Risky business

More than a year after Russia"s financial meltdown, people are still trying to understand what went wrong. There is another question that is being asked: what now?

The Russian banking system is being slowly restructured. However, the period past since the beginning of disease allows to make judgments about the results of treatment and perspective of the insane institution. Already today it is clear the basic events are behind us, and it is not worth to expect new sensations.

What should we expect from Russian Banks? Did the last year changed anything in the consciousness of members of Bank community or would the change of the signboards be the sole result? Would the Bank system with which we will join the new millennium be principally different from the system we have had in 1997-1998, before crisis? Only time will give answers to these questions.

The banking system in Russia in the period of its flourishing is gigantic financial and industrial corporations grown on budget accounts, super profitable currency operations and high incomes state bonds being free from any risk, as was seemed at that time. Banks expanded branch networks and ambitious investment projects. It is enormous, frequently very numerous staffs and high wages for employees.

For the banking sector, the economic situation in the early 1990s was favorable, and the effect of being accustomed to it was very quick and strong. For banks initiated to get high profits the troubles appeared also by facing with not so serious problems as default on the state debt.

Early this decade banks were opened thanks to the same reason which, as a rule, initiated also plundering. Getting super high profits was at that time a matter of technology. The very quick plundering rate of ruble offered the brightest opportunities for this.

Generally speaking, the profit margins of bank operations was so high that it allowed to smooth serious errors in credit policy and insufficient control over bank risks.

Nevertheless, with time conditions for the play were turning up more complicated. The appearance of the market of state bonds with the profits equal to the currency market brought the rise in commercial banks accounts of more "civilized" and more complicated for management active - state securities instead of foreign currency without cash transfer.

With time a variety of opportunities for the investment of winning means becomes more and more wider but the average profit margin of an operation more and more lower.

As profit margins sank in 1997 and 1998, unattractive conjuncture of financial markets and well-known lapses in credit portfolios forced to look for a new approach for bank management. Bankers began unanimously to speak about the conservatism of current policy what, it seemed more likely, was in reality perceived as an explication based on partiality of causes for dropping of incomes and showed a slightly embarrassment among early aggressive businessmen.

Stories are going on that employees at one of the western rating agencies having heard analogue statements in one state bank (with a big portfolio of state securities) with irony noted that under current situation the bank should be called not simply conservative but very conservative.

Nevertheless, in reality some evolution within the bank system and in the views of its representatives took place. A group of leading banks was clearly set up. Its financial power gave an opportunity to install the most modern banking technologies.

The range of offered services widened up, the systems of risk management were modernized, the control over expenses was tightened. The country's leading banks began to take over the western experience trying to get services in the sphere of management advising and carrying out parallel accounts according to international standards of accountancy.

However, as in the past the feature of the successful Russian bank wasn't in line with the work of foreign Banks. First of all, it was the result of particular making up of resources basis. Under conditions when the economic situation and the mentality imposed tough limitations on the attractions of means from the people and when there were only several enterprises capable to make payments and who had massive remainders on the accounts the best resource for the means' attraction were the export dealing companies and the different level budget. In the fight for seizure these clients frequently were employed approaches not quite correct from the ethnical point of view. Serious economic interests sucked major banks into the big policy.

August 17 showed in a totally unexpected way that the fatal role in the fate of the bank can play not only problem-reach loans but also a massive portfolio of state securities which was treated as an example of financial stability. Enormous amounts of investments in this instrument in one hour went out of the turnover.

Banks enjoying the confidence of private investors and at the same time lost it together with their deposits as the result of panic actions of the faced with disastrous reforms population found themselves in a very deplorable situation.

The state of the banks once the crisis broke out took shape in many aspects through two above mentioned parameters plus the scale of the game on the urgent currency market. And because the effective activity towards all these orientations was traditionally associated with major banks precisely they mostly suffered from the crisis.

Disappearance from the first lines of bank ratings of such well-known names as Uneximbank, Menatep, Mosbiznesbank, Promstroybank, etc was seen by the majority of population as the most visible result of the August crisis. Nevertheless, the key outcome has become not the withdrawal from the scene of the first-dozen banks - the major part of them continues to more or less working. The events in 1998 called forth more considerable tendencies capable to shape for a long time the orientations for the Russian bank system development.

First, banks will probably be faced with more tougher control and appearance of new restrictions from the Central Bank. It is not easy to imagine a more noble pretence than the Bank crisis. A lot of things in this direction has been yet made. The Central Bank showed its intention to employ administrative measures for putting under control several spheres of Bank activity: from operations on the currency market until restructuring and bankruptcy of credit facilities.

Furthermore, an attempt is undertaking to install normative restrictions on Bank risks trough toughening of limits for the open currency position and correction of methods for accounting Banks capitals.

The whole issue clearly shows the Central Bank has its own understanding of what feature would be proper for the Russian banking system in the new millennium. With all of these particularities the need of many banks to seek financial support gives an added weight to these ideas.

In statements of the Central Bank chairmen more and more frequently we run an issue over picking out of basis regional Banks dedicated, it seems, to serve as an alternative for the preponderance of big Moscow banks. The idea, in general, is sane, in particular, if we take into account the experience of spreading problems faced by the main office to regional subsidiaries what will lead to the paralyses of the payment system in Russia.

Yet in the near future as the key mission we can also see a rehabilitation of the banking system from the point of view of private depositors. Obviously, with the time a harsh struggle would be launched for their deposits.

The most important consequence of the financial crisis became the redivision of one of the main reserves for financing the banking sector - means of the corporate clients. Contrary to private depositors having easily rejected the splendor of bank offices for the sake of security and accessibility of consumer goods the enterprises attended to insolvent banks didn't have the time for expectation.

Theoretically there were three possible variants for settlement of the current situation: switch over to another bank, take out a loan from a foreign credit organization, or take advantage of services in one gigantic and now operative bank. However, in reality there wasn't an opportunity for a free choice.

For Banks having ceased to pay back the major part of clients - relatively big enterprises - was the too great a burden. As a consequence, the serious redivision of the market servicing corporate clients with the redistribution of operations' volumes for the benefit of little banks did not take place. Only a few of smaller firms chose the last option.

Not much attractive for the majority of companies was also the second variant. The sharp actions of the Russian government put on the agenda of foreign banks more principle questions than the change of clients strategy. And because their traditional policy was carried out not under the guide of development of retail business but the necessity to follow all operations of major clients for the main offices it was no sense to expect the satisfaction of specific demands of the Russian clients.

For example, it was doubtful at that moment whether foreign banks were ready to discuss the question of giving credits to Russian companies being also clients under standard conditions of complex bank servicing. Only Russian banks were heroically running such credit risks.

The unique way toward the renewal of more or less normal activity of companies was the pass to the service in one of banks keeping operations despite the crisis. With the absence of reliable information about their financial state one of the rear factors influencing on make-up of enterprises priorities became the shareholder composition of any bank. By selecting a bank with the support of, let it say, Gazprom or the Central Bank it was possible to expect relatively calm existence. The migration of clients to such banks gained so massive character that they simply had no time to open accounts.

Nevertheless, despite of the scale of the operation the redivision of corporate clients came to an end leaving the whole picture of financial system without any changes. Most funds (almost 30 percent of corporate clients" money) remain on the accounts of big Moscow banks, such as Sberbank, Vneshtorgbank and Gazprombank.