Effectiveness of russian state banks as financial intermediaries
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« Effectiveness of Russian state banks as financial intermediaries ». Ekaterina Glushkova , Banking Department, Higher School of Economics, Moscow. Efficiency of state banks: empirical findings on transition countries.

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«Effectiveness of Russian state banks as financial intermediaries»

Ekaterina Glushkova, Banking Department, Higher School of Economics, Moscow


Efficiency of state banks: empirical findings on transition countries

Bonin, Hasan, Wachtel [2005]: government-owned banks are less efficient than domestic private banks but not significantly so;

Kraft, Hofler and Payne [2006]: green-field private and privatized banks are not more efficient than public banks, privatization does not immediately improve efficiency, while foreign banks are substantially more efficient than all domestic banks;

Russia:

Fries, Taci [2005]: foreign ownership and private ownership are both associated with greater efficiency;

Styrin [2005]: Russian banks affiliated with the state are not either more or less cost-efficient, other things equal, greater efficiency of foreign banks concluded, whereas public ownership is not significant for explaining efficiency;

Karas et al. [2010]: in the Russian banking market foreign banks are more efficient than domestic private banks, but domestic private banks are not more efficient than public banks.


Motivation

controversial findings of panel-data estimates on transition countries;

little research devoted to the analysis of the issue with regard to Russian banking industry;

thus, demand in a more in-depth analysis.


State banks performance: theoretical assumptions

DEVELOPMENT VIEW

POLITICAL VIEW

VS

  • performance different from that of private banks;

  • variant strategic goals and management incentives;

  • inability to operate on purely commercial terms


Researchquestions

  • assets and liabilities structure - focus:

  • key activities;

  • funds sources;

  • state-authorities’ and non-residents’ «intensity»

«intermediation quality»

of state banks’ activities

  • ROA;

  • ROE;

  • NIM;

  • Staff expenses/assets;

  • Assets income / Liabilities expenses

relative profitability

of state banks

  • leverage;

  • loan quality;

  • credit and liquidity risk prudential ratios

state banks’ risk-profile


«Target»sample

Source: Vernikov, A.V. (2009), Russian Banking: The State Makes a Comeback? - BOFIT Discussion Paper No.24/2009, Bank of Finland.


Group-wise comparisons of:

«target» sample:

57

74

«target» sample:

state-owned banks

state-governed banks

state-influenced banks

VS

domestic and foreign

private banking institutions


Data:

Statistics:

Interfax agency quarterly (balance sheet and P&L-based) bank-level data :

1 Quarter 2006 – 1 Quarter 2009

13 observations for each sampled bank


Results: intermediation measures

State-owned banks ~ foreign banks:

willingly invest in government (and non-government) securities;

exhibit relatively high share of interbank loans in total assets;

enjoy continuing growth of the proportion of loans to non-residents in total loans, high non-residents’ share in assets and liabilities.

but:

still enjoy high share of public authorities in total loans to non-banks;

high share of the state in residents’ deposits, current and settlement accounts;

are much less dependent on interbank loans as the source of funds compared to private banks (both domestic and foreign);

exhibit much lower «loan-to-deposit» ratio than private banks (both domestic and foreign.

!!! These trends majorly relate to the sub-category of banks with direct state ownership at federal level, while other state-connected banks in most cases do not significantly differ from national private institutions.


Results: profitability

! State-connected banks are definitely not more efficient than either banks with foreign ownership or national private banks:

much lower ROA (with directly state-owned banks at federal and sub-federal level being the least efficient);

the efficiency gap is less solid in terms of ROE;

in terms of NIMs national private banks are the most efficient (even compared to foreign-owned banks) while the latter do not substantially differ from all groups of state-connected banks;

on average are less efficient than private banks in terms of the extent to which the overall expenditures on liabilities are covered by total income on assets.


Results: risk characteristics

! State banks:

on average exhibit quite similar level of credit risk in terms of the share of NPLs to that of their private peers:

while:

the NPLs share ratio substantially differs within the group of state-connected banks;

the proportion of loan-loss provisions in total loans is much lower for banks with state ownership;

do not significantly differ from private peers in terms of large credit risk.


Conclusions and further research:

Findings are rather mixed and in some cases significantly differ from the previous studies of the issue => further investigation needed.

Directions for future research:

at micro level: factors affecting the differences in operating efficiency and other performance indicators of Russian banks with respect to ownership structure;

at macro level: the impact of state presence on the depth of financial intermediation and stability of the banking sector.

Thank you for your attention!


References:

Andrews, A. M. (2005), State-Owned Banks, Stability, Privatization, and Growth: Practical Policy Decisions in a World Without Empirical Proof, IMF Working Paper № WP/05/10, January 2005, www.imf.org

Barth, J. R., Caprio, G., Levine, R. (2002), Bank Regulation and Supervision: What Works Best?, World Bank Working Paper 2725, http://econ.worldbank.org.

Bonin, J. P., Hasan, I., Wachtel, P. (2005a), Bank Performance, Efficiency and Ownership in Transition Countries, Journal of Banking and Finance, 29, pp. 31–53.

Bonin, J. P., Hasan, I., Wachtel, P. (2005b). Privatization matters: Bank Efficiency in Transition Countries, Journal of Banking and Finance, 29, pp. 2155–2178.

De Nicolo, G., Loukoianova, E. (2007), Bank Ownership, Market Structure and Risk, IMF Working Paper 07/215.

EBRD Transition Report (2006), Finance in transition, http://www.ebrd.com/ pubs/econo/6813.htm.

Fries, S., Taci, A. (2005), Cost Efficiency of Banks in Transition: Evidence from 289 Banks in 15 Post-Communist Countries, Journal of Banking and Finance, 29, pp.55–81.

Fungacova, Z., Poghosyan T. (2009), Determinants of Bank Interest Margins in Russia: Does Bank Ownership Matter?, BOFIT Discussion Paper No.22/2009, Bank of Finland.

Fungacova, Z., Solanko L. (2008), Risk-Taking by Russian Banks: Do Location, Ownership and Size Matter? - BOFIT Discussion Paper No.21/2008, Bank of Finland.

Glushkova E., Vernikov А. (2009), How big is the visible hand of the state in the Russian banking industry? - MPRA Paper No. 15563, June 2009. Munich University Library. http://mpra.ub.unimuenchen.de/15563


References (2):

Glushkova E. (2009), Granitsi gosudarstvennogo sektora v bankovskoi sisteme (The boundaries of public sector in the banking industry), Bankovskoye delo, 8/2009, pp.34-37 (in Russian).

Haselmann, R., Wachtel, P. (2007), Risk Taking by Banks in the Transition Countries, Comparative Economic Studies 49, pp.411 – 429.

Iannotta, G., Nocera G., Sironi, A. (2007), Ownership Structure, Risk and Performance in the European Banking Industry, Journal of Banking and Finance, 31, pp.2127-2149.

Karas, Alexei, Koen Schoors and Laurent Weill (2010), Are Private Banks More Efficient than Public Banks? Evidence from Russia, The Economics of Transition, 18/1, pp.209-244.

Kraft, E., Hofler, R., Payne, J. (2006), Privatization, Foreign Bank Entry and Bank Efficiency in Croatia: a Fourier-Flexible Function Stochastic Cost Frontier Analysis, Applied Economics, 38, pp.2075-2088.

La Porta R., López-de-Silanes F., Shleifer A. (2002), Government ownership of banks // Journal of Finance, 57 (1), pp.265–301.

Maechler, A. M., Mitra, S., Worrell, D. (2007), Decomposing Financial Risks and Vulnerabilities in Eastern Europe, IMF Working Paper 07/248.

Sapienza, P. (2004), The Effects of Government Ownership on Bank Lending, Journal of Financial Economics, 72, pp. 357-384.

Styrin, K. (2005), What Explains Differences in Efficiency Across Russian Banks?, Economics Education and Research Consortium, Russia and CIS, Final report, Moscow.

Vernikov, A.V. (2007), Russia's banking sector transition: Where to?, BOFIT Discussion Paper No.5/2007, Bank of Finland.

Vernikov, A.V. (2009a), Dolya gosudarstvennogo uchastiya v bankovskoi sisteme Rossii (Assessing government participation in Russian banking system), Dengi i Kredit, 11/2009, pp.4-14 (in Russian).

Vernikov, A.V. (2009b), Russian Banking: The State Makes a Comeback? - BOFIT Discussion Paper No.24/2009, Bank of Finland.


Contacts:

Ekaterina Glushkova

Banking Department - Higher School of Economics, Moscow, Russia,

[email protected]


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