Central Bank needs to monitor key banks more closely - IMF
MOSCOW. April 12 (Interfax) - The Central Bank of Russia needs to monitor key banks more closely, Dimitri Demekas, Deputy Head of the International Monetary Fund's Monetary & Capital Markets Department, said at a press conference at the Interfax central office.
More stringent oversight is needed due to "moral risks" which Demekas said were arising because the system was dominated by banks that are "very large, too large" to be allowed to go under.
Many of the government's crisis support measures were directed towards backbone lending institutions, which was justified, but which "increases the moral risk in the long term," Demekas said.
He also said the Central Bank ought to have the right to issue binding risk management regulations.
In addition, Demekas said it is necessary to provide oversight bodies the option of monitoring bank groups and affiliated parties on a consolidated basis. "Under the application of laws and regulatory acts, they should have the option of applying professional judgments. Such authorities should not be unrestricted but sufficiently wide-ranging and secure the legal protection of employees in oversight bodies," Demekas said.
He said that the extent of competition on the Russian banking market is still not very high. The trend towards reducing the role of state banks in total deposits, which emerged prior to the economic crisis, halted its progress during the crisis period. "We hope that this is a temporary occurrence," he said.
Demekas added that high concentration in the banking sector could boost stability in the system but this would not ensure growth over the long-term. However, this problem cannot be solved immediately and, therefore, additional measures, are necessary.
For example, Russian authorities should create level playing rules for all banking market participants so that preference is not give to major institutions. In addition, the IMF believes that reliable oversight should be instituted and supported, which would be implemented equally in relation to all banks. However, Demekas added that oversight of major banks should be stricter since they present the highest risks if an unstable situation emerges.
In addition, the CB should facilitate consolidation in the banking sector and, for instance, should not form hurdles for the consolidation of small and medium-sized bank, which could create a counterweight to existing banks, Demekas said.
Demekas had high appraisal of the efforts of the Russian government, the CB and the Deposit Insurance Agency (DIA) in combated the effects of the economic crisis. "They were successful in limiting the influence of the world financial crisis on the Russian financial sector. Despite the substantial drop in GDP, financial stability was maintained," he said. Demekas added that this was possible thanks to a wide circle of measures quickly implemented by the Russian authorities, such as money policy, tax measures and temporary emergency authorities to the CB and DIA. He also cited the CB and DIA's close partnership as an important factor in fighting the crisis.
"The banking system has started to recover, revenues have gone up and lending to the economy has restarted," Demekas. However, he noted that "insufficiencies and vulnerabilities" are still present on the balance sheets of banks, which are, in part, related to the formation of provisions. "As long as banks' balance sheets recover, it is necessary to observe a high level of vigilance," he said.
Demekas also said that the plan for developing the banking sector until 2015, as developed by Russia's CB, is feasible and capable of resolving many of the long-standing problems in the industry.