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CURRENT TRENDS IN THE RUSSIAN BANKING: COMPARATIVE AND INSTITUTIONAL ANALYSIS

Svetlana KirdinaInstitute 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

Moscow, Russia

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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?

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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

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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.

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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.

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Breakdown of Russian banking system, 2000-2010

Dec

-00

Dec

-01

Dec

-02

Dec

-03

Dec

-04

Dec

-05

Dec

-06

Dec

-07

Dec

-08

Dec

-09

Dec

-10

0%10%20%30%40%50%60%70%80%90%

100%

foreign-controlled banks

private domestic banks

state-controlled banks

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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.

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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.

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Market shares of state-controlled banks: Russia Vs. CEE

0

10

20

30

40

50

60

70

80

90

100 Belarus

Russia

Serbia

Poland

Ukraine

Romania

Croatia

Slovenia

Czech R.

Slovakia

Bulgaria

Hungary

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China, banking system, 2007

Bank typeShare, % of assets

Share, % of loans to non-financial

companies

Share of state authorities in

equity, %Policy banks 8.2 14.7 100*

State-owned commercial banks

53.4 47.2 100*

Joint-stock commercial banks

16.9 17.8 > 70*

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

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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

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

Economy

Politics Ideology

Economy

Politics Ideology

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X- matrix versus Y-matrix

XY

Redistributive economy

Com

munit

ari

an

ideolo

gy

Unitary-

centralize

d

political o

rder

Feder

ativ

e p

olit

ical

ord

er

Ideolo

gy o

f

subsid

iarity

Market economy X

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X- and Y-institutions in the economy and their functions

Functions of institutions

X-institutions

Y-institutions

1. Fixing of goods (property rights system)

Supreme conditional ownership

Private ownership

2. Transfer of goods Redistribution (accumulation-coordination-distribution)

Exchange (buying-selling)

3. Interactions between economic agents

Cooperation Competition

4. Labor system Employed (unlimited term) labor

Contract (short and medium term) labor

5. Feed-back signals (effectiveness indexes)

Cost limitation (Х-efficiency)

Profit maximization (Y-efficiency)

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Combinations of X- and Y-matrices

X – dominant Y- complementary

(Russia, China, most Latin

American & Asian countries)

Y – dominantX – complementary

(European and North American countries)

Y

XY

X

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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.

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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.

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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.

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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.

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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.