Caused a storm in the media and social networks: “The state is going to confiscate deposits! Herods! Urgently run and save what’s left of your blood, changing into clean clothes!” In reality, everything is much more harmless, but it hides important changes in the banking system.

We are dealing with the formalization of new approaches to the rehabilitation of problem banks.

We are talking about the legislative registration in Russia of a new bail-in mechanism (forced conversion of unsecured claims of third-priority creditors into subordinated deposits or the authorized capital of a bank). Such measures were used quite actively in the United States, as well as during the reorganization of banks in Cyprus in 2013 (in the Bank of Cyprus, 47.5% of deposits over €100,000 were exchanged for shares). Our most famous cases of voluntary forced “dekulakization” of large depositors are the reorganization of the Tavrichesky and Fondservisbank banks (with the conversion of funds from Lenenergo and Roscosmos, respectively, into subordinated deposits for 20 and 10 years). According to Moiseev, super-large deposits of individuals - starting from 100 million rubles - in the event of a bank reorganization with the participation of the DIA, can be forcibly converted into the bank’s share capital. From the point of view of the Ministry of Finance, individuals with such large deposits are no different from legal entities and should be happy that the bank will be sanitized and they will not lose almost all their money in the bankruptcy process.

The bail-in mechanism resolves the issue of fairness and division of losses from the reorganization not only between shareholders, but also between super-large depositors, who are most often affiliated with the owners of the bank and should be aware of its financial problems. Now large deposits of individuals in the event of reorganization are subject to servicing and issuance upon request. This encourages the regulator to make a decision on bankruptcy, and in this case, holders of large sums receive (on average) pennies from the ruble if the deposits exceeded the insured 1.4 million rubles. In this case, bail-in - when something can be obtained in the form of subordinated bonds or deposits - is profitable and fair. The new rules do not apply to clients of operating banks, we are talking only about those undergoing rehabilitation.

However, as always in such cases, the devil is in the details.

The Ministry of Finance has just begun to study this instrument and, according to the deputy minister, “there is no precise understanding of what maximum deposit amount we are talking about, whether it will be 1 billion or 100 million rubles.” It is quite possible that deposits over 50 million or even 10 million rubles will be declared super-large - which will affect significantly more enterprises and citizens. There is also no clear answer to the question: will such coercion apply to deposits and accounts of uninsured legal entities? It is possible that partial conversion into subordinated bonds (not subject to insurance) will be extended to all deposits below this level, but above the insured amount. All these issues that are significant for wealthy investors will be resolved during the legislative process, which will take quite a lot of time.

And of course, the question arises about the meaning of public discussion of this idea against the backdrop of another wave of instability and the introduction of temporary administrations in banks.

Work on the bill has not even begun, and preliminary discussions in the expert community could have been carried out without statements to the media. Additional hassle among depositors provokes discussion of issues that reduce confidence in all banks. Maybe this mechanism is used for mass withdrawal of large deposits as the crisis grows? Is there a forced conversion of foreign currency deposits (the idea of ​​removing insurance from them is regularly voiced even by officials)? The authorities cannot force journalists or bloggers to be competent, but it is not so difficult for the Ministry of Finance and the Central Bank to calculate the consequences of their actions and statements. In this case, as with the recent bill on expanding citizens’ access to OFZs, during the commentary process the technical measure turned into a conspiracy against depositors. Most likely, in this case, silence would benefit both the really necessary bill and the banking system.

The Central Bank and the Ministry of Finance are discussing a new mechanism for Russia to save troubled banks - bail-in. What is this scheme and how will it work?

The English word bail is translated as “pledge” or “guarantee”. But the expression bail-in means a mechanism for rescuing problem banks with the involvement of its largest creditors. In other words, clients of a bank that is experiencing problems are offered to either convert part of their accounts and deposits into shares of the bank (in essence, become its co-owners), or convert part of their deposits into a subordinated loan, a special loan to replenish capital.

It is important to understand that nothing changes for owners of deposits up to 1.4 million rubles. In any case, they will receive their money in full - after all, these funds are insured by the DIA.

From 2008 to 2010, US and European authorities spent hundreds of billions of dollars to save 13 of the world's largest banks (including Citigroup and Commerzbank). In Russia, more than a trillion rubles have already been allocated for the rehabilitation of problem credit institutions.

The bail-in mechanism allows not only to improve the position of creditors, but to reduce the state’s costs of rescuing a problem bank. First of all, this applies to legal entities. If in the future the bank remains afloat, client shareholders will receive their savings back.

“Now, if we talk about the number of accounts in the system as a whole, 99% of all citizens’ accounts are insured. And if in terms of amount, then 66% of the population’s deposits in banks are insured. Bail-in was used in Russia even earlier than the precedent for which everyone is used to referring to the experience of Cyprus,” comments General Director of the Deposit Insurance Agency Yuri Isaev.

In fact, in Russia, in one form or another, this approach was used during the crisis in 1998, when the so-called settlement agreement mechanism was used to save a number of banks. When depositors, meeting at extended committees of creditors, decided that they were ready to undergo a certain restructuring of their deposits in front of these banks. Later, during the financial crisis in Cyprus, this mechanism was used to save the Bank of Ciprus. True, in this case, the procedure was different in that it did not imply any voluntary participation.

“The bail-in mechanism, which is currently being discussed, assumes that in certain cases regulators can offer it to large creditors (primarily legal entities), because there is always such a presumption all over the world that the write-off of any obligations to the bank’s capital should happen in accordance with the order. That is, the first ones should “get”, excuse the slang - the shareholders. If they have brought the situation to such an unsightly level, then they are the first to suffer! Then there are subordinated loans of various levels. After this, it is the turn of the legal individuals and, above all, large ones. This logic should still be stage-by-stage. Those who understand more take more risks and ultimately pay more. I think that we should approach the bail-in procedure in Russian realities very, very carefully , with the understanding that we must, first of all, explain to creditors that this is being done for their benefit, because if there is a feeling that the procedure proposed by regulators causes harm to someone, then it is better not to do it. If it is introduced, it will only be with the understanding that it will benefit creditors of all levels,” explains Yuri Isaev.

The DIA emphasizes: bail-in is not an alternative to reorganization with state participation. The bail-in procedure only complements the reorganization procedure. Then, when there is clearly no economic feasibility for saving the bank, but the bank is significant, there are a lot of funds from enterprises and individuals. In this case, if creditors accept the bail-in procedure, then part of their funds will be frozen, but not lost.

“In general, any procedures related to the transformation of creditors’ money into bank capital must always be weighed against the balance of liquidation procedures. If in liquidation we understand that on average creditors of the first priority now receive 77%, the second priority - about 25%, and the third priority - less than 20, this is, say, the lowest bar, below which no other procedure should fall. That is, if not a liquidation procedure, but a bail-in is introduced, then creditors should at least receive more than in the liquidation procedure," Yuri Isaev clarifies.

The idea of ​​rescuing troubled banks with the help of large creditors arose after one of the most high-profile bankruptcies: the collapse of Lehman Brothers. With assets of 639 billion dollars, his debts reached 613 billion! The clients demanded that 300 billion be returned to them at once; the temporary managers did not have even a quarter of this amount.

The financial disaster gave rise to the bail-in system. Many countries around the world have now followed this path. It allows you to significantly expand the use of bank resolution mechanisms, as it makes them more market-based and fair, and also allows you to reduce government costs for the financial rehabilitation of banks.

Here is how Deputy Chairman of the Bank of Russia Mikhail Sukhov comments on the new mechanism: “When bail-in is used, we can offer the obligation to convert your money in the bank into other instruments only when the value of the money remaining with the lender in the bank exceeds or is equal to that value , which he would receive upon liquidation of the bank. Moreover, with such financial recovery, the bank’s activities are at least not suspended for a long time, and creditors get access to their money almost immediately. As for the banks that we sanitized, these banks have 130 billion funds of creditors. In the amount of over 100 million rubles. Which, according to my estimates, would allow saving about a quarter of the funds provided in their economic value for the purpose of financial recovery, naturally. The state saves much more - because the total amount of funds that the creditors of a particular bank convert the whole society does not pay, but the whole society inevitably pays, because the Central Bank provides money at the expense, ultimately, of the emission source. At the same time, at this stage we do not propose to completely abandon state participation and leave the opportunity to carry out additional financing and financial recovery if there is not enough money from creditors. Or, if they are enough to support capital, for example, but from a liquidity point of view, the bank’s balance sheet needs to be revived with money for a year or two.”

Russia is thinking about introducing a mechanism to rescue banks at the expense of large depositors. After the 2008 crisis, it was adopted by the United States and the European Union, but in practice it was used only by banks in Cyprus, Greece and Portugal

Passers-by outside the Lehman Brothers Bank building in New York. Archive photo (Photo: Reuters/Pixstream)

After the collapse

The idea of ​​​​shifting the burden of rescuing banks close to bankruptcy from the state to their creditors arose in 2009, when experts began to study the catastrophic consequences of the bankruptcy of one of the largest American banks, Lehman Brothers, that had happened a year earlier.

It was then that they began to seriously analyze the bail-in mechanism, which is a procedure in which bondholders and depositors are forcibly involved in rescuing troubled banks. In other words, the claims of creditors are converted into subordinated loans (payments on such loans come after payments on all other debts) or authorized capital to eliminate the hole that has formed in it. Moreover, if a deposit placed with a bank exceeds the amount covered by the state deposit insurance system, then it is subject to a “haircut,” that is, the authorities forcibly exchange “excess deposits” for shares. Thus, creditors become shareholders of the bank and have the opportunity to return their money several years after the bank’s financial recovery.

As one of the first to describe this scheme, Deputy Chairman of the Board of Credit Swiss Wilson Erwin, said, the creation of a bail-in mechanism would have been impossible without the support of the leadership of central banks and the head of the Financial Stability Board (FSB) created by the G20 in 2009, Mark Carney.

Already in 2011, the FSB, together with the Basel Committee on Banking Supervision, prepared new “Standards for the restructuring and orderly liquidation of financial institutions in the event of their insolvency (bankruptcy).” Under these rules, national governments must ensure that taxpayers' funds are not used to rescue crisis-ridden banks and companies and protect the interests of small and medium-sized depositors. At the same time, financial responsibility must be assigned to shareholders and large creditors: debt obligations must be converted into capital. This mechanism is an internal repurchase - bail-in.

Late last year, the FSB developed rules for the world's 30 largest financial institutions. By 2019, they must create a “safety cushion” that would help them absorb losses (Total Loss-Absorbing Capacity, TLAC): these are instruments and liabilities that, in the event of a threat of bankruptcy, can be easily converted into capital. Its size should be 16% of risk-weighted assets; by 2022, the “safety cushion” should grow to 18%.

Two approaches

The United States insured itself against a repeat of the collapse of Lehman Brothers by adopting the Dodd-Frank Act in 2010, which spelled out new rules for the rehabilitation of credit institutions. According to them, the Federal Bank Deposit Insurance Corporation (FDIC) received the right, having accepted the bank under its management, to transfer its activities to a new organization or even liquidate it, while losses “to the extent necessary” are subject to distribution between shareholders and creditors. Plans for the “orderly liquidation” of financial institutions, eliminating the emergence of systemic risks for the global financial system, must be prescribed by the financial institutions themselves - these plans, called “wills,” are submitted to the FDIC for consideration. The bail-in rules were formulated by American financial regulators during 2013-2015.

In the European Union, the bail-in mechanism has been in effect since January 1, 2016. According to the Directive on Bank Restructuring and Bankruptcy, approved back in April 2014, the burden of rescuing a credit institution should be shifted to shareholders and creditors of financial institutions. The bail-in mechanism will primarily apply to banks and large investment firms that accept deposits from the public.

According to the procedure provided for in the document, first, obligations to shareholders (capital) are completely written off, then obligations to bondholders are converted into capital, and finally large deposits worth more than €100 thousand. Deposits of a smaller amount must remain untouched, since they are guaranteed by the state. The directive also establishes that the authorities can become involved in the restructuring of the bank only after its shareholders and creditors take part in its rescue. Taxpayer money can be allocated to save the bank only after 8% of the bank's liabilities have been repaid from creditors' funds. According to the European Commission's clarification on the directive, this “comprehensive instrument” for debt conversion involves “a minimal burden on taxpayers.”

At the same time, the directive established a “closed recovery” mechanism, which implies the division of a financial institution into two banks - “good” and “bad”. The first plays the role of a sanator, the second, a “problem” bank, is subject to liquidation. The obligations of creditors of a “problem” bank can be left in the liquidated bank or transferred to a new one while simultaneously reducing the amount of their claims or converting their funds into share capital.

Cypriot haircut and Greek banks

In March 2013, as part of the rehabilitation of the Cypriot financial system, Bank of Cyprus absorbed its closest competitor, Cyprus Popular Bank (Laiki), and was recapitalized by converting deposits into shares. The bank's 21,000 customers with deposits exceeding €100,000 now own 81.4% of the bank's shares after 47.5% of their uninsured savings were converted into share capital at €1 per share. According to The Wall Street Journal, about half of all deposits at the Bank of Cyprus belonged to non-EU residents. Among the depositors, according to the publication, there were many Russians, among whom the bank was popular due to its simple procedure for opening accounts and lax requirements for documents, including disclosure of beneficiaries.

At the end of October 2015, the European Central Bank (ECB) presented the results of stress tests of Greek banks. Checks showed that in an unfavorable scenario, the country's four largest financial institutions (Alpha Bank, Eurobank, National Bank of Greece and Piraeus Bank) would need a total of €14.4 billion. Following this, the country's parliament approved a bill on the recapitalization of Greek banks, which was supposed be completed by the end of the year.

Two months earlier, eurozone financial authorities signaled that holders of Greek bank bonds would likely have to accept some losses before a bailout program could be launched. In mid-October 2015, Bloomberg, citing sources, reported that systemically important Greek banks are negotiating with creditors to exchange their bonds for bonds, which are converted into shares if the price of the latter reaches a certain level (the so-called contingent convertible securities, or Cocos).

In mid-November, Alpha Bank and Eurobank Ergasias announced that they would be able to attract enough funds from investors to eliminate the hole in capital without government help, and the latter, in turn, reached an agreement with creditors on the additional capitalization of the two remaining system banks - National Bank of Greece and Piraeus Bank. Alpha Bank stated that it has enough funds to close the hole in its capital of €2.6 billion: €1.55 billion will be allocated to the bank by institutional investors, and it will receive €1.01 billion from the conversion of bonds into shares. Eurobank reported raising about €2 billion from investors through the sale of shares, as well as funds received from converting bonds into shares.

National Bank of Greece and Piraeus Bank, which required additional capitalization in the amount of €4.6 billion and €4.93 billion, respectively, in turn received applications from investors to purchase bank shares at a more than 90 percent discount to the price at which securities of financial institutions were traded. As a result, the National Bank of Greece raised €1.28 billion through the conversion of bonds into shares, the sale of shares to international investors, as well as other measures approved by the ECB, and also gained €300 million through the sale of shares to local investors, Reuters wrote. The bank received €308 million from the conversion of debt instruments into ordinary shares. The state decided to allocate the remaining funds necessary for the additional capitalization of National Bank of Greece (€2.71 billion) to the bank after approval received from the European Commission.

Bad and good banks of Portugal

The year before last, Portugal divided the once largest bank Banco Espirito Santo into two credit institutions: BES, which retained its previous name, received “bad” assets, Novo Banco received “good” assets. The reorganization cost the regulator €4.9 billion.

Last November, the Portuguese Central Bank conducted a stress test on Novo Banco and found that in the worst case scenario (in the event of a recession), the bank would lose $1.4 billion in capital and its adequacy ratio would drop to zero. After which the regulator selected five of the bank’s 52 senior bond issues and transferred them to the toxic BES.

As reported by Reuters, some investors criticized this decision, seeing it as discrimination: holders of senior bonds suffered losses, while the measure did not affect other creditors of the bank. They asked the ECB to intervene. The regulator distanced himself. “The decision of the Bank of Portugal to involve holders of senior notes in the bail-in in relation to Novo Banco was taken solely by itself in accordance with its national powers. The ECB did not require or approve bail-in in relation to holders<...>in this case,” the regulator said in a statement.

The Bank of Russia becomes the main investor of FC Otkritie, the regulator’s press service reports. A temporary administration has been appointed to the bank, which includes employees of the Central Bank and the Management Company “Fund for Consolidation of the Banking Sector”.

“As part of these measures, it is planned that the Bank of Russia will participate as the main investor using funds from the Banking Sector Consolidation Fund,” the statement says.

As noted in the Central Bank, the implementation of measures to increase the financial stability of the bank is carried out in cooperation with the current owners and managers of the bank, which will ensure the continuity of its activities in the banking services market and subsequently carry out all necessary measures in order to further develop the activities of the financial institution.

As always, the news is not about the closure of the bank.
- Rocketbank (@rocketbank) August 29, 2017

The Central Bank assured that FC Otkritie will continue to operate as usual, fulfilling its obligations and making new transactions.

“The Bank of Russia will provide financial support to the bank, guaranteeing the continuity of its activities,” the press service emphasized.

There is no moratorium on satisfying creditors' claims. The mechanism for converting creditors' funds into shares (bail-in) is not applied, the Bank of Russia said.

Bloomberg on August 19 that the Central Bank approved a credit line for FC Otkritie. This decision, according to the agency, was made to maintain the liquidity of the credit institution.

Bank "FC Otkritie"

PJSC Bank FC Otkritie is a large universal bank with a well-developed network of branches. Focused primarily on comprehensive services and lending to both corporate and private clients. In addition, he actively works in the field of investment services and operations in the precious metals market. Since August 29, 2017, the Bank of Russia has been the main investor of the credit institution. A temporary administration was appointed to the bank, which included employees of the Central Bank and the Management Company “Fund for Consolidation of the Banking Sector”. From December 21, 2017, the functions of the temporary administration for managing the bank assigned to the FCBS were terminated. On December 11, 2017, the Bank of Russia officially became the owner of over 99.9% of the shares of FC Otkritie Bank. On January 1, 2019, the official merger of FC Otkritie Bank and B&N Bank took place. The united credit organization will operate under the Otkritie brand and with the Otkritie FC license.

According to Banki.ru, as of April 1, 2019, the bank’s net assets were 2,134.09 billion rubles (8th place in Russia), capital (calculated in accordance with the requirements of the Central Bank of the Russian Federation) - 310.44 billion, loan portfolio - 891.33 billion, liabilities to the population - 828.91 billion.

The Bank of Russia has launched a rehabilitation procedure at Otkritie Bank, the Central Bank announced on Tuesday. Otkritie Bank ranks seventh in the Interfax-CEA ranking with assets of 2.45 trillion rubles and is among the top ten systemically important credit institutions.

“The Bank of Russia decided to implement measures aimed at increasing the financial stability of PJSC Bank Financial Corporation Otkritie (Moscow). As part of these measures, it is planned that the Bank of Russia will participate as the main investor using funds from the Banking Sector Consolidation Fund,” writes the Central Bank.

A temporary administration has been appointed to the bank, which includes representatives of the Central Bank and the Banking Sector Consolidation Fund. At the same time, the rehabilitation of the bank will take place with the participation of the current owners and managers of the bank.

The bank will continue to operate as usual, fulfilling its obligations and entering into new transactions. There is no moratorium on satisfying creditors' claims. The mechanism for converting creditors' funds into shares (bail-in) is not applied, the regulator notes.

Otkritie FC was formed as a result of the integration of more than 10 banks of various sizes. The bank's client base includes more than 30 thousand corporate clients, 165 thousand small business clients and about 3.2 million individuals. The main shareholder of the bank is Otkritie Holding (66.64% of shares).

Recently, the bank has faced an active outflow of customer funds. Clients began to withdraw money from the credit institution after ACRA assigned a low rating (BBB-) to Otkritie FC. This is the first time the rating agency has assigned such a low rating to a systemically important bank. In its commentary, ACRA pointed to the adequate capital adequacy of FC Otkritie Bank, but at the same time to its weak ability to generate it. After this, the bank lost the opportunity to work with money from state-owned companies and pension funds, and an outflow of client funds began. According to Moody's, the outflow of client funds in the bank in June - July amounted to 435 billion rubles. To cope with the problems, the bank, in particular, was forced to actively borrow funds on the repo market.

In August, information attacks also began on the bank. Thus, an employee of the management company Alfa Capital distributed a letter reporting problems at B&N Bank, FC Otkritie Bank, Moscow Credit Bank and Promsvyazbank. Later, the Criminal Code withdrew this letter, and the author of the letter was summoned to the Central Bank to give an explanation. At the same time, some bank clients received similar messages on their mobile phones signed by other experts.

Experts believe that information attacks on the bank are not the main reason for the reorganization.

“The main reason for this outcome is the low quality of assets.

The bank developed too quickly: suffice it to say that during the period from July 1, 2008 to July 1, 2017, the bank’s assets grew 11.6 times, while the growth of the banking sector was much more modest - only 3.5 times. This rapid growth has not been accompanied by a corresponding increase in sustainability."

— Maxim Osadchy, head of the analytical department of the BKF, comments on the situation. According to the expert, the hole in the bank’s balance sheet could amount to hundreds of billions of rubles.

It is noteworthy that the rehabilitation of Otkritie Bank will be the first project for the recently created Banking Sector Consolidation Fund. The law on the fund came into force in June. The adoption of the law was caused by the desire of the Central Bank to reduce the costs of financial rehabilitation of banks. As the regulator explained, the new mechanism will allow sanitization without the participation of the Deposit Insurance Agency. At the same time, the law provides that after reorganization the fund can sell the credit institution.

The process of financial rehabilitation of FC Otkritie Bank, according to the Central Bank, will take from six to eight months. Bank Russia expects to meet the deadline within one year.

As Alexander Dmitriev, managing director of FC Otkritie, emphasized in a conversation with a Gazeta.Ru correspondent, the shareholders themselves turned to the Central Bank for support. “The transfer to the management of the Central Bank was the result of a productive dialogue between the owners of Otkritie and the Bank of Russia. Relying on the support of the shareholder in the form of the Central Bank, Otkritie Bank has good opportunities for further development,” commented Dmitriev. At the same time, he emphasized that the changes will not affect the bank’s work in any way.

Help for Otkritie from the Central Bank was the most likely outcome, because the second possible option - revocation of the license - was fraught with a powerful domino effect and a full-fledged banking crisis, says Maxim Osadchiy.

“The choice of rehabilitation in this situation is logical and expected. Initially, it was clear that only two options were being considered - either the situation would improve, or a reorganization would have to be applied,” agrees NRA Managing Director Pavel Samiev.

The main thing is that the bank operates as before and none of the creditors and depositors will suffer, which will avoid a negative impact on the market as a whole, the expert notes. At the same time, he finds it difficult to estimate how expensive the current rehabilitation will be, since this is the first time the mechanism is used through the new financial recovery system.

Meanwhile, on the Moscow Exchange, shares of Otkritie Bank rose after the publication of the Central Bank’s message. As of 18:15 Moscow time, the price of FC Otkritie shares increased by 4.5%. The main growth, according to the MICEX chart, began at approximately 17:30 Moscow time - after the publication of information by the Central Bank on the reorganization of Otkritie Bank.