Banking in Russia Dr' Ivan Darushin StPetersburg State University

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Banking in Russia Dr. Ivan DarushinSt-Petersb
urg State University

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The Soviet Financial System

• The financial system of the Soviet period was a
  mechanism for state control of the economy.
• The government owned and managed the banking
  system.
• The State Bank (Gosudarstvenniy bank-Gosbank) was
  the central bank and the only commercial bank.

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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.

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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-bank)
• the Social Investment Bank (Zhilsotsbank), which
  managed credits for the social welfare sector.

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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.

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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.

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Bank of Russia Functions

• The Bank of Russia (www.cbr.ru) 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 Federation
• 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 Federation
• sets the rules to conduct banking operations

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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
  reserves
• makes decisions on the state registration of
  credit institutions, issues banking licences to
  credit institutions and suspends and revokes
  them

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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
  functions
• organises and implements foreign exchange
  regulation and foreign exchange control in
  compliance with federal legislation

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Bank of Russia Functions

• establishes the procedure for effecting
  settlements with international organisations,
  foreign states and also legal entities and
  private individuals
• 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 Federation

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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 exchange
• 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.

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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

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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.

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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)

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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 bank A
Commerce bank B
Commerce bank A
Commerce bank B
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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
  sectors activity in accumulating household and
  enterprise sector funds and transforming them
  into loans and investments
• making Russian credit institutions more
  competitive

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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.

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Commercial banking

• Regulated by Low on Banks and Banking Activities
  (1993)
• 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

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History of banking system development

• 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 gt absence of credits
  (interest rates are too high)
• Use of money on the accounts to earn income from
  operations with currencies
• Favourable credits of CBR gt high level of
  inter-bank credits
• Banks hadnt tendency to develop management and
  quality of services
• Lowering of inflation gt bankruptcy of small and
  medium banks and concentration of capital in the
  large banks

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History of banking system development

• 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)

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History of banking system development

• 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

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History of banking system development

• Crises of August 1998
• Large banks were the biggest holder of GKO
• had the biggest losses
• People began to close currency accounts
• gt decrease of bank assets
• Deficit of funds gt paralysis of transfer system
• Result full bank crises which produced currency
  and financial crises.
• Only small banks which hadnt 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

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History of banking system development

• 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

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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 balances.
• Some banks also offer credit cards to customers
  with impeccable credit history.

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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 doesnt exist but foreign banks
  have to provide their activity from established
  departments registered by Russian lows.

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The dynamics of legal entities assets in banks
(billions of roubles)
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The dynamics of natural persons assets in banks
(billions of roubles)
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Quantity of new banks in Russia
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Quantity of closed banks
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Quantity of banks
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Quantity of new banks in The System of Deposits
Insurance
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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 services

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Banks innovations

• Certificates of deposit (CDs) for legal
  entities, up to 1 year.
• Certificates of Savings (CSs) for natural
  persons, up to 3 years
• Structured financing (deposits connected on the
  another market indicators)

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Some news of last years

• Government Agency of Deposit Insurance (2004)
• Government Agency of Restructuring of Mortgage
  Loans (end of 2008)

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Positive factors of banks development

• 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.

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Main activities and temps of growth (billions of
roubles)
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Biggest Russian banks (by own capital)

• Sberbank (www.sbrf.ru)
• Gazprombank (www.gazprombank.ru)
• VTB-24 (Vneshtorgbank) (www.vtb24.ru)
• Vnesheconombank (www.veb.ru)
• Alfa-bank (www.alfabank.ru)
• Bank of Moscow (www.mmbank.ru)
• Uralsib-bank
• Raiffeisen bank, Russian branch
  (www.raiffeisen.ru)