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Financial Institutions Rehabilitation: Approaches, Problems, Prospects

Experts discussed the recovery mechanisms of credit and insurance organizations, ways to prevent financial institution failure and ways to ensure financial market sustainability at the II International Insolvency Forum, taking place at SPBILF.

The session was organized by Central Bank of the Russian Federation (Bank of Russia). The moderator of discussion was Alexey Guznov - Legal Department Director of Central Bank of the Russian Federation. Anatoliy Aksakov – Chairman of the Committee on Financial Markets of the State Duma of the Federal Assembly of the Russian Federation, Aleksandr Zhdanov - Director of the Department on Financial Rehabilitation of Credit Organizations of Bank of Russia, Anatoliy Kozlachkov - Vice President of Association of Russian Banks, Aliaxandr Pedzko - Executive Manager of Delta Bank (Republic of Belarus), Yana Pureskina - Director of the Department of Financial Policy of the Ministry of Finance of the Russian Federation, Richard Healey – Partner at Gateley Plc, United Kingdom, Vladimir Chistyukhin - Deputy Governor of Central Bank of the Russian Federation, and Igor Yurgens – President of All-Russian Insurance Association participated in the discussion.

Aliaksandr Pedzko noted that in the recent years a lot of efforts have been made to create a legal framework, which will contribute to the rehabilitation of financial organizations. According to his opinion, bank bankruptcy is unusual for the Republic of Belarus nowadays. “We had late bank bankruptcy in the old legislation back in 2010. The bankruptcy proceedings of “DB” CJSC started in 2015 and had already lasted for three years. Tomorrow we’ll celebrate three years since the day the bankruptcy proceedings started. During three years of liquidation proceedings we managed to fulfill over 86% of creditors’ payment demands, amounting to 130 million dollars, including the total return of money to the Deposit Recovery Agency”.

In the Republic of Belarus, there is 100% deposit recovery. Such results were achieved thanks to efficient control of the National Bank and response actions. The bank was placed under the external state management before the moment, when final crash could happen, which means total asset stripping and loss of employees and technologies. When the bankruptcy option was determined, they chose not the option of quick asset realization, but the option of more efficient work with the bank’s assets,» the expert shared his experience.  

Richard Healey shared the experience of the UK, related to the regulation of financial rehabilitation and work with financial institutions. “After the crisis of 2007-2008, the UK thoroughly reviewed different ways to work with financial credit institutions, and today we mostly work with “a carrot and stick” method,” he said.  

Aleksandr Zhdanov drew the attention of experts to the efficiency of the financial rescue model, which was created one year ago. “I wouldn't say that we managed to perfectly foresee all the problems from the very beginning. It required certain amendments, which were introduced to the legislation both at the end of the last year, and the beginning of this year. But the model itself turned out to be quite efficient.” the expert stated. He added that financial rescue, which is executed with the participation of the Bank of Russia, has a number of advantages. First of all, it is a nominally smaller volume of financing and larger responsibility from the point of view of target achievement.  

Through the case of Otkrytie bank financial rescue, the expert explained that there is a problem not only in the bank sector, but also in other financial companies and financial groups. “Now we are trying to find out, if we should use financial rescue for non-state pension funds and financial groups and holdings in general. Sometimes the problem is hidden not only in the head organization, it can be distributed along the perimeter of the group,” Aleksandr Zhdanov summed up.

Anatoliy Kozlachkov noted that when shifting to the new financial rescue system, all the issues of banks, which deal with it systematically, were resolved.

Yana Pureskina added that the option of financial rescue of financial organizations with participation of Central Bank opens new positive opportunities. “To a large extent, it will let us decrease too complicated procedures, not allowing to quickly freeze a critical situation in order to preserve business and existing infrastructure,” she underlined.

Moreover, according to the speaker's opinion, the new mechanism allows to find the balance of interests in case of bankruptcy: if possible, to preserve financial institutions, which, partially through no fault of their own, appeared in the situation of bankruptcy, and to fulfill the requirements of the clients, which will keep financial market in general sustainable and help escape shocks. “The first results of financial recovery operations will show, if we are right or not,” Yana Pureskina said.  

Vladimir Chistyukhin covered the topic of financial rescue of non-credit financial organizations. “Speaking about the law itself, the bank model, which had already been tried out in the real life, was taken,” the expert said. Having said this, he noted that from the point of view of its concept this procedure should cover the biggest and most significant players: insurance companies, non-state pension funds, and systematically important infrastructure. At the same time, it is important to remember that each of these participants has its specific features, and it's impossible to use the bank model in all the cases.  

The President of All-Russian Insurance Association Igor Yurgens added that in professional society the assessment of what happened varies depending on insurance market stability, social tension decrease, growing trust to the insurance system till non-judicial process of property deprivation actually starts. Nevertheless, he noted that there is an ongoing dialogue between all the parties and organizations: “We don't have any hidden concerns that something completely wrong happened.”