Financial Markets: Increasing Complexity, Maintaining Stability

3–5 July 2019, ST. PETERSBURG

    The Bank of Russia will present seven economic and financial studies devoted to different aspects of the modern Russian financial system at the International Financial Congress on July 12–14.

    The Central Bank’s Research and Forecasting Department has devoted two large-scale studies to the Russian regulator’s oversight policy.

    In recent years, the Bank of Russia has been pursuing an active oversight policy in the banking sector that aims to remove weak and dishonest players from the market, increase confidence in banks, strengthen financial stability, and ultimately improve the banking sector. One consequence of this policy has been the increased centralization of the Russian banking sector, which is sometimes regarded as a negative trend. Despite the obvious goal of overseeing the protection of the rights of bank depositors and creditors, experts periodically raise questions about how the revocation of licenses impacts competition in the banking system and whether an active oversight policy is beneficial to the largest banks, primarily state-owned ones, and pushes bona fide small and medium banks off the market.

    In the study titled ‘An Active Oversight Policy: Small Losses and Big Gains’, Central Bank experts analyzed the potential effects of an active oversight policy on different types of banks in the long term and short term. The study showed that pursuing an active oversight policy reduces the level of monopoly and enhances the efficiency of the banking system in the medium term, while weakening the position of medium and small banks in the short term. Based on the model of the banking sector, experts compared the short-term and long-term effects under two types of oversight policy that differ in terms of their degree of rigidity. The model calculations revealed that the short-term effects of intensifying oversight in the model weaken the positions of medium and small banks, including those that comply with oversight requirements. However, as the banking sector improves, the benefits from the increased trust in such banks and the banking system as a whole offsets the short-term losses. As a result, the share of medium and small banks in the number of loans provided and deposits made in the banking system is higher than in the period before the oversight policy was intensified.

    Maintaining competition and ensuring stability in the financial sector are among the issues addressed in the study titled ‘Impact of the Banking Sector Rehabilitation Policy on Competition and the Sustainable Development of the Financial System’.

    The analysis showed that after the Bank of Russia began pursuing a policy to improve the banking sector, a decrease was seen in the volatility of growth rates in corporate and retail lending, with an adjustment for macroeconomic factors. The decrease in the volatility of lending growth rates was seen both in the cluster of banks in the form of a relatively low level of overdue debt, and also among banks that have a relatively high level of overdue debt. Analyzing the fluctuation in interest rates throughout the banking system with an adjustment for system and specific risk assessments, the authors conclude that the decrease in the number of banks as a result of the Central Bank’s policy to improve the banking sector did not have a significant negative impact on competition during the period under review. In general, the empirical analysis demonstrates that the banking system has become a more efficient institution for lending to the economy and is ridding itself of the excess risk of individual and systemic sustainability while maintaining the previous level of average risk for lending projects. At the same time, the financial stability of medium and small banks is increasing.

    Alexander Morozov, Director of the Research and Forecast Department of the Bank of Russia commented on the outcome of the studies:
    «The Department of Research and Forecasting conducts studies on a wide range of topics covering the functions of the Bank of Russia. The two studies on banking regulation and oversight show that, despite the reduction in the number of banks, the improvement in the banking sector is resulting in increased competition in the medium term and the stability of the banking system as a whole».