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Document Type

Case Study

Case Series

Ad hoc Capital Injection

Abstract

In July and August 2017, Otkritie Bank, Russia’s largest privately owned bank, experienced a deposit run related to concerns over recent acquisitions, including a large, troubled bank and insurance company. The run prompted Otkritie’s shareholders to ask the Central Bank of Russia (CBR) for assistance, which the CBR announced on August 29, 2017. In the announcement and subsequent press interviews, the CBR pledged to become Otkritie’s main investor using a newly created resolution mechanism wherein the CBR would take at least a 75% equity stake using funds from the Fund for Banking Sector Consolidation (FBSC), a subsidiary of the CBR. The CBR said that it would neither bail in creditors nor impose a moratorium on payments. The bank would remain open, but management would be replaced by a provisional administration composed of CBR employees. On October 1, an audit by the provisional administration revealed a capital hole of 188.9 billion Russian rubles (RUB). Given the capital hole, the CBR moved to impose losses on subordinated creditors and shareholders before recapitalizing the bank. However, the provisional administration failed to get shareholders’ approval for the bail-in. In response, the CBR requested amendments to the Bankruptcy Law, which the Duma passed in November 2017. The new law expanded the provisional administration’s powers, enabling it to promptly write off the subordinated debt and write down Otkritie’s equity to RUB 1. In December 2017, the CBR purchased RUB 456.2 billion in newly issued ordinary shares (99.9% of total ordinary shares) to cover Otkritie’s capital deficit, allow it to meet regulatory capital adequacy requirements, and extend financial assistance to Otkritie’s related entities. In March 2018, the CBR decided to restructure Otkritie through a merger with a smaller bailed-out bank, B&N. At the same time, the CBR planned to create a bad bank to take over a portion of Otkritie’s noncore assets. In June 2018, the CBR injected an additional RUB 42.7 billion in new capital in Otkritie, mostly to provide relief to related entities. In December 2022, the CBR sold Otkritie to state-owned (and former shareholder) VTB Bank for RUB 340 billion, as compared to the RUB 498.9 billion of capital support.

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