The Problem of 1% Foreign Currency Deposits
Translated from Russian with the help of AI. Original: Russian version
Banks earn a fat margin on foreign currency deposits capped at 1% while capital leaves the country; the author proposes changes to the regulation.
I would like to raise one more topic: foreign currency deposits.
Any decisions we take must be monitored and revisited in the future. Otherwise we will end up with imbalances, because our world changes fast.
The maximum rate on foreign currency deposits is 1%, while US government securities now yield more than 5%. Our regulation is built so that banks cannot offer more, and this rule is already 10 years old, yet nobody sees a problem in it. Having taken in foreign currency deposits, banks redeploy the funds at a much higher return, placing them with the National Bank of Kazakhstan (NBK) and in other financial instruments. I estimate the average risk-free yield at 5%, which leaves banks with a 4% margin. Such deposits used to be a burden for banks, because lending in foreign currency in Kazakhstan is very problematic. Now banks are earning huge sums out of thin air.
If we look at the structure of deposits in second-tier banks and at the NBK's current account, we can see that this has led to capital outflow from the country, and I believe the trend will continue, even though this money should be working for our country. It is hard to see the picture in the aggregated current account data, because the outflow is offset by money from Russians arriving in our depositors' accounts, and that money is temporary. But I think that if we looked at a more detailed breakdown, the situation would turn out to be far from the best.
The issue is complex, tangled and needs explaining.
It all began long ago, when the NBK tried to stop banks from moving money out of the country, still contending with the consequences of the BTA case. The domestic asset ratio (DAR, known in Russian as KVA) was introduced. It is calculated as the ratio of assets placed abroad to liabilities raised abroad, and it must not exceed 1. Later, to fight dollarization, rates on dollar deposits were capped at 1%. After that, foreign currency lending was restricted through tighter regulation, with only exporters left eligible for such loans. That may have made sense at the time, when the tenge was stable apart from one-day devaluations.
As a result, foreign currency bonds disappeared from bank balance sheets, since no Western rates can compete with our 1%. But the problem is that our deposits are short-term and are hard to use to finance long-term projects, so long-term funding has vanished from banks' balance sheets. Many people ask for the UAPF to be unleashed on the economy, but the UAPF sends most of its money into government securities, because someone has to finance the budget deficit.
The problem has to be solved comprehensively, and the sooner the better:
Change the DAR, at least for investments in investment-grade securities. This would let second-tier banks redeploy money into higher-yielding bonds rather than correspondent accounts at the NBK.
Raise the rate on foreign currency deposits to the level of the Fed rate. This would keep capital in the country and let our depositors earn the money, rather than the banks, as is the case now.
Ban non-market state funding in tenge for export-oriented projects, and offer instead an alternative in foreign currency with a subsidized rate. This would attract foreign investment.
Create a market for long-term currency swaps, which the country does not currently have, to hedge currency risks. The state's role is very important at the initial stage. If monetary policy is predictable and the legislation, liquidity and infrastructure are right, foreign players will come to this market.
Reduce risk weights for medium-term foreign currency loans, for example up to 3 years, for certain sectors whose prices correlate with the exchange rate, such as machine building, production of exchange-traded commodities and so on.
As the saying goes, a fish looks for deeper water, and a person for a better life. A piece of advice to everyone: there is no ban on buying foreign securities. Through any broker you can buy US government securities yielding 5% or more, with much lower risk than deposits in second-tier banks. A further advantage of these securities is that they can be sold instantly and converted back into cash. I expect many brokers will now start offering such services.