You — the weakest link

You — the weakest link

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Analyst Vasily Koltashov on why Russia’s Central Bank reduces banks

The international ratings of Russia are growing, and it can be considered recognition of the stability of the Russian banking system, which, in turn, was made possible largely thanks to the policy of the Central Bank. Which is appreciated very differently. The questions mainly causes strategy aimed at reducing the number of banks.

Some see it as senseless and merciless financial cleansing, depriving us of credit diversity. Others agree that Russia does not need so many banks. At the start of the policy of the Central Bank in 2013 there were about 1 thousand 150 of them with a dubious reputation. Now the country is 284 less than Bank, and, according to Elvira Nabiullina, dubious banks were not more than 10. This does not mean that almost all the weak banks from the market has already left. The reduction in the number of banks will continue.

The weakness of banks verifies not only the planned diagnosis of the Central Bank, but also circumstances.

In 2014-2015, these circumstances were extremely harsh. The fall in world oil prices combined with the weakening of the ruble and the decline in wages. It made many bad loans in banks ‘ portfolios. It was also found that the policy of considerable part of the banks was very adventurist.

In this situation Russia could break out of an acute banking crisis. But it did not happen. He was anticipating. The situation remained under control.

On the eve of the global crisis our banking system was built in a free spirit of capitalism of the XIX century. Banks have been many. They worked willingly and according to the old Russian traditions were often focused on quick profits. Analysis of the processes in the economy, even in large credit institutions was poor. However, after the first wave of the 2008-2009 crisis, little has changed. The acute phase has passed, and everyone breathed a sigh of relief. The country has intensified housing construction, were given a variety of mortgage and consumer loans. Important was the revival in the stock market, and opening new possibilities for financial speculation. Banks played all the games in which they could.

The second wave of the crisis began to Mature in 2011-2012. In 2013, the Central Bank has had to move from the trial to the revocation of licenses for widespread use of this policy. 2016 economists estimated as the relative calm in world prices of raw materials have risen, the ruble has strengthened, even recorded a slight increase in rouble earnings of citizens. Consumers have passed a two-year shock. To borrow a more prudent citizens did not. Accumulated from previous years problems with debt and ordinary Russians and business.

It is not surprising that in 2016, the Central Bank has revoked the licenses of as many as 74 banks. This measure is actually prevent bankruptcy. It also changes the financial. The position of the large, time-tested and storms of the crisis, banks strengthened.

The credit system of the country is gradually losing market primitive anarchy. More clear is the functionality of the banks. Naturally, the revocation of licenses provoked considerable criticism. But, on the other hand, it is clear that the country’s banking system in recent years has been able to avoid shocks in the spirit of the 1990-ies with all the negative consequences for the economy. Investors are not perfect, but was protected by the state.

However, even 700 banks to Russia a lot. To control this number of credit institutions hard, and many of them do not perform properly its economic functions. Instead of lending to businesses and consumers, they launder money, are adventurous speculation, capital withdrawal in the direction of fabricate statements, or otherwise violate the law.

The failures of banks, may now seems unlikely. But the global crisis is not over, and another storm in the markets could lead to this. As a result, affected the credibility of the entire credit system.

After the 1990s, confidence in banks in Russia back hard. And undermine it easy. And without the second wave of the global crisis and the revocation of licenses has caused the citizens of watchfulness, which failed to take off due to interpretations for Deposit insurance. But the flow of deposits to the largest banks occurred. As the Central Bank revoked the licenses of many banks, has studied how investors and Bank managers.

As far as the management of Russian banks ready for new surprises in the world market, we will be able to judge later. Yet it must be remembered that the supply of surprises from the crisis is far from exhausted: the complicated situation is in the us and Chinese economies in the EU after a surge of optimism in 2014, the situation deteriorated. This can lead to the depreciation of securities, the decline in commodity prices and the ruin of many companies engaged in the production, trade and financial activities.

The problem for Russian banks in the domestic market — a congestion of citizens of debt. A considerable part of them obtained from microlenders. Interest is huge, which insures a micro-credit company, but impoverishes citizens. And if they have obligations to banks, they can lose the ability to pay for them. The restriction rate of the loan, thus, become a pressing task of maintaining banking stability. You need to microlenders could not assign the interest at random: their rates should be tied to the rate of the Central Bank, as is done for banks.

The stabilization of the Russian economy allows the Central Bank to estimate the number of “lame” banks only 10. We discussed the introduction of a gradation which will separate local and large banks, identifying the first border activities (e.g. lending to small and medium enterprises) and reducing the risk to the banking system of the country. However, we repeat — the global crisis can bring us new surprises. Because the new storm in the markets will have to identify new weak players, and, in all probability, as much more ten. But the method of solving the problems tested.

The author is Director of the Center for economic research Institute of globalization and social movements

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