Washington, 22 August 1996 (RFE/RL) -- Russian politicians have traded charges in recent months over whether the country is facing a banking crisis, but international experts say there is no question of IF there will be a problem, only when it will occur and how severe it might be.
A World Bank official, who has been working closely with Russia on commercial banking for several years, hesitates to call it a "crisis." Rather, he says it is "a kind of natural evolution" in banking that is occurring right now and that everyone has long known that there will be a "fall-out or shake-out" of the more than 2,000 banks operating in the Russian federation.
Major international commercial banks agree. The Dutch-British ING Barings banking group, in a recent report entitled "Russia's banking sector - clouds on the horizon," said "the banking sector has yet to face a shake-out."
From the start of the transformation process, raging inflation, virtually nonexistent bank regulation and a declining ruble made it possible for just about anyone to open a bank and for even the worst run banks to make a profit. So long as the bank had access to some funds -- often directed credits or subsidies from the central or local governments -- it could succeed by living off inflation and trading currencies.
But with the decline in inflation and the introduction of the ruble exchange rate corridor in July 1995, ING Barings says, the primary source of income for most banks became income from government treasury bills.
Those notes, sold only to Russian banks, have had average annual yields of over 100 percent per year. But the yields rose to 220 percent when tax collections faltered so badly in late 1995 and early 1996. No bank bothered with commercial credits, which would have helped build the economy, when they could make such easy money on government notes.
While this meant huge profits for the banks handling the treasury notes, it was a financing arrangement the government could ill afford. As tax collections returned to more normal levels in recent weeks, market confidence and competition began pushing the yields down by more than half. They stood at around 70 percent at the start of this week and promised to go much lower if and when the government fully opens the market for government treasury notes to foreign buyers.
There has been some reluctance to move too quickly in opening that market to foreign money because, while it would significantly bring down the government's cost of borrowing, it would, according to ING Barings, "immediately deny the banks their principal source of livelihood and precipitate a crisis that the government is keen to avoid."
What's happening, says the World Bank official who spoke to RFE/RL's economics correspondent in Washington on condition of anonymity, is that a banking sector which thrived on the distortions and instabilities of the transforming economy cannot survive under general economic stability and normal market conditions. It must change and adopt and that process will leave a large number of the less sound, poorly managed banks, at the side of the road.
The World Bank has said all along that the explosion of Russian banks from five in 1989 to close to 3,000 in early 1995 would be unsustainable because "normal banking skills, including risk management, project screening and selection, and a diversified menu of instruments to attract savers, were unknown" in Russia.
Commercial banks in a market economy make their living off holding depositors savings and lending the money out to businesses and individuals, charging enough interest to pay depositors and make a profit. They also normally buy some government notes and bonds as part of a rounded, diversified investment portfolio. But the government securities are normally not major money makers; they function more as anchors for security.
In its annual World Development Report earlier this year, the World Bank said that the lack of fiscal and monetary control, which helped fuel the early inflation, gave the new banks an edge over old banks in offering services to the newly emerging private sector.
The voucher privatization program provided what the bank says was another new business opportunity "as many banks invested in enterprises directly or lent to other investors buying shares." As a result, the bank's report said, the new banks by early 1996 held two-thirds of all assets in the entire banking system. The remaining three state banks held the rest.
The World Bank says the problem was that because these banks sprang up so fast and with little government regulation, a "large number of poorly capitalized and badly managed banks" emerged. As stabilization began to take hold, it says, the environment became difficult for commercial banks and in 1995 a third of the banks in the country reported losses.
Making it worse is that even when many of these banks got involved in commercial lending, they made poor choices and bad investments. The ING Barings report says that bad loans, called non-performing loans in the business, "represent as much as 20 percent of the loan portfolio" of banks in Russia.
In its report, the World Bank said "many troubled banks remain" and the Russian authorities "will need to deal with these banks quickly, in many cases through liquidation, to restore confidence and prevent a major crisis, and to allow resources to be intermediated by the better banks instead."
The Russia Central Bank has already begun to take seriously its new role as the supervisor of banks throughout the country. Central Bank Governor Sergei Dubinin said in late July that the CBR has revoked 155 banking licenses already in 1996, pushing the total banks closed since 1988 to 456. At least one major bank, Tveruniversalbank, was closed recently.
Working with World Bank experts, the Russian Central Bank is conducting intensive reviews of the top 50 banks in the country, making sure they are strong enough to survive the shake-out.
This is part of a program to move Russian banks up to international standards and World Bank officials say the country is quickly approaching that goal.
ING Barings says the Central bank "has acted quickly to support banks both directly and indirectly" and that Central Bank officials have said privately they expected to see a "number of mergers between smaller institutions."
The World Bank official working with Russian banks tells our correspondent that another problem many of the smaller banks are facing is pressure from local officials to provide loans to faltering, unprofitable local enterprises. He says it is "hard to resist those pressures to support ailing industries when the pressure is being brought by the banker's neighbors."
The official says the World Bank is going to launch a major effort in September to completely review the situation and make sure -- as well as it can -- that Russia is ready for the banking shake-out and that it is an "orderly adjustment."
"They are making a lot of progress," says the official, "but whether they have progressed to the point where they've reached a sufficient level, we're trying to assess right now."
He says it is always difficult to tell whether a system is ready for a shake-out. After all, he points out, even the United States did not have any clear idea of the magnitude of the savings and loan crisis it went through several years ago. That shake-out cost American taxpayers several billion dollars.
"It's hard to tell from afar how much resources you'll need," says the official, so the World Bank is working with Russia to make sure there are financial and economic mechanisms in place so that "there is not a lot of political maneuvering.
There are already reports of some political moves, however. The New York-based "Journal of Commerce" reported this week that at least one bank, Kredobank, was saved by officials cancelling a government agency withdrawal that would have drained the bank of its resources.
In the end, says the World Bank official, the success or failure of each bank depends on its individual managers -- "management that either sees economic swings coming and makes adjustment, or not. It's kind of simplistic, but it makes a huge difference whether bank management is really involved in the bank's activities and has the capacity to make policy changes in the bank."
That and good banking laws, basic business and property rights statutes in place and a strong, central bank keeping a wary eye to make sure all the banks in the country are towing the mark.