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9 Oct, 2008 03:17

Bank support law held up as smaller banks look for help

Russia's lower house of parliament, the Duma, has held up a bill providing banks with subordinated loans. Experts are sure the law will eventually be passed, but whether it will solve the systemic problems in the sector is another question.

The Russia government introduced a bill on Tuesday providing Sberbank, VTB, Rosselhozbank and VneshEconomBank with $36 Billion over 5 years in subordinated loans.

The government has stressed that it s a preventive measure and asked the Duma to act quickly. The Duma wants to consider the bill for another 2 days, but its likely to be passed next week. From these loans, the major banks should refinance private and regional banks, but it's not certain that this will happen, according to Anatoly Aksakov, Duma member, and Head of the Association of Regional Banks.

“The regional banks which are involved in the wider economy and support small business lack governmnent help and don't see the funds. History shows that government funds allocated in the large government banks are almost never transferred to other banks – small and regional ones.”

The first government aid to the banking system was granted 2 weeks ago. $44 Billion in deposits were transferred to large government banks.
Pavel Medvedev, from the Committee for Financial Markets, United Russia, says this did not solve the systemic problem, prompting the government to propose the latest bill.

“Now the central bank will be able to give mid-term loans to any banks that it considers trustworthy. Our Central bank is not only a creditor but also a supervisory institution so it can't be misled.”

The crisis has prompted the government to adopt other amendments to the banking system that have been discussed this year, including an increase in the level of guaranteed deposits.

$80 Billion has been pumped into the banking system from Russia's $560 Billion of gold and foreign currency reserves and the central bank's own funds.  Propping up the banking system is getting more vital by the day, with Russian firms in the wider economy already starting to fall victim to a lack of capital.