A Second Life for Banking Assets. New Opportunities for Investment
Banking crises have long-term effect
Ten years ago there was a global financial crisis that led to a recession. And even now, we still feel these effects either in the form of worse growth rates in developed economies, or global debt in comparison to GDP. These indicators are now at a record level. <...> Banking crises, as well as other problems overtake the Eurozone from time to time. For example, in Italy there is a need for recapitalization and restructuring to help loans join the economy — Neil MacKinnon, Global Macro Strategist, VTB Capital .
The financial crisis in the late 1990s and early 2000s was serious, resulting in the failure of 180 financial organizations. Our deposit insurance corporation contributed somewhere around 48 trillion yen to the financial system and asset acquisition. Our mission was to effectively level out bad assets. We have developed a special programme. There were two ways: to put those bad assets on the market or sell the RCC (Resolution and Collection Corporation – Editor’s note), the corporation that is designed to solve such problems. <...>It took us 20 years to correct this situation — Takamasa Hisada, Deputy Governor, Deposit Insurance Corporation of Japan.
No way out of crisis, unless government contributes
It is necessary for the government to intervene during a banking crisis. <...>The ability of the government and the private sector to invest together and cooperate in order to save the banks is even more important. The possibility of using private money together with public funds could reduce the burden that taxpayers face in such situations. As for NPL (nonperforming loan – Editor’s note),the government could play an important role here. It makes the first transaction and builds the whole market. This is an important step because it creates benchmarks that others are already looking at — Paolo Petrignani, Chief Executive Officer, Quaestio Capital SGR S.p.A..
DIA demonstrates world level success
Since 2004, when the Agency started acting as bankruptcy manager, ‘the worm has eaten 675 kernels’. This number includes 629 credit organizations, 34 private pension funds and 12 insurance companies. We achieved generally good results, even by international standards. On average, the level of satisfying creditors' claims went up from 5 to 41%. The number of banks under management grew almost 10 times to 322 at a time. Their volume of assets increased 300 times - almost 4 trillion roubles. Now we sell more than 50 thousand items of assets. Their total value is about USD 65 billion — .
Key objective: to get bankrupt banks’ assets back to economy
The main objective of the DIA's work with assets is to form the largest possible bankruptcy estate, which will be the source for settlements with creditors. But it is equally important for this activity to contribute to returning bankruptcy assets to the economy. We need to get assets worth 4 trillion roubles back to the country’s economy. They can and should become the foundation for new businesses, attract investment to the economy particular regions, create new jobs and increase tax revenues — .
Russia’s new mechanism for recovery of systemically important financial institutions
The second life of banking and non-banking assets can happen without liquidation or revoking the license, which is actually better, because the asset value drops critically if they don’t work. <...> Over the past 2.5 years, the Bank of Russia has been actively engaged in discussions on the creation of a new mechanism for financial recovery. First of all, it is intended for the largest credit organizations of systemic importance both for the economy of the whole country and for individual regions. The essence of these procedures is the following: after finding serious problems in a large bank that can’t be stripped of its license due to financial stability reasons, we start operational control of the bank management as soon as possible, increase its capital, create all necessary risk and capital management procedures and it prepare for the market entry — Vasily Pozdyshev, Deputy Governor, Bank of Russia.
New recovery mechanism proved its efficiency
We had several large banks with serious problems: lack of capital and chronic liquidity problems. <...>By the end of last year they had a total volume of troubled financial assets of 7 trillion roubles. From this volume, we managed to build one large and healthy financial group by the beginning of 2018 on the basis of Otkrytie Bank, to which Binbank will be merged before the end of this year and which will own Rosgosstrakh and three joint pension funds with a common balance in 3.4 trillion roubles. This group now does not experience any problems either from the point of view of capital or from the point of view of liquidity — Vasily Pozdyshev, Deputy Governor, Bank of Russia.
Russia creates non-core asset fund
We are creating fund of non-core and bad assets, which will be managed by the Banking Sector Consolidation Fund (BSCF). We assume that this project has a significant potential for cooperation with two organizations – the DIA and the Russian Direct Investment Fund. It (BSCF – Editor’s note) will manage those assets that he gets on his balance sheet. The goal is to liquidate part of them, to finance others through healthy BSCF and other banks, other market banks, reshuffle those assets and offer them to the market at a higher and fairer price. Then the costs that we incur on additional capitalization and financing of the non-core and bad asset fund will be reduced. We expect to close the volume of assets that will flow into this fund by the end of 2019. The fund is believed to reach the total volume of about 2 trillion roubles. In 3–5 years, all assets of this fund will be liquidated, which means they will be sold to market investors at arm’s length — Vasily Pozdyshev, Deputy Governor, Bank of Russia.
Inefficient property sales system
What is the main drawback of the current property sales system? First, we can proceed only after shareholders meeting, and once the creditors committee is established and approves the procedure for property sales, including opening prices. And only after that we can start our attempts to sell this property. Then we face the following complication: according to the current legislation, we can only enter bull transactions, while the book price we start with is too high. On average we lose a year on this. Banks’ property and assets deteriorate after a bank falls out of life. This inevitably happens to any asset, especially to a loan portfolio that needs constant maintenance. The sooner we proceed with selling the property, the more money we’ll save for settlements with creditors — .
Provisional administration functions go from DIA to Bank of Russia
We propose to transfer functions of provisional administration appointed immediately after license withdrawal from the Bank of Russia to the Agency. Then we will be able to start liquidation measures immediately after the license is revoked, and not after adjudication order. This will help us avoid many risks associated with the double business handover: first from the bank’s executive bodies to provisional administration, then from provisional administration to the DIA. We will save time and we will save resources — .
DIA should be included as provisional administration. With such authority, the DIA will act faster, and everyone will benefit from this, primarily the creditors of the financial institution — Anatoly Aksakov, Chairman of the Committee of the State Duma of the Federal Assembly of the Russian Federation on Financial Markets; President, Association of Regional Banks of Russia (Association ‘Russia’).
Introduce Dutch auction for faster procedures
We propose to introduce Dutch auctions in Russia, which will allow us to speed up trade procedures. Under the Dutch system, we will be able to start the sale within a day. In general, this will make the liquidation procedure at least six months shorter. The overall effect is cost reduction for the bankruptcy estate. Preliminary calculations show if these proposals are implemented, the average liquidation procedure for banks can be reduced from 3 to 1.5 years, while cost reduction can reach 40%. Of course, we are talking about extending this liquidation mechanism to other financial organizations – private pension funds and insurance companies — .
Creating single-window system for sales
We would like to create a single information showcase for sales. On average, we do over 100 trades on different sites monthly. It turns out that some assets are sold on one site, some on a different one, some somewhere else. This approach once used to be market driven and transparent. However, due to a significantly larger number of assets, as well as more assets owned by different organizations we should move towards the single-window principle. This will increase the transparency and marketability of these sales — .
Changing procedure for creditors register
According to the law, the register of creditors and the whole work related to the creditors' committee can start only after the credit organization is declared bankrupt. This also takes time, which also means efficiency of asset work. We could possibly form the creditors’ register within 30 days after the provisional administration announcement. The committee for credits could commence its work, which will include increasing transparency and confidence in what is happening around this credit organization and the assets it will use to fulfil its obligations to creditors — Anatoly Aksakov, Chairman of the Committee of the State Duma of the Federal Assembly of the Russian Federation on Financial Markets; President, Association of Regional Banks of Russia (Association ‘Russia’).
The material was prepared by the Russian news agency TASS