A Black Hole in Russian Banks

[Manny]

From the New York Times - Source Here

Nationalizing banks isn’t an option for the Russian government. It already owns the country’s largest financial institutions, and a string of smaller ones. But the global liquidity freeze has hit the country’s banks hard, and their problems have been amplified over the summer by capital flight from foreign investors who fear the Kremlin’s unpredictability. Russian exchanges have lost more than two-thirds of their value since their highs in May.

The Russian government has spent tens of billions of dollars of public money and foreign reserves to assist markets and help the country’s banks — to no avail. In the latest twist, Dmitri Medvedev, the country’s president, said the government would extend $36 billion in five-year loans to the leading Russian banks, hoping the money would trickle down to the rest of the banking sector and the economy.

When those funds come through, the total public financial support of the banking sector will come to $190 billion — that’s almost 10 percent of Russia’s gross domestic product. But the Medvedev announcement was met with the same response as previous moves: further share price declines. So the authorities did what they have done in response to past stock market tumbles — they closed the exchanges.

The financial storm is hitting Russia at a bad time. The Georgia war has scared investors, inflation is rocketing and oil prices are tumbling. Russia had wisely set aside its oil windfall profits in rainy-day funds and can now take advantage of its relatively conservative fiscal policies. But its foreign reserves have dwindled by $30 billion in the last month alone. At that rate, the remaining $550 billion will be gone by early 2010.

There’s no clear way for Russia to regain investors’ confidence. A comprehensive reform of its financial system to make it better capitalized and more transparent would be a good place to start. It might pass unnoticed in the current turmoil. But at least Russia could find a firmer footing when better times come around again.

[WestCoast]

$190 billion to the Russian banking system, almost 10% of the total Russian GDP.  Russia is having a far, far more trouble with their banking system than the Americans or Europeans and the Russian government owns the biggest banks!  I wonder how much Putin and gang have lost on their "investments" in Russia and how much they have moved to the west to keep it safe?  Which country do you think Putin and gang have stashed their "investment income" - Switzerland, Lichtenstein, Luxembourg or maybe the Cayman Islands so they can get some sun while visiting their money? 

The second part of that article on the £50 billion investment by the British government into the UK banking system seems to say that the UK is having serious problems with their banking system too.

[cufflinks]

$190 billion to the Russian banking system, almost 10% of the total Russian GDP.  Russia is having a far, far more trouble with their banking system than the Americans or Europeans and the Russian government owns the biggest banks!  I wonder how much Putin and gang have lost on their "investments" in Russia and how much they have moved to the west to keep it safe?  Which country do you think Putin and gang have stashed their "investment income" - Switzerland, Lichtenstein, Luxembourg or maybe the Cayman Islands so they can get some sun while visiting their money? 

The second part of that article on the £50 billion investment by the British government into the UK banking system seems to say that the UK is having serious problems with their banking system too.

Perhaps the best interview I have seen all week... and Jim Rogers moved from NYC to Singapore is buying Yen and Swiss Franks

http://www.cnbc.com/id/27097823

[Manny]

The second part of that article on the £50 billion investment by the British government into the UK banking system seems to say that the UK is having serious problems with their banking system too.

Yes there has been nationalisation and mergers of banks here too, all over Europe actually. Iceland nationalised it's three big banks last week and their subsidiaries across Europe. (I had a lump of personal doh in one of them, the return of which is currently uncertain.) The Icelandic Kroner is effectively finished as a currency now I have just read.

Smaller European territories with low populations that have relied on credit to expand in recent years are still possible targets of the global recession, I am thinking there will be some bank problems in the Baltic States soon.

[andrewfi]

I am thinking there will be some bank problems in the Baltic States soon.

I doubt it. Swedbank (Hansabank) and the other large retail banks were not heavily exposed to bad lending in the US. Locally, even though expansion in the economy was financed by credit the rate of default is still running below 1%, although Swedbank did note that they expect that figure to rise to around 1.9%.

In general the Baltics carry a low personal debt burden comapred to the countries where most of us live and thus there is a relatively large discretionary income buffer. A friend who has jsut returned from Finland had noticed that nightlife in the country had gone very quiet. Due to high taxation Finns have relatively little discretionary income and so a small change in prices of fixed price goods leads to a disporportionate fall in discretionary spending - this seems to be happening in the US now with very bad recent retail figures. I do not think we are seeing the same effects here.

[Manny]

The Icelandic banks were not heavily exposed to US toxic debts either. Two weeks ago Landsbanki declared it had 400 days of liquidity, but was the second victim after Glitnir of the Governments bank grab. I didn't investigate Glitnir, but I did some investigation recently on Landsbanki and Karpthung and both seemed sound enough.

[andrewfi]

Icelandic banks are very different to Baltic (Nordic) banks. If  not so then Estonian firms would be buying up the UK high st - this has not been happening. Icelandic banks were hugely dependent upon market funds for their activities, they died for lack of cashflow. This is not an issue over here.

Icelandic banks were making good quality loans on good quality projects and therefore on some levels were being prudently managed. Kinda like the property speculator who has a good eye for real estate and who buys well and at the right price. BUT, in order to succeed he needs access to cash. Take away the new cash coming onto the business and no matter how well he invested on a project basis his business will fail.

Here, lending is, in the main, on local projects and funded from local/regional deposits with a low default rate. Very different - much smaller growth but much less risky.

[Manny]

As the economy declines in Estonia, do you think the default rate will increase and put undue pressure on the banks, or is the population small enough that even a high default rate could easily be cushioned by the likes of Swedbank?

[Chris]

Ukraines banks are also suffering, with the Central Bank giving out loans of 1.5billion Hryvna ($300m) to two banks at the rate of 12% over 1 year, and another loan to the Prominvest Bank of 5 Billion Hryvna ($1Bn)  which went into receivership loast Wednesday. Both Prominvest and Nadra are privately-owned and unlisted on the stock exchange.

All in all, central bank refinancing jumped in the past few days from a daily trickle of 300-400 million hryvnias to 2 billion on Tuesday and almost 3 billion on Wednesday. Total refinancing in the first eight days of October stood at 6.45 billion hryvnias ($1.3 billion) compared to 5.96 billion for the entire month of September.

[AkMike]

Chris,
 Where did you find info on Ukraines banks? I have some savings sitting at Bank Aval. Maybe it wasn't a good move after all?

[rambo]

AkMike,

Bank AVAL should be fine since it is part Austrian-owned. Also, I have not seen its name mentioned amongst the list of banks that are having trouble right now.

[AkMike]

Thanks Rambo, It's partialloy owned by Reichsbank IIRC a german outfit. I felt that since it is the biggest it'd be the most stable. They don't pay the larger interest rates as some of the newer/smaller ones though.

[andrewfi]

As the economy declines in Estonia, do you think the default rate will increase and put undue pressure on the banks, or is the population small enough that even a high default rate could easily be cushioned by the likes of Swedbank?

Swedbank have said they they expect defaults to climb but see it as part of normal business - IMHO they are right. Default rate is currently pretty low.

They are the largest bank in the nordic/baltic region a region where debt levels are lower than the UK/US and where incomes have been rising rapidly.

ANY bank is vulnerable to run of withdrawals or to lack of availability of new money. It may be that Swedbank's Swedish parent may not be able to provide cheap liquidity to the Baltic subsidiary and that'll be an issue. On the whole I do not expect my credit card to stop working but on the other hand I am not about to start a pension plan right now.

[Chris]

Chris,
 Where did you find info on Ukraines banks? I have some savings sitting at Bank Aval. Maybe it wasn't a good move after all?

I have not heard anything bad about Aval,  it was one of the banks I visited when I was last there to check out interest rates they were paying etc. But I have ears on the ground if I hear anything I will let you know.

[Chris]

Russian Banks now asking for loans to be repaid early


In the midst of financial crisis, banks are willing to extremes: Rosevrobank asked the borrowers to request in advance to repay part of debt on mortgages, referring to the swift collapse of the real estate market and declining value of the collateral.

Most borrowers the banks money on early repayment does not indicate the experts. The bank will be forced to give Real Estate Bank, which trigger massive implementation of mortgages and declining home prices.

More translated here

[Chris]

Chris,
 Where did you find info on Ukraines banks? I have some savings sitting at Bank Aval. Maybe it wasn't a good move after all?

The National/Central Bank Ukraine has now issued a Decree and stopped all banks to allow early withdrawals of deposited funds. If funds have been deposited on long term arrangements, they have to sit it out and wait for the term to expire. You will not be allowed to withdraw early even if it means you are prepared to pay penalties to have it early.

The restrictions imposed are in order to neutralize the impact of external financial crisis. The restrictions do not affect the deposits in government bonds, certificates of deposit and Bank operations in the interbank market.

.

[Manny]

That would be a big red flag in my opinion, it means its coming. Thats how Iceland started.