Financial Restructuring of the FK Otkrytie and the Binbank will not Cause Inflation Rate Growth

The decision taken by the Central Bank of Russia to carry out financial rehabilitation of such large banks as the FK Otkrytie and the Binbank is a significant event for development of the banking sector of the Russian Federation.

An alternative to financial rehabilitation would be a withdrawal of the banking license from these financial institutions which situation could not but produce serious implications for the market as a whole because large depositors, both legal entities and individuals would have lost their funds.  So, the decision to save these banks is a positive one and aimed at underpinning stability of the banking sector. But the regulator will have to pay a high price for the restructuring of these banks’ problem assets.

There are serious concerns and they are not groundless that the restructuring procedures are going to be quite expensive and require large funds, so they may affect the macroeconomic indicators because the main resource at the regulator’s disposal is money printing. However, it does not mean that a larger portion of the money emission related to the financial rehabilitation of these banks will affect the rate of inflation.  

In case of the license withdrawal scenario, the money supply would have shrunk because some depositors would have lost their money. With restructuring procedures started, the money supply volume remains unchanged though the bank liquidity is replenished through provision by the Central Bank of Russia of additional loans to banks which undergo financial rehabilitation.  

With the above factors taken into account, no sudden surge in the rate of inflation should be expected. It is just a mechanism which provides the money supply volumes which would have been in place if no bank failures occurred.  

Мikhail Khromov, Head of the Financial Study Department