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November 23, 2018 www.intellinews.com I Page 5
and other measures to shore up the solidity of the sector have been introduced. Next up will be the ap- plication of the so-called Basel III rules, which man- date bigger provisions and other prudential meas- ures to further improve the solidity of the sector.
For these reasons, and Nabiullina’s super con- servative monetary policy, she has been dubbed “the world’s most orthodox central banker.”
Garden Ring crisis
Things changed up a gear in September last year when the CBR closed its first too-big-to-fail com- mercial banks. The so-called Garden Ring banks went bust and had to be rescued by the CBR. These banks were too large for the DIA to com- pensate their depositors, but the CBR had set up a new mechanism, the Bank Sector Consolidation Fund, in April that simply took over the troubled banks — Binbank, Otkritie FC and Promsvyazbank – and kept them open so there was no need to compensate depositors.
The government itself precipitated the September 2017 near miss banking crisis. In April last
year the newly formed domestic ratings agency Russian Analytical Credit Rating Agency (ARCA) pulled its AAA ratings for the Garden Ring banks. Under new rules, also launched at the state of last year, state-owned enterprises (SOEs) are not allowed to hold cash in banks without these AAA ratings, so the decision led to the outflow of large deposits at these commercial banks, plunging them into crisis.
Even though the de facto reorganisation of these commercial banks was clearly planned long
in advance it nearly ran out of control as the collapse of one large commercial bank threatened to undermine the whole sector. Bank sector profitability, which had been growing steadily for
two years after a barren 2014-15, collapsed, with the sector as a whole losing over RUB300bn in September alone.
The Garden Ring banks turned to the CBR for help, as can clearly be seen by the spike in repo transactions, where banks use their assets like bonds as collateral for expensive short-term bor- rowing from the CBR. After two months of grow- ing worries, the CBR stepped in, took the banks over using the new bank stabilisation fund, and abruptly ended the crisis.
While some have criticised the government for closing the Garden Ring banks and see it as a ruse for the state-owned banks to increase their market share – the state now owns some 70% of banking assets as a result – the problem with the Garden Ring banks is they had all bought pension funds and were using their cash to pump up their balance sheets. That was fine as long as pension premium payments continued to rise, but when this sector reached maturity the pyramid would crumble. The Garden Ring banks were a system- atic crisis waiting to happen.
There are a few more banks to close. Several years ago Putin said he believed the optimal num- ber of banks was 300, and pointed to the German system as the model for Russia.
The banking sector has now entered the end- game. If the CBR continues to close banks at the same steady pace it has been then Russia will reach this target in about 2020 and the clean-up will be over. The next phase will then begin: the privatisation of the sector as the CBR attempts to sell all the formerly commercial banks it picked up in last year’s crisis that are currently residing in the Bank Sector Consolidation Fund and more sales of stakes in Sberbank and VTB bank.