"Fitch Ratings, the international rating agency, says that despite recent jitters in the Russian banking sector, a systemic crisis is unlikely in the near-term, according to a report published today," a press release from the agency said.
"In the report, entitled 'The Banking System: Russia's Achilles Heel', Fitch says recent bank failures, jitters in the inter-bank market and household depositor flight at certain banks underline the fragility of the Russian banking system, which remains a significant sovereign rating weakness.
"'The recent instability in the banking sector is unlikely to escalate into a systemic crisis in the near-term, though the lack of confidence and the potential for a self-fulfilling bank panic mean that cannot be ruled out entirely,' says Edward Parker, Director in the Fitch Sovereigns Group. Some small banks could still fail, hastening consolidation. But the macroeconomic setting is strong and overall liquidity plentiful, and there is no clear evidence that systemic banking weaknesses have deteriorated, or that bad loans are rising.
"In Fitch's view, the mini-crisis was triggered by uncertainty over the extent and sequencing of financial sector reforms. The revoking of Sodbiznesbank's licence in May suggested that the Central Bank of Russia (CBR) might, at last, be enforcing tighter supervision ahead of the introduction of deposit insurance, increasing uncertainty over the fate of individual banks and their depositors and creditors. This was exacerbated by a fundamental lack of transparency of and trust in banks, supervisors and the rule of law. Nerves appear to have calmed following the revision on 10 July to the deposit insurance law to bail out small depositors of failed bank with immediate effect, as well as liquidity support from the CBR. But the authorities will now need to walk a tightrope between closing weak banks to strengthen the system in the medium term, while maintaining public confidence.
"Fitch assesses that even a worst case scenario of a systemic crisis would have only a moderate direct impact on public finances, given the relatively small size of the banking sector...
"If the macroeconomic climate were to turn unfavourable (for example if oil prices drop sharply), after a further period of rapid balance sheet and asset price expansion and if there is no improvement in the structural foundations of the banking system, then Fitch would not be surprised if Russia did suffer a more severe banking crisis at some time in the future."
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