КР № 5

BANKING REFORM IN RUSSIA
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(1) Countries making the transition to a market economy have pursued a variety of approaches to banking reform. To become globally competitive, however, transition economies will need to accelerate bank privatization and the reform of bank management and governance.
(2) The former centrally planned economies of Central and Eastern Europe, and the Baltic countries, Russia and the other countries of the former Soviet Union face a formidable challenge: their banks, traditionally passive conduits for funds, must be transformed into efficient financial intermediaries and active agents of market discipline. Despite progress, weaknesses persist in many transition economies banks. The absence of sound banking systems has hindered the development of nonbank financial markets, private sector investment and the conduct of monetary policy.
(3) To correct structural weakness in their banking systems, transition economies have financially restructured banks, improved enabling environments, and reorganized banking sectors through consolidation and privatization. Significant systemic risk remains, however, because of excessive exposure to weak enterprises and unsound management and governance. Most transition-countries have made progress toward market-based banking systems, but none has succeeded in fully meeting the needs of the emerging private sector. There is evidence that, unless 'banking reforms accelerate, companies will find it difficult to obtain adequate and affordable services of high quality.
(4) To restore bank liquidity and solvency and meet the private sector's financing needs transition countries need to develop banking sectors that operate on commercial principles in a competitive environment and that have strong management and internal supervision. To increase competition and improve service, governments need to open markets to foreign banks and allow the most competitive domestic banks to extend their locations and operations. The success of banking reforms will also require the curtailment of funds for loss making of bank and enterprise, the acceleration of bank and enterprise privatization, an improved legal and regulatory framework, and efficient payment systems.
(5) Following the creation of a two-tier banking system in 1987, Russia's approach to banking reform rapidly - and partly unintentionally - diverged from that of other transition economies. In 1988 new laws permitted the creation of cooperative banks to serve the nascent private sector. Establishment of joint-stock banks became possible with the 1990 banking law, with licensing subject to only minimal requirements. Competition between a reformist Russian government and a more conservative Soviet government led to a separation of Russian banks from Soviet banks and, in Russia, to the break up of several state banks into independent regional banks. Together these events fueled an explosion in the number of Russian banks: from 5 in 1989 tо 1,500 in 1992 and 2,500 in 1995.
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