Russian banks are being driven to restructure their European operations to avoid being classed as “significant institutions” by regulators in Frankfurt, a status that has irritated executives in Moscow by increasing their capital requirements.
Andrei Kostin, chief executive of VTB, said the Russian state-controlled bank planned to close its French operation and to shift its European headquarters from Vienna to Frankfurt by folding its two subsidiaries in those cities into one.
The move, which will also cut costs, is designed to remove VTB from the European Central Bank’s list of the continent’s 125 most significant institutions that it oversees and subjects to regular stress tests. As well as a bank’s size, the ECB also considers how interconnected it is when judging its significance. VTB has 60 staff in France and more than 240 in Germany and Austria.
“In Europe we definitely have a cutting expenses operation because we have three banks, small banks in Germany, Vienna and France,” Mr Kostin told the Financial Times in an interview last month.
“There are three licences,” he said. “We [have] now agreed with the ECB there will be one licence for all the banks, which helps us to be excluded from the [list of] systemically important banks. We are shrinking in Europe.”
A person briefed on the ECB’s position said VTB’s application was at an early stage and while no decision had been made, it was expected to be approved by the end of the year.
Sberbank, the larger Russian state-controlled rival to VTB, said it was watching its compatriot’s move closely and was considering a similar simplification of its European operation, which has licences in eight countries.
Sberbank and VTB had to inject an extra €240m and €200m, respectively, into their Austrian units after they both failed ECB stress tests in 2015 by falling below the minimum capital required under the adverse scenario.
That prompted an outburst from Herman Gref, chief executive of Sberbank and former Russian economics minister, who complained he could not understand European regulatory policy, which he described as “quite difficult”.
The two biggest Russian banks have been subjected to sanctions by the US and EU since Russia fomented a separatist war in eastern Ukraine in 2014, barring them from raising capital with a maturity of more than 30 days in western markets.
Mr Kostin, an associate of Russia’s president Vladimir Putin, said VTB had started to collect deposits from European customers as a way to raise funds in euros. It has raised €3bn-€4bn in France and Germany this way, but Mr Kostin said: “In the scale of European banking it is nothing.”
The VTB boss said its London operation would be relatively immune to any disruption from Brexit as it mostly served customers outside the EU, such as in Africa, Asia, India, Russia and Ukraine.
He expressed delight that after a meeting with Mark Carney, governor of the Bank of England, the Russian bank would escape the extra capital and liquidity requirements that came with being classed as systemically important by the UK regulator.
“We were complaining for two-and-a-half years that we were not treated on an equal basis, on capital, liquidity and many other requirements,” he said, adding that he recently persuaded the BoE that because VTB had no British deposits it was less of a risk to the UK, despite the sanctions it was subjected to.
Alexander Morozov, Sberbank’s chief financial officer, told the FT: “We are also considering consolidating our European subsidiaries . . . but we haven’t taken a decision.
“We are also looking at VTB’s experience there. It’s very important for us that we make a decision that best increases their efficiency and cutting the regulatory costs for the business.”
Sberbank aims to decide on its European structure by the third quarter. But Mr Morozov said any move to simplify its European operations could also have drawbacks, such as IT integration risks, bureaucratic delays and the limited precedent for converting a subsidiary into a branch.
The ECB and BoE declined to comment.