Russia's central bank said on Tuesday it was bailing out Otkritie bank, one of the country's largest private lenders, after Otkritie suffered a huge outflow of funds amid worries about the quality of its loan portfolio.

The central bank said it planned to tap its funds in order to become a major investor in Otkritie, the country's seventh-biggest bank by assets according to Interfax data, executing a radical move aimed at saving the troubled lender.

The bail-out is likely to stoke anxiety about the wider state of the Russian banking sector, fuelling speculation that other big banks may have similar problems. It also raises questions about how the central bank is supervising the sector.

Otkritie is the country's largest private lender by assets, according to second-quarter data from Interfax, and some of its shareholders are connected to major state entities, a fact that prompted some analysts to believe it was too big and influential to be allowed to fail.

"On one hand, the central bank’s comment is a relief for the market," said Dmitry Polevoy, chief economist at ING Bank in Moscow.

"On the other hand, the overall situation and the central bank’s action raises questions about the quality of the central bank’s supervisory of Russia’s largest systematically important lenders."

The central bank did not say how much it was spending on the bail-out. Until now, the biggest banking bail-out in Russia was a 395-billion-rouble ($6.7 billion) rescue of Bank of Moscow in 2011, Russia's fifth-biggest lender by assets at the time.

"The central bank as the lender of last resort has an obligation to prevent spillover into the rest of banking sector," said Simon Quijano-Evans, a strategist at Legal & General Investment Management.

"It has to send the message that it is on top of things, to the markets as well as depositors."

The central bank said in a statement that Otkritie's owners and executives had agreed to cooperate to help restore the lender's balance sheet. In the meantime, Otkritie and its businesses would operate as usual, it said.

WHAT WENT WRONG

The central bank is trying to clean up the banking sector, shutting down banks it believes pose a risk to the system. It revoked the licence of Yugra Bank, a top 20 lender, last month after saying it had falsified its accounts.

Otkritie's problems came into focus in early July after Kremlin-backed rating agency ACRA assigned the lender a BBB- rating, citing the "low quality of its loan portfolio".

Investors began to sell off Otkritie's shares this month and Moody's put its ratings on review for a possible downgrade soon afterwards, saying it was concerned by "elevated volatility of the bank's customer deposits, which puts pressure on its liquidity position."

In June and July, Otkritie's customer deposits contracted by 435 billion roubles ($7.40 billion), equivalent to 18 percent of the bank's total liabilities as of June 1, Moody's said.

This month, rouble liquidity in the Russian interbank market rose unexpectedly as the banking sector started borrowing more from the central bank, seen as a sign of deteriorating trust in the interbank lending market.

The central bank said it would not use a bail-in tool at its disposal whereby creditors' claims on the bank are converted into the bank's equity.

Otkritie is 65 percent owned by Otkritie Holding, which in turn is owned by a group of executives from oil major Lukoil , state-owned VTB bank, Otkritie and others.

Shares of Otkritie were up 2.4 percent on the central bank's announcement. Otkritie's $500 million bond, which matures in April 2019, was up 34 cents, according to Tradeweb data , while the November 2019 issue jumped 11 cents.