Bypass the banks: how to find money for the Russian economy

Packaging of Bank assets in a transparent and suitable for investment pools could become a technology of rapid saturation of the securities market

One after the other come reports that Russia’s banking system is in good shape. This is evidenced by President Putin, the rating Agency Moody’s changed the Outlook of banking sector from “negative” to “stable”.

Constrained risk

And yet the banking sector is clearly not able to solve the problem of financing economic growth. It is difficult to do business when you have long been accustomed to easy money. Especially when you have also proved to be unscrewed hands. This has happened with Russian banks: they quickly moved from a situation of a credit boom associated with massive capital inflows, a prolonged stagnation, when the risks of a volatile Russia’s economy are implemented. Capital flows dried up, the price of oil fell and the Bank of Russia was forced to deal with stricter supervision on the background of growth of holes in Bank balance sheets. Came the “low tide” — and it turned out that the banks cannot perform the function of financing the economy of the country due to the large proportion of “bad debt,” high capital requirements and the lack of the ability to take on risk.According to the Bank, at the expense of the Bank loan financed only 8 per cent of fixed capital investment

Contrary to popular political cliché, monetary policy in General and interest rate in particular are secondary — the same problem can be seen in European banks (with the super soft monetary policy of the ECB). The Russian model of the financial sector is built with an eye on the continental pattern, the main feature of which is the dominance of credit institutions. In the EU 60% of the funding comes from the banks, but in recent years, in the absence of growth, the risks of lending such that banks are more willing to pay the Bank for the placement of the liabilities (to place at a negative rate of interest) than to start lending to the economy and to create the appropriate reserves.

In any country the banking financing procycling: the flow of available resources is exhausted in the crisis, as banks are forced to reduce the availability of loans to reduce the burden on capital, and the regulator is preoccupied with considerations of macroeconomic stabilization, often increases the demands on the financial condition of banks. For example, structural banking reforms in the US and the UK aimed at clearing banks ‘ balance sheets from risks not directly related to lending. Banks are “cut” have become non-core divisions either increasing their capital in response to the requirements of the regulation. Until clearance with the Bank financing is not seen neither in Russia nor in the EU.

Really all that’s left is to wait for the resumption of economic growth will once again allow banks to breathe a little freer and return to lending? Can the Russian financial sector to find other ways of development? We believe that the untapped reserves there are among non-Bank sources of financing. One key to solving the problem is impossible to find — but it is essential to provide two components: supply of quality financial assets on organized market and the formation of domestic demand.

To regain the trust

It is naive to expect that in Russia soon there will be a new class of issuers is so large and generous, to pay for the bloated costs of the financial industry. Given the small size of the majority of Russian enterprises, high costs of raising capital in the market and low information transparency, the only real way to establish a supply of financial assets is securitization. Packaging of Bank assets in a transparent, diversified and suitable investment pools could become a technology for rapid improvement. Of course, this is not an easy task for professional participants of the financial market, but another way to quickly saturate the market securities may not have. In addition, the securitization needs to start to work properly as a tool of clearing Bank balance sheets, and we will need changes in legislation.

It is obvious that industry will have to overcome the skepticism of the controller to this instrument, due to the obvious negative assessment of the role played by derivative securities in the beginning of the crisis of 2007-2009. However, we believe that the skepticism of the regulator and investors can be tackled through greater transparency, new tools — for example, the availability of detailed public information about the individual loans that make up a pool. Taking into account the modern level of development of information technologies, there is no doubt that there will be an effective platform solutions that allow you to quickly get a correct evaluation of the level of risk for such instruments, regardless of rating agencies, whose reputation was severely tarnished last crisis.

The second component should be the stimulation of demand from domestic investors. The accumulation of funds of institutional investors is limited due to prolonged reforms and the forced “haircut” of the pension system. The total amount of assets of natural persons in the stock market is only 0.5 trillion, a serious inflow “of new private investors” is not there. How to stimulate it? The financial industry would easing the regulatory burden, expansion of tax privileges and participation of the state in creating the insurance system in the securities market. In contrast, the Bank of Russia put forward the proposal formally to protect private investors from themselves. Means that getting rid of fear, a private investor will start to invest more, and the period of its operation on the market multiple will increase. The proposals of the Bank brokerage community is met with hostility, but for long-term development of the industry, it is important to find a balance between your interests and the interests of clients (perhaps via standards SRO) by removing the concerns of the regulator.

Now the market is again at a historic crossroads. Whether the Russian financial sector to make much needed step to diversify or remain completely dependent on the condition of banks? What specific measures to take to stimulate internal investors? How to ensure the transparency and efficiency of the “conveyor securitization”? Do I need the state to start structural reforms aimed at limiting private operations of banks in the financial markets? Here are just some of the questions that need to be addressed to the professional community and regulators.

The authors ‘ point of view, articles which are published in the section “Opinions” may not coincide with ideas of editorial.

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