Real Estate

Russian banking sector: an overview

Although Russia is not considered an offshore banking center in the world, before the crisis it managed to attract a large volume of capital to its capital markets. Russia initiated reforms in the banking sector in the late 1980s with the establishment of a two-tier banking system, made up of the central bank responsible for carrying out monetary policy and five large specialized state banks that deal with collection. deposit and loan of money. Most authors argue that three main types of banks developed in Russia in the late 1990s: joint venture banks, national commercial banks, and so-called ‘zero’ or ‘wildcat’ banks. The latter were formed by their shareholders -in most cases groups of public institutions and/or industrial companies (the so-called Financial Industrial Groups (FIGs))- with the main objective of financing their own non-financial businesses. capital requirements and virtually nonexistent banking regulation, the number of these new banks grew rapidly and as of January 1, 1996, Russia had 2,598 banks, of which the vast majority were made up of ‘zero’ banks.

The structure of the banking sector adopted the German-type model of universal substantial banks, allowing banks to hold stakes in non-financial companies. At the same time, through cross-shareholdings, Russian companies literally owned the banks they borrowed from, “thereby giving new meaning to the concept of ‘private’ loans.” Such lending practices have worked well because the government backs the implicit debt created by corporate banks making risky loans to themselves. In addition to this, in the initial stage of the reform, government-directed credit dominated money lending; therefore, the main function of the banks was to borrow money from the Central Bank of Russia (CBR) at subsidized rates, and then channel the finances to designated companies; the latter being in most cases the de facto owners of the banks. The general effect of this situation was, on the one hand, with regard to the corporate sector, that many new companies were excluded with extremely limited access to funds and, on the other hand, with regard to the banking sector, it involved exposures high risk since the banks were subject to risk both as creditors of the industries and as shareholders of the same. In addition, there was an additional source of risk for banks since, at least in theory, banks bear the risk of government-directed credit to businesses.

Furthermore, the macroeconomic situation in the early 1990s was characterized by extremely high inflation rates and thus negative interest rates (for example, in 1992-1993 real interest rates were -93%; in 1994 until early 1995 -40% before finally turning positive for time deposits during the second half of 1995). As a result, the amount of total credit to companies fell sharply during this period; in 1991 the share of loans to companies comprised 31% of GDP, while in 1995 the banking system had a book value of loans to companies of $26 billion, which represented 8.1% of GDP. All these factors together lead to a rapid growth in non-performing loans and by the end of 1995, one-third of all bank loans were in default, a proportion amounting to almost 3% of GDP. Of equal importance, long-term loans amounted to around 5% of total bank loans, that is, banks concentrated mainly on short-term money loans (which, considering the high level of uncertainty, had a relative advantage compared to long-term ones). borrow money).

The above described features of the Russian banking sector in the first half of the 1990s highlight the difficult macroeconomic situation in which a German-style universal banking model was introduced. And even at this early stage, one has every reason to question the feasibility of this decision, since instead of a clear history of inflation – an absolutely necessary precondition for the introduction of a German-type banking system – Russia had experienced a extremely high and persistent inflation. inflation rates and great macroeconomic instability. In addition, some authors say that the participation of banks in non-financial companies was rare and could not reach a sufficient level of concentration to allow the mechanism proposed by Gerschenkron to work. Thus, the introduction of a German-type banking system in Russia does not appear to be the result of a well-thought-out strategy on the part of policymakers, but rather, unfortunately, as most observers see it, the result of regulatory capture by some influential private interests.

Still, many authors argue that, given Russia’s background, the chosen system of close bank-business relationships was optimal and that banks played an important role in facilitating investment. In this regard, the next section of the paper will focus on providing empirical evidence on bank-firm relations in Russia and assessing the relevance of the chosen banking model for the Russian economy in the initial stage of transition. In particular, two important questions will be raised: 1) how did (if at all) the close bank-business relationship affect the distribution of bank credit and business decisions; and most importantly, 2) did this model play the role of an instrument to boost business investment as Gerschenkron believed?

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