CEO of Halyk Bank and former governor of Kazakhstan’s central bank, Grigori Marchenko tells Karina Robinson why the Federal Reserve got it wrong.

If Grigori Marchenko, CEO of Halyk Savings Bank but also former central bank governor of Kazakhstan and the architect of its much admired regulatory framework for banks, were in charge of the US Federal Reserve, what a different scenario the financial world would find itself in now.

Look at the past 20 years, he says, citing the bail-out of Continental Illinois in the 1980s, the de facto bail-out of banks involved in the Latin American debt crisis, the bail-out of hedge fund long-term capital management and the Fed’s pumping liquidity into the system after the internet bubble burst in 2000. “If something happens, those guys who have the wrong strategies get bailed out with taxpayers’ money. It is not fair,” he says, with disapproval and a shake of his bearded face, noting that policymakers are “worrying more about systemic risk and less about moral hazard.”

The tall 47 year old points out that “we were not shy in pulling the plug” when he was at the Kazakhstan central bank, revoking 210 banking licences, including that of the second largest bank in the country by deposits.

Impressive groundings

Mr Marchenko was at the central bank from the mid-1990s until 2004, with a stint as chairman of the national securities commission and a two-year break from the public sector as president of the local operations of Deutsche Bank Securities. He then became first deputy prime minister and subsequently adviser to president Nursultan Nazarbayev.

A technocrat friend of his from the International Monetary Fund, who has worked with him, says: “He is a fascinating figure – [from the early 1990s] operating under a semi dictatorship and yet doing technical work as it should be done.” Kazakhstan has been ruled by President Nazarbayev for almost two decades. Mr Marchenko denies that he has fallen out with him. In fact, London and Kazakhstan-listed Halyk Bank, where he is now CEO, is majority owned by the president’s daughter, Dinara, and her husband.

Over insipid lotus tea at the luxury Mandarin Oriental hotel in London, Mr Marchenko joyfully recognises the contradiction between his philosophy on government bail-outs and his current position as CEO of the largest bank in the country by retail deposits, with its 25% market share, and one through which two-thirds of pensions and salaries are paid.

Theoretically speaking

“If, theoretically, something happens to our bank, if the government did not bail us out, we would have a new government!” he exclaims, almost bouncing in his seat with mischievous glee, noting how many voters have stakes in the bank’s health.

His former central bank governor hat comes off and his experience in the commercial sector comes to the fore when discussing the CEO behaviour that helped to bring on the current global financial crisis. In excellent English, Mr Marchenko, who was not allowed out of the Soviet Union until he was 29 years old, despite having attended the elite Moscow State Institute of International Relations, says investment by banks in assets that are now proving toxic cannot only be blamed on the bonus structure of CEO compensation.

“There is a lot of peer pressure and it should not be under-estimated,” he says, adding that a board of directors would not tolerate a contrarian philosophy for long. Mr Marchenko has direct experience of this. In 2007, two other local banks surpassed Halyk in assets on the back of lending into a booming economy, growing at an estimated 8.7% in 2007 and with real estate prices rising 40% a year.

“On the board there was dissent and even [among] shareholders. I did resist because I had a track record [as central bank governor]. But in another 18 months I would have been ousted, they would have said I was too conservative, too risk averse,” he says.

His eyes light up as he fantasises: “Then I would have gone back to the Financial Supervision Agency and then I would have had my revenge. I would have had no mercy [with the banks],” he says, chuckling away. On a more serious note, Mr Marchenko believes there are two measures the central bank should have taken to lower Kazakhstan’s exposure to the global financial crisis – although he is at pains to point out that he speaks with hindsight.

First, it should have imposed strict limits on the foreign borrowings of the local banks by July 2006 – it only did so late in 2007. He notes that half of the foreign borrowings stock on the balance sheets of Kazak banks was contracted after July 2006.

As rating agency Moody’s notes in a recent report, the banking sector’s very rapid asset growth over the past three years was supported by mounting wholesale foreign borrowings, which accounted for 50% of their total funding in 2007. Reliance on foreign capital markets as they have dried up forced the National Bank of Kazakhstan to inject $10bn of short-term liquidity support into the market last year.

Second, Mr Marchenko says he would have created a sub-fund in central bank reserves which would have been labelled “core reserves”. This would have made it “optically” easier for the markets and the public to understand that the billions of dollars flying out of the country between August and November 2007 was simply hot money leaving.

Hot money

Investors and speculators had pumped about $7bn, or almost 10% of Kazakhstan’s gross domestic product, into the country between December 2005 and June 2007 in a bet that the currency would appreciate. About 90% of that hot money left between August and November 2007, creating the impression that Kazakhstan’s reserves were being depleted.

Mr Marchenko speaks with nostalgia about his days as a central bank governor: “It is one of the best clubs in the world to belong to. I miss it. There is not much camaraderie and too much materialism [among commercial bankers].”

The father of two admits that he is at a stage where he needs to make some money “but it will not last for ever”. His longer-term plans include helping design and fund the third stage of social security reforms in Kazakhstan, which would encompass issues such as unemployment and maternity benefits.

In the meantime, though, mention of Standard & Poor’s description in a December report of Halyk Bank’s capitalisation ratios as only “adequate” causes a bit of an explosion. “I am not worried about our capital position. The Basel requirement is 8% [minimum capital adequacy ratio], we have 12%,” he says, with a quick aside to insist he does not like to join the bandwagon by criticising rating agencies.

But then he cannot resist, pointing out that Halyk has never undertaken hybrid or subordinated debt issues on the international market, “another issue conveniently overlooked by the rating agencies,” he thunders, with evident enjoyment of his diatribe.

Additionally, the bank owns 90% of its 670 branches, which it has never marked to market. If it did so, that would add another $250m to its capital, he says.

“Rating agencies visit us twice a year. We are not complaining, but the standard of corporate analyst covering Kazakhstan is not adequate and I have told them to their faces,” he adds, with a final flourish.

On the global financial crisis, Mr Marchenko believes there is a need for a different balance between regulators, banks and the rating agencies. Basel I put too much emphasis on the regulator’s responsibilities and capital, Basel II puts too much emphasis on a bank’s internal models and on the rating agencies – yet if something goes wrong, he notes, everyone blames the regulator.

He also strongly believes – but then his opinions are probably always strongly held – that the work to streamline and implant the same accounting standards all over the world needs to be speeded up in order to allow like-for-like comparisons between banks, and therefore increase transparency and a way out of the crisis.

If Mr Marchenko were in charge of the Fed, some banks would already have been allowed to fail and the unprecedented injections of liquidity over the past eight months might not have taken place.

Who knows whether his prescriptions would have succeeded – after all, he has only been in charge of the banking sector of an economy with a population of some 15.4 million, a GDP of about $93bn and a heavy reliance on commodities. But then, the actions taken by central banks and regulators over the past 10 months haven’t succeeded either.

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