21 Nov 2019 11:57

Bank regulators still have eye on problem of capital quality - CBR oversight chief

MOSCOW. Nov 21 (Interfax) - Bank regulators are still keeping an eye on the problem of capital quality, as artificial capitalization is one of the evils of any banking system, the head of the current bank oversight service at the Central Bank of Russia (CBR), Bogdan Shablya said in an interview with Interfax.

"Fictitious bank capital has no economic content, so sooner or later the situation with its use ends with the collapse of the credit institution. Case managers at the service constantly assess not only the quality of assets that were used when forming or increasing bank capital, they assess the quality of all the assets of the credit institution," Shablya said.

He recalled that the CBR now gives preliminary approval for inclusion of assets in capital. "And now it is not we who prove that the bank is including improper assets in capital, but banks themselves must prove that these sources are transparent. In addition, when a license is revoked from a bank and a temporary administration goes there, we, of course, look with the temporary administration at what actually ultimately happened. We transfer these conclusions to active credit institutions and we are constantly discussing found schemes used to inflate capital," Shablya said.

Furthermore, a detailed analysis is done in the event of any change in the structure or size of capital, he said. There are still banks that increase their capital base by inflating the value of assets, and some banks create the appearance of meeting regulatory ratios such as N2, N3, and quick and current liquidity, by using chains of interbank loans, he said.

Some banks try to refinance bad loans, extending the repayment period for borrowers so they do not have to reflect nonperforming loans on their balance sheet and make provisions for them.

"Unfortunately, the scheme of replacing overdue loans with toxic assets, where an asset is often replaced not directly but through some scheme, buyout of property, payoff and so on, has not lost its relevance. Case managers have learned to identify many schemes, including these, where funds are issued and technical assets appear on the balance sheet of one bank, but the money goes out through another bank or non-credit financial institution," Shablya said.

"One can say that the product of bank oversight is proof, confirmation of facts of assets being siphoned out of a bank, where an asset in the bank's balance sheet is replaced by a 'technical' asset in various form, from investment in securities at inflated prices or lacking exchange quotes, or investment in securities that actually don't belong to the bank, or illiquid promissory notes," Shablya said.

One of the main reasons that banks' licenses are revoked is still failure to comply with the law against money laundering and financing of terrorism.

"Of course, there are fewer acute problems today, but the problem of using improper assets when forming sources of capital and unreasonable assessment of existing assets and risks still remains," Shablya said.