Kremlin backs CBR initiative for bail-out fund for banks
MOSCOW. July 8 (Interfax) - The Kremlin backs an initiative by the Central Bank to set up a fund to rescue failed banks.
A source from the government's financial and economic agencies told Interfax that Central Bank Governor Elvira Nabiullina wrote to the Russian president on June 27, setting down the regulator's proposals on the issue. The Central Bank's approach requires new legislation, and Nabiullina sought backing for this.
The president appended affirmative instructions to the letter and asked Russian Prime Minister Dmitry Medvedev and Sergei Ivanov, head of the presidential administration, to support the Central Bank's proposals, a source familiar with the document said.
In fulfillment of the president's instructions, First Deputy Prime Minister Igor Shuvalov requested that the Russian Finance Ministry and Economic Development Ministry, in conjunction with the Central Bank, submit a report to the president by July 20.
The Central Bank governor outlined plans to create a special fund for consolidation of the banking sector that would acquire equity stakes in banks that are being bailed out at a banking congress on June 30. The regulator thinks the current system of saving failed banks with soft Central Bank loans is flawed. Banks selected to participating in the rescue of distressed banks do not invest their own money in those banks and frequently end up using Central Bank loans to solve their own problems.
"The Bank of Russia is willing to assume a great deal of responsibility for the effectiveness of bailouts by acting not only as the main source of financing, like now, but also as the main organizer of this process," Nabiullina said at the banking congress.
"By the fall session of the State Duma we will already propose a package of amendments to legislation that will ensure the possibility of the Bank of Russia creating a special fund for consolidation of the banking sector that will enter the capital of banks being bailed out. The day-to-day management of the bank being bailed out can be carried out by a specially founded management company," Nabiullina said. The Central Bank estimates this arrangement would cut the cost of saving a failed bank by 25%-30%.
Nabiullina said the Deposit Insurance Agency (DIA), which currently organizes bank rescues, would not be involved in new bailout projects.
But Finance Minister Anton Siluanov said on July 1 he was unsure about the feasibility of the Central Bank creating a fund to rescue failed banks and said it would ne necessary to try to raise the effectiveness of investing money in bank bailouts.
"The Bank of Russia has invested over a trillion rubles already bailing out banks via the DIA. The question lies in how that money is used. To what degree it is being spent or placed effectively. The function of a regulator is essentially to monitor this. Creating new institutions to do this task still needs further discussion," Siluanov said.
"It's not the function of the Bank of Russia to directly become a shareholder, even through bailouts, we have a special institution [for this]. We need to enhance that institution, and improve control over the money which is allocated to rescue banks via the DIA," he said.
