Financial Markets: Increasing Complexity, Maintaining Stability

3–5 July 2019, ST. PETERSBURG

    The head of the Central Bank said Russia has met its goal of eliminating chronically unstable banks and criminal bankers for the most part.

    The Bank of Russia has managed to get rid of the majority of banks that built their business on illegal transactions and chronically unsustainable banks, Russian Central Bank Governor Elvira Nabiullina said at the International Financial Congress in St. Petersburg. She said the bulk of work required for the recovery of the banking system has been completed, an RBC correspondent reports.

    “Numerous types of unscrupulous practices that had been considered normal have become a thing of the past”, Nabiullina said, citing such “practices” as the withdrawal of funds through lending to non-residents and the creation of fictitious assets through lending to technical borrowers, in particular.

    Nabiullina promised that in the coming years regulation and oversight will be “more focused on development and stimulation”, while acknowledging that a lot of work still needs to be done to combat offenders.

    The Central Bank’s priorities include introducing comprehensive restrictions on lending to banks by their owners. The head of the Central Bank considers this practice dangerous for two reasons.

    “First, the bank will turn a blind eye to the risks of its own company that is receiving the loan. Second, if the owner’s project runs into some actual difficulties, practice shows that the affiliated bank will be the last one to be repaid money”, Nabiullina explained.

    In addition, Nabiullina plans to get the right to restrict commercial banks from engaging in pledge-based transactions that can be used to withdraw assets, including just before a bank collapses.

    “We are reducing the required reserves taking into account the availability of collateral. And when this collateral is withdrawn in one day, the quality of the loan deteriorates dramatically. In the event a license is revoked, nothing is put into the bankruptcy estate. The rights of depositors and creditors suffer. In our view, when calculating reserves, collateral should be taken into account only if we have the right to impose a moratorium on transactions involving it”, Nabiullina said.

    She also noted that when issuing a secured loan many banks immediately count on the enforcement of the collateral. As a result, loans are often issued to companies in a state of pre-bankruptcy, while the collateral given is illiquid and its value is overstated.

    “This is fundamentally wrong: the source of loan repayment should not be the collateral, but the borrower’s operating profit. Otherwise, the banking system might turn into one big pawnshop”, she said.

    Nabiullina also criticized overly active lending by banks for M&A transactions. She said focusing efforts in this area creates risks for banks and does not generate an additional gross product or new jobs, but only “serves as the redistribution of property”.

    “Meanwhile, our economy currently needs more lending for the operating and investment activities of companies”, Nabiullina said.