Studying the question of what is capitalization, it is worth saying that this is a procedure that is very popular as the dominant means of dealing with financial and economic crises. Between 2008 and 2009, many states provided first-tier capital to financial institutions. Today, this policy is practiced in Russia. Back in 2008, financial assistance to private and state-owned banks and a number of commercial companies helped the country solve many problems.
How are funds injected?
The introduction of funds into troubled banks was carried out by the state purchasing preferred shares and other financial instruments that corresponded to the rank of the first level. Recapitalization of credit institutions by the state through the purchase of ordinary shares of financial institutions is carried out much less frequently. Considering the statistics, we can say that of the fifty of the largest banks in America during times of crisis, only 23 received state assistance. In Europe, assistance was provided only to 15 institutions, which corresponds to 76% and 40% of the pre-crisis capitalization of the banking segment. According to information provided by the IMF, the average recapitalization program at the state expense in the spring of 2009 amounted to 3% of GDP.
Recapitalization in Russia
Considering what recapitalization is, you need to look at the situation in Russia. Russian President Putin signed a law on the recapitalization of financial institutions in the amount of 1 trillion rubles by issuing OFZs (federal loan bonds). According to the assumptions of the authors of the law, the property contribution should be paid to the Deposit Insurance Agency. It, in turn, will redirect funds to banks to fulfill their obligations in terms of paying off debts to depositors, loans and bond issues. Funds will be allocated to preferred shares. The government will transfer to the OFZ insurance agency the amount indicated above, which will enable it to support domestic banks at the time of the crisis.
What opportunities does the solution offer?
The bill, in accordance with which the capitalization of credit organizations in Russia will be implemented, has been prepared for a very long time. This is due to the fact that as a result of the deteriorating economic situation in the country due to sanctions from the West, the financial sector was hit. Many experts even predict a default in this direction. The money allocated for the rehabilitation of the financial segment will be tightly controlled. This was officially announced by the chairman of the Audit Chamber Golikova at a scheduled meeting. The forecasts of the Minister of Finance Siluanov indicate that the bill, after full implementation, should increase the total amount of the country's banking capital by at least 13%. The total amount of lending in the near future should increase by at least 15-20%. It was announced that all DIA revenues from OFZs will be redirected to the federal budget.
When does a bank need support?
Each bank has its own capital, which consists of personal funds of a financial institution. Within the framework of financial structures, there are assets that attract investors and ensure that an enterprise belongs to a certain category. The bank collects capital by attracting funds from investors - both individuals and commercial entities. He takes a loan. At the same time, a financial institution gives loans at higher interest rates. The difference between the payment of interest on loans and interest on the loan and ensures the liquidity of the enterprise. In a crisis, with a sharp outflow of capital from Russia, many borrowers of the bank not only failed to repay the debt, but were also unable to pay off the interest on it. Consequently, a budget deficit has formed and the bank is no longer able to fulfill its obligations to investors. Recapitalization of banks helps to change the situation. What is it, easy to understand. In essence, and in a simplified format, this is the state’s compensation for bad loans in order to keep the liquidity of a financial institution at a high level.
Why is the government conducting capitalization?
Considering from the point of view of the government the question of what additional capitalization is, the procedure can be called an attempt by the state to avoid panic. If financial institutions do not fulfill their obligations en masse due to low capital adequacy, this will cause excitement. People will massively withdraw funds from funds and withdraw deposits, which can not only lead to the devastation of the budget, but also become an incentive to strong jumps in rates. The issuance of a subordinated loan, which will be confined to fixed assets and will guarantee the stability of the entire banking system, can be called the word “recapitalization”. And today, more than one bank has been exposed to this procedure. So, the capitalization of Delta Bank, Rosselkhozbank, and VTB was recapitalized. And these are just a few of the list of financial structures supported by the state. In accordance with the law, subordinated loan obligations are fulfilled last.
What will subordinated loans actually give?
Deputy Chairman of the Central Bank of the Russian Federation Mikhail Sukhov says that the capitalization of Rosselkhozbank, in fact, like other financial institutions, should have a downward effect on the interest rate in the real economic sector. In the future, stabilization will be achieved between the economic sector and the financial market of the country, which is now on the verge of default. Funds that will be transferred from DIA to banks should not be taxed. The Russian government practiced this scheme to support the financial system of the state in 2008, which brought very impressive results. The solution will avoid the bankruptcy of many credit organizations, save a lot of depositors from losses.
What credit organizations can count on government support?
Having dealt with the question of what additional capitalization in a bank is, it is worth paying attention to the fact that not all financial institutions receive state support. The list of banks is selected and approved by the DIA. According to RBC, 27 institutions with capital of at least 25 billion rubles can count on subordinated loans. Of the 1 trillion rubles officially allocated to support the financial sector, actual assistance will amount to only 830 billion. The main criterion for the choice of enterprises will be their willingness to significantly expand lending to the real economic sector in priority areas for the government. As has been repeatedly stated, recapitalization of banks (what it is, discussed above) is not focused on solving difficulties in troubled financial institutions. Material support has a direct purpose.
Conditions to be followed by the bank
The list of lucky ones includes financial institutions whose activities comply with established standards. This is the presence of capital in the amount of 25 billion rubles, which was described above. Moreover, the applicant bank was to actively develop lending to the real sector of the economy over the past two years. Extension of the direction should be at least 12%. In accordance with the selection criteria, a financial institution must be tough on the remuneration of its employees: limited salary growth, minimal remuneration to members of the board and the board of directors. A tough policy should also be applied in the aspect of accruing dividends to investors. According to preliminary estimates, assistance will be awarded to the following financial institutions:
- VTB will receive 307 billion rubles.
- The reserve point of VTB is 193 billion rubles.
- Retail subsidiary VTB24 - 65.8 billion rubles.
- Bank of Moscow - 49 billion rubles.
Government Anti-Crisis Plan
Studying the question of what is capitalization, it is worth noting that this term applies not only to credit organizations. Material assistance from the state can be intended for commercial companies, for any other organizations whose activities will help restore the country's economy. In the framework of the program aimed at combating the crisis, it is planned to spend about 2.3 trillion rubles. The planned recapitalization of the company, for which, incidentally, the financial institution still has to compete, was already activated at the beginning of the first quarter of this year. The banks that will receive support have undertaken a number of commitments. They should increase the volume of mortgage lending in the amount of at least 1% per month, increase the number of loans for small and medium-sized businesses. Moreover, financial institutions must increase their capital by an amount equal to half the material assistance received. Raising wages to all employees of a financial institution is prohibited for the next three years.
In which sectors are subordinated loans planned ?
As already known, financial assistance will be provided to at least 30 Russian banks, including VTB. Recapitalization will cover the following areas:
- Agriculture - in the amount of 10 billion rubles.
- The auto industry is 5 billion. Funds exclusively for the continuation of the waste management program.
- Credit subsidies to enterprises - 5 billion.
- Regions will receive a billion for the purchase of gas-powered vehicles.
In a statistical state, it is planned to leave expenditures on the country's defense and the social sector. It is planned to give 82.2 billion rubles to the fight against unemployment. Initially, it was planned to invest at least 100 billion in the restoration of the state’s economy, but then it was decided to limit it to only 23 billion rubles for active sectors.
Gazprom to help
In addition to issuing subordinated loans to financial institutions, the president has repeatedly raised the issue that the capitalization of Gazprom is no less important. The President of Russia was reckless to formally promise material support from the state. In fact, the bill was rejected, as it was considered that a large corporation was able to independently find money for a project to build a pipe to transport domestic gas to China. To implement the project, it is necessary to spend about 55 billion in total, 25 of which China itself has already promised to give, Russia’s partner in the BRICS and SCO associations. The Ministry of Finance of Russia not only doubts the rationalism of the project, it is confident in its unprofitability, and the additional capitalization of VEB looks like a much more successful project. In addition, phrases were heard at a meeting of government members that government spending was constantly growing, and now was not the time to spend part of the state budget on supporting dubious projects.