Basel III and the Russian banking system

The building of the Bank for International Settlements, BIS, in Basel, Switzerland
With the adoption of the Basel III accords to help minimize the risk of systemic failure in the global banking system, Business RT spoke with market insiders about the implications for the Russian banking system.

Richard Heinsworth, RusRating CEO

RT: What major changes, do you think, Basel III will bring into the Russian banking system?

RH: “I don’t actually believe there will be much change to the Russian banking system. The changes required by the Government include, to increase the total equity up to 7%, and then including something that they call a cushion- of about 10.5% – and the minimum required in Russia is 10%. So, we are already there.”

RT: Do you think, Basel III requirements will bring about a consolidation in the Russian banking system?

RH: “The forces for consolidation in the Russian banking system already exist. This is because the Central Bank required an increase in the absolute level of capital, already, at the beginning of this year and, I think, it’ll require another increase in the beginning of the next year. ”

“Basel III is aimed at global banks, particularly at those issuing sophisticated instruments and also the banks that have generated a great deal of leverage, that have borrowed a lot, having escaped the previous Basel requirements. And consequently, the levels of capital were much lower than appreciated before. So, Basel III is aimed at such global banks that required bail outs by their Governments, and not at such banks as in Russia.”

Rustam Botashev, banking analyst at Unicredit Securities

RT: What major changes, do you think, Basel III will bring into the Russian banking system?

RB: “The changes introduced to Basel III won’t affect the Russian banking system short term, as the requirements of the Central Bank of Russia are even tighter. Also, the volume of operations with derivatives at Russian banks isn’t that significant, while Basel III changes mostly deal with those.”

RT: Do you think, Basel III requirements will bring about a consolidation in the Russian banking system?

RB: “I think, Basel III won’t cause a consolidation in the Russian banking sector. Even the crisis hasn’t caused that. It’s more likely that some smaller players will just leave the market, not consolidate with others.”

Christian Tegllund Blaabjerg, equity markets analyst at Saxo Bank

RT: Do you think Russian banking sectors is ready to accept Basel III? In terms of sufficient liquidity to create extra reserves for a case of emergency?

CB: “I think, currently it isn’t ready, as well as other European countries. That’s why the period of implementation is 8 years. And during this time the banking system will get the necessary capital in order to increase both its volume and quality.”

RT: What major changes, do you think, Basel III will bring into the Russian banking system?

CB: “First of all, I think, that like in other European countries, small banks will no longer exist in the banking sector in about 10 years. There will be a consolidation, as small banks simply don’t have either enough capital nor specialists who can make sure that these Basel III requirements are met.

Second, the larger banks will mainly exist at the base. They simply have capital, expertise and they have the influence on the legislation and policy making. I think, this will be mostly a sort of a bargain for smaller banks.

And third, there will be a major change within banks themselves – the whole scheme of financing their capital needs will change. They will issue more corporate bonds to finance their funding needs instead of going to a bank. This means that the model when you go to a bank when you need funds is going to be replaced by another one, where about 30% or even 50% of a bank’s capital will be financed right in the market, through issuing corporate bonds. There could be a pool of smaller companies, who are not able to issue bonds themselves. And, I think, this bond market will explode in volume. And during 8 years given the banking system will be able to get ready for this new banking model.”