Bank of Russia’s $23 Billion Bailout Lesson: Do It Yourself

  • After spending big on bailouts, Bank of Russia changes tactics
  • Record number of Russian banks shut since Nabiullina took over

Bank of Russia Governor Elvira Nabiullina is sick of delegating.

After pouring 1.5 trillion rubles ($23 billion) since 2008 into rescues of failed lenders by outside investors, the central bank wants to handle bailouts on its own, Nabiullina told a financial congress in St. Petersburg on Thursday. The new mechanism will be “cheaper, faster, more manageable and efficient,” she said.

Russia’s worst banking crisis under President Vladimir Putin is forcing the central bank’s hand after dozens of rescues in recent years failed repeatedly to restore troubled lenders to health. After shutting a record number of lenders during her three-year tenure, Nabiullina is asserting complete control over the rescue process as part of her battle with banks deemed mismanaged or under-capitalized.

“The Bank of Russia is ready to take on more responsibility for the results of the cleanups, acting not only as the main source of financing -- like now -- but also as the main organizer of the process,” Nabiullina said.

Efforts in Russia echo concerns of regulators in the European Union. Policy makers in the EU have spent years erecting a bank-failure framework that’s intended to make sure investors -- not taxpayers -- are on the hook when a lender collapses.

Nabiullina, who’s shut down more than 250 banks in an unprecedented campaign, hopes it doesn’t take that long.

After studying recent bailouts in Russia -- funded by subsidized, long-term loans -- the central bank found that the cleanups were costing more than estimated, Nabiullina said. Banks selected to help revive troubled lenders weren’t always investing in them or developing their businesses, and sometimes dumped bad assets onto their balance sheets, she said.

Several of the biggest state-financed rescues haven’t unfolded as planned. Bank FC Otkritie, Russia’s largest private lender, has requested additional support after getting 127 billion rubles to save National Bank Trust. B&N Bank, a top-five private lender, deconsolidated Rost Bank from its balance sheet in 2015 after receiving 35.9 billion rubles to rehabilitate it the previous year.

State banks haven’t always done better, with VTB Group refinancing a loan from the Deposit Insurance Agency in 2014 that it had received to save Bank of Moscow three years earlier.

Bailout Fund

To change the system, the central bank is putting forward a draft law to create a fund to bail out, recapitalize and sell failed banks on the market. Under the proposed rules to be submitted to parliament during its autumn session, the regulator will oversee the whole process, Nabiullina said. The cleanups currently under way will continue, according to Deputy Governor Mikhail Sukhov.

Not everyone in the government thinks giving the central bank new powers is the best way to improve the process.

“It is necessary to improve the Deposit Insurance Agency,” Finance Minister Anton Siluanov told reporters Friday in St. Petersburg. “The feasibility of establishing a fund raises questions at first glance.”

Nabiullina used her speech in St. Petersburg to unveil other initiatives to tighten oversight. The central bank is looking to win the power to supervise financial holdings because their owners often their sprawling structure to hide risks, according to the governor.

The regulator has no plans to ease regulation of the banking industry now after finding that its problems “are wider than we expected,” Nabiullina said. The central bank is going to watch operations in real time -- instead of relying on later reports by banks -- and use stress-tests results to define individual capital requirements, she said.

“This is not a quick solution,” Fitch Ratings analyst Alexander Danilov said by phone from Moscow. “But if the central bank spends enough time on each bank it wants to rehabilitate, it just might work.”

Before it's here, it's on the Bloomberg Terminal.