CURRENT TRENDS IN THE RUSSIAN BANKING_ COMPARATIVE

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CURRENT TRENDS IN THE RUSSIAN BANKING_ COMPARATIVE Powered By Docstoc
					               CURRENT TRENDS
               IN THE RUSSIAN BANKING:
               COMPARATIVE AND
               INSTITUTIONAL ANALYSIS
Svetlana Kirdina
Institute of Economics - Russian Academy of Sciences (RAS)
kirdina@bk.ru , www.kirdina.ru

Andrei Vernikov
Higher School of Economics - National Research University;
Institute of Economics – RAS
verand77777@gmail.com, http://www.hse.ru/en/org/persons/64873

                                                                1
Moscow, Russia
Research questions

   Has post-Soviet transformation led to an irreversible
    change in the intrinsic model of financial
    intermediation and credit allocation?
   What was the impact of the financial crisis?




                                                        2
Outline
   Financial intermediation reforms in post-Soviet
    Russia (1991- …)
   International context: Russia compared to Central
    & Eastern Europe and China
   Interpretation based on the theory of institutional
    matrices




                                                          3
Stage 1 (from 1991 until 1998): State
withdrawal from financial intermediation

   Appropriation of state-owned banks by private
    persons, mainly insiders;
   New private banks emerge;
   Foreign banks establish their subsidiaries in
    Russia.




                                                    4
Stage 2 (from 1999 until 2009): State re-
engagement with financial intermediation

   State-controlled banks increase their market share
   Private domestic banks are crowded out
   State regulation of banking becomes more
    comprehensive and intense
   During the crisis the government steps into the
    banking industry more directly
   Development and policy lending expand.



                                                     5
   Breakdown of Russian banking
        system, 2000-2010
100%
 90%                                                                                                      foreign-controlled
 80%                                                                                                      banks
 70%
 60%                                                                                                      private domestic
 50%                                                                                                      banks
 40%
 30%
 20%                                                                                                      state-controlled
 10%                                                                                                      banks
  0%
       Dec-00
                Dec-01
                         Dec-02
                                  Dec-03
                                           Dec-04
                                                    Dec-05
                                                             Dec-06
                                                                      Dec-07
                                                                               Dec-08
                                                                                        Dec-09
                                                                                                 Dec-10


                                                                                                                               6
Factors that led to state re-engagement
in the banking sector
   Lack of private capital, insufficient depth of financial
    intermediation
   Fragility and volatility of the credit system
   Popular mistrust towards private banks
   Private banks pursued only short-term strategies, failed
    to finance innovation
   Private banks did not display superior efficiency
    compared to state-owned banks
   Huge social cost of keeping private banks afloat.



                                                               7
Stage 3 (from 2010 - ?): New wave of state
withdrawal ?
   The number (not a share) of state-controlled banks falls
    (divestment; merger; fraud)
   Market share of state-controlled banks stops growing
   Privatization program is announced.




                                                               8
Market shares of state-controlled banks:
Russia Vs. CEE
    100                                                                                Belarus
     90                                                                                Russia
     80                                                                                Serbia
     70                                                                                Poland
     60                                                                                Ukraine
     50                                                                                Romania
     40                                                                                Croatia
     30                                                                                Slovenia
     20                                                                                Czech R.
     10                                                                                Slovakia
      0                                                                                Bulgaria
                               2003
          2000

                 2001

                        2002



                                      2004

                                             2005

                                                    2006

                                                           2007

                                                                  2008

                                                                         2009

                                                                                2010
                                                                                       Hungary
                                                                                                  9
           China, banking system, 2007
                             Share, %    Share, % of loans   Share of state
       Bank type             of assets    to non-financial   authorities in
                                            companies          equity, %
Policy banks                   8.2             14.7              100*
State-owned commercial         53.4            47.2              100*
banks
Joint-stock commercial         16.9            17.8              > 70*
banks
Urban commercial banks         6.0             6.3               100**
Rural commercial banks         1.2             1.3               100**
Foreign banks                  1.9             2.0                 -
Urban credit cooperatives      0.4             0.5              > 75**
Rural credit cooperatives      8.1             9.8              > 75**
Others                         3.8             0.4                …
                     Total     100             100
* central authorities; ** local authorities

                                                                              10
Key to interpretation: Institutional matrix
theory
   Existing theory offers only partial explanation to
    government banking phenomenon.
       Development theory (need to finance development in countries
        with scarce private capital)
       Political theory (politicians use state-controlled banks to extract
        rent, to keep power, etc.).
   Institutional matrices theory (or Х-Y-theory) offers a
    deeper and broader perspective




                                                                              11
HUMAN SOCIETY……is seen as a social system, as
multiple inter-related social systems, within the main
“sociological co-ordinates” being economy, politics and
ideology. These value spheres are strongly interrelated
morphologically as parts or sides or components of one
complete whole.


          Politics

                Politics        Ideology




                           Economy
X- matrix           versus    Y-matrix
Redistributive economy

         X
         X

                               Y
                         Market economy




                                          13
 X- and Y-institutions
in the economy and their functions
     Functions of                     X-                    Y-
     institutions                institutions          institutions
1. Fixing of goods (property   Supreme conditional   Private ownership
        rights system)             ownership
    2. Transfer of goods          Redistribution         Exchange
                                 (accumulation-        (buying-selling)
                                  coordination-
                                   distribution)
  3. Interactions between         Cooperation           Competition
      economic agents
      4. Labor system          Employed (unlimited   Contract (short and
                                  term) labor        medium term) labor
   5. Feed-back signals          Cost limitation     Profit maximization
  (effectiveness indexes)        (Х-efficiency)         (Y-efficiency)
                                                                          14
Combinations of X- and Y-matrices



                 Y
                                             Y
                 X                           X




    X – dominant                  Y – dominant
    Y- complementary              X – complementary
(Russia, China, most Latin      (European and North American
  American & Asian countries)     countries)
                                                          15
    Russia: interpretation
   X-matrix institutions have historically prevailed in Russia.
    Banking has always been dominated by the state.
   Y-matrix institutions play complementary, auxiliary role by
    filling gaps left by redistribution
   An attempt to replace centralized allocation of resources by
    market-led mechanisms failed. Private banks proved to be
    unfit; they destroyed value instead of creating it.
   Growth of market share of state-owned banks reflects
    recovery of the X-matrix institutions.




                                                              16
Central and Eastern Europe:
interpretation
   In CEE countries the institutions of Y-matrix used to
    prevail
   After the WW2, X-matrix institutions were imposed by
    the USSR
   After the fall of the Berlin Wall and the waning of USSR
    influence, the “normal” institutional matrix recovered
   State-owned banks were privatized to foreign direct
    investors. Resource are allocated in a decentralized
    way, no directed nor policy lending takes place.



                                                               17
China: interpretation
   Like in Russia, X-matrix institutions have historically
    prevailed
   Unlike in Russia, the dominant matrix remain intact.
    Reforms aim at gradually complementing X-matrix
    institutions by Y-matrix institutions
   State-controlled banks stand at the core of the financial
    system. The government tries to make them more
    competitive and efficient. But directed political lending
    prevails over individual market decisions regarding
    resource allocation.




                                                                18
Conclusions
   Market (Y-matrix) institutions grow in Russia, but they
    remain complementary to the redistributive (X-matrix)
    institutions
   Financial system again becomes more centralized. The
    state plays an increasingly important role in resource
    allocation, through government banking and other
    regulation.
   The financial crisis overturned the balance in favor of the
    institutions of Х-economy. It streamlined the banking
    sector with its longer-term trends.




                                                             19
Bibliography
   Kirdina S. G. (2001), Institutional Matrices and Development
    in Russia (2nd edition), Novosibirsk (in Russian).
   Kirdina S. (2001), Fundamental Difference in the
    Transformation Process between Russia and East European
    Countries // Berliner Osteuropa Info, No.16.
   Kirdina S. (2010), Institutional matrices theory, in: Sociological
    Dictionary, Moscow (in Russian).
   Vernikov A., Kirdina S. (2010). Evolution of banking in X- and
    Y-economies /Evolutionary economics and finances:
    innovation, competition and economic growth. Moscow, 2010
    (In Russian)
   Vernikov A. (2010) Russian banking: A comeback of the state.
    - Economics Working Paper No.104, UCL SSEES Centre for
    Comparative Economics, London.
   Vernikov A. (2011), Government banking in Russia:
    Magnitude and new features, IWH Discussion Papers.
    August, No. 13.
                                                                    20

				
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