The regular ARB congress was proceeding in a completely different atmosphere than the preceding one that had taken place in early April last year, during the highest peak of the recession. This time, delegates represented by government agencies, leaders of the largest banks, famous economists and analysts did not voice pessimistic forecasts of ‘second’ and ‘third’ waves of the crisis and of the potential collapse of the national banking system in the case of the unfavourable course of events. Therefore, unwillingly one couldn’t help but remember the title of a totally different story, ‘the Congress of the Victors’. But so far, it looks like the congress participants, whether bankers or regulators, have managed to win just the height of the economic crisis. However the same cannot be said of the numerous problems of chronic nature that have been impeding the steady development of the banking business in Russia.

LIFE IS GETTING BETTER. IS IT GETTING HAPPIER TOO?

Nobody had seriously objected to a conclusion or rather an observation that we’re over the worst. Banks are no longer suffering the liquidity shortage; there aren’t even minor signs of a potential collapse of a large bank that would provoke panic among investors and a mass outflow of deposits of individuals and legal units from accounts of the financial and credit systems. Growth of past-due debts which, according to Sergey Ignatiev, Chairman of the Central Bank of Russia, had been 20% per month early last year, has now dropped to zero. The growth had stopped as of December, 1st. During the recent months, we’ve seen obvious signs of the past-due debts reduction: between January, 1st and April, 1st, this index (exclusively of Sberbank) dropped by 1%. By Russian Accounting Standards, arrears are perhaps not the best indicator of the state of bad debts, but they do reflect the trends quite precisely,’ Head of the Central Bank summarized in his speech.

Against this background, one shouldn’t really be surprised seeing the Congress participants come up on the platform and thank the Central Bank and the Finance Minister repeatedly for their timely and effective support that had been provided to the banking sector during the peak of the recession. However, there was still a hint of bitterness even in those words of gratitude. ‘It turned out that during the recession, we proved to be not as smart and skillful as we would’ve liked to be,’ Bella Zlatkis, Sberbank’s First Deputy Chairman of the Board stated. ‘The monetary authorities of our country, the Central Bank primarily, did prove smart and skillful. The Central Bank and the Finance Ministry in particular provided the required liquidity to the banks during the peak of the crisis. But this cannot last forever; and the challenge of the present time, the recovery time, is to recover unassisted.

The bitterness was caused not only by realization of the fact that without the government support, the national banking system would’ve had much more difficulties surviving the crisis; anyway even the ‘pillar countries’ of the market economy were facing a similar picture alongside with Russia. Examples of rescuing the Royal Bank of Scotland, Goldman Sachs and others were given during the discussion a number of times. The Congress participants weren’t really inspired by the fact that the government had no intentions of keeping this up. There had been talks about it before; but the ARB congresses have been traditionally dotting the i’s in many key issues. And it looks like this time, the i’s were dotted by the Central Bank’s head Sergey Ignatiev who stated that ‘we’ve already taken enough measures to normalize the situation, i.e. state guarantees, subordinated loans and so on. And further decisions related to the bad debts buyout with the state money, for instance, aren’t required.

CREDITING AS A WOUND SPRING -OR A RUSTY ONE

A reasonable question arises as to why the banking market regulators in particular and Russian authorities in general are so adamant? Especially in a situation when growth prospects of the Russian economy remain unclear due to the loan hunger’, i.e. companies being unable to take out loans for the reasons of their own unstable credit standing, or high prices of borrowed resources. As it turned out during the Congress, there was a simple answer to that: state institutions’ leaders believe in tomorrow, or rather, in the time which starts as of the middle of this year. According to forecasts of the Central Bank’s chief executives, that’s when the lending process will shoot out like a wound spring, and will begin gaining momentum.

‘I don’t see any significant obstacles for   restarting   and   activating   this process. Banks have more than enough liquidity; capital sufficiency of the banking sector in general was 20.5% by 1st of March 2010. The bad debts issue is gradually lessening. According to our assessment, growth of the loan portfolio may amount to 15% in 2010’, Sergey Ignatiev is convinced.

First Deputy Chairman of the Central Bank of Russia Gennady Melikyan supported his supervisor. ‘The rates at which banks obtain funds and the rates at which they are ready to give out credit are not equal yet. Banks will be ready to give out credit when this process is finalized; and it’s estimated that lending will be quite intensive in the second half of this year. I believe that the 15% growth of the loan portfolio is quite realistic. The credit ‘pull-back’ that took place last year and, to some extent, carried on through January and February this year, will be overcome’, Gennady Melikyan stated on the sidelines of the Congress. By the way, he was the one who made a striking comparison of today’s lending process with a wound spring which is about to straighten and shoot out with all its accumulated strength.

One should admit that the bankers were much less picturesque in their comparisons and much more restrained in their assessments. Even Mikhail Zadornov, head of the VTB24 Bank with state participation, predicted that in 2010, lending growth will not exceed 10%. Other speakers called today’s lending process a boring and unoptimistic name of ‘stagnation’. ‘During the last year, the volume of the aggregate banks loan portfolio dropped by 28%, and the volume of individual loans by 11.7%. Everybody was expecting a significant lending revival early this year, but it hasn’t happened so far’, the ARB President Garegin Tosunyan stated. ‘Thus, the total loan portfolio is practically ‘frozen’, and this has a negative impact on the entire economy’s recovery process. Banks find themselves in a difficult situation: there are just a few large borrowers, and they don’t need money as they’re over-credited. Smaller companies don’t see prospects of their development and aren’t confident in their future; therefore, they’re not seeking to take out loans.’

However, it’s not so much an issue of economic pessimism that the Russian companies’ heads are seized with. According to the ARB’s leader, the fact that the economic crisis hasn’t made the Russian authorities reconsider the issue of linking loans to the inflation is also playing a negative role. It is still assumed, just it had been before the Lehman Brothers collapse, that the increase of the loans volume triggers escalated price growth. ‘For us, the arguing for the ‘inflated’ stock of money as the reason for high inflation in Russia remains unclear. Putting it lightly, Russia is far from topping the list of countries with the best ratio of volumes of retail and cooperative credits to the GDP. Each year, we’ve been learning that in Russia, the inflation is primarily of the non-monetary nature, and that growth of natural monopolies rates and growth of budget expenses are it’s source and initial cause,’ the ARB’s head emphasizes.

WILL BAD DEBTS DISSOLVE OR ENGULF?

So in Russia, the lending process is malfunctioning for the reasons of undercapitalized banks (by the way, the state is not striving to tackle this issue), pessimism of economic agents who don’t believe in a better tomorrow, and finally, dearness of borrowed resources. Regarding the latter, or rather, when analyzing the reasons of this dearness, state officials and bankers differ on the point again. The former are pointing primarily at the fact that during the peak of the recession, banks were drawing expensive liabilities, and now they have to offset their cost.

Leaders of the financial and credit structures are in turn emphasizing the low paying capacity of potential borrowers and bad debts, of course. They agree that growth of past-due debts has really dropped to zero, but this hasn’t made the existing problem assets in bank loan portfolios ‘dissolve’. And they require establishment of reserves, which means withdrawing funds from banks’ capitals.

There will be no help, the Central Bank leaders stated this with captivating clarity and frankness. The question of organizing a ‘bad bank’, a specialized state structure engaged in buyout of problem assets from banks, is off the agenda. Bank capital replenishment mechanisms used during the recession, i.e. subordinated loans, exchange of federal loan bonds for privileged shares, and state guarantees are ‘frozen’ or ‘semi-frozen’. This is happening in spite of the fact that almost all the Congress participants declared for preserving them, especially under such conditions when the system deficit of medium-term and especially long-term funds hasn’t been resolved.

‘Subordinated loans mechanism shouldn’t be wound up; it shouldn’t be seen only as an anti-crisis measure; to the contrary, this institution should be expanded to increase banks’ capitalization. However it should be used in such a way as to avoid disturbing competitive environment, i.e. not just for a narrow circle of banks and not on the principles of exclusive admission to it’, Garegin Tosunyan believes. Yury Trushin, head of the Rosselkhozbank agrees with him. By the way, Rosselkhozbank was among the financial and credits structures that had received a powerful replenishment in form of a 25-billion subordinated loan at the peak of recession. ‘Subordinated loans are a very helpful mechanism. We drew a conclusion that banks really needed such a timely support. On the other hand, it’s hard to imagine providing adequate capital replenishment to more than 1.000 financial and credit systems with this mechanism’, Trushin stressed.

But, according to news after the 21st ARB Congress, ‘subords’ have been and still remain manna from heaven for a narrow circle of the chosen ones. And the problem of bad debts, as we know, remains topical to one degree or another for all banks in spite of their size, regional belonging or other parameters. That’s why the words of Alexander Turbanov, Director General of the Deposit Insurance Agency sounded so prophetic: ‘According to some forecasts, the banking system will be able to ‘digest’ the bad debts problem on its own; however it will be left bloodless as a result.’ And eventually, this ‘bloodlessness’ will not take long to affect the country’s economy in general; if financial structures have no funds to proceed with their active operation, as a result companies and individuals would not get the opportunity of taking out loans on acceptable terms and at reasonable price.

Nonetheless, things are not as sad and hopeless as it may seem at first sight. Unlike the 20th Congress, at the 21st, ‘suspicions’ weren’t voiced about creation of a bad bank as a crafty way of forcing the state to pay for mistakes that had been made by the financial and credit structures in pursuing the lending policy during the pre-crisis period. It seems there is no need of convincing anyone in absurd-ness of this assumption.

On the other hand, according to Georgy Piskov, head of ARB's Distressed Assets Action Committee, we have to convince that a sui generis preventive mechanism, a system of banks assets insurance, should be organized. ‘This establishment would certainly not prevent new crises from occurring; and there is a simple reason for it: a crisis cannot be prevented. However, this system would make crises less of an ordeal for banks, and would allow paying a smaller price for ‘dissolving’ the bad debts situation. I agree that this situation will be ‘dissolved’, but the question is, low long it will take, and how many opportunities we may lose in this time’, Georgy Piskov addressed his colleagues.

REGULATION OF THE POST-CRISIS PERIOD: IRON FIST IN A VELVET GLOVE?

It would be fair to note that the 21st Congress ‘inherited’ from its predecessor not only the bad debts issue which is still unresolved as we can see, but also the problems related to, or rather arising because of stiffening of the banking market regulation. Not so much was said about upping the requirements for the banks minimal capital. Rather, bitter jokes were told that, if the authorities already decided to leave 100 to 200 banks on the market, wouldn’t it be better not to ‘chop the cat’s tail off piece by piece’?

According to a speaker, it would’ve been much easier to immediately raise the requirements to the size of Sberbank’s capital and see who would remain on the market then, and how wonderfully the Russian banking system would work. As we know, in every joke there is just an element of joke. Banks went through raising of requirements for minimal capital sufficiency to RUR 90 million relatively smoothly; however further increase of this standard to 180 million rubles may prove to be an overwhelming task for some. Not even mentioning 1 billion rubles: it’s no secret that even this figure has been voiced on the market occasionally; and it’s been getting less of a ‘joke’ as well.

However bankers were concerned not as much about the ‘prospective stiffening of the banks’ financial statements, as about the implemented statutory regulations or pending draft laws. They include the memorable Federal Law #152 ‘On personal data’ implementation of which would require banks to go through significant expenses; and draft laws on bankruptcy of individuals and on a possibility of making banks liable for actions which might’ve resulted in ‘money laundering’, and the draft law on financial recovery of individuals.

The list could go on, but Mikhail Alexeev, Chairman of the Board of UniCredit Bank has perhaps given the best description of the current situation. ‘In my opinion, there is a crisis going on now, the rule-making crisis which may result in even greater consequences than the crisis on non-payments. We’re talking about an entire fountain of legislative initiatives, which unwillingly makes us remember the phrase of Kozma Prutkov: If you have a fountain, plug it up. Let the fountain too have a rest. Perhaps now is the high time to slow down a little, otherwise if things keep going the way they have been so far, nobody knows what the banking system would become and how its environment would change.

Will they really ‘plug up’ this fountain? Judging by spirits and comments of the Congress participants, the answer would rather be negative than positive. Some experts however, believe that stiffening of control and regulation of the banking market is an objective process. ‘Having pumped up the banks with liquidity or entered their capital, what is the international community doing now?’, Bella Zlatkis is reasoning. ‘Clearly, it will keep stiffening the standards, as the banking system has proved incapable of leveling the risks. In this regard, our banking system is no different from analogous systems of developed economies. No matter how much we dislike talking about it, banks now have to both increase their capital and raise their reliability standards’. As Sberbank’s First Deputy Chairman of the Board is convinced, any crisis is an opportunity for cleansing from problems.

Cleansing, but not ‘purging’, her opponents are objecting. Cleansing means removing dishonest participants from the market. In ‘purging’ however, financial and credit systems may become the victims; while their only guilt may be in their inability of meeting the raised standards or bearing additional expenses for implementation of legislative requirements due to their size or lack of access to funding sources.