A Trillion Tenge in Bank Profits from Regulatory Arbitrage

I have written before that last year the banking sector earned KZT 1 trillion, net of CIT, through regulatory arbitrage. I have now calculated how much second-tier banks earned from the ban on paying interest on current accounts and the cap on rates for foreign-currency deposits between 1 January 2019 and 31 December 2024. The methodology was as follows. I took all balances on tenge current accounts from the banks' consolidated reports. I then assumed that the rate would have been the base rate minus 1% and calculated the rates for current accounts month by month. Next, I took all foreign-currency balances, including foreign-currency deposits. I also calculated a potential rate as the Fed rate minus 1%, and worked out the income from foreign-currency liabilities as the income at that calculated rate minus the expenses the banks actually incurred on those liabilities. Finally, I added up the resulting income from current accounts and foreign-currency deposits and subtracted a potential CIT, calculated as the effective CIT rate (about 15%) applied to the income from these operations.

As we can see, from 2019 to 2021 the profit from this arbitrage was not so large, about KZT 200 billion, because the base rate was low and the Fed rate was close to zero. In 2022 both the Fed and the National Bank of Kazakhstan began raising rates. In Kazakhstan the rate rose in March 2022, so already in 2022 the banks earned KZT 500 billion from this arbitrage. Then, against the backdrop of high Fed and NBK rates, the banks earned KZT 1 trillion in each of 2023 and 2024. The cumulative total for the whole period came to KZT 3 trillion, against total sector profit of KZT 9 trillion over the same period. This year the amount will most likely be larger, since balances at second-tier banks grow every year, and we can already see this in the January financial results.

The main income comes from the balances of legal entities, the largest share of which belongs to budget-funded organisations. They are barred from holding deposits, so they keep everything in current accounts. From 2019 to 2024, legal entities brought second-tier banks KZT 1.8 trillion, which is, in essence, money the country's consolidated budget failed to receive.

The second interesting point is that this regulatory arbitrage brings the bulk of its profit to the large banks, where most budget money and household money is concentrated. While on average 33% (KZT 3 trillion / KZT 9 trillion) of profit comes from regulatory arbitrage, at the large banks the share may reach 50%, and at the smaller banks it will be much lower, because households' foreign-currency deposits, balances on individuals' card accounts and budget-funded organisations mostly choose the top six banks. This is easy to verify from the banks' profitability: most of the sector's profit is concentrated precisely in the large banks.

Such distortions create enormous disincentives for lending: with margins from current accounts and foreign-currency deposits so high, banks have no reason to lend to the economy. The state is trying to address the budget and the lending to the real sector, yet it leaves in place the most important disincentive, which allows the banking sector to earn trillions of tenge from a single prohibition. And this profit is, in essence, a loss for businesses and individuals.

How Regulatory Arbitrage Brought Kazakhstani Banks KZT 3 Trillion and Why It Holds Back the Economy

From 2019 to 2024, Kazakhstan's banking sector earned KZT 3 trillion through regulatory arbitrage, a mechanism tied to the ban on paying interest on current accounts and the cap on rates for foreign-currency deposits. This source of income accounted for 33% of the banks' total profit over the period (KZT 9 trillion). In 2023 and 2024, arbitrage income reached a record KZT 1 trillion a year, which underscores its importance for the banking sector.

How the Banks' Profit Was Calculated

A detailed analysis was carried out to estimate the banks' profit from regulatory arbitrage.

• Data were collected on aggregate balances on tenge current accounts from the banks' consolidated reports.
• It was assumed that the potential rate on current accounts could have been the "base rate – 1%".
• Similarly, for foreign-currency deposits, a potential rate was calculated as the "Fed rate – 1%", and the difference was then taken between the potential income and the second-tier banks' actual expenses on foreign-currency liabilities.
• A potential corporate income tax (CIT) at an effective rate of 15% (based on data from previous years) was deducted from the resulting profit.

How Rising Rates Affected Bank Profits

The analysis showed that until 2021 the profit from regulatory arbitrage was relatively small (~KZT 200 billion a year), since the rates of the National Bank of Kazakhstan and the US Fed remained low. From 2022, however, the situation changed:

• In March 2022 the NBK rate rose significantly, which immediately increased the potential yield on current accounts.
• The rise in the Fed rate increased the potential yield on the banks' foreign-currency liabilities.
• As a result, in 2022 the banks earned KZT 500 billion, and in 2023 and 2024 KZT 1 trillion each year.

The banks' cumulative earnings for the whole period came to KZT 3 trillion.

Who Brought the Banks Their Main Profit

The largest profit from regulatory arbitrage came from the balances on the accounts of legal entities: KZT 1.8 trillion over 2019–2024. The main contribution came from budget-funded organisations, which are barred from placing funds in deposits and are forced to keep their money in current accounts that earn no interest. These KZT 1.8 trillion can thus be regarded as revenue the state budget failed to receive.

Moreover, the distribution of arbitrage profit within the banking sector is uneven. The large banks reaped the main benefit, since that is where most budget funds, foreign-currency deposits and household balances are concentrated. At the large second-tier banks the share of arbitrage profit may reach 50% of total income, while at the smaller banks the figure is significantly lower.

Why This Is Harmful for the Economy

The structure of the banking sector's profit reveals a serious imbalance. With margins from current accounts and foreign-currency deposits so high, it is unprofitable for banks to lend to the economy, since they can earn guaranteed excess profit without taking on credit risk. As a result:

• Access to financing for businesses is reduced.
• Economic growth slows, since bank loans are a key source of investment in the economy.
• The state budget loses substantial funds that could have been directed to infrastructure and social spending.

What Can Be Changed

To remove this disincentive, reforms are needed:

• Consider allowing interest to be paid on current accounts.
• Introduce market mechanisms that would encourage banks to lend to the real sector; I have already written about what needs to be done for this.
• Revisit the limits on rates for foreign-currency deposits in order to reduce the artificial advantages for banks; in this case, it would be logical to link the yield on foreign-currency deposits to the Fed rate.

Without these changes, the banking sector will continue to earn trillions of tenge from regulatory restrictions, while the economy will face a shortage of credit resources. Regulatory arbitrage is a hidden form of redistribution of funds from businesses and the state to banks, and the longer this mechanism remains in place, the greater the losses for the real sector of the economy.