A pessimistic scenario
Category: Bank Management
A number of issues will be crucial for the development of the banking sector: Will governments be able to stabilize their currency? Will they manage to cut subsidies? Will they be able to commit not to intervene in the business of banks, but provide the necessary regulatory environment? Will capital markets finally assure that managers of firms behave in a profit-maximizing way? Three scenarios can be considered.
A pessimistic scenario
High inflation persists and there is a risk that the situation deteriorates, with hyperinflation as a result. Governments do not reduce its budget deficits, but continue or even intensify their subsidization policies. Firms remain dependent from state aids, and instead of restructuring their organizations and looking out for new markets and new sources for restructuring funds, they lobby for subsidies and for protection from outside competition. Government institutions continue intervening in banks’ decisions concerning the allocation of credits to firms. Privatization of firms does not take off; capital markets are not developed and there is no managerial turnover replacing inefficient manages by more efficient ones. Governments threaten to renationalize, and state institutions remain inefficient and corrupt. The legal system does nor guarantee property rights and the mafia controls large parts of the economy.
Consequence for banks: If this scenario materializes, banks cannot fulfil their important macroeconomic functions, but remain paralyzed by the influence of the state. Due to the multidimensional uncertainty (inflation, political stability), bankers’ strategy will simply be to take no risk at all, and simply do what they told by the government. Moreover, the incentive of bank managers to try to enrich themselves by deviating funds will increase. Very quickly, the situation of the economy will deteriorate further, and transition towards a well-functioning market economy will become impossible.
This scenario seems not completely unrealistic for countries like Belarus, in which the political leadership is not committed to create a market economy but pursues its own agenda. Fortunately, many CIS countries will be able to prevent this development, provided that some elementary reforms of the banking sector will be realised. In particular, the bad loan problem must be alleviated in order to prevent a banking crisis.