Professional Depositors and Interest Rate Risks for Banks: Russian Case of Significant Fluctuation of Exchange Rate and Federal Fund Rate in 2014-15

Abstract

Facing significant changes in exchange rate (35 → 72 → 49 RUR per 1 USD) and interest rate (8 → 17 → 12.5) over a half year and private banks bankruptcies in previous crises Russian middle class, who are experienced in savings and risk taking, create sophisticated methods of depositing money. In December 2014, some Russian big private banks pessimistically forecasted significant inflation, peoples’ aversion from bank deposits and high interest rate over several years. Many professional depositors (experienced retail savers) forecasted more optimistically, expected the repetition of an economic cycle of 2008-11, when high inflation and interest rate lasted over a half year and then declined quickly to the pre-crisis level. In panic every professional depositor signed tens of deposit contracts with minimal required balances and “fixed” high interest rates for 2-3 years, which would make commercial banks to realize significant interest rate risks. The research shows that professional depositors share is 24% of total household deposits, plus 11% of deposits of ordinary savers contributed to long contracts during crisis-high interest rates. When financial stability comes and market interest rate falls, banks will have to pay high interest on this 1/3 deposits and get negative gross margin about minus 1.5%. Banks have to follow the deposit contracts and can not decline the interest rate, when vast majority of credits have the option to decline the interest rate as market one falls. Avoiding this interest rate risk realization, the Central Bank of Russia (CBR) should impose lower interest rates ceiling on saving and flexi fixed deposits (CBR regulates only the maximum interest rates on classic deposits) and smooth the interest rate gap toward on demand deposits. Also CBR should use conditional commitments more active, tells to the market that interest rate will de kept high over a short period of time, and allow commercial banks to raise deposit interest rates over the same short time only. DOI: 10.5901/mjss.2015.v6n4p107