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Central & eastern EuropeSeptember 2 2007

Russia’s urgent need for more red tape

Reg Rage often criticises regulation, but where Russia’s concerned, more is needed – and quickly. The country’s banking sector is undergoing regulatory reform, but too slowly, writes Michael Imeson.
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What is it

The much-needed reform of the regulatory and supervisory framework governing Russia’s banking system is progressing at a snail’s pace. It is lagging behind the changes happening in neighbouring emerging markets, such as Kazakhstan, and standards are well out of line with global best practice. As a result, most Russian banks remain relatively inefficient, uncompetitive and unsound. This is causing serious problems for companies and consumers needing access to reliable financial services, which in turn is hindering economic development.

Who dreamed it up?

The Central Bank of the Russian Federation (Bank of Russia), the banking regulator. It embarked on a series of reforms shortly after Sergey Ignatiev became chairman in 2002.

What are its main provisions?

The main banking reforms are outlined in the document Strategy for Russian Banking Sector Development until 2008, published jointly by the Bank of Russia and the Russian government in 2005. Achievements to date include:

  • Anti-money laundering measures, which have been successful only at a price. Andrei Kozlov, the Bank of Russia’s first deputy chairman, was murdered last year by, it has been speculated, those who lost out as a result of these measures, which included revoking the licences of unreliable banks.

 

  • The introduction of a bank deposit insurance system, which protects the first $15,000 of deposits.

But the list of reforms still to be implemented is much longer. They include:

  • The replacement of Russian Accounting Standards with a new set similar to International Financial Reporting Standards (IFRS). The Bank of Russia took the industry by surprise when it announced in March that banks would move to the new standards on January 1, 2008.

 

  • The consolidated supervision of banking groups.

 

  • An early-warning rating system to assess banks’ stability for supervisory purposes, with a particular focus on the largest banks.

 

  • Applying the Basel II capital accord.

What’s in the small print? Several lower-impact reforms have been published, such as tightening the legal framework for mortgages and creating legislation for asset-backed securities.

What does the industry say?

“Weak regulation and supervision, along with limited political commitment to regulatory reform, is the major weakness of Russia’s banking system,” says Ekaterina Trofimova, a Standard & Poor’s credit analyst. “Deep and determined banking reform is crucial for enhancing the Russian banking sector’s credit standing and for meeting the government’s goal of promoting economic growth through increased financial intermediation.”

The Association of Russian Banks supports reforms that simplify life for its members but is less supportive when they tighten limits or make things difficult in other ways. It, for example, opposes new IFRS-style accounting standards.

How much will it cost?

There will be short-term costs, but in the long term these will be more than offset by increased banking efficiency.

What do the regulators say?

The Bank of Russia refused to answer questions. However, in the latest Banking Supervision Report, Mr Ignatiev writes that the deposit insurance system is “exerting a favourable influence on the soundness of Russian banks and promotes confidence of their creditors and depositors”.

The law of unintended consequences

Regulatory change may spark more bank closures than intended. This would conflict with the Bank of Russia’s need to preserve fragile customer confidence in the sector and increase the dominance of the large state banks.

Could we live without it?

No. The banking system needs reform.

Rating: 5

Rating scale: 5 = Essential;4 = Useful; 3 = Neutral;2 = Unnecessary;1 = Waste of time

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