Commercial banking in Russia Dr. Ivan Darushin


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Commercial banking in Russia Dr. Ivan Darushin

  1. 1. Commercial banking in Russia Dr. Ivan Darushin St-Petersburg State University
  2. 2. The Soviet Financia l System <ul><li>The financial system of the Soviet period was a mechanism for state control of the economy. </li></ul><ul><li>The government owned and managed the banking system. </li></ul><ul><li>The State Bank (Gosudarstvennyy bank--Gosbank) was the central bank and the only commercial bank. </li></ul>
  3. 3. The Soviet Financia l System <ul><li>Wages were paid only in cash, and households used cash exclusively for making payments. </li></ul><ul><li>Checkbooks, credit cards, and other alternative forms of payment were not available in the Soviet Union. </li></ul><ul><li>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 revenue. </li></ul><ul><li>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 pertaining to trade. </li></ul>
  4. 4. The Soviet Financia l System <ul><li>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: </li></ul><ul><li>the Agro-Industrial Bank (Agroprombank), </li></ul><ul><li>the Industry and Construction Bank (Promstroy-bank) </li></ul><ul><li>the Social Investment Bank (Zhilsotsbank), which managed credits for the social welfare sector. </li></ul>
  5. 5. The Financial Sector in the 1990s <ul><li>In the 1990s, Russia's financial sector, particularly its banking system, has been one of the fastest changing elements of the economy. </li></ul>
  6. 6. Reform of banking system <ul><li>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. </li></ul>
  7. 7. Central bank of Russia <ul><li>The Law on the Central Bank, enacted in April 1995, provides the statutory authority for the CBR. </li></ul><ul><li>Under the law, the CB R is responsible : </li></ul><ul><li>for controlling the country's money supply, </li></ul><ul><li>monitoring transactions among banks, </li></ul><ul><li>implementing the federal budget and servicing Russia's foreign debt, </li></ul><ul><li>monitoring the foreign-exchange rate of the ruble, </li></ul><ul><li>implementing Russian exchange-rate policies, </li></ul><ul><li>maintaining foreign currency reserves and gold reserves, </li></ul><ul><li>licensing commercial banks, </li></ul><ul><li>regulating and supervising commercial banks. </li></ul>
  8. 8. Role of CBR in monetary policy <ul><li>Control of the money supply by lending funds to commercial banks and by establishing their reserve requirements. </li></ul><ul><li>In the early years, the CB R 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 </li></ul>
  9. 9. Commercial banking <ul><li>Regulated by Low on Banks and Banking Activities (1993) </li></ul><ul><li>May provide all kinds of banking activity: </li></ul><ul><li>To lend and borrow money; </li></ul><ul><li>To make money and currency transactions; </li></ul><ul><li>To open and serve accounts of enterprises and natural persons; </li></ul><ul><li>etc </li></ul>
  10. 10. History of banking system development <ul><li>1991-1993: concentration of capital resources on several number of new commercial banks (former state banks); </li></ul><ul><li>1994-1995: appearance of large quantity of new-formed banks. </li></ul><ul><li>High level of inflation => absence of credits (interest rates are too high) </li></ul><ul><li>Use of money on the accounts to earn income from operations with currencies </li></ul><ul><li>Favourable credits of CBR => high level of inter-bank credits </li></ul><ul><li>Banks hadn’t tendency to develop management and quality of services; </li></ul><ul><li>Lowering of inflation => bankruptcy of small and medium banks and concentration of capital in the large banks </li></ul>
  11. 11. History of banking system development <ul><li>1995-1997: concentration of capital </li></ul><ul><li>Decrease of currency incomes (from 20% to 10%) </li></ul><ul><li>Lowering of credits (from 66% to 55%) </li></ul><ul><li>Growth of assets in government bonds (from 2% to 20%) </li></ul><ul><li>Interestingly: main participants of government securities market – agents banks by budget accounts (use budget money to by government securities issued to decrease budget deficit) </li></ul>
  12. 12. History of banking system development <ul><li>1997 – middle of 1998: over-concentration of banks capital. </li></ul><ul><li>A lot of bank holdings, bank mergers </li></ul><ul><li>Reorientation of activity for the real sector of economy (low level of GKO rates, currency corridor) </li></ul><ul><li>Decrease of banks profits </li></ul><ul><li>Improvement of management </li></ul>
  13. 13. History of banking system development <ul><li>Crises of August 1998 </li></ul><ul><li>Large banks were the biggest holder of GKO </li></ul><ul><li>had the biggest losses </li></ul><ul><li>People began to close currency accounts </li></ul><ul><li>=> decrease of bank assets </li></ul><ul><li>Deficit of funds => paralysis of transfer system </li></ul><ul><li>Result: full bank crises which produced currency and financial crises. </li></ul><ul><li>Only small banks which hadn’t a lot of GKO and currency obligations lived and worked. </li></ul><ul><li>Crises continued to the middle of 1999 before Central Bank began restructuring and readjustment of problem banks </li></ul>
  14. 14. History of banking system development <ul><li>1999-nowadays: recovery and development of banking system. </li></ul><ul><li>Mostly problem banks were closed. </li></ul><ul><li>From 1999 – rising of foreign banks capital </li></ul><ul><li>From 2000 – rising of local banks capital </li></ul>
  15. 15. Commercial banks activities <ul><li>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. </li></ul><ul><li>Some banks offer debit cards that allow customers to have payments for goods and services deducted directly from their bank balances. </li></ul><ul><li>Some banks also offer credit cards to customers with impeccable credit ratings. </li></ul>
  16. 16. Foreign banks <ul><li>In early 1996, the State Duma passed a statute prohibiting the CB R from licensing foreign banks that did not have operations in Russia before November 1993 to protect national banking system </li></ul><ul><li>Nowadays it low doesn’t exist but foreign banks have to provide their activity from established departments registered by Russian lows. </li></ul>
  17. 17. Tendencies of the last years <ul><li>Decrease of state controlled banks influence (and its part on banking sphere) </li></ul><ul><li>Increase of activity of foreign banks </li></ul><ul><li>Reduction of interest rates </li></ul><ul><li>Increase of customer credits and mortgage credits </li></ul><ul><li>Enlargement of quantity and quality of services </li></ul>