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Russia steps in to prevent 'domino effect' in its banking sector — but confidence concerns linger

Sam Meredith
Russia's central bank has been forced to rescue two major lenders in less than a month, intensifying concerns among global investors.

Russia's central bank has been forced to rescue two major lenders in less than a month, intensifying concerns among global investors that a systemic banking crisis could be in the offing.

The Russian government's latest rescue of a major bank was confirmed on Thursday, when the Central Bank of Russia (CBR) said it had nationalized the country's 12th largest lender in terms of assets, B&N Bank.

Last month, the CBR stepped in to launch one of the largest bank rescues in Russia's history when Otkritie Bank required a bailout to help plug a $7 billion hole in its balance sheet.

'Domino effect averted'

Russia's central bank moved to dismiss intensifying concerns that a brewing systemic crisis could be forthcoming on Thursday, as it said its second major bank nationalization in three weeks had prevented a "domino effect" in the country's ailing banking sector.

"We realized that it's better to isolate a bit more so that the domino effect does not arise, and according to the results of this work the domino effect is excluded, there is no risk of this," Vasily Pozdyshev, deputy governor at the CBR, told a press conference as reported by state media.

B&N Bank requires an estimated capitalization of around $4.3 billion to $6 billion, according to Pozdyshev, an amount approximately equivalent to 25 percent of the lender's balance sheet.

The failure of two major lenders in relatively quick succession has fueled anxiety over the health of Russia's banking sector, which has been hampered by an economic slowdown and Western sanctions in recent years.

In 2014, Russian regulators were jolted into action after a dramatic slump in oil prices as well as tough international sanctions for its annexation of Crimea and Russia's perceived role in destabilizing eastern Ukraine.

The CBR has been attempting to clean up the banking sector since 2013, shutting down scores of banks that it believed represented a risk to the system.

Russia's central bank has reportedly now closed more than a third of the country's banks - approximately 300 lenders – in the last three years as it sought to eradicate undercapitalized institutions.

'Stronger and cleaner banking sector'

Oleg Kouzmin, chief Russian economist at investment bank Renaissance Capital, told CNBC on Friday that he could not foresee any signs of a looming systemic banking crisis.

Instead, he argued the last two cases of big banks being nationalized in Russia could imply the CBR is completing the task of cleaning up the country's banking sector.

"In the short-term, we could see certain negative spill-over effects, namely certain confidence issues, complicating business environment for mid/small and non-state banks," Kouzmin said via email.

"However, the recent efforts show that the CBR is gradually moving closer to the end of the banking sector reform (and) supervision reform. As soon as the process is completed, Russia ultimately gets stronger and cleaner banking sector," he added.

Russia's Credit Bank of Moscow, which was recently named by the CBR in a list of systemically important banks, told Reuters on Wednesday that it did not see a risk of direct losses in the wake of B&N Bank's bailout.