The Bank creates funds that can guarantee its financial stability and fulfillment of obligations in case of problems. The amount of equity should exceed the normative value of the capital adequacy ratio. The latter is a kind of customer insurance. It shows that the bank is interested in normal activities in the market. After all, if shareholders invest their own funds, then there are more guarantees that they will be invested with due care. But with a sharp deterioration in the quality of the loan portfolio, the indicator of capital adequacy can reach limit values. In this case, the bank risks losing its license.
Exit
In order to prevent a critical situation, the Central Bank takes measures to stabilize the financial condition of the organization. Additional capitalization is the provision by the Bank of Russia of credit institutions of a subordinated loan. It is part of additional sources of financing. This means that in the event of bankruptcy of an organization, its obligations to the Central Bank will be fulfilled last. The law declares the level and procedure for state participation in this process. Such loans may not be issued directly, but through the Agency for Insurance Deposits (DIA) in the form of federal loan bonds (OFZ). A similar scheme was used during the 2008 financial crisis .
Last news
In December 2014, the President of Russia signed the Law on the capitalization of banks in the total amount of 1 trillion rubles. The list of "lucky" DIA published in February 2015. Loans will be provided not only through OFZs, but also through ordinary subordinated loans. This will help the DIA to resolve the issue of bank capitalization. Program participants must submit their consent to the acquisition of obligations by the Agency by June 1, 2015, and the Central Bank - provide requirements for a particular institution.
Conditions
The bank must increase the volume of mortgage lending and loans to small and medium-sized businesses by more than 1% within 36 months. The option of directing cash flows to the most important sectors of the economy is also allowed. Another requirement is to increase the authorized capital by 50% of the amount of funds received due to profits or investments of shareholders. At the same time, over the next 36 months, banks cannot increase employee salaries. The latter factor to a greater extent and inhibits management from deciding to participate in the program. Recapitalization is assistance that is provided under very harsh conditions.
The essence of the process
For the industrialization of the economy, significant injections into the production capacities of the state are necessary. Moreover, the influence of Western investors should be limited. Banks must issue large targeted loans. This is partly aimed at recapitalization. The organization does not receive “live” money, but OFZ. In this case, she will have to attract a similar amount on her own. You can get only a quarter of the existing amount of equity, which, in turn, should not exceed 25 billion rubles. That is, recapitalization is a measure to strengthen regional banks, which in the future can take a stable position in the market and develop independently. The same is confirmed by the terms of the program: organizations must monthly increase their loan portfolio by 1% or more.
international experience
The crisis of 2009 showed the effectiveness of this method. Then the US government allocated trillions of dollars to restore the financial condition of credit institutions without any sanctions. After 4 years, the European Bank funded Greek institutions in the amount of 50 billion euros. After stabilization of the situation, the investor receives the net profit of the organization. That is why it is so important that the state act as the latter.
The amount of own funds of credit institutions is reduced due to the requirement of the Central Bank to form reserves. Part of the funds appears only on paper: revalued fixed assets, equipment, buildings and other values that cannot be used as sources of financing. In order to control the situation, the Central Bank establishes special standards and checks whether the organization’s activities correspond to the possibilities of capital.
For this, stress tests are arranged. Risk analysts calculate how complex economic processes can affect an institution. In theory, such a check should occur quarterly. In Ukraine, it was last carried out at the request of the IMF in 2014. Then experts calculated how capital would react in the event of an outflow of deposits and an increase in debt. Based on the test results, a decision was made on recapitalization.
About the prospects for the development of the mortgage market
The Ministry of Finance expects that banks will be able to increase real estate lending by 15%. This is another goal that capitalization is aimed at. What does it mean? Banks will not be able to use the funds to buy foreign currency, as happened in 2008. It's a good news. But to increase the volume of lending to the required will be very difficult. We will have to reduce interest rates and take on part of the obligations. Not all organizations agree to this. Since recapitalization is a voluntary business, VTB24 and Rosbank have already refused to participate in the program, arguing that they already have enough profit.
A potential home buyer is affected by many factors: loan conditions, rising apartment prices, confidence in a stable income. A slight decrease in the rate can be offset by other monthly commissions. Therefore, such a measure is unlikely to increase the demand for this service. A low interest mortgage can only be issued by borrowers with an ideal credit history. This position of the bank is justified. And besides, not every borrower can be sure that within 10-15 years his solvency will not worsen.
Experts predict that with a positive outcome, additional capitalization will lead to a reduction in interest rates and an increase in demand in the economy segment, in which the share of mortgage transactions is 80%. Persons who have an acute question of buying an apartment will benefit from a small reduction in interest. The rest of the buyers are likely to expect a significant change in the cost of the loan. The share of mortgage transactions in the premium segment rarely exceeds 20%. Therefore, a change in rates is unlikely to affect demand. Most of the buyers of luxury real estate are paid in installments on individual terms.
Recapitalization of the bank: what the depositor needs to know
1. This measure is used to increase assets or cover losses. The process can be initiated by shareholders. In this case, we are talking about raising funds to issue new loans.
2. The presence of problems in the bank does not mean that it needs money. Perhaps the Central Bank has revised the standards, and the credit institution did not have enough accumulated profit from previous years to achieve the targets. Although the recapitalization of Ukrainian banks in 2014 was aimed at covering losses.
3. First, the institution addresses the shareholders. If they don’t have the opportunity to finance the organization, the search for outside investors begins. The law on recapitalization of banks provides that all changes in the authorized capital should be registered with the Central Bank. After depositing funds into accounts, they can be used, like any other asset.
4. If it was not possible to attract borrowed capital to cover losses, the bank must either scale back its activity or liquidate.
5. Recapitalization is a recommendation, not a requirement. The increase in capital does not ensure the financial reliability of the organization. If the shareholders are dishonorable, then the funds can be used to replenish the loan portfolio. In this case, it is likely that after some time the organization will again need financial assistance.
Conclusion
One of the ways that can be used to stabilize the financial condition of credit organizations is recapitalization. What it is? Providing financial assistance to the bank from shareholders, the Central Bank or other international institutions. At the end of 2014, the President of Russia signed a law under which 27 regional institutions can receive subordinated credit. But there are few who wish, since the conditions for providing a loan are very strict.