The Central Bank of Russia (CBR) has finally done what critics have been calling on it to do for years. In May, it exercised new anti-money laundering powers and for the first time pulled the licence of a suspect bank. However, rather than prompting congratulations to the CBR, the closure of Sodbiznesbank nearly sparked a crisis.
Russia has about 1,300 banks but the top 400 have more than 90% of the capital. The rest are often referred to as ?bank-like institutions? and survive by offering what are politely called ?exotic services? to their owners. Deputy CBR chairman Andrei Kozlov said that 80% of Sodbiznesbank?s capital was artificial and the regulator was investigating more than $1 billion in ?suspicious transactions?.
Sparking trouble
?It seems silly to applaud when people are doing their job,? says Bernie Sucher, the head of Alfa Capital. ?But so little has happened in the past. What was remarkable was [the closure] caused so much trouble.?
The market should barely have noticed the disappearance of a bank ranked 112 by assets. But the move highlighted the instability of the banking system and nearly caused the collapse of the interbank market.
Panic began when Sodbiznesbank?s sister institution, KreditTrust, filed for bankruptcy in June. Big banks began to cut credit lines to smaller banks, interbank interest rates soared from about 12% to over 40% and liquidity evaporated.
Banks were apparently scared that the CBR had launched an aggressive clean-up campaign, and the central bank was forced to deny it had a blacklist of banks to close.
Russia?s small banks are most at risk. The well-capitalized big Moscow-based banks can live without the interbank market. A second tier of smaller banks offering banking services to regional clients would also probably survive. But hundreds of banks in the third tier that act as industry?s pocket banks rely on the interbank market to raise the capital that fuels a fragile credit pyramid.
Russian banks are vulnerable to a mismatch between the short maturity of most loans of about a year and the longer duration of investment projects that can be as long as seven years. ?There is a large number of actors who take credits and invest into projects assuming that they can get new credits when the old ones mature. It is obviously a risky business,? says Sucher. Upsetting the credit pyramid is dangerous and affects all banks ? big and small.
The CBR acted quickly to limit contagion by reducing the obligatory reserve requirements from 9% of liabilities to 7%, and by cutting overnight night rates from 14% to 13%, thus pumping $1.5 billion of liquidity into the system. ?If the volume of liquidity continues to shrink, the central bank will refinance the banking system as much as is needed,? said deputy chairman Kozlov.
The CBR is now trying to achieve reform where acting too fast will destabilize the system, but leaving the dodgy banks in business is not an option. Big banks have been reminded of the danger of doing business with little banks and are already paying more attention to the risks. Now the smaller banks will find it more expensive to borrow, putting them under pressure to sell securities and refinance loans.
At the end of last month another firm, Dialog-Optim, ranked 58 by assets, was struggling to meet payments. ?Bank Dialog-Optim... is a crucial test for Russia's systemic management. It is well run and its management is respected in banking circles,? says Andrew Keeley, a bank analyst with Renaissance Capital.
?If the bank is allowed to fail, then the repercussions will be long-term and unpredictable.?