The idea of creating a "bad bank" to soak up Russian banks' toxic assets could become a reality if the economic situation worsens, even though senior officials currently reject the idea.
Banks are unlikely to see any profit in 2009 and the amount of non-performing loans is predicted to reach 10 per cent, while some analysts believe it may hit 20 per cent by the end of the year. This could cause a second wave of the crisis and a bad bank that would take on toxic assets is one potential solution the government appears to be considering.
"If we are persuaded that [setting up a bad bank] is the right thing to do, then we will have to listen," Deputy Prime Minister Igor Shuvalov said, Forbes reported.
The first deputy chairman of the Central Bank, Alexei Ulyukayev, also said that it was "unwilling to support" the idea, Forbes reported, while Finance Minister Alexei Kudrin has played down the idea in the past.
Currently the number of non-performing loans in Russia is smaller than in the United States and Europe, standing at 3.7 per cent. But the number of new ones is increasing by 20 per cent a month and could reach 10 per cent, according to German Gref, CEO of Russia's largest lender, Sberbank. However, analysts from other banks have warned that the actual figure is much higher.
"I think 10 per cent is already the reality, it is no longer the scary scenario," said Natalya Orlova, chief economist at Alfa Bank. "The scary scenario is now 20 per cent."
The idea of creating a vehicle for toxic assets was first used in Sweden which was suffering a banking crisis after a housing bubble burst in 1990. However, the number of non-performing loans in Sweden was significantly higher than in Russia and the policy is seen as more suitable for Western countries with more exposure to toxic assets.
"In the view of the authorities creating such an agency would be tantamount to simply mimicking the actions in the West," said Yaroslav Lissovolik, chief economist at Deutsche Bank. "In their view, Russia's conditions would not favour the creation of such an agency at this stage."
Kudrin's meeting in March with the governor of Sweden's Central Bank, Stefan Ingves, fuelled speculation that they were discussing Sweden's experience and how it could be adapted to Russia if things turned worse.
If official estimates of non-performing loans do reach 10 per cent, which many banks have considered a plausible bad scenario, then it is an option the government will begin to consider. Lissovolik conceded that the chance of a bad bank being created was 35 per cent to 40 per cent if the economy continued to worsen.
"The question of such an entity depends on the scale of the problem of bad loans," said Lissovolik. "Given that at least so far this problem is not as pronounced as in most of the developed countries it may be the case that this is not something that is necessary under the current circumstances."
However, the problem of bad loans in Russia is very different from that of the toxic assets that are plaguing the U.S. and German economies. Russian banks bought very few derivative securities, bundled packages of loans, which have lost almost all their market value since the crisis began.
"Russia does not have a major toxic asset problem in the banks," said Martin Gilman, a professor at the Higher School of Economics and a former IMF representative in Russia. "Russian banks were not really involved in buying these derivative securities."
Without a toxic asset problem, a bad bank is unnecessary as loans are backed against tangible assets, such as real estate. Russia may not run into a capital problem, even if the rate of non-performing loans increased to 10 per cent, Gilman said.
"The banks in Russia, as a group, are relatively well capitalised, they are not insolvent," said Gilman. "That being said there are certain banks that are insolvent. They overlent to the wrong borrowers without doing due diligence."
It is mostly smaller, regional banks which may face insolvency, particularly with the minimum capital requirements being raised. These banks are likely to go bankrupt unless they receive more funding or offload assets, which could be done into a bad bank.
"This idea of using a toxic asset scheme in Russia is one way, some are suggesting, of salvaging the banks that made bad credit decisions and whose non-performing assets would wipe them out," said Gilman.
It is unlikely there would be much support for protecting smaller banks as there are already too many lenders in Russia. The government is also reluctant to create a toxic assets vehicle because it could create opportunities for corruption.
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