Thursday, July 07, 2011

Bank of Moscow to Receive the Largest Bailout in Russia

FT: Bank of Moscow Rescued With $14bn State Bail-out
WSJ: Russia Gives Bank $14 Billion Bailout
NYT: Regulators Provide $14 Billion Bailout for Bank of Moscow

Bank of Moscow, the fifth largest bank in Russia, will receive the largest bank bailout ($14.5 billion) in Russia’s history. The bailout was necessary due to the problem loans extended to the bank's former management. VTB, another Russian bank that acquired a 46.5 percent stake in Bank of Moscow last February, recently found that the size of the problem loans amounted to 250 billion rubles ($9 billion), representing almost 30 percent of the bank’s assets. Sixty percent of the problem loans were “very bad” and were made without any collateral. According to Russia’s central bank, Bank of Moscow will receive 295 billion rubles from the Deposit Insurance Agency at 0.5 percent. Additionally, VTB will provide 100 billion rubles as well.

This bailout raises questions about the quality of regulation and supervision in Russian banking. Indeed, banks in Russia have not been considered transparent, and problem loans have been rising after the recent financial crisis as regulators have not actively responded to regulate such problems. Still, the huge size of bailout (almost 50 percent of the bank’s total assets) for a quasi-sovereign bank surprised investors. “If this kind of thing happens at such an important institution, it’s an amber light that the entire Russian banking system has to be finally cleaned up,” said Tim Ash, emerging markets economist at Royal Bank of Scotland.

Finance Minister Alexei Kudrin asked for criminal investigations, accusing the bank’s former chief executive Andrei Borodin, closely connected to an ousted mayor Yury Luzhkov, of practicing “fraudulent lending.” Investors question why VTB was not able to find the bank’s problem loans prior to its purchase of such a large share of the bank. VTB’s chief executive Andrei Kostin said that the bank’s management had not provided the bank’s actual loan book and former mayor Luzhkov “prevented anyone from asking unwelcome questions.”

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