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10 Apr, 2009 18:58

“Bad bank” concept floated to deal with non-performing assets

A key Central Bank figure has raised the idea of a Russian 'toxic asset agency' for bad loans, after the World Bank warned of a "silent tsunami" engulfing the country's financial institutions.

Ireland this week became the first EU state to set up an agency for bad loans. The theory is troubled banks get a clean slate, while the state auctions their debt to the highest bidder for recovery.

After fresh estimates that $70 billion of the $500 billion owed by Russian firms and individuals is non-performing, Central Bank Deputy, Gennady Melikyan, mooted a 'bad bank' for delinquent loans in this country. But colleague Aleksey Ulukayev, Senior Deputy Chairman has reservations.

“The very discussion of such an agency creates a massive stimulus for banks to loosen their risk management. This moral hazard will snowball the number of bad debts.”

The main international precedent for a so-called "bad bank" is Sweden in 1992. But Evgeny Nadorshin, Chief Economist at Trust Bank, says even its achievements are in dispute.

“The 'success' of Sweden in buying back bad loans was in the fact they managed to recover half the money they spent. I wouldn't call that a success. And it's always a problem, because it's normally society which pays for that.”

Finance Minister Aleksey Kudrin consulted with Swedish Central Banker Stefan Ingves in Moscow last month. Publicly, Kudrin says Russia's crisis is not yet serious enough to copy Stockholm's example.