Russian banking sector: an overview

Although Russia is not considered an offshore banking center globally, 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 conducting monetary policy and five large specialized state banks that deal with collection. deposits and money lending. Most authors argue that three main types of banks developed in Russia in the late 1990s: joint venture banks, domestic commercial banks, and so-called ‘zero’ or ‘wildcat’ banks. The latter were made up of 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 non-existent 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 ‘zero’ banks.

The structure of the banking sector adopted the German-type model of universal substantial banks, with banks being allowed to hold shares in non-financial companies. At the same time, through cross-shareholdings, Russian companies literally owned the banks they borrowed from, “thus giving new meaning to the concept of ‘private’ lending.” Such lending practices have worked well because the government backs the implicit debt created by corporate banks that make risky loans to themselves. In addition to this, in the initial stage of the reform, government-directed credit dominated money lending; thus, the main role of the banks was to borrow money from the Central Bank of Russia (CBR) at subsidized rates and then funnel 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, as regards the corporate sector, that many start-ups were left out with extremely limited access to funds, and, on the other hand, as regards the banking sector, 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 companies.

In addition, the macroeconomic situation in the early 1990s was characterized by extremely high inflation rates and therefore 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 drastically 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 of non-performing credit and by the end of 1995, one third of all bank loans were in arrears, a proportion that amounted to almost 3% of GDP. Equally important, long-term credits amounted to around 5% of total bank loans, that is, banks concentrated mainly on short-term money lending (which, given 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 model of universal banks was introduced. And even at this early stage, one has sufficient 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. Furthermore, some authors say that the participation of banks in non-financial companies was rare and could not reach a level of concentration sufficient to allow the mechanism proposed by Gerschenkron to work. Therefore, the introduction of a German-type banking system in Russia does not seem to be the result of a well-thought-out strategy on the part of policymakers, but unfortunately, as most observers see it, the result of the regulatory capture by some influential private interests.

Still, many authors argue that, given Russia’s background, the chosen system of close bank-company 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-corporate relations in Russia and on assessing the relevance of the chosen banking model for the Russian economy in the early transition stage. In particular, two important questions will be raised: 1) how the close bank-company relationship affected (if it affected) the distribution of bank credit and the decisions of companies; and most importantly, 2) did this model play the role of an instrument to promote investment by companies as Gerschenkron believed?