LONDON (Reuters Breakingviews) - The bailout of Otkritie, one of Russia’s biggest lenders, shows the perils of aggressive expansion and an incomplete system for winding up financial giants. It also rekindles anxiety over what it means for a bank to be too big to fail.
Russia has been purging its banking sector. This has been shrinking in recent years as economic sanctions and the low oil price forced weaker banks to close or be absorbed by stronger peers. Otkritie, whose large shareholders include state-backed bank VTB, had thrived by hoovering up straggling companies and making large trades on its own account, making it onto Moscow’s official list of systemic entities. That hasn’t saved it.
Otkritie may have bought too much, and of too low quality. The trigger for its failure was a warning from a state credit rating agency in July, which made it harder for the bank to borrow. It can’t have helped that the agency, ACRA, worried not just about its “low loan quality” but also the “negative influence” of its parent company. The group lost about a third of its deposits that month.
It’s still not clear how much this clean-up will cost the central bank and resolution fund. ACRA reckons that one in five loans is doubtful or non-standard. Its related-party loans made up more than a fifth of its total lending at the end of 2016.
The bailout also has some old-school wrinkles. Rather than place the bank in resolution and wipe out holders of loss-absorbing debt, as Western regulators now aim to do after the bailouts of the 2008 crisis, the central bank will put money directly into Otkritie, leaving shareholders with a stake. Subordinated creditors, who had feared a near-certain writeoff, have seen the value of their bonds nearly double in the secondary market. Senior debt and depositors will be saved.
Russia is divided into banks that get rescued and those that get crushed. Small and medium-sized lenders, like restructured Peresvet, fall into the latter category. The other side of the too-big-to-fail contract, which Russia seems to have missed, is that systemic banks have to make themselves super-safe. The fact Otkritie collapsed, having reported a Tier 1 capital ratio of over 12 percent as recently as December, is anything but reassuring.
Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.
Sign up for a free trial of our full service at https://www.breakingviews.com/trial and follow us on Twitter @Breakingviews and at www.breakingviews.com. All opinions expressed are those of the authors.