EXCLUSIVE Regulators prepare for possible closure of VTB in Europe - sources

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An employee poses for a picture while demonstrating a payment card at a branch of VTB bank in Moscow, Russia May 30, 2019. REUTERS/Evgenia Novozhenina

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FRANKFURT, March 3 (Reuters) - Regulators are preparing for a possible closure of the European arm of Russia's second-largest bank, VTB Bank (VTBR.MM), amid growing concerns about the impact of Western sanctions on the bank following the Ukraine invasion, according to two sources familiar with the matter.

VTB Bank's European operations could be closed within days by regulators in Germany, where it chiefly operates on the continent, one person with direct knowledge of the situation said.

The second source said BaFin, the German regulator, was on "high alert", monitoring the situation closely and ready to act if needed although no final decision had been taken.

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VTB, which did not respond to a Reuters' request for comment, said on its European website on Thursday that it was in close consultation with BaFin. It said that the bank was stable and fully operational.

The Russian finance ministry in Moscow and officials at the embassy in Berlin did not respond to requests for comment about VTB's European division.

BaFin declined to comment.

The London Stock Exchange Group's clearing arm LCH said on Thursday it had placed VTB Capital, the trading division of VTB Bank, in default as a clearing member. read more

Last Friday, the exchange had suspended VTB Capital's membership, meaning it could no longer buy and sell stocks listed on the platform.

A spokesperson for the Bundesbank, which shares responsibility for bank supervision, declined to comment on a specific bank when asked about Russian banks in Germany but said it was in close contact with BaFin in this regard. "If necessary, we will take the appropriate measures," the spokesperson added.

Should regulators decide to close VTB in Europe, it would mark the second failure of a major Russian bank in the region as sanctions from the West squeeze the country's lenders. Most of the European operations of Sberbank, Russia's largest bank, closed earlier this week. read more

VTB, which has more than 4 billion euros of deposits in Europe, principally in Germany, would be covered by Berlin's deposit protection scheme, which shields savers with up to 100,000 euros.

BaFin has said that VTB will not take on new customers and that existing account holders were able to access their money.

Supervisors, however, have been monitoring an outflow of deposits since Russia invaded Ukraine, one source familiar with the situation said. The person added that sanctions made it difficult for the bank to recapitalise to meet demands.

VTB has become one of the principal targets of economic sanctions against Moscow in recent days in the aftermath of Russia's invasion of Ukraine. read more

On Wednesday, it was excluded from the SWIFT messaging system underpinning global transactions.

That followed U.S. sanctions last week that effectively kicked the bank out of the U.S. financial system, banned trade with Americans and froze its U.S. assets.

One European Union official, asking not to be named, said VTB was in a similar position to Sberbank because both were sanctioned and had been reputationally damaged in Europe.

VTB had roughly 8 billion euros of assets in Europe, according to its most recent quarterly statements. Its European customers include 600 companies, 150 financial institutions from Russia and 160,000 private customers, according to its website.

In recent years, ordinary Germans and local governments have also parked their money with VTB in part because it was one of a handful of banks that did not charge negative interest rates.

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Additional reporting by Frank Siebelt in Frankfurt and Jan Strupczewski in Brussels; Editing by Paritosh Bansal, Edward Tobin and Jane Merriman

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Thomson Reuters

Covers German finance with a focus on big banks, insurance companies, regulation and financial crime, previous experience at the Wall Street Journal and New York Times in Europe and Asia.