Banking reform has picked up at last, with a number of promising initiatives…
The pace of banking reform has accelerated markedly since early 2002. The most important reform initiatives of the last two years have included deposit insurance legislation, a major reform of the framework for prudential supervision, steps to increase transparency in the sector, and measures to facilitate the development of specific banking activities. Each of these measures is an important step in its own right. Even more important is the ‘fit’ between them: the various strands of reform complement each other well, which reflects the coherence of the authorities’ overall strategy. The emphasis on transparency, in particular, is especially welcome, as greater openness will facilitate better monitoring of banks by private-sector agents. The importance of banking reform is particularly evident in view of the recent very rapid growth in bank lending. While the evidence suggests that this growth represents a welcome process of financial deepening, there is a risk that such rapid growth in bank credit may come at the expense of portfolio quality. This will require careful monitoring on the part of the authorities. By strengthening the framework of prudential supervision now, when the environment for the banks is fairly benign, the authorities can reduce the risk of real problems arising as and when the external environment is less favourable and liquidity tightens.
Selected balance-sheet indicators of the Russian banking sector
1998–2003 (USD billion, end of period)
* Comparable data do not exist; figures for 1998 are based on the accounting rules in force as of 1 January 1998.
Source: Central Bank of Russia.
…but implementation will require considerable political will and regulatory capability
The real test of the authorities’ banking reform strategy will be in implementation. The reforms challenge numerous vested interests and their successful realisation will require considerable political will as well as the development of regulatory capacities of a very high order. The establishment of the new deposit insurance system will constitute a critical early test. If the central bank proves unable or unwilling to enforce the criteria for admission to the system strictly and to exclude weaker banks, the credibility of all the central bank’s regulatory reform efforts will suffer. By contrast, the exclusion of significant numbers of banks - on the basis of transparent criteria, consistently applied - would send a powerful signal of the authorities’ determination to regulate the sector effectively.
The government needs to adopt a clearer strategy with respect to state-owned banks
There is also a need for a clearer government strategy with respect to the future of state-owned banks; at present, Russia’s largest banks continue to be controlled by the state. There are good reasons for seeing the state’s continuing dominance of the banking system as a problem. State ownership and state intervention in credit allocation tend to distort competition, to aggravate moral hazard by encouraging the expectation of a bailout, and to undermine the efficiency of intermediation, as banks often pursue policies that reflect the non-commercial requirements of the authorities rather than good commercial sense. The short history of Russia’s banking sector exemplifies many of these problems, particularly with respect to competition and the imposition of hard budget constraints on banks. Official policy is that state-owned banks should exist, if at all, to correct market failures: their activities should be specialised in sectoral and other niches which the market will not address on its own. In practice, however, the major state-owned banks in Russia have tended to operate as universal banks, with Sberbank, in particular, exploiting its protected retail monopoly to extend its business in other directions. It is now the dominant bank in a number of market segments, not only retail (see table).
The relative weight of Sberbank in the Russian banking sector
Per cent of total sector assets
Source: Central Bank of Russia
The Russian authorities have long been committed in principle to reducing both state ownership of commercial banks and the intervention of state institutions in credit allocation. However, progress has been slow. The sector’s largest banks remain in state hands, while regional authorities continue to intervene, sometimes quite heavy-handedly, in local banking sectors, suppressing competition and impeding entry. While the government and the Bank of Russia should undoubtedly proceed cautiously in considering any major changes to the status of Sberbank or other very large state-owned banks, their present status is undoubtedly problematic from the point of view of banking sector development. While a more fundamental restructuring, involving privatisation of most of the state’s banking assets, is likely to prove desirable over the long term, he more urgent priority must be to reduce the distortions caused by the state’s current position in the sector and to facilitate the growth and consolidation of private banks capable of competing with Sberbank and other state-owned banks. These might include steps to simplify mergers and acquisitions, and also to facilitate easier branching, as well as the rigorous application of prudential norms to state-owned banks. Above all, the authorities should consider changes to the governance structure of the main state-owned banks that would make possible a credible commitment by the government and the central bank neither to extend special privileges to them nor to intervene in their commercial affairs.
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Экономический обзор -- Российская Федерация