It is clear that the functioning and efficiency of an economy's financial sector has an impact on economic development. Several studies suggest that a broadly-based and efficient financial sector enhances an economy's long-term growth potential. In a number of poorer countries, the banking system plays a very important role in financial intermediation, which further highlights the importance of banks to economic progress. In transition economies, the evolution of the banking system has been of particular significance, since under the pre-transition system they differed greatly from those in market economies.
For these reasons, considerable effort has been devoted to analysing the banking systems of transition economies (eg Bonin et al, 2005 provides a thorough overview of the related literature). Studies have been conducted at both macro and micro level, depending on the choice of approach. However, when focusing on issues related to individual banks, the availability of relevant research data has often posed problems. Therefore, relatively little research has been done on the Russian banking system, which still comprises more than 1,000 banks.
With comprehensive statistical data on Russian banks' balance sheets and profit and loss accounts now available, the Bank of Finland's Institute for Economies in Transition (BOFIT) is hosting a number of research projects on the activities of Russian banks. BOFIT researchers Zuzana Fungacova and Laura Solanko have examined Russian banks' risk-taking. Banks' rapid lending growth in the last 6–7 years has led to a decline in their equity to total assets ratios. Different risk measures indicate, however, that the risk level of Russian banks is lower than that of banks in central and eastern Europe, for instance. It would indeed seem that foreign banks are more inclined to take risks than Russian-owned banks. This naturally stems from their better access to international capital markets. It also seems that banks operating in the Russian regions are more prepared to increase their risks than banks operating in Moscow.
A study by Alexei Karas, Koen Schoors and Laurent Weill on the efficiency of Russian banks and how this is affected by ownership structure has been published in the BOFIT discussion paper series (BOFIT DP 3/2008). According to this study, foreign banks are more efficient than private Russian banks. Surprisingly, private banks are not more efficient than publicly owned banks. These results are not affected by banks' choices of production process, operating environment, management risk preferences, activity mix, size or the econometric approach used. It even appears that publicly owned banks are more efficient than private banks, and the efficiency gap has not narrowed since 2004, when deposit insurance was introduced in Russia. This may be due to increased switching costs or to the moral hazard effects of deposit insurance.
In this respect, the findings of this study differ greatly from those on other transition economies. Publicly owned banks in the new EU member states in central and eastern Europe, in particular, have almost without exception been the most inefficient, while foreign banks in those countries, too, have usually been the most efficient. It is, in fact, hard to say why publicly owned banks in Russia appear to operate so efficiently. It is, of course, worth bearing in mind that they also have private ownership and senior managers may be important shareholders, which naturally has an impact on incentives in running the bank.
The policy conclusion is that the efficiency of the Russian banking system may benefit more from increased levels of competition and greater access for foreign banks than from privatisation of the remaining public banks. As foreign banks are also ready to accept higher risks, foreign banks' market entry would boost economic growth further still.
Literature:
Bonin, JP, Hasan, I and Wachtel, P (2005). Bank performance, efficiency and ownership in transition countries. Journal of Banking and Finance, 29, p. 31–53. |