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November 23, 2018 www.intellinews.com I Page 3
Number of Russian banks falls below 500 as sector clean-up enters its end game
There was an explosion of banks in the 1990s during what came to be know as the “wildcat” banking days. Regulations on starting a bank were eased and as only a small amount of capital was needed to establish a bank companies and busi- nessmen established thousands of what Renais- sance Capital analyst Kim Iskyan famously called “bank-like institutions.” At the peak there were some 4,500 banks registered in Russia.
However, few of these banks actually did any real banking business. At best they were “glorified treasury operations” (another Iskyan epithet) and at worst they were “money chutes” established to facilitate capital flight through non-transparent schemes.
Sod business bank
The sheer number of banks is a major headache for the CBR, which was overwhelmed and so un- able to physically regulate the sector. That poses a systemic risk to Russia’s entire financial sector, which is otherwise one of the most sophisticated in the emerging markets (EM) universe. A lack of manpower meant the CBR was simply unable to prevent the stealing, scams and schemes to whisk cash overseas as it doesn't have enough inspec- tors to oversee everyone.
The need to clean up the sector has been obvious for years and dovetails with President Vladimir Putin’s “deoffshorisation” initiative which at
first banned Duma deputies from holding bank accounts abroad, but has since been broadened to include managers of state-owned enterprises as well as “encouraging” Russian companies domiciled overseas to bring their legal structures back onshore.
But Nabiullina’s predecessor, the camera-shy Sergei Ignatiev baulked at the challenge. There was an opportunity following the 2004 “mini- banking crisis” that saw up-and-coming retail bank Guta collapse and several of the top tier banks like Alfa Bank wobble as panicked deposi- tors withdrew their savings.
With the bank sector weakened in the aftermath of the 2004 crisis there was a perfect opportunity to close down some of the more obviously nefari- ous small banks, but fears of sparking a systemic crisis meant Ignatiev dodged the issue. However, in his parting speech to the Duma, he railed against the scams that lead to the tens of billions of capital flight a year. “One group is responsible for half of all the capital flight,” Ignatiev said in a verbal tongue lashing of Duma deputies. He did specify which group was responsible, but he made it pretty obvious to his audience who he was talk- ing about by his ire.
Part of the problem for the CBR is that the smaller banks make most of their business from borrowing cheaper than companies can on the interbank market, where big banks put their spare cash to earn a little extra revenue. However, what started the 2004 crisis was the CBR’s decision to pull the licence of the aptly named Sodbiznesbank for egregiously running a money laundering op- eration – the first time the CBR had cancelled any banking license for not doing banking business. Rumours quickly circulated that the CBR had a “blacklist” of other dodgy banks that it was going