Troubled large Kazakh banks: to fail or to rescue?

Introduction

Is the devil as black as he is painted? Are bank runs always a calamity? Should Kazakhstani taxpayers be the beasts of burden in supporting banks? 


Rescuing Kazkommertsbank

In November 2016, President Nazarbayev promised to prevent the collapse of Kazkommertsbank, the largest bank in Kazakhstan. Poor management in the past made the Bank deficient in capital. According to Nazarbayev, the Government could support Kazkommertsbank, or the Bank could sell its shares to resolve the problem, reports KazWorld.info.

On January 20 of this year, Kazkommertsbank and Halyk Bank, the second largest bank in Kazakhstan, began preliminary talks about a deal. On March 2, the two banks signed a memorandum, according to which Halyk Bank could possibly purchase over half of Kazkommertsbank shares, reports the Kapital newspaper.

On June 15, Halyk Bank signed a deal to purchase 86.09% of Kazkommertsbank common stock for 1 KZT per share from Kenes Rakishev, Chair of the Board of Directors of Kazkommertsbank, and with the Governnment, to purchase 10.72% of shares, also for 1 KZT per share. Halyk Bank will inject 185 billion KZT to enable Kazkommertsbank to comply with capital requirements, reports Zarina Zhakupova, of Informburo.kz. Kazkommetsbank top management was replaced. On July 5, Halyk Bank announced that the deal is complete, reports Kirill Zhdanov, of Informburo.kz.

Both banks are linked to President Nazarbayev, implying a possible vested interest in the deal. Dinara Kulibayeva, President Nazarbayev's daughter and her husband Timur Kulibayev, have a controlling stake in Halyk Bank. Kenes Rakishev is the son-in-law of Ambassador Extraordinary and Plenipotentiary of Kazakhstan to the Russian Federation and former Vice Prime Minister Imangali Tasmagambetov.

This is not the first bank rescue in Kazakhstan. In 2009-2016, BTA Bank, Alliance Bank and Temirbank underwent nationalization and debt restructuring, to be re-privatized. In 2014, Kazkommertsbank bought BTA Bank, while Alliance Bank and Temirbank merged with Forte Bank, with the new bank taking the name of the latter.

Could the government have allowed large banks to fail? What were the alternatives?


Policies on poorly performing large banks

A troubled large bank triggers economic collapse, by eroding depositor confidence. Large depositors place their uninsured savings “under a pillow”, or invest abroad, decreasing output and increasing unemployment.

The government may permit bankruptcies, while spending money on compensating the affected parties. For example, during the Great Recession, the government of Iceland allowed three large banks to go bankrupt and created an agency for borrowers, to apply for debt forgiveness. Its banks were too big to bail out, since their overall assets were 20 times the state budget. Eventually, revenues from tourists, who totaled 1.5 million in 2015, compared with 500,000 visitors on average before 2008, triggered recovery, though wages are still lower than before the crisis, reports BBC.

State support may be unnecessary for preventing bank runs. A bank may sell some or all of its shares to another bank, through a merger or an acquisition. In the former case, the two banks become a single new entity; in the latter case, the stronger bank purchases most or all of shares of the problem bank, taking over its operational decisions. Mergers and acquisitions kill two birds with one stone: depositors sustain their accounts; the Government retains its funds.

Bank mergers and acquisitions have shortcomings. It may be hard to find a buyer, willing to absorb bad loans, so its shares may sell for symbolic prices. Yet depositors may still view the new bank as “too big to fail”, ignoring news about its financial performance. Also, the banking industry becomes more concentrated, increasing the monopoly power of banks.

The central bank may provide last-resort loans to private banks. However, the bank may still default. Also, the money supply increase pulls inflation.

The Government may partially or completely nationalize system-forming banks, to increase bank capital and re-negotiate debt payment terms, a procedure called debt restructuring. Nationalizing banks can be expensive. For example, the Treasury Department had spent $700 billion on American commercial banks alone after the crash of September 2008, reports the Forbes magazine. However, toxic (high-risk and illiquid) assets may become more valuable if the economy rebounds, making the bailout less costly on net in the long run.

Saving failing banks is inequitable. Poorer depositors receive their insured deposits if the bank fails. Yet last resort lending and nationalization safeguard rich depositors at the expense of other taxpayers: rich depositors are more likely to invest better anyway, since they can hire consultants.


Re-privatizing banks

Re-privatizations are common after bank nationalizations and debt restructurings. The Government or the new owner may create a “bad bank”, to separate toxic assets from the rest, then remove them from the balance sheet. Since this procedure does not always reveal all such assets, the sale may take months or years.

Keeping the bank nationalized opens another can of worms. A state-owned bank prevails over private banks in competition. Managers do not worry about bankruptcy and their compensation is not tied to profit. Supporters of state ownership for all banks argue that credit allocation is too important to be left to the private sector. Yet state-owned banks often charge less than the market interest rate, implying a subsidy, difficult to assess. The banks compete for state funds, rather than clients. Having the upper hand over the regulator, bank administrations may be abusive. For example, they may spend too much or too little on equipment. They may also be too cautious in lending and other operations.


Conclusion

Taxpayers often pay to save large banks and prevent an overall economic collapse. Private entities are not always willing to buy troubled banks, so nationalization or bailout loans may be needed. Alternatively, the government may allow banks to fail, and compensate the parties that the collapse would affect. Discussions about troubled large banks are likely to continue in the future.



References

BBC. How did Iceland clean up its banks. http://www.bbc.com/news/business-35485876. 2016.

Forbes. The big bank bailout. http://www.forbes.com/sites/mikecollins/2015/07/14/the-big-bank-bailout/#4c3c2e643723. 2015.

Kapital. Halyk Bank and Qazkom signed a memorandum on the possible purchase of shares. https://kapital.kz/finance/57990/halyk-bank-i-kazkom-podpisali-memorandum-o-vozmozhnoj-pokupke-akcij.html. 2017.

KazWorld.info. Nazarbayev promised to prevent Qazkom collapse. http://kazworld.info/?p=59235. 2016.

Zhakupova, Z. Halyk Bank will buy Kazkommertsbank shares for 1 tenge. https://informburo.kz/novosti/za-1-tenge-kupit-narodnyy-bank-akcii-kazkommercbanka.html. 2017.

Zhdanov, K. Halyk Bank concluded a deal on buying Qazkom shares. https://informburo.kz/novosti/narodnyy-bank-zavershil-sdelku-po-pokupke-akciy-qazkom.html. 2017.