Additional capitalization is Law on additional capitalization of banks

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

The Bank creates funds that can guarantee its financial stability and performance of obligations in case of problems. The amount of own funds must 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 activity in the market. After all, if shareholders invest their own funds, then there are more guarantees that they will be invested with due caution. But with a sharp deterioration in the quality of the loan portfolio, the capital adequacy ratio may reach limit values. In this case, the bank risks losing its license.

Exit

In order to prevent a critical situation, the Central Bank is taking measures to stabilize the financial condition of the organization. Additional capitalization is the provision by the Bank of Russia to credit institutions of a subordinated loan. It is part of the additional funding sources. This means that in the event of bankruptcy of the organization, obligations to the Central Bank will be fulfilled last. The law declaresthe level and procedure for the participation of the state 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 financial crisis of 2008.

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In December 2014, the President of Russia signed the Law on additional capitalization of banks for a total of 1 trillion rubles. The list of “lucky ones” was published by the DIA 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 capitalization of banks. Participants of the program must send their consent to the acquisition of obligations by the Agency before 2015-01-06, and the Central Bank - to provide requirements for a particular institution.

Conditions

The Bank should increase the volume of mortgage lending, 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 from the profits or investments of shareholders. At the same time, banks cannot increase the salaries of employees over the next 36 months. The latter factor to a greater extent deters management from making a decision to participate in the program. Additional capitalization is assistance that is provided on very strict conditions.

The essence of the process

For industrializationthe economy needs significant injections into the production capacity of the state. At the same time, the influence of Western investors should be limited. Banks must issue large targeted loans. This is partly the purpose of capitalization. The organization does not receive "live" money, but OFZ. However, she will have to raise the same amount on her own. You can get only a quarter of the already available amount of own funds, which, in turn, should not exceed 25 billion rubles. That is, additional capitalization is a measure to strengthen regional banks, which in the future can take a stable position in the market and develop independently. This is also confirmed by the terms of the program: organizations must increase their loan portfolio by 1% or more every month.

International experience

The 2009 crisis 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 financed the 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 last one is the state.

The volume of own funds of credit institutions is decreasing due to the requirement of the Central Bank to form reserves. Part of the funds appears only on paper: overvalued fixed assets, equipment, buildings and other valuables that cannot be used as sources of financing. To control the situation, the Central Banksets special standards and checks whether the activities of the organization correspond to the possibilities of capital.

Stress tests are arranged for this. 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. At that time, experts calculated how capital would react in the event of an outflow of deposits and an increase in debt. Based on the results of the tests, a decision was made on additional capitalization.

On 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 for which additional capitalization is directed. What does it mean? Banks will not be able to use the funds to buy foreign currency, as was the case in 2008. It's a good news. But it will be very difficult to increase the volume of lending to the required ones. We will have to reduce interest rates and take on part of the obligations. Not all organizations agree to this. Since additional capitalization is a voluntary matter, VTB24 and Rosbank have already refused to participate in the program, arguing that they already have enough profit.

A potential homebuyer is influenced by many factors: credit conditions, rising prices for apartments, confidence in a stable income. A slight rate cut could beoffset by other monthly fees. Therefore, it is unlikely that such a measure will increase the demand for this service. Mortgages at a low interest rate can only be issued by borrowers with an ideal credit history. This position of the bank is fully justified. And besides, not every borrower can be sure that his solvency will not worsen within 10-15 years.

Experts predict that if the outcome is positive, the additional capitalization will lead to a reduction in the rate, an increase in demand in the economy segment, in which the share of mortgage transactions is 80%. Persons who have an acute issue of buying an apartment will benefit from a slight reduction in interest. The rest of the buyers are likely to wait for a significant change in the cost of credit. The share of mortgage transactions in the premium segment rarely exceeds 20%. Therefore, a change in the rate is unlikely to have an impact on demand. Most buyers of luxury real estate pay in installments on individual terms.

Bank recapitalization: what a depositor needs to know

1. This measure is used to increase assets or cover losses. Shareholders can initiate the process. In this case, we are talking about raising funds for issuing new loans.

2. The presence of problems in the bank does not mean that he needs money. Perhaps the Central Bank revised the standards, and the credit institution did not have enough accumulated profit from previous years to achieve planned targets. Although the additional capitalization of Ukrainian banks in 2014 was aimed at coveringloss.

3. First, the institution addresses the shareholders. If they do not have the opportunity to finance the organization, the search for third-party investors begins. The law on additional capitalization of banks provides that all changes in the authorized capital must be registered with the Central Bank. After depositing funds into the accounts, they can be used like any other asset.

4. If it was not possible to attract borrowed capital to cover losses, then the bank must either curtail the volume of activities or be liquidated.

5. Capitalization is a recommendation, not a requirement. An increase in capital does not ensure the financial soundness of the organization. If the shareholders are dishonest, 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 institutions is additional capitalization. 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 a subordinated loan. But there are few who want it, since the conditions for granting a loan are very strict.