An intermediate scenario
Category: Bank Management
Governments manage to stabilize their currency to some high-level but less volatile inflation rates, and the real interest rate (nominal interest rates minus anticipated inflation) converges to some stable rate. Budget deficits are cut to some extent but governments continue subsidization of loss-making firms in order to prevent social unrest and political backlash. Privatization takes off, but in the case of less profitable firms, entrenched directors manage to keep shareholders out of the firms. Here, state institutions, especially successors of branch ministries and managers team up; in exchange for subsidies employment is kept above the efficient level. In the case of more profitable firms, however, strategic investors acquire blocks of shares that allow them to gain control over the firms. In other cases, productive managers take the initiative, restructure their firms and are able to save employment due to higher efficiency of its operations.
In this scenario, institution building reforms become crucial. When regulatory institutions are more inclined to assure the rights of shareholders and law enforcement becomes more efficient, shareholder control prevents managers from shirking and abusing the capital of firms. Reform of the tax administration allows to stabilize the budget further and the legal system is reformed to some extent which allows to reduce the influence of the mafia.
Consequence for banks: A large proportion of banks, especially the spin-offs of former state-owned banks remains in the same situation as before, basically allocating and managing state credits to inefficient firms. Some banks, however, find niches, in particular, by financing new private firms. In the beginning, credit lines of international donors and foreign banks play an important role in order to stabilize financial markets’ beliefs about the profitability of banks and to reinstall depositors’ trust in banks. Capital markets may gain some momentum, when profitable firms are quoted on the stock market.
In this scenario, the banking sector is divided into two markets that co-exist: inefficient banks that provide large industrial loss-making firms with the funds necessary for survival, and dynamic commercial banks that develop profitable business with the emerging private sector.
This scenario appears to be realistic for, e.g. the RF or Kazakhstan. Here, given the countries’ resources there will be a large number of potential foreign investors, once the general legal and regulatory environment is stable. In the long run, many CIS countries can reach this stage.