The Russian Banking System has High Adaptability

How has the crisis influenced the banking sector? Why is the Central Bank increasing its requirements from bankers? How many banks does the economy need altogether? These were the topics discussed by Mikhail Kovrigin, director of the Central Bank of Russia’s Banking Regulation and Oversight Department, at a meeting with members of the HSE Banking Institute.

How the CB interacts with banks

Mr Kovrigin observed that the dialogue between the Bank of Russia and the banking community has become more intense in recent years. One could say that the national banking system is regulated conservatively – that is to say Russian banks “must use their capital to cover a significantly wider range of risks than their foreign counterparts”.

Rigid regulation has an obvious advantage: banks which closely follow the Bank of Russia’s prescriptions have “the necessary level of stability” even under the current difficult economic conditions. But the other side of the coin is that the ethically sound banks, which are already playing by the rules, suffer additional costs from the increased requirements.

On credit and capital

Russian banks may grant credit to a single beneficiary not exceeding 25% of the bank’s capital. “This is becoming a problem for our economy, especially right now, as major companies are returning to the internal credit market,” acknowledged Mr Kovrigin. Where previously a large corporation could obtain credit abroad in one go, it must now cover 5-10 Russian banks to gather the funds it needs.

The business community is suggesting that this restriction be lifted. But experience shows that concentrating risk in a single place, even if that place is a major company with flawless accounts and a great rating, leads to nothing good. Hence the CB has no intention of abandoning the 25% limit, nor the N25 standard, which limits credit for involved parties to 20% of capital. The standard’s implementation was put off for a year, but “nevertheless, we will have to shift to it”.

The future of the banking business

Unlike the 2008 crisis, the main victims this time round weren’t the banks but the corporations which underestimated currency-related risks. The crisis’s influence on banks is different. The banking business in Russia is becoming more expensive, and many businesspeople are being forced to make the choice: either to keep supporting their bank by topping up its capital, or to leave the financial market altogether.

Under these circumstances one question naturally arises: how many banks does the economy need anyway? In Mr Kovrigin’s opinion, there is no exact answer. Much depends, for example, on the development of federal and major regional banks’ networks.

This is because there are regions which large credit organisations are reluctant to involve themselves with, and the economy there can’t function without local niche banks.

Learning from experience

The scope of prediction within the banking sphere and the economy in general has narrowed considerably, but Mr Kovrigin is confident that Russian banks will weather the present crisis just like they did the others, whatever their individual problems. “Our banking system’s strength is its high adaptability,” the CB representative explained. “There are banks in the current market which survived the 1998, 2004, 2008 and 2011 crises. The coming times will be demanding, in terms of effort, but not catastrophic.”