Chapter 2

Taking into account the situation with bank funding in Russia what are its sources in practice?

At different stages of historic development of commercial banks in Russia there were various sources for funding. At first it was income from FX transactions (due to the difference between purchaser’s and seller’s rates and commission fees).

The period from 1994 to 1998 was the “golden age” of bank investments in short-term government bonds - that was the main source of bank incomes (and, consequently, resources). Commercial banks were active purchasers of not only rouble bonds but also eurobonds and currency bonds issued by the Ministry of Finance. The reason for such a popularity was that due to market volumes and technologies these government bonds were highly liquid assets (besides, with high interest income). In addition, Russian commercial banks had become borrowers in foreign financial markets.[16] The dollar exchange rate was fixed (that was one of the measures of the stabilization policy of the Government) so it was profitable for banks to convert loans into roubles and invest these funds in short-term government bonds again.

External loans were also highly popular among commercial banks in 2000s too (it provided two advantages: low interest rates and possibility for big borrowers to attract money for 5-10 years). However, such a scheme increases currency risks, creates refinancing problems, and does not give impetus to the population to place money on deposits and that in turn reduces internal consumption and hampers the economic development.

In crisis situations the Central Bank has to perform a function of lender of last resort to solve the liquidity problem and refinance external borrowing. That happened in 2009 when share of the Central Bank in liabilities of the banking system grown from almost 0% in the beginning of 2008 to 8% in mid-2009.[17]

As it was already mentioned in the 1^st chapter, currently the Central bank also uses loans for commercial banks (especially for “state” banks). The scheme is the following: long-term assets of a bank are backed up by a chain of Central Bank’s refinancings for this bank during the term of a corresponding asset.[18] It looks like banks get used to such a “help”. Thus, the survey conducted in 2011 by the Association of Russian Banks showed that management boards of considerable amount of banks (33% in sum) believe that the main role of the Central Bank’s loans is not the smoothing of short-term liquidity fluctuations (as it should be) but is the long-term refinancing of lending or closing the gap between bank assets and liabilities. It means that in near decade bank management doesn’t foresee any changes in the current scheme of resource formation.[19]

Speaking of changes in the formation of resources of commercial banks many representatives of bank community (including the regulator) are convinced of their necessity. For example, implementation of deposit insurance in 2003 was conducted also for increase in population confidence in the banking system and, consequently, rise in terms of deposits. Besides, as it was already noticed, there were attempts (on initiative of the Ministry of Finance and Association of Russian banks) of legislative imposition of deposits as irrevocable[20] (banking lobby is pressing for that since the beginning of 2000s[21]). The bill was rejected but the Ministry of Finance still has a plan of partial implementation of irrevocable deposits[22] (with corresponding difference in interest rates which most probably will be significant). Such initiatives only infringe on depositors’ rights, however, it would be much better if resource problem solved not by legal restrictions but by development of new bank products (taking into consideration the foreign experience in this area).