1. question Do you agree with the opinion that market has excessive liquidity today?
2. question What are the key reasons for excessive liquidity? What risks does over-liquidity of banks cause?
3. question How long can such an issue as over-liquidity last in the banking sphere?
4. question How can a bank ‘fight’ excessive liquidity?

Absolut bank
Sergey Mikhailov, Director, Investments and Trade Department
‘Banks may go into risky segments such as securities, investments in which are not always justified and even dangerous for a number of banks’
1. This problem does exist, with allowance for the fact that we are talking about stable banks. A number of market players may be actually experiencing liquidity shortage. Absolut Bank, as a bank with foreign capital, has a balanced liquidity.
2. The situation on labor markets has caused cuts in crediting volumes, in corporate as well as in retail and investment segments. At the same time, excessive liquidity leads to decline in efficiency of use of capital and causes banks to lose some of their profit. To preserve their revenue level, banks may go into risky segments such as securities, investments in which are not always justified and even dangerous for a number of banks.
3. Regulatory authorities and banks, having become prisoners of the situation, were consolidated in tackling the liquidity issue. The situation will keep improving along with the market’s revival.
It’s crucial to return to stable credit processes on time and to avoid getting in a situation when all clients and market segments have already been allocated between more active players and when cutting interest rates would be the only way to expand the business. I believe we’ll see the situation improve by the end of this year, but it is unlikely to straighten completely.
4. There’s only one way to fight excessive liquidity, which is to place funds in instruments acceptable for a bank according to risk/reward ratio. The purpose of this ‘fight’ is always the same, that is, to boost the volume of operations. Preterm repayment of previously taken loans can be an optional way of fighting excessive liquidity. Excessive liquidity of the banking sector has a negative impact on assets. At the same time, a number of banks would prefer decline of income rather than cuts in assets.

BINbank
Maxim Rumyantsev, Head of Treasury
‘Apparently, crediting is very likely to rise in a little while’
1.  I do. Banks are in a similar situation now.
2. The key reason is the increased credit risk in the current state of the economy. As far as I know, most banks have faced this problem. On the other hand, individuals and companies are not willing to increase their loan debts. Excessive liquidity is not bad from the viewpoint of the credit risk but isn’t very good from the viewpoint of profitability. Reduction of credit margin can eventually cause efficiency problems and failure to meet the profitability standards on the part of the Deposit Insurance System and the Central Bank when the effective moratorium is cancelled.
3. In theory, crediting should be recovered when solvency of the economy’s entities is improved. State bodies are desperately trying to determine positive trends of economy’s recovery in the current statistical data such as the GDP, industrial growth and inflation. Moreover, the course of investing liquidity in securities is now less attractive compared to the first quarter because of corrections. Moreover, the Central Bank’s moratorium is about to be cancelled. Also, there is no more room for further interest rates reduction; and banks have to execute their plans of crediting and profiting. As a result, apparently, crediting is very likely to rise in a little while.
4. First, banks should look for borrowers and assess credit risks thoroughly; second, they should realize and accept the current level of rates; third, they should play their role in the economy of transforming savings into investments, and function as profit-making commercial entities. Thus, banks will be forced to start crediting gradually and to take significant credit risks.

VTB 24
Dmitry Lepetikov, Director, Center for marketing researches
‘Unless something extraordinary occurs in the banking system, in autumn this will happen anyway’
1. By early June, the banking system did really have some excessive liquidity, however I wouldn’t consider it a significant problem. In our bank, the situation is balanced.
2. I believe the reason is not that there is liquidity, but rather that there aren’t ways to apply it. The fact that funding is not free and that banks have to cover these costs and their margins is the key risk for banks. The situation is aggravated by reduction of rates. It may be especially difficult for banks that were practicing aggressive attracting policy, offering unreasonably high rates on long-term deposits during the economic recession.
3.  The key means is to restore credit demand. We find it hopeful and starting from March, the credit portfolio has been growing for individuals, and the growth tempo has been increasing each month. I believe that unless something extraordinary occurs in the banking system, in autumn this will happen anyway.
4. If this problem exists, one should be seeking different ways of using liquidity on the credit and financial markets. At the same time, a balanced percentage policy should be applied to minimize the risk of this problem.

Investtorgbank
Vitaly Glevich, First Deputy Chairman of the Board
‘Excessive liquidity will inevitably result in the risk of sharp strengthening of the ruble’
1. We are trying to keep balanced liquidity, and by doing so we’re maintaining parity between investment terms of assets and liabilities. Today we have excessive liquidity, just as most of Russian banks do.
2. The year 2009 saw a massive inflow of deposits to banks at high interest rates. The financial meltdown, however, had a severe impact on many borrowers, both corporate and individual, causing problems with timely payment of debts. Employees were losing jobs, and a severe recession occurred in the production and sales spheres. Many banks that had accumulated their clients' money on deposit accounts were too cautious and thus reluctant to credit real economy. Today we are seeing lending rates restore slowly after the recession, though they still have yet to reach the pre-crisis level. This situation in the banking sector in general has led to excess liquidity in a number of Russian banks.
Liquidity must be managed. One of the main threats posed by excess liquidity is realization of the interest-rate risk and, therefore, loss of profit margin, which may lead to revenue losses.
3. Clearly predictable inflation rate, restoration of the economy, clearly defined euro and dollar rate targets, strengthening of the national currency, and absence of sharp oil price fluctuations are all signs of the crisis abating. The market will become less restrained, which is surely going to raise the moods in the banking sector and instill confidence in overcoming the excess liquidity problem. In my opinion, by fall 2010, the picture will have cleared up completely, which will lead to a reduction in excessive bank liquidity.
4. Today, Russian banks are trying to get rid of excess liquidity by crediting small and medium businesses, which are now short on funds, and by resuming individual lending. One of the key issues here is that of the borrower's solvency, so that issued loans do not transform into past-due debts. I am convinced that the resources accumulated will return to the market and the crediting market will rise again. Excess liquidity will inevitably result in the risk of sharp strengthening of the ruble, which will negatively affect the competitiveness of nearly all sectors of Russia's economy.

Life Finance Group
Filipp Samarets, Head of Treasury
‘Entire banking sectors are at risk of going in the red’
1. Yes, excess liquidity is characteristic of the current situation in the banking market, and our bank group is no exception here.
2.  The key reasons lie in the slumping growth rate and falling household incomes; together with psychological post-crisis factors, this has led to a sharp decrease in demand for loans and therefore a decrease in interest rates. Excess liquidity always entails
extra costs, and the degree of threat they pose differs from bank to bank. Entire banking sectors are now at risk of going in the red.
3. I think that by autumn, seasonal activation of businesses and individuals after the summer vacation period will mitigate part of the problem; besides, many banks have significantly lowered their liability interest rates, which should also have its effect on liquidity and cost of resources by autumn.
4. On the one hand, excess liquidity must be ‘fought’, and it is the goal of any treasury to be efficient in allocating liquidity reserves and make sure that its interest rate policy reduces the flow of ‘expensive’ money. On the other hand, it is important to remember about customers, who have their own idea of the risk/reward ratio; extreme reduction of interest rate may result in banks losing whole strata of their customer bases, which may result in liquidity risks in the future.

Promsvyazbank
Alexei Ilyushchenko, Vice President Strategic Development Director
‘Entire banking sectors are at risk of going in the red’
1. Indeed, liquidity in the banking sector (or rather in most major banks) has grown up significantly this year. The total balance of Russian banks on their correspondent and deposit accounts in the Bank of Russia, along with investments in Bank of Russia bonds as of June 1 this year amount to RUR 2 trillion, compared to the RUR 1.7 trillion early in this year and RUR 780 billion on October 1 last year. As of April 1, 2010, liquidity norms in the banking sector were as follows: norm N2 - 74.7% (minimum 15%) and norm N3 - 109.9% (50%). Excess liquidity keeps coming in. This situation has both positive and negative aspects. As for Promsvyazbank, its current position is fairly stable.
2. Excess liquidity began to accumulate in banks due to drawing of additional resources from the Bank of Russia and Vneshekonombank during the crisis, and the banks' own active
efforts to attract cash deposits from the population. Favorable international situation over the last year has also contributed a lot to the accumulation of cash on corporate accounts of exporting businesses and related companies. All that, along with reduction in crediting volumes, has led to excess liquidity in many banks, both state-owned and private. As I have noted, big liquidity reserves have their advantages and drawbacks as well. On the one hand, it lends stability to the banking system. Among other things, the current serenity on the interbank credit market is largely explained by high liquidity of the banking sector. On the other hand, presence of excessive resources is inevitably going to affect banks' performance by reducing the revenue flow. The risk of permanent excess liquidity is first of all about incomplete use of the bank's resources in traditional lending. Banks now are facing shortage of quality borrowers whose financial standing causes little worry about repayment of credits. The same applies to credit liabilities of most potential issuers. Today, banks cannot continue the relatively liberal credit lending policy that they practiced before September 2008. In an effort to make up for the lack of solvent borrowers, banks have been actively investing in corporate equities, which entails an extra risk of losses due to high volatility of domestic securities market.
It should also be noted that liquidity that banks have accumulated over the last 18 months is mostly of short-term nature (three or six months). That increases the risk of maturity mismatch.
3. In the face of excess cash, banks started taking corresponding measures. In particular, they now offer significantly less appealing terms on individual deposits. Moreover, banks try to use these resources in operations that used to be less popular: for instance, in operations of the inter-dealer Repurchase agreements, which have grown manifold in volume and which show annual profits of up to 5 or 6%. This however would not radically solve the issue of excessive bank liquidity. A cardinal solution of this problem can only be found in the area of restoring the lending volumes, which depends on improvement of the general economy, tackling the issue of bad debts, restoring competition in the banking sector, and many other factors. Unless the financial standing of the corporate and domestic sector is improved, the situation of excessive liquidity, or rather, a large share of banks’ low-yielding or non-performing assets, may last for quite a long time.
4.  I’ve already mentioned actions of some banks. Other ways to improve a bank's liability structure is pre-term buyout of the bank's own debt liabilities issued at high rates, or by refusing to prolong expensive liabilities. Generally speaking, in order to provide an optimal level of balanced liquidity, banks should develop their crediting and borrowing policies competently. They should seek market segments which would enable offering maximally profitable crediting at a moderate risk level, and attracting clients’ funds at terms and costs that meet their credit policy.

OTP Bank
Evgeny Romakov, Deputy Chairman of the Board, Head of Finance Division
‘Players that had been actively crediting in 2009 and that keep increasing volumes today, have a balanced situation of assets and liabilities’
1. In 2009, banks were actively attracting assets from the population. It was practically the only source of funding available at that time. But reduced crediting tempo prevented players from allocating this liquidity efficiently. For this reason, at present large banks are really facing the issue of excessive liquidity. Players that had been actively crediting in 2009 and that keep increasing volumes today, have a balanced assets and liabilities situation. For instance, banks that were in the business of corporate crediting are facing reduction of portfolios today. This is related to lack of good borrowers on the market today, in both corporate and retail sectors. The pos-crediting market where the OTP Banks remains one of the key players has quickly recovered after the economic recession. In 2009, it gave pos-credits in the total amount of more than RUR 28 billion, therefore having allocated its liabilities efficiently. Today, our bank has a balanced assets and liabilities situation. We have 1 billion US dollars which we are ready to allocate within our crediting programs.
2. The key reason for excessive liquidity is in the imbalance of assets and liabilities which is related to active attraction of deposits while the credit demand drops. This leads to reduced interest margin: on the one hand, banks are paying high interests on deposits, and on the other, they cannot gain revenue from crediting. Large banks faced the need of tackling this issue to a large extent, as small players were not attracting liabilities in such significant volumes. For them, liquidity shortage is still a problem.
3. I believe the issue of excessive liquidity will be tackled when the economy is recovered after the recession. At present, we already see points of growth.

First Republic Bank
Ludmila Lebedeva, Board member
‘The key problem today is low operating profitability caused by significant allocations of reserves to cover possible bad debt losses and by shrinking of credit portfolios’
1. Yes, banks did accumulate liquidity over the last year, which shows in balance structures and shares of liquid assets. Today, banks are ready to lend more, but the economic situation is taking long to recover, so quality borrowers are scarce. This problem has been widely discussed for quite a while. Anyway, credit portfolios were growing much faster in the period from March to May this year than in the winter.
2. While I don’t think that excess liquidity poses any grave danger for the banking sector, the key problem now is low operating profitability caused by significant allocations of reserves to cover possible bad debt losses and by shrinking of credit portfolios during the crisis. Therefore, achieving the asset profitability targets requires more lending, the faster the better - provided that the quality of the new portfolios is closely monitored.
3. I think customer demand for credit products will grow significantly by this fall. Banks will be faster with their lending decisions, and interest rates will allow attracting more credit resources.
4. We need to maximize profits, so we must increase the share of operational assets and optimize their structure. In this connection, excess of liquidity means an imperfect balance of assets and thus loss of revenue.

BNP Panbas Vostok
Andrei Galayev, Deputy Chairman of the Board
‘Banks are facing interest rate risks: expensive liabilities must be honored, while assets do not generate enough profit’
1. In general, the banking market doesn’t seem to have any problems with liquidity. After the peak of the crisis in late 2008, when Bank of Russia's prompt actions helped prevent a bank liquidity crisis, banks have no shortage of liabilities today. At the moment, many banks say that, given the more conservative risk policy, lending is not that easy today, since the criteria used to determine ‘quality’ borrowers are rather strict. At the same time, we see banks compete fiercely for ‘good’ borrowers on the market, which results in lower interest rates.
2. The reason for today's excess of liquidity is that during the crisis, banks became more cautious in their asset transactions, i.e. in fund allocation, while their liabilities did not decrease either. Therefore Banks are facing interest rate risks: their expensive liabilities must be honored, while their assets do not generate enough profit.
3. Recovery of the lending market is visible in both corporate and retail segments. I think the trend will continue in the next year.
4. In every bank, there is an Assets and Liabilities Management Committee, whose task is to manage liquidity according to the market situation and monitor the balance of assets and liabilities. Of course, during crisis, all banks stock up on liquidity, but that has a negative impact on profitability. This is why banks are going to reduce those reserves as the crisis abates, each according to its own risk management policy: some quicker, some slower.