Yana Galukhina

The current crisis on the IBC market clearly has an artificial ring to it. Banks have money, but they have simply stopped sharing it. As no criteria for regulatory agency activity exists, Russian bankers are waiting for new targeted political attacks and have stopped lending each other funds.

Last week, hysteria broke out among bankers, their clients, and banking analysts. The banks severely cut inter-bank credit market operations, traditionally a means of maintaining liquidity, and as a result as of June 3rd the average inter-bank credit interest rates shot up five to six times from 2-3% to 12-15%. But even at these higher rates it was practically impossible to get a loan. Though there are no large-scale indicators of a major crisis, an inter-bank “crisis of confidence” is clearly at hand.

The domino effect

It all began May 13th, when Sodbiznesbank’s license was revoked. Actually, the serious problems began at Kredittrast Bank. Rumor has it that both banks belong to the same owner. As the press and banking circles mulled over the connection between the two banks, more than 2 billion rubles were withdrawn from Kredittrast in a single week. As a result on June 1, the bank was not able to pay off 60 million rubles in its own bonds and on June 3 the bank resolved to liquidate. This decision was announced June 8. In addition, the bank’s directors stated that it would borrow more than 1 billion rubles in stabilization credit from the Bank of Russia to settle up with depositors. No one knows if the bank applied to the Central Bank for this loan, but this statement only contributed to the market panic, as it was obvious that the Central Bank was not likely to bail the bank out. After the courts found Central Bank official Alexander Alekseev guilty of overstepping his authority when he approved a stabilization loan to SBS-Agro in 1998, First Deputy Chair Andrei Kozlov announced that no one at the bank would repeat this move.
Last week, anxiety on the market increased significantly thanks to state officials’ clumsy pronouncements. Representatives of the Central Bank and the Federal Service for Financial Monitoring (FSFM) publicly denied the existence of a “black list” of banks due for liquidation, but the head of the FSFM Viktor Zubkov immediately declared that the Service “does actually have some issues with around a dozen banks.” This statement only throw oil on the fire as the Service’s “having some issues” could be understood in whatever way one pleased. Trying to protect themselves from IBC default, banks reduced their activities on the IBC market and the average daily trading fell by 20% compared to late May levels.
Of course, this isn’t the first time the market has seen abrupt changes in liquidity, and in April they occurred in connection with a general deficit of ruble resources. First of all, a new version of Central Bank regulations came into effect April 1 and as a result, banks began to keep more funds in their Central Bank correspondent accounts. Moreover, an April statement by Central Bank head Sergei Ignatyev that the monetary authorities were not going to allow any excessive real strengthening of the ruble also played a part. It sparked an increase in capital outflow, which had a negative effect on banking system liquidity. Finally, the Central Bank itself took part of the resources out of circulation. It conducted a market sterilization operation to the tune of 140 billion rubles, a fairly large sum. As a result, when banks traditionally would enter the IBC market at the end of the quarter, there was very little money to be had. In late April, the IBC rate skyrocketed to 20%, but it was still possible to borrow money at that rate. Now it isn’t. “Previously, higher rates resulted from objective deficits in short-term liquidity on the IBC market. Now in addition to the objective factors, there are also subjective ones caused by market participant caution due to the possible revoking of bank licenses by the Bank of Russia and the rumors of a bank black list,” explains Ruslan Vlasenko, Vice-President of Transkreditbank.

The echo of the blast

The liquidity problem has already had its effect on the financial market as banks that can’t get funds on the IBC market have started selling off assets. Starting June 3, the weighted average yield on corporate bonds grew by 50 base points, while second-tier corporate bonds gained 100-120 points. The problem is that when the market had an excess of ruble resources, medium-sized and small banks began to actively buy second-tier ruble bonds with yields of 14% p.a. or higher. The quotes on these very bonds are now falling fastest. There are practically no buyers for these assets and for this reason, even though the overall price levels have fallen, practically no deals are taking place.
The number of investors interested in purchasing bank bonds has also dropped abruptly, while 31 bank issues totaling 29.4 billion rubles are in circulation. “Nothing much is happening to large banks’ bonds, like Vneshtorgbank. They are falling along with the rest of the market,” says Alexei Yu, “but the attitude toward medium-sized banks’ bonds is very negative. Investors are trying to get rid of them not only to increase liquidity, but also to save themselves from risks associated with the banking industry.”

Unprecedented

Many bankers are comparing the current situation to the banking crisis of 1995. This is hardly justified. First of all, banks were far more dependent on the IBC market back then. According to certain analysts, IBC credit made up 30% of banks’ liabilities in 1995. Now, according to Mikhail Khoromov, an expert at the Center for Macroeconomic Analysis and Short-Term Forecasting, it currently makes up only 5% for the banking system as a whole and only 3% for large banks. Even among banks that are not among the top hundred in Russia, this figure is only 8-9%. Only 110 banks have crossed the 20% line, or 10% of all banks. These are primarily very small or medium-sized banks with an average of 2 billion rubles in assets, though there are also several large banks from the top 100 among them.
Secondly, in 1995, the banking system moved from the downward spiral of emission and devaluation to financial stability. “The elements of financial stability were on one hand a rapid decrease in emissions from the Central Bank and the refusal to fund the government and commercial banks via direct credit. On the other hand, there was a transition to the currency corridor for the ruble exchange rate. This came at a time when the IBC market had grown dramatically and the banking system was absorbing the huge amounts of money emitted by the Central Bank. For precisely this reason, the deficit of funds that emerged in August 1995 on the inter-bank market was absolute or `physical’ in nature. Only Central Bank intervention, when it bought up around $1 billion in state bonds in one week, diffused the situation and prevented system-wide paralysis. Today the inter-bank market has a different function, to maintain short-term liquidity and filling any gaps in cash flow. In principal, there is enough money in the system and the crisis is clearly psychological. Fear and mutual distrust have temporarily frozen operations.”

Gloomy forecasts

The tension eased somewhat on the inter-bank market in mid-June. Interest rates for one-day inter-bank loans fell to 6-8%, while correspondent accounts gained 11 billion rubles and grew to 163.7 billion rubles. But there is still no reason to believe the market is back on track. Banks are cautious, waiting to see if someone else will get in trouble in the near future. “The current situation demonstrates that without clearly formulated criteria for the Central Bank to determine which banks are not viable, any rumors or suspicions will spark a crisis of confidence on the inter-bank market. Moreover, the market is unsure which banks the Central Bank will allow into the deposit insurance system. Obviously the banks that lose the right to work with individual consumer accounts will start to experience problems, including on the IBC market,” believes Ruslan Vlasenko at Transkreditbank.
The problem, however, is not only the possible action or inaction of regulatory agencies. If the public and corporate clients continue to actively withdraw their money from small banks, then without access to inter-bank market resources, they could easily end up in the same position as Kredittrast. “If one of the major banks fails in the next two weeks, this will mean the complete failure of all our hopes. If not, everything will work out somehow. All in all, we are optimistic about the situation,” notes Andrei Gaek of Nomos Bank. Andrei Egorov of Sudostroitelny Bank (Shipbuilding Bank) is also confident that in a week or two, banks now experiencing liquidity problems will have coped by transferring their collateral to different banks and temporarily reducing corporate loans. Nonetheless, it will take a minimum of several weeks for the IBC market to calm down.
Problems will also inevitably arise when banks place their bonds. According to Vlasenko, after the well-known events surrounding Sodbiznesbank and Kredittrast Bank, bonds will become more expensive for banks, as investors will be looking for a certain risk premium on bank securities. That, or underwriters will have to buy up significant portions of the issues.

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