Fears Of A Systemic Banking Crisis Stoked By Russia Bailout

Stoking fears of a possible systemic crisis in its banking sector, Russia’s central bank stepped in to launch one of the largest bank rescues in the country’s history.

Amid concerns about its loan portfolio, Otkritie, the country’s seventh-largest bank by assets according to Interfax data, was announced to be rescued by the Central Bank of Russia (CBR) late Tuesday.

“The problems at Bank Otkritie are, I think, raising more general concerns as to whether a larger and potentially systemic crisis is brewing in the Russian banking sector,” Tim Ash, a strategist at BlueBay Asset Management in London, said.

Russia’s its central bank had only been jolted into action in 2014 even though the underlying structural weakness in the country’s banking system had been known to Russian authorities for some time, Ash said. Tough international sanctions for the annexation of Crimea and Russia’s perceived role in destabilizing Ukraine was coupled with a dramatic slump in oil prices at that time. This had exposed “vulnerability” among its lenders and put Russian markets under “extreme pressure”, Ash said.

Ash described the central bank’s “pro-active” yet “painful” bid to clean-up the banking system as a “big plus” now that the CBR was looking at ways to improve the insulation of the country’s banking sector.

“It is notable in my view that the accelerated efforts by the CBR to clean up the Russian banking sector, with large numbers of bank closures already, has not seen noticeable stress across the broader banking sector,” he concluded.

The a fact that prompted some analysts to believe it was too big and influential to be allowed to fail is that some of Otkritie’s shareholders are connected to major state entities.

The central bank said it planned to take a minimum 75 percent stake after evaluating Otkritie’s financial position but did not say how much it was spending on the bailout. A 395 billion ruble ($6.7 billion) rescue of the Bank of Moscow in 2011, Russia’s fifth-biggest lender by assets at the time was the biggest banking bailout in Russia until now.

Snapping up banks such as Nomos, non-pension funds and insurers, and even the diamond business of Russian oil producer Lukoil, Otkritie Bank, part of the wider Otkritie Group, grew rapidly in recent years.

But its business practices had been questionable, Dmitry Tulin, the central bank’s first deputy chairman, told a news briefing.

Gina Sanchez, CEO of Chantico Global, said that while Russia’s banking sector had not necessarily been a primary focus to date, this had been a “very important” development. when asked whether market participants should be concerned about the news regarding a planned Otkritie bailout package.

“We are talking about a potential systemic bank failure,” she told CNBC Wednesday.

(Adapted from CNBC)

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Categories: Economy & Finance, Strategy, Sustainability, Uncategorized

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