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Small banks: this way out



MOSCOW. (Anatoly Gorev for RIA Novosti) - The State Duma, the Russian parliament's lower house, has doomed Russia's smallest banks by adopting amendments to the federal law on banking on February 11.

The changed law sets a lower limit of 180 million rubles (barely over $5 million) on a bank's capital (shareholder equity). Banks whose capital was below that amount as of January 1, 2007 are allowed to continue operation but are required to boost their capital to at least 90 million rubles by January 1, 2010, and 180 million by January 1, 2012.

The change in the law followed a period of heated debates, which was only natural. The Central Bank, Russia's monetary regulator, is perfectly aware of the decision's possible consequences, as Russian law never set any limits on a bank's capital. As many as 150 lenders may go out of business before the end of the year, and another 150 might not survive 2012.

Small banks do have good reason to be upset. Bank lobbyists aren't happy either.

The head of Russia's regional banks association, Anatoly Aksakov, didn't even try to hide his indignation.

"Many banks with small equities operate in economically depressed regions, which are of no interest to large banks. These small banks issue loans, particularly to local SMEs, thus preserving jobs and promoting the region's development," he said a few days before Parliament's decision.

"I believe consolidation is good for the economy, only it should develop through market mechanisms, not be imposed administratively. Large banks will never take over these small banks, because they are more interested in multi-branch networks. They won't go for a bank with capital below 1 billion rubles. These banks I am referring to will just die. Who is going to benefit from it?" he asked.

His last question is easy. The amendments were proposed by the Central Bank; therefore, the new rules will benefit the regulator.

How? Officials in the Central Bank said the national banking sector would become healthier and more transparent without the 300 small lenders. These small banks, according to the officials, mainly engage in shady transactions rather than in straightforward lending; they do not serve a broad range of customers, but limited groups. They have few depositors and borrowers.

The regulator estimates the amount of cash in accounts held at the 150 smallest banks marked for shutdown this year at no more than 7 billion rubles.

For comparison, the Deposit Insurance Agency state corporation has paid 10 billion rubles to depositors of bankrupt lenders since the beginning of the financial crisis. The agency has enough cash to compensate the customers of the doomed banks without much strain, the regulator said.

Incidentally, the Central Bank was not the only agency that initiated the amendments. Russian banks included in the country's top 30 and top 50 lists also ardently lobbied for the change.

However, many analysts express concern about changing the rules of the game amid the crisis. Russia's banking sector has survived the first blow but is still unstable. Barely past the first wave of "rehabilitation deals," the sector is likely to be hit by the second one this spring. A simultaneous collapse of 150 banks in ten months is unlikely to add stability to the sector, even though they are predominantly regional and absolutely not strategic.

The opinions expressed in this article are the author's and do not necessarily represent those of RIA Novosti.

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