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Russian regulator continues banking license revocations

November 10, 2015, 18:57 UTC+3 Alexandrova Lyudmila
Russia’s Central Bank

Russia’s Central Bank

© Pavel Smertin/TASS

MOSCOW, November 10. /TASS/. The Central Bank of Russia is taking measures required to clean the banking system and is revoking licenses from banks violating legislation but this process cannot last endlessly, Russian economists say.

They believe that some new measures are needed to strengthen the banking system because otherwise this may disrupt the confidence of the population and business in it.

The Central Bank of Russia made a decision on Tuesday to revoke banking licenses from four banks at once: RSB 24 (Russlavbank), Regional Bank for Development, Regional Savings Bank and Mezhregionbank, as well as from Tor Credit non-bank credit institution.

The regulator revoked licenses from 75 credit institutions earlier this year and from 86 entities in 2014, citing the unsatisfactory quality of their assets, the loss of capital, risky lending policies and their focus on dubious transit transactions.

Overall, more than 600,000 depositors have been affected by license revocations since the start of 2015.

According to data of the Russian Central Bank, 798 credit institutions with banking licenses operated in Russia as of July 1, 2015.

The Russian monetary regulator has been taking large-scale efforts to clean the banking system from dishonest operators since mid-2013, after Elvira Nabiullina was appointed as chief of Russia’s Central Bank.

Nabiullina recently promised that the Central Bank would continue tightening control over the banking sector.

"This is not a cleansing effort. This is an effort to make the banking sector viable and get rid of weak players," the Central Bank chief said.

The Russian Central Bank’s tough policy has also caused a lot of criticism. Business ombudsman Boris Titov has said recently that the revocation of licenses from banks with large accounts held by entrepreneurs is leading to negative consequences for Russian business. According to the ombudsman, the Central Bank earlier focused on commercial banks involved in "untypical operations," whereas now "these are typical entrepreneurial banks."

"In Probiznesbank alone, there were 202,000 accounts held by legal entities. As a result, many of them were forced to stop their activity," the ombudsman said.

"The regulator is taking absolutely correct measures against banks involved in activities violating Russian legislation," ex-Chairman of the Central Bank, Vice-President of the Association of Regional Banks, Professor of the Academy under the Russian President Alexander Khandruyev told TASS.

"But you also have to see that generally the conditions for small and medium business, in particular, in the banking sector, are extremely unfavorable now. They are not receiving any support compared to major banks with state stakes," the expert said.

The expert said he shared the business ombudsman’s opinion.

"Even if a bank’s managers have violated legislation and you are disciplining them, shareholders and depositors have nothing to do with this. The regulator can just demand the replacement of the bank’s management or the replacement of the bank’s owners after all," he said.

Khandruyev said he didn’t understand the criteria the Central Bank was following when it was revoking banking licenses in some cases and was deciding in other cases to introduce financial recovery measures at banks of the same or even smaller size. "Why is this done? This is not explained publicly. There is no transparency in criteria, under which some banks are bailed out and others are not," the expert said.

The number of banks by itself has no significance, the expert said. "Russia is the sole country in the world where the number of banks is counted. However, the main criteria are the quality of banking services and banks’ sustainability," he said.

"The matter is not only that banks are not working in the proper way but that there is also a problem with the possibilities for business," Professor of the Higher School of Economics Alexander Abramov told TASS.

"The Central Bank is limiting today the volume of refinancing for the banking system and banks can’t earn by receiving cheap money abroad while deposits are an expensive funding source," the expert said.

"That is why, this is probably an objective process that small and medium banks are being liquidated, if they are not being reorganized," he said.

At the same time, this process can hardly be called normal "because the revocation of licenses on a weekly basis causes some bewilderment of the banking system’s potential users — it is generally unclear whether they can trust banks outside the group of 4-5 state banking institutions."

The continuation of this process will be disrupting the confidence of the population and business in the banking system, the expert said.

"In this regard, the Central Bank has to change something. Probably, measures are needed to ease the issues of mergers and acquisitions so that weak banks can be merged into larger banking institutions to make processes less painful. Some new measures are needed," the expert said.

There are, indeed, a lot of banks, including a plenty of small banks, in Russia, the expert said.

"The presence of large banks with a ramified network of branches is a normal picture for the banking system. There are quite few such banks and this is what makes the banking system stable," the expert said.

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