How Regulatory Restrictions (Zero-Interest Accounts, the FX Deposit Cap, Tax Breaks on Securities) Delivered Windfall Profits to Banks

I read reviews of the banking sector and see that its profitability is rising across the board. Banks are now earning very substantial sums, yet lending is not growing. In my view, this points to serious imbalances within the banking system. It seems to me that the sector's current favorable position is the result of changes to the regulatory environment after the 2016–2017 crisis. I will try to explain how regulators, while fighting one problem, inadvertently helped banks earn money today.

In 2018, a ban on paying interest on current accounts was introduced to combat corruption in state organizations, on the assumption that bankers were paying kickbacks to win current accounts. In reality, when accounts pay no interest, the incentive to attract them by various means is much higher, because banks earn enormous sums on current accounts. By raising funds at zero cost, banks place them without risk at 16.75%. Balances on card accounts and current accounts make up roughly 30–40% of all liabilities, so anyone can do a quick calculation of how much the financial sector earns from this. Incidentally, the budget loses money here too: organizations that are barred from placing deposits have simply lost the income they would have earned on their idle cash balances.

Banks are also subject to a cap on foreign-currency deposit rates, currently 1%. In principle, this was reasonable when the Fed rate was zero. The Fed rate is now 5%. That means funding for top-tier borrowers worldwide costs at least 6–7%, while here the cost remains at 1%. Naturally, foreign-currency borrowing has grown, and banks earn an additional margin from this restriction. The aim was to fight the dollarization of deposits, although to my mind the cap violates the principles of a market economy and creates imbalances. As a result, banks obtained funding far cheaper than that of AAA-rated banks.

Banks do not pay taxes on income from notes and bonds. They hold huge reserves of liquidity, which they put into bonds and notes, and they pay no tax to the budget on this income. As a result, the effective rate on their placements is not 16.75% but 20.9%, which means banks have no reason to lend to the economy at any rate below 20.6%.

Banks also always profit from exchange-rate volatility, because they can take positions and widen spreads during turbulent periods. The regulation is designed in such a way that volatility persists. It was created precisely in order to fight volatility, or more precisely the weakening of the tenge. We should remember that any prohibition leads to imbalances. To hold up the tenge, ordinary companies were banned from buying foreign currency, while quasi-public companies convert 50% of their revenue. At the same time, the National Bank periodically sells large amounts of foreign currency to replenish the budget. How does this work? When the National Bank sells currency, there is simply nobody to buy it except importers, who buy under current contracts. The tenge therefore strengthens sharply. As soon as the National Bank stops selling, the tenge weakens, because importers keep buying currency for their immediate needs. In global practice, when companies see their currency strengthening, they buy foreign currency in advance for future contracts. This balances supply and demand, hedges their risks and losses, and makes the exchange rate less volatile.

It seems to me that the regulatory environment for the financial sector needs to be adjusted in order to eliminate imbalances in the economy altogether and to encourage banks to lend to the real sector rather than to buy National Bank notes and Ministry of Finance bonds.