Labor reserves

The Central Bank increased the requirements for the financial reserve

From October 1, the Bank of Russia will increase the standard for contributions to the Mandatory Reserve Fund from 2 to 3.5% for the obligations of credit institutions to non-resident banks. The Central Bank explains this innovation by the need to reduce the amount of liquid funds in the economy in order to fight inflation. Market participants, meanwhile, consider this measure ineffective and believe that it is unlikely to have a significant effect on inflation growth rates.

The regulator's decision was made public a day after President Vladimir Putin on Tuesday ordered the Central Bank to pay close attention to combating excessive strengthening of the ruble, thus depriving the Bank of Russia of the ability to fight inflation through exchange rate policy. This means that the Central Bank will have to use other instruments of monetary policy, one of which is an increase in banks’ contributions to the financial reserve. Let us note that this is the first decision to increase contributions since the fall of 2004, when the Central Bank softened standards in connection with the banking liquidity crisis.

As deputy chairman of the board of the Central Bank Konstantin Korishchenko said yesterday in an interview with Interfax, the Central Bank is concerned that the process of the influx of Western capital into the country, and primarily through the banking system, is gaining momentum. “Increasing the reserve ratio will have a restraining effect. I can’t say it’s very strong, but it’s definite,” he said.

Market participants also believe that this measure will not be decisive either for regulating the money supply or, accordingly, for inflation. “Banks and their clients - Russian enterprises - have many opportunities to avoid contributions to the Federal Reserve Fund,” says Interfax-CEA General Director Mikhail Matovnikov. -- For example, credit institutions are increasingly securitizing their assets, removing them from their balance sheets. Consequently, payments to FOR are not made for such transactions, and companies are increasingly borrowing money abroad, bypassing Russian banks. Thus, the Central Bank cannot control with the help of the fund the increase in money supply on the market, and therefore inflation.”

The chief economist of Deutsche UFG, Yaroslav Lisovolik, shares a similar opinion: “This measure is rather just a reminder to the market that the Central Bank has tools to influence bank liquidity. It is unlikely that this decision will have a significant impact on the volume of money supply, since the Central Bank left unchanged other, more important standards for the financial reserves - for deposits of private and corporate clients. Increasing these deductions would be more noticeable for banks.” At the same time, according to Mr. Lisovolik, the Central Bank is unlikely to undertake such drastic changes in monetary policy, at least until the end of this year. According to many economists, the strengthening of the ruble may reach a critical level in the first half of next year. It is possible that then the regulator will have to take tough measures to weaken the national currency. However, in any case, according to Mr. Lisovolik, the Central Bank’s actions will be very careful so as not to provoke instability in the financial market through its actions.

Another innovation of the Central Bank is increasing the averaging coefficient for credit institutions to 0.3 from 0.2. This means that now banks can use funds allocated to the reserve reserves not by 20%, as before, but by 30%. As the Central Bank said in a statement, “this will allow credit institutions to better adapt to new reserve requirements and provide them with greater opportunity to manage their own liquidity by maintaining required reserves in a correspondent account opened with the Bank of Russia.” According to Mr. Matovnikov, this decision was expected, since representatives of the Central Bank had already promised to soften these requirements: “This will not greatly affect the activities of banks, but it indicates that the Central Bank is gradually bringing its requirements closer to global practice.”

Natalia ROMANOVA