The Russian banking system is taking a big hit by a combination of a shock rate hike and the collapsing ruble.
Shares in Russia’s largest banking group, Sberbank, fell on Tuesday amid rumours that the bank had stopped lending to customers.
Rumours abound that the lender had stopped issuing new loans to customers across the country as the ruble collapse continued, falling almost 13% against the dollar at the time of writing. Russian banks were also caught out by the central bank’s decision to raise interest rates by 650 basis points overnight from 10.5% to 17%.
Sberbank issued a statement saying “despite the increased volatility in financial markets and increasing the emergency key rate of the Central Bank, Sberbank continues lending to customers – both individuals and companies”. Despite the bank’s denials its share plummeted 15% as fears grow about the health of Russia’s banking system.
Elsewhere, Russian news service Interfax reports that Svyaznoy Bank has stopped issuing credit cards as it looks at increasing the interest rates on banking services to “ensure profitability”.
The news suggests that Russia’s banking system is struggling to adapt to the abrupt changes in financial conditions in the country. This will be of particular concern to the Russian authorities, and the central bank in particular, as it comes in a month where Russia’s private sector is due to repay some $US35 billion in foreign-currency loans.
A good chunk of that is owed by Russia’s banking sector. This is a problem as, unlike the country’s commodity exporters that can sell their products in dollars and euros, most of the banks’ business is conducted in local currency. That means that ruble falls increase the cost of repayments as they have to convert ruble revenues back into foreign currencies.
What does this mean?
Well the Russian central bank is moving to be as accommodate as it can be. Along with its interest rate hike it announced that it had increased the maximum volume of foreign currency it provides to Russian banks through its foreign-exchange repurchase agreement auctions for 28 days from $US1.5 billion to $US5 billion.
It has also lowered the interest rate it charges on the currency it gives to banks from 1.5% above the London Interbank Offered Rate (Libor) — the benchmark interest rate at which banks lend to one another — to 0.5% above Libor. A lower interest rate should make it less expensive for banks to borrow from the central bank and therefore more appealing.
However, there are rumours that the Russian banking system is running low on the collateral — high quality loans and other financial securities — that they have to pledge to the central bank to access that money. As a nod to this, Elvira Nabiullina, head of the Russian central bank, announced last week that “the Bank of Russia plans to consider the introduction of foreign currency lending on the security of non-marketable assets”.
The question now is whether the central bank has done enough to prevent a loss of confidence in the currency that could quickly become a danger to the banking system. After two days of double digit falls in the ruble, the signs don’t look promising.