Funding Liquidity Risk in the Russian Banking Sector: Evidence from the 2008-09 and 2014-15 Crises

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School of Business | Master's thesis
Ask about the availability of the thesis by sending email to the Aalto University Learning Centre oppimiskeskus@aalto.fi

Authors

Date

2017

Department

Taloustieteen laitos

Major/Subject

Mcode

Degree programme

Economics

Language

en

Pages

106

Series

Abstract

The Russian banking sector is backed by cyclical economy with narrow diversification like many resource cursed developing markets. It is therefore highly volatile and suffers from risk premiums higher than seen in the West. Banking sector is underdeveloped, includes many peculiarities and in general more prone to crisis. The sector is corporate-focused while deposit-funded, but has large portions of borrower concentration and related party lending. Capital adequacy ratios defined by Basel Committee are important globally used framework giving perception of buffers in times of financial difficulty. However even banks with low capitalization can survive with sufficient liquidity and funding. Liquidity shortfall is the most common reason for banking collapse. This thesis focuses on risk management and further to funding liquidity risk i.e. rollover risk of the Russian banking sector. Russia’s financial crisis in 1998 lead to collapse of several banks, which increased the mistrust to Russian banking sector. Many banks fell over and investors still remember that. Back then short-term interest rates could hit close to 200 %. When currency lost its value, barter trade grew significantly. This was common practice in Russia in crisis times. In banking sector the state-owned banks increased their market share. There was also similar strong surge in capital inflows before 2008, but inflow turned to strong outflow. Sudden drop seen in market liquidity in 1998 was present also in the crisis of 2008-09 and MIBOR rates hit close to 30 %. During both crises, foreign money fled and dried up the market. The sector needed support package equivalent to over 10% of GDP, proportionately largest among G8 countries. 2008-09 crisis mainly led to market concentration as the state-owned banks increased market share they had been losing for many years to private banks. In 2014-15 crisis banks suffered severe funding issues as Western sanctions restricted access to international capital markets and low oil prices eventually led to sudden currency collapse after floatation. Currency lost 40% of its value against dollar in 2014. This increased share of foreign currency exposures, which concerned roughly third of lending. Loans were difficult to refinance. However, banking sector managed with the help of government’s 15 billion USD capital injections to 27 banks and sector continues nowadays increasingly funded with domestic deposits. Sovereign default was of concern in 2014 as Russia faced multiple headwinds with lower buffers than in 2008. This reflected highly to investor confidence and capital markets’ volatility. Despite state-owned banks still controlling the sector, sanctions have allowed unsanctioned banks to gain market share. Russia is considered as emerging market. Banking sector however has followed Basel accords for years and implementation of Basel III has progressed well since 2013. Institutional framework is considered adequate and funding liquidity risk of the sector is now much lower than in 2015. Liquidity shortfall is present in banking crises and due to continued mistrust Russia suffers often of systemic liquidity risk. However weak fundamentals like asset quality, are key problem currently.

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Thesis advisor

Haaparanta, Pertti

Keywords

bank regulation, financial crises, funding liquidity risk, Extreme Value Theory, risk-based capital requirements, Russia, VaR

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Citation

Permanent link to this item

https://urn.fi/URN:NBN:fi:aalto-201707046302

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[gradu] Kauppakorkeakoulu / BIZ