Russia: Banking Industry in Consolidation

The process of consolidation in the Russian banking industry initiated a few months ago. However, these developments are being delayed by the political system. An effective consolidation process is similar to a fresh wind, which can remove or transform the instable and weak structures that are driven by the free market economy. The legislation must take the necessary actions in order to avoid erroneous developments.

The atmosphere for changes and innovations that had been boosted during the era of Yeltsin, by the liberal post-communist governments, is now coming to an end. There is no doubt that the number of banks (around 1,300) is too large, even for Russia. It was impossible to develop “healthy” structures, which are ready for the market, in such a short period of time. In the Russian banking industry, there is no lack of capital; instead there is a lack of tradition and experience. A serious need exists for a legislation that is able to support the banking sector and take corrective measures in case of misconduct.

Legal requirements like Basel II, which aim to control risks, are known in Russia but not yet officially established. In the Global Data Management Survey 2004 that was conducted by AIM Software 61 % of approached banks confirmed that “regulatory requirements” would be a driving force for implementing risk management systems. However, only the largest institutions with a high degree of international relations are willing to make efforts in this area.

In order to become a major player in the international field, Russian banks will be obliged to control their market, credit and operational risk more efficiently and to converge to Western standards. It is desired to not have political risks play such a major and unpredictable role, as in the case at present.