Expert word

Risks Triggers under the Christmas Tree

During his recent hot line the Russian president Vladimir Putin assured the nation that there would be no banking crisis. Today, when the complex period of banks’ adaptation to the new conditions is coming to an end, the president’s confidence is also shared by many analysts. Much of the confidence is based on the good performance of the Russian economy, the regulator’s timely interference and the system of bank deposit insurance, which prevented panic among retail investors.

But even when risk revaluation is completed, the stable development of the Russian banks will still be threatened and the regulator will continue to worry. This is due not only to the transition to the inflationary targeting that was recently announced by A.Ulyukaev, the Central Bank’s first vice-president and which suggests the use of refinancing mechanisms on a continuing rather than on and off basis. The liquidity risks of the Russian banking system are still high, and the deteri

What should one be afraid of in the New Year? Risks triggers or any other events provoking a sharp growth of risks which can take place both inside Russia and abroad.

The US substandard mortgage crisis has clearly shown the reality of such unpleasant scenario as liquidity contraction of the financial markets. In 2007 the crises was caused by the mortgaged-backed securities which had been considered very reliable. As the financial market infrastructure becomes more complex the range of instruments whose risks are rather difficult to estimate, will only grow. The question about the cause of the next shock remains open.

The pessimists are viewing the crisis phenomena on the US mortgage market as the first sign of the US economy going into recession which is bound to result in changes of the raw market situation. The optimists recall the smoldering conflicts in the oil regions and the increased independence of some oil-producing countries - factors which will keep the oil prices high. There is much less controversy concerning the fallout of oil price reduction: credit risks are bound to increase in the corporate sector and then in the retail one. That will bring about drastic changes in the dynamics of the currency reserves which will have an impact on the liquidity level and the costs of borrowing in the banking sector.

The cyclic recession may even take place against the background of relative stable oil prices. Recession will turn into the realization of the credit risks which have been accumulating during the economic growth period. The main problem here is that very few will be ready to cope with this slowdown. The period of rapid growth created illusions that new borrowers who wish to consume "here and now ", will continue to cover banks’ bad losses with their growing revenues. But this mechanism shall not work during a recession.

Another danger comes from excessive regulation of the economy and the banking sector, in particular. The 2007 drive to enhance the transparency of retail credit rates almost turned into “a crusade" against the commissions in general, and this is not unlikely to repeat.

The bankers appear to be powerless before the threats looming ahead. They surely can’t prevent a cyclic recession or stop such external threats as instability on the global financial markets?!

But forewarned is forearmed. There is a significant potential for improvement both in risks management and bank laws. The weakness of liquidity is well-known; there is a clear understanding of how to reduce liquidity risks by extending and diversifying the liabilities. As more and more investors return to the Russian markets it will be easier to move in this direction.