Andrei Vernikov

The Impact of State-Controlled Banks on the Russian Banking Sector

A senior Russian economist examines the structure, governance, and balance sheets of state-controlled banks in Russia, which accounted for over 55 percent of the total assets in the countrys banking system in early 2011. The author offers a credible estimate of the size of the countrys state banking sector by including banks that are indirectly owned by public organizations. Contrary to some predictions based on the theoretical literature on economic transition, he explains the relatively high profitability and efficiency of Russian state-controlled banks by pointing to their competitive position in such functions as acquisition and disposal of assets on behalf of the government. Also suggested in the paper is a different way of looking at market concentration in Russia (by consolidating the market shares of core state-controlled banks), which produces a picture of a more concentrated market than officially reported. Lastly, one of the authors interesting conclusions is that China provides a better benchmark than the formerly centrally planned economies of Central and Eastern Europe by which to assess the viability of state ownership of banks in Russia and to evaluate the countrys banking sector.

Russian banking: The state makes a comeback?

The purpose of this paper is to carefully assess the size of public sector within the Russian banking industry. We identify and classify at least 78 state-influenced banks. For the state-owned banks, we distinguish between those that are majority-owned by federal executive authorities or Central Bank of Russia, by sub-federal (regional and municipal) authorities, by state-owned enterprises and banks, and by ‘state corporations’. We estimate their combined market share to have reached 56% of total assets by July 1, 2009. Banks indirectly owned by public capital are the fastest-growing group. Concentration is increasing within the public sector of the industry, with the top five state-controlled banking groups in possession of over 49% of assets. We observe a crowding out and erosion of domestic private capital, whose market share is shrinking from year to year. Several of the largest state-owned banks now constitute a de facto intermediate tier at the core of the banking system. We argue that the direction of ownership change in Russian banking is different from that in CEE countries.

Evolution of the Banking System in the Russian Context: An Institutional View

We undertook an institutional analysis of commercial banks in Russia. After the failed experiment with private financial intermediation in the 1990s, Russia migrated towards a banking system consisting of three — rather than two — tiers and featuring core institutions controlled by the state directly or indirectly. This evolution is consistent with this countrys historical pattern of financial intermediation. It is also in line with recent trends in the real sector of the economy, where public ownership has rebounded over the past decade. The core state-controlled banks have evolved into hybrid institutions, performing two various sets of functions: those of regular commercial banks and of policy banks. We found a similar evolution in China, but not in the transitional economies of central Europe. Institutional matrix theory suggests that, in non-market economies, centralized finance and credit allocation is the dominant institutional form, while private banking activity is complementary.

Comparing the banking models in China and Russia: Revisited

In 1999, the Studies on Russian Economic Development published an article by T. Speranskaya who compares the Russian model of banking with the Chinese one [1]. The author looks at government banking and the relevance of banks for the non-financial economy and concludes that banking models in China and Russia are different. Since the time of that publication, the Russian government has increased its presence in the credit system as regulator, strategic planner and service provider. The authorities have pursued the industrial policy aimed at nurturing a few “national champions” [2] and increased the degree of interference in the lending decisions of banks. The new evidence suggests reverting to the question raised by T. Speranskaya, namely whether Russia really abandoned the Chinese path of state capitalism in the banking sector as opposed to the industrial sectors. We look for typological similarity or dissimilarity between the two banking systems. The object of the study is restricted to commercial banks, leaving beyond the scope of analysis development or “policy” banks and non-banking financial institutions.

State-Controlled 'National Champions': Implications for Empirical Study of Russian Banks' Efficiency and Concentration

This article assesses the effect of Russia’s industrial policy of growing “national champion�? state banks, on concentration and competition in 2000–2010. An alternative method for estimating concentration shows that the main market segments have crossed the high-concentration threshold and that the market for individual deposits has approached monopoly conditions. State banks have additional market power resulting from their dominance and are actually able to collect rent that increases their profitability. We believe that with respect to banks, Russia’s industrial policy is similar to China’s.State-controlled «national champions» of the Russian banking market: Concentration, competitiveness, and efficiency Summary. This paper tries to assess some of the effects from industrial policy of growing statecontrolled “national champions” in the Russian banking industry. We look at market concentration and competitiveness and average bank efficiency. A modified method of calculating the indicators of market concentration suggests that main segments of the market have crossed the threshold of high concentration, whereas household deposits market became close to a monopoly situation. High market share of core public banks enhances their market power and explains their higher profitability as compared to other groups of market players.

Competition impact of market structure: The case of banking services markets in two Russian regions

This empirical paper adds to competition and industrial organization literature by exploring the interplay between industry structure and competitiveness on local, rather than nation-wide, markets. We use micro-level statistical data for banks in two Russian regions (Bashkortostan and Tatarstan) to estimate Herfindahl-Hirschman index, Lerner index, and Panzar-Rosse model. We estimate Panzar-Rosse model in two ways: via the widely used price-equation that accounts for scale effects and then via a revenue-equation that disregards scale effects as suggested by Bikker et al. (2009). We find both regional markets to be ruled by monopolistic competition, although estimation by revenue-equation does not reject monopoly hypothesis for Tatarstan. Existence of sizeable locally-owned and operated institutions does not necessarily lead to higher competitiveness of the given regional market, and the results from non-structural methods of estimation suggest that bank competition in Bashkortostan is stronger than in Tatarstan. Going further away from aggregated analysis we compute Lerner indices in two product segments of Tatarstan – retail and corporate loans – and find that retail segment is significantly more competitive. Local banks exert more market power in corporate loans, while federal branches – in retail loans.

Does Corporate Governance Really Predict Firms' Market Values in Emerging Markets? The Case of Russian Banks

This paper aims to add to the literature on the connection between corporate governance and company valuation. Conventional wisdom predicts a positive effect of good governance on stock price, and empirical papers claim to have proven this effect for a number of large emerging markets including Russia. We refer to the case of Russian banks to suggest that this connection cannot be established in a convincing way due to data scarcity. A cross-industry panel fails to regard the specificity of financial firms, and a single-industry panel of banks might be unfeasible due to the sheer number of eligible firms. A selection of banks would be biased in favor of publicly listed entities and has little chance of being a wholly representative for the entire industry. Russia’s stock market can supply sufficient statistical material for a study involving just two large state-controlled banks. While 20 or so banks maintain some presence in the organized segment of the stock market, over 90 percent of all trading in bank shares and their market capitalization involves the stock of Sberbank and VTB. For them, however, the appropriateness of the market price as the sole comprehensive indicator of performance can be challenged on principle because they have stakeholders who pursue a combination of financial and non-financial goals and assess bank performance differently. The case of Russian banks reveals a critical scarcity of stock market data, so the results of some empirical studies might be attributable to their contributors’ opinion. This discussion is potentially relevant for other economies that share institutional characteristics such as high ownership concentration, shallowness of the stock market, and substantial role of state-controlled firms.