Russia: Otkritie Emergency Liquidity Program, 2017

In July 2017, Otkritie—Russia’s largest privately owned bank and considered systemically important—experienced large deposit outflows after Russian rating agency ACRA rated Otkritie at its lowest investment-grade rating (BBB-), citing concerns about its loan portfolio from recent acquisitions (Novye Izvestiia 2017; Seddon 2017b; 2017c). According to the bank’s 2017 annual report, Otkritie’s July 2017 credit rating meant that, going forward, Otkritie would be excluded from a number of financial activities: Federal budget funds could no longer be deposited at the bank; insurance funds could no longer invest their funds and capital in Otkritie’s subordinated bonds and deposits; and the rating further limited the placement of pension savings for nonstate pension funds at Otkritie (Otkritie 2018; Seddon 2017c). The rating also meant that Otkritie’s bonds would not be eligible for banks to collateralize loans from the CBR’s standing liquidity facilities (CBR 2017d; Otkritie 2018). In the resulting runs, Otkritie lost RUB 611 billion in deposits (USD 10.4 billion) or 20% of its balance sheet in the two subsequent months (Seddon 2017d). At the time, Otkritie was the largest privately owned bank in Russia, the eighth-largest bank overall, and designated as a systemically important bank—with RUB 2.5 trillion assets and RUB 539 billion of retail savings and deposits (CBR 2017e; Dementyeva et al. 2017; Karpova and Kruglikova 2018).

As of August 1, Otkritie’s debt to the CBR amounted to RUB 338 billion, through the CBR’s fixed-rate repo facility—a standing overnight liquidity facility that comprised the majority of CBR lending operations for 2017 (CBR 2017k; CBR 2017l). By month-end, its debt had tripled to RUB 1.1 trillion, an increase of RUB 728 billion (Borisyak and Eremina 2017; Titova et al. 2017). For context, CBR borrowings across all Russian banks increased RUB 736 billion to RUB 2.1 trillion, meaning that Otkritie accounted for 99% of the increase over the month and over 50% of the total outstanding liabilities to the CBR by the end of August (Titova et al. 2017). See Figure 2 for context.

Figure 2: CBR Lending, December 2014–September 2017 (RUB billions)
Source: Borisyak and Eremina 2017.

Of the RUB 1.1 trillion in liquidity support for Otkritie at the end of August 2017, RUB 682 billion was in the form of repos backed by securities and RUB 385 billion in loans—the majority of which had maturities of 91–180 days, according to a ratings analyst at Expert RA, a Russian rating agency (Borisyak and Eremina 2017). These loans included an emergency unsecured loan of RUB 330 billion, reflected on Otkritie’s balance sheet as deposits from the CBR for up to 180 days, identified by the monthly bank reports published by the CBR under form 101 (Lokshina and Ladygin 2017).

The CBR provided the emergency loan as Otkritie ran out of liquid assets to cover the outflow of deposits. The exact date and terms of the loan were not publicly released; however, much of the information was later revealed in Otkritie’s filings and leaks to the press. On August 21, 2017, sources close to Otkritie leaked to the newspaper Vedomosti that Otkritie had received an unsecured loan from the CBR; the article noted that CBR had not extended such a loan to any bank since 2010 (Borisyak, Voronova, and Terchenko 2017).

On August 29, the CBR announced a rescue plan for Otkritie, with an eventual recapitalization. As part of the announcement of Otkritie’s rescue, the CBR pledged financial support to guarantee the continuity of Otkritie’s operations without a moratorium on payments. The CBR also appointed a provisional administration, staffed by CBR employees, to assess Otkritie’s financial condition before recapitalizing the bank (CBR 2017e). The financial audit revealed Otkritie to be negatively capitalized and in December 2017, following amendments to the bankruptcy law, the CBR recapitalized Otkritie with RUB 456.2 billion through a new issue of ordinary shares, amounting to a 99.9% stake (CBR 2017i; CBR 2017j). In the interim, before the recapitalization, the CBR continued providing liquidity support to keep Otkritie operational (Lokshina and Ladygin 2017).

Partly owing to the reduced deposit outflow in September, Otkritie was able to close its outstanding RUB 682 billion in repo transactions with the CBR during that month. However, it maintained the RUB 330 billion emergency loan it had received in August and received an additional RUB 380 billion emergency deposit from the CBR in September. The new RUB 380 billion deposit had a maturity of 1–3 years. As of October 1, Otkritie’s liquid assets covered just 50.9% of funds raised, excluding the funds from the CBR (Borisyak 2017b).

Otkritie repaid RUB 150.4 billion to the CBR in December, leaving RUB 565.3 billion outstanding under the two emergency loans (Borisyak and Ostapenko 2018).

By January 1, 2018, Otkritie had received RUB 380 billion in “short-term” liquidity support from the CBR (CBR 2018c). The CBR provided such liquidity support in the form of deposits using funds from the FBSC, a subdivision of the CBR and newly introduced resolution mechanism (CBR 2019a).

On August 29, 2017, following a request from Otkritie’s shareholders amidst a depositor run, the CBR announced that it would inject capital into Otkritie through a newly established CBR subdivision, the FBSC (CBR 2017e). Under this mechanism, the CBR would take at least a 75% equity stake after appointing a provisional administration to assess the bank’s financials (Mokeeva and Popova 2020). On September 15, the CBR approved a plan to recapitalize Otkritie and provide funds to ensure the bank’s liquidity (CBR 2017b). In December 2017, the CBR injected RUB 456.2 billion into Otkritie through an additional issue of ordinary shares, which left the CBR with 99.9% ownership (CBR 2018c).  As of November 1, 2017, the aggregate capital of Russian banks amounted to RUB 9.3 trillion, rendering this injection into Otkritie equivalent to almost 5% of the sum (Krivorotova, Mikheeva, and Litov 2017). In June 2018, the CBR injected additional capital into Otkritie, purchasing RUB 42.7 billion in newly issued ordinary shares in Otkritie. Most of the proceeds would be used to provide relief to the subsidiaries Otkritie had purchased in August 2017. RUB 8.9 billion provided additional capital for Otkritie (CBR 2018b).

In 2018, the CBR decided to reorganize Otkritie Bank, along with other large distressed private banks, while continuing to operate it as a going concern. On January 1, 2019, the CBR merged Otkritie and B&N Bank under a newly established universal financial group, Otkritie Group. In 2018, the CBR also established a bad bank, the NAB, which received noncore and toxic assets of banks in which the CBR had intervened (CBR 2019a). The CBR would provide the bad bank with a RUB 1.1 trillion loan at a 0.5% interest rate. The bad bank would recover and liquidate the distressed assets overtime, returning to the CBR the funds allocated for resolution (Larina 2019; Seddon 2018).

On September 1, 2017, the CBR introduced a new, broadly defined emergency liquidity facility for banks that had exhausted all other liquidity sources. The CBR announced the facility on September 4. Eligibility was under the discretion of the CBR, which would consider a bank’s systemic importance and solvency before approving draws. Approved banks could pledge collateral outside of the CBR’s Lombard List (collateral accepted for standard facilities), claims on nonfinancial institutions, and other types of securities. Liquidity could take the form of a repo and/or secured loan, depending on the collateral, and would have a maximum term of 90 days and a rate of 1.75% over the CBR policy rate (CBR 2017f). Research has not determined whether Otkritie used this new emergency facility. The August emergency loan the CBR provided to Otkritie occurred prior to the creation of the facility. In a speech, CBR Governor Nabiullina stated that the August emergency loans were consistent with the new facility (Nabiullina 2017).

The CBR’s authority to extend emergency unsecured loans is provided under the 2002 Federal Law on the Central Bank of the Russian Federation (CBR Law). The August emergency loan fell under Article 46 of the CBR Law, which authorizes the CBR to provide liquidity support to banks in various forms, including unsecured loans:

to extend unsecured loans for a term no longer than twelve months to Russian credit institutions that are rated not below the eligible level. The list of the rating agencies whose ratings are used to determine the creditworthiness of the borrowers, the necessary minimum ratings, additional requirements for the borrowers and the procedure for extending the corresponding loans and their terms and conditions shall be drawn up by the Board of Directors. (Russian Federation 2002a, art. 46.1)

On August 29, 2017, the CBR’s board of directors decided to place Otkritie under “rehabilitation” (CBR 2017e). Rehabilitation refers to resolution measures undertaken by the authorities to avoid putting a bank through bankruptcy.

The September liquidity assistance was authorized under Article 75 of the CBR Law, which authorizes the CBR to “extend loans, place deposits and issue guarantees” to banks undergoing rehabilitation measures (Russian Federation 2002a, art. 75).

The CBR administered the emergency loans following a decision of the CBR’s board of directors, dictating the terms and conditions thereof (Russian Federation 2002a, art. 46).

After the CBR decided to rehabilitate Otkritie, it managed oversight of the loan facility through the FBSC.

Pursuant to Article 76.12 of the CBR Law, the chief auditor of the CBR assesses annually the operational efficiency of the FBSC in performing its goals and ensuring maximum return on investment, in accordance with various international and domestic auditing standards (CBR 2018c). The audit looks to four main areas in assessing the use of funds for the rescue of banks, with Otkritie being the first bank rescued by the FBSC:

• Comparative efficiency of the amount of funds allocated by the Bank of Russia against the amount of damage to the economy in case the scenario of the credit institution’s bankruptcy materialises.
• The optimal resource utilisation for the recovery of credit institution financial position indicators.
• The efficiency of utilisation of funds by the credit institution’s management.
• The efficiency of the sale of shares of the credit institution by the Bank of Russia given the market situation. (CBR 2018c, 109)

On August 21, 2017, sources close to Otkritie leaked to the newspaper Vedomosti that Otkritie had received an unsecured loan from the CBR, without detailing the size or terms of the loan (Borisyak, Voronova, and Terchenko 2017). The CBR did not disclose the emergency liquidity assistance it provided to Otkritie until after it announced Otkritie’s rehabilitation on August 29, 2017. On August 30, Deputy CBR Chair Tulin communicated to the press that the loan could not be classified as unsecured but rather as a non-standard refinancing mechanism with market conditions, without detailing the collateral associated with the loan (Vedomosti 2017).

The CBR did not provide specific information as to the pricing of the two emergency loans it provided to Otkritie in August and September. A Kommersant article in February 2018 stated that Otkritie did not comment on the rates it paid on such CBR loans (Soldatskikh 2018).

There was some confusion as to the relationship between the ad hoc loans Otkritie received in August and the new broad-based liquidity facility, which the CBR introduced on September 1. In a speech on September 15, CBR governor Nabiullina answered a question to clarify: 1) Why CBR officials indicated that the CBR had extended loans under the new liquidity framework, prior to the official introduction of the facility and 2) How the CBR intended to disclose such support given the historical disclosure of unsecured lending data on the CBR’s website during the GFC (Nabiullina 2017). Nabiullina responded:

On the urgent liquidity provision scheme, the decision to provide liquidity to Otkritie was made before the decision on the urgent liquidity provision scheme. However, the former was consistent with the pending introduction of the liquidity scheme, first, and, second, it was within the Bank of Russia’s mandate. Yes, data will be disclosed in the routine manner. This is in line with our prior communications. (Nabiullina 2017)

During September, another private bank, B&N Bank (judged by the CBR to not be systemically important) also suffered deposit runs. B&N Bank requested assistance from the CBR, and, on September 20, the CBR announced that it would provide emergency liquidity support to B&N, with no initial mention of a capital injection (CBR 2017g). This resulted in some market confusion and the same day B&N dollar-denominated bond prices fell 30% (Reuters 2017). The following day, on September 21, the CBR issued another press release stating that it would inject capital into B&N, like Otkritie, using the FBSC (CBR 2017h).

The CBR provided the emergency liquidity assistance to Otkritie through monetary issuance. In the months following the emergency liquidity provision, the CBR issued central bank bonds to offset the inflationary effects (Sterkin 2017). See Key Design Decision, No. 11, Impact on Monetary Policy Transmission, for more information.

Bank analysts initially estimated the size of the unsecured loan in August to be RUB 54 billion (Borisyak 2017a). The actual size of the loan, as later revealed, amounted to RUB 330 billion (Soldatskikh 2018).

As of November 1, 2017, Otkritie owed the CBR RUB 716 billion (Borisyak and Ostapenko 2017). Of this, RUB 330 billion came in the form of the unsecured August credit line and the rest was from the RUB 380 billion September deposit (Soldatskikh 2018). See Figure 3.

Otkritie’s 2017 annual report stated that in September the CBR provided Otkritie a RUB 380 billion deposit at a preferential interest rate of 0.51% (Otkritie 2018). According to Fitch, the average cost of Otkritie’s borrowings from the CBR during the fourth quarter of 2017 was 4% (Soldatskikh 2018). Otkritie’s annual report listed a weighted average interest rate of 2.92% on the total of RUB 566.5 billion borrowings from CBR loans (Otkritie 2018).

The RUB 330 billion emergency CBR loan Otkritie received in August represented the only other debt to the CBR during the fourth quarter of 2017. Considering that the September deposit carried a rate of just 0.51%, that implies a roughly 8% interest rate on the August loan, in line with market rates at the time (Soldatskikh 2018).

For context, the CBR’s key rate stood at 9% in August 2017, reduced to 8.5% on September 18, 8.25% on October 30, and 7.75% on December 18 (CBR 2018c). The CBR did not provide specific information as to the pricing of the two emergency loans it provided to Otkritie in August and September.

The August loan and September deposits carried maturities of up to 180 days and three years, respectively (Soldatskikh 2018).

In December 2017, Otkritie received a RUB 456.2 billion capital injection from the CBR and an inflow of funds from depositors and corporate clients (RUB 87.9 billion) (Borisyak and Ostapenko 2018; Soldatskikh 2018). As a result, at the end of December Otkritie repaid RUB 150 billion of the August emergency loan. On February 15, 2018, Otkritie’s CEO announced that it repaid the remaining RUB 180 billion in February (Soldatskikh 2018).  Otkritie repaid the RUB 380 billion CBR deposit by the end of 2018 (CBR 2019b).

Given the unsecured nature of the loan, there was no mention of collateral.

In September, following the increase in CBR lending during August (almost entirely provided to Otkritie), the CBR raised its forecast for surplus liquidity for 2017 from RUB 0.9 trillion–1.4 trillion to 1.4 trillion–1.9 trillion. According to the CBR and other Russian economists, the volume of liquidity assistance would not translate to a commensurate increase in inflation. According to the Alfa Bank chief economist, despite the expansion of the CBR’s balance sheet, at the time, bank lending was minimal, so the outflow of funds from Otkritie would ultimately be redeposited by other banks at the CBR rather than lent out into the economy. The CBR also increased its auctions for CBR coupon bonds (known as coupon-OBR) to offset the excess liquidity, with RUB 150 billion issued in August 2017, maturing in November; the CBR issues OBRs to absorb excess liquidity in the banking system (Sterkin 2017). In 2018, the CBR continued to auction off three-month coupon-OBRs to absorb the excess liquidity, issuing RUB 1.4 trillion during the year compared to the RUB 356.7 billion in 2017 (CBR 2019a).

According to a December 2017 news article, the CBR required Otkritie to generate a plan in January 2018 for paying back the outstanding debt to the CBR (Borisyak and Ostapenko 2017).