«Holes» in the Capital of Failed Russian Banks: Old Indicators and New Hypotheses

Abstract

In the first three years after the Head's replacement, the Central Bank of Russia has withdrawn the licenses of each third bank in the system and afterwards has discovered that substantial part of these failed banks hided “holes” in their capital that amounted to 2,1% of GDP. In this paper, a first attempt was made to predict the size of the “holes” of that failed Russian banks. For that purpose, international research employs quite simple indicators that reflect bank's assets and liabilities, size and risk exposures. We formulate three new hypotheses to describe the “holes” in the capital — balance sheet falsification (H1), high assets' rollovers (H2), and low margins of banking business (H3) — and propose what we call complex indicators to test them. We obtain official data on revealed “holes” in banks' capital from the “Vestniki Banka Rossii” over the period from the mid-2013 to the beginning of 2016, so that the initial sample covers 106 failed banks and the filtered sample includes 89 of them. We found that these complex indicators bring gains when describing the size of the “holes” using simple indicators. Moreover, the strongest economic effects belong to the complex indicators. In particular, if a bank has already failed, then the “hole” is expected to be as large as (1) higher were the rollovers on corporate loans, (2) greater was the specialization on attracting (expensive) retail deposits and investing them in (cheap) corporate loans, (3) greater was the size of the bank, (4) higher were the rollovers on the correspondent accounts in the Bank of Russia, (5) lower was the bank's capital disclosed on the eve of its license withdrawal.