Although this would make the B&N Bank bailout slightly smaller than that of Russia's biggest private lender, Otkritie Bank, the rescue has raised questions among investors about central bank supervision and the stability of a banking sector buffeted by an economic downturn and Western sanctions.

Otkritie's shortfall is estimated at $6.9 billion, but market insiders believe that a systemic crisis is unlikely, because the state banks that hold most of Russia's banking assets are viewed as solid, with the problems confined to a handful of private banks.

Central bank deputy governor Vasily Pozdyshev told reporters that, based on a preliminary estimate, B&N Bank and its affiliated lenders would need 250 billion to 350 billion roubles ($6.03 million) in new provisions to cover bad loans.

Some of this money was coming from the bank's shareholders, a holding controlled by Russian oligarch Mikhail Gutseriyev and his family, thereby capping the central bank contribution.

The bank's owners have already set aside additional provisions as requested earlier by the central bank, which cut the bank's capital by one third and triggered the bailout, but those provisions were not enough, Pozdyshev said.

Depending on what the central bank administrators find out about the bank's assets and liabilities, the regulator could decide to take 100 percent ownership, Pozdyshev said.

The central bank has suspended the management role of Mikail Shishkhanov, Gutseriev's nephew, who was this week appointed chairman of B&N Bank's board, Pozdyshev said, but did not say who would take over.

Shishkhanov said on Thursday that the bank did not have any holes in its capital but only loans which require additional provisions, TASS news agency reported.

"We don't have 'holes' in the capital but rather a sense of loans not covered by proper provisions because of the market situation - a lot of borrowers are in bad condition, we estimate from 100 billion roubles to 150 billion (are loans without proper provisions)," he said.

Asked if other private banks were at risk, Pozdyshev said they had been reducing their exposure to problem banks over the past few weeks, in some cases at the central bank's behest.

"As a result of this work, to my understanding a domino effect now is absolutely out of the question. Here, there is no risk at all," Pozdyshev said.

PROBLEM ASSETS

B&N Bank, Russia's 12th biggest lender by assets, said on Wednesday it had requested a rescue. Problem loans on the books of banks it had bought during an acquisition spree were too great for it to handle, it said.

In July and August, 17 percent of the deposits held in B&N Bank by corporate clients were withdrawn, according to the bank's own data. Three percent of B&N Bank's retail deposits were withdrawn over the same period.

The withdrawals coincided with media speculation about banking sector stability after the central bank closed down a different lender, Yugra Bank.

The central bank said on Thursday it would provide extra capital and become B&N Bank's main investor, and the rescue would apply to affiliated lender Rost Bank and other banks in the group.

There would be no freeze on creditors' claims, and a so-called bail-in, where creditors loans are converted into shares in the bank, would not be used, it said.

BANK STOCKS DOWN

The bailout outlined for B&N Bank appeared to closely mirror the rescue under way for Otkritie, which is the biggest in Russia's history. Banking sector insiders say the Otkritie plan has so far been effective in shoring up the bank.

However, Russian financial sector stocks recovered on Thursday, with the composite financial sector stock index <.MICEXFNL> up 0.2 percent to 7,400 at 1718 GMT, better than the benchmark rouble-traded MICEX index. <.MCX>

Russian banks were already under stress from an economic slowdown made worse by Western sanctions, seeing bad debts rise over the past three years.

The financial health of some worsened after the central bank forced them to make more rigorous provisions for non-performing loans, while margins have tightened due to lower interest rates.

B&N Bank embarked on an expansion drive after 2010, buying several smaller banks before a merger with MDM Bank, one of Russia's largest lenders, in 2016.

($1 = 58.0741 roubles)

(Additional reporting by Katya Golubkova, Andrey Ostroukh and Kira Zavyalova; Writing by Christian Lowe; editing by Alexander Smith, Greg Mahlich and Adrian Croft)

By Elena Fabrichnaya and Polina Devitt