Invisible Eye
Large number of Russian banks finances personal projects of their owners and/or credit institutions connected with their personal interests. For example, in the Yugra Bank, most of its portfolio is used for the personal loans, and the Central Bank had suspicions about the fact that the bank was circumventing using the H25 normative schemes, which limits lending to the owners' business. As a result, in September, the financial breach in the bank’s capital equaled to almost 90 billion rubles. Later the First Deputy Chairman of the Central Bank Dmitry Tulin admitted that it could expand to 135 billion rubles.
The bank FC Otkritie had a similar fate. Two months after the readjustment, the negative equity at FC Otkritie rose to minus 178 billion rubles from positive 158 billion rubles. Back in July, rating agency ACRA stated that 20% of the credits of FC Otkritie Bank are qualified as dubious and non-standard. As a result, over one hundred managers of FC Otkritie will be banned from the banking activity.
So why, despite constant and increasing monitoring by the regulator, do financial institutions continue to use illegal schemes right in front of the Central Bank?
Twist around little finger
The problem lies not the Central Bank’s negligence, but in the absence of such tool that would allow fast identification of violations. Fraudulent banks usually use several common and well-known schemes. One of them is to take money from the bank in exchange for certain obligations of some companies. For the regulator in this situation everything looks fine from the first sight: there are both the contract and security.
However, it turns out that there is neither security nor the deposit, and companies, which obligations are used, usually are affiliated with the bank's owners. Such companies are called "technicians", because they perform a technical function to cover different of the fraud. The Central Bank does not have the opportunities to check all such structures for their loan security.
Another scheme includes signing for the currency forwards, when the contract specifies the expected dollar exchange rate within the 6 months. All the payments should be made at this rate. The problem is that neither in six months, nor in a year, nor even later, the dollar's exchange rate will reach the agreed point – the conditions of the contract are set in an unlikely way. Thus, six months later, no legally owes anything to a bank.
This scheme is often used in tandem with another. Sometimes the Central Bank requires from a bank an increase in the authorized capital. To do this, the bank takes a subordinated loan - a loan for a period of five years, the payment for which the creditor cannot claim before the expiration of this period. So how do fraudulent banks get such a loan? They withdraw money through foreign exchange forwards or other schemes into affiliated companies, and then theyalso take a subordinated loan. Formally, the requirements of the Central Bank are met, but in fact, the same amount of funds received is also gone.
Mortgages are another popular tool to implement the fraud. The bank issues securities for refinancing the mortgage loans. Since mortgage is considered a very reliable asset for banks – there is generally a low overdue, mortgage loans are very attractive. The trouble is that people whose mortgage provides necessary paperwork, can participate in the same scheme several times, and it is impossible to detect it from the outside. As a result, such loans also prove to be unsecured.
Other popular security schemes include those so-called "mirror" bills. One bank from a financial group under a real bill receives a loan, after which the credit organizations of the same or an affiliated group draw up loans for exact copies of this bill that are not secured by anything
In general, there are a lot of schemes, to uncover which, one needs to look into the depth and explore, but the Central Bank does not have the tools to do it. For a financial organization, in order to attract attention of the supervisory authority, it will have to seriously damage the reputation, more than once. Moreover, even if the Big Four does the conclusions and statements, they can be often the means of cover up as well. Auditors can ask imprecise questions and sometimes they have to believe the words of the bankers and sign financial statements.
In the manual mode
Currently the Central Bank consistently tightens its control and works with the lawmakers. Therefore, the bankruptcy establishes subsidiary liability for people who in fact are in control of the bank, not just legally. This tremendously changes the alignment of forces. Fictitious directors - drivers and cleaners - can testify in court that they made decisions following anyone’s instructions. The first real owner of the bank, attracted under the new law, was Sergei Pugachev.
However, this is not enough. Yes, the new legislation makes it difficult to withdraw money from the banks, but the Central Bank is still unable to quickly identify illegal schemes. The private initiative of the attacker will always be one step ahead. The strength of the Central Bank lies in systemic work, but there are questions to this exact system.
In addition, starting the summer of 2017 the Central Bank sanctions banks not through lending, but directly, entering the capital of the sanctioned bank. The regulator considered that the old approach was ineffective, because both FC Otkritie and Binbank, that ‘healed’ other banks, were themselves under attack. Since the summer, the Fund for the Consolidation of the Banking Sector (FCBS) has started its work on the matter, and the management company has been installed over it to perform technical functions (accounting for the funds’ movements).
Of course, the Central Bank is not a state, it is a regulator that will sanction the banks. The quality of management will inevitably decline, as the government structure will never be able to manage anything as effectively as the market does.
This will affect the banking system as a whole, and after that the economy of the country. Most likely, the financial recovery of individual banks will continue, but the state participation in the banking system will only increase. All this will lead to a decrease in competition, and therefore, to a deterioration in the quality of services.
That frustrated service, that we can observe in some of the largest state-owned banks, can become commonplace. Now the state-owned banks are somehow pressed by private competitors, but what will happen next?
