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Fitch: Russian Bank Rescue Plan Would Be More Effective, Cheaper
February 15, 2017 / 1:21 PM / 10 months ago

Fitch: Russian Bank Rescue Plan Would Be More Effective, Cheaper

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Russian Bank Rescues here MOSCOW/LONDON, February 15 (Fitch) The Central Bank of Russia's (CBR) plan to introduce a mechanism to recapitalise failed Russian banks with equity injections would be more effective and less costly than the current system of cheap loans from the CBR, Fitch Ratings says. We believe the plans, which are set to be introduced in the second half of the year, would reduce the problem of rescued banks being acquired by weak buyers, who then transfer non-performing assets to the banks to improve their own financial position, often leading to additional rescue costs for the state. Under the current regime, rescued banks do not have to comply with regulatory ratios while they rebuild capital from income supported by cheap CBR funding. This has created an incentive for weak buyers to acquire rescued banks and transfer toxic assets into them. Under the proposed regime, banks' regulatory capital will be restored by the equity injection and they will have to comply with regulatory ratios immediately, which should deter weaker buyers and attract stronger ones. Bail-in legislation being introduced separately may further reduce costs for the state, although its implementation may be delayed beyond 2017, according to recent comments by the first deputy governor of the CBR. Senior officials at the Ministry of Finance and the CBR had previously said that deposits of more than RUB100m could be subject to bail-in. It is not clear how this would operate alongside the proposed rescue mechanism, but our base-case expectation is that pre-emptive support for major government-related banks will remain probable, meaning that rating downgrades are unlikely. Most bank failures are due to weak asset quality, the scale of which is usually uncovered only after failure. The CBR has to date rescued banks by offering funding at low rates and seeking investors willing to buy failed institutions for a negligible amount. In our view, the investor selection process is not transparent, participation requirements are not stringent and post-sale monitoring is weak. Even the strengthened financial eligibility criteria for investors introduced in April 2016 would not have prevented some previous acquisitions where the acquirers subsequently failed themselves. In most cases the cost of supporting banks significantly exceeds the cost of liquidation, according to our analysis of the 30 banks currently undergoing rescue programmes in Russia. We estimate the total extra cost to be about RUB0.5trn. We believe lobbying by creditors was a factor in some of the decisions to rescue these banks, as most of them seem unlikely to be systemically or even regionally important, with market shares below 0.1%. The extension of state support to uninsured senior private creditors increases costs and gives rise to moral hazard. Bank recoveries are lagging behind target because reduced market rates are limiting the margin that rescued banks are achieving from their CBR funding, slowing the replenishment of their capital shortfalls. Under the proposed new system, shortfalls would be replenished immediately by the equity injections. The Russian authorities have spent RUB3.2trn on supporting the banking sector since 2014, equivalent to 3.7% of estimated 2016 GDP. We do not expect further major recapitalisation to be needed in the near term but rescues will remain a drag on the sovereign during the sector clean-up. Fitch's report "Russian Bank Rescues - Proposed Changes to Inefficient Mechanism Are Positive" is available at or by clicking on the link above. Contact: Anna Erachina Associate Director +7 495 956 7063 Fitch Ratings CIS Limited 26 Valovaya Street Moscow 115054 Alexander Danilov Senior Director +7 495 956 2408 James Watson Managing Director +7 495 956 6657 David Prowse Senior Analyst Fitch Wire +44 20 3530 1250 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email:; Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email: The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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