Director of the Central Bank's Financial Resolution Department, Alexander Zhdanov: Any new banking sector bailouts will be selective
Photo: Press-office of the Central Bank of Russia
The Russian banking sector clean-up reached its height in 2017, when the Central Bank decided to bail out three of the country’s biggest lenders at once and coined the ominous phrase “tired owners” in a sign that the process would continue. But by and large it was over quite quickly, and now the sector’s rehab is coming to an end. Alexander Zhdanov, Director of the Central Bank's Financial Resolution Department, tells Interfax in an interview about how the regulator will be approaching bailouts going forward, what scale of help troubled banks can expect to receive and plans for the sale of Asia-Pacific Bank and Otkritie.
Question: Bailouts have been something of a rarity in the last couple of years, unlike the 2015-2018 period, when the regulator frequently used this means of supporting banks. What’s happened?
Answer: Most of the work to rehabilitate the banking sector financially has been done; further bailouts will be selective only.
Q.: How much has the Central Bank spent on bailouts by the old and new methods? How much has it got back?
A.: The word “spent” isn’t quite the right one.
Q.: Allocated, then.
A.: Yes, allocated. Because “spent” implies the money is non-repayable and that you won’t get it back. So here it would be more appropriate to say “allocated” or “used.”
Regarding funds that have been used to bail out banks with the Bank of Russia’s involvement, it’s important to remember that funds have been disbursed both for capital and to support liquidity. For liquidity purposes some 2.9 trillion rubles have been allocated under the new rescue scheme and 1.2 trillion rubles of this have been returned. The remainder, less than 1.7 trillion rubles, is held mostly by Trust, the bank for non-core assets, and some by Moscow Industrial Bank (MInB). Trust has KPI to return funds to the group, to recover 482 billion rubles by 2024, and its management is working on fulfilling this. So far Trust has returned more than 117 billion rubles to the Bank of Russia.
Some 941 billion rubles had been allocated to bolster the capital of banks being bailed out with the Central Bank's involvement. This includes 3.9 billion rubles transferred to a special closed-end mutual fund to rescue Asia-Pacific Bank (APB). Some of that money will be returned as bailed-out banks are sold. It is more difficult to assess quantitatively how much the Central Bank will get back as the result of bankruptcy litigation.
As regards bailouts with the Deposit Insurance Agency’s involvement, altogether 1.6 trillion rubles has been allocated for loans for and half a trillion of that has already been paid back. Less than 1.1 trillion rubles is outstanding, and we expect both the DIA and the Central Bank will get all their money back.
Q.: Do you really expect to track down the beneficiaries and senior managers of banks if a court sides with the Central Bank and orders that funds be recovered? Do those people have the assets to cover the billions of rubles of claims?
A.: The Central Bank will of course ensure that all cases are reviewed in their entirety and that when rulings are handed down, as much will be recovered from the assets of respondents as they are in a state to pay. We realize that the likelihood that we recover all amounts claimed from those respondents is not that high, but we have to do all we can to recover as much as we can.
Q.: The Central Bank at one time said there were three criteria when deciding whether to bail out a bank: economic feasibility, systemic importance and non-involvement in dubious transactions. Have those criteria changed at all?
A.: The overall thrust is the same, the criteria you mentioned are still relevant and have not changed either. If signs of a bank’s instability or risks to its creditors and account holders are identified, we analyze a large body of information. Two years ago the Central Bank approved an approach that describes more extensively the criteria for such decisions. They include the extent to which the situation at a bank might affect the banking sector as a whole; how it might affect a specific sector of the economy if it were to go bankrupt; its effect on the budget and enterprises and organizations of social importance; and its regional importance. Issues like a bank’s involvement in dubious transactions, affiliation between a bank’s operations and its current owners, on other words whether the bank acts a financial intermediary in the economy and to what extent. And other factors and circumstances may be taken into consideration, because in this case there is room for professional motivated judgment. We also assess how much financial resolution might cost. On the whole, some 30 items are taken into consideration when all factors are weighed up.
Q.: It’s a long time since we have heard the phrase “tired owners” which was popular two or three years ago. Given the current difficult economic situation, have there been any requests from such owners to hand banks to the Banking Sector Consolidation Fund?
A.: The purpose of bailouts is not to help owners dispose of a business because it envisages a procedure for a forced change of ownership with all its ramifications for them. For us to start considering a rescue, a bank needs to have lost most or all of its capital, from the point of view of legislation. A bank's capital adequacy needs to have fallen below 2%, otherwise the Bank of Russia cannot buy a 75% stake in a bank as the law requires. Losses of that nature must, according to the law, be recovered from those who reduced the bank to such a state. Charges are made against a bank's obligations to such people, and their business reputation is deemed unsatisfactory. That is why there have been no requests from tired owners.
A civilized departure from the market takes place either through the sale or consolidation of the business or through the voluntary surrender by bankers of licenses via the annulment of such licenses. We see such examples on the market today.
Q.: Have there been any requests from investors involved in old-style bailouts? Perhaps some of them aren’t coping, or they don’t have enough money, or more problems than originally envisaged have come to light at a bank?
A.: According to the general rule, an investor in a bank that is being bailed out is responsible for fulfilling all planned financial resolution measures and completing all procedures. Also, an investor who comes into a project takes on the risks of further losses by the bank being bailed out but which were not taken into consideration when its financial state was being analyzed. The Central Bank's position is that investors must bring bailouts that began in the past to their conclusion. There have been three instances when the format of a bank rescue has altered because the investing banks themselves, Trust, Rost-Bank and Avtovazbank, went through financial rehabilitation; and two where the investing banks had their licenses revoked. So the sole means of transitioning from one bailout mechanism to another has serious ramifications for the existing investor who operates under the loan arrangement. A general change in the external environment cannot be a reason to change the bailout mechanism, the investor has to bring the process to an end.
Q.: Have there been any requests at all to change the financial resolution plan?
A.: There have been requests, and they are discussed individually. But I reiterate, for such discussions to take place, there simply must be a combination of factors that are capable of influencing a change in the conditions, including extending the loan maturity.
Q.: What factors, for instance?
A.: In some cases, there were potential risks that investors could not have taken into consideration when getting involved in a bailout. They might include an unforeseen deterioration of “old” assets, a liquidity drain or changes to the law that significantly affected a bank's business model. Then new circumstances might be taken into account when decisions are reached, for example to extend the timeframe of a plan, but we always work on an individual basis with investors to assess the risks of each specific project. The general rule is that unless special circumstances come to light the investors themselves have to cover risks that were not previously identified.
Q.: How often does the Central Bank check the financial state of investors?
A.: When a bailout begins with the Deposit Insurance Agency’s involvement there’s a standard procedure for assessing the investor’s financial state. The law and a Bank of Russian regulation explicitly require this. Such an assessment is then carried out once a year, as is an assessment of the owners of other banks. Because the investors in most bailouts by the loan mechanism are banks, then constant monitoring of their financial state is also carried out in the course of routine oversight, more than once a year.
Q.: The Central Bank recently published draft amendments to rule out private individuals from acting as investors in bailouts with loans. Why is that?
A.: When this was allowed under bailouts with the DIA’s involvement with loans, there were major arguments within the Central Bank about the extent to which private individuals could be permitted to participate in such projects as investors. At the time the decision was reached and the projects are well known.
When bailouts with the Central Bank’s participation were introduced we no longer saw the loan method as the principle one, although we do preserve this method. But there is no real need to involve private individuals in bailouts any longer. There arise more complications for individuals in terms of verifying their financial state now or in the future, and it is harder for them to confirm that they can assemble a professional team prepared to take on managing a bank that is being bailed out. In general it is easier to control what a functioning organization is doing by means of regular reporting, which can also be verified by an independent auditor.
Q.: There has been another draft Central Bank amendment that allowed those banks that have been bailed out by the new method to be bailed out by the old method. In other words Otkritie would gain the opportunity to participate in a bailout by the loan method. Why is the Central Bank doing this and what’s the status of the draft?
A.: The draft Bank of Russian regulation to amend current requirements for investors is with the Justice Ministry for registration. Our objective is to create the same opportunities for all market participants, here there are no advantages for banks that have been bailed out with the Bank of Russia’s involvement. Why? During the bailout a bank first loses its capital, then it gets a cash injection, its capital is formed anew and the bank changes ownership. The loss of all or a considerable amount of capital means that a bank cannot carry out operations in keeping with the large number of requirements prescribed by law in Russia. It loses that entitlement automatically due to the fact it is being bailed out. And the legislator considers this to be unfair. So when a bank is being bailed out by the old method the current procedure for selecting an investor assumes the bank should not have had any problems with capital adequacy for a period of three years. But a bank being bailed out by the new method is automatically eliminated from this process despite the fact that it regains solvency in a short period of time.
A whole range of other laws and government regulations allow a bank being bailed out via the BSCF and which has got through the loss of capital stage to continue to handle the budget accounts of state corporations or to carry out operations in the framework of tax and customs legislation.
Q.: At what stage is the bill that limits the Central Bank’s ownership of banks being bailed out to five years?
A.: The Central Bank aims in time to divest its stakes in the banks that it owns and do so by market means, transferring a bank to private owners as quickly as the market situation allows. We must adopt a reasonable approach from the point of view of price - a now healthy bank cannot be transferred to a new owner for a pittance. So rigid time limits could adversely affect the price.
Q.: So far there have only been attempts by the Central Bank to sell a bank. Central Bank Governor Elvira Nabiullina has said that in view of the market situation you have decided to put off the sale of Asia-Pacific Bank. Can you give some more detail about who was interested in it and whether there were any foreign investors among them? What was the Central Bank inclined to do and when might APB be put up for sale again?
A.: We believe that APB is ready for sale from the point of view of its balance sheet structure; it does not require any additional preparation. There were four parties interested in APB, among them Russian lending institutions, non-financial organizations, and nonresidents. The full spectrum was obtained following acceptance of applications, but they all said they wanted to assess the impact of the pandemic on the bank's business. Therefore, the decision was made to postpone the selling process until 2021.
We didn't name specific dates, but I think H2 2021 looks entirely realistic for returning to this matter. Naturally, this will be done if there is interest on the part of real participants who have already performed due diligence on the bank and confirm their interest, or on the part of other investors who want to acquire this bank.
Q.: When do you plan to sell shares in Otkritie? Will the sale of APB not overlap with the sale of shares in Otkritie?
A.: As far as Otkritie is concerned the sale should take place in the spring of 2022 so there should be no overlap. It must be borne in mind that the target profiles of the buyers differ for those banks. In APB’s case we see the buyer primarily as a strategic investor. This could be a Russian bank that wants to use that opportunity for market growth, or it could be a way in for a foreign bank that wants to gain access to the Russian market and start doing business here by acquiring a rehabilitated bank from the Central Bank.
Q.: The Central Bank and Otkritie gathered proposals in the spring from investment banks on how the bank’s shares might be sold and in what amount. What did the investment banks propose? What was their main line?
A.: The main proposal made was to clean up Otkritie of non-core assets, which shouldn't somehow distract potential investors from acquiring the bank. There are a lot of choices to make, primarily, whether to sell the group in parts or as a whole and, basically, in what volumes, in what timeframes, and through which formats. When all this has been considered at the Central Bank and a decision is made, we will definitely announce it.
Q.: Did they suggest putting Rosgosstrakh up for sale or holding an IPO?
A.: Yes, there were such proposals as well, but we have a fairly wide range of participants and a range of different options for the strategy of the Bank of Russia's exit from Otkritie Group that could be implemented, among which was also the suggestion about a Rosgosstrakh IPO.
Q.: Have the consultants who will deal with the sale of Otkritie been selected or have you put the selection process off?
A.: It was decided to hold off on this process. I think that now with the arrival of the autumn, we will gradually step up this activity and will provide information based on the results.
Q.: A few weeks ago MInB said it had a new board of directors and management. Why was that? Was there something the Central Bank didn’t like about the MInB bailout?
A.: Yes, decisions were made. This is a complicated project, in the course of whose implementation the need became apparent of both strengthening the team and increasing the efficiency of decision-making. More could have been done for MInB's rehabilitation. Therefore, Igor Antonov, who formerly headed IFC bank, was appointed as the new chairman of the bank's management board. The bank's board of directors was also expanded, new representatives joined it as independent directors who are well known on the market and they will thus strengthen the bank's management bodies.
Q.: What was the departure of the BSCF CEO linked to?
A.: Undoubtedly, there is a common line in these actions [the management change at MInB], as the head of BSCF Management Company entered the MInB board of directors, and the bank's management bodies changed. You know that this isn't the first CEO change in the management company's history; this isn't a matter of some kind of dissatisfaction but normal management practice.
Q.: What are the prospects for MInB from the point of view of its sale? Are any further injections of any kind needed?
A.: The bank's financial recovery has not been completed; therefore, it is still too early to talk about the prospects of selling the MInB bank for now. The bank's new-look management team is faced with the tasks of building a new and effective business model, which isn't simple in the current conditions; therefore, it is definitely not a question of the next 18 months.
Q.: A question about Trust, the bank we started with. As far as I can gather the bank will keep going until 2024. Does the Central Bank have any concerns that Trust will not be able to fulfill its KPI, that it will remain on the market after that? There is talk now that the distressed assets of healthy banks might be moved to Trust.
A.: The handover of any assets is always a question of price and recording a loss on the balance sheet of the bank that is transferring them, that is whether the owners of that bank are prepared to take that hit. At present there are no plans to broaden the scope of Trust’s work – it will continue to deal with those assets that are already within its sphere of activity. There are plans to limit the Trust’s legal status as a bank for non-core assets to five years but in reality one more year after that might be needed to complete voluntary liquidation formalities.