Oda Russian Commercial Law 2007-1
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As a representative of the IMF seconded to the Central Bank pointed out in his report, the fundamental problem which stands in front of the banking sector and the Central Bank is the task of reinforcing the con dence of the Russian society in banks, since at present, in order to cause a panic or massive withdrawal of deposits, a simple rumour is suf cient, and it does not matter whether it is true or false.36
In 2004, the government introduced a deposit insurance scheme. Under this scheme, only deposits of individuals are covered and to the limit of 100,000 roubles, excluding deposits with exceptionally high interest rates. The potential coverage of this scheme is around 40% of all deposits. Participating banks are required to pay each quarter a premium of up to 0.15% of the average value of their insured deposits in the preceding quarter. If the fund is not able to meet its obligations, it may apply to the government for budgetary support.37
At present, deposits in the Sber Bank made before 2004 are fully guaranteed by the state. In addition to promoting the con dence of the general public in the banking sector, the new scheme is expected to create a level playing eld for the state and private banks.
The Central Bank reviews the soundness of the banks which applied to join the scheme. 1,140 banks applied for the scheme, but as of January 1, 2006, only 930 banks were allowed to participate.
3SOURCES OF BANKING LAW
Banks are regulated by Federal law and subordinate acts. On the regulatory side, two Federal laws are relevant. One is the Law on the Central Bank (Bank of Russia) and the other is the Law on Banks and BankingActivities. The latter provides that banking activities in Russia are regulated by the Federal Constitution, Federal laws and normative acts of the Central Bank (Art.2). However, this list is incomplete in that decrees of the President and decisions of the government which regulate banking activities in reality, were “omitted by mistake” in the legislative process.38 Both laws were enacted in 1990 at the incept of the banking reform, but the former was replaced by a new Law enacted in 2002.39
36A.de Vil’pua, Kommentarii po tekushchim problemam rossiiskogo bankovskogo sektora, www.cbr.ru. p.6.
37IMF Country Report No.5/379, Russian Federation:Selected Issues, October 2005, p.99.
38V.A.Belov, Bankovskoe pravo Rossii; teoriia, zakonodatel’stvo, praktika, Moscow 2000, p.21.
39Law No.86-FZ of July 10, 2002.
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The Law on Banks and Banking Activities provides, inter alia, for the procedure of registration and licensing of banks, mandatory reserves, bank accounting, bank con dentiality, arrest of accounts etc. Mandatory requirements to the banks are covered not by this Law, but by the Law on the Central Bank.
There are also the Law on Insolvency of Credit Organisations and the Law on the Restructuring of Credit Organisations which were enacted in the aftermath of the 1998 banking crisis.40
In 2001, the Law against Laundering of Income Received by Criminal Acts and Financing of Terrorism was enacted.41
On the banking transaction side, the Civil Code is the major source of law. The Code covers contracts of bank guarantee, loan and credits, factoring, bank deposit, payment etc.
The Central Bank has a power to enact subordinate legislative acts which are binding on the agencies of state power of the Russian Federation, constituent entities of the Russian Federation, municipalities, as well as juridical persons and individuals. Subordinate acts include normative acts of the Central Bank, decrees of the President, and decisions of the government. Normative acts of the Central Bank take the form of rules (ukazaniia), statutes (polozheniia), instructions (instruktsiia), as well as letters and telegrams. In fact, it is these normative acts which provide for matters relevant to the operation of banks. Thus, the procedure for credit organisations to prepare annual accounts is regulated by the ukazanie of the Central Bank No.1530 of October 17, 2004. The preparation and submission of reports to the Central Bank by credit organisations are covered by ukazanie No.1375 of January 16, 2004. Organisation of internal control system of credit organisations and banking groups is regulated by a polozhenie No.242 of December 16, 2003. Preparation and submission of consolidated accounts are covered by polozhenie No.191 of July 30, 2002. A particularly important document is the instruktsiia of the Central Bank No.110 of January 16, 2004 on “Mandatory Normatives of Banks”, which incorporated prudential requirements in line with the BIS rules.
The Constitution also provides that “the universally accepted principles and norms of international law and international treaties of the Russian Federation” are an integral part of the legal system of the Russian Federation (Art.15, para.4). What speci cally constitutes “universally accepted principles and norms of international law” in the area of banking law is not clear in court practice, and academic views vary. The Geneva Convention of Uni ed Rules on Cheques, Uni ed Rules on Transferable and Simple Bills of Exchange, the UNIDROIT
40Supra, footnotes 32 and 33.
41Law FZ 115 of August 7, 2001.
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Convention on International Factoring, and the UNIDROIT Convention on Financial Lease, inter alia, are understood to incorporate these principles and rules.42 The prudentiality requirements of the BIS, which the Central Bank is a member, certainly is one example of those rules.
In addition, commercial custom serves as a source of law insofar as it is not against mandatory statutes or binding contracts (Civil Code,Art.5, para.2). Commercial custom is referred to in the Civil Code in the part covering banking transactions (e.g.Art.836 and 848) as well. International commercial custom applied in banking practice includes ICC Uniform Rules on Incasso Transactions, Rules for Demand Guarantees, Contract Guarantees, as well as the Uniform Customs and Practice on Documentary Credits.
4THE CENTRAL BANK (BANK OF RUSSIA)
The Constitution provides that the defence and ensurance of the stability of the rouble are the basic function of the Central Bank. The Bank is to carry out this duty independently of agencies of state power (Art.75, para.2).
The goals of the Bank as provided by the Law on the Central Bank are (Art.3):
i)protection and ensurance of the stability of the rouble;
ii)development and strengthening of the banking system;
iii)ensurance of the effective and incessant functioning of the payment system.
The Central Bank is a juridical person. It reports to the State Duma, which appoints and dismisses the Chairman of the Bank upon recommendation of the President (Art.5). Members of the Board of directors of the Bank are appointed by the Duma upon recommendation of the Chairman of the Bank with the consent of the President. The National Committee of the Bank, a powerful body within the Bank which has the power to review the annual report of the Bank and to approve the expenditure of the Bank, has 12 members, of which three are representatives of the President, and another three are representatives of the government. In addition, there are three representatives of the Duma and two of the Federal Council.43 Despite the fact that the Board of Directors is the highest body of the Bank, the new Law on the Central Bank has signi cantly strengthened the
42Tosunian, supra, p.132.
43A.S.Tosunian andA.Iu.Vikulin, Postateinyi kommentarii k federal’nomu zakonu o tsentral’nom banke RF, Moscow 2003, pp.38-39.
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power of this collective body of the Central Bank. This seems to cast doubt on the independence of the Central Bank.
The Central Bank performs the following functions:
i)preparation and implementation of the monetary-credit policy of the state in conjunction with the government;
ii)emission of the currency and organisation of its circulation;
iii)acting as a creditor of the last resort for credit organisations by organising the system of re nancing;
iv)establishment of rules for payment in Russia;
v)establishment of rules for banking operations, bookkeeping and auditing for the banking system;
vi)registration of credit organisations and granting licenses;
vii)supervision of credit organisations;
viii)registration of emission of securities by credit organisations;
ix)regulation of foreign currencies and sale and purchase of foreign currencies;
x)determination of the procedure for payments with foreign states;
xi)control of foreign currency transactions;
xii)organisation of the balance of payment for the Russian Federation.
In its regulatory and supervisory capacity, the Central Bank
i)sets the numerical norms in order to ensure the prudentiality of credit organisations;
ii)forms the fund of minimum mandatory reserve for credit organisations;
iii)nances credit organisations;
vi)ensures the liquidity of the banking system by buying and selling government securities (open market operation);
v)establishes the rules for the banking operations, accounting and reporting, organisation of internal control etc. and;
vi)supervises the observance of banking laws and the normative acts of the Central Bank and inspects the activities of credit organisations.
In order to carry out the regulatory and supervisory functions, the Bank is empowered to inspect credit organisations and their branches, give them binding instructions for the removal of violations, and to impose sanctions. Inspections are carried out by representatives (of cials) of the Bank, or by accounting rms retained by the Bank (Art.73). In cases of violation of the law, normative acts or orders of the Central Bank, or where there has been a failure to provide information or false information has been provided to the Bank, the Bank is empowered to impose a ne of up to 0.1% of the minimum capital or suspend a speci c operation of the credit organisation for up to 10 Months. If the credit organisation fails to rectify the violation within a xed period, the Bank may impose a
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ne of up to 1% of the paid-in capital, but not more than 1% of the minimum capital (Art.75).
The Central Bank is, in the end, empowered to withdraw the license of credit organisations on grounds provided by the Law on Banks and Banking Activities (Art.18). Withdrawal of licence is not limited to cases where banks were in breach of the law. Failure to meet the capital requirement or insolvency is a ground for withdrawal.
5CREDIT ORGANISATIONS (BANKS AND NON-BANKS)
The Law on Banks and Banking Activities was originally enacted in 1990, but underwent various amendments since then. Initially, the key concept was “banks”, but by the 1996 amendment, the concept of “credit organisations” was introduced. Credit organisations are de ned as juridical persons which, for pro t, based upon the licence granted by the Central Bank, are entitled to conduct banking operations listed in the Law (Art.1). Credit organisations are divided into banks and non-banks.
Banks are de ned as credit organisations which have an exclusive right to carry out all of the following banking operations; soliciting deposits from individuals as well as juridical persons, lend the deposited money in the name and at the cost of the bank and, open and manage accounts of individuals and juridical persons. In contrast, non-bank credit organisations are those which have the right to carry out speci c banking transactions (Art.1).
The Law lists the following banking operations (Art.5):
i)taking of deposits from individuals and juridical persons;
ii)lending of the money deposited in the bank’s own name and account on the condition of return, pro t basis, and limited term;
iii)opening and managing of accounts of individuals and juridical persons;
iv)arranging payments upon instruction by customers;
v)service of customers by incasso transactions, bills of exchange transactions, payment and settlement by documents;
vi)purchase and sale of foreign currencies in cash and non-cash form;
vii)solicitation for deposit and investment of precious metals;
viii)issuing of bank guarantees;
ix)transfer of money upon instruction of individuals without opening an account.
There is a list of auxiliary businesses including trust business, storage, leasing and consulting service. On the other hand, credit organisations are prohibited from being engaged in production, trading and insurance business (Art.5).
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It should be noted that in Russia, there is no segregation of the banking and securities businesses. Credit organisations are allowed to carry out professional activities in the securities market. Based upon the general banking licence, banks may issue, purchase, sell, register, and possess in deposit securities. They can also hold securities on trust on behalf of individuals and juridical persons (Art.6).
Table 11 Registration of Credit Organisations as of January 1, 2006
Registered Credit Organisations in Total |
1,409 |
Banks |
1,356 |
Non-Bank Credit Organisations |
53 |
Credit Organisations entitled to Carry Out Banking Activities |
1,253 |
Banks |
1,205 |
Non-Bank Credit Organisations |
48 |
Credit Organisations with a License to Solicit Deposits of Individuals |
1,045 |
Credit Organisations with a General Banking License |
301 |
Credit Organisations with a License for Foreign Currency Operation |
827 |
Credit Organisations with Foreign Participation |
136 |
100% Foreign Capital |
41 |
Over 50% Foreign Capital |
11 |
Credit Organisations with the Licence Withdrawn, but not yet Liquidated |
154 |
Credit Organisations for which a Resolution to Liquidate was adopted |
146 |
Credit Organisations whose Liquidation has been Registered |
1,687 |
|
|
Registered Capital (million roubles) |
444,377 |
|
|
(Biulleten’bankovskoi statistiki, 2006, No.4, pp.86-88)
Credit organisations can be founded as “commercial organisations on any form of ownership”. This means that credit organisations can be either joint stock companies or, limited liability companies. Credit organisations must have the word “bank” or “non-bank credit organisation” as well as the organisational form of the company attached to their name.
The minimum capital of newly founded credit organisations is set by the Central Bank (Art.11, para.2).
Credit organisations are subject to registration with the Central Bank. Credit organisations receive the right to perform banking transactions on the basis of a licence granted by the Central Bank.
Registration and the issuing of licences can be refused on the following grounds (Law on Banks and Banking Activities, Art.16):
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i)incompatibility of the candidates for senior management positions of the bank with the requirements of the Federal law and the normative acts of the Central Bank;
ii)unsatisfactory nancial state of the founders or their non-performance of tax payment and other mandatory payments to the state;
iii)non-compliance of the submitted documents with the requirements of the law or the normative acts of the Central Bank.
Grounds for the withdrawal of licence include:
i)information on which the licence was based turned out to be untrue;
ii)delay in starting banking operation for more than a year from the issuing of licence;
iii)essential inaccuracy of reported data;
iv)delay in the submission of a monthly report for more than 15 days;
v)carrying out of banking operations which are not included in the licence;
vi)non-compliance with federal laws regulating banking activities and normative acts of the Central Bank, repeated within a year (includes breaches of anti-money laundering law);
vii)repeated failure to enforce court judgments to seize money in the account within a year;
viii)existence of a temporary administrator (on the basis of the Law on Insolvency).
Licence must be withdrawn on the following grounds:
i)the capital adequacy rate fell below 2%;
ii)the capital of the credit organisation fell below the minimum capital set by the Central Bank at the time of registration.
iii)the credit organisation failed to increase the capital in accordance with the requirements within the period set by the Central Bank;
iv)the credit organisation is unable to satisfy the claim of the creditors or the state for 14 days (the total claim must be 1,000 times or more of the minimum capital).
6CURRENT STATE OF THE RUSSIAN BANKING SYSTEM
In early 2001, it was reported that the Russian banking system has not really recovered from the 1998 crisis. By January 2001, aggregate capital was restored only to 60% of the pre-crisis level.44 The ratio of non-performing loans to total
44 “Banking Sector”, Russian Economic Trends, 2001, p.63.
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loans declined from 17% in 1998 to 4% in 2004. Return on assets is around 2.5 to 2.9% between 2001 and 2005.45
Lack of transparency in nancial reporting and the absence of reliable information about the condition of banks, particularly about their loan portfolios, are among the serious obstacles to recovery.46
The ultimate problem is the lack of con dence of the general public in the banking system. In 2004, there was a “run on the bank” following the suspension of business by Guta Bank. There was another such incident soon afterwards when several of the ATMs of the Alpha Bank, which is the largest bank, ran out of funds.
The number of banks in Russia is stunningly high as compared to the size of the banking sector in the economy (Banking sector assets of Russia was 42.2% of the GDP, while in the Czech Republic, it was 93%, and in Poland, 67%. The total capital is 6% of the GDP).
As of January 1, 2006, there are 1,253 banks registered, of which 1,205 are banks and the remaining are non-bank institutions.47 In the peak year of 1994, the number was 2,457, but the strengthening of enforcement of prudential and supervisory requirements and the introduction of anti-money-laundering measures resulted in the decline in the number of banks. In 2004, 33 licenses were withdrawn. In the last quarter of 2005 only, 16 banks were liquidated and registered as such.48 The total number of banks with the licence withdrawn and liquidated since the beginning of the banking system amounted to 1,498.
The ratio of regulatory Tier 1 capital to risk-weighed assets, the capital adequacy ratio, was 13.8% in the rst quarter of 2004. Nonperforming loans accounted for 5.0% of the total gross loans. This ratio has been constantly declining from 17.3% in 1998.49
“Integration” of industry and the banks is another feature of the Russian banking system. Major private banks are part of large nancial groups:50
Alfa – Alfa Bank
Interros – Rosbank
Lukoil – Sobin Bank, Petro Commerce, Ural-Sib
MDM – MDM Bank
Menatep – Trust & Investment, KB Menatep
Rosprom – DII Bank
45IMF Country Report: Russian Federation, October 2005, pp.89, 92.
46“Banking Sector”, Russian Economic Trends, 2001 March, pp.62-63.
47Vestnik Rossiislokgo Banka, 2006 No.3 (electronic version).
48Ibid.
49IMF, Russian Federation, Selected Issues, August 10, 2004, p.44.
50IMF Country Report, No.05/379, October 2005, p.90.
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The state controlled Gazprom has Gazprom Bank in the group. Of the 13 private banks among the top 20 banks, 12 are related to nancial-industrial groups in the resource-extracting sector, and the remaining one is related to a group in IT/Telecommunication sector.51
Despite the large number of banks, the system is fragmented. Only 19.4% of them have a registered capital of 300 million roubles or more.52 Top 30 banks held 66% of the assets of the banks at the end of 2004. As of December 1, 2005, the top ve banks held 43.1% of all assets of the banks. Top 6 to 20 banks held another 19.4%. The total amount held by the top 50 was 74.2%.53 On the other hand, there are around 800 banks which have capital below 5 million euro.54 It is primarily banks of this size which had the licence withdrawn. It should be noted that, according to the Central Bank, of 638 banks surveyed in 2004, 20% of them reported over-in ated capital.55 A study of 30 banks in the early 2000s showed that several had signi cantly overstated capital and some had negative net worth.56
As a whole, the Russian banking sector is characterised by its undercapitalisation. The ratio of the capital to the GDP was 5.7% in 2005, which had increased from 2.9% in 1999.57
Another unique characteristic of the Russian banking system is the dominance of state-owned banks. There are six fully state-owned banks and some state-controlled-banks which total 21. The top two banks are state owned banks – Sber Bank and Vneshtorg Bank. In addition, even though not directly owned by the state, many banks are owned by state-owned enterprises. In 2004, Guta Bank, which was one of the medium-sized banks, was acquired by Vneshtorgbank which is a state bank with the support of the Central Bank deposit of 700 million USD. This should be regarded as a nationalisation.58
Sber Bank which is the former savings bank, with its 1,009 branches all over Russia, holds over 60% of the deposits of individuals. In total, 21 state-owned or state-controlled banks hold around 38% of the total bank assets, 42% of the credits and 66% of household deposits.59
51IMF Selected Issues, supra, p.49.
52Central Bank, Grouping of operating credit organisations by the amount of registered capital, 2006.
53Obzor bankovskogo sektora RF, electronic version, p.7.
54Ibid., p.72. Vilpu, supra, p.4.
55IMF Selected issues, supra, p.49.
56IMF, Financial System Stability Assessment, Russian Federation, April 11, p.19.
57Obzor, supra, table.1.
58Vil’pua, supra, p.7.
59IMF, Country Report 05/379, supra, p.97.
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Foreign banks are allowed to be set up. There are currently 41 banks with 100% foreign capital operating in Russia. There are 11 banks with more than 50% foreign participation.60 There is a quota for foreign investment in the banking sector.
7SUPERVISION OVER CREDIT ORGANISATIONS
The Central Bank is the regulating and supervisory agency over credit organisations. It exercises permanent supervision over the observance of banking legislation and normative acts of the Central Bank, namely the mandatory numerical requirements established by them (Art.55, Law on the Central Bank).
Between 1992 and 1995, the Central Bank gradually created a system of supervision and inspection over credit organisations. However, supervision by the Bank can hardly be regarded as effective as has been demonstrated by the 1998 banking crisis. The Central Bank conducted a survey of 18 large banks, based upon Western accounting standards. Most banks were found to have negative capital due to insuf cient loan loss provisioning, excessive lending to related parties, inaccurate and incomplete reporting, reliance on speculative income, and over-exposure to foreign currency risk.61
As part of the monetary policy, the Law on the Central Bank requires a mandatory reserve be deposited by credit organisations with the Central Bank (the Law on the Central Bank, Art.38). Territorial agencies of the Central Bank conduct a quarterly inspection over the accuracy of the calculation of the mandatory reserve by credit organisations.
On banking supervision, the Basel Committee was set up in 1974 and provides an international forum for regular cooperation on banking supervisory matters. It has developed increasingly into a standard-setting body on all aspects of banking supervision, including the Basel II regulatory capital framework. In 1997, the Committee prepared the Core Principles for Effective Banking Supervision. Although Russia is not a member of this Committee (the Central Bank is a member of the Bank of International Settlement), numerical requirements accommodated in this document are re ected on the Russian banking legislation.
The Law on the Central Bank provides that in order to ensure stability of credit organizations, the following mandatory numerical requirements are set out (Art.62):
60Vestnik, supra.
61IMF, Financial System Stability Assessment, supra, p.22.