The world crisis, which covered the whole spheres of economics and finances, had a serious effect on the development of Russian financial institutions, showed up and enhanced systemic risks, associated with dependence on the external financing, unbalanced asset and liability profile, non completion of institutional organization processes.

In the years preceding the crisis the role of Russian financial institutions has significantly increased in the Russian economics. The resource potential of banking sector has increased. Over a period since the year 2001 through 2007 the share of bank assets in GDP increased by 1.9 times, and proprietary capital by 2,5 times. Pension reserves of private pension funds in relation to GDP increased by 7 times, and net asset value of mutual investment funds by 14 times (Table 1).

 

Table 1 – Characteristics of development of Russian financial institutions in the years 2001- 2007 in % to GDP (at the beginning of the year)[1]

 

 

2001

2002

2003

2004

2005

2006

2007

Commercial bank assets

 

32.3

 

35.3

 

38.3

 

42.3

 

41.9

 

45.1

 

51.9

Commercial bank capital

3.2

3.9

5.4

6.2

5.6

5.7

6.3

Insurance premiums

2.3

3.3

3.0

3.4

2.8

2.3

2.2

Pension reserves of non-governmental pension funds

 

0.2

 

0.4

 

0.5

 

0.7

 

0.7

 

0.9

 

1.9

Net assets of mutual investment funds

0.1

0.1

0.1

0.6

0.7

1.1

1.6

 

Resources earned by pecuniary institutions allow them to make a considerable contribution in the activation of investment process and development of country’s economy. Thus, during the years 2000-2007 bank credits of real sector of economy grew from 479,2 billion rub. to 9046,2 billion rub. and made 27,4% of GDP. The ratio of bank credits in the bulk of business investment in the capital assets increases almost twofold and reached 10,4%.

 

At the same time these processes were accompanied by the reinforcement of internal conflicts of financial sector development, concentration of exchange, credit, interest-rate risks, and liquidity risks. The accumulation of these risks turned into a powerful factor of financial threats, which caused the worsening of condition of Russian pecuniary institutions with the destabilization of global financial markets[2].

 

During the years 2008 – 2009 Russian financial sector revoked 86 bank licenses, over 150 licenses of insurance organizations, and about 80 licenses of private pension funds; over two decades of M&A deals passed. Based on the activation of bankruptcy processes, mergers and acquisitions, the tendency of pecuniary institutions consolidation increased and they decreased in number (Figure 1). Thus, in the year 2008 the number of active credit organizations shortened from 1136 to 1108, insurance organizations from 857 to 786, private pension funds from 252 to 243. Thus, in the year 2008 the total number of active credit organizations in Russia shortened to 1058, insurance organizations from 702, private pension funds to 172. The quantity dynamics of mutual investment funds became an exception: over the year 2008 the number of mutual investment funds increased by 10,7% — to 1134, over the year 2009 — by 15,3%, to 1307, including mutual investment funds for qualified investors — by %, to 408.

 

 

Figure 1 — Dynamics of quantity of financial institutions:[3]

 

The level of concentration of assets and capital of pecuniary institutions increased. The share of 200 largest assets of credit organizations in size in total assets of banking sector increased from 91.6 to 93.7 % over the years 2008 – 2009. Herewith, a share five largest banks estimate January 1, 2010 made 47.9% against 42.3% for January 1, 2008. The share of the largest assets of credit organizations on the size of capital estimate 1/1/2010 made 92.9% of the overall capital of banking sector (for January 1, 2008 — 89.7%), including 52.2% for 5 largest banks (for January 1, 2008 — 43.2%). Insurance company assets, which make 15% from their total number reached 80% of total assets in the insurable sector. 25 largest pension funds had 93.6% of all pension reserves, whereas the national pension fond «Gazfond» had 50%.

The growth trend of foreign capital share continued in the total authorized capital of Russian pecuniary institutions. The number of acting credit organizations with 100% of foreign participation in Russia increased from 63 to 82 for the years 2008-2009. Total number of Russian credit organizations with some foreign participation increased from 2002 to 226. The share of foreign participants in the authorized capital of insurance organizations reached 13,5%; they had 35% of total insurance premium and 23,7% of reinsurance premium.

A dominant position of banks in Russian financial sector strengthened as a result of critical events and the growth trend of shares of non-bank financial institutions in total assets of financial sector, which took place in the years 2001-2007, discontinued. Over the years 2007-2009 the share of non-bank financial institutions in GDP decreased from 6.0 to5.1 % of GDP, and in total assets of financial institutions from 10.3 до 6.4% (Table 2).

 

Table 2 — Assets structure of Russian financial institutions [4]

 

 

1/1/2007

January 1, 2010

Amount, billion rub.

in % to GDP

Ratio in total assets of a financial sector, %

Amount, billion rub.

in % to GDP

Ratio in total assets of a financial sector, %

Banks

13963.5

51.9

89.7

29430.0

75.3

93.6

Non-bank financial institutions

 

1609.9

 

6.0

 

10.3

 

1997.0

 

5.1

 

6.4

Including

insurance companies

 

679.5

 

2.6

 

4.4

 

873.8

 

2.2

 

2.8

Mutual investment funds

(total net assets)

 

 

 

420.5

 

 

 

1.6

 

 

 

2.7

 

 

 

380.7

 

 

 

1.0

 

 

 

1.2

Non-governmental pension funds

(proprietary means)

 

 

509.9

 

 

1.9

 

 

3.2

 

 

742.5

 

 

1.9

 

 

2.4

 

The crucial factor, which conditioned this trend line, is a value impact of equity instruments, which caused asset impairment of non-bank financial institutions, and priorities of state support in respect of the banking sector. 

From the middle of the year 2009 the situation in the financial sector began to flatten out thanks to massive risk overestimation by pecuniary institutions and anti-recessionary measures, which were undertaken by financial controllers. Correlations of the majority of highlights, defining the role of pecuniary institutions in economics increased by the year 2010 (Table 3), this increase took place, primarily, due to significant decrease of nominal scale of GDP.

Deposits of individuals became the main source of increase of bank resource base in the year 2009.  Increase of sum of compensation on the insured deposit up to 700 thous. rub., unconditional performance of obligation by Deposit Insurance Agencies to bank investors with revoked licenses allowed to suspend the runoff of retail deposits from banks, which took place during the acute critical phase (September 2008 – February 2009). The Bank of Russia set the peak value limits for the rates of interest on bank deposits with the aim of reduction of financial imbalance of bank risk, connected with the increase of deposit rates. Despite the succeeding lowering of depositary rates by banks, the influx of population funds into deposit was practically restored, which is mainly explained by the absence of alternative of financial instruments. In the first half of the year 2010 the deposits of individuals grew by 15.1 percentage points and made 28.2% of banking sector equities. The rates of growth of funds, drawn from enterprises and organizations (6,5 percentage points), were less significant than the rates of growth of retail deposits.

The process of retargeting of Russian banks to the resources of internal financial market, and mainly to the mobilization of retail deposits, at the decrease of borrowings at the world market, drove up to the average cost of assets attraction. Conditions of resource limitations (on the amounts, value, and terms), as well as reevaluation of credit risks, defined the rethink of bank policy in the field of active transactions.

 

Table 3 — Indicators of development of Russian financial institutions during the years 2008-2010. (at the beginning of the year)[5]

 

Figures

2008

2009

2010

Banking sector

Banking sector assets (equities), billion rub.

in % to GDP

20125.1

60.5

28022.3

67.6

29430.0

75.3

Banking sector proprietary funds, billion rub.

in % to GDP

in % to banking sector assets

2671.5

8.0

13.3

3811.1

9.2

13.6

4620.6

11.8

15.7

Investment of individuals, billion rub.

in % to GDP

in % to banking sector equities

 in % to money income

5159.2

15.5

25.6

24.2

5907.0

14.3

21.1

23.1

7485.0

19.2

25.4

26.4

Means drawn from enterprises and organizations, billion rub

in % to GDP

in % to banking sector equities

 

7053.1

21.2

35.0

 

8774.6

21.2

31.3

 

9557.2

24.5

32.5

Commercial loans provided by non-financial organizations and individuals, billion rub.

in % to GDP

in % to banking sector assets

 

12287.1

36.9

61.1

 

16526.9

39.9

59.0

 

16115.5

41.3

54.8

Non-bank financial institutions

Insurance premiums of insurance organization funds, billion rub.

in % to GDP

A share of voluntary insurance, other, than life assurance, in GDP %

Insurance payments, billion rub. 

in % to GDP

776.0

2.4

 

1.2

481.9

1.5

946.2

2.3

 

1.1

622.7

1.5

977.9

2.5

 

0.3

734.6

1.9

Net asset value of mutual investment funds (without considering funds for the qualified investors), billion rub.

in % to GDP

 

 

488.5

1.5

 

 

312.2

0.8

 

 

367.7

0.9

Pension reserves of non-governmental pension funds, billion rub.

in % to GDP

 

472.9

1.4

 

462.9

1.1

 

564.4

1.4

 

The funds attracted from population in some instances were destined not for credit financing of the real economy, but for the covering of bank liabilities, in particular, on the previously arranged bond certificate, as well as acquisition of corporate bonds, ineligible bills, federal loan bonds, and bond certificates of the Bank of Russia.

The stocks ratio of originated loans to GDP increased from 36.9% for January 1, 2008 to 41.3% for January 1, 2010. At the same time, their share in total assets of banking sector shortened by 6,3 percentage points and made 54.8%. The share of overdue indebtedness in the bulk of loans, originated by the bank to non-financial organizations, increased by 2.9 times (up to 6.0%), on population loan — by 2.6 times (up to 6.8%).

In the year 2009 the dominant factor of volume reduction for the credit financing was the requirement strengthening to the financial position of loan debtors and the collateral quality on loans[6]. For August 1, 2010 the share of overdue indebtedness in the bulk of loans, originated by the bank to non-financial organizations made 6.1%, on population loan — 7.5%. The volume of credit financing increased gradually: In the first half of the year 2010 the increase in loans to non-financial organizations and population made 4,4 percentage points.

The restoration of insurance sector, which is traditionally more conservative and depends on the situation in the real sector and at the financial market, had a more protracted nature of a crisis. The analysis of dynamics of share insurance in GDP is indicative of the lowering of this index in the year 2008 and some growth by the year 2010, which was primarily reached at the expense of reduction of the nominal GDP value. During the investigated period the share of premiums on the optional insurance, other than life insurance significantly decreased. The growth of share of total insurance in GDP in the year 2009 took place due to obligatory insurance. Inasmuch as the volume of insurance premiums grew at a slower pace than the volume of insurance payments, rate insurance payments increased up to 75.1% for January 1, 2010, which was the worst rate for that period. In the first half of the year 2010 the volume of insurance contribution made 521.5 billion rub., the volume of repayments made 368.0 billion rub., the rate of insurance compensation dropped to 70.6%.

The basic asset types of insurance organizations were debt securities, loans granted, bank deposits as well as monetary funds. Following the results of the latest period, the most significant changes in the investment activity of insurance enterprises were boost of insurer interest to equity investment and reduction of equity contribution in the ineligible bills of banks. Whereas the first tendency is conditioned by the post-crisis share market behavior, the second one is conditioned mainly by the reconsideration by the Federal Insurance Supervision Service of requirements to the structure and asset profile, focused on the enhancement of financial stability and creditworthiness of insurers.

It is worthy of note that, if the banking sector received fundamental State support as part of anti-crisis program (particularly, by subordinated loans), which would avoid the loss of strength of systemic banks, and then such measures would not be applied for insurance organizations. Generalization of crisis lessons and tasks of risk management enhancement conditioned the introduction of range of changes in the legal framework. Thus, the amendment to the Act «On the Organization of the Insurance Industry» includes the introduction of a subordinated loan institution for the insurance companies, as well as the flow definition of insurance portfolio transfer at the replacement of the insurer in the insurance policy, monitoring possibility of financial condition for insurance organizations on the ground of systematized factors list, perfection of the organization of internal control and audit, specification of norms of financial statements keeping etc.[7]

Creation of compensatory mechanisms for individuals at the financial market by analogy with the mechanism of deposit insurance, which proved its efficiency in critical conditions, is essential for the development of the polled investment sector. 

Russian mutual investment funds, occupying the fundamental place in the structure institutional investors in pre-crisis period, turned out to be the most vulnerable to supply shocks at the stock market. The drop of quotes of Russian valuable securities at the end of 2008 the beginning of 2009 led to the massive outflow of investors’ funds from mutual investment funds, their transfer to less risk tools and a drastic fall of the net asset values. In the year 2008 the integrated cost of net assets of mutual investment funds shortened by 6.6 percentage points for the first time in recent years, the net influx of shareholders funds shortened by 7.4 percentage points in comparison with the year 2007, and was secured basically by the mutual investment funds of estate property.

Change of situation on the stock market in the other half of the year 2009 made it possible to secure positive yield for the majority of mutual investment funds; in addition, mutual investment fund specializing on trading in stocks and shares, showed the maximum profitability. The integrated cost of net assets of mutual investment funds increased by 22.0 percentage points in the year 2009; the total net influx of shareholders funds into mutual investment funds made 18.1 billion rub.[8] In the first half of the year 2010 the aggregate cost of net assets increased up to 374.3 billion rub. at the expense of investment into closed mutual investment funds, shareholders withdrew1.6 billion. rub from mutual funds, and 0.4 billion rub. from interval funds. Positive yield was shown not by all mutual investment funds due to the drop of MICEX index almost by 4.5 percentage points[9].

The crisis developments in economics seriously undermined the credibility of shareholders to the investment into mutual funds. Further development of these institutions is substantially related to the restoration of the Russian share market and measures of controllers on the reduction (limitation) of risks. It should be noted that in the elaboration of the act on the investment funds the Federal Financial Markets Service developed and adopted normative acts, focused on the essential expansion of the number of mutual investment fund categories, detalization of requirements to qualified investors, improvement of licensing procedure of subjects in the polled investment sector and requirements to their activity.

Development of private pension funds in the investigated period is characterized by controversial dynamics of pension reserves, the most important indicators of their activity, reflecting not only liabilities of funds for the participants, but also their reliability degree. In the year 2008 the volumes of pension reserves dropped by 9 billion rub. for past ten years or by 2.1 percentage points, which is connected with negative profitability, obtained from the National Pension Fund from placement reserves. However, in the year 2010 National Pension Fund not only restored the volume of pension reserve but also increased it to 564.4 billion rub or by 21.9 percentage points. This was encouraged to certain extent by the adoption of amendments in the RF Government decree No 63, dated 1.02.2007 in the year 2008, which established the rules for the investment of funds of NPF pension reserves. The mentioned changes are firstly related with the expansion of tool list and marginal inputs in the separate assets, secondly, with increase of assets share, the emitters of which are fund investors; thirdly, cancellation of current limitations for independent (without services of the management company) placement of pension reserves into deposits, state and municipal bonds, common shares of mutual investment funds. Thus, National Pension Funds developed new investment opportunities, which allowed to correct strategy investments promptly, to increase the outcome and investments reliability.

The planned restoration of Russian pecuniary institutions takes place under the conditions of their transition to a more deliberate financial policy and dynamic actions of financial market controllers on the risk regulation.  The vector of their post-crisis development is related to further managerial improvement of risks in conditions of dynamic changes of financial medium at micro and macro levels, organization of the interaction between various financial controllers, system implementation of integrated monitoring of all financial market segments, which allows to obtain the associative information on the origin of risk factors in these segments, reveal potential problem characteristic and take reasonable management measures.

 

References

A.V.Yegorov, A.S. Karamzina, Ye.N. Chekmaryeva. Assessment and monitoring of bank crediting conditions/ Егоров А.В., Кармазина А.С., Чекмарева Е.Н. Анализ и мониторинг условий банковского кредитования. – Деньги и кредит. – 2010. -№10.

Everything about mutual investment funds and management companies. — http://pif.invеstfunds.ru/аnаlitics/stаtistic.

Official Web site of the Federal Financial Markets Service. — http://www.fсsm.ru.

The official Web site of Federal Insurance Supervision Service of Russian Federation — http://www. fssn.ru.

The official Web site of Central Bank of Russian Federation — http://www.сbr.ru.

A.L. Savatyugin New in regulation of insurers’ activity. Finances / Саватюгин А.Л. Новое в регулировании деятельности страховщиков Финансы. – 2010. — №8. – С.8-9.

Medium-term evolution forecast of Russian financial system. Analytical report. A team of authors under the supervision of Ya.M. Mirkina, Professor, Doctor of Science Economics (years 2010-2015) / Среднесрочный прогноз развития финансовой системы России (2010-2015 гг.) Аналитический доклад. Коллектив авторов под руководством проф., д.э.н. Миркина Я.М. ФГОБУ ВПО «Финансовый университет при правительстве Российской Федерации». – М., 2010.  — http://www.mirkin.ru/_dоcs/аnаlyt_doclad2010-2015.pdf.

Central Bank of the Russian Federation. A report on the development of banking sector and banking supervision in the year 2009. The official Web site of Central Bank of Russian Federation — http://www.cbr.ru.

 


[1] Source: The official Web site of Central Bank of Russian Federation — http://www.сbr.ru; The official Web site of Federal Insurance Supervision Service of Russian Federation — http:// www.fssn.ru.

[2] Medium-term evolution forecast of Russian financial system. Analytical report. A team of authors under the supervision of Ya.M. Mirkina, Professor, Doctor of Science Economics (years 2010-2015) / Среднесрочный прогноз развития финансовой системы России (2010-2015 гг.)Аналитический доклад. Коллектив авторов под руководством проф., д.э.н. Миркина Я.М. ФГОБУ ВПО «Финансовый университет при правительстве Российской Федерации». – М., 2010. — http://wwwmirkin.ru/_dоcsnаlyt_dоclad2010-2015.pdf

[3] Central Bank of the Russian Federation. A report on the development of banking sector and banking supervision in the year 2009. The official Web site of Central Bank of Russian Federation — http://www.сbr.ru.

[4] Calculated on the data from the official sites of Central Bank of Russian Federation — http://www.сbr.ru, Federal Insurance Supervision Service of Russian Federation. – http://www.fssn.ru; Federal Financial Markets Service. — http://www.fсsm.ru; Everything about mutual investment funds and management companies. — http://pif.investfunds.ru/analitics/statistic.

[5] On the data from the official sites of Central Bank of Russian Federation — http://www.cbr.ru, Federal Insurance Supervision Service of Russian Federation. – http://www.fssn.ru; Federal Financial Markets Service. — http://www.fсsm.ru; Everything about mutual investment funds and management companies. — http://pif.invеstfunds.ru/аnаlitics/stаtistic.

[6] A.V.Yegorov, A.S. Karamzina, Ye.N. Chekmaryeva. Assessment and monitoring of bank crediting conditions/ Егоров А.В., Кармазина А.С., Чекмарева Е.Н. Анализ и мониторинг условий банковского кредитования. – Деньги и кредит. – 2010. -№10. – С.19.

[7] A.L. Savatyugin New in regulation of insurers’ activity. Finances / Саватюгин А.Л. Новое в регулировании деятельности страховщиков Финансы. – 2010. — №8. –  С.8-9.

[8] Central Bank of the Russian Federation. A report on the development of banking sector and banking supervision in the year 2009. The official Web site of Central Bank of Russian Federation — http://www.сbr.ru.

[9] Everything about mutual investment funds and management companies. — http://pif.invеstfunds.ru/аnаlitics/stаtistic.