St Petersburg banking conference

Speech by Kurt Geiger, Business Group Director for Financial Institutions: St Petersburg Banking Conference
5 June 2003

Good morning, Ladies and Gentlemen:

It is good to remember in front of this particular audience that exposure to the Russian financial sector accounts for one-fifth of the EBRD’s Russian portfolio. Our Russian financial sector portfolio amounts to €605 million and includes almost €500 million in operating assets.  

That is more than any other sector of the Russian economy.

There is much more that can and should be done. The Russian Banking Sector still suffers from a very low level of intermediation, reflecting a continuing lack of confidence by the market.  This needs to be changed.

The EBRD is ready to invest a great deal more in the Russian financial sector if the conditions are right.

I will give details later of these potential investments, but whether or not they happen is to a great extent up to the people in this audience. I mean those who regulate the banking sector, the politicians who decide how it should work and also on the senior executives who actually run the banks that are represented here today.

Let me start by voicing strong support for the courageous and determined efforts of the management of the Russian Central Bank to put real muscle into supervision of the banking sector and introduce crucial reforms.

The Central Bank’s initiative to set up an effective deposit insurance system built on strong foundations is much to be welcomed and the progress of that legislation through the Russian parliament is being watched with a great deal of interest.  It is important that the scheme creates a level playing field for all and applies to all.

It is vital for the whole economy that Russia should adopt a system that will really help make the banking system stronger. This and other reforms are crucial, but I want to say that reform is not the only medicine that the Russian banking sector needs.

It is obvious that to fulfill its role properly, the Russian banking sector needs to consolidate. The Central Bank screening that should accompany the introduction of a deposit insurance system which will certainly help weed out a number of unsound banks.

But the consolidation also needs to come about as the result of the natural play of market forces, as in any country.

A Russian banker recently told me that if a bank wants to take over another one in this country, it must obtain the written consent of every single depositor in the bank it wants to absorb.  It is clear that such obstacles need to be removed to allow market dynamics to work more  efficiently.

For the Russian economy to grow, Russian banks need to play a much more important role as intermediaries between the savings of the population and the businesses that desperately need funds to invest in the future of their companies.

Today, only 4 per cent of fixed investments by Russian companies are financed by bank credits. (Source: IMF paper quoting Goskomstat)  Bank lending in Russia is only half the average level in the Czech Republic, Hungary, Slovakia and Poland. (Source: IMF paper)  Only 25 percent of corporate bank loans in Russia are for a period longer than a year. (Source: IMF paper)

To put it simply, money in Russia needs to circulate better. And Russian banks as a whole should be taking a leading role in the development of the country’s capital markets, rather than being sidelined by that development.

As per one report last September, the total exposure to the banking system of the bank that takes in the vast majority of Russia’s private deposits is less than 1 per cent. (Source: Renaissance Capital report of September 2002)

Why does the largest bank, holding the vast majority of deposits, seem uncomfortable in funding other intermediaries?

There must be a reason for it. And the reason, obviously and sadly, is lack of trust. So trust is the first thing that has to be rebuilt. Trust between banks. Trust of the population in the banking system. And the best way to do it is through transparency and showing consistency in decision-making.

I have mentioned some of the obvious issues. How to tackle these issues is something that the banking community needs to decide and implement. The regulators and legislators provide the framework.  

The EBRD is ready to support banks which want to make changes, which are committed to applying good business practices, openness, transparency in corporate governance and also in negotiations.

We are ready to support banks that want to lend to private enterprises, particularly SME. We are ready to support banks which want to build up a  modern and efficient banking network or  create financial intermediaries such as consumer banks, mortgage institutions, leasing companies and which are prepared to do so across the whole country, in the regions, not just in Moscow and St Petersburg.

We began due diligence on Vneshtorgbank last week and are looking forward to working with management and the Russian Government to support the transition of this state-owned bank to a modern, universal and transparent commercial bank.

You may also be aware that, in addition to VTB, we are ready to invest up to $50 million in equity in various Russian intermediaries and lend some $300 million to Russian banks to finance the private enterprise sector, mortgages and leasing.

I have already given you a lot of figures, but let me just give a few more that will help put these potential investments in the Russian banking sector in context. Our total equity investments in Russian banks today stand at €12 million is equity in three banks. In addition, we have committed over $250 million to eight banks in Russia under trade finance facilities  and have made loans of $34 million to three banks – not counting our commitments under our SME lending programme.

So there is a lot to do, and we are ready to do business and be an active participant in the modernisation of the Russian banking sector.