Monday 26 September 2016

Russian bank collapse shines light into shadowy corners of Irish finance

Donal Griffin and Joe Brennan

Published 25/02/2016 | 02:30

Based in a drab office building in Dublin down the road from a pub frequented by Taoiseach Enda Kenny, VPB Funding Ltd. had no employees but one function: selling bonds. In 2013, it issued $225m of unsecured notes.

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The proceeds of that sale were funneled to Vneshprombank Ltd, a Moscow lender whose license was revoked last month when Russian authorities accused management of pilfering its assets and falsifying accounts. VPB's notes have plunged to pennies on the dollar.

The entanglement of an obscure Dublin firm in the woes of a lender 2,000 miles away shows why Irish officials have begun shining a light on special purpose vehicles (SPVs) like VPB, unregulated entities that borrow on behalf of corporations throughout the world.

The Irish capital, home of Europe's costliest banking meltdown, remains a hub for the sort of opaque operations that contributed to the global financial crisis, threatening risks that policy makers are seeking to stamp out.

"There's concern that Irish SPVs are exporting risk to other financial systems around the world and could have contagion effects," said Shaen Corbet, a lecturer in finance at Dublin City University (DCU).

SPVs fall under the heading of shadow banking -- lending by entities outside the traditional banking industry. Ireland ranks with China as the biggest centre for non-bank finance firms after the US and the UK, with €2.3 trillion of assets, according to a survey by the Financial Stability Board, a group of global regulators.

The shadow-banking system here is more than 10 times the size of the economy.

While most of the network is regulated by authorities in Ireland or elsewhere, unregulated vehicles - including SPVs - account for an estimated half a trillion euros, the survey found.

Gareth Murphy, who heads the Irish central bank's markets-supervision unit, said authorities must increase co-operation in circumstances where a Dublin-based SPV, for example, is linked to "a German bank or a French bank which is prudentially regulated elsewhere".

"Monitoring of the full financial landscape wasn't good enough," Mr Murphy, who formerly worked at JPMorgan and the Bank of England, said in an interview. "One of the lessons of the financial crisis is that a narrow, inwardly focused approach to the pursuit of one's regulatory mandate really doesn't work because of the global nature of financial services."

The scenario has played out before. In 2007, Germany's Landesbank Sachsen Girozentrale needed a €17bn emergency credit line from a group of German banks after its Dublin-based SPVs, loaded with toxic assets, were unable to pay their debts.

Irish authorities have begun amassing data on SPVs, and joined last year in an annual survey of shadow banking by the FSB, a group of regulators that monitors the global financial system.

The report examined 26 jurisdictions, though some countries with large shadow-finance operations, such as Luxembourg, didn't participate.

"It makes sense for the central bank to look for that kind of information just to get an idea of the scale of what's happening," said Enda Faughnan, a Dublin-based partner at accounting firm PricewaterhouseCoopers, which helps set up the vehicles.

The collapse of Vneshprombank encapsulates some of the cross-border risks the central bank is seeking to identify.

The lender, which held billions of rubles in deposits for some of Russia's biggest state companies, including oil producer Rosneft OJSC and pipeline operator Transneft OJSC, set up VPB Funding to raise cash for "general corporate purposes" and to "diversify its sources of funding", a prospectus shows.

Last year, Russian regulators found a 187 billion-ruble (€2.2bn) hole in Vneshprombank's balance sheet. Former managers may have stripped the bank's assets for investments in real estate, expensive vehicles and financial instruments, Russia's central bank said in a statement.

Ireland's Central Bank said all prospectuses are subject to a "robust approval process," and that the VPB notes were issued before the US and European Union imposed sanctions on Russia in 2014. The sale was restricted to institutional investors and use of the proceeds was "clearly disclosed," it said.

Shadow-banking assets have swelled since the financial crisis, and not just in Ireland. Regulators, concerned that banks may use shadow lending to evade new rules and wary that risks could build up unseen, are trying to map the size of the industry and develop rules for it.

Until late 2015, Irish SPVs had no obligation to even alert the Central Bank that they were here, unless their activities touched on regulated areas.

Vneshprombank wasn't alone in making the trip to Dublin. Moscow-based UralSib Bank, which faced bankruptcy last year until the state orchestrated a takeover by an ally of President Vladimir Putin, is among Russian firms with ties to SPVs, Irish company filings show.

In 2013, another SPV lent $1bn to Sibur Holding, a chemicals company part-owned by Gennady Timchenko, a billionaire subject to US sanctions, and Kirill Shamalov, who a family acquaintance said last year is Putin's son-in-law. (Putin has not confirmed the relationship.) Other entities have ties to Russian oil-drilling firms, energy companies, the country's national energy grid and Domodedovo Airport in Moscow, filings show.

These are the kinds of cross-border links Ireland's central bank should be worried about, said DCU's Corbet, a former commodities trader.

"I'd be concerned about the reputational, financial and contagion risks that would be associated should more Russian banks with SPVs in Ireland meet the same fate as Vneshprombank,'' he said. "Without data, the central bank is in the dark." (Bloomberg)

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