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The following OECD assessment and recommendations summarise chapter 4 of the Economic Survey of Russia published on 15 July 2009.
The authorities’ reaction to the onset of the crisis was broadly in line with that of many OECD economies, although the response in Russia was unusually rapid and large, reflecting in part the substantial resources available to the authorities after years of fiscal and balance of payments surpluses. Liquidity and capital were provided to the banking system, deposit insurance limits were increased, and a number of expansionary fiscal measures were announced. All told, quantifiable announcements in the first months of the crisis were equivalent to about 13% of GDP. These measures were initially thought to be more than adequate to address the consequences for Russia of the global financial crisis, but it has become increasingly clear that Russia is facing a deeper and longer downturn than was imagined a few months ago. As the stock of available resources has dwindled while the cost of some initial measures has risen (notably the combination of limiting depreciation of the rouble while providing ample liquidity to banks) new measures are being more carefully weighed, especially with respect to possible risks to fiscal sustainability.
Demand-support measures will be less effective to the extent that the financial system is not operating smoothly. This implies that maintaining the functioning of the banking system is of prime importance. While liquidity shortages did trigger turmoil at the onset of the global crisis, the main threat to credit growth now appears to be solvency problems, arising from the declining capacity of borrowers to repay bank loans. Banks risk breaching regulatory capital requirements if, as expected, the downturn brings an upsurge in non-performing loans. Such capital shortages can force deleveraging as banks shrink their balance sheets to meet capital adequacy requirements. Banks may also be unwilling to lend as credit risks on new lending rise in an environment of negative real GDP growth both domestically and abroad. The challenge is to maintain capital adequacy and prevent a sharp curtailing of lending flows financing new activities, while minimising moral hazard and the cost to taxpayers.
Russia’s banking sector has suffered repeated crises since the start of transition. Policy makers face two broad regulatory challenges in seeking to improve the stability of the banking system: to converge on existing best practice as regards the implementation of prudential supervision and (a challenge shared with many other countries) to address defects in bank regulation which amplify economic cycles and give insufficient weight to liquidity considerations. In the cyclical upswing Russian banks on average maintained but did not increase capital cushions above the minimum standard, and many therefore risk falling below the minimum as loan losses rise as a result of the recession, unless new capital can be found. As in OECD countries, there is a need for a more macro-prudential approach to financial supervision, which takes more account of systemic risks, in addition to focusing on bank-specific ones. Capital requirements and/or provisioning rules should be made counter-cyclical and capital requirements should be allowed to vary across banks to reflect each bank’s contribution to systemic risk. In addition, stress tests should include assessments of shocks which hit across the banking system. There will be ongoing efforts to reform international rules to strengthen existing supervision approaches, and Russia should actively participate in these discussions while proceeding with own reforms to bolster financial market stability.
Russia’s financial system, despite its recent rapid expansion, is still relatively underdeveloped, leaving considerable scope for financial deepening to contribute to long-term growth. A number of reforms would contribute to such deepening. First, although Russia has many banks, competition overall is weak, especially at the regional level. Consolidation of the sector would help, as this would lift more banks above a minimum efficient scale, which is necessary to contribute to effective competition. Over the long term, competition and efficiency would be improved by streamlining the state’s involvement in the sector. Here, as with state-owned enterprises in other sectors, policy goals are mixed with commercial ones, mandates are unclear, and institutions with sub-optimal corporate governance arrangements are given major roles. Beyond being boosted by competition, banking efficiency would benefit from improvements in the rule of law, faster convergence to international financial reporting standards, and measures to lengthen the effective duration of bank liabilities (notably, repeal of the Civil Code provision that allows withdrawal of all household deposits on demand regardless of their contractual term).
There are still many banks, most of which are very small
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Source: Central Bank of Russia.
The largest banks are state-owned
Source: Central Bank of Russia and OECD calculations.
How to obtain this publication
The complete edition of the Economic Survey of Russia is available from:
The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations.
For further information please contact the Russia Desk at the OECD Economics Department at email@example.com.
The OECD Secretariat's report was prepared by Geoff Barnard, Roland Beck, Paul Conway and Tatiana Lysenko under the supervision of Andreas Wörgötter. Research assistance was provided by Corinne Chanteloup.