In the middle of December 2013 the Russian banking market had a hard time: once the regulator recalled the licences for banking from three quite notable participants of the market: Investbank, Project Financing Bank and Smolensky Bank. As a result, it comes to the phenomena, well-known since the autumn of 2008: panics of the depositors, black PR (invitations to the customers of the so-called bad banks to shift onto the high street financial-lending organizations) and, of course, heated arguments whether it is a starting point for nationalizing of the banking system (due to the flow of funds from "privates" to "publics"). Actually it has been a test not only for the market, but also for the Bank of Russia which has recently become the financial megaregulator of the Russian Federation.

A DAY IN THE YEAR

It was clear that the three above-mentioned banks had faced the greatest problems, unsurvivable problems, a couple of days (or even a couple of weeks) before the regulator made its verdict. All the three financial-lending institutions, after the bad case of Master-Bank, had either limited the withdrawal of cash on deposits and plastic cards, or suspended with­drawals at all. So as it is shown by observers the question should be seen from another angle: who shall be granted a pardon, i.e. sent for the bank rehabilitation, and who shall be executed through a recall of the licence. The regulator, despite a majority of expectations, has made the most radical decisions of all, having deleted all the three weak links from the market: Smolensky Bank that was rigorously supported by its customers, Invest­bank and Project Financing Bank (PFB). It worked out almost as in Alexander Grin's story: "They lived long and happily, and died on the same day". Alongside it is interesting that their life periods are almost comparable: Smolensky Bank existed for 21 years, Investbank and Project Financing Bank - for 22.

The Bank of Russia's management gave an immediate explanation for its actions. Rescue of Smolensky Bank as informed by the deputy chairman of the Central Bank of the Russian Federation, Mikhail Sukhov, required for a full replacement of the existing assets with liquidity under no market conditions. He reminded that the lending entity had negotiations with the Central Bank as for the option of the bank rehabilitation and looked for the investors, however the negotiations became deadlocked and they failed to find any investors. As regards Investbank, as informed by the representative of the Central Bank of the Russian Federation, that market player possessed no assets to raise the standard refinancing from the regulator, and the decision to recall the licence was made under conditions of evident insolvency so that the depositors would have access to cash in the amount of the insurance reimbursement before the New Year Day. M. Sukhov reported that the cash of 93% depositors of PFB, Investbank and Smolensky Bank, deprived of the licences, was covered by the insurance compensation.

As we all know, the most rigid response for the triple hit on "Black Friday" was given by Investbank customers. As the observers admit, it was a seldom case in Russia for the past 25 years that the bank offices were taken by assault with breaking of doors and windows. Nikolay Tsukanov, the Governor of Kaliningrad Region, where the case took place, explained that the approximate amount of RUR 150 mln was frozen on the accounts with Investbank;the pre-Christmas salaries for the public employees and pension allowances were up in the air. Definitely, the private companies, for which Investbank was the settlement one, and the individual enterprisers, who had accounts therein, were the victims. By the way, the same can be said about the customers of two other financiallending entities that lost the licence on the same day with Investbank.

"The major risk of credibility gap may arise not from the private depositors with the insured amounts, but from the lenders, which monies are not secured, as they have almost nothing at bankruptcy. These are the legal entities, including the small-sized companies, where the loss of funds in credit organizations might mean a threat against their further existence, and the physical persons, whose deposits exceed the insurance reimbursement threshold of RUR 700 000 (based on data of the DIA, while Sberbank has the share of insurance liability of 75-76%, the private banks being the largest ones by the amount of raised funds have this parameter fluctuating in the range between 30% and 35%). The outflow of 20-30% of customer assets may put the bank on the point of survival," outlines the deputy executive of the analytical department of SOVLINK, Olga Belenkaya. As a matter of fact, there are more pessimistic estimations: in the opinion of some experts, it will be enough for the bank to lose 10% of its deposits base during a relatively short period, so its life period will be cut off greatly, of course unless there is a decision on the bank rehabilitation.

REHABILITATION FOR TRANSPARENT AND LAW-ABIDING BANKS

The rehabilitation issue has been recently among the most topical and urgent. Why was there no prescribed rehabilitation procedure for Smolensky Bank, PFB and Investbank? What is the principle for carrying out of rehabilitation nowadays? Solidarnost bank has been rescued, despite the fact that the amount of deposits it had from individuals could not be compared with the similar parameters of Smolensky Bank or Investbank. Some time ago particularly the deposits' volume was the main criteria for choosing the rehabilitation arrangements, and it is common knowledge that for the above reason some financial-lending entities tried to form a larger deposit "cushion" for themselves. Now the time has changed and approaches are another, and those protective mechanisms as triggered in 2008 are actually reckoned as inept.

A representative of one of the largest banks has informed that the rehabilitation procedure will be initiated in the event that the banks have a low risk of assets retirement, when the capital they own becomes negative. "I think that the licence revocation procedure was applied against those banks, because the Central Bank had reasonable proofs to suspect the management of those lending organizations of using the clients' cash for selfish ends," explains the specialist.

"I might assume why the two of three banks, PFB and Investbank, did not have the rehabilitation procedure. Still it is not so openly clear with the third one, Smolensky Bank. The problem of PFB and Investbank lies in the fact that they really had large poor quality borrowers. Under the situation, the rehabilitation would be beyond the reason, as it would mean the acceptance of exclusive liabilities without normal assets. It is confirmed by the wording of the Bank of Russia in respect to the Investbank and PFB licences' revocation (on ascertainment of signs that assets are taken out, doubtful transactions are conducted and irregular actions are made by shareholders)," is the reply to NBJ's question from the deputy director general of Expert RA, Pavel Samiev. In the expert's opinion, the situation is much more difficult with Smolensky Bank: it was not accused of taking out the assets, and it suffered not due to the risky policy, but rather due to the panics of depositors. "In theory Smolensky Bank could be involved into rehabilitation, moreover there were attempts to normalize the situation by the management and shareholders of the bank," thinks the specialist.

"The Central Bank makes the decision either to revoke the bank's licence or to rehabilitate the bank subject to the degree of problems with the bank, whether it is reasonable to pay efforts to rehabilitation thereof and subject to the efficiency extension of such efforts. For instance, in case the material misrepresentation of accounts with the lending entity has been revealed, at actual absence of capital and no relevant actions by the management and owners as to increase the capital up to the appropriate level, the Central Bank may decide whether it is reasonable to revoke the bank's licence in order to terminate the banking of the entity, which is incapable of assuring the required level of the activity standards," says the deputy director of the Financial Institutes Group of Standard & Poor's, Natalia Yalovskaya. As for the decision not to forward the three above-mentioned banks for rehabilitation, it is quite explainable, in the expert's opinion. "In each specific case the Central Bank estimates the required efforts on rehabilitation of any particular lending entity in comparison with the effect which might be gained in the end. Besides, the decision-making either on rehabilitation or revocation of the licence by all means will take into account the potential negative effect from termination of business of such particular institution on the banking sector as a whole. The Central Bank has examined the situation with Investbank, PFB and Smolensky Bank in detail before the decisionmaking. It is evident that the low quality of assets and a significant shortage of capital in all the cases required for provision of considerable amounts of financial support. As it comes from the Central Bank's comments, for example, on Smolensky Bank, the required amount of the financial support is significantly more than the amount of guarantees on deposits. In the meantime, there are no obvious reasons, under which the continuation of business of such financial-lending entities is critical for retaining the stability of the banking sector. Accordingly, it was resolved that it would be economically expedient to revoke the licence and make the payments to depositors through the deposits insurance compensation system," summarizes the expert.

"An alternative of rehabilitation was actively discussed at least for Smolensky Bank, the mass media even pronounced the names of the lending organizations desiring to be the rehabilitators thereof," notes Olga Belenkaya (SOVLINK).

"Investbank could also be deemed as the nominee for rehabilitation in terms of the huge amount of liabilities to people: almost RUR 40 bln. The PFB's situation with failure of liabilities against the depositors was indecently long, however one could expect that the Central Bank and the DIA would have found any decision of more elegance than the licence's recall. Perhaps, the analysis thereof showed that there was nothing to save in the banks and it would cost too much in comparison with the bankruptcy and payment of compensations to depositors." "A refusal from rehabilitation of the said lending entities is a strong pulse to the market. If we disregard any administrative resources, the rehabilitation (meaning the process of presentation of the bank's business or a part thereof) is influenced by a number of factors: quality of assets of the bank under rehabilitation, general situation in the banking system (presence of the systemic banking crisis)," holds forth the director of Moscow Affiliate of Energotransbank CB, Pavel Sakadynsky. "One of the key issues is the quality of assets. In vain that Solidarnost Bank's net assets were RUR 25.3 bln, and the ones of Smolensky bank were RUR 37.3 bln. The market knew the cases when it was 100% dead assets, or 80% of the bank's assets consisted of a certain magic asset (with zero value in reality), or the scope of issued loans was fivefold more than the real projects, and the bank had some hundreds of "falsie" companies, where the recrediting payments were going between them in order to cover up the violations of H6 regulation. And the amount of loans with interest was in double excess of the total sum of the loan portfolio. Thus, the balance sheet's gap was equal to the balance size and the bank was not subject to any rehabilitation. There was no business at all."

"We know that the Project Financing Bank (PFB), suffering from the problems in serving the customer, held the negotiations with the Central Bank as for the steps to stabilize the liquidity situation, including on provision of the collateral loan. The same way negotiations were conducted with the Investbank's owners concerning the possible measures to cure the situation. However, the owners of the lending entities did not take themselves any efforts to solve the problems. There is a grounded question: if the owners do not wish to cure their own banks or are unable to do it, who shall be the doctor for them? As a matter of fact, here lies the reply to the raised question. As a result, when all the supervisory response arrangements were exhausted, the licences had to be revoked," as Mikhail Belyaev, chief economist of the Stock Market and Management Institute, estimates the  "Black Friday" situation (December 13, 2013).

Probably the full stop in this discussion has been made by the first deputy of the chairman of the Bank of Russia, Alexei Simanovsky. "As for Solidarnost, it was a transparent bank, and that fact along with other circumstances roused us to resolve on rehabilitation of the bank. We plan to take similar steps in respect to other financial-lending entities provided that they are transparent and law-abiding. These are the two criteria which shall be unconditional and mandatory for decision-making on sending the bank to rehabilitation. I hope it will create correct benchmarks for the market and for the clients, with an obvious manifestation of which banks we are ready to support in case they have troubles," underlines Alexei Simanovsky in his speech at the meeting of the Interregional Banking Board at the Council of Federation of the Federal Assembly of the Russian Federation on December 20, 2013.

NO SILENCE IS AHEAD

On last days of December 2013 the top executives of the Bank of Russia made somewhat contradicting, but mainly irreconcilable declarations: on the one hand, they told us that the market situation was under control, on the other hand - black PR facts were exposed, intentional misdeeds were made as to heat up the panics among the customers of some banks. In this view, Alexei Simanovsky even promised that the Central Bank would deviate from its usual practice, in terms of the situation, and would say nothing about the banks, whether bad or good things. Now the megaregulator intends to make word interventions as a counter-action to the black PR campaigns, in order to support this or that financial-lending entity being under assault.

Still it is not very cheerful for the observers and participants of the market: along with the above declaration they hear quite opposite suggestions, which are much less favourable, regarding, for instance, the "hoeing of the banking weeds," which will go on, and that the year of 2014 will also be under the sign of clearing up the market against the bad faith participants. With that, few people are doubtful of the fact that the megaregulator will change the line it has.

"The will of the Russian Federation Central Bank to clear up the banking system is uncompromising. A signal to the market being the massive recalls of licences as well as the interbank crisis is of low probability, because the limits are already closed for everyone who shall have closed limits. There will be some isolated revocations. Rest of the banks, meaning the overwhelming majority thereof, will be allowed by the regulator to survive through their own forces," thinks Pavel Sakadynsky (Energotrans-bank).