Do Banks Benefit from Devaluation?

I keep reading rather ill-informed comments claiming that devaluation benefits second-tier banks.

In fact, this is entirely untrue, and I will now try to explain why.

The main argument shouted by populists and people who do not understand the subject is that all banks stock up on US dollars before a devaluation.

Let me explain: banks cannot buy US dollars for themselves, because the foreign exchange market is subject to restrictions. If a bank does have an open currency position, it is insignificant and, as a rule, opened for a short period.

There is a basic rule: foreign currency assets equal foreign currency liabilities, and tenge assets equal tenge liabilities.

What does this mean? All of a bank's funding consists of deposits, clients' current account balances, bonds, loans and borrowings from other financial institutions, and its own capital.

Its assets consist of loans issued, securities, cash, fixed assets, intangible assets and other assets.

So if a bank has foreign currency liabilities, its foreign currency assets, in the form of loans, securities and foreign currency cash, must equal those liabilities.

Otherwise, the bank would be in breach of a National Bank of Kazakhstan regulatory requirement.

Accordingly, when a bank's clients convert their deposits into US dollars, the bank is obliged to buy the currency for them. The main buyers are therefore the bank's clients, not the bank itself. In other words, households and companies.

So when people say that banks are buying foreign currency, they can only be doing so for their clients, not for themselves.

Devaluation itself is not good for banks, because a bank's main earnings come from interest income. All banks have foreign currency borrowers who took out loans in foreign currency. In tenge terms, their obligations to the bank increase, but the bank's obligations to its clients increase as well (see above: assets equal liabilities).

But the bank's credit risk on such a borrower rises, because the borrower's collateral is denominated in tenge and no longer covers the loan, and the borrower's cash flows are not always in foreign currency and cannot service the debt. As a result, overdue and non-performing loans grow. Meanwhile, the bank cannot delay payments on its own obligations to clients, so it has to book losses in the form of provisions (in other words, it covers its obligations to clients out of its own capital). That is why banks are the first to suffer from devaluation and have no interest in it whatsoever.

So, dear subscribers, first try to understand the subject before writing absurd comments.