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By HaleStewart December 22, 2014 8:31 am
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Russian Crisis Deepens With The First Bank Bailout

     From Bloomberg:

     Russia’s central bank pledged as much as 30 billion rubles ($531 million) to support National Bank Trust after the ruble plunged and liquidity tightened.

    The central bank is selecting an investor to help shore up the lender, and the Deposits Security Agency will take over its management, Bank of Russia said in a statement today.

     The ruble has depreciated 38 percent against the dollar since June, and volatility has soared to the highest since Russia defaulted on local-currency debt 16 years ago, stoking concern that Russian lenders’ asset quality has deteriorated. The central bank last week eased demands on banks to help boost liquidity. Trust, once part of exiled former oil tycoon Mikhail Khodorkovsky’s business empire and later advertised in Russia by actor Bruce Willis, is one of the country’s top 15 lenders by retail savings.

     Here is the general chain of events that will lead to further banking problems.  On the liability side (remember, banks assets and liabilities are reversed) there will be in increase in the amount of account redemptions as depositors take their money out of the bank.  They'll do this to either spend their money before the ruble devalues further or they want to convert local currency into harder currency.  This means branches need more physical currency (M1).  Banks may not have this on hand because they operate a fractional reserve system, meaning their entire business model is based on only have a percentage of assets on hand at any one time.

     On the asset side, the value of their assets is decreasing.  The currency on which the value of most of their assets is based has dropped over 50% this year.  In addition, interest rates are spiking meaning bond prices are down.  As banks seek to sell assets to cover redemptions, they are finding they are getting lower prices.  And, adding to the pressure, interest rates are also increasing, meaning banks are borrowing are higher costs.   

     This bail-out is just the first.  Expect more. 

Hale Stewart is a former bond broker who has been writing about economics and financial markets since 2006 on the Bonddad Blog.  He is also a tax attorney with a domestic and international practice while also forming and managing captive insurance companies for US companies.   You can follow him on twitter at:@captivelawyer

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