The Russian government will ‘reorganize’ the Otkritie banking group. What's that mean?

Russia’s Central Bank has announced the reorganization of the banking group “Otkritie,” one of the largest financial institutions in the country, with hundreds of billions of rubles on its accounts. The Otkritie banking group consists of a bank by the same name and the banks Tochka, Roketbank, Rosgosstrakh Bank, and other organizations. All these institutions will now be “rehabilitated.”

Yes, reorganization means the bank cannot meet all the requirements of the regulator, Russia’s Central Bank, without money from the “reorganizer.” When the Central Bank sees a situation like this, it has two options: revoke the bank’s license (destroying the bank), or reorganize it. As a rule, regulators reorganize large banks that are significant on a national or regional scale.

Basically, it goes like this:

1. The bank in question becomes the property of another, more powerful bank or several banks, or the State Deposit Insurance Agency assumes ownership over the bank. The new owner is the reorganizer.
2. The reorganizer rehabilitates the bank in question. To do this, the state issues a soft loan to the reorganizer. Afterward, the bank’s new owner decides whether to keep the rescued bank or sell it.

Russia’s Central Bank is doing the job itself, which is what makes this reorganization different from all the others performed since 2008. Believing that too many private banks have become involved in the reorganization process, the Central Bank decided that if the regulator issuing the money for reorganization, it should also be the one to oversee the rescue procedure. Legislation to this effect was enacted earlier this year, and the Central Bank created the so-called Banking Sector Consolidation Foundation, which it controls. This is the body that will now manage Otkritie.

It’s too soon to say. The previous system certainly had its share of drawbacks: sometimes reorganization was used to absolve a bank’s owners and creditors (occasionally the same people) of responsibility for failures; sometimes powerful banks were reorganized to gain access to a permanent preferential credit line from the government; and sometimes reorganizers did everything to transfer their own toxic assets to the bank being reorganized.

At the same time, it’s still unclear how the new system will work. The Central Bank is a regulator, not a market competitor, and it has no experience managing commercial banks. It’s also unclear how the Central Bank is supposed to regulate the banking industry while simultaneously acting as an industry participant.

That’s hard to say. On the one hand, Otkritie has a new owner: instead of a group of private individuals, the holding company now belongs to the most powerful financial institution in the country. The Central Bank directly guarantees that all banks within the Otkritie holding group will continue operating as normal. The banks’ licenses won’t be revoked, their offices will remain open, and theoretically that could mean everything will continue as before.

On the other hand, it’s impossible to say how strongly this news will affect Otkritie’s customers, or if this will provoke a run on any of the banks. If clients begin withdrawing their funds en masse (and the Central Bank has promised that it won’t impose a moratorium on creditors’ claims), the consequences would be unpredictable.