Should a self-regulating organization be created in the Russian baking market which could “take over” the supervision functions of CB (Central Bank) concerning the market participants? Should Bank of Russia have right to pass motivated resolution to decide future of banks, and what “costs” will be incurred if the answer given for the question will be positive. Is it necessary to create not only a mega-regulator, but also a legal entity of bank supervision? This and other questions were answered by Alexey SAVATYUGIN, deputy Finance Minister of Russian Federation in NBJ interview.

“IF THE INSTITUTIONS OF MOTIVATED RESOLUTIONS ARE TO BE IMPLEMENTED THEN THE QUESTIONS REGARDING THE PUBLIC OFFICERS' RESPONSIBILITY AND COLLECTIVITY OF DECISION MAKING SHOULD BE WELL ANALYZED”

NBJ: Alexey Lvovich, after the case with Bank of Moscow and a series of criminal and semi-criminal bankruptcies which happened in the of the last year and in the beginning of this year, the subject concerning the ineffectiveness or insufficient effectiveness of bank supervision in Russia is discussed by everyone. What is your opinion in this respect and are the banking market participants fair in their judgment of bank supervision?

A. SAVATYUGIN: It would have been unfair to give a categorical verdict that bank supervision in Russia is ineffective. The events of last three years have shown that such supervision is ineffective everywhere around the world - even in countries which were presented to us as an example to follow. Particularly in these countries you could see a collapse of system-forming banks and in Russia even in the acute crisis period not even one major financial and credit organization went bankrupt. Bank of Moscow got into difficult situation and “Mezhprombank” has collapsed after the crisis.

Of course bank supervision has specific weak points. But those weak points are common for any supervision in the various country sectors everywhere around the world.

NВJ: In the other sectors the problems of organizations which are supervised do not have such impact of country budget and on the taxpayers.

A. SAVATYUGIN: But they have other negative effects - when the airplanes crash and ships sink it can also be considered as supervision problems, but in different sector. However, when speaking about Bank of Moscow and “Mezhprombank” you should understand that in both situations the malicious intent of bank directors who have carried out unlawful plans was the case.

NBJ: So, no matter what type of supervision is present the cases similar to the one with Bank of Moscow and “Mezhprombank” will potentially be possible?

A. SAVATYUGIN: Yes, and I will repeat myself - they are possible in any markets. This does not mean that we have ideal bank supervision; of course we have to keep on improving it.

NBJ: For example by adoption of law on consolidated supervision? Will the decision empowering Bank of Russia to make motivated resolution help solving existing “gaps” in bank supervision?

A. SAVATYUGIN: Such a discussion exists for several years, it is not new. There are people who favor it as well as opponents of implementing motivated resolution. I guess I can find myself on the side of idea supporters. I will explain why: if the CB is empowered with the right to carry out motivated resolution then the civil officer will decide on the future of particular bank taking into account not only the formalities of the case, but also based on the ideal view. For example, the following situation comes up: when one of the bank normative standards falls below the allowed level - then the CB, in accordance with the laws should ask the credit organization to terminate the license. No matter if organization wills or not the resolution should be carried out based on such market regulator.

NBJ: This is in the case if motivated resolution does not exist?

A. SAVATYUGIN: Yes. In case if it exists the civil officer can say: yes, formally the normative standard is violated, but I do know that such bank is working better that it might seem, it has a crisis evading strategy, it was promised additional help from shareholders, it finishes a “good” contract etc. This means that the bank can easily “pull through” without any risk for clients and it is not logical to “eliminate” it now, you need to wait several months and it will become a perfect bank. Taking into account these results - the license is saved.

Or let us take an opposite situation into account: It seems like everything is O.K. with the bank, it keeps on to normative standards, but civil officer does know or suspects that based on the provided information that bank carries out fraudulent operations, that there are signs of assets stripping, improper deal conclusion. Then the resolution on license termination will be carried out anyway without looking at good reports. By the way, such situation took place with the Bank of Moscow and the CB representatives say that if Bank of Russia could carry out a motivated resolution then they would “deal with” Bank of Moscow on much earlier stages without such budget consequences. There is logic in their arguments - this is why I support motivated resolution.

NBJ: And what do opponents of such idea say?

A. SAVATYUGIN: That in the event when CB is empowered to carry out motivated resolution the question on corrupt practices will arise, in other words there will be good soil for its growth. When civil officer is obliged to carry out a particular resolution he does not really have a choice. It is no use bribing him as he acts similar to a mechanical device. But when he can choose, than the can feel the element temptation, as well as his employees and in the critical situation they will try to reach the agreement with the supervising civil officers informally (bribes).

Let us assume that civil officers of bank supervision are all angels and that there is not even a single reason why we have to suspect them in corrupt practices and corruption intents. Then still there are questions arising, for example about the officer responsibility for carried out decision. If he acts strictly in accordance with instructions then why must he answer for consequences of license withdrawal or license preservation for the bank? The officer has worked on the standard normative and observed that it does not meets the legislative requirements and pass a decision. What happens in the officer makes a motivated resolution? He can preserve bank's license and then it can happen that bank was not only formally of poor level, but it was poor overall. As a result the officer is guilty that he did not prevent the bank bankruptcy, asset striping and client fraud?

NBJ: Supposedly, yes.

A. SAVATYUGIN: Supposedly, yes. But what responsibility must he bear in this case?

Let us examine a completely opposite situation - the officer has read in printed newspapers or the internet that the bank director strips the assets from the bank and based on this he has taken hard supervisory measures. And in fact such information has turned out to be false, bank has undeservingly incurred losses -some contracts were rejected, the clients moved out. The same question - should the civil officer be responsible for such situation? Yes. But if he is responsible in any case then he will just not be stimulated to proved qualified motivated resolution. The cost of making a mistake may be too big and no matter if it is “negative” or “positive”. But not to punish him is not an option as well, because than the officers will act unpunished and the future of whole banks, as well as the major ones will depend on them.

This is a question of responsibility. The other question concerns the sphere of motivated resolution application. Let us assume that banking sector not only needs such an instrument, but it is vital for it. And what about non-banking sector? Eventually other sectors like insurance sector supervision or supervision in the security market can request to empower them with the right to carry out motivated resolution. And this would be logical: why should banking supervision be different from supervision of any other financial market sector? Then the representative of other regulatory authorities will come up and say: We want the same! And it could lead to the situation where customs officers will be carrying out a motivated resolution to accept or reject goods through the border, tax assessors will decide whether to charge a tax or not, STSI - to penalize the violator or not. Then at some point there will be no choice but to say: It is enough, no more motivated resolutions, you have to stick to strict formalized rules.

NBJ: You have stated the positive and negative aspects for empowering the CB with the right to carry out motivated resolution, as well as counterarguments. So what “outbalances” at the end?

A. SAVATYUGIN: As I have said before - I support the motivated resolution even taking into account everything what was said above. I do understand that it is not simple as it seems. The questions regarding the supervision service employees, the questions on the competency limits, the questions on collectivity assessment have to be studied in depth, only then we will be able to carry out a decision which will not be dependent on one civil officer, but it will be based on the collective mind.

“EVEN IF GOVERNMENT SETS ITS SHARE IN SBERBANK AND VTB CAPITAL TO “ZERO” THOSE TWO WILL STILL REMAIN BANK NUMBER ONE AND BANK NUMBER TWO”

NBJ: After the “casus” with Bank of Moscow aside from motivated resolution a lot was said about the need to create a special supervision policy for system-forming banks, “draw up” more strict requirements. Do you agree with such question formulation? Is there a need for such thing?

A. SAVATYUGIN: Yes, there is, but it is not only an idea which came up after the incident with Bank of Moscow it is more of a world tendency. Around the world it is considered that if you are a system-forming organization than you are not receiving any privileges, but vice versa - you have to meet more strict requirements concerning the capital and reporting information etc. In Russia within the limits of president council on development of financial markets there is a question raised regarding the creation of list of system-forming financial institutions, not only banks, but also insurance companies and participants of the capital market. I am referring to organizations which carry major risks for clients, shareholders, budget system. There is a chance that in the end of the year the criteria for including companies in such list will be worked out, as well as the list its will be defined with regulative requirements for such companies.

NBJ: Is it too early now to talk about the criteria which will be used to include the banks in such list?

A. SAVATYUGIN: I don't think that you will discover something new, the criteria are obvious - assets size, investments and deposits volumes, geographical coverage of the activities, bank activity on the market of interbank lending, in other words how significantly it influences the bank system as a whole.

NBJ: Are there any forecasts on how much banks will be on the list - ten, twenty, fifty?

A. SAVATYUGIN: I think it will be a two digit figure. But there will not be any sudden “names” of banks which no one has a clue about. And there will definitely be no specific criteria as national or non-national. The property structure will does not have anything to do with system-forming.

NBJ: However state banks will probably be on the list. Now some experts are saying that state banks should not only have special regulations, but there must be a legislation to prevent their growth. Their share in particular market should be limited by legislated value. How do you treat such propositions, is there a need to limit Sberbank's share in the deposit market to 25 percent?

A. SAVATYUGIN: This means that Sberbank has to reduce its current share twice? No, I do not support such state limitations regarding such questions, the limitations should be more of a market based ones. I am a member of supervising council of Sberbank as well as VTB and I can assure that supervising councils do limit the expansion of both banks - especially Sberbank in particular market segments. Generally such criteria of management work effectiveness as the market share increase is removed for Sberbank and it is removed on the request of Central Bank and government representatives who are a part of supervisory council. As it is obvious that initial starting conditions for Sberbank with 170 year history of its activity, sovereign rating etc., and the ones of private banks are not equal. But it is also unfair to reduce its market share or limit its growth.

NBJ: Even though you are saying that supervisory councils limit the expansion of state banks, they still remain the major players and in certain form they dictate their own rules of the game for other market participants. From your point of view what can be done to restore equal competitive conditions if it is possible in any way taking into account such initial start? Maybe government should completely remove its share of capital?

A. SAVATYUGIN: What will it change? Let's assume that government will do it - it will “zero” its share in Sberbank and VTB. But they will still remain the major banks in Russia - banks number one and two in the country. Their funding will still be cheaper, best clients, leadership in the deposits market for individuals as they will simply have the largest regional networks. And again there will be talks that they have special privileges. But as a matter of fact they do not receive any special privileges even now. They take part in auctions for allocation Ministry of Finance funds with major private banks; they received help during the crisis in the form of unsecured lending from CB; subordinated credits together with major private banks on equal conditions. Government did not point out any difference between state banks and private ones.

The only “privilege” of state banks which they have - is that rating agencies rate them one or two position above than they would be rated in case if they had been the same banks but without state structure. This is because rating agencies assume that in case with state banks the government will be responsible for its liabilities, but formally such a responsibility is not “written up” anywhere.

NBJ: You have said that even if government completely exits the capital of Sberbank and VTB they will still remain bank number one and bank number two in Russia. Then there is a question -why execute their privatization, why not let government have majority interest in shares of both banks?

A. SAVATYUGIN: For now it is such a majority holder. But there are several purposes of privatization. First of all it is done for budgetary recharge, so it is a fiscal purpose. Secondly, even though it may sound strange from a civil officer, we truly think that private entrepre-neurship is more effective in comparison with government entrepreneurship. Government participation in the role of the owner is appropriate in the sectors where they are socially significant, but not are not interesting for business or sectors which are significant from the view of protection provision or national security. The banking sector is not in any of this categories and that is why government has no reasons for keeping state banks under control. In addition, in case if government reduces its share in capital or exits completely - which is possible in theory, there will no longer be any accusations that state banks use special privileges on the market and because of this the competitive conditions are unfair.

NBJ: Of course, completely radical propositions are not read out loud from the tribunes of various bank arrangements, but they can often be heard in “lobbies”. One of them sounds the following way: it would be nice if government not only left the capital of Sberbank and VTB, but would “break it up into pieces” for several independent legal persons who compete with each other and other market participants.

A. SAVATYUGIN: What for? We already have about a 1000 banks in our country and that means the competition is more than enough. I can say one thing that government does not have any such plans. Several years ago there was a discussion about state banks and that certain restrictions should be imposed on particular activity types - to prevent them for crediting big business, medium business and small business or attract deposits from individuals. But this discussion passed long ago and we shall not return back.

There are very promising examples in other segments of financial market: last year the government completely exited the share in capital of Rosgosstrah, its significance in the insurance market can be compared with significance of Sberbank in the banking market. Now the company is completely in its market “drifting” and experiences hard competition from its other market participants.

NBJ: You have mentioned that banking market consists of nearly a 1000 banks. Nowadays there are many talks that the number of banking organizations should be reduced: some say using economical means, others by arbitrary decision. From your point of view, is there really too much banks and what number of banks is required for proper functioning of Russian economy?

A. SAVATYUGIN: I consider such discussions very strange, especially when they are initiated by clever people. I desperately want to ask them: O.K., 1000 banks is too much, would 200 be sufficient and what about 140 million people in Russia? Is this figure sufficient or too large? Truly speaking we are not aiming at any specific figures regarding the subject number on the market. They are as much as they have to be and moreover, their number is constantly being reduced and not only in the banking sector, but in the capital market as well as in the insurance market. This is a natural process.

NBJ: On the other hand the number of micro-financial organizations and credit cooperatives keeps increasing.

A. SAVATYUGIN: Their number is not really increasing it happens simply because only starting from this year those figures had been recorded. Before such figures where noncountable and now they are being recorded and they are being “declared” that is why you may deem that their number rapidly increases. There is a chance that their number will be greater than number of banks because no matter what they cannot be compared to banks nor by capital, nor by assets etc.

NBJ: I guess you had been hearing the complaints from bankers that micro-financial organizations “steal” a piece of bread from the banks are working in more privileged regulated conditions.

A. SAVATYUGIN: Obviously this segment has more privileged regulated policy, because micro-financial organizations perform other functions than banks. They do not attract household deposits, do not carry out accounting and cash services as well as plenty of other operations.

NBJ: So, you want to say that supervision is “soft” not because the market is only being formed?

A. SAVATYUGIN: And also because of that. From the other side, you must not forget that supervision of micro-financial organizations is much more strict that it was half a year ago.

NBJ: When there was no supervision.

A. SAVATYUGIN: Yes, such activity did take place. Now we have introduced supervision, requirements for reporting, we started to identify micro-financial organization. There will be statistical data, complaints, court practice - then we, as it is often said, 'we will see'.

NBJ: But in any case the supervision of banking market shall be stricter than the supervision of micro-financing market.

A. SAVATYUGIN: Undoubtedly, for one simple reason - the banks bear higher risks. If we would allow micro-financial organization to perform operations similar to banks, then they would be supervised the same way.

“IF THE SRO IS TO BE CREATED IN THE BANKING MARKET THEN LET'S REMOVE GOVERNMENT BANK SUPERVISION”

NBJ: One self-regulating organization was already created on the market of microfinancial organizations, as I have heard, but on the banking market they are only discussing the proposals on creating SRO. What is your attitude towards the corresponding legislation which is being reprocessed by specialized State Duma council?

A. SAVATYUGIN: We share common position  with   Bank  of  Russia   and Ministry of Economic Development and Trade (Minekonomrazvitie) - we negatively react at this legislation. Even Ministry of Economic Development who is one of consistent supporters of self-regulation idea does not support such initiative. Because the legislation in its currently presented form does not remove the supervision, but introduces supervision from the side of self-regulating organization and besides that the membership for banks in SRO is “written down” as obligatory. If the legislative draft is accepted in its current revision then it will be worse position for banks, because they already have daily strict supervision from CB and there will be another SRO supervision where they will be charged money. And in addition this organization will have a right to penalize its members.

NBJ: So in fact, it is really a duplication of bank supervision?

A. SAVATYUGIN: Right. Is there any purpose for it?

NBJ: But, let us assume that SRO exists on the market of credit cooperation. There it is required for some reason.

A. SAVATYUGIN: Yes, the self-regulating organizations exist on the markets of obligatory insurance as well as on the security markets. But the only thing those SROs have in common with organization to be created on the bank market is their name. The name is the same - but the functions are completely different.

NBJ: So, the in markets which you have outlined the SROs do not have a right to perform supervision?

A. SAVATYUGIN: No - for the securities market, there is no obligatory membership in SRO. If you do not like the standards provided by SRO you can avoid entering it and no one will think of discrediting your license.

NBJ: In other words, the SRO on the securities market is similar to banking associations?

A. SAVATYUGIN: Yes, if fact they are lobby organizations. On market of obligatory insurance the SRO does have supervisory power, but it has its own compensation fund, it pays money for the companies which exited the market.

NBJ: And on bank market there is Central Bank as a regulator and ASV as compensation fund. So there is no need for SRO as such? Or it is not required in the state it is being proposed in the legislation draft?

A. SAVATYUGIN: If it is to be created then let's remove the government supervision and pay everything “away” to self-regulating organization. Such models do exist: this is the way how auditors, appraisers and a range of other “free professions” work.

NBJ: In theory - is it possible for banking sector to be regulated by non-state SRO instead of government institution?

A. SAVATYUGIN: In theory it is possible, but when it comes to practice it is very unlikely and you will hardly find such examples in world practice. One reason for this is inevitable interest conflict: SRO “feeds” on membership subscription. So as a bank you are charged money and then you are punished for this money. It will be very hard for SRO manager to speak to banks, especially major banks. As it is clearly seen - in all SROs everything is concentrated in hands of major players - even if there is an approach “one member - one vote”. Just imagine the procedure how SRO should supervise Sberbank under such condition.

NBJ: Which will be its main “donor”.

A. SAVATYUGIN: Yes. It will be especially hard if the charges are set different for SRO members in accordance to the market share which is taken by the bank or according to capital size. And what do we have in the end? Sberbank will be creating half of the SRO budget with its contribution payments.

“THE GOVERNMENT IS MORE CONCERNED ABOUT INCREASE OF BANK CAPITALIZATION INSTEAD OF REDUCING ITS NUMBER”

NBJ: If you let us then let's return to the question on the bank number. Maybe the government is not concerned about their number verbally, but the government actions show us that they want to reduce their number. If there is no aim to reduce the number of banks to the minimum mark why increase the requirements for minimum capital?

A. SAVATYUGIN: The government is currently concerned about increase of bank capitalization instead of reducing their number. Let them be a lot, but they will be of larger size compared to current situation. Here we have opposite logical approach. Yes, we are increasing the capital requirements for banks, but we are doing it in a smooth manner. There were much more radical proposals regarding this matter.

NBJ: For example, to raise the “margin” to billion rubles?

A. SAVATYUGIN: Yes. To the extent of “2020 Strategy” the separate banking group has been formed which is directed by two co-chairmen - Sberbank president German Gref and chairman of Board of Directors of MDM Bank, Oleg Vyugin. One of the recommendations of this group is to raise the “margin” for minimum capital to 3 billion rubles.

NBJ: Up to 2020?

A. SAVATYUGIN: No. In 2013 it was up to 1 billion and in 2015 it should be up to 3 billion. And they position this proposal from expert banking society towards the government in the form of: At present the government is raising this margin too slowly, let's hasten the process. I do understand that it is easy to set even 10 billion rubles for Sberbank and MDM Bank, it is not a matter for them.

NВJ: But what about government, will it listen to the opinion of society experts?

A. SAVATYUGIN: Our plans are fixed in the Strategy of banking sector developments which was accepted this spring and signed by CB chairman and head of the government. It shall be 300 million rubles in 2015. As I have said before it is a smooth increase. The last increase to 90 million rubles was not really felt by anyone. I think in 2012 when there will be a new requirement for 180 million rubles everything will pass smoothly as well. Only the employees of the banks exiting the market will feel this change. Again, let's be fair: the capital requirements are increased not only for banks, but insurance companies and other companies in financial market segments. This is happening not only in Russia, but all around the world. The worldwide tendency is requirements toughening in regards of capital and definitely not weakening them.

NBJ: However, some of the banks shall feel it. It is not a coincidence that actively again propositions are sounded on creation of credit organization group consisting of regional and local banks. The government has no intention to listen to such propositions?

A. SAVATYUGIN: We do listen to such propositions and we are ready to discuss them if there are enough arguments. But in this case I could not receive a clear answer on what do they mean by “regional bank” even from the authors of this idea.

This means if bank is working in Region of Kaluga then it will not be authorized to provide service for investor from Region of Tambovsk? It will not be able to provide credit for company from Region of Tambovsk? Or it will not be authorized to credit bank which is from different region? So the organization will have limited operation allowance in one region? Where from to get fundings then? And what about internet banking? And what about “card” business - with its cards you can only walk around “locally”? It is XXI century now, globalization. In XVI century, maybe, it was appropriate to speak about local banks, but now? And no one answers those question - authors of the idea just say, 'fine, we shall think about that' and leave.

This was the first comment. There is a second one regarding this idea as well: in the Constitution of Russian Federation the unity of economical area throughout the country is postulated, as well as free goods, capital and human flow. How does this postulate conform to the idea of local bank institutions? Let us then make Russian Citizens to be regional or local.

NBJ: As far as I understand the authors of this idea do not propose to “attach” the banks to a certain region - the point of it is that if organization leaves the limits of its region then it is automatically leaving the special regulating policy.

A. SAVATYUGIN: I do not understand how this idea can be brought into practice. Fine, the bank says to itself: I am regional. It will have nice attractive interest rates and a client from another region comes then what will the bank do, refuse the client? Will it be checking the client registration for making decision to provide service or not?

“THERE IS A MEGA-REGULATOR ALREADY IN RUSSIA, BUT THERE IS NO MEGA-SUPERVISION YET”

NBJ: This is the last question which I would like to ask, it returns us back to the case on regulation of bank sector and in general to the financial market. In Russia as well as in the other parts of the world on periodic occasions the discussions take place on creation of mega-regulator. What do you think; do we have prerequisites for creating such structure? Is there a necessity to create a unitary regulator for banking, insurance, micro-financial and other markets?

A. SAVATYUGIN: I will answer as follows: we already have a mega-regulator on the level of legislative and strategic regulation. As fortunately Bank of Russia is not empowered to carry out legislative initiative.

NBJ: Why “fortunately”?

A. SAVATYUGIN: I will answer your question a bit later. Let me continue for now: laws which regulate bank activity are introduced by the government and in the government they are developed by Ministry of Finance which is of course is closely related to Bank of Russia. Ministry of Finance on the other hand develops the laws which are related to other financial market segments: insurance, micro-financial, securities markets.

NBJ: This means that Ministry of Finance is our mega-regulator?

A. SAVATYUGIN: Yes. Bank of Russia has a right to issue instructions and letters which supplement and explain the laws. Certain orders in the insurance field and field of security market can be issued by Federal Service for Financial Markets. The reform which was carried out this summer - the union of Rosstrahnadzor and Federal Service for Financial Markets created such mega-regulator in Russia.

NBJ: Strange that it appeared without any noise or fuss.

A. SAVATYUGIN: Everything we do is done this way as the work of financial experts requires quietness and concentration. So overall, we do have a mega-regulator, but not mega-supervisor. The bank market supervision is performed by Central Bank and the supervision of other financial market segments is performed by Federal Service for Financial Markets. Is there a point in incorporating them? I do not know, in theory it may be correct, but in practice we can face unsurmountable problems.