The Russian government would like banks to go bust. Not that it has made bank failure a major objective of economic policy. But it wants to use the current crisis as an opportunity to get rid of hundreds of sub-scale, badly-managed and poorly-funded institutions. At the same time, it will provide state funds to help larger banks fend off the crisis. Let the small fail and help the big survive: this is the Russian banking challenge.
Russia has more than 1,000 banks and could do with half as many. The 100 largest account for about 90% of the market, and the authorities mostly care about the 30 largest. But the government should be careful of what it wishes for, because the crunch is hitting banks of all sizes. Non performing loans, now at around 4% of total portfolio, could rise to 10% this year and maybe more, the finance minister has said.
The government has already allocated some $19bn – more than 1.5% of GDP - to shoring up banks in its 2009 budget proposal. The Bank of Russia is helping keep the ratios up by allowing some subordinated loans extended by the government to be considered as Tier 1 capital.
The latest support comes in the form of what the government calls a bond-for-shares exchange. It would sell non-tradable bond to the largest banks, with the money immediately re-invested in shares in the same institutions. The amount of the program could reach RUB500bn, or $15bn, according to insiders. The extra capital is welcome, but some analysts estimate Russian banks could need four or five times as much by the end of 2009 if the recession worsens.
The government is adamant that it doesn’t want to set up a bad bank to take over the system’s toxic assets. But it may not have much choice, if non-performing loans top 15% – which could be the case if more banks are forced to acknowledge the sorry state of their balance sheets.
It’s one thing to manage the smaller fry’s failure. It will be quite another to try avoid a major bank’s meltdown.
