Abstract
This paper analyzes the banking systems of the founding states of the Eurasian Economic Union (EAEU) to indentify discrepancies that may hinder the establishment of a single market for financial services. Practical contributions are derived from two dimensions. First, a comparison of the EAEU banking sectors’ structures prior to integration reveals common features such as high concentration, low level of foreign ownership and dominance of state-controlled banks. Significant heterogeneity in the development of the EAEU banking sectors, however, is observed. We expect changes towards reinforced Russian banks’ power in smaller EAEU member states. Intense cross-border competition will drive a further consolidation of domestic credit institutions and decrease the market share of state banks. Second, harmonization of banking regulations and supervisory practices is a critical starting point for moving to a single market for financial services. We report some divergences in the implementation of Basel III standards at the national levels. Russian banks’ regulatory framework is more advanced and compliant with international requirements for capitalization and liquidity. Governance and information disclosure in the EAEU banking sectors, however, remain weak. Unless regulation is strengthened and appropriate prudential tools to control bank risks are properly set, financial integration may facilitate spillover of risks across national borders and threaten the financial stability in the EAEU.
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Notes
The Eurasian Custom Union of Russia, Kazakhstan, and Belarus took effect on 1 January 2010 with the aim of removing trade barriers and facilitating trade among member states.
The Treaty on the Eurasian Economic Union, Article 4 (http://www.eaeunion.org).
The Treaty on the Eurasian Economic Union, Part III, Section 16 “Regulation of financial markets,” Article 70 “Objectives and Principles”.
Annex 17 to the Treaty on the Eurasian Economic Union “Protocol on financial services”.
The Banking Union is a new regulatory and supervisory system of EU area banks (and other future members) executed at micro and macro levels under a single rulebook. The single rulebook ensures that legal and administrative rules are applied consistently across all EU countries.
The Capital Markets Union is a plan of the European Commission to deepen the financial integration by developing capital investments and complementing bank financing with more diversified funding sources.
As of 1 January 2016, Kazakhstani bank assets to GDP ratio shows improvements reaching 57.6%.
In the Russian Federation, the access to international borrowing has been limited by the sanctions imposed by Western countries.
For example, Barclays (UK), KBC (Belgium), and HSBC (UK) exited Russia in 2015.
Such as Sberbank of Russia, VTB Bank, and Alfa Bank.
Roman Olearchyk. Ukraine imposed sanctions on Russian-owned banks. Financial Times, 16 March 2017. Access: https://www.ft.com/content/45153bb8-c24e-34c1-b989-e9805671f7d3?mhq5j=e3.
As of 1 January 2015, the largest Russian banks by assets are Sberbank of Russia, VTB Bank, VTB 24, and Gazprombank.
The Samruk-Kazyna Welfare State Fund became the largest shareholder of BTA Bank (including its subsidiary Temirbank) and Alliance Bank by controlling more than 70% of equity; Halyk Savings and KKB banks received capital injection from the state, which controlled around 21% of equity in 2009.
KKB Bank acquired BTA Bank by purchasing stocks from the Samruk-Kazyna Welfare State Fund. The deal was completed in June 2015.
In Kazakhstan, ForteBank, Alliance Bank, and Temirbank merged in 2014; Halyk Savings Bank acquired HSBC at the end of 2014 and merged with KKB Bank in 2017.
International Monetary Fund. July 2016. Russian Federation. Financial system stability assessment. IMF Country Report no. 16/231.
The National Bank of the Republic of Belarus. Ordinance no. 229/6 dated 28 March 2017. On the strategy of the development of financial markets in the Republic of Belarus by 2020.
The analysis of key stability indicators of the Russian, Kazakhstani, and Belarusian banking sectors is conducted by the authors but not reported in the paper.
European Commission. February 2009. The high-level group on financial supervision in the EU. The de Larosiere Group, Brussels.
The Basel Committee on Banking Supervision. December 2010. Basel III: a global regulatory framework for more resilient banks and banking systems.
For instance, non-cumulative perpetual preferred stocks are excluded from Tier 1 capital. Tier 3 capital is abolished since it represented low-quality capital in the form of subordinated short-term bonds for covering market risk.
The Basel Committee on Banking Supervision. January 2014. Basel III: leverage ratio framework and disclosure requirements.
The implementation deadline is 1 January 2019.
The Basel Committee on Banking Supervision. October 2012. A framework for dealing with domestic systemically important banks. In this document, the BCBS recommends the following bank-specific factors for defining systemic importance: size, interconnectedness with other financial institutions, banking sector concentration, and complexity including cross-border activities.
The Basel Committee on Banking Supervision. January 2013. Basel III: the liquidity coverage ratio and liquidity risk monitoring tools.
The Basel Committee on Banking Supervision. October 2014. Basel III: the net stable funding ratio.
The Basel Committee on Banking Supervision. January 2015. Standards. Revised Pillar 3 disclosure requirements.
The Basel Committee on Banking Supervision. March 2016. Assessment of Basel III risk-based capital regulation—Russia. Regulatory consistency assessment programme.
The Central Bank of the Russian Federation, Press Service. On introducing of international approaches to regulating the activities of credit institutions in order to improve the stability of the banking sector. 7 October 2013.
The Central Bank of the Russian Federation, Press Service. On countercyclical buffer to capital adequacy ratio. 27 June 2017.
The Central Bank of the Russian Federation, Press Service. On measures to implement Basel III and to regulate systemically important banks. 17 July 2015.
The Central Bank of the Russian Federation, Press Service. On introducing liquidity coverage ratio. 7 September 2015.
The Central Bank of the Russian Federation, Press Service. On approved list of systemically important credit institutions. 20 October 2015. On measures to implement Basel III and to regulate systemically important banks. 17 July 2015. Note: four of ten SIBs are state-controlled.
The National Bank of Kazakhstan. On approval of rules for classifying financial organizations as systemically important. Ordinance of the National Bank of Kazakhstan no. 257, dated 24 December 2014.
The Decree of the Board of the National Bank of Kazakhstan no. 147, dated 29 May 2016. “On the establishment of normative values and methods for calculating prudential standards and methods for calculating prudential standards and other mandatory norms and limits for the size of the bank’s capital at a certain date and the rules and limits for an open currency position.”
The National Bank of the Republic of Belarus. Methodology for calculation of a countercyclical capital buffer. Instruction no. 784, dated 26 December 2013.
The National Bank of the Republic of Belarus. Methodology on determination of systemically important banks and non-banking credit organizations. Instruction no.180, dated 18 May 2017.
The National Bank of the Republic of Belarus. Methodology for liquidity ratios and monitoring tools of liquidity risk according to Basel III international standards. Instruction no. 787, dated 31 December 2015.
The National Bank of the Republic of Belarus. Reporting on the NSFR and liquidity risk monitoring in accordance with the Basel III international standards. Order no. 23-13/114 as of 9 November 2016.
The National Bank of the Republic of Belarus. Instruction no. 550, dated 29 October 2012; instruction no. 557, dated 30 October 2012; instruction no. 625, dated 30 November 2012; instruction no. 641, dated 7 December 2012.
National Bank of the Republic of Belarus. Instruction no. 19, dated 11 January 2013.
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Pak, O., Iwata, K. A path to financial integration: steps for the Eurasian Economic Union. Asia Eur J 18, 99–115 (2020). https://doi.org/10.1007/s10308-018-00531-1
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DOI: https://doi.org/10.1007/s10308-018-00531-1