What happened in 2010

ANTI-CRISIS BANK SUPPORT MEASURES CUT DOWN, STRICTER REGULATION OF THE BANKING SECTOR

The anti-crisis measures were adopted quickly and are cancelled slowly - this is what market players should thank the Central Bank for. At least the regulatory body implements this idea quite transparently. Moreover, as Aleksey Simanovsky, director of the department of banking regulation and supervision of the Bank of Russia believes, these measures were required in the first place because banks had excessively aggressive credit policies and cared little about liquidity.

The goal was achieved and the measures are no longer needed. That is why unrated issuers may not be included into the Lombard list from January 1, 2011. Within the next year, the regulator also plans to reduce the term of loans with non-marketable assets as the collateral from six to three months. The regulator will also suspend three-month deposit auctions, replacing them with one-month auctions, and will reduce the duration of investments into the obligations of the Bank of Russia from six to three months. Furthermore, unsecured auctions will be suspended.

Regulation of the banking sector is also getting stricter along with reduced anti-crisis measures. The Central Bank requires from credit organizations to further diversify their credit portfolio and concentrate less on providing loans to affiliated businesses of bank owners. Another significant initiative of the Central Bank is to force banks to disclose the property on their balance sheet starting from January 2011. Buildings and land not used by the bank in its main business, such as pledged property or investment projects, will have to be specified in separate report items.

These, of course, are not all of the measures that the Central Bank intends to implement as part of stricter control over banks. Most of them will be implemented within the next year. But the resolutions to do so have been made in 2010, so they can be deemed the events of this year.

REFINANCING RATE OF THE CENTRAL BANK HAS REACHED HISTORIC LOW

7.75% - Russia has never had the refinancing rate at this low, unlike values as high as 150, 180, 200% or even more. (The record high rate was 210% per annum, effective from October 15, 1993 to April 28, 1994).

The path from this astonishing rate to a modest 7.75% was long and painful, literally with its highs and lows. As recently as in 2009 the rate has been reduced 10 times, reaching 8.75% just three days before the new year 2010. In February 2010, the rate was revised again and went down to 8.5%, and has remained at 7.75% from June 1.

The rate trend largely depends on official inflation forecasts issued by the Central Bank itself - as little as 7% this year. Pressure from the financial community might also influence this decision. During the whole year 2009, banks asked the regulatory body to take measures to normalize the situation. More rate reductions mean that the Central Bank has listened.

However, as it often happens in life, happiness for some turned to be a disaster for other market players. Reduced refinancing rate has hit those banks that, during the acute phase of the crisis, took deposits from private customers at 16% to 18% or even as much as 20% per annum. The banks were unable to make profit with this high cost of money when the refinancing rate went below 10% and then reached 7.75%. As a result, the banks got trapped between expensive deposits and cheap credits.

Unsurprisingly, demands for lower refinancing rate transformed into outcries that “it's enough already” and the market would prefer stable conditions for some time, with the refinancing rate suspended at the same level for some time. The Central Bank has hinted that it agrees with this reasoning; the officials of the regulatory body do not mention any further rate cuts, but suggest that in 2011 (most likely in the second half of the year) the bank may consider slightly increasing the rate. Experts believe that even if it happens, the increase will be small, 0.25% or 0.5%.

MINIMUM CAPITAL REQUIREMENT FOR BANKS HAS BEEN INCREASED TO 90 MILLION RUBLES

The law that has increased the minimum capital requirement for banks became a real shock therapy for the banking community. As of April 1, 2009, 145 Russians banks operated with a capital of less than 90 million rubles. Many experts expected a true drama in 2010, when a hundred or even more bank licenses would be recalled nearly simultaneously. However, despite the dark forecasts, it happened quietly, with no unnecessary words and tears.

Only seven licenses were recalled on the basis of the new requirements to the amount of own capital. Furthermore, seven banks with insufficient capital were transformed into non-bank credit organizations, seven other banks have increased their capital by January 2010, and one more bank has been liquidated voluntarily.

Thus, the banking community was able to overcome the first barrier with minimum losses. However, there are still chances that seven cancelled licenses is not the final result. For instance, Troyka Bank was found to have simulated the increase of the capital up to the minimum requirements of 90 million rubles, for which its license was cancelled. An audit of the Central Bank has discovered that the owners of the bank, also being its top managers, have first “donated” their salaries as additional capital, but then have withdrawn this money from the bank, stripping it of its capital. There have been completely opposite cases, too: West Bank whose license was recalled on February 26 due to insufficient capital has managed to get its license back through Moscow Arbitration Court.

In 2012, banks have a new goal to reach - increase their capital up to 180 million rubles. They will accept the new limit much calmer. Probably because bankers think this limit is not so scary, since the Ministry of Finance is not going to stop and pledged to bring the minimum capital limit up to 5 billion rubles. In this way, financial authorities hope to stimulate consolidation of the banking system and to increase its stability.

Stricter requirements to the amount of bank capital have indeed triggered the consolidation process in the Russian banking market. According to Mikhail Sukhov, director of the department of licensing and financial rehabilitation of credit organizations of the Bank of Russia, 2010 was the record year as for mergers and acquisitions in the banking sector. In this year, 18 banks merged with 12 other banks; thus, about 6% of total banking assets were involved in the consolidation process. However, Mikhail Sukhov believes that this is not the limit and year 2011 will bring new records in the M&A market.

FINANCIAL OMBUDSMAN APPOINTED

Year 2010 saw the creation of the institution of financial ombudsman in Russia. It is an extra-judicial dispute resolution body for disputes between financial organizations and their private customers. Deputy Pavel Medvedev who became the financial ombudsman has started his work from October 1.

A claim may only be filed by a natural person being a customer of the bank. Claims are reviewed for free. Filing a claim to the ombudsman does not prejudice the right to file a lawsuit to the court, but the customer undertakes not to file such lawsuit while the claim is being reviewed by the ombudsman. The disputed amount may not exceed 300,000 rubles.

The office of the financial ombudsman that will accept claims and demands from people experiencing difficult financial situations is in Moscow, at the Association of Russian Banks. The ombudsman acts upon the agreement with the member banks of the Association of Russian Banks who have signed the appropriate document. Six banks have currently joined this agreement: Raiffaisenbank, Uniastrum Bank, OTP Bank, Home Credit, GE Money Bank, and Trust.

According to Pavel Medvedev, some other banks already want to join the new pool as well. He believes that after some time, representative offices of the financial ombudsman may open in all federal districts and large cities of the country.

A TOP 30 BANK LOST ITS LICENSE

2010 would have been bloodless unless one “but”: a top 30 bank (by the amount of assets) had its license revoked. Mezhprombank and its owner, Sergey Pugachev, have struggled to stay in the market for a long time, but to no avail.

The bank's troubles that have started from unrepaid loans from the Central Bank's unsecured auctions have been multiplying and gathering as a snowball, even though the main events around the failing bank occurred in the spring and summer. A default on Eurobonds worth 200 million euro, lawsuits by large creditors (such as Severstal and Sukhoi Civil Aicraft), double reports (one of which was terrible, and another, submitted to the Central Bank several days after the first one, was quite acceptable) - these and other issues troubled the bank. The last straw that Mezhprombank tried to grasp (loans from VTB and Severstal) loudly broke down in late September / early October, and the Bank of Russia has revoked the license from Mezhprombank proper on October 5 due to non-compliance with the requirements of the Central Bank and inability to pay back to creditors. After a little more than two weeks, the same followed for its retail subsidiary, Mezhprombank Plus.

The most remarkable part of this story was how market players and customers stressed that they were calm about it. It was not even 10% as bad as in autumn 2008: after Mezhprombank's license was revoked, nobody stormed offices of other banksdemanding their deposits back. There was no domino effect for other market players, as it was in the summer of 2004. However, according to the news that circulated in late November, criminal investigations may be started, since the management of the Central Bank believes Mezhprombank might have been bankrupted intentionally by the hard efforts of its top managers.

what did not happen in 2010

LONG-TERM LIQUIDITY INSTRUMENTS

During the crisis, when the government and the Central Bank have actively deployed a set of measures to save the banking system and stimulate credits for the real sector, the banking community had a slight hope for long-term money. Unsecured auctions of the Central Bank and, most importantly, subordinated loans from VEB became a kind of prototypical long-term money in the Russian market.

However, the dream was not meant to come true. Having increased the duration of loans at unsecured auctions up to six months, the Central Bank did not expand the programme any further, and later completely abandoned six-month unsecured auctions. The regulating body has explained that the liquidity in the banking market has stabilized and banks should now have no cash shortages.

The life of subordinated loans was even shorter. During the acute phase of the crisis, a few large banks managed to obtain subordinated loans, but they were soon cancelled. And together with them, the hope for long-term money from the government was also gone, at least for the nearest future.

One of the key sources of long-term money for banks are deposits of private customers, while for subsidiaries of foreign banks these are funds provided by parent financial groups (although they were not very generous in 2009 and 2010). Foreign money that banks actively used before the crisis is still not as available as before. And the Russian economy has offered no good substitute.

NEW REHABILITATION CASES

Aleksandr Turbanov, head of the Deposit Insurance Agency, spoke confidently in his forecast for 2010 that there will be no new rehabilitation cases in the banking area. His forecast turns out to be 99% true. One percent should be reserved for possible rehabilitation of Mezhprombank Plus, whose license was cancelled in October 2010, right after Mezhprombank proper. This issue remains undecided, but as NBJ found out, the agency is ready to accept the retail subsidiary of Mezhprombank for rehabilitation.

Why were there no new rehabilitations? This is quite obvious: the Russian economy has stabilized, and there was no double dip recession, as pessimists predicted. Since spring 2010, bank loans tended to grow and overdue debt ratios in credit portfolio tended to reduce. Cash shortage was replaced with overliquidity -also a dangerous problem, but not as dangerous as to kill any bank.

Absence of new rehabilitation cases does not mean that the agency remained idle for the whole year. In January, rehabilitation of Nizhegorodpromstroybank was completed ahead of schedule, in May -the rehabilitation of Nizhny Novgorod Bank, in October - NOMOS-BANK-Sibir. Bank Petrovsky has stopped its activities from September due to reorganization and merger with OTKRYTIE COMMERCIAL BANK. As of November 1, the agency takes part in the rehabilitation of 11 banks, all of which have initiated this procedure in 2008 and 2009. The amount of bad debt currently managed by the Deposit Insurance Agency is about 150 billion rubles. A third of them are debts of former Petrovsky Bank, about 50 billion rubles more are shares of Rostelecom inherited from Globex-Bank transferred for rehabilitation to VEB.

A BAD BANK

The banking crisis in Russia is over, and the banks are able to resolve toxic debt issues on their own, without the help from the government - this is the approximate consolidated opinion of the government and the Central Bank of the Russian Federation regarding the situation in the system.

As recently as in early 2010, most market players were confident that it will be the year of bad debt. Bankers constantly repeated that they will not be able to deal with the bad debt problem on their own and a bad bank or an alternative mechanism to sort out these debts was vital.

However, by the middle of the year, the tone of the claims has changed: the strongest will survive, and if some of the banks that are not able to digest the toxic debt are going to fail, this is not a tragedy.

Still, a miracle did not occur. According to the estimate by the Association of Russian Banks, the amount of bad assets is not decreasing - it is growing, and growing fast. As of November 1, this amount was estimated at 1.8 trillion rubles, and the monthly growth rate was about 20 billion rubles in September and October. The obvious conclusion: the problem is mostly not being solved, it is being hushed up and ignored.

POSTAL BANK

In this aspect, 2010 was hardly different from the previous years: the process of establishing the Postal Bank, commonly abbreviated as Postbank, has been delayed again without yielding any definite results, even though it seemed as if the business is about to start and there are literally days (months at most) before the new competitor of Sberbank emerges.

The idea of Postal Bank has re-emerged when 99.5% of assets of Svyaz-Bank were transferred for rehabilitation into Vneshekonombank. The supervisory board of VEB has approved the project of creating Postbank on December 17, 2009. It was announced that there will be a large private investor, one of the largest commercial banks. At the same time, it was resolved that a special working group should develop the set of actions to create the Postal Bank before April 1, 2010. Since this body is headed by Prime Minister Vladimir Putin, it seemed clear that this process that has hardly seen any progress since 2004 was finally started.

By April 1, not a single key issue required in order to implement the project was resolved. Among such issues are corpo-ratization of the Russian Post, distribution and buyout of shares when creating the new legal entity, business plan, feasibility study and investors. Some internal documents were created by VEB and provided to the banks interested in the project. After studying these documents, UniCreditBank has refused to participate, and currently Nomos-Bank and Russian Standard are named as possible co-investors.

what should or may happen in 2011

LAW NO. 152-FZ “ON THE PROTECTION OF PERSONAL DATA” TAKES EFFECT

This federal law has been approved in 2006 and requires all operators of personal data to bring their systems in compliance with the standards developed by the FSB, Federal Service for Technical and Export Control, and Federal Service of Supervision in Information Technologies and Communications, by January 1, 2010. The time was running out, and there were no concrete actions taken to implement this law: regulators failed to make their requirements more precise, and banks failed to bring their systems in compliance with the new regulations. As most market players claimed, the new technical requirements caused millions in expenses for credit organizations. As a result, only 5% of the banks complied with the new standards by early 2010.

The Central Bank of Russia has also been concerned about the effects of this law. It supported banks in this issue and started negotiating with FSB, FSTEC, and Federal Consumer Rights Protection Service. As a result, the regulating authorities have managed to meet halfway. First of all, banks were given a second chance when the effective date for the law has been postponed to January 1, 2011. Secondly, FSB and FSTEC as the regulators have revised a number of their requirements and made them more clear. For instance, FSTEC has issued Order No. 58 that considerably reduced the security requirements, and has cancelled by a collegiate resolution some of the provisions that came under most criticism. Finally, industrial standards have been developed for bringing the business of the banks in compliance with personal data protection regulations.

A NATIONAL PAYMENT SYSTEM WILL BE CREATED

Russian financiers have had the idea of a national payment system for 16 years. A lot of efforts have been taken to actually create it. The first such effort was within the EU programme for speeding up economic reforms in ex-USSR countries. The project was led by Andrey Kozlov, head of the securities department of the Bank of Russia. This project, however, was dead before it was born. Other efforts to create a national payment system were made by Aleksandr Smolensky basing on STB-card, Oleg Boyko basing on Olbi-Diplomat, and Naumov brothers basing on Union Card.

In later 2009, President Dmitry Medvedev has suggested creating a national payment system and issue versatile electronic cards. Interestingly, this time the idea was backed by a draft law.

Initially, VEB was the main candidate for the operator of the payment system, but Sberbank was able to quickly take the lead. A federal authorized body, Joint-Stock Company “Versatile Electronic Card” was created to implement the project, issue and service the unified electronic card. The shareholders of this new entity are AK BARS and Uralsib banks with 33% each, and Sberbank with 34%.  However, other members may also join the company. Requirements for member banks of “Versatile Electronic Card”, the unified payment and service system, are currently being developed.

PRIVATIZATION OF STATE BANKS

The event expected by the whole market is the offering of share packages of two leaders in banking: Sberbank and VTB. And it is expected for a good reason: heads of large banks know that Sberbank and VTB will try to feel the market and show whether the demand for shares of Russian banks has restored, and whether investors are interested in them. If everything will be smooth, those banks that planned their IPOs in 2008-2009 but had to cancel these plans due to “interference from outside of Russia” will have a good chance to try again.

The forthcoming offering of Sberbank and VTB shares will most likely differ from those in 2007, the so-called people's IPO. First of all, the offering will not be so public this time, since the experience of turning laymen Russians into investors was not very successful (at least for new shareholders). Secondly, VTB seems to take the lead this time (in 2007, Sberbank was the first to try the market). There have been claims that the sale of 10% of the second largest Russian bank will be finalized even before the end of this year (however, Elvira Nabiullina, head of the Ministry of Economic Development has stated in the middle of November that the appraisal of the 10% share package of VTB is not yet ready). What about Sberbank? It will wait and will offer shares in 2010 in the best case, most likely after VTB.

REDUCED MEMBERSHIP IN THE DEPOSIT INSURANCE SYSTEM

The Central Bank, however, is confident that there will be no tragedy about this. It will not be tragic for sure in the first half of the next year, since the regulator has extended up to July 1, 2011 the moratorium on removing banks from the deposit insurance system if they violate regulations and ratios concerning financial stability (capital, assets, liquidity and profitability) within two quarters in a row. The Central Bank clearly said that the extension of the moratorium was not a result of demands by banks, but a result of an analysis of the current situation, particularly the results of Q3'2010. A total of 89 banks have not complied with the minimum requirements of the deposit insurance system, mainly as for the profitability, according to Mikhail Sukhov, director of the department of licensing and financial rehabilitation of credit institutions of the Central Bank. Still, he said that the losses of 46 banks are less than 100 million rubles, so they can easily resolve the compliance problem. Other 19 candidates for removal from the insurance system are already profitable according to the results of the last few months. A number of banks are being prepared for sale, so it can be expected that the compliance problems will be resolved when they are transferred to larger and more successful banks. Thus, only a few banks will have to be removed from the deposit insurance system.

APPROVAL OF THE NATURAL PERSONS BANKRUPTCY LAW

The idea of bankruptcy of natural persons (the full name of the latest revision of the draft law is “On rehabilitation procedures applied to debtors being natural persons”) has been discussed in Russia for many years, and each time it is promised that the law will be approved “before the end of the year”. In 2010, the State Duma was also going to “work actively” on this document to make it into a law before the end of this year. But it just did not happen. All expectations are now postponed automatically to 2011.

The draft law details the stages of the bankruptcy procedures for a natural person. The claim of bankruptcy is filed to an arbitration court either by the creditor or the natural person itself. The court may appoint a receiver to help the debtor cope with the debt. In order to reduce costs, the debtor itself may become a receiver, if the amount of debt is less than 500,000 rubles.