Стабильность банковского сектора России: результаты адаптации международных стандартов банковского регулирования

Universita degli Studi Guglielmo Marconi

UNIVERSITA DEGLI STADI GUGLIELMO MARCONI


UNIVERSITY " GUGLIELMO MARCONI"





Stability of Russian Banking Sector: the Results of Adaptation International Standards of Banking Regulation







A Dissertation Submitted to the .
Faculty of the International PhD in «Science in Finance and Financial Law» in Candidacy for the Degree of Doctor of Philosophy

                         Rome, Italy 2014

Content


Introduction..................................................................................3
1.  Theoretical foundation of banking regulation.............................................8
1.1. Concepts of banking regulation...........................................................8
1.2. Theories of bank risk-management........................................................13
1.3. Models of deposit insurance.............................................................32
2.  Peculiarities of functioning of the banking system and financial markets in Russia.......41
2.1. Specifics of activity of Russian banks. Major segments of financial market..............41
2.2. Specifics of the FINANCES Russian stock index...........................................56
2.3. Influence of foreign capital on the banking sector in the Russian Federation............60
3.  Effectiveness of the monetary policy of the Bank of Russia and anti-crisis measures of the Government of the Russian Federation during the period of the financial crisis and subsequent stabilization.....................................................................69
3.1.  Structural problems of Russian economy and internal factors of destabilization of the banking sector in the Russian Federation.....................................................69
3.2. Instruments of the monetary policy of the Bank of Russia and their influence on the banking sector status................................................................................76
3.3. Role of the deposit insurance system in the Russian Federation in ensuring the banking sector financial stability...................................................................89
4.  Implementation of risk-oriented approach to bank supervision in Russia..................110
4.1. Requirements to the capital............................................................110
4.2. Requirements to risk evaluation and management.........................................123
4.3. Identification and regulation of systemically important banks..........................135
4.4. Compliance of supervision in the Russian Federation with the international principles of effective banking supervision...............................................................145
5.  Soundness of the banking sector in Russia...............................................152
5.1. System of indicators of banking sector financial stability..............................152
5.2. Position of the Russian banking sector in the global system of financial stability......159
5.3. Indices of early warning of bank bankruptcy............................................174
Conclusion..................................................................................185
References..................................................................................190
Annexes.....................................................................................202

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Introduction


        Research topic actuality
        Latest global financial crisis made it necessary to revise approaches to the regulation of financial institutions in many countries of the world. An important contribution to this process was introduced by the Basel Committee on Banking Supervision, in particular, in -2010 the Basel III international standards of capital were published, which imposed exclusive requirements to quality and capital adequacy of banks, and in 2011 and 2013 documents to identify and regulate systemically significant financial institutions were prepared.
        During last decade, the world banking community undertook drastic efforts to improve efficiency of the banking regulation in order to prevent destructive aftermaths of financial crises. Many countries of the world continue introduction of the Basel II international recommendations (2004) into the work of the supervisory authorities and the banks itself relating to the minimum requirements to the capital for covering risks, to the market discipline and to the supervisory process. In practice, regulation and supervision of many countries also advanced methodologies of the Core principles for effective banking supervision (2006) and the Core principles for effective deposit insurance systems (2009).
        Global compliance of the banking regulation and supervision in Russia with the established international standards of effectiveness is an essential prerequisite for successful positioning Russian banks in the international financial markets. In this context, perfection of the regulation and supervision of banks in the Russian Federation will be carried out in order to maximize implementation of international standards of efficiency. According to the experts of the International Monetary Fund and the World Bank, the system of normative legal regulation of the banking sector of Russia to a large extent is consistent with the principles of effective banking supervision, and, in recent years, significant progress was made in strengthening regulation and supervision of banks. At the same time, the supervision practice in a number of aspects is not yet consistent with the international standards, and Russian officials admit this fact.
        In this research study, the impact of introduction of international standards of state regulation of banks is analyzed in view of the problem of the banking sector stability. In a context of the stagnating world economy, the problem of ensuring stability of the Russian banking sector is becoming most acute in connection with a commodity based economy and outflow of capital. Since non-fmancial sector and high credit risks have a direct impact on the

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stability of banks, there is a need for increased attention of supervisory authorities to regulation of liquidity and capital in the banking sector.
        Latest global financial crisis showed that neither globalization, no international principles of regulation of financial systems can reduce the threat of emergence of a systemic risk. Identification and regulation of the systemically significant banks in the Russian Federation is particularly relevant in connection with the high level of concentration of capital and assets of the banking sector.
        In Russia the Bank of Russia performs regulatory and supervisory functions in the banking and financial spheres. The supervisory process covers the entire cycle from licensing to elimination of the credit organization. Improvement of comprehensive supervision of the quality of risk management systems and capital in banks is currently the most important element, therefore, that is why, this work examines the norms of prudential regulation and requirements to banks.
        Review of scientific development of the topic _
        Problems of ensuring stability of financial institutions and financial systems, techniques of its assessment and forecasting, as well as methods of the financial risk management have been reviewed in works of foreign researchers since the middle of the last century. The topic was the central one in work of E. Kane, F. Black, R. Merton, P. Rose, J. Sinkey, J. Bessis, C. Matten, X. Freixas, J. Rochet, F. Mishkin, R. Miller, D. VanFIoose A. Demirguc-Kunt and others.
        Emergence and development of the Russian banking system has been accompanied by the increased interest in the theory and practice for regulating activities of the banks in order to ensure financial stability. Flowever, due to the national characteristics of the arrangement and functioning of the banking system and financial markets in Russia foreign experience in the sphere of regulation of financial institutions could not be applied in full. A search for ways of adaptation of international recommendations and standards of regulation of financial institutions to Russian conditions is needed. In spite of the fact that the last world financial crisis revealed a wide range of problems in the sphere of regulation and supervision of banks in Russia, as in many other countries of the world as well, research on the consequences of the Russian banking sector transition to international standards of the bank regulation and its impact on the financial system stability are not sufficiently fully analyzed in the domestic scientific literature. Complexity of introduction of international standards of regulation of financial institutions in Russia, as well as the need for assessment of the effects of the process aimed at ensuring stability of financial and banking systems determined the choice of the topic of the thesis.

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        Purpose and objectives of the research
        The purpose of the dissertation research is to evaluate the results of adaptation of international standards of regulation in the Russian banking sector and their influence on the banking sector stability.
        To achieve this goal the work deals with the following tasks:
    •    Theoretical framework for banking regulation was studied: regulation concepts, risk management theories, deposit insurance models
    •    Functioning of the banking system and financial markets in Russia and factors of their destabilization were analyzed
    •    Analysis of the implementation of the international capital requirements and risk management in the Russian banking sector was made, especially in relation to the systemically important banks
    •    Comparative analysis of compliance of the banking supervision in the Russian Federation with the international principles of effective supervision was carried out
    •    Position of the Russian banking sector in the global system of financial stability was examined
    •    Analysis of the dynamics of the financial stability indicators of the Russian banks in the pre-crisis, crisis and post-crisis periods was conducted.
        Research subject: effect of the introduction of international standards of banking regulation in Russia on the banking sector sustainability.
        Research object: banks and banking sector of Russia.
        Theoretical basis of the research: works of Russian and foreign researchers, devoted to issues of ensuring stability of the financial and banking system, as well as methodologies of the financial risk assessment and management.
        Methodological base of the research: dialectic cognitive method, which foresees analysis of economic relations and phenomena in their development and interrelations, method of analysis and synthesis, methods of integrated and comparative analysis, extrapolation method.
        Information base of the research include: statistical and analytical materials of the Bank of Russia, the International Monetary Fund and the World Bank; data of international and national rating agencies; legal acts of the European Union, the Russian Federation and the

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regulatory acts of the Bank of Russia; information and analytical materials of the European Central Bank and the Federal Reserve System; statutory reporting of the Russian banks.
        Scientific novelty of the results of the study:
    ■    External and internal factors of destabilization of the Russia financial and banking system are identified
    ■    Method for calculation of differentiated insurance premiums for the Russian banks is developed, which takes into account the risk level of the assets on the basis of foreign experience
    *    Method to single out systemically important banks in Russia on the basis of the methodology of the Basel Committee on Banking Supervision is developed
    ■    Position of Russia in the global financial stability system are defined on the basis of the system indicators of the bank financial stability, developed by IMF
    ■    Leading indicators of financial stability for Russian banks are identified for early warning of bankruptcy.
        The theoretical and practical significance of the results of the study
        Theoretical conclusions and practical recommendations of this work can be used in the Bank of Russia operations in order to regulate banks and activity of commercial banks in the sphere of capital and risk management. The proposed method for calculating differential rates of insurance premiums for the Russian banks with taking into account the asset risk level may be applied in the practical activities of the Deposit Insurance Agency insurance corporation. The proposed method of identifying the systemically important banks in Russia can be used in the bank supervision practice. Leading indicators of financial stability of the Russian banks can be used in development of the bankruptcy early warning systems.
        The author uses the results of the research in training courses for bachelors and masters majoring in “Economics” and “Finance and Credit”, as well as for participants of advanced training courses.
        The theoretical and practical research results were reported at scientific and practical Russian and international conferences. Following articles on the research topic were published in leading Russian publications:
    1)   G. Lovkova, U. Malygina, S. Hasyanova. (2010). «The Indicators of Predicting Credit Institutions' Financial Insolvency»//Banking, Moscow, Jul, No7, pp. 67-73.

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    2)  S. Hasyanova. (2011). «Dynamic Model of Banking Risks Projections the Role of Leading Indicators»//Hi story of Accounting Business Administration Doctrines and Development of New Methods of Management in Italy and in Russia. Scientific Series. IV Workshop of Higher School of Economics in N. Novgorod and Department of Business Sciences of State University, Florence, Italy -N. Novgorod, Rerea, Sep, pp. 129-146.
    3)  S. Hasyanova. (2012). Capitalization of the Russian Banking System: Crisis Results and the Prospects»//Digest-Finances, Moscow: Publishing House “Finances and Credit”, Jul, No 7, pp. 40-45.
    4)  S. Hasyanova. (2012). Che System for the Evaluation of Financial Sustainability
        Banking Sector»//Money and Credit, Moscow, Dec, No. 12, pp. 24-28.
    5)  S. Hasyanova. (2013). «Russia Banking Sector in the Global System of Financial Stability»//Money and Credit, Moscow, No 6, Jun, pp. 35-40.
    6)  S. Hasyanova. (2013). implementation of International Capital Requirements (Basel III) in the Russian Banking Sector»//Finance and Credit, Moscow: Publishing House “Finances and Credit”, Jul, No 26, pp. 22-28.
    7)  S. Hasyanova, E. Sychkova. (2013). improvement of the Deposit Insurance System with Taking into Account the Banking Business Risks»// Banking, Moscow, Sep, No 9, pp. 23-28.
    8)  S. Hasyanova, E. Sychkova. (2013). identifying Criteria of the Bank System Importance in Russia»// Banking, Moscow, Nov, No 11, pp. 68-74.
    9)  S. Hasyanova. (2014). «Banking Supervision in Russia: Compliance with International Principles of Effective Supervision))// Finance and Credit, Moscow: Publishing House “Finances and Credit”, Jan (in print).

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1. Theoretical foundation of banking regulation.



1.1. Concepts of banking regulation
        The bank system regulation includes two aspects - the market regulation and the legislative regulation. The market regulation determines the cost of the bank assets, the flow of its facilities and permits to bring in balance the interests of the managers and the bank owners. Market regulation is supplemented by the legislative regulation, which may be more or less effective. The model of the regulatory discipline includes several actors: lawmakers, regulators, taxpayers, banks, bank holdings and groups, and nonbank financial institutions.
        Kane E.J. (1977) characterizes relations between the banks and the regulators as a regulation dialectics or a struggle model [121]. The cause of the conflict is in a mismatch of aims of their activity as the regulators ensure safety and stability of the financial system while the bankers aim to increase the profits and the cost of capital. Because of this situation, the banks try to overcome constraints, using shortcomings in the legislation system while the supervisory authorities prepare new arrangements aimed at regulation strengthening. Financial innovations, which permit to circumvent statutory requirements and increase competition between the regulated and the unregulated financial institutions, are the implications of this struggle. For example, in the USA bank system emergence of circulating debt instruments and financial holding companies as well as securitization of assets was called into being by the desire of the banks to overcome legal constraints. Jones D. (2000) showed that with introduction of the capital standards into the supervision practice (Basel Committee on Banking Supervision, 1988) the arbitration on the capital requirements became the mostly widespread manifestation of the regulatory dialectics [120], Its essence is in fact that banks build up their assets portfolios in such a way that the risk level increases while the capital level demanded by regulators remain at the same level. Schliephake E. and Kirstein R. (2013) found out that the banks, which faced with the mandatory requirements to the capital, prefer reducing lending in contrast to raising additional capital [150], As a result, reduction of the competition in the credit market may lead to inefficiency of this market. This strategic effect should be taken into account in the prudential regulation, especially when the requirements to the capital are being increased.
        Maintenance of confidence of the society into the bank and financial system is the main goal of regulation. Banking regulation is an attempt to reconcile conflicting tasks of ensuring safety and stability and maintenance of the bank system effective competitiveness. Kane E.J. (1996) thinks that regulation can be considered optimum if officials manage to minimize net

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expenses or maximize net profits due to introduction of the regulation schemes into practice, that is, the activity of the regulators should be aimed at ensuring maximum reliability, stability and competitiveness [122], Reliability means state guaranties for return of facilities to creditors and investors. Stability means defense of the economy from the devastating consequent effects of financial crises. Competitiveness means securing competition and effectiveness in the financial and nonfmancial spheres.
        Miller R.L. and VanHoose D.D. (2000) enumerate several concepts of the banking regulation [81;268],
    ■    "Public interest" theory. The regulators act in the interests of consumers of financial services, using regulation instruments, which maximize common welfare. Interests of the regulatory authorities proper does not play a part in the decision-making process
    ■    "Capture" theory. The banks attempt to knit with the regulatory authorities to gain profits from the supervisory measures while the consumers of financial services bear losses. The representatives of the supervisory authorities, in their turn, are not interested in the rigid regulation as they expect to join banks after completion of their term of assignment
    ■    Public choice theory. This theory views the two above-mentioned concepts as extreme cases. The supervisory authorities usually regulate the market in such a way that allows the banks gaining profits, which are higher than the level of the perfect competition market, but lower than the level, which is ensured by establishing monopoly prices, that is, the supervisory authorities have alternatives in the regulation process
        Sinkey J.F. (2006) thinks that the theoretic foundation of regulation is based on the following conceptual notions[85; 832, 850]:
    ■    Agent theory - “principal-agent” relations
    ■    Banking regulators - suppliers of regulation services
    ■    Regulatory dialectics - model of struggle of regulators and regulated financial organizations
    ■    Capital adequacy
        At that, Sinkey J.F. thinks that the major problem of interrelations “agent (banks) -principal (regulators, insurers, creditors)” is in inability of the principal to conduct adequate monitoring of the agents' activity.
        The banks and the supervisory authorities interact in the following areas: product price, convenience to the consumer and clients' trust (business reputation). Capping deposit interest

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rates or prohibition to pay interest on separate types of deposits are examples of the competition restriction on part of the supervisory authorities. These limitations were first introduced in the USA and later they spread to other countries (including Russia, during the last crisis) as emergency measures to combat crisis, but later on, they led to the inefficient activity of the deposit-taking institutions. At present, the restrictions on separate types of assets and price formation with taking risk into account are the most widely used types of limitations. The restrictions on geographical diversification increase the transaction risk and reduce the convenience level for the consumers of financial services. As the banks compete with each other within the framework of the established borders, the bankers try to compensate the cost of regulation, which is a sui generis tax, by the cost of the services for the clients.
        Clients' trust to the bank is detennined not only by the available government guaranties, but also by the economic situation of the bank, its profitability and liquidity. The effective market demands the disclosure of information about the level of risk, accepted by the bank, which foster the growth of its reputation. At present the banks are bound either to undertake measures to disclose information, or to publicly explain the reasons to refuse to disclose such information. The contemporary problem of the information disclosure is expressed in the level of specification of data presented by banks.
        The problem of influence of the market concentration on general effectiveness of the market performance is absolutely essential. Miller R.L. and VanHoose D.D. (2000) define the bank market as the zone of the essential bank services, that is, the geographic region, which covers considerable part of sellers and buyers of these types of banking services [81 ;282], The banking sector witnesses a tendency of consolidation: the number of banks is decreasing while the average bank size is growing. The market concentration, which is characterized by the share of the largest banks in the total loans and deposits, assure these banks a dominant position in the market. For the supervisory authorities determination of the accepted level of the market concentration is of vital importance. Sinkey J.F. (2006) offers two opposite theories of interdependence of concentration and effectiveness [85; 841-843]:
    *    “Structure-conduct-performance” model.
    ■    “Efficient structure” theory
        The first theory considers the market with a high concentration level as an adverse event. The higher the concentration level the higher is the probability of the situation when banks' behavior will be close of that of monopolies, and this can lead to an allocational inefficiency and losses for the society in general. With the increase of the concentration level in the market of

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