From bank privatization to nationalization

Privatization of state-owned banks is underway in Azerbaijan (for instance, Kapital Bank was privatized last year) while banks are being nationalized across the world due to the global financial crisis. Largest banks are also being privatized.

The bank sector was the first victim of the financial crisis. Deepening of the crisis necessitated nationalization of the bank assets. The government is the only reliable investor and source of liquidity during the crisis.

As a rule, nationalization is associated with revolutionary events and scares owners who do not get any recompense. This process specifically contradicts rhetoric of European authorities. In the early 21st Century, the European Social-Democratic Party not only refused nationalization, but also privatized major industrial fields and banks. Only low-profit community services were state owned.

These radical measures take totally different shape on the backdrop of the crisis. The government allocates funds to banks in exchange of part of assets. Banks who are caught up in crisis and on verge of collapse, accept this form of governmental support. It is noticeable that this is voluntarily procedure for banks. The government only exercises control on use of resources so that it will serve bank's recovery and stabilization of the bank system, return of people's deposits, prolongation of credits and financing real sector of economy. 

This does not mean to expand government's influence, but measures to save budget funds, namely, tax-payers' money. It is not only government's right, but also obligation to allocate dozens of millions to save private sector due to tax payers and then to exercise a control over it. A strong must be exercised over the issued funds via government's participation. To do this, the government needs control majority. It does not contradict market economy principles at all.

For example, the German government approved new law on German banks. The new law will enable government to nationalize banks who suffer economic crisis most of all. The law on stabilization of the German bank system adopted in fall 2008 allowed the German government to own at most one-third of a bank which is on a verge of collapse via budget funds. However, latest events showed that this law is not enough to prevent major German banks, specifically Hypo Real Estate (HRE), from bankruptcy. The bank would have been collapsed if it were not for the 87-billion-euro governmental aid.

Hypo Real Estate's nationalization will be first case for the last 80 years. Germany nationalized Danat Bank in 1931. Experts usually compare Danat Bank history with that of Lehman Brothers bankruptcy.

Germany was not first to take nationalization steps amid deepening financial crisis. The U.S. nationalized two largest mortgage lending banks - Fannie Mae and Freddie Mac - in 2008. Washington had to take control over some largest banks to prevent them from going bankrupt.

The economic team of current U.S. President Barrack Obama also plans to nationalize banks as a part of measures to save American banks. For instance, the government co-participated in the management of Citigrooup and Bank of America. At present, 318 banks and 8,000 bank industry enterprises receive governmental assistance to cover deficit

Moreover, Federal Reserve System former head Alan Greenspan urged American authorities to fully nationalize faulty banks. "One can resort to nationalization once in hundred years," he said. Temporary nationalization of some banks will enable to restructure financial sector rapidly, he said.

Other developed countries who have always opposed nationalization of large companies and banks face the same situation. The British government had to decide to partially nationalize largest banks. Portugal took control over Banco Portugues de Negocios (BPN).

The EU governments say that this is temporary measure and that assets will be privatized again. However, experts do not share this optimistic view: they argue that the bank owners can be deprived of their property in this process. This will be the last way out of the extreme situation.

Crisis in the banking sector forced adequate measures in Kazakhstan as well. In February, two major banks in Kazakhstan were nationalized and ran under government's control. Without any decrees, the banks were simply bought by the government through obligatory purchase of stocks. First claimants to nationalization in Russia have been divulged. They are listed in the top ten largest banks in the country. The State may become shareholder of 50 private banks in Russia.

Privatization of banks is out of the question in Azerbaijan. Like all developing countries, Azerbaijan is still demonstrating a good economic growth and experiencing a negative impact of lingered global development rate. Exacerbating liquidity-related problems in foreign markets have turned out to be the key impact. As a result, the National Bank of Azerbaijan had to resort to serious measures.

In 2008, assets of the bank system increased 53.14%, credit portfolio - 53% and population's deposits -36.6%. The bank system saw high growth rates until second half of 2008. Later it stabilized in accordance to global conditions and internal economic situation. So, bank system adapted to new dynamics of economic growth and money supply due to restriction of liquidity on world financial markets.

To secure flexible management of financial risks, the National Bank took preventive measures to ensure extra liquidity worth $350 million in the bank system. The banks amended their strategies assessing risks in currect situation.

The requirements for quality and assets of the bank sector were increased in an effort to step up financial reserves. In early 2008, the NBA took steps to ensure safe rate of foreign borrowings.

Starting from Oct. refinancing rate was reduced from 15% to 5% each year. Norms of obligatory reservation on bank liabilities both in national and foreign currency was reduced from 12 to 3% and norms on obligatory reservation on foreign liabilities - from 5% to zero.

The National Bank also took measures on prudential management in an effort to up financial security in the bank sector. The NBA toughened rates on classification of assets: the rates of controlled assets increased from 6 to 10%, rate of non-satisfactory assets - fro 25% to 30% and dangerous assets - from 50 to 60%. Besides, requirements on providing real estate while issuing loans increased from 120% to 150%, limits were imposed in maximum amount of subordinate loans in the first -level capital. It can total 50%.

In October 2008, the capitalization of the Azerbaijani banking sector increased by 4.8 % and as of 1 Jan by 47.8% as compared to the beginning of the year. According to the data provided by the National Bank of Azerbaijan, as of 1 Jan. 2009, the capital of 43 banks exceeded AZN 10mln. Its percentage in the total amount of capital of banks increased from 97.9% to 98.6%. Two banks with the percentage of 1.1% have formed their capital between AZN 5 and 10mln, one bank - AZN 3.5 and 5mln.

The number of profitable banks in Azerbaijan increased from 36 to 38 in December 2008. The number is two less than in December 2007. Revenues in the sector increased 44.7 percent compared to January 2007 to 192.08 million manat.

The number of unprofitable banks decreased by one compared to November and three compared to early 2008. Eight banks lost 7.4 million manat, which is twice more than the figure for early 2008.

Financial Results of Bank Activities (After Tax Payments) with Million Manat:

Periods

Number of Profitable Banks

General Revenue of Banking System (Profitable Banks)

General Revenue of Banking System (Unprofitable Banks)

General Loss of Banking System (Unprofitable Banks)

Total Revenue (+) or Loss (-) of Banks

01-12-2006

30

62.08

13

13

49.08

01-12-2007

40

132.77

5

3.65

129.12

01-12-2008

38

192.08

8

7.40

184.68

The global financial crisis forced Azerbaijan to reconsider monetary support for private banks. Azerbaijan is expected to allot 50 million manat from the 2009 budget to secure liquidity in the bank sector. It will be invested in banks' authorized capital stock.

Amid the ongoing crisis the governmental support can only help recover investors' and population's trust to the bank sector. Government's participation in the stock capital of commercial banks can serve major psychological factor to slow down pace of deposits' outflow.

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