the CBR to strengthen enforcement of prudential regulations have been hampered by a weak framework for bank resolution, notably, until very recently, an inadequate bank bankruptcy law and an unpredictable judicial system.

  • The authorities’ banking sector strategy is designed to address many of these weaknesses. A key element is the introduction of household deposit insurance to level the playing field for Sberbank and other banks, and leverage stronger enforcement of prudential standards. However, no strategic review of Sberbank’s role is envisaged in the near term.

  • Recent turmoil in the banking sector highlights the fragility of confidence, and reflects the sector’s continuing structural weaknesses. Further nervousness is likely as the CBR continues to strengthen supervision. The strong macroeconomic environment provides an important opportunity to do this while macroeconomic and systemic risks are still manageable.

  • While the CBR’s recent measures were effective in calming the situation, more effective bank resolution processes, improved crisis management tools, and a clear and consistent public communications strategy are needed to minimize the impact of individual banks’ problems on confidence in the sector as a whole. The Duma’s recent approval of a strengthened bank bankruptcy law is an important step in this direction.

APPENDIX I

Larger Russian Banks’ Ratings as of July 26, 2004

article image
Sources: FitchRatings; Moody’s Ratings Direct; and Standard & Poor’s Bank Ratings Guide.

Foreign long-term deposit ratings for Gazprombank, NIKoil IBG Bank, Rosbank, NOMOS Bank, Sberbank, Vneshtorgbank, and MDM Bank.

Long-term local issuer credit.

38

Prepared by Pamela Madrid, Franziska Ohnsorge, and Leslie Teo.

39

These trends continued during the first five months of 2004 but may have been interrupted in May–July after the closing of a mid-sized bank sparked interbank and depositor nervousness, culminating in a deposit run on two large private domestic banks (see below).

40

Russian Accounting Standards are subject to several weaknesses discussed in paragraph 12.

41

State-owned banks are Sberbank, Vneshtorgbank (VTB) and the specialized banks VEB, Russian Agricultural Bank, Russian Bank of Development, and Roseximbank.

42

An FSAP report was completed in August 2003, based on FSAP missions in April and September 2002.

43

Standard & Poor’s, Bank Industry Risk Analysis: Russian Federation, June 2004.

44

These risks were demonstrated by the bankruptcy of a seemingly healthy bank in early 2003, after the withdrawal of deposits by a large shareholder.

45

A 2001 amendment to the law on bank bankruptcy allows for expedited payment (at the outset of proceedings) to retail depositors.

46

At end-July 2004, the Duma passed amendments to the deposit insurance law removing the state guarantee of new Sberbank deposits after October 1, 2004. Those deposits remain guaranteed by the CBR.

47

Previously, the only grounds for refusal of bank ownership were criminal convictions.

Same Series

Other IMF Content

Other Publishers

Cover IMF Staff Country Reports
Russian Federation: Selected Issues
Author: International Monetary Fund
Volume/Issue:
Volume 2004: Issue 316
Publisher:
International Monetary Fund
ISBN:
9781451833119
ISSN:
1934-7685
Pages:
91
DOI:
https://doi.org/10.5089/9781451833119.002

Liquid Assets/Total Assets 1/

Liquid Assets/Customer & Short-Term Funding 1/