Banking sector liberalization and the impact of foreign banks: the case of Russia

What is the impact of the presence of foreign-controlled banks on the Russian economy and banking system?

The Russian experience has produced mixed evidence with regard to presumed advantages of the entry of foreign banks into an emerging market.

The author finds that foreign-controlled banks:

• have increased the degree of financial intermediation
• have reallocated savings from foreign markets to Russian borrowers
• may have contributed to the lowering of interest rates on bank loans.

Among his other findings are:

• banks owned by leading foreign commercial banks have strengthened the banking system by importing high standards of management, efficiency, prudence and risk control
• parent banks did inject fresh funds into their Russian subsidiaries that suffered losses as a result of the financial crisis which sent a positive signal to the rest of the banking system
• foreign subsidiaries have facilitated Russian exports and imports
• operation of the foreign subsidiaries as a part of transnational structures has promoted opening up and integration of the Russian banking sector into the world financial markets.

However, the results of the study also indicate that:

• foreign banks did not mitigate local banks’ reluctance to lend to the national economy
• the average tenure of loans provided by foreign subsidiaries was generally shorter despite the fact that foreign subsidiaries had greater access to cheap long-term funding
• foreign banks did little to prevent the financial crisis of 1998 but instead may have brought it closer by investing heavily in government securities and exposing local banks to currency risk
• foreign banks did not substantially contribute to the resolution of the liquidity crisis
• foreign banks were slower than local peers to resume lending to Russian companies after the economy recovered from the crisis
• foreign subsidiary banks may have hindered positive structural changes in the Russian economy by focusing on resource-based sectors and commodities and on large corporations, and by concentrating operational presence in Moscow
• foreign banks may not have attracted foreign investment into Russia
• not many new banking products and technologies became available to Russian banks through foreign subsidiary banks
• foreign banks have made a negligible impact on employment in the banking sector
• the benefits from knowledge spillovers have yet to materialise.

The author concludes that the impact of the presence of foreign banks in Russia may be tentatively positive, even if many of the assumptions regarding benefits turned out to be overoptimistic.