The draft of the Development Strategy for the Russian banking sector up to 2015 containsnothing drastically new. It clearly shows the consistent actions of the Central Bank in diverse areas: risk management, transparency of the banking system, banking discipline, combatting money laundering etc. Still, despite being unsensational, the interest of the banking community in this document remains high. One of the important reasons for such interest is that market players realize that the regulator is now serious, and the goals set in this draft Strategy will likely be more than just words.

GENERAL TREND, NO SPECIFICS

The draft of the Development Strategy for the Russian banking sector up to 2015 (hereinafter referred to as the Strategy) lists a number of problems of the banking market discovered during the crisis: deficiencies of corporate management and risk management; high percentage of credits granted to affiliated borrowers; various schemes that lead to false reports; insufficient liability of top officials of the banks, and illegal activities of the banks.

The Central Bank has again stressed that one of the main reasons for the troubles of Russian banks during the acute period of the crisis was unsatisfactory risk management, says Aleksey Kogorev, Deputy Director of the Financial and Retail Risks Department of Promsvyazbank. This is what the Central Bank has been speaking about for some time now. It has been trying to solve this problem by bringing Russian regulations in compliance with Basel II and Basel III. “I would say that getting closer to international standards is an issue that runs through the whole draft Strategy”, he said.

According to the Strategy, new information technologies and banking innovations should be actively implemented; another important issue is to increase the competitive ability of the Russian banks -both within Russia and internationally. Other high-priority goals include ensuring high transparency and market discipline, and developing a system of corporate management and risk management.

However, Maksim Osadchy, head of the Analytics Department of the Corporate Funding Bank, believes that the Strategy lacks understanding of the transparency of banks as pointless without the transparency of banking groups: “Strict information disclosure requirements should apply to members of banking groups, and the Central Bank should have more powers to control them”. Still, the transparency of many banks is also insufficient, he believes. It would be reasonable to require that member banks of the deposit insurance system publish on the Central Bank’s website their report forms No. 101, 102 134, and 135, “List of persons significantly affecting (directly or indirectly) the resolutions passed by management bodies of the bank” and IAS reports.

Aleksey Kogorev believes that all goals in this draft are generalized, and it aims for a certain development trend with no specifics. For example, the draft Strategy mentions the National Payment System without any definite implementation time, figures etc. According to the draft, “the Bank of Russia should develop the procedure and mechanism of monitoring and supervision over the business of operators of payment systems, operators of payment processing infrastructure (operation centers and clearing centers), and implement regulation of operators of money transfers, including operators of electronic money, payment processing operators, operators of payment systems and operators of payment processing infrastructure services”. Moreover, the Russian banking regulator will have to identify important payment systems in accordance with international standards, and take into account the peculiarities of across-the-border payment systems.

However, it is a mere statement. “I believe such policy document is not expected to contain any breakthroughs”, Aleksey Kogorev said. “We have received another proof of the consistency of the Central Bank’s policy that it has maintained during the whole post-crisis period.

HOW MUCH CAPITAL IS ENOUGH TO BE HAPPY

Sergey Barsukov, Director of the Department of Financial Policy at the Ministry of Finance of Russia, said that the Strategy has preserved the policy of the Ministry of Finance and the Central Bank to prevent opening branches of foreign banks in Russia, while the issue of increasing minimum capital requirements of banks continues to be discussed.

Declaring that the government does not intend to introduce any quotas for participation of foreign players in the Russian banking system is certainly good news for Russian bankers, and it is where they are unanimous. “The regulator’s statement on prohibiting branches of foreign banks is certainly reassuring for the banking community”, says Gennady Vagabov, Deputy Chairman of the Board of Razvitie-Stolitsa Bank. “Underdevelopment of the domestic banking system may cause its crash if such bans were to be cancelled”.

As for increasing the minimum capital, this issue has caused and continues to cause heated discussions. From January 1, 2012, the minimum capital will be 180 million rubles, up from current 90 million. Over a year ago, Minister of Finance Aleksey Kudrin has suggested increasing the minimum capital of banks up to 1 billion rubles within 5 years. In his opinion, this would halve the number of banks, from 1000 to 500. However, the minister later noted that the Ministry of Finance will not put forward this initiative, because the post-crisis banking system is not yet ready for this increase.

Nevertheless, in early autumn 2010 Deputy Minister of Finance Aleksey Savatyugin stated that the minimum required capital of the banks may be increased by “somewhat several hundred million rubles”, up to 250-500 million. At the same time, Deputy Minister has stressed that the draft of the Strategy contains no specific figures of the minimum capital requirements that may be passed in this period: “Our proposal contained no specific figures. It was intended and thought-out”.

If we want to our banking sector to be open for customers, we have to discuss increasing the minimum required capital, Mikhail Sukhov believes, Director of the Department for Licensing and Financial Rehabilitation of Credit Institutions. This proposal, which is mentioned in the Strategy, is now getting more and more topical. During the recovery from the crisis, retail banking grows faster, especially in the deposits market. This, in turn, demands stricter requirements to the financial stability of the banks which accept deposits from individuals, Mikhail Sukhov stressed.

Rushan Khvesyuk, Chairman of the Board of Alfa-Bank, believes that doubling the minimum required capital from 2012 is the most important provision of the Strategy. “If the Central Bank tight-
ens the capital requirements, about two hundred of the thousand banks existing at the moment may lose their licenses, and their assets may be absorbed by banks with more viable business models”, he said. “In our opinion, whatever the Strategy will turn out to be in the end of the day, it should aim for developing competition, because it is the only way that will benefit of consumers. The market should have diverse players”.

According to Marina Mishuris, Chairman of the Board of Flexinvest Bank, it should be noted that the bottom margin of the possible increase (250 million rubles) is quite adequate, unlike the previously declared figure of 1 billion rubles.

Aleksey Kogorev of Promsvyazbank notes that there is nothing significantly new as for the Central Bank’s position on consolidating the banking sector, including some strategic guidelines about the minimum required capital. The Central Bank is consistently increasing the capitalization of the banking system, and this policy definitely leads to consolidation of the banking sector. “The policy of mergers and acquisitions will continue. The minimum capital thresholds may be increased; however, this is not a barrier to wipe all small banks out of the market. I believe banks have quite enough time to increase capitalization. Moreover, if the minimum capital is increased indeed, the increase will be up to 250-500 million rubles and not tenfold”.

STRATEGY AND MACROECONOMICS

The Development Strategy for the Russian banking sector up to 2015 contains specific figures - banking assets, capital and credits to GDP ratios, which show the penetration of the banking services into the national economy. As for these indicators, Russia is lagging behind many other countries, Vladimir Golubkov, Chairman of the Board of Rosbank, pointed out. “At the same time, this obviously depends not only on the banking system, but on more general trends of the nation’s economic development that give rise to the demand for banking services. For example, it depends on the government’s policy in stimulating the investment demand. In my opinion, the development strategy should list clear targets for the indicators of funding and banking services in order to secure the economic growth forecasted by the government”, he said.

Marina Mishuris (Flexinvest Bank), on the contrary, points out that some aspects of the document concerning forecasts ad guidelines “are not quite in the powers of the government and the Central Bank”. For example, the Strategy declares that banks should be incentivized to transition from the extensive to the intensive development model. “However, in the end it depends on the banks themselves, and they can hardly be forced to invest e.g. in upgrading infrastructure. Another example is the bank assets to GDP ratio, bank capital to GDP ratio etc. - reaching these indicators also depends on the banks who will act according to the economic conditions, profitability etc.”, she said.

REGISTRATION OF PLEDGES

According to the Strategy, Russia will have a system for mandatory registration of all pledges for loans. Pledged assets will be registered by the Bureau of Credit Histories (BCH). Absolutely all pledged property will have to be registered - both property of companies and individuals. Apartments involved into mortgage transactions are currently registered by the Federal Registration Chamber. Other secured loans do not have a single pledge registration system, even though this issue has been raised by the banking community for many years. Gennady Vagabov (Razvitie-Stolitsa Bank) believes that an important measure suggested by the Central Bank in order to develop crediting is to create registration and notification systems for pledges and other encumbrances of cars, machinery and vehicles, in accordance with the All-Russia Classifier of Fixed Assets. This would protect lenders from fraudulent borrowers who pledge their assets in several banks.

Another important and long-awaited measure, according to Gennady Vagabov, is settling the liquidation netting issues: “The lack of protection of its assets with the priority of the liquidated company’s assets is what scares banks away of the derivatives market, which is developing sluggishly since the 1998 crisis”.

IN NOBODY’S FAVOUR

According to Russian laws, individuals may withdraw their deposits at any moment, which has caused failures and bankruptcies of a few banks during the crisis and panic. Bankers are wondering how any bank can develop its liquidity and plan anything with this regulation, especially if they have a significant percentage of deposits from individuals. Moreover, where do banks obtain fixed-term funds if not from individuals?

This serious problem is currently identified in the draft Strategy, but offers a semi-decision in nobody’s favour, according to Aleksey Kogorev (Promsvyazbank). The Strategy mentions that the law should allow urgent withdrawal (complete or partial) with a prior notice to the bank. However, he believes that such “prior notice” will not help. “Despite the notice period, be it three days or two weeks, this will not change the essence of the issue. How can banks provide loans to the real sector in these conditions? Suppose we grant a loan for one year, and our depositors come back and withdraw the money in two weeks. The bank cannot demand the borrower to pay back immediately, it will just not give the money back, referring, for example, to having all of the funds circulated”, Aleksey Kogorev pointed out.

CORRECT WORDING AND STRICT APPROACH

The section concerning “intensive” development stipulates that banks should reduce their expenses, particularly by pursuing “reasonable minimization of the set of documents for obtaining a loan and reducing the review time of loan applications, combined with modern technologies of interaction with the customers”. The wording, according to experts, is correct -you just cannot find fault with it. Still, anyone who knows the Central Bank’s reserve requirements and who has experienced the Central Bank’s audits know how many documents, calculations, justifications and so on banks should submit to convince the regulator that the loan they granted will not bring a higher credit risk and does not require additional reserves (which reduces the profit - excessive reserves may cause losses), according to Marina Mishuris (Fleksinvest Bank).

The Strategy itself evidences this strict approach: “the value of assets of credit institutions and the collateral they accept is often overstated, which causes underestimation of risks. For this reason, Bank of Russia will work on creating regulations for more adequate and conservative valuations of assets quality by credit institutions”. This conservative approach to risk estimates precludes “minimization of the set of documents”, according to the head of Flexinvest Bank: “The regulator should choose which goal is the biggest priority, and communicate it to all of its departments, to avoid a situation when one department calls for minimizing the documentation and another department calls for conservative approach to reserves”.

Furthermore, as for “technologies of customer interaction using modern automation and remote access equipment”, let us remember that the Central Bank requires to view the transactions with customers over the Internet as high-risk transactions as for money laundering risks. Thus, banks will have to prove it otherwise to the regulator or take additional steps to prove closer attention to the transactions of such customers. For this reason, the statements about the remote access would have been more convincing if the Strategy intended to decrease the distrust to Internet and remote banking systems, according to Marina Mishuris (Flexinvest Bank).