Less money will trickle through to business

The Central Bank of Russia tightens control over the capital adequacy of credit institutions. CBR has put an end to the popular practice of shedding bad assets off the banks’ books. Earlier it has been reported that CBR plans to restrict foreign borrowings by domestic banks. In practice it means less money in the economy.

According to the letter ’On the specifics of valuation of the banks’ risks in relation to the contributions to the closed-end mutual funds’ published yesterday banks must create reserves for the debts transferred to mutual funds, debt collection agencies, or affiliated structures as if the problematic assets were still on their balance sheet.

Capital adequacy requirements grew out of the work of the Basel Committee on Banking Supervision and aim to provide a cushion of capital which may protect depositor’s funds in the event of a bank incurring losses.

In order to avoid the trouble of creating reserves and to free cash banks sell bad debts writing them off their records. This practice, it seems, came to an end: they will have to keep 100% of the amount of the problematic assets as a reserve.

Stability of the banking system remains the priority of the Russian government. As Pekka Sutela, from the Bank of Finland said, ‘the Russian financial system is rather a drag than a booster for future growth.’



September 10, 2009