1. Russian Banking as an Active Volcano Koen Schoors Ksenia Yudaeva

2. Historical problems of Russian banking sector I Poor institutional environment (see other chapters) – Property rights – Land rights – Information asymmetries – Court system Poor regulatory environment – Unclear and inconsistent rules – Enforcement of the rules relatively poor

3. Historical problems of Russian banking sector II Lack of foreign and domestic competition – Protection of market against foreigners – Dominance of a few big state-owned players – Regional fragmentation Very volatile economic environment – Repeated economic crises (1990-1996, 1998- 1999, 2008-2009) – Repeated bank crises (1994, 1995, 1998, 2004, 2008)

4. How to enforce regulations?

5. Schoors and Claeys 2007 Is the CBR willing to enforce bank supervision? Banks are less likely to face delicensing IF they – are in highly concentrated regional bank markets – are large (Too Big To Fail) – are money center banks (To Central To Fail) – are too many failing banks (Too Many To Fail) Forbearance is related to systemic stability issues – N11 (capital to household deposits) forborne since enforcement would affect large deposit banks and trust – Regular liquidity breaches forborne in underbanked regions – Regular capital breaches forborne if banks are large – Severe liquidity breaches are forborne if there are too many failing banks

6. Is the CBR able to enforce bank standards? Bank supervision staff

8. Bad institutional environment – Banks preferred speculation to lending Soft legal constraints, monitoring skills, information – Lending to connected agents Insider lending, pocket banks – Dominance of state players with CBR backing Bad regulatory environment – poor capitalization (Revealed by 1998 crisis) – Waves of fraudulent bankruptcies that dent trust Consequences of these fundamental problems I

9. Consequences of these fundamental problems II Lack of foreign and domestic competition – Private banks less efficient (Karas, Schoors, Weill, 2010) – Fragmentation of the banking market Very volatile economic environment – institutional instability of normal Russian banks – Massive bank failures Reaction 1: sophisticated discipline (Karas, Pyle, Schoors, 2010) Reaction 2: flight to quality, domination by public banks Reaction 3: Stay away from banks alltogether

10. Alexei Karas, Koen Schoors, Laurent Weill Main results, production approach

12. Alexei Karas, William Pyle, Koen Schoors Sophisticated Discipline Deposit Growth Sensitivity to Interest Rates

13. Temporary conclusion Until 2000 the Russian banking system does a horrible job in financing growth (See Pyle and Spicer, 2002, Overbanked and credit-starved) But banking does a much better job thereafter (Berkowitz and Dejong, 2010) There have been considerable improvements since then – Macroeconomic stabilization in 2000 – Land reform and court reforms improve property rights – Deposit insurance restores some of the trust – Improved supervision restores institutional stability – Improved enforcement of regulation

14. Deposit insurance and market discipline after deposit insurance

15. Are household deposit growth and deposit rates less sensitive to capital after deposit insurance?

16. Source: alain-bertaud.com Socialist-era impact on post-socialist city

17. Russia’s outlier status (BEEPS) Firms considering land title or leasing an obstacle

18. Russia’s outlier status (2) Firms considering land title or leasing an obstacle

19. Collateral type and provision of external finance Immovable assets more attractive to lenders than movable assets: relatively greater probability (increasing in time) of recovering value if borrower defaults For borrowers being able to pledge land and real estate as collateral: * Increased loan maturities * Increased loan volumes For lenders lending on pledge of land and real estate as collateral: * Increased propensity to try and seize pledged assets

20. Ownership and use patterns in urban settlements

21. Findings Pyle and Schoors, 2011 Regional differences in industrial land owned by legal persons explain – Regional differences in bank credit More credit in the better regions – Regional differences in capital investment More capital investment in better regions – Firm-level differences in financial constraints firms in the good regions are less financially constrained

22. BUT there were remaining weaknesses on the eve of the crisis Still weak institutional environment Lack of competition and implied inefficiency (Karas, Schoors and Weill, 2010) Lack of trust and implied failure to attract the deposits needed to finance lending I Implied dependence on short term finance from interbank markets and foreign finance to finance lending (very risky)

24. Crisis response on institutions October 2008: Duma improves powers and tools of Deposit Insurance Agency (DIA) for resolving failing banks: 1.provide financial assistance to individuals/entities buying shares of a distressed bank (DB) giving them control; to banks buying assets and liabilities of a DB to prevent its bankruptcy; to buyers of shares of a DB giving the buyer control and preventing bankruptcy; to shareholders of a DB to prevent its bankruptcy; 2.organize asset auctions of collateral offered by insolvent banks, including collateral pledged to the CBR; 3.acquire provisional administration functions based on decisions made by the CBR.

25. Peformance DIA in 2008 In Q4 2008, the DIA dealt with 20 banks – Participations in 5 failing banks resolutions were rejected as their rehabilitation was not viable – 10 failing banks received financial support and were sold to new owners, – in 2 failing banks the DIA became the owner, – assets and liabilities of 3 failing banks were transferred to other banks and those banks were sent into liquidation.

26. How the banking system was saved Pump money honey – Huge liquidity injections of CBR liquidity and also from the government – Non-collateralized central bank loans – Interbank market guaranteees – Lower mandatory reserves (4 pp down) Capital injections – Subordinate loans from from the government Deposit insurance – threshoid raised to 700000 rubles

27. Have all needed changes been implemented? High cost of saving banks (4% of GDP) Good – Some operational restructuring, but fairly little Bad – Regulation and monitoring practices have not changed dramatically – Bank market structure is still unchanged and not very competitive – Competition is still not taking off – There is still too little consolidation and too high fragmentation and fragility

28. Remaining research questions Role of Sberbank in all this? – Depositary of trust of the population – Recycle deposits through the interbank market to provide liquidity – Ensure the integration of the banking market as apublic good – Bad for competition? The point is probably not to privatise Sberbank but rather – To further improve institutions – And stimulate competition (through foreign access) – And only if private banks get more efficient a privatisation makes much sense.