Shuvalov described the risks of a hidden banking crisis in his dissertation
The current regulation of the banking sector makes possible the emergence of a "so-called latent crisis," Igor Shuvalov wrote in his doctoral dissertation. The head of VEB proposes to focus supervision on the prompt identification of problems Igor Shuvalov
A significant proportion of license revocations from Russian banks is caused by the loss of assets or liquidity of a credit institution, in this regard, it makes sense to review the sector supervision mechanism. VEB.RF Chairman Igor Shuvalov wrote about this in his dissertation for the degree of Doctor of Law, which was studied by RBC.
Shuvalov defended his dissertation on Monday, September 19. Its topic is "Legal regulation of entrepreneurial activity during the socio-economic crisis (theory and practice)". The dissertation was defended at the Institute of Legislation and Comparative Law under the Government of the Russian Federation, the director of the institute, academician of the Russian Academy of Sciences Taliya Khabrieva acted as the scientific supervisor of the head of VEB.RF. The scientific work is devoted to the regulation of several sectors - in addition to the banking system, it examines the regulation of business relations, the role of the institution of bankruptcy in a crisis, the regulation of public-private partnerships, investment activities, energy resources, mechanisms to support entrepreneurs, etc.
In a chapter on bank supervision during periods of crisis, Shuvalov looks at the crises of 2008, 2014, and 2020 and highlights the risks associated with the poor quality of assets held by banks. For example, problems with Globex Bank were obvious back in 2003-2005, but were not resolved - as a result, in 2008 the bank lost its solvency and was bought by Vnesheconombank for a symbolic amount, Shuvalov recalls. Subsequently, VEB repeatedly tried to sell Globex, but could not do it. In 2018, the state corporation merged the bank with another distressed asset, Svyaz-bank. In 2019, shortly after VEB was headed by Shuvalov (before that, he served as First Deputy Prime Minister; the merger began even before his arrival), Svyaz-Bank was transferred to the Federal Property Management Agency, and then Promsvyazbank became its owner, a credit institution sanitized in 2017,
“Starting from mid-2009 until the beginning of 2014, the Russian economy was gradually recovering, but the crisis of 2014 again revealed the poor quality of supervision, which resulted in the collapse of two reputable banks in 2017 - Binbank and the largest private Russian bank Otkritie. For several years, both banks have been implementing a development strategy based on the absorption of other banks, which each time required obtaining permission from the regulator, ”Shuvalov writes in his dissertation (both banks were sanitized by the Central Bank and then merged).
“The mass wave of revocation of licenses from commercial banks that began in 2013 only led to negative consequences in the form of undermining depositors’ confidence in them, as well as an increased burden on the Deposit Insurance Agency,” Shuvalov said. In the same year, he recalls, amendments were made to the federal law “On the Central Bank” aimed at introducing a risk-based approach, “however, as statistics show, 50% of cases of revocation of licenses from banks over the next few years are due to the loss of assets or liquidity of a credit institution.
“When any crisis unfolds, the number one question always arises - what to do with the financial sector as a whole. There is always a lot of criticism about this, and without going into the political aspects of this activity, I can say that the legislation of the Russian Federation on the Central Bank and banks is structured in such a way that it is separated from specific borrowers, ”said the head of VEB.RF during dissertation defense, RBC correspondent reports. He considers this "a defect in our legislation." In many countries, central banks are responsible, along with the executive branch, for economic growth, in Russia this is not the case, he concluded.
What Shuvalov offers
The subject of the activity of the Bank of Russia and the regulation of banking activities "so that, of course, this regulation will affect the way out of the economic crisis," is the subject of changes in federal legislation, Shuvalov said in defense.
“Probably, in the current situation, the entire mechanism of banking supervision should be reviewed. Indeed, until now, the current legislation has established quantitative (formal) limits on the activities of credit institutions (requirements for the amount of capital, mandatory ratios, reserves, etc.), which cannot cover the dynamics of banking activities and often do not allow the application of preventive measures aimed at preventing financial instability. specific credit institution and the banking system as a whole. The supervisor in the framework of a formal (quantitative) approach runs the risk of receiving information about problems in the bank's activities too late, that is, when it can no longer take effective corrective measures, since the bank's problems have become irreversible, ”he warns in the dissertation.
As a result, “a situation of the so-called latent crisis, referred to in foreign literature as bank distress, may arise, when the vast majority of credit institutions are already insolvent, have hidden internal problems, caused, among other things, by the implementation of risky policies, but at the same time continue to conduct their activities as usual ”, writes the head of VEB.RF: “In this case, before the onset of a crisis, the problems of such entities are practically not noticeable, and during the crisis they have a negative impact on the banking system as a whole.”
He considers it necessary to create a system of supervision aimed at "promptly identifying problematic aspects in the work of credit institutions." But a number of questions arise, Shuvalov emphasizes. For example, the practice of supervision determines the crisis state of a particular bank on the basis of the Federal Law "On Insolvency (Bankruptcy)", namely: when it allows a violation in terms of monetary obligations, economic standards for capital adequacy and current liquidity. In practice, separating “a troubled bank from a crisis bank or a stable bank from a bank with minor current problems or problems of a different severity” is quite difficult, Shuvalov notes. In the economic doctrine, a stable functioning bank is taken as the basis, which does not violate the law, makes all payments in a timely manner and in full, and any deviation from the norm will mean that the credit institution has problems, the dissertation states. According to the head of VEB.RF, "the main focus in the development of the banking system should be shifted towards monitoring the macroeconomic situation, identifying imbalances in the monetary sector and developing measures to prevent the so-called systemic risks."
The Chairman of the Bank of Russia, Elvira Nabiullina, has repeatedly announced the transition of the Central Bank to a risk-based approach in recent years. However, the extent of the impact of the current crisis on the Russian banking system is not entirely clear. The regulator banned credit institutions from publishing regular reports; on September 16, these restrictions were extended until January 1, 2023. In practice, data is not published either under RAS or IFRS. According to the results of the first half of 2022, the losses of the banking sector amounted to 1.5 trillion rubles, Dmitry Tulin, the first deputy chairman of the Central Bank, disclosed in an interview with RBC. This is a record loss since at least 2012 (for the entire time the relevant statistics were disclosed). However, banks have a capital reserve of 7 trillion rubles. January 1, Thulin emphasized. The reporting of banks is planned to be disclosed in two stages, he explained:
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