Adaptation of banks: strategy, use of resources and organization
Category: Bank Management
This section links the analyses of systemic changes, of developments of the banking sector in CIS and the possible scenarios with questions of optimal bank management in a CIS country. The main goal of this part is to show that much of the seemingly inefficient and irrational organizational and managerial practices in CIS banks can be understood as consequences of a bank’s adaptation to its environment, but that there is however some scope for improvements of banks’ conduct that may have substantial impact on the success of transition. This part is organized according to the main partners of banks: government agencies, depositors and shareholders, firms, and competitors.
2.4.1 Government agencies
The following government agencies are involved in the banking sectors of CIS countries: the Central Bank and regulatory institutions, SOE’s and branch ministries. The Central Bank’s main function is to stabilize the currency. In most countries, it also defines the regulatory framework of the banking sector and monitors banks’ conduct in regard to issues of competition (sometimes this function is also carried out by a specific regulatory institution).
In some countries, especially Russia, most of the firms have been privatized. There are other countries, for instance Uzbekistan in which the economy is still mainly dominated by SOE’s. Their interest is to receive subsidies in order to make the transformation process less painful. Their natural allies in this respect are branch ministries. While in many countries these ministries have been abolished, the old networks of bureaucrats and SOE directors still function, and successors of branch ministries (e.g. the Ministry of Economic Affairs) try to influence the loan policies of commercial banks via the Central Bank.
To give another example, in Uzbekistan, the Central Bank only licenses banks for activities in specific sectors of the economy. This practice allows to take substantial influence in a bank’s policy. Obviously, this is harmful for the respective banks, because they are obliged to engage in lending to firms that are not viable in the medium run. Moreover, an undiversified portfolio cannot absorb a sectoral shock, which makes banks even more vulnerable to crises than they already are due to undercapitalization.
Although direct interventions of government agencies seem to become less of a problem in most countries of the CIS, there is a number of reasons why the influence of government agencies remains high. As outlined above, many banks consider lobbying for credits as a more secure activity than trying to attract and allocate funds on the free market. This gives government agencies some bargaining power, which is often abused for interventions into the conduct of banks. Moreover, it should not be forgotten that bank managers, industry managers and bureaucrats often stem from the same background, and that received networks often still function.
The single most important issue in the relationship between government agencies and banks appears to be the enduring bad state of the regulatory environment. Although some countries have undertaken some effort in defining a system of rules and prudential regulations, such as credit/deposit ratios, limitations for cross-ownership, norms of reserves and deposits with the Central Bank etc, there is in general still a large degree of unsettled issues. Moreover legal enforcement remains weak, and as case studies of bank regulation show, regulatory institutions sometimes abuse their authority in order to make banks comply with the political interest of the government or some specific groups.
Consequence for the strategy of banks: Almost no bank can do without or even against government. Compromises must be found, and these often imply substantial constraints on a bank’s strategy vis-а-vis competitors, clients and depositors. It must be interpreted as a bad sign that in recent times even private commercial banks start lobbying for subsidized credits instead of developing new markets.
Due to the untransparent regulation, legal insecurity and political instability, banking is very risky. Renationalizations can occur. In Belarus, for instance, a large private bank (Belarusbank) was merged with the State Savings banks by a decree of the President. It is moreover alleged that the President of the country changes the CEO’s of firms at his whim. In such a politically risky environment, managers need excellent contacts with state institutions in order to insure themselves against the risk of political backlash or extreme changes of regulation, and the consequences for their personal career and/or wealth. It is hence not surprising that most CIS bankers try to be at good terms with state officials.
Consequence for the use of resources: As long as the bad loan problem is not solved and governments subsidisation policy does not change, many banks will consider the subsidized credits of the government more interesting than the acquisition of new funds. This is especially the case for those banks the portfolio of which mainly consists of bad loans. Then, large part of managerial resources will be invested in unproductive activities vis-a-vis the state instead of restructuring the banks and directing effort towards clients and depositors
The creation of efficient banking associations that represent the interest of banks vis-a-vis regulatory institutions and other government agencies can be an important step towards a more efficient allocation of managerial effort: bank associations can lobby on behalf of the whole industry and co-ordination failures are reduced by such an organization. Twinning arrangements can also be helpful in this respect. Since governments want to attract foreign capital, foreign banks should co-operate with domestic banks in order to lobby for stable institutional environments. Experience shows however that Bank Associations are under skilled, understaffed and not accepted by government agencies as a serious partner.
Consequence for bank organizations: Necessary restructuring efforts towards a modern banking organization are not undertaken, since there is a high risk that these investments do not pay off, if for instance regulation is changed and government does not provide a bank with a license for a specific sector of the economy. This will only change if government agencies fulfil their task of providing an efficient institutional framework without intervening in the business of banks.