Banking reform in Russia: problems and prospects

This paper examines the state of the Russian banking sector in 2004 and assesses the most important reform initiatives of the last two years, including deposit insurance legislation, a major reform of the framework for prudential supervision, steps to increase transparency in the sector, and measures to facilitate the development of specific banking activities. The overall conclusion that emerges from this analysis is that the Russian authorities' approach to banking reform is to be commended. The design of the reform strategy reflects an awareness of the need for a 'good fit' between its major elements, and the main lines of the reform address some of the principal problems of the sector. The major lacuna in the Russian bank reform strategy concerns the future of state-owned banks. Despite a long-standing official commitment to reducing the role of the state, and of the Bank of Russia in particular, in the ownership of credit institutions, there is still a need for a much more clearly defined policy in this area. The real test of Russian banking reform efforts, however, will be in implementation. The reforms challenge numerous vested interests and their successful realisation will require considerable political will as well as the development of regulatory capacities of a very high order.