Development of the banking sector in the 90’s. Banking in the SU
Category: Bank Management
The transformation of the economies of the CIS affects the rules according to which the respective banking sectors function. We first describe the received banking system of the SU. While current developments indicate that the development of banking sectors may in future differ to some extent from country to country of the CIS and even from region to region of a given country, there are however two phases of development all CIS have been subject to. These are described in the succeeding two subsections.
Point of departure: Banking in the SU
According to the pure theory of central planning, the economy of a country is co-ordinated by a system of plan figures. Here, a Central Planning Bureau defines an aggregate plan that is broken down to firm-level plans by Branch Ministries. The income of households consists to a large extent of non-monetary benefits such as publicly provided housing, nutrition and services. The state collects the surplus of firms and re-allocates fixed investments to firms according to the plan.
In reality, the economy of the Soviet Union did not function according to the principles of such a textbook-like centrally planned economy. Already in the 1920’s, Lenin’s New Economic Policy incorporated a number of incentives for households and firms. Consumers were incited to save, and deposit their savings at the Saving Bank (Sperbank). State Bank (Gosbank) and Branch Ministries allocated investments to firms, financed by these deposits and the surplus of firms. Later specialized banks (for agriculture and industrial sector of the economy) were founded.
It turned out that credit allocation did not follow the requirements of economic efficiency, i.e. allocate money to most efficient firms. Instead, directors of firms would together with their advocates, the respective Branch Ministries, engage in lobbying efforts to receive more investments. These influence activities led to inefficient investment decisions.
While state banks were thus subject to the influence of industries as a whole, they had an important monitoring function vis-а-vis the individual firm. Its local branches held the financial accounts of each enterprise in its jurisdiction and monitored all financial transactions (the so-called “control by the ruble”). These branches would even carry out random spot checks in order to detect a firm’s “reserves” or shirking employees.