The specific of the Russian mass privatization program
Russian mass privatization resulted in long-term insiders’ control of privatized companies. On average insiders (management and workers) controlled 70% of the stakes of privatized companies. This is in sharp contrast with the situation in Czech Republic where employee owned only 4.4% of the shares. Outsiders held on average 21.5% the rest remaining in State’s ownership. IPFs played an insignificant role. They manage to control only approximately 6% oh he shares in privatized companies (Katharina Pistor and Andrew Spicer, 1996).
In an extensive study of Russian experience of mass privatization, Pistor, Spicer and Frydman conclude that the insiders’ control phenomenon was a necessary compromise the privatization’s planners had to make in order to dislodge the existing state-controlled structures. In other words, it was a profound hostility towards the communist structures which drove the design of mass privatization scheme in Russia. Ironically, the same argument is invoked by their Czech counterparts. A more plausible answer for the insider’s control problem in Russia resides in specific socio-political realities in place in Russia at that time. We also have to mention that Czech Republic had the chance to be governed by competent people. Vaclav Havel, president at that time was considered a national hero for his opposition to communists before the Velvet Revolution. And he was wise enough to listen to competent economic advisors. Read more
Optimal Supervisory Models for Developed and Developing Countries
Financial liberalization, multinationalization of the financial entities, blurring boundaries between various types of financial intermediaries brought about the problem of appropriate regulation of these institutions. The central question that arises is keeping the supervisory function with the central bank or delegating it to the separate independent agency(s). It is important to note that answer to this question may be different for developed and developing countries.
For developed countries the answer is more or less straightforward. First of all separating monetary and supervisory functions in different institutions solves fundamental problem of conflict of interest between two. Moreover, degree of blurring boundaries between various types of financial intermediaries in developing countries is high; therefore separating banking supervision from supervision of the rest of financial sector becomes less feasible. On the other hand, assigning supervision of the entire financial sector to the central bank is also infeasible: first of all it strengthens conflict of interest between two functions even more and second central bank will have to deal with the issues that historically lied outside its scope and expertise. Consequently, for most of the developed countries separating banking supervision from the central bank and delegating it to the unified supervisory entity may be an optimal solution. Read more
Russian Banking Sector: An Overview
Russia started reforms in the banking sector in the end of the 1980s with the establishment of a two-tier banking system, composed of the Central bank responsible for carrying out the monetary policy, and five large state-owned specialized banks dealing with deposit collecting and money lending. Most authors argue that by the end of the 1990s three major types of banks developed in Russia: joint-venture banks, domestic commercial banks, and the so-named ‘zero’ or ‘wildcat’ banks. The last were formed by their shareholders - in most cases groups of public institutions and/or industrial firms (the so called Financial Industrial Groups (FIGs) - with the major purpose to finance their own non-financial businesses. As a result of the low capital requirements and practically nonexistent bank regulation, the number of these new banks grew rapidly and as early as January 1, 1996, Russia had 2,598 banks, of which the great majority was constituted of the ‘zero’ banks.
The structure of the banking sector adopted the German-type model of universal banks with banks being allowed to hold substantial stakes in non-financial firms. At the same time, through cross-shareholdings the Russian firms literally owned the banks they borrowed from, thus ‘giving new meaning to the concept of ‘insider’ lending’. Such lending practices worked well because the government underwrote the implicit debt created by enterprise banks making risky loans to themselves. Read more
What are the costs of banking crises?
Banking crises have detrimental effects on the rest of the economy. Banking crises usually result in severe economic crises with negative GDP growth, frequent bankruptcies, high unemployment and often social and political turmoil. A possible breakdown of the whole payment system, capital flight and higher probability of currency crises, as well as a general loss of confidence add to the list.
Bailouts of insolvent banks to avoid spreading of bank insolvencies put a heavy burden on the budget and can increase social inequality by transferring money from tax payers to depositors. Budget deficits constrain future government spending and can result into inflationary monetary policy thereby imposing an additional inflation tax on tax payers. Bailouts can distort economic incentive schemes by keeping inefficient banks alive and therefore reducing the motivation of managers to act efficiently and of depositors to choose banks cautiously, thus preparing the ground for future banking crises. Read more
