Banking system under stress

After a central bank stress test of the Russian banking system revealed that half of the banks tested were undercapitalized Business RT discussed the findings with Natalia Orlova, Chief Economist at Alfa-Bank.

RT: What have the stress tests told us about the state of the Russian banks?Natalia Orlova: I would say the stress tests per se, it’s not really the way to identify if thebanking sector is in good or bad shape but this is really the way to identify the areas of risk.So I think what is really really important at the moment is to say that after the 2008 crisis we still have a very big number of banks which potentially can be in financial trouble in the case of new economic turbulence., and I would say the amount of 300 banks, which would be forced out of the market – half the of the banks which would require some support – this is definitely a very big proportion of the banking system.And I would say we have seen after the publication of the stress test the interbank rates went slightly up, so this is definitely generating some nervousness between the banks, in terms of the quality of their counterparty risk, and I think the stress test caused the central bank to be more proactive in controlling and monitoring the risks of the banking sector.RT: Why do some banks think the stress test was too tough for them?NO: Personally I believe that it is not, maybe, the appropriate way to look at the stress test, because the tougher the stress test the better the banking sector could be prepared for the new crisis.And again, a very tough stress test would mean that the central bank really has the opportunity to look into the banking system from a number of sides and really identify well the risks it is now taking.However we understand it right now a number of financial institutions, because the tough environment, because of the loan growth, would prefer to look at details for this risk and maybe delay this painful analysis, just to be focussed on their profitability at the moment.RT: How can the bank recapitalise?NO: Well the normal way to increase the equity capital, and to boost capital adequacy ratios, is just to capitalize the profit.However we understand that at the moment the equity and bond market is not performing as fantastically as before the crisis, and when the loan growth is much smaller than pre crisis levels, and for a number of banks – in particular private banks – it is definitely very hard to come back to profitability level which they generated before the crisis.So, as a different opportunity in the case of crisis, the institution can call for the state support, but this is an emergency case, so I would say normally everybody has to account on their high profit, and I think this is very important side for the shareholders at a number of, private shareholders cannot really expect any dividends from their bank or financial institutions, they really have to be prepared for some long period of investing into the banking business.RT: Can we say that there are still too many banks in Russia?NO: Well if you are judging by this quota of vulnerability of the banking institutions to the crisis, this is definitely one of the conclusions but another way is to use some theoretical economic calculation of the fair number of banks, and usually if you are measuring the number of banks by the size of GDP, the size of banking assets to GDP, normally your conclusion would be that in Russia we need around maybe 500, 300 to 500 banks.So definitely as we are now seeing with around 1000 banks this number looks to be excessive.RT: How do Russia and EU banks differ?NO: Well the key problem now is that the Russian banking sector still operate under Russian accounting standards, we have different capital adequacy standards of 10%, while we know that the global banking system of developed countries operates under international accounting standards and there they have capital adequacy and different requirements are much, much tougher.