The developments in the Russian banking sector in the past two weeks look very much like an unplanned event in the circus: an acrobat performs his stunt carelessly, almost falls from the trapeze and makes the audience's heart leap in horror. In this case, the Central Bank of Russia, the country's chief bank authorized to revoke licenses, has been the clumsy acrobat. A month ago it revoked the license of Sodbusinessbank, a medium-sized credit institution in terms of assets. The media reported at that time that the claims to Sodbusinessbank were legitimate: the bank had been used by various structures in their money-laundering schemes. The collapse of Sodbusinessbank was followed by the collapse of Kredit Trust - both banks had the same owner. However, when Central Bank chairman Sergei Ignatyev announced in the State Duma the so-called "white list" of banks, which, in his opinion, had nothing to fear about, people, naturally wanted to know what would happen to other banks and what banks would be included in the black list.
The Central Bank's purge of financial institutions is proceeding according to plan: in the past six months, licenses have been revoked from almost 30 non-viable and actually non-operating banks and no crisis has resulted from these measures. The Central Bank is scrutinizing banks in terms of sustainability in compliance with the law on individual bank deposit insurance, which came into effect on December 27, 2003. At the same time, the Central Bank announced that far from all banks wishing to join the deposit insurance system would be able to qualify for it. After depositors took into account the facts relating to Sodbusinessbank and the prospect of the collapse of other banks on the financial market, they started to panic. On top of that, by some fatal coincidence, head of the department for struggle against money-laundering Mr. Zubkov came up with a statement that there was a list of ten banks awaiting the fate of Sodbusinessbank. The Central Bank did not disprove this information.
After hearing about the list of ten unnamed banks, depositors who were not accustomed to sharp regulatory actions by financial authorities and who had learnt much from the bitter experience of the August 1998 default and collapse interpreted the situation differently. Therefore, they were gripped by the desire to withdraw their savings from banks as soon as possible.
But the main thing is that banks have stopped to trust each other. Frightened banks have begun to lend very selectively, choosing only the most reliable borrowers. The shortage of borrowed funds also pushes loan interest rates up. Banks engaged in encashment operations have raised the fees for their services. Apart from that, if the crisis situation leads to loan defaults on the inter-bank market, banks may again start to raise interest rates in order to make up for such losses. All these factors triggered a failure in the operation of the banking system. This is why, Dialog-optim and Guta-bank have also started to experience serious financial difficulties.
Can this failure be called a crisis? One thing is clear: this period cannot be called favorable in any way. However, its impact on market participants is different.
Let us begin with private depositors. Sodbusinessbank and Kredit Trust have already collapsed and at least 30,000 depositors have suffered. Dialog-optim has suspended its operations and thus created problems for another 40,000 depositors. Problems have emerged for Guta-Bank: VISA International has frozen plastic cards issued by that bank. Of course, the news that Vneshtorgbank has offered to purchase Guta-Bank somehow calmed down depositors. Nevertheless, it is not difficult to imagine the psychological condition of all the affected depositors. This is a true crisis for them. That is why, they started a run of panic-driven withdrawals from the ATMs of all credit institutions to save their money. As a result, even depositors keeping money with reliable banks have begun to feel uncomfortable.
Most likely, few depositors will lose some part of their savings. Amidst these developments, State Duma deputies hastily adopted the law authorizing the Central Bank to assume responsibility for household deposits not exceeding 100,000 rubles (about $3,400). Considering that in the Central Bank's estimate 80% of all deposits do not exceed the above figure, the problem of ordinary citizens will largely be solved.
However, the situation, which has emerged for corporate clients and, first of all, banks, as a result of such failure, is quite different.
Small banks do not keep large amounts of private deposits. Most household deposits are concentrated in several large banks (about 90%), which are not experiencing any problems. Whereas private depositors have been promised protection, it will be more difficult for numerous corporate clients to defend their interests. Moreover, the effective legislation stipulates that in the event of bankruptcy private depositors are the first on the list of getting their money back while corporate clients are the last on this list. Therefore, some of them will after all experience some unpleasant moments.
Overall, there are almost 1,200 banks in Russia today. Naturally, after Russia's accession to the World Trade Organization, a large number of credit institutions will be unable to compete with foreign operators. And in this case, the Russian banking system will certainly be unable to avoid its collapse. That is why, sanation is simply necessary for the country's banking system. All the actions taken by the Bank of Russia lately to stabilize the banking system have brought benefits, in the first place, to banks that have no liquidity problems. As a result of panic-driven bank withdrawals, they are getting an additional inflow of clients who are looking for the most reliable banking institutions to entrust their savings. They are also winning in the struggle for liabilities and obtaining advantageous projects abandoned by operators that have lost in competition.
So, from the state's viewpoint, nothing fatal is happening in the banking sphere. A serious reform, which cannot but reveal weak links, is going on in the banking sector. According to deputy chairman of the State Duma banking committee Valery Zubov, its task "is to free society from ill operators to enable all others to develop more actively, rather than to help everyone, including outsiders."
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