Regulatory Arbitrage: Current Accounts and Article 751
Translated from Russian with the help of AI. Original: Russian version
The ban on interest on current accounts, in place since 2018, has brought second-tier banks roughly KZT 3.5 trillion at the expense of their clients and the budget – a case of regulatory arbitrage.
In 2018, the National Bank of Kazakhstan changed the status of current accounts in second-tier banks, and amended Article 751 of the Civil Code and the Law "On Payments and Payment Systems", thereby banning the payment of interest on current accounts. The rationale was that less stable banks were offering budgetary and state organizations inflated interest rates on current accounts, exposing them to the risk of losing their funds. The second argument was that unstable banks, by offering incentives to decision-makers, attracted the funds of budgetary and state organizations, and the absence of interest was supposed to remove any possible justification for placing funds with a particular bank. In essence, the proverb applied: "Once bitten, twice shy."
First, solving this problem did not require changing an entire Code. A single government resolution establishing rules for placing funds, for example on the basis of a bank's rating, would have been enough. Indeed, this is the practice that Samruk-Kazyna and the Baiterek holding later adopted.
Second, free current accounts are even more attractive to banks, since they earn substantial sums from them. As a result, less stable banks, using incentives, began to attract such balances even more actively, and placing the funds with them could always be justified.
In effect, with this decision the state gave banks the opportunity to earn huge sums at the expense of clients who keep their money in current accounts. Assuming that banks place funds risk-free with the National Bank at the base rate minus 1%, and taking into account the re-placement of foreign currency balances and deposits at market prices, banks earned KZT 3.5 trillion between 2019 and 2024. Even after corporate income tax (CIT), net earnings come to about KZT 3 trillion, against total second-tier bank profits of KZT 9 trillion over five years. In other words, every third tenge earned by second-tier banks is secured by the ban on paying interest and the cap on rates on foreign currency deposits.
Most of the balances on current accounts belong to budgetary and state organizations, at whose expense banks earned KZT 1.8 trillion over five years. These are, in essence, direct losses to the budget. In the last year alone, the figure was KZT 489 billion.
At the expense of individuals' balances, second-tier banks earned KZT 1 trillion over five years.
Of course, all these calculations are hypothetical, but any ban or restriction inevitably redistributes profit among participants in the economy. Had there been no such ban, competition would have forced banks to pay interest on current account balances, as happens in many countries, ensuring a fairer distribution of income.
Moreover, the support provided to the banking sector since 2017 has amounted to a sum many times smaller than what second-tier banks have earned through regulatory arbitrage.