Comparative characteristics of the institutional structure of the banking sector in Russia and China

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Comparative characteristics of the institutional structure of the banking sector in Russia and China

Introduction

Economic transformation in Russia is usually compared with the reforms in the countries of Central and Eastern Europe (CEE) and China. But it's a common prevailing view among the Russian speakers, that even though the economic transformation is quite similar, still the transformation models in Russia, China, Central and Eastern Europe and are fundamentally different not only in the stated objectives, but also on the methods and techniques which were determined.

The banking system of each country separately (Russia and China) are the subjects of many publications, but as for now there is not much of an example of a comparative analysis of these two banking systems.

In fact, some distinct events and indicators of development banks in Russia, as well as the liberal official rhetoric could create the illusion of movement in the direction of the market model of competition and pluralism of forms of an ownership. However, over the past few years scientists have accumulated new evidence calling us to make a conclusion about the divergence of banking system models of those two countries.

In particular, in Russia there was a growing state presence in the credit sector as a regulating organ.

The object of the study was the system of commercial banks in Russia and China. But development banks and non-bank financial institutions and "Political banks" "Political banks" in China - Export-Import Bank of China and Agricultural Development Bank of China. were left beyond the analysis.

Theories and hypotheses of the research.

As I mentioned before, the theory consists on the similarity, that economic transformation in Russia is usually compared with the reforms in the countries of Central and Eastern Europe (CEE) and China, but in this article I want to dispel this claim by showing not only the similarities, but also highlight the differences.

Methodology of the research

Comparative Analysis of models of the institutional structure of banking system

In both countries, there is a model of financial intermediation or in other words bank-based financial system.

Commercial banks dominate among financial institutions. In Russia it counts for over 90% of total assets of financial institutions (according to the Bank of Russia), in China - 82% of assets and 80% of all employees [CBRC (China Banking Regulatory Commission), 2014, p. 128, 137]. There are two major models of financial intermediation in the world - the Anglo-American and German-Japanese, the banking system of Russia and China are typologically closer to the second one, meaning that the bank loans are the main source of external resources for the non-financial sector of the economy. But it's impossible to complete similarities with the German-Japanese model: in the framework of this one banks own industry, which is not observed in Russia and China. Talking about the index-depth of banking intermediation, Russia lags way behind China.

The ratio between the private bank deposits and the GDP shows us that gap has narrowed considerably, but if we are looking into the ratio between bank assets and GDP, China still has a noticeable advantage. (Fig.1). The first two indicators of the dynamic trend are directed upward, meaning the ratio between bank loans and deposits gradually grows in Russia, but declines in China (Fig. 1c). This can also mean that Russian banks starting to make a fuller usage of the deposit base to fund the loan portfolio, whereas previously the resources were sent to non-credit assets. With liquidity ratio of 3.5: 1 Chinese banks are stepping out from a risky edge to the place where they're trying to balance out those numbers.

A) Assets of depository institutions / GDP, %.

B) Private bank deposits / GDP, %.

C) Bank loans / bank deposits, %.

Source: Financial Development and Structure Dataset (Updated Nov.2013). The World Bank, Washington DC.

Fig.1 The depth of banking intermediation in Russia and China.

The levels of the banking system

The modern standard Duplex (two-tier) banking system is mostly used all over the world, (Central Bank and all other banks), where all the commercial banks are equal, at least de jure. Banking legislation of both countries meets the requirement. De facto the structure of the banking system in both countries is complex and multi-level. In Russia, the largest state-controlled banks stood out from the general mass of market participants and made special level of the banking system (Fig. 2). On average, each of the three leading banks exceeds twenty largest private banks by total assets at 12.4 times. In turn, each of the twenty largest private banks exceeds the average of the remaining Russian banks 38 times. The Bank of Russia as the supreme regulator of the banking system, recognizes the heterogeneity of the commercial banks together, highlighting "systemically important" institutions but only de facto. In China, it's clearly three major system level - the largest state-owned banks, joint-stock commercial banks, as well as all other commercial banks. On average, a major state bank, joint stock commercial bank exceeds the number of employees 12.7 times and the total balance sheet exceeds 6.1 times. In turn, the average volume indices of joint-stock commercial banks and other types of banks also differ by an order. It's also an evidence of stratification: only the largest of the banking institutions are operating in the whole country, while many of the urban and rural commercial banks are operating mainly within its core areas.

Russia:

1. The largest state-owned banks (3)

2. Other systematically important banks (30) and the rest of the banks of the second circuit supervision (150)

3. Other banks (650)

China:

4. The largest state-owned banks (6)

5. Joint-stock commercial banks (12)

6. Urban commercial banks (145), Rural commercial banks (468), foreign banks (42)

Fig. 2 The structure of the banking system in Russia and China.

Market structure and level of concentration

If we analyze the structure of the banking industry by ownership, then in Russia and China, official statistics give only a partial picture of the public sector size. Defining the boundaries of the public sector in a country like Russia or China, it is a non-trivial task and it requires a separate study. In the period preceding the 1998 crisis, the public sector of the Russian banking system was almost "imploded" to approximately 1/3 of all the assets and only then began to recover. However, by the beginning of 2014 the market share of state-controlled banks approached 60% (according estimates), partly due to the second-tier banks, government-related entities, directly or indirectly. The core of the credit system in each country are the largest banks with state participation. In Russia, the total share of Sberbank, VTB and Rosselkhozbank has reached 42%. In China, the share of the largest state-owned banks gradually reduced to about 53% and 61% creating the illusion of "care" of the state (Fig. 3). Judging from the trend line, at about 50% of the total assets of commercial banks, both series of data can be crossed. Dynamics of state participation in the whole banking sector of two countries look in different directions, but it is an illusion. Firstly, the chart reflected only the period after 2000, but just in the previous period in Russia occurred by 'avalanche' like collapse of the system of state specialized banks, which China somehow avoided. Second, China's state sector was not limited by the "large commercial banks".

Russia * - Sberbank of Russia, VTB, Rosselkhozbank without counting the subsidiary banks.

China * - Industrial and Commercial bank of China, Agricultural bank of China, China Construction Bank, China Bank, Bank of Communications.

Source: CBRC 2013 Annual Report. Beijing: China Banking Regulatory Commission, 2014; the Banker, July 2014 / Russia's Central Bank

Fig.3 The share of the leading state - owned banks in Russia and China (% of total assets of commercial banks).

Results of the data analysis

Based on the material presented in the preceding sections of this article, I have placed signs on each element of value judgments. In statistics, I am mostly interested in whether the substantial similarity or difference prevails; in dynamics - whether evolving banking system of Russia and China towards greater similarity (convergence) or their paths diverge. Below are the main results of the comparison.

Institutional framework

Statistics: prevail similarities (+) or differences (-).

Dynamics: Convergence (+), divergence (-), no changes (=).

Table 1- Comparison of the Russian and Chinese banking systems.

The comparison table shows that the static between the banking systems of the two countries remains many differences, but the situation is more likely to change in the direction of more similarities than vice versa. In 1990's the proportion of public and private capital, between the centralized redistribution and the market was far deviated from the historical optimum, meaning there was an overlap (overshooting). Now this proportion was renewed. There is a growing government presence in the credit sector as a regulator, and direct producer services as the controlling shareholder of the largest commercial banks and development institutions. The government develops the tools of influence on the price mechanism in the credit market. As a result, the scope for action of private initiative and market sharing is narrowing for now. In China, the complete domination of the institutions of the same type (centralized redistribution of financial resources) moves to more balanced set of them, in which there is a market placing method of resource allocation, where it's going slowly but steadily and progressively. Since private capital are still under-represented in the banking system, but now it is expected to grow. Keeping the proportions between the different institutions maintains the stability of the credit system and public confidence in it, while supporting economic growth. Thus, each of the banking systems moves to the optimum relationship between the dominant institutions of the X-type (providing the centralization and redistribution of financial resources) and the complementary Y-type institutions (self-regulatory institutions of market supply and demand and competition). I have attempted to quantify these dynamic using two indicators (proxy) - the number of country's operating commercial banks and market share, attributable to the leading state-owned banks. The first assumption is that, with limited and fixed number of state-owned banks, large commercial bank's operating in the country is much wider, as a private bank capital becomes more active. When thinking "reverse" the institutions of market co-ordination have no place in a system consisting of only five banks, each of which is fully owned by the government (as it was at the beginning of reform in Russia and China). The second assumption links the power of the X-type institutions (the centralization and redistribution) with a specific weight of state-owned banks, which, overall conditions are equal, often act as conductors of public policy and decision-making involved in lending of the necessary state borrowers and projects. Accordingly, in Fig. 4 a, I reflected on the ordinate the number of banks in the reverse scale and Fig. 4 b on the chart - the share of the leading state-owned banks in the total assets of the banking system.

a) The number of active commercial banks (reverse scale)

b)Share of the leading state-owned banks (total assets)

Fig. 4 Institutional dynamics in the banking systems of Russia and China.

Conclusion

Overcoming a difference between two countries economies, I was looking for an answer to the question: how the Russian banking system and Chinese banking systems are similar to each other in their content characteristics and whether there is a gradual convergence or divergence of the trajectories of their development. Therefore, I compared the institutional structure, market structure and concentration, government's structural policy in relation to the banks and the participation of banks in lending to non-financial sector. The overall conclusion is that in the static between the two banking systems there are elements of both similarities and differences. In addition, in the dynamics it is a clear domination of convergence elements. Multileveled and hierarchically organized system of commercial banks, at the head of which there are several banks that are directly controlled by the government. Following statements are:

· penetration of banking services in both countries

· market share of the largest state-owned banks at the level of 42-45% in both countries, although it is growing in Russia and is reducing in China

· complication of the share capital structure of the largest state-owned banks instead of their real privatization

· China's intention to put in place the private deposit insurance system (in Russia it has already took place)

· China's bank loans have become an important source of investment in fixed assets of non-financial enterprises

· in both countries, the state bank loans are in addition budgetary investments in fixed assets of non-financial enterprises

· budgetary deficit compensates by bank's lending in China, whereas in Russia it's only planning for now.

The vector of the evolution of the Russian banking system is directed towards convergence with the Chinese one. Already typological similarities with China are more noticeable than with the countries of Central and Eastern Europe. In the banking sector, China and Russia are actually become a donors for each other in terms of ideas for institutions and institutional forms, but at the political level, it is not recognizable at all.

References

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