Whatever happened to the Russian bank crisis?

November 9, 2009

Just a few months ago, there was widespread alarm in Russia about the state of the country’s banking sector.

In June, rating agency Fitch predicted that impaired loans would reach 25 percent of all loans by the end of this year, requiring at least $22 billion in additional capital. Other analysts warned that the final bill could reach $60 billion. But as the smoke clears, it seems increasingly obvious that these concerns were greatly overblown.

This week, the Russian government is set to amend the budget, slashing the amount of money that will be set aside to fund recapitalization of the country’s banks.

It had originally budgeted $13.8 billion during the remainder of this year and next, on top of $24 billion already provided to recapitalize banks since the crisis began. Now, it intends to reduce the size of the new injection to just $3.4 billion.

The reason? Banks apparently don’t need the new capital. Almost none of them have applied to participate in the recapitalization plan since it was launched at the end of last month.

One possibility is that Russia’s banks simply underestimate the scale of their problems. Yet just a few months ago, the banks themselves were among the loudest advocates of additional government support. Now, many of these same banks say that the situation is under control.

Official figures show that in September, the share of delinquent loans was 5.8 percent, the same as it was in August. Meanwhile, Russia’s banks have already received significant capital injections, both from the government and private shareholders. The average capital adequacy ratio reached 20.5 percent in September, up from 14.5 percent a year earlier.

True, these rosy figures don’t tell the whole story. Sceptics point to the high share of loans — around 30 percent — that have been restructured. These could yet go bad when payment eventually falls due.

It obviously helps that Russia’s battered economy is now recovering, diminishing the financial difficulties facing borrowers. But even without the upswing, the gloomy forecasts may have overestimated the problems.

In Russia, for a loan to qualify as delinquent, the interest must have been unpaid for just a single day, compared with a thirty-day period typical in the West. Based on anecdotal evidence RusRating, a local bank rating agency, predicts that just 10-15 percent of these delinquent loans will be unrecoverable, compared with a 50 percent share typical in the United States.

Nor is the widespread restructuring of loans necessarily an ominous sign of impending defaults. Russian banks typically make short-term loans, matching the short-term nature of their funding, but in normal times such loans are re-extended on a regular basis.

The restructuring of such loans during the crisis may therefore reflect temporary payment difficulties rather than borrowers’ insolvency. The overall amount of corporate debt, around 50 percent of GDP, is modest by international standards, while consumer debt is a minuscule 8 percent of GDP.

Despite the positive signs, the debate will undoubtedly rumble on. The ambiguity of Russian banking statistics makes all forecasts difficult. But the mounting evidence suggests that the situation was never as alarming as the doomsayers predicted.

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It may have been the largest investment in CRE space but doesn’t their loss depend on whether wachovia gave them recourse or non recourse financing. A loss of $250 million is not small but it doesn’t compare with $1.9 billion.

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