Russian bailouts: Too many questions, too few answers
One large bank bailout may be seen as a misfortune; two certainly raise some questions.
On September 20, the Central Bank of Russia (CBR) confirmed that shareholders of B&N Bank, the country’s 12th largest lender, had asked for help after deposit outflows threatened to cause a liquidity crunch. A day later, the state took the bank into temporary administration.
The move came less than four weeks after the CBR stepped in to rescue Otkritie, Russia’s largest privately owned bank, which had also suffered a run on deposits.
Successive bailouts on this scale might be understandable during a financial crisis, but at a time when the wider Russian economy is recovering nicely, these upheavals in the banking sector look bizarre.
The first question, then, is why is this happening now? In Otkritie’s case, the immediate cause of its woes was an unexpectedly low rating from new Russia agency Acra, which forced large-scale deposit withdrawals by pension funds and state-owned companies.
With B&N Bank, the situation is less clear. Depositors may have had good reason to head for the exit or they may simply have been spooked by Otkritie’s troubles.
Hard to believe
Given the interconnectedness of things in Russia, however, it is hard to believe that full-scale bailouts were the only possible solution.
It is notable that the CBR introduced a new bank resolution mechanism this year. Was it purely coincidental that Otkritie and B&N Bank did not go bust until the Banking Sector Consolidation Fund was in place to rescue them?
Still more pertinent questions concern the CBR’s actions over the last three years. In the wake of the 2014 oil price crash, the regulator encouraged and financed the takeover of failing lenders by larger private-sector players.
B&N took on Rost Bank and MDM; Otkritie got Trust Bank. In both cases, these acquisitions proved quite indigestible. Absent the CBR’s intervention, B&N at least might have remained a going concern.
At Otkritie, meanwhile, it turns out that the hole in its balance sheet may be even larger than expected. Central bank officials last month accused the lender of manipulating its accounts by mismarking the price of Russia’s 2030 Eurobond, of which it held $7 billion-worth.
Given that systemically important banks – of which Otkritie was one – have had CBR officials permanently seconded to their offices for at least three years, it is surely legitimate to ask how this slipped under the radar.
More broadly, why were private-sector banks pushed to rescue weaker peers but not given the support to see the acquisitions through? Will other consolidators such as Credit Bank of Moscow and Promsvyazbank suffer the same fate as Otkritie and B&N, as some investors fear?
Finally, what should outside observers make of the fact that nearly 70% of Russia’s banking sector is now directly controlled by the state? Will Otkritie and B&N actually be privatized, as promised, once restructuring is completed? If so, who would be willing to buy banks of this magnitude?
Under governor Elvira Nabiullina, the CBR has made much of its determination to clean up the Russian banking sector. If policymakers are serious about creating a healthy, transparent industry, however, some of these questions will have to be answered.