The collapse of Russian lenders Otkritie and B&N bank will not spark a domino run of bank failures, nor does it mark the end of Russia’s privately owned banking sector, Ksenia Yudaeva, deputy governor of the country’s central bank, said as the regulator continued to take a hard stance on “risky business models”.
The CBR’s rescue in August of Otkritie, Russia’s largest privately owned bank, marked the first bail-out of a systemically important financial institution in the country, and arguably the largest Russian bank failure in history.
Sector contagion fears saw investors rush to dump the subordinated bonds of other privately owned lenders, with yields on Credit Bank of Moscow and Alfa Bank’s debt soaring. The subsequent bail-out of smaller lender B&N appeared to confirm fears.
The cost to the central bank is said to be Rb800bn ($13.9bn)-Rb820bn ($14.2bn), according to local press reports. The CBR argues that Otkritie and B&N had been on the watchlist for some time.
“We don’t expect to see a domino effect,” Yudaeva told GlobalMarkets. “Deposits stabilised quickly, and we see no reaction of equity markets [to the news]. There was only a muted reaction [in the senior] bond markets and the only significant reaction was in the subordinated bond market.”
New oversight regulations
Russia’s central bank has closed more than 300 of the country’s 900 banks since it began an aggressive clean-up of the country’s banking system in 2013.
“Some banks have been operating very risky business models, based on money laundering and [other problems] so the central bank is strengthening implementation of regulation,” she said. “We have implemented new oversight regulations and we are now seeking to ensure that banks are properly regulated.”
The recently introduced Banking Sector Consolidation Fund — through which the bailout of Otkritie was managed — is new legislation bringing in a new banking sector resolution mechanism, as the previous credit-based resolution model was not fit for purpose, Yudaeva said.
“We have enough instruments of liquidity support to calm down the market,” she said. “We opted for the recovery scheme with these banks as we believed they were systemically important and so enmeshed in the wider banking system as to need our full support.”
Otkritie was previously one of Russia’s largest banks by assets. The bank had suffered from a run on deposits after a downgrade by local ratings agency ACRA in June. It lost some $7.4bn in deposits in June and July alone.
Russia’s finance ministry is now focused on developing the country’s capital markets, to reduce the reliance of corporates on bank financing.
By Elliot Wilson, Virginia Furness
14 Oct 2017
Want full access to GlobalCapital?
If you are new to GlobalCapital or you already subscribe to some of our channels you can still easily extend your access.
Take a trial to the entire site or subscribe online to see all our capital markets news, opinion and data sets.