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November 23, 2018 www.intellinews.com I Page 4
to shutter and as a result all the big banks cut off the small banks from their funds on the interbank market. As the liquidity evaporated most of the small banks quickly started to get into trouble. The CBR ended up having to intervene and
pump huge amounts of cash – about 3% of the entire sector’s assets – to reflate the interbank market business and head off a full scale banking meltdown.
And it used to be dangerous to close banks. While Ignatiev shied away from closing banks, the deci- sion to close Sodbiznesbank was actually taken by his deputy Andrey Kozlov, who was gunned down by an assassin in 2006 for closing another bank owned by Aleksei Frenkel who was eventually jailed for ordering the killing.
Nabiullina has been braver and started closing banks as soon as she took over in 2013 and has steadily continued the process since, despite Rus- sia facing a major economic crisis at the end of 2014 when the price of oil collapsed, leading to a massive devaluation of the ruble that also destabi- lised the banking sector.
DIA to the rescue
The way this has been done so that the interbank market doesn't seize up again was to make sure that the Deposit Insurance Agency (DIA), that in- sures all retail deposits up to RUB1mn ($15,000), is rigorous about compensating all deposits af- fected by a bank closure. The DIA has been so good at its job that some Russians interviewed by bne IntelliNews went out of their way to find small banks paying extraordinary interest rates of as much as 25% vs the overnight rate of 17% at the time, confident that if their bank went bust (which was highly likely) the DIA would reimburse their money, including the interest payments.
This is an expensive way to work and the DIA has run out of money at least twice; the agency now owes hundreds of millions of rubles to the regulator.
In 2013 the DIA allocated RUB103.9bn o pay- ments of affected depositors, in 2014 RUB202.4bn,
in 2015 RUB369.2bn, and in 2016 RUB663.4bn, whereas in 2017 the DIA spent RUB438.9bn.
As the clean-up moved up the food chain and the closed banks became progressively bigger, so did the depositor bail-outs. Starting in 2015 the cen- tral bank was forced to start giving the DIA loans so it could meet its commitments.
The regulator issued a five-year unsecured loan to the agency that year which has grown to more than RUB1 trillion. The debt of the DIA to the CBR by the end of 2017 amounted to RUB821bn rubles, according to the agency.
Now the clean-up has moved into a new phase and the lead is being taken by the banking sector consolidation fund rather than the DIA, the agency has begun to settle its accounts, paying back the first RUB17bn last year.
“It is possible, with a certain, perhaps cautious and optimistic, to say that the Deposit Insurance Fund is quietly moving towards some kind of rela- tive self-financing,” the agency’s general director Yuri Isayev said as quoted by Interfax at the time.
At the beginning of 2018, the DIA also increased the base rate of banks' contributions from 0.12% to 0.15% of the average balance on deposits for the quarter, which is its main source of funds.
The last time the state increased the size of deposit insurance contributions by banks was at the end of 2014 following a sharp devaluation of the ruble and the depositor panic that followed. At that time the maximum amount of depos-
its guaranteed by the DIA was increased from RUB700,000 to RUB1.4mn.
And in the first week of November some mem- bers of the Duma floated the idea of increasing the minimum guaranteed amount again to RUB2mn as well as upping the contributions retail banks have to make to the fund – effectively a tax on hold-
ing deposits. The CBR’s clean-up is not just about closing dodgy small banks: a raft of new regulations