Russian securities market _gener

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					      Banking in Russia

      Dr. Ivan Darushin
St-Petersburg State University
   The Soviet Financial System

• The financial system of the Soviet period
  was a mechanism for state control of the
• The government owned and managed the
  banking system.
• The State Bank (Gosudarstvenniy bank-
  Gosbank) was the central bank and the
  only commercial bank.
 The Soviet Financial System
• Wages were paid only in cash and households used
  cash exclusively for making payments.
• Checkbooks, credit cards, and other alternative forms of
  payment were not available in the Soviet Union.
• Wage earners could keep savings deposits in the
  Savings Bank (Sberbank), where they earned low
  interest, and these funds were available to the
  government as a source of income.
• Two other banks also existed prior to 1987. The
  Construction Bank (Stroybank) provided investment
  credits to enterprises, and the Foreign Trade Bank
  (Vneshtorgbank) handled financial transactions to trade.
 The Soviet Financial System
• In 1987 and 1988, commercial banking
  operations were separated from Gosbank and
  replaced the two specialized banks with three
  banks to provide credit to designated sectors of
  the economy:
• the Agro-Industrial Bank (Agroprombank),
• the Industry and Construction Bank (Promstroy-
• the Social Investment Bank (Zhilsotsbank),
  which managed credits for the social welfare
The Financial Sector in the 1990s
• In the 1990s, Russia's financial sector,
  particularly its banking system, has been
  one of the fastest changing elements of
  the economy.
    Reform of banking system
• The Russian banking system has
  developed into a two-tier system, including
  a Central bank and commercial banks,
  that is the standard structure in market-
  based economies.
    Bank of Russia Functions
The Bank of Russia ( performs its functions in
  compliance with the Constitution of the Russian
  Federation and the Federal Law On the Central Bank of
  the Russian Federation (Bank of Russia) and other
  federal laws:
• elaborates and pursues a single state monetary policy in
  interaction with the Government of the Russian
• exercises its exclusive right to issue currency and
  manages currency circulation;
• acts as the lender of last resort for credit institutions and
  manages the system of refinancing them;
• sets the rules to effect settlements in the Russian
• sets the rules to conduct banking operations;
    Bank of Russia Functions
• manages all categories of budget accounts, unless
  otherwise is stipulated by federal laws, by effecting
  settlements upon the instruction of authorised bodies of
  executive power and government extra-budgetary funds
  responsible for organising budget execution and
  executing them;
• efficiently manages Bank of Russia international
• makes decisions on the state registration of credit
  institutions, issues banking licences to credit institutions
  and suspends and revokes them;
    Bank of Russia Functions
• supervises the activities of credit institutions and
  banking groups;
• registers the issue of securities by credit
  institutions in compliance with federal laws;
• conducts on its own or on the instruction of the
  Russian Government all kinds of banking
  operations and other transactions necessary for
  the fulfilment by the Bank of Russia of its
• organises and implements foreign exchange
  regulation and foreign exchange control in
  compliance with federal legislation;
   Bank of Russia Functions
• establishes the procedure for effecting
  settlements with international organisations,
  foreign states and also legal entities and private
• sets the accounting and reporting rules for the
  Russian banking sector;
• sets and publishes the official exchange rates of
  foreign currencies against the ruble;
• participates in drafting the Russian balance of
  payments forecast and organises the compiling
  of the balance of payments of the Russian
    Bank of Russia Functions
• establishes the procedure and terms and conditions for
  the organisation by foreign currency exchanges of
  operations to buy and sell foreign exchange and issues,
  suspends and revokes permits granted to currency
  exchanges to organise operations to buy and sell foreign
• analyses and makes forecasts on the state of the
  Russian economy as a whole and by region, especially
  with regard to monetary, foreign currency, finance and
  price relationships, and publishes corresponding
  materials and statistical data;
• performs other functions in pursuance of federal laws.
Role of CBR in monetary policy
• Control of the money supply by lending funds to
  commercial banks and by establishing their
  reserve requirements.
• In the early years, the CBR financed state
  budget deficits by issuing credits to cover
  Government expenditures. The availability of
  such credits played a central role in the high
  inflation that the Russian economy endured
  between 1991 and 1994. In 1995 new legislation
  and regulations reduced this type of credit by
  prohibiting the use of credit to finance state
  budget deficits
 Methods of CBR monetary policy
Central Bank of Russia provides the monetary
  policy by:
• establishing of Central Bank rate;
• establishing of the norms of required reserves
  for commercial banks;
• refinancing operations;
• operations on the open market;
• currency operations and regulation;
• issuing and impressments of money.
    Structure of Central Bank
• Headquarter in Moscow (Board of
  Directors and Departments);

• 87 Regional Branches and National Banks
  (in each region);

• 776 Local Branches (clearing centers)
 Organization of settlement system
• each commerce bank has the correspondent account at
  the local branch of Central Bank.

        Local branch         Local branch A   Local branch B

  Commerce       Commerce     Commerce         Commerce
    bank A         bank B       bank A           bank B
    The goals of banking sector
   development (strategy of CBR)

• increasing the protection of interests of
  depositors and other creditors of banks;
• enhancing the effectiveness of the banking
  sector’s activity in accumulating household
  and enterprise sector funds and
  transforming them into loans and
• making Russian credit institutions more
    The goals of banking sector
   development (strategy of CBR)
• preventing the use of credit institutions in
  dishonest commercial practices and illegal
  activities, especially the financing of
  terrorism and money laundering;
• promoting the development of the
  competitive environment and ensuring the
  transparency of credit institutions;
• building up investor, creditor and depositor
  confidence in the banking sector.
        Commercial banking
Regulated by Low on Banks and Banking Activities
Banks may provide all kinds of banking activity:
• to lend and borrow money;
• to make money and currency transactions;
• to open and serve accounts of enterprises and
  natural persons;
• to invest money;
• etc
          History of banking system
• 1991-1993: concentration of capital resources
  on several number of new commercial banks
  (former state banks);
• 1994-1995: appearance of large quantity of new-
  formed banks.
 High level of inflation => absence of credits (interest rates are too
 Use of money on the accounts to earn income from operations with
 Favourable credits of CBR => high level of inter-bank credits
 Banks hadn’t tendency to develop management and quality of
 Lowering of inflation => bankruptcy of small and medium banks and
  concentration of capital in the large banks
        History of banking system
• 1995-1997: concentration of capital
Decrease of currency incomes (from 20%
  to 10%)
Lowering of credits (from 66% to 55%)
Growth of assets in government bonds
  (from 2% to 20%)
Interestingly: main participants of government securities
   market – agents banks by budget accounts (use budget
   money to by government securities issued to decrease
   budget deficit)
      History of banking system
• 1997 – middle of 1998: over-concentration
  of banks capital.
A lot of bank holdings, bank mergers
Reorientation of activity for the real sector
  of economy (low level of GKO rates,
  currency corridor)
Decrease of banks profits
Improvement of management
        History of banking system
• Crises of August 1998
Large banks were the biggest holder of GKO
 had the biggest losses
People began to close currency accounts
=> decrease of bank assets
Deficit of funds => paralysis of transfer system
Result: full bank crises which produced currency and
  financial crises.
Only small banks which hadn’t a lot of GKO and currency
  obligations lived and worked.
Crises continued to the middle of 1999 before Central Bank
  began restructuring and readjustment of problem banks
      History of banking system
• 1999-nowadays: recovery and
  development of banking system.
Mostly problem banks were closed.
From 1999 – rising of foreign banks capital
From 2000 – rising of local banks capital
   Commercial banks activities
• Most of the commercial banks offer their
  customers savings deposit accounts, and the
  more established banks provide foreign-
  exchange services, investment services, and
  corporate services.
• Some banks offer debit cards that allow
  customers to have payments for goods and
  services deducted directly from their bank
• Some banks also offer credit cards to customers
  with impeccable credit history.
            Foreign banks
• In early 1996, the State Duma passed a
  statute prohibiting the CBR from licensing
  foreign banks that did not have operations
  in Russia before November 1993 to
  protect national banking system
• Nowadays it low doesn’t exist but foreign
  banks have to provide their activity from
  established departments registered by
  Russian lows.
  The dynamics of legal entities
assets in banks (billions of roubles)
 The dynamics of natural persons
assets in banks (billions of roubles)
Quantity of new banks in Russia
Quantity of closed banks
Quantity of banks
Quantity of new banks in The
System of Deposits Insurance
   Tendencies of the last years
• Decrease of state controlled banks
  influence (and its part on banking sphere)
• Increase of foreign banks activity
• Reduction of interest rates (rates increase
  from the middle of 2008)
• Increase of customer credits and
  mortgage credits
• Enlargement of quantity and quality of
          Banks innovations
• Certificates of deposit (CD’s) for legal
  entities, up to 1 year.

• Certificates of Savings (CS’s) for natural
  persons, up to 3 years

• Structured financing (deposits connected
  on the another market indicators)
     Some news of last years
• Government Agency of Deposit Insurance

• Government Agency of Restructuring of
  Mortgage Loans (end of 2008)
        Positive factors of banks
•   Favorable macroeconomics environment;
•   Increasing of trust for banks;
•   Increasing demand for bank services;
•   Diversification of banks services;
•   Improving of management;
•   Improving of risk-management;
•   Transition to international standards of
    evaluation and planning.
Main activities and temps of growth
       (billions of roubles)
  Activities        2006       2007     Temp, %
Assets             9 750,3   14 045,6    44,1%
Capital            1 241,8    1 692,7    36,3%
Credits for        4 187,9    5 802,7    38,6%
incl. bad debts     53,3      66,3       24,3%
Personal credits   1 179,3   2 065,2     75,1%
incl. bad debts     22,1      53,9      143,9%
Entities assets    1 674,1   2 361,2      41%
Persons assets     2 754,4   3 793,5     37,7%
    Biggest Russian banks (by own
•   Sberbank (
•   Gazprombank (
•   VTB-24 (Vneshtorgbank) (
•   Vnesheconombank (
•   Alfa-bank (
•   Bank of Moscow (
•   Uralsib-bank
•   Raiffeisen bank, Russian branch

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