BANKS EVADING DRASTIC CHANGES
The term of office of Mr. Sergey Ignatiev, the current Chairman of the Bank of Russia, expires in June 2013. Former Finance Minister Alexey Kudrin, Central Bank’s Deputy Chairman Alexey Ulyukaev and VTB24 Management Board Chairman Mikhail Zadornov are regarded potential successors of the Central Bank’s Head, according to experts. Each of the nominees is sure to have extensive experience in the Russian financial system. However, their “systems of values” are not identical. Which of the nominees is the most “suitable” for credit institutions that directly report to the Bank of Russia? In no small measure it depends on the mid-term policy the banks select, which is often determined by the previous development vector.
Most Russian banks survived in the 2008/2009 crisis, not without the Central Bank’s assistance. The bank sector performs fairly well now: the retail loans, total assets, equity and profit surged by more than 30%, 14%, 11% and approx. 18%, respectively, in 2012. However, there are risks that the banks’ reserves will prove insufficient if the high consumer lending rates are maintained, if credit institutions continue to rely on the Central Bank’s funding, and the set of pledge lending tools remains limited. The retail credits provided by the banks (approx. 23% on the aggregate credit portfolio) boosted by 90% in 2011/2012, while provisions for possible loan losses increased by 10% only. Banks’ borrowings from the Central Bank have skyrocketed by 8 times in the last two years.
Increase in corporate loans provided by banks is restrained by relatively high discount rates nowadays – 13% in 2012, which is a half as high as in 2011. The business community is confident that the refinancing rate reduction will contribute to attracting more investments into economy, which will push up production growth rate. The discount rate reduction prompts business banks to take loans from the Central Bank, which improves their credit options, and the money supply multiplication begins. In turn, the Central Bank does not intend to reduce the rate considerably in the nearest future (it stands at 8.25% p.a. now and is among the lowest in the last 20 years). It is worth reminding that one of the principal objectives for the Bank of Russia is to maintain the established (target) inflation, while governmental priorities include achievement of the planned economic growth. Thus, at least two nominees to the Central Bank Chairman’s position, Alexey Kudrin and Alexey Ulyukaev, might have disagreements on the rate reduction. However, opinions of the former Finance Minister and the current Deputy Chairman of the Bank of Russia on this problem virtually coincide: the current refinancing rate is relevant for the economic environment in this country.
Mikhail Zadornov, VTB24 CEO, might have had a different opinion on this issue, in his capacity of a representative of credit institutions, but he keeps silent so far. On the one hand, banks have expensive liabilities that constrain credit institutions in pushing down interest on loans and demand for loans in general. Cheaper borrowings could improve the situation and expand the range of the banks’ potential borrowers. On the other hand, rate reduction on deposits may result in negative real interest and, consequently, shrinking of bank deposits. However, as experience suggests, absence of alternative investments leads to increase in bank deposits even in the least favourable conditions.
Thus, the discussion on whether it is necessary for the Bank of Russia to change or maintain the rate did not reveal any major differences between the nominees. Nonetheless, many believe that Alexey Kudrin, unlike with Alexey Ulyukaev, could become a more independent Chairman of the Central Bank. This opinion is attributed to his commitment to his own development strategy for the financial system of the country and his rather decisive statements. The former Minister has headed the National Banking Council (NBC) for 10 years and is well aware of the problems in governmental authorities’ liaising with the Central Bank. Moreover, Alexey Kudrin was active in supporting the Central Bank’s independence and opposed to double hatting of the positions of the Bank of Russia’s Chairman and the financial mega-regulator[i].The last factor may be a major obstacle to Alexey Kudrin’s election Chairman of the Central Bank.
Alexey Ulyukaev, Deputy Chairman of the Central Bank, also defends the bank’s independence in his speeches. Politicians and well-known businessmen have openly pressurized the Central Bank in the last few weeks. So far, the Bank of Russia holds its position: it is formally independent of the government. But if the decision to reduce rates is made in the near future, the Bank may be compromised severely.
An independent Central Bank’s Chairman does not “suit” not only the government but credit institutions either. The Central Bank’s strict adherence to the goals set (achievement of the monetary policy targets and control over banks) narrows down the potentialities for credit institutions to obtain “preferences” and to lobby their own interests. The Bank of Russia did not, obviously, confined itself to control over operations of credit institutions and tried to maintain certain stability of the financial system. On the other hand, the recently adopted laws envisaging more stringent rules of doing business and disclosures for banks are indicative of the Central Bank’s strengthening of control. The Bank of Russia and credit institutions understand, though, that the structure of the Russian banking system (state-owned banks’ assets account for over 60% in the aggregate assets of credit institutions vs 47% at the end of 2007) determines the level of the Central Bank’s “reliance” on the government. Credit institutions managed to fit into this pattern of relations between government institutions rather well and are unlikely to welcome any changes in the Central Bank’s policy.
[i] According to the Russian Government’s proposals, the single entity will start functioning on January 1, 2015, and ensure end-to-end control and supervision over the entire banking and financial sector in Russia when control over financial institutions and private pension funds is common .
G.V. Kovalishina
Head, Corporate Finance Department
News
-
It’s All Set for a Radical Transition to the CryptoRuble
The article by A.Vavilov "It’s All Set for a Radical Transition to the CryptoRuble"/“Vedomosti” new...
-
Credit-driven Asset Inflation and Intergenerational Wealth Transfers by G. Trofimov
"Credit-driven Asset Inflation and Intergenerational Wealth Transfers" article was published in Journal of Mac...
-
FINANCIAL MARKETS’ DIFFICULT PUZZLES
The article by G.Yu. Trofimov, IFI Chief Economist, Financial Markets’ Difficult Puzzles, devoted to the Noble Prize Win...
-
A. Vavilov became a member of the New Economic School Board of Directors.
In May 2013 Andrey Vavilov became a member of the New Economic School Board of Directors.
-
Europe-Asia Studies reviewed Andrey Vavilov's "The Russian Public Debt and Financial Meltdowns"
Europe-Asia Studies reviewed Andrey Vavilov's "The Russian Public Debt and Financial Meltdowns" in Vol. 65...
Analytics
-
Competitive storage and commodity price in continuous time
Commodity Markets \ pdf, 602.5 Кб
-
SOLLERS and FIAT versus GAZ GROUP, DUCATO versus GAZEL
Industrial \ pdf, 284.23 Кб
-
AVTOVAZ stakes on LADA priora
Industrial \ pdf, 270.01 Кб