Banking 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 inflation rates and a stronger national currency. Average monthly inflation rates fell from 10 per cent in 1994, 7.2 per cent in 1995, 1.7 per cent in 1996 and about 1 per cent in 1997.

The monetary policy pursued by the Bank of Russia has made it possible to maintain positive interest rates on time deposits for a fairly long period, and household savings have grown significantly. The signs of increased activity have appeared in some sectors of the economy. The rate of growth of GDP in January-October 1997 amounted to 100.3 per cent in comparison with the same period of 1996. The rate of growth of industrial production accordingly amounted to 101.5 per cent. The unemployment growth rate has slowed down.

In 1996 the Bank of Russia 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. The first one envisages development of new instruments of managing liquidity (such as Central Bank operations on collateral) and consistent upgrading of the the payments system in order to enable credit organisations to cope with temporary liquidity shortages. The second provides for the broadening of the Central Bank's authorities in banking supervision. The third aimed at more effective prudential regulation of banking activities. The fourth concerns the creation of conditions for dealing with problem banks, in order to stimulate qualitative changes in the banking sector. The latter requires a comprehensive analysis of the soundness of the banking system and the working out 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 that would accelerate the liquidation of financially insolvent 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 of Russia used reserve requirements as an instrument of monetary and credit regulation. In 1997 Central Bank gradually reduced the reserve ratio on rouble deposits and increased the reserve ratio on foreign exchange deposits. In accordance with the latest changes, since November 1997, the reserve requirements on demand deposits and time deposits of up to 30 days were set at the level of 14 per cent; 11 per cent on time deposits from 31 days to 90 days; 8 per cent on time deposits from 91 days or more; 9.5 per cent on deposits in the Saving Bank; and 9 per cent on foreign exchange deposits.

Throughout the year the Bank of Russia lowered the refinance rate, taking into account the real state of economy and finance. By the beginning of November 1997, the refinancing rate was at the level of 21 per cent (compared to 48 per cent in January 1997). In November 1997 the Bank of Russia was forced to increase the refinance rate to 28 per cent, to smooth out the consequences of the international financial crisis for domestic markets.

Being the last resort lender to commercial banks, the Bank of Russia used the practice of refinancing commercial banks on a wider scale, including overnight loans. The Bank of Russia has made the lombard credit window a permanent facility. The lombard credits are provided to commercial banks on a permanent basis at fixed rates since August 1996. The lombard rates are changed along with corrections of the refinance rate. As from November 1997, the rate for credits from 3 to 7 days was 22 per cent; from 8 to 14 days it was 25 per cent; and from 15 to 30 days it was 28 per cent.

To regulate the money supply, the Bank of Russia attracts spare funds from commercial banks to deposits at interest. In November 1997, the rate for overnight deposits was 15 per cent; for 7 day deposits it was 12 per cent.

A major instrument of monetary policy is the Bank of Russia's operations on the Government's securities market. At present, the 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 influences the situation in the adjacent sectors. The Government securities market has been growing quickly throughout 1997 and the average monthly turnover of the secondary market exceeded 70 trillion roubles.

The banking system

After a short period of rapid extensive growth, the Russian banking system has entered a period of intensive transformation. The first Russian commercial bank was registered in 1988. By November 1997, there were 2,549 credit institutions, of which 1,717 were operational banks. Most Russian credit institutions have been operating in the financial market for 5 or 6 years. Affiliates of the operating credit institutions - 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 152 at the beginning of 1997 to 144 by November.

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 main objectives is to encourage growth in the authorised capital of credit institutions.

By November 1997 the aggregate declared authorised capital of credit institutions totalled 29,957.3 billion roubles, an increase of 60.3 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 thirty billion roubles increased from 6.1 per cent at the beginning of 1997 to 10.8 per cent by November. 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 33.6 per cent to 29.4 per cent in 1997. The level of concentration of banking capital can also be judged by the dynamics of the share of total assets in Russia's twenty leading banks in the overall volume of the commercial banks' assets: 57.6 per cent as of 1 January 1997 and 58.3 per cent as of 1 October 1997.

At the same time, there are still too many small and medium-sized banks, and therefore the Bank of Russia will continue to make efforts to gradually raise the minimum authorised capital level 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 5 million ECU and from 1 to 5 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 7 per cent from 1 February 1998; 8 per cent from 1 February 1999; and 10 per cent from 1 January 2000.

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 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, pursuing a prudent lending policy and are able to find profitable niches for their development.

It should be noted that by 1998, Russia has achieved a principally new stage of development, characterised by reasonable perspectives of the steady economic growth. Stabilization of financial conditions of the domestic industrial leaders has stimulated Russian commercial banks to invest more actively in non-financial enterprises in 1997.

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 those 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 two years. Only five per cent have been in place for more than four 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. However, there are several large companies in the Russian insurance market whose funds are big enough to insure against serious risks, especially investments.

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.

By the end of the first half of 1997, the Non-Governmental Pension Funds Inspectorate had issued licences for 259 funds. Their own capital amounted to more than 2,900 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 10 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 72 financial/industrial groups in the Russian financial market today, which have a total of more than 1,500 members, including more tha 100 financial and credit institutions. Even the small 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 unified financial/industrial group ensures considerable effects from the pooling of financial resources and technological capabilities.

Mutual funds have been operating in the Russian financial market since November 1996. By November 1997 there were 17 such institutions, the volume of their net aggregate assets amounting to more than 210 billion roubles.