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Central Bank Ditches Collateral-Free Loans

The Central Bank said Thursday that it would scrap collateral-free loans by the end of the year, continuing the unwinding of emergency support for the banking sector as the economy recovers.

Auctions for collateral-free loans longer than five weeks will be stopped from Oct. 1, and the stoppage will be extended to all maturities as of Jan. 1, 2011.

"Now, at a time of stabilization in the domestic financial markets and, in particular, a normalization of the banking liquidity situation, demand for this instrument has fallen sharply," the Central Bank said.

The halt of collateral-free lending will thus "not have a negative effect on the functioning of the banking sector as a whole and will not create additional risks for the stability of lending organizations," it said.

The move was expected. Central Bank First Deputy Chairman Alexei Ulyukayev said Tuesday that the loans — introduced in fall 2008, to see banks through the worst of the economic crisis and global credit crunch — would likely be eliminated by the end of this year.

With Russia's economy and financial markets stabilizing, the Central Bank wants to reduce exposure to the risky tool and has already tightened the rules this year, making about 60 banks no longer eligible for such funding.

A revival in the domestic money market — where a rallying ruble and ample liquidity has pushed down three-month Mosprime rates to levels not seen since 2006 — has helped dampen banks' appetite for the relatively expensive collateral-free loans.

Currently, banks owe the Central Bank just 50 billion rubles ($1.6 billion) in such loans — down sharply from a peak of over 1.9 trillion rubles in February 2009.

The biggest debtor is International Industrial Bank, a top-30 lender controlled by Russian mining and shipping magnate Sergei Pugachyov.

Also known as MezhPromBank, IIB is currently in talks with the Central Bank over the restructuring of its collateral-free debt into another, collateralized instrument.

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