Developments in the Russian financial and
banking system: 1996 overview

Sergei Dubinin
Chairman, the Central Bank of the Russian Federation

Bank policy

The activities of the Russian Federation Central Bank aim to achieve macroeconomic stabilisation, reduce the inflation rate, strengthen the national currency, ensure the equilibrium of the country's balance of payments and, eventually, create the conditions that will make it possible to carry out favourable structural changes, surmount crisis in the real sector of the economy, and resolve social problems such as unemployment.

The consistent implementation of financial stabilisation policies through control of growth in the money supply has brought about favourable trends, such as lower interest rates and a stronger rouble. Average monthly inflation rates fell from ten per cent in 1994 and 7.2 per cent in 1995 to 2.4 per cent in the first half, and 0.3 per cent in the third quarter, of 1996.

The monetary policy pursued by the Bank has made it possible to maintain positive interest rates on time deposits for a fairly long period, and household savings have grown significantly. The rate of industrial decline has stabilised in relative terms and signs of increased activity have appeared in some sectors of the economy. The unemployment growth rate has slowed down.

In 1996 the Bank pursued a policy agreed with the Government within the framework of a joint statement on middle-term strategy and economic policy. In accordance with this statement, the middle-term strategy comprises a set of four measures designed to strengthen the banking system as the basis of the financial sector. Firstly, this strategy envisages creating new instruments of managing liquidity and consistently upgrading the payments system in order to enable credit organisations to cope with temporary liquidity shortages. Secondly, it provides for the broadening of the Central Bank's powers in banking supervision. Thirdly, a broad range of measures are to be implemented to ensure more effective regulation of banking activities. Fourthly, the need for qualitative changes to the banking sector - and the need to create the conditions in which we can work with problem banks - requires a comprehensive analysis of the state of the banking system and the elaboration of the principles of restructuring the banking system, as well as the drafting and enforcement of special laws on the concentration of banking capital, mergers and acquisitions and bank bankruptcy laws which would accelerate the liquidation of financially unviable banks.

The middle-term strategy also envisages introducing a deposit insurance scheme that would minimise non-corporate customers' losses from bank bankruptcies and liquidations. The size of guaranteed compensation for each depositor will be limited, because the main aim of this scheme is to protect small investors. It is mainly the commercial banks that will finance the deposit insurance fund.

Realising the need to comply with preset money supply targets, regulate bank liquidity and assist the reduction of the inflation rate, the Bank in 1996 actively used compulsory reserve requirements as an instrument of monetary and credit regulation. In accordance with the latest changes, since August 1996 the reserve requirements on demand deposits and time liabilities with terms of up to 30 days have been cut from 20 per cent to 18 per cent, on time liabilities of 31 days to 90 days from 16 per cent to 14 per cent, and on time liabilities of 91 days or more from 12 per cent to ten per cent.

Seeking to meet the targets of the monetary programme, and taking into account the real state of the country's economy and finances, the Bank has repeatedly changed the refinancing rate. In 1995 it changed the refinancing rate five times, reducing it from 200 per cent a year at the beginning of the year to 160 per cent by the end. In 1996 the Bank scaled down the refinancing rate in February to 120 per cent, in July to 110 per cent and in August to 80 per cent. In October it was cut further to 60 per cent.

Being the lender of last resort for the commercial banks, the Bank of Russia used the practice of refinancing credit institutions on market terms on a wider scale. In 1996, for example, the Bank introduced an auction-based lombard crediting system. The lombard credits extended to banks were generally repaid on time or ahead of schedule. In October 1996, the Bank cut by ten percentage points all lombard credit rates. In general, the Bank intends to make the lombard credit window a permanent facility, including overnight loans.

To regulate the money supply, the Bank increasingly attracts spare funds from commercial banks to its deposits at interest. Such operations are now conducted in all regions of Russia.

A major instrument of monetary policy is the Bank's activity on the Government's securities market. At present, Government short-term bonds (GKOs) and federal loan bonds (OFZs) constitute the largest segment of the Russian financial market, which continues to develop at a fast pace and which influences adjacent sectors. The Government securities market grew quickly throughout 1996 and by October its volume exceeded 200 trillion roubles.

The banking system

After a short period of rapid and extensive growth, the Russian banking system has entered a period of intensive transformation. The first Russian commercial bank was registered in 1988. By October 1996, there were 2,601 credit institutions, of which 2,069 were operational banks. Most Russian credit institutions have been operating in the financial market for four or five years. Affiliates of the operating credit banks - excluding the Sberbank Savings Bank - amounted to 5,193; Sberbank outlets and branches total 34,426.

The number of credit institutions with a foreign stake fell from 165 at the beginning of 1996 to 148 by October, but the average declared capital of these banks had grown since the beginning of 1996 by 31.1 per cent.

The Bank of Russia is making efforts to create the optimal conditions for the development of a modern banking system based on the liquidity principle. That is why one of its chief objectives is to encourage growth in the authorised capital of credit institutions.

By October 1996 the aggregate declared authorised capital of credit institutions totalled 16,529.8 billion roubles, an increase of 47.4 per cent over the beginning of the year. In addition, the number of large credit institutions has grown constantly. Thus, the share of credit organisations with declared authorised capital in excess of five billion roubles increased from 21.9 per cent at the beginning of 1996 to 334.8 per cent by October. Credit institutions with declared authorised capital of between one billion and five billion roubles dominate the Russian financial market, though their share is gradually shrinking: it fell from 36.6 per cent to 34.4 per cent in 1996. The level of concentration of banking capital can also be judged by the dynamics of the share of corporate clients' deposits in Russia's five leading banks in the overall volume of commercial bank deposits: 65.6 per cent as of 1 January 1996 and 66.9 per cent as of 1 July 1996.

At the same time, there are still too many small and medium-sized banks, and therefore the Bank of Russia will continue efforts to gradually raise the minimum authorised capital for newly-established credit organisations in order to bring the minimum level of the credit organisations' own funds (capital) by 1 January 1999 to a sum equivalent to five million ECU and one million ECU for credit institutions licenced to conduct a limited range of operations.

To bring the economic requirements of the Russian credit institutions into line with international standards, the Bank of Russia established the minimum allowable ratio between the organisation's capital and overall assets weighted against risk exposure at five per cent from 1 July 1996, six per cent from 1 February 1997 and eight per cent from 1 February 1999.

The maximum risk exposure per borrower or group of related borrowers, established on the basis of the credit organisation's own funds, was set at 60 per cent as of 1 July 1996 and will be 40 per cent as of February 1997, and 25 per cent as of February 1998.

In the present difficult economic climate, the best performance in the Russian market has been shown principally by universal commercial banks, which have invested their funds in various parts of the economy, pursue a prudent lending policy and are able to find profitable niches for their development.

It should be noted that the present economic situation, which is characterised by serious difficulties in industry and other sectors of the economy which are potential or existing borrowers of the commercial banks, and the falling inflation rate which deprived many commercial banks of the inflation-related part of their profits, have revealed that a fair number of the banks established in 1992/93 cannot deal with serious production and investment projects, prefer to credit one-off commercial transactions and have not formed any significant long-term reserves.

Therefore, in addition to measures ensuring the stability of the financially sound banks, the Central Bank has worked out an early warning system for detecting problem banks. The set of enforcement measures applied to problem banks includes stabilisation arrangements, with regard to the commercial banks that have lost their capital and have become insolvent.

In accordance with its powers, the Bank of Russia will take various steps to restore the solvency of banks which have temporarily found themselves in difficulties. These measures may include restructuring (under Bank of Russia supervision), the appointment of a temporary administration and rehabilitation procedures. As regards the financially hopeless commercial banks, some other sanctions, including the bankruptcy procedure, may be applied.

New players

One cannot fail to note that a number of new players have become increasingly active in the Russian financial market. They have their own financial niches and perform specific functions. The most obvious of these new players are insurance companies. The State Register lists more than 2,700 insurance companies, most of which operate in the financial market for about a year. Only five per cent have been in place for more than three years.

The average authorised capital of the insurance companies is at the moment several times smaller than that of the commercial banks and does not allow most of them to insure against reasonably large risks. To increase the competitiveness of Russian insurers, the Federal Insurance Supervision Service (Rosstrakhnadzor) has ordered an increase in the minimum authorised capital to ECU300-900,000 for various kinds of insurance. However, there are several large companies in the Russian insurance market whose funds are big enough to insure against serious risks, especially investments.

Emerging institutions

A short while ago some new financial institutions such as investment funds and non-governmental pension funds appeared in the Russian financial market. These institutions are taking only their first steps, the legislative and regulatory framework is still at the initial stage of formation and so they will inevitably face certain problems and setbacks.

In 1996 there were nearly 900 non-governmental pension funds in Russia, but their number is expected to drop through licensing of their activities which began in October 1995. By the end of the first half of 1996 the Non-Governmental Pension Funds Inspectorate had issued licences for 206 funds. Their capital amounted to 659 billion roubles, and assets totalled 1,997 billion roubles. World practice shows that pension funds are a major stabilising factor in the economy and their funds constitute considerable additional investment resources, so the system of non-governmental pension funds holds much promise in Russia.

We are currently seeing the gradual establishment of a system of investment funds. Even in 1995 there were 86 cheque investment funds in Russia licensed by the State Property Management Committee, of which 40 funds had an authorised capital of ten billion roubles or more. By the end of 1995, the period of the cheque investment funds had ended and new institutions such as unit investment trusts were being founded. It is believed that the unit investment trusts will ensure more active use of household savings, help create new forms of investment, attract additional investors and safeguard their rights and, in the final analysis, enhance the efficiency of Russia's investment policy.

Great importance is now attached to the establishment and further development of financial/industrial groups. There are 36 financial/industrial groups in the Russian financial market today, which have a total of 587 members, including 501 industrial enterprises in various sectors and 86 financial and credit institutions (51 commercial banks and 35 non-banking financial institutions - insurance companies and investment funds). Even the little practical experience accumulated by the financial/industrial groups - and the logic dictated by the real economic situation in Russia - show that the participation of all economic structures in a financial/industrial group ensures considerable effects from the pooling of financial resources and technological capabilities.

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