Hundreds of Russian banks are at risk of collapse
Based on the results of Russia’s Central Bank stress tests, problems were identified in 117 banks. There exists a risk of a gap appearing in their capital if oil prices go down sharply. Moreover, the bankruptcy of several organizations can lead to a domino effect that will affect another 107 banks, RBC reported with reference to the report of the Russian banking regulator.
According to the Central Bank of Russia, these 117 banks account for about 30.6 percent of all banking assets. The Central Bank warns that in case of negative scenarios there is a serious risk of capital deficit. The total volume of a gap in the capital of 117 banks is estimated at 500 billion rubles or eight billion dollars.
The stress scenario that the Central Bank used to test the banks included a sharp drop in oil prices and the increase of the ruble exchange rate. The last stress test forecasted a 39 percent drop in the ruble’s value and a fall in oil prices to $25 per barrel, while the Russian economy fell by 3.9 percent of the gross domestic product over this period. The tests were conducted in 2017 but the results of the analysis have only recently been published.
"Even considering the income that can be received during a stress period, the activity of the banking sector will be unprofitable," the Central Bank of Russia acknowledged, noting that in the event of a shock scenario, 51 out of 117 banks would simply collapse and fail to meet the capital sufficiency standards. These banks account for 19.1 percent of all banking assets, the regulator said.
In addition to capital insufficiency, the Central Bank assessed that a potential domino effect, an avalanche of bankruptcies among banks caused by the bankruptcy of counterparties could lead to the collapse of 107 financial institutions, accounting for 9.8 percent of bank assets.
Stress tests are necessary to assess the potential risks in the market, to assess the potential costs of the Central Bank for the rehabilitation of key players in the banking sector, and to issue instructions to banks to eliminate flaws to avoid potential problems in the future.