PALGRAVE MACMILLAN STUDIES IN
BANKING AND FINANCIAL INSTITUTIONS
SERIES EDITOR: PHILIP MOLYNEUX
Financial Markets
Evolution
From the Classical Model to the Ecosystem.
Challengers, Risks and New Features
Edited by
Galina Panova
Palgrave Macmillan Studies in Banking
and Financial Institutions
Series Editor
Philip Molyneux, University of Sharjah, Sharjah,
United Arab Emirates
The Palgrave Macmillan Studies in Banking and Financial Institutions
series is international in orientation and includes studies of banking
systems in particular countries or regions as well as contemporary themes
such as Islamic Banking, Financial Exclusion, Mergers and Acquisitions,
Risk Management, and IT in Banking. The books focus on research and
practice and include up to date and innovative studies that cover issues
which impact banking systems globally.
More information about this series at
http://www.palgrave.com/gp/series/14678
Galina Panova
Editor
Financial Markets
Evolution
From the Classical Model to the
Ecosystem. Challengers, Risks and
New Features
Editor
Galina Panova
Banks, Monetary Circulation and Credit Department
Moscow State Institute of International Relations
(MGIMO-University)
Moscow, Russia
ISSN 2523-336X
ISSN 2523-3378 (electronic)
Palgrave Macmillan Studies in Banking and Financial Institutions
ISBN 978-3-030-71336-2
ISBN 978-3-030-71337-9 (eBook)
https://doi.org/10.1007/978-3-030-71337-9
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Preface
This book examines the most urgent problems associated with assessing
the prospects for transforming the business models of financial intermediaries and the efficiency of financial markets. It covers a complex of
fundamental (international and domestic) factors in the development of
financial markets in the context of the economy digitalization. Separate
chapters provide the analysis of modern approaches to ensuring banks’
sustainable progressive development, taking into account the peculiarities
of banking risk management and anticrisis regulation of their activities
at the macro- and microeconomic level. The constantly changing market
environment, the volatility of the market conditions, the place and role
of financial markets and their participants, as well as insufficient knowledge of the issues of financial stability of the latter in the global economy,
indicate the relevance of the issues raised in the monograph.
Scientists from Russia, Kazakhstan, Azerbaijan, Mongolia, Ireland and
Italy took part in the work on the monograph, who presented their
approaches, expert opinions on the most pressing issues of modern
science and the practice of financial intermediaries in the conditions of
v
vi
Preface
economic transformation under the influence of the 4th Industrial Revolution and the COVID-19 pandemic. The authors invite the reader to
explore current trends in the development and improvement of banks
(central and commercial), insurance companies, pension funds in the
digital economy. The book presents controversial theoretical approaches
and practical application of bank business models; shows how the face
of traditional financial markets is changing when introducing innovative bank business models; determines the role of banks implementing
projects to create ecosystems during the financial markets’ technological transformation. The monograph is aimed at bridging the knowledge
gap between technology developers, bank employees and other financial market participants, as well as to develop the best policy options
for banks, whose needs in digitalization dictate life itself. Financial intermediaries make their choice depending on the availability of competitive
advantages, specialization or prospects of their business model. The book
is designed for a wide range of readers interested in the transformation
of financial markets and the development of their participants.
Moscow, Russia
Galina Panova
Acknowledgements Moscow State Institute of International Relations
(MGIMO University), Moscow, Russia.
Contents
Introduction
Galina Panova
Financial Markets: Current Trends and Factors
that Determine the Functioning of Financial and Credit
Institutions
Irina Yarygina and Tural Mamedov
1
21
Paradoxes of Financial Market Institutions: Traditions
and Ecosystems
Galina Panova
33
The Role of Financial Intermediaries in Digital Economy
Development (Chapter23)
Alla Dvoretskaya, Aibota Rakhmetova, and Gaukhar Kalkabayeva
49
Internationalization of Financial Markets: World Financial
Centres
Vitalii Klevtcov and Artem Zamlelyy
65
vii
viii
Contents
New Challenges for Financial Market Infrastructure Risk
Management Systems
Dmitry Panov
Payment Systems in Digital Economy
Aleksei Bolonin and Vladimir Balykin
77
97
Role of National Currencies in Transforming International
Monetary System
Vladimir Shapovalov
109
Monetary Policy: Global Trends and the Development
of Bank of Russia’s Approaches
Veronika Zagoyti
119
Financial Innovations, Financial Engineering
and Financial Technologies: Risks or New Opportunities?
Innovations and New Financial Technologies
in the Practice of Banking
Aleksei Bolonin, Igor Turuev, and Vladimir Balykin
129
Banks and Banking: New Trends and Challenges
Marco Ricceri, Valentina Tarkovska, and Irina Yarygina
143
Transnational and Regional Banks
Elena K. Volkova
155
Analysis of Banks with State Participation Functioning
the Role of Development Banks in the Global
and National Dimensions
Vitalii Klevtcov and Artem Zamlelyy
177
Insurance Companies: Prospective Business Models
Natalia Adamchuk, Vladimir Osipov, and Lyudmila Tsvetkova
187
Insurance of Financial and Credit Institutions
Natalia Adamchuk, Vladimir Osipov, and Lyudmila Tsvetkova
199
Contents
Pension Funds and Prospects for Reforming the Russian
Pension System as a Condition for the Qualitative
Implementation of the State’s Social Policy
Aleksei Bolonin
ix
213
Microfinance Organizations in Russia and Abroad
Ksenia Trushina and Olesya Gracheva
223
Sustainability Trend in Russian Banking Sector
Amin Babazade
235
Responsible Principles in Banks: Short-Term Trend
or Inevitability?
Inal Kishmariya
249
Managing the Risks of Financial Intermediaries:
Transforming Approaches and Reality
Dmitry Panov and Irina Larionova
261
Problems of Ensuring the Financial Stability of Financial
and Credit Institutions in the Digital Economy
Irina Larionova and Dmitry Panov
273
Crisis Regulation by Financial Intermediaries
Irina Larionova and Kirill Gorelikov
285
Banking Stress Testing
Elena Meshkova
299
Mega-Regulation of Financial Markets
Vitalii Klevtcov and Artem Zamlelyy
313
Conclusion
Galina Panova
327
Index
339
Notes on Contributors
Natalia Adamchuk is Honorary Worker of Higher Professional Education, Professor, Doctor of Economics, Professor of Insurance and Risk
Management Department of Moscow State Institute of International
Relations (MGIMO University). It published more than 100 articles
in professional magazines and 4 monographs. The sphere of scientific
interests and research includes the convergence of the financial market,
the global insurance industry, international practice of foreign investment protection, insurance of digital economy risks, insurance in the risk
management system of commercial enterprises, insurance marketing.
Amin Babazade is a Researcher, an Economist, a Scholar and a Ph.D.
candidate at the Department of International Finance at Moscow State
Institute of International Relations (MGIMO University). He holds two
advanced postgraduate degrees, one in Business and Economics from
Linnaeus University and a second in International Accounting from
Moscow State Institute of International Relations (MGIMO University). Research interests include international finance and economics,
development of theoretical frameworks and practical recommendations
xi
xii
Notes on Contributors
for sustainable finance implementation in emerging markets, as well as
application of econometrics in scientific research.
Vladimir Balykin is Ph.D. student at MGIMO University. He also
worked at KPMG (Audit, Financial Services). His main research interests
are money theory, banking supervision and economic history.
Aleksei Bolonin is Professor of Economics at the Moscow State Institute of International Relations (MGIMO), Moscow, Russia. After
working in the Department of Economic Analysis of an Investment Bank
and the Research Institute of the Accounts Chamber of the Russian
Federation, he switched to teaching and has been engaged in academic
activities for over 20 years, lecturing as a visiting professor at the Financial University and RUDN University in Moscow. Research interests:
banking, financial analysis, payment and settlement systems, innovation
and investment. He has a doctorate in economics.
Alla Dvoretskaya is Doctor of Economic Sciences, Full Professor. She
is also Head of Economics and Finance department at the Russian
Presidential Academy of National Economy and Public Administration
(Faculty of economic and social sciences), where she teaches courses on
Finance, Money, Credit and Banking. She has more than 30 years of
experience in research monetary sphere. Research interests include the
development and systemic transformation of the capital market, monetary regulation, the development of financial institutional sector, functional banking modernization. Today her research interests focus on
actual problems in interaction of the innovation sector and financial
institutions in the digitalization age.
Kirill Gorelikov is Associate Professor at MGIMO-University. He is
the author and editor of numerous publications on the monetary
economy and financial crisis, including the small open economy and
exchange rates and monetary policy models. His main research interests include monetary and economic issues in global economy, monetary
policy, exchange rates crises and bank runs.
Olesya Gracheva graduated from the Moscow State Technical University. Bauman is now a postgraduate student of the Department of
Notes on Contributors
xiii
International Relations and an economist at MGIMO University. Her
research interests are focused on the development of a system of financial
support for small- and medium-sized businesses, in particular lending
to small- and medium-sized businesses, etc. Interested in microfinance
organizations in Russia and Abroad.
Gaukhar Kalkabayeva is Candidate of Economic Sciences, Associate
Professor, Professor at the Department of Bank Management and Financial Markets of Karaganda Economic University of Kazpotrebsoyuz.
Her research interests include the development of bank lending and
credit support for small- and medium-sized entrepreneurs, financing the
activities of subjects of the innovation sector of the economy.
Inal Kishmariya is a Ph.D. student of the Department of International Finance in the Moscow State Institute of International Relations
(MGIMO University). His research interests include the sustainable
economic development, ESG risks, responsible investment and responsible banking. Inal has worked for Gazprombank, providing rating and
sustainability advisory services to the financial institutions in Europe and
CIS. Inal has an experience in the development and validation of credit
rating models and the assessment of ESG risks as well as the elaboration
of the green bonds’ frameworks.
Vitalii Klevtcov is a Professor at MGIMO, head of the department of
Financial and Investment management at the Financial University under
the Government of the Russian Federation. Research interests include
the development of the housing finance mechanism, mega-regulation
of financial markets, research on the development of financial markets,
global financial centres, business models of financial and credit organizations, technological innovations, and financial and non-financial factors
business valuation. He defended his doctoral dissertation in Finance,
Money Circulation and Credit.
Irina Larionova is Doctor of Economics, Professor (Economics,
Banking & Finance) Moscow State Institute of International Relations
(MGIMO University), Financial University under the Government of
the Russian Federation. The author’s research activities are focused on
identifying fundamental and applied problems and finding solutions to
xiv
Notes on Contributors
overcome them in the field of ensuring financial stability in the financial markets and the banking sector, risk-based regulation and management at the macro- and micro-levels, assessing the effectiveness of anticrisis mechanisms, risk management in credit institutions and others.
Experience in research activities is more than 15 years. More than 200
publications in economics and banking, 19 monographs.
Tural Mamedov is an expert in economics and finance. Research interests include the development of investment cooperation between the CIS
member countries, the study of role of foreign direct investments (FDI)
and banks in the development of the integration process of the CIS countries, the analysis of the public-private partnership (PPP) in the global
economy. Publications are on the international economics and finance.
Elena Meshkova is Associate Professor at Financial University under the
Government of the Russian Federation. She has more than 15 years of
experience in research and lecturing on banking and risk management
in banks. She has worked as a head of risk management department for
Russian Agricultural Bank. Her scientific interests include banking risk
management and banking regulation.
Vladimir Osipov is Doctor in Economics, Professor of Asset Management Department at MGIMO—university (Russia) and also Guest
Professor of School of Economics and Management at Beijing Jiaotong
University (China). He is the Member of American Law and Economics
Association, Editorial Boards Member of several scientific Journals. He
has published over 160 articles in professional journals and sixteen books
as author, co-author, editor and co-editor. His primary research expertise embraces institutional policy and public administration. He is ViceHead of Dissertation Council of Lomonosov Moscow State University.
The area of his scientific and research interests consist of institutional
policy, market architecture and digital economy.
Dmitry Panov has a Ph.D. in Economics. He is a Lecturer at MGIMO
University specializing in topics relating to the Banking and Financial
Industries. Beside the University he has been working for the Central
Bank of Russia, large commercial banks and held different positions in
Notes on Contributors
xv
risk management. He currently continues to work as a deputy CRO for
the National Clearing Center and the Moscow Exchange Group.
Galina Panova is Doctor of Economics, Professor (Economics, Banking
& Finance) of the International Finance Department at MGIMOUniversity, former Vise-Rector of the Financial Academy under the
Government of the Russian Federation and former head of the “Financial markets” Department of the Analytical Centre of the Government of
the Russian Federation. She is consultant, author and editor of numerous
publications on monetary policy and banking in Russia and abroad. Her
current primary research expertise embraces modern finance; global and
national finance markets and financial intermediaries in the face of digital
transformation, banks and banks’ management. She has been the leader
and responsible executor of more than 20 international research and
development projects on those issues. She is member of the Committees
of the Association of Russian Banks, working groups of the State Duma
of the Federal Assembly of the Russian Federation, member of Dissertation Council. She has more than 30 years of consultancy experience for
top management bankers of the Central Bank of Russia and commercial
banks.
Aibota Rakhmetova is Doctor of Economic Sciences, Associate
Professor, Professor at the Department of Economic Theory and State
and Local Government of Karaganda Economic University of Kazpotrebsoyuz. Her research interests include problems of macroeconomic regulation; the interaction of the banking and real sectors of the economy;
financial support for the development of real innovations; development
of the banking system; role of financial and credit organizations in
ensuring economic growth.
Marco Ricceri Expert, European social and labour policies, is acting
as general secretary of the EURISPES, a primary Italian research institute in the economic, social, territorial development. Ricceri is also a
coordinator of the Ethic Committee of the A.E.I.—European Agency of
Investments, Geie, Bruxelles; enrolled in the list of “Pool of Reviewers”
of the ESF-European Science Foundation, Strasbourg, for: “European
Social Policy”, “Industrial Relations”. Co-founder and coordinator of the
xvi
Notes on Contributors
European Research Group “European Social Model” (London-BremenRome). Founding member of EAVI-European Association for Viewers
Interests (Brussels), dealing with the dissemination of Media Literacy
and Media Education. Ricceri was awarded the Degree Honoris Causa
in European Policies by the Institute of Europe of the Russian Academy
of Sciences. IE-RAS.
Vladimir Shapovalov has a Ph.D. in Economics. He is an Associate
Professor at MGIMO University in Moscow specializing in topics
relating to International Relations, Country Risks for Translational Business and Financial Regulation of Global Politics. He has been lecturing
in respective specialization courses in the frame of MGIMO International Relations Master’s programme since 2005. Mr. Shapovalov also
holds position as Head of Bilateral International Relations Division with
the Central Bank of Russia. Prior to the Central Bank, he was executive
board member of Renaissance Capital Investment Group, vice-president
of Uralsib Bank and Head of Risk Management Department in Deutsche
bank Moscow.
Dr. Prof. Valentina Tarkovska (Banking & Finance), Specialist (Engineering), Honorary Fellow, Management School, University of Liverpool, UK. Lecturer in Corporate Finance (Universität Witten/Herdecke,
Germany) Auf der Heide 100, 58313 Herdecke, Germany & Dublin
Technological University. Main interests: business, finance, financial
markets and analysis. Publications in the named spheres. Valentina is
a member of Academic course committees Postgraduate Diploma in
Finance, M.Sc. Finance M.Sc. International Business, a member of
Assoc. of North America Higher Education International (ANAHEI)’s
Council. Discussant and session chair: Academy of Management
Annual Meeting, Reviewer: EURAM conference, European Management Review.
Ksenia Trushina has a Ph.D. in Finance and Credit. She is an Associate
Professor at Moscow State Institute of International Relations (MGIMO
University) at the Department of International Finance. Research
interests include regulation of the banking and financial systems,
specifically anticrisis regulation, the development of methodology and
Notes on Contributors
xvii
implementation of International Financial Reporting Standards in financial system of Russian Federation. She is also interested in the development of the banking sector and the financial system of Russia, including
strategies of Russian banks in the field of development, marketing and
use of FINTECH. She is working for Bank of Russia’s Department of
regulation of accounting.
Lyudmila Tsvetkova has a Ph.D. in Economics. She is an Associate
Professor of the Moscow State Institute of International Relations
(MGIMO-University, Department of Insurance and Risk-management)
and Associate Professor of the Higher School of Economics (Department of World Economy). She published more than 100 articles in
professional magazines and 5 monographs. The main sphere of scientific interests—strategic risk management, management of insurance
company.
Igor Turuev has a degree of Doctor of economic Sciences. Professor of
the Department international relegations of Moscow State Institute of
International Relations (MGIMO University) specializes in the issues of
Economics, phenomena and processes of the economic life of society, on
the methods in the tools of research of these phenomena, on the ways
and means of solving economic problems. For 26 years he gave a full
course of lectures and conducted seminars on the subject “International
monetary relations”. Together with the staff of the Department, he developed and introduced into the educational process a number of specialized courses. He actively works in the expert Advisory Council of the
Central Bank of the Russian Federation, takes part in the organization
and holding of conferences of MGIMO, Russian Academy of Sciences,
Financial University under the Government of the Russian Federation.
Experience in practical management of various areas of banking.
Elena K. Volkova is an Associate Professor at the Belarusian State
University who teaches at the Departments of Corporate Finance and
Analytical Economics and Econometrics. At MGIMO-University she
taught courses “Deposit and credit policy of banks”, “Anti-crisis regulation of the activities of financial and credit institutions”, “International
xviii
Notes on Contributors
experience of corporate finance and lending”, “Investing banking business”, “Digital financial instruments”. She holds Ph.D. in Economics
from the Financial University under the Government of Russian Federation. Has a long practical experience in large credit institutions and in the
Federal Treasury of Russia. Carried out activities in systemically important banks in Russia in the areas of lending to legal entities and individuals, project financing, credit risk management, methodology, monitoring and administration of credit operations, interaction with government agencies. Her research interests include issues of risk management
and modern development of credit organizations.
Dr. Prof. Irina Yarygina (Economics, Banking & Finance), head of the
Chair “Economics and banking” of the International Institute of energy
policy and diplomacy of MGIMO under the Ministry for Foreign Affairs
of the Russian Federation, Head of Programmes of the Financial University under the Government of the Russian Federation, member of the
International Committee of the Association of Russian Banks, member
of the working group of the State Duma of the Federal Assembly of
the Russian Federation, member of Dissertation Councils, member of
the Association “Analytics”, Head of the Analytical department of the
Eurasian consortium (EIAC), Member of the Scientific Council of the
National Committee on BRICS research. 165 publications in economics
and banking, 19 monographs.
Veronika Zagoyti is a Ph.D. student at the Moscow State Institute of
International Relations (MGIMO-University). She also works as a Lead
Economist at the Bank of Russia’s International Cooperation Department and analyses recent economic developments of foreign countries
paying much attention to the monetary policy. Her research interests
include the implementation and development of the inflation targeting
regime in the member states of the Eurasian Economic Union as well as
the elaboration of a single monetary policy within the Union.
Artem Zamlelyy has a Ph.D. in Finance, Money Circulation and
Credit, the first protector of the BRICS University. Research interests
are formed by studying investment financing instruments considering
Notes on Contributors
xix
non-financial factors, digitalization of financial markets, cost factors of
financial products and financial services, and alternative finance.
List of Figures
The Role of Financial Intermediaries in Digital Economy
Development (Chapter23)
Fig. 1
Fig. 2
Diagram of the dependence of the results of innovative
activity on the indicators of bank lending (for legal
entities), including in the context of lending terms
in the Republic of Kazakhstan. Note Compiled
by the authors based on simulation results
Diagram of the dependence of the results of innovation
activity on various types of financial assets in the Republic
of Kazakhstan. Note Compiled by the author based
on the results of modelling
59
60
Role of National Currencies in Transforming
International Monetary System
Fig. 1
Share of currencies in international payments (excluding
payments within the EU). Source SWIFT RMB Tracker
https://www.swift.com/swift-resource/250136/download
115
xxi
xxii
List of Figures
Monetary Policy: Global Trends and the Development of
Bank of Russia’s Approaches
Fig. 1
Fig. 2
Policy rates in the EAEU countries (Source Refinitiv)
CPI, % year on year, standardized, not SA (Source
Refinitiv)
123
124
Insurance of Financial and Credit Institutions
Fig. 1
Fig. 2
Correlation of per capita income and share of the income
saved (Source calculated by the author using the website
of the Federal State Statistics Service where the average
per capita income by years was given [electronic resource])
Correlation of the average insurance premium
and the share of the income saved (Source calculated
by the author using the website of the Federal State
Statistics Service where the collected insurance premiums
by years were given [electronic resource])
202
203
Sustainability Trend in Russian Banking Sector
Fig. 1
Degree of sustainable banking practice by Russian
banks by 5 categories of indicators (Source Compiled
by the author)
242
Responsible Principles in Banks: Short-Term Trend or
Inevitability?
Fig. 1
Fig. 2
Analysis of bond issue yield functions (Source Compiled
by the author, based on Bloomberg)
Generation change model (Source Compiled by the author,
based on UN World Population Prospects 2019)
255
256
Managing the Risks of Financial Intermediaries:
Transforming Approaches and Reality
Fig. 1
Structure of the Russian financial sector, % (Source Central
Bank of the Russian Federation, Annual report, 2019.
http://www.cbr.ru/Collection/Collection/File/19699/ar_
2019.pdf)
264
Fig. 2
Fig. 3
List of Figures
xxiii
Dynamics of return on equity metric for US Banks (Source
Federal Reserve Economic Data [Electronic resource]
https://fred.stlouisfed.org/series/USROE)
Relationship between risk assessment and the formation
of economic capital scheme
265
267
Banking Stress Testing
Fig. 1
Liquidity risk stress test diagram
305
List of Tables
Financial Markets: Current Trends and Factors that
Determine the Functioning of Financial and Credit
Institutions
Table 1
The main indicators of the Russian financial market
in global finance
23
New Challenges for Financial Market Infrastructure Risk
Management Systems
Table 1
Major Russian financial market players in 2014–2020
(by the start of the year)
80
Role of National Currencies in Transforming
International Monetary System
Table 1
Trading volume on the foreign exchange market
of the Moscow Exchange, RUB billion
114
xxv
xxvi
List of Tables
Transnational and Regional Banks
Table 1
Top 10 World Banks 2019
160
Microfinance Organizations in Russia and Abroad
Table 1
Table 2
Microloan agreements concluded in 2017–2019
Categories of small- and medium-sized businesses
in Russia and the USA
230
231
Sustainability Trend in Russian Banking Sector
Table 1
Table 2
Sustainable banking practice implementation
Bank sustainability indicators (in points)
240
241
Problems of Ensuring the Financial Stability of Financial
and Credit Institutions in the Digital Economy
Table 1
Assessing the impact of increasing the capital adequacy
ratio by 1 percentage point on the credit volume
and growth
281
Crisis Regulation by Financial Intermediaries
Table 1
Measures to support the banking sector in different
countries during the global financial and economic crisis
of 2007–2009
289
Banking Stress Testing
Table 1
Cross-correlation between the most evident factors
defining the target variable
308
Mega-Regulation of Financial Markets
Table 1
Table 2
Digital financial intermediation products
Financial intermediation models in foreign countries
317
318
Introduction
Galina Panova
Introduction
While this monograph was being prepared for publication, major
changes were taking place in the world in all areas. Among them were
pandemic, the oil crisis, a sharply increasing volatility of developing
countries’ national currencies, the economic crisis, etc.
The development of financial markets has a direct impact on the state
of the world economy and the national economies of individual countries. Banks are interested in developing and strengthening partnerships,
relationships with their customers, and they revitalize the latter’s activities. The changes taking place in the world financial markets in recent
years—increased competition, globalization, new information technologies, new high-tech, structured banking products—lead to increased
G. Panova (B)
Moscow State Institute of International Relations (MGIMO University),
Moscow, Russia
© The Author(s), under exclusive license to Springer Nature
Switzerland AG 2021
G. Panova (ed.), Financial Markets Evolution, Palgrave Macmillan
Studies in Banking and Financial Institutions,
https://doi.org/10.1007/978-3-030-71337-9_1
1
2
G. Panova
risks, and as a result, there is a need for standardizing and tightening
the requirements for the stability of financial and credit institutions.
During the transition of the domestic banking system to international
accounting and reporting standards, implementing the recommendations of the Basel Committee on Banking Regulation and Supervision,
Russia’s participation in the WTO, development of cooperation with
China and other countries of the East, ensuring the stability of financial markets and the role of Russian commercial and investment banks
in the world arena became urgent tasks (Beyond: Initial Considerations,
2016; Handbook of Block Chain, Digital Finance, and Inclusion 2017;
Merton, 1995; Torkunov et al., 2020).
A significant place in the infrastructure of the modern market
economy is occupied by commercial banks, whose international currency
and credit operations are one of the main channels of communication
between national markets and world markets. International currency and
credit transactions of commercial banks are among the most important areas of banking, both within the global monetary and financial
system, and within national monetary and financial systems, and are in
a complex interdependent relationship with the cross-border movement
of goods, capital and services.
For Russian commercial banks, most of which are still inferior to
leading foreign financial and credit institutions in terms of the size of
their banking business, including the equity capital, the client base, the
deposit and loan portfolios, etc., it is especially important to solve the
problems that ensure their financial stability, thus promoting growth and
development.
Customer banking is one of the most promising areas of the banking
business. From the bank’s point of view, a wide range of operations
and services is a source of interest and commission income, a way to
expand its client base, attract new customers and develop cooperation
with foreign banks and international financial and credit institutions.
Thanks to their activities, global national and international projects are
being implemented.
If we take the modern economy, financial and credit institutions are
faced with the issue of minimizing the risks associated, inter alia, with the
Introduction
3
foreign economic activity of their clients (currency, interest, credit, operational, etc.). Analysis of opportunities to reduce risks when conducting
transactions by financial intermediaries, as well as ensuring stable profitability even when increasing the influence of unfavourable trends in the
economy, determines the relevance of the issues raised by the authors.
The new realities combined with the geopolitical risks faced by all
countries require to search for non-standard approaches for solving
domestic economic problems. They can be solved by identifying internal
reserves and determining the points of stimulating economic growth.
One of the sources of economic growth, as you know, includes a
positive trend in the industrial production volume, which is ensured by
increasing the potential and expanding the business activity of economic
entities, which are supported by the investments’ inflow and the financial
intermediaries supporting companies by providing the required amounts
of credit resources. One of the sources of economic growth is the banks’
financial resources, whose share in the financial system, according to
the IMF estimates, is more than 80%, and their potential is incomparable to other financial intermediaries in Russia. At the same time,
the Russian banking system has a low potential in comparison with its
Western competitors. In these conditions, it is necessary to increase the
role of banks in lending to the economy and ensuring its growth and
development.
In modern conditions, the credit potential of many Russian financial
and credit institutions is limited due to the influence of several factors,
including the external ones. At the same time, banks make a significant
contribution to solving these problems due to their higher capitalization,
a high level of creditors’ trust, access to sources of refinancing and state
support. From the theoretical point of view, there is no consensus in the
scientific works on a number of issues that require reflection and practical
solutions:
– modern problems of financial markets and the financial and banking
sector’s growth and development, changes in the industry associated
with the digitalization of the economy and other spheres of people’s
lives;
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– fintech as an attempt to solve the problems arising in the context of
the fourth industrial revolution;
– financial innovation, risks and institutional stability of financial
markets.
The study determined the position of the authors regarding the role
and importance of financial markets and financial and credit institutions
in the context of the digital economy, theoretically substantiated and
determined the criteria for the effectiveness of banks and other financial
intermediaries in the context of the digital transformation.
The work identifies reserves for increasing the stability of financial
and credit institutions and dwells upon increasing their efficiency, which
can be taken into account in the work of state authorities, regulators,
commercial banks and the legislative body.
Methodology
The methodological basis of the study was made up of the works
of both Russian and foreign scientists, experts (Ashmarina & Mantulenko, 2021; Ashmarina et al., 2020; DaSilva et al., 2013; Handbook of
Block Chain, Digital Finance, and Inclusion, 2017; King, 2020; Merton,
1995; Torkunov et al., 2020), international organizations (A Glossary
of Terms Used in Payments and Settlements Systems, 2001; Beyond:
Initial Considerations, 2016; Schwab & Malleret, 2020), central banks
and individual credit organizations, which to some extent addressed the
financial stability of the banking sector, its individual institutions, as well
as the impact of regulation on economic development.
The study used general scientific methods: abstraction, an ascent from
the abstract to the concrete, typology, induction, deduction, analysis,
synthesis, the unity of the historical and the logical, as well as comparative methods, benchmarking and recommendations of international
consultants.
The analysis was based on materials from the World Bank, Bank for
International Settlements, Bloomberg, Citibank, Banking Association for
Central and Eastern Europe (BACEE, Hungary), the Central Bank of the
Introduction
5
Russian Federation, the Association of Russian Banks (ARB), Sberbank
and Tinkoff Bank (Russia), etc. The main objective of the monograph is
to identify modern problems of the financial markets and financial and
credit institutions in the context of the economy digitalization and work
out the recommendations for overcoming them.
Results
Financial Markets: New Approaches to Defining
the Conceptual Apparatus
Before analysing the current state and prospects for the development
of financial markets, it is important to define the very concept of the
financial market, since experts sometimes put different meanings in this
term.
For example, the Financial and Credit Encyclopedic Dictionary
defines the financial market as “a part of the loan capital market, where
capital is redistributed between creditors and borrowers in the form of
emission and sale of securities)” (Finance and Statistics, 2004, p. 866).
And it is further emphasized that, from the institutional point of view,
the financial market is a set of credit and financial institutions through
which there is an overflow of financial flows from owners to borrowers
and vice versa. Financial intermediaries include various financial institutions (commercial banks, credit unions, stock exchanges, financial
companies, pension and insurance funds, investment banks, construction companies, etc.). We believe this interpretation is too narrow for
the modern understanding of the essence of the financial market and its
participants.
And in this monograph uses a different approach, according to which
financial markets include the following: the financial markets that differ
in the types of financial instruments used (the market for stocks, bonds,
derivative financial instruments); financial markets that differ in the
types of operations performed (credit market, options market, forward
market, etc.); those differentiated by the operation urgency (instant,
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G. Panova
spot or pronto market), the markets in which financial intermediaries perform short-term transactions (money market) and long-term
transactions (capital market); stock market, securities market, etc.
Modern Trends
If we speak of financial globalization, we can say that world trends in the
development of financial markets and financial and credit institutions
fully affect Russia. Modern realities make it possible to single out the
following main factors determining the financial markets‘ development:
financial globalization; increased competition; information technology
development, financial innovation and financial engineering; increasing
risks, crises, etc.
The globalization of financial markets, including the expanding presence and the increased number of company mergers and acquisitions, has
become an important stimulus for developing financial intermediation.
In the context of global competition, financial and credit institutions
consider the internationalization strategy as a priority and enter the international market, first strengthening their positions in the national market
and then expanding their international presence.
Globalization has created an integrated world banking system, which
is reflected in a concentration of assets (the 20 largest banks in the
world accounted for 50.5% of world GDP in 2015), and in an increased
presence of foreign banks in banking systems of developing countries.
The development of information and telecommunication technologies
(complication, quality improvement, speed and convenience of operations carried out by financial intermediaries, as well as a sharp decrease in
their cost price) has radically changed people’s daily life and the essence of
the banking business. For example, the world monetary system in recent
years has been “drifting” from the one that unites national monetary
systems based on the turnover of national currencies into a multicurrency system based on the widespread use of advanced information
technologies. Digital currencies developing on the basis of the blockchain
technologies are prohibited in some countries, while in others, on the
contrary, they are actively used. The Bank of Russia, as a mega-regulator
Introduction
7
of financial markets, is concerned about the possibility of losing control
over money circulation in the country, which is fraught with serious
economic and political consequences. In the future, digital currencies
will find their rightful place in the global payment system, subject to the
effective implementation of new digital technologies while maintaining
control over financial markets at the national and international levels.
Active growth and development of the securities market, including derivatives, became a crucial factor in the development of the financial and
banking sectors and had a generally positive impact on the economy
and banking business in Russia and all over the world, ensuring closer
interaction between banks and their clients, and contributed to the interdependence of markets. At the same time, increased competition in
financial markets, the development of information technology, financial
innovation, financial engineering have increased risks and, as a result,
provoked crises. The situation in the world markets has demonstrated
that financial and banking crises have ceased to be local in nature,
developing on the territory of a single country. Crises are increasingly
becoming international, which means that there is a need to create
a global security system based on the observance of uniform international standards for regulation and supervision of the financial and credit
institutions.
Global factors, including structural shifts in the global economy, the
transition of the Chinese economy from growth based on export and
investment to the one based on consumer demand, have increased the
risks. In emerging markets, there is volatility in national currencies and
national markets. The countries of the European Union are pursuing a
policy of “Europe of different speeds”; in fact, a banking union has been
created while ensuring financial stability.
The colossal financial losses as a result of the global financial and
banking crisis of 2008–2009, the economic crisis caused by the COVID19 pandemic, on the one hand, demanded anti-crisis measures to support
economic entities and, on the other hand, predetermined the need
to tighten the regulation of financial and credit institutions, some of
which are reflected in the standards of the Basel Committee on Banking
Supervision.
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The world has used various government measures to support the
economy. The toolkit of central banks included various measures to overcome the crisis’ negative consequences. Among them were instruments of
macro- and micro-prudential regulation to ensure the financial stability
of the economy and business entities, as well as monetary regulation
instruments.
In November 2014, the Bank of Russia changed the monetary policy’s
priorities: the inflation rate, not the ruble exchange rate, was declared
as the main reference point for the monetary policy. The key rate
has become the main tool for managing the amount of money in
the economy. Since 2015 The Central Bank of the Russian Federation
switched to a policy of a floating rouble exchange rate and an inflation
targeting regime while abolishing the dual-currency corridor and refusing
to conduct regular foreign exchange interventions. This decision testifies
to the exhaustion of the economic growth model based on income from
trade in raw materials and a gradual transition to a model of economic
growth based on a new technological order. Increasingly active use of
new information technologies is becoming a feature of macroeconomic
regulation in modern conditions.
The above trends are closely interconnected and directly correlate with
macroeconomic indicators including inflation rates in the country, which
have not exceeded 4% over the past several years.
The policy of the Government and the Central Bank of the Russian
Federation includes a wide range of anti-sanctions measures, from
tough measures to introduce counter-sanctions to the creation of more
comfortable conditions for doing business in Russia to its allies from the
CIS member states, the EAEU, the SCO and the BRICS.
During the crisis and post-crisis development, many countries of the
world (including Russia) are gradually shifting the emphasis on stateregulated economy, using, among other things, instruments of macroprudential regulation aimed at curbing the credit boom, minimizing
currency risk, limiting leverage, smoothing financial cycles, increasing the
stability of systemically important banks, capital flow management, etc.
The Bank of Russia, which acts as a mega-regulator of financial
markets, on the one hand, has strengthened supervision over the activities of financial and credit institutions and on the other hand, together
Introduction
9
with the Russian Government, has developed a system of anti-crisis
measures and a programme to support the banks suffering from international sanctions.
Despite the sanctions, thanks to the consistent work of the megaregulator of financial markets, macro-financial conditions have been
significantly improved—the inflation rate has slowed down to record
lows; the rouble exchange rate has been relatively stabilized; the nominal
key interest rate is gradually decreasing. In general, the monetary policy
pursued by the Bank of Russia has created favourable conditions for
economic growth.
Russia’s participation in the integration processes imposes obligations
to use uniform, unified and, most importantly, internationally recognized approaches, i.e. in matters of business organization of financial and
credit institutions and supervisory practice. Russia’s accession to the Basel
Accords helps to increase the efficiency of Russian banks, allows national
credit institutions to become full-fledged participants in international
banking relations, strengthens the confidence of foreign investors, which
is important in the context of the globalization of the world economy
and financial markets. It is important for most Russian banks in terms
of the low capitalization of the national banking sector and the slowdown of the Russian economy under international sanctions, falling oil
prices and the consequences of the coronavirus pandemic to apply the
Basel Principles for Effective Banking Supervision, as well as introduce
international banking standards in Russia.
The most significant problems faced by banks were the growing bad
and overdue debts and dropping liquidity.
As the situation aggravated, the volatility of financial markets and,
in particular, the foreign exchange market increased, which weakened
the rouble, when many banks experienced the negative impact of
foreign exchange and exchange rate risks. To overcome them, Russia also
required additional financial resources, increasing the risks of inadequate
liquidity for banks. That is why, banks had to solve the problems of spontaneous depositors’ behaviour, adapt to low credit activity of customers
and an increased level of risks.
The sanctions, which affected the country’s economic situation,
provoked a downgrade of the sovereign credit rating by international
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rating agencies, which lowered the rating of Russian national banks. As
a result, their level of trust decreased, which undoubtedly had a negative
impact on the investment attractiveness of domestic credit institutions
in the eyes of foreign investors and depositors. Foreign banks began to
reduce the scale of their activities in Russia. The number of Russian
credit institutions also continued to decline. Improving the financial
stability and reliability of banks has become one of the key tasks of the
Central Bank of the Russian Federation—a mega-regulator of financial
markets.
The current situation looks different. The negative impact of the
sanctions undoubtedly affected the GDP growth rate, the stability of
financial markets, the volatility of the rouble exchange rate, the financial blockade of Russian banks by the United States, EU countries and
their allies. But there are also positive consequences of sanctions both at
the micro-level (the level of specific economic entities, including financial
intermediaries) and at the macro-level of the national economy. In this
case, we are talking about identifying risks, bottlenecks in the country’s
economy, the functioning of financial markets, the activities of financial
and credit institutions, etc.; overcoming them and minimizing financial
losses. A striking example of this practice in the context of sanctions is
creating, in response to the Western threat to disconnect Russia from
VISA and Mastercard systems, the national payment system, which was
created in the shortest possible time and began functioning on the basis
of the Central Bank of the Russian Federation.
The international sanctions forced large banks to reconsider their
international strategies, considering the possibility of ending their presence in European countries, while at the same time assessing positively
the prospects for the development of banking business in China due to
the intensifying Russian-Chinese business relations. Financial and credit
institutions have almost adapted to the sanctions and at the end of
2018–2019 received profit after completing the main stage of “clearing” the sector from non-viable banks and reducing losses of rehabilitated
commercial banks.
In 2019–2020, the Russian economy demonstrated resilience in the
face of the COVID pandemic. The country possesses modern technologies to overcome crises that have been formed in previous years.
Introduction
11
Therefore, the sharp drop in world oil prices, large financial costs due
to the quarantine measures, of course, slowed down the economic development but did not inflict an irreparable blow on the Russian economy.
The arsenal of anti-crisis measures accumulated by Russian financial and
credit institutions during the period of sanctions and a series of crises in
recent years suggests that the regulator has the necessary experience and
tools to successfully overcome shocks in the financial market.
The Role of Banks in the Russian Financial Market
The national specificity of the Russian financial markets is inherent in
the prevalent banking sector, which allows experts to assert: Russian
banks are so important to the national economy that the bank regulation
inevitably turns into a political discussion.
During this difficult historical period, Russian banks developed
in difficult, contradictory macroeconomic conditions. In fact, a new
macroeconomic reality has been formed in the country. Modern trends
in the development of Russian financial markets include not only global
trends but also national characteristics (a relatively low level of lending
to businesses and the population compared to developed countries, the
impact of sanctions on the Russian economy, etc.).
Institutional features of the financial and banking system of Russia
such as its national character, the universal nature of the special banking
activities of credit institutions (the combination of credit and investment
transactions is not prohibited), second-tier banks are divided into banks
with a basic licence and those with a universal licence, banks have to take
part in the deposit insurance system and the banking system includes
the development bank—Vnesheconombank—a credit institution with a
special status of a state corporation.
An important direction in the development of financial markets in
recent years is overcoming the growth trend of the state’s share in
the assets of financial and credit institutions (which was quite justified during the crisis and reached a high level in recent years) and the
incentives for fair competition among financial and credit institutions.
Today, such areas of the banking business as syndicated lending, project
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G. Panova
financing are developing; new approaches to financing and lending
for housing construction are proposed (incentives are introduced for
banks participating in mortgage lending programmes and certain categories of borrowers); the insurance of individual deposits and funds
in the accounts of small and medium enterprises is developing; the
Banking System Consolidation Fund has been established to work with
problematic bank assets.
The issues of banking services to the population are of particular relevance in market conditions. There is a competitive struggle and banks
resort to various forms and methods of attracting funds from the population (transactional deposits, trust services, leasing, factoring, forfeiting,
brokerage, etc., banks accept deposits with compound interest, with
interest accrued with respect to the inflation rate, etc.). The problem
of attracting funds from the population to deposits and other forms of
organized savings remains relevant, along with a decrease in the rouble’s
purchasing power, lack of trust in banks, a preference to invest in foreign
currency and precious metals, liquid goods, or keep funds in gold.
Tightening the regulator’s requirements, as well as increasing the transparency of the banking business affect the banks‘ activities. Banks that
provide clients with a variety of high-quality services usually have advantages over the ones with a limited range of services. In the market
conditions, it is the banks which are constantly expanding the range
of services, improving the quality of service and offering intermediary
services who withstand the competition.
The bank’s clients are also changing. They become more proactive. If
earlier a client could apply to a bank with a request to place his funds
as conservatively as possible, now he is ready for risk, which implies
different business models. Digitalization, the multichannel nature of the
banking business, the relationship of the bank with the client lead to the
fact that personal relations with the client, personal contact are increasingly being replaced by remote interaction; mechanisms for interactive
remote authentication and customer identification of a credit institution
are being created, including individuals based on the use of biometric
personal data.
Introduction
13
Tightening regulatory requirements and increasing the transparency
in the banking business also affect the existing business model and the
structure of the bank’s income.
Economists are focused on such important issues for Russia as stimulating the growth and development of the Russian economy in the
context of economic sanctions; monetary policy and its real implications for business; Russia’s participation in the international movement
of capital; monetary and financial aspects of Russia’s economic strategy in
the world economy; functioning and assessment of the financial market
mega-regulator’s effectiveness.
Economic growth restoration and the recovering economy as a whole
will help overcome negative trends in the banking sector. The prospects
for the Russian economy are largely determined by the investment
activity and consumer demand recovery pace, based primarily on the
search for additional internal sources of funding, including such alternative methods of financing as venture capital investment, P2P lending,
crowdfunding and crowdinvesting.
P2P lending is mutual lending to individuals, and crowdfunding and
crowdinvesting are means of alternative financing, the mechanism of
which involves the use of special Internet platforms, which are used to
host and promote various ideas and projects.
The state of the banking system is an indicator of a country’s development, its economic stability. Indeed, the banking system (as a part of
the country’s economic system) develops cyclically, overcoming ups and
downs, stagnation and crises.
In a relatively stable macroeconomic situation, when the country
is experiencing an economic recovery, growth of the gross domestic
product, investments and a decrease in inflation, the banking system is
developing quite successfully, which has been proved by world practice
and the centuries-old history of the Russian banking system.
In general, the market of banking operations and services is developing as one of the most successful segments of the economy. The
current state of the Russian banking system, in comparison with the
banking system s of the top economies, is characterized by the following:
a high share of the public sector, low share of banks with foreign capital,
a relatively small number of regional banks, weak regional system of
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G. Panova
commercial banks, relatively underdeveloped banking infrastructure, low
banking system capitalization, when the capital and total assets of all
Russian banks are comparable to the corresponding indicators of the
three largest world banks. In this sense, the Russian banking system does
not fully comply with the best international standards, which does not
allow characterizing it as a developed one.
In this regard, one of the most important areas for further research and
improvement of the banking system’s functioning practice is to increase
its competitive advantages by weakening negative and ensuring faster
growth and the influence of positive factors in the banks‘ development.
The Role of Banks in Ensuring Economic Growth
An analysis of the competitive environment cannot be carried out
without taking into account the proportions of the financial (in particular, banking) and non-financial sectors of the economy, which is
explained, first of all, by the relationships between banks and companies
in the real sector. Today, it is the large companies that form the basis of
the Russian banks‘ client base. However, the level of the banking system
still does not fully meet the demand of the real sector. In these conditions, the Russian Central Bank has identified the following priorities:
stimulating a more even development of the banking system between
the regions of Russia, taking into account the deficit of banking services
in the regions and their concentration in the central part of the country;
preventing large banks from monopolizing regional markets for banking
services; stimulating the concentration and centralization of banking
capital, establishing cooperation between credit institutions, creating
holdings, pools, syndicates with the wide involvement of medium and
small banks, which is necessary to serve the real sector of the economy
and ensure higher competitiveness of financial products in the banking
services market; a combination of protectionist and liberal measures in
relation to foreign banks, which may pose a real threat to the competitive
environment in the Russian banking sector in the long term; constant
monitoring the competitive environment.
Introduction
15
In this regard, the issues of theoretical substantiation of the banks’
role in ensuring economic growth and the practical application of
measures to improve the investment climate, creating new opportunities
for economic growth and increasing the financial well-being of the population are of particular relevance. For example, Russia is actively cooperating with foreign investors to stimulate investments in the Russian
economy, and a tax amnesty for capital has been announced.
At the same time, in the context of the infrastructural revolution,
which is gaining momentum all over the world, a trend towards a digital
economy especially its financial and banking sector is actively developing
in Russia, having a positive impact on the transparency and openness of
the business environment. Draft laws on digital assets, cryptocurrency
emission and circulation are actively discussed, the conceptual apparatus for conducting operations with cryptocurrencies is determined.
Projects of the interaction between the mega-regulator and financial
market participants engaged in operations with digital assets are being
developed. The Russian Central Bank is gradually introducing new rules
for using digital platforms, including those based on distributed ledger
technologies. For example, digital platforms for remote customer identification can increase the competition in the banking sector while simplifying the interface and protecting customer biometric data. At the same
time, digital platforms are being created to develop fast payment systems
(payments by phone number, by e-mail, etc.) along with payments by
plastic cards, etc. At the same time, infrastructure platforms will not
replace the existing financial and credit institutions, but become an
addition to them.
In Russia, the role of banks has increased significantly in recent years;
the contribution of the banking system to economic growth has been
especially noticeable in the field of consumer lending. Nevertheless, in
general, the contribution of banks to investment is not yet large. At the
same time, there is a chronic excess of savings over investments in Russia
(while Russia is a large investor on the global scale, there is a lack of
investment inside the country).
The banking sector plays a key role in developing the economy of
any state. In Russia, market relations have created certain features of
both the real and financial sectors of the Russian economy. The crises
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G. Panova
of recent years have shown that the stable development of the Russian
economy depends on the stability of the banking sector, which has been
achieved, i.e. by increasing the share of state capital in the Russian
banking sector. At the same time, there is a gradual concentration of
banking capital against the background of a decreasing number of credit
institutions. This was facilitated by fundamental (both international and
national) factors, including changes in the type and structure of the
Russian economy, the volatility of financial markets, as well as the regulator’s policy. In addition, it is necessary to take into account the later
trends that appeared after the global crisis of 2008–2009 and during
the economic downturn 2013–2015. Among them were the relative
deliberalization of the economy, the emergence of elements of state capitalism, tightening the regulation of the financial sector in general and
the banking sector in particular. As a result, there were processes in the
banking sector that led to the strengthening of the state’s position in
the banking sector. Among the factors that influenced such a change in
the share of state banks over the past 10 years are the economic crisis,
the government’s policy of supporting the real and financial sectors, and
increasing confidence in state banks among the population.
Strengthening the influence of the state in the banking sector is a
trend of the post-crisis period in many countries, including the USA,
Germany, France and Great Britain. This happened as there was the need
to tighten regulation of banks’ activities and provide state support to the
largest credit institutions during periods of instability in the financial
markets. Thus, it is possible to distinguish not only structural changes in
this area but also a trend towards strengthening macro-prudential control
and supervision. One of these measures to minimize systemic risk was
introducing the increased regulatory requirements in accordance with the
Basel Recommendations for groups of systemically important banks.
If we take the modern economic literature, the issue of assessing the
efficiency of the state banks and banks with other forms of ownership
is actively discussed. In further scientific research, it is important to
find confirmation or refute the idea that the leading state-owned banks
are on average as cost-effective as private Russian banks, and the main
reason for the volatility of their income levels (despite support from the
authorities) is increased social obligations accepted by banks with state
Introduction
17
participation in the capital; features of the personnel management policy;
macroeconomic instability.
Banking Internationalization
In recent years (before the COVID pandemic), the integration of
national financial markets was actively underway. Processes such as
economic globalization, the international division of labour, strengthening of international interaction have formed the basis for international
economic relations, world trade, increased investment flows and, as a
consequence, the development of international banking business.
Banking internationalization is one of the main manifestations of the
globalized economy. This is a complex and large-scale process, which
previously took place in the form of an increase in the volume of exports
and imports of banking services and foreign exchange transactions, and
now proceeds mainly in the form of the increased importance of the
banks‘ international activities.
The transfer of banking activities beyond national borders occurs
in its most general form under the influence of the desire to increase
profits, which consists of many incentives, including financial services
for the foreign activities of transnational corporations; providing banking
services to domestic corporate and private clients in foreign countries and
attracting local clients; cheaper attraction of funds in other countries;
more profitable lending to foreign clients; participation in international
banking operations—placement of syndicated loans, Eurobonds and
foreign loans; international payment and settlement transactions and
others.
Consequences of crises, including the global financial and economic
crisis of 2007–2009, the pandemic and the oil crisis of 2019–2020,
necessitated greater attention to the problems of regulating and supervising the work of financial intermediaries. In this area, significant
changes are observed in terms of both expanding and tightening regulatory norms that restrict the acceptance of risks by commercial banks, as
well as certain organizational and content requirements for risk management. At the same time, in terms of continuing economic instability,
18
G. Panova
especially in emerging markets, the policy of the regulator to “cleanse”
the market from non-viable credit institutions, special attention has been
paid to the problems of identifying credit institutions with problems at
the early stages of their crises, as well as financial recovery in different
forms. The regulatory practice is rapidly developing and modernizing,
which prompts the need for systematizing and generalizing the ongoing
changes.
One of the most controversial issues in the national financial markets
in terms of achieving positive macroeconomic effects is the way credit
institutions can be regulated and supervised. Taking into account the
observed trends in this subject area at the national and global levels, the
problem of building an effective system of regulation and supervision
raises many questions that require theoretical understanding.
The monograph combines theoretical and applied issues and reflects
current trends in the regulation of financial intermediaries at both macroand micro-levels.
The advantage of the monograph is that it not only considers regulatory and supervisory practice from the organizational and substantive
points of view but also analyses the current state and development of the
financial and credit institutions at all stages of their life cycle.
An independent section is devoted to the risk regulation at the microand macro-levels, changes in the banking regulation and supervision, as
well as a number of others.
The monograph is intended for students and young scientists, teachers
and specialists dealing with this issue.
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Introduction
19
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Financial Markets: Current Trends
and Factors that Determine the Functioning
of Financial and Credit Institutions
Irina Yarygina and Tural Mamedov
Introduction
While the Russian Federation aims to integrate into the world economy,
the efficiency of this process depends largely on the success of banks
in capital and services markets. In the context of the globalization
of economic relations, the modern Russian economy needs to adopt
the experience of transnational banks, interstate credit institutions, and
private-public partnerships. Modern practices of international banks
using innovative technologies contribute to implementing the principles of maximum efficiency and universality, which is directly connected
I. Yarygina (B)
Moscow State Institute of International Relations (MGIMO University),
Financial University under the Government of the Russian Federation,
Moscow, Russia
T. Mamedov
Baku, Republic of Azerbaijan
© The Author(s), under exclusive license to Springer Nature
Switzerland AG 2021
G. Panova (ed.), Financial Markets Evolution, Palgrave Macmillan
Studies in Banking and Financial Institutions,
https://doi.org/10.1007/978-3-030-71337-9_2
21
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I. Yarygina and T. Mamedov
with the harmonization of the basic principles of regulation and implementation of the partner states’ monetary policy. Adoption and use of
international experience in the activities of financial and credit institutions contribute to the financial stability of business entities, also
providing the high-quality organization of credit, financial, information,
and other activities undertaken by those various institutions providing
mediation functions.
The UN session (New York, September 2015) adopted a resolution
to promote the restructuring of the world social and economic sphere
in line with the development of common principles of action. Active
participation by the Russian Federation in implementing this strategic
objective is an important aspect of national foreign policy at the present
stage of development.
The relevance and novelty of the problems discussed are intended to
contribute to enabling the Russian Federation to successfully implement
the development programmes aimed at ensuring that the measures taken
are compatible with the international practice, comply with world standards, ensure the safety of banking operations, provide a high quality of
banking services using modern digital platforms, and give professional
knowledge. The success of Russia in world economic relations depends
largely on how these problems are going to be solved.
Methodology
The authors used the materials of domestic and foreign scientific schools
describing the current trends in the fields of banks and banking and
financial markets. The research uses methods of system analysis, such
as deduction, induction, analysis, synthesis, etc.; graphic, statistical and
econometric methods; methods of groupings and classifications, as well
as a comparative historical method.
23
Financial Markets: Current Trends and Factors …
Results
The Russian Federation’s financial market today is a complex mechanism
of capital redistribution between different spheres and subjects of the
economy.
Russia’s share in global GDP amounted to 1.67%, and the ratio of
banks’ assets to GDP was at 85.9% in 2018. It is important to note
that the Russian banking sector occupies a leading position in terms of
total assets within the EAEU. Today, the stock market and the corporate bonds market are considered to be the most developed segments of
the financial market. The share of market capitalization was 38.6% of
GDP (only 0.7% of the world volume) with an annual growth of 11.4%
in 2018. The ratio of the corporate bonds in circulation value to GDP
was 11.5%, with yearly growth of 4.5%. The government bond market
accounts for only 7.6% of GDP. The main indicators of the Russian
financial market are presented in Table 1.
The presented indicators testify to the positive dynamics of the
Russian financial market. The securities market shows slight growth,
but the sub-federal and the municipal bond market remains in deep
stagnation (less than 1% of GDP). The analysis of the data allows us
to conclude that the development potential of the Russian financial
Table 1 The main indicators of the Russian financial market in global finance
Indicator
Russia
GDP growth rate (per year)
GDP, billion US$
Share of the country in the world GDP, %
GDP per capita PPP, US$
The value of bank assets, billion US$
Assets/GDP, %
Capitalization of the domestic stock market, % to GDP
Share of the Russian stock market in the world, in %
Value of corporate bonds in circulation, % to GDP
Value of government bonds, % of GDP
Value of sub-federal/municipal bonds, % to GDP
1.7
1657.6
1.67
27147.2
1424.6
85.9
38.6
0.7
11.5
7.6%
0.7
Source Compiled and calculated by the authors according to the World Bank
and Bank of Russia (2019)
24
I. Yarygina and T. Mamedov
market has not been exhausted. At the present stage, the Russian financial market is characterized by the dominance of indirect financing. It is
worth noting that net assets are concentrated mainly in backbone banks,
and there is a tendency to decrease the capitalization level of medium
credit institutions. The digital economy is one of the priority directions
of the Russian financial market development, as the Russian Federation
is integrated into global economic relations. Digital technologies make
credit and financial institutions improve their work quality. There is no
uniform definition of the term “digital economy” in economic science.
This term was first used in 1995 by the American scientist Nicholas
Negroponte in his book “To Be Digital”, in which he singled out the
use of information and communication technologies as the main advantage of the new economy. Don Tap Scott, in his turn, defines the digital
economy as the process of interaction of people through network technologies, as a result of combining intelligence, knowledge and creativity,
which contributes to the creation of shared capital and well-being
(Pertseva, 2018). Practice has shown that the digital transformation of
the financial sector is manifested in creating the financial technology
industry. The financial technology services’ infiltration index 2019 (EY
Report, 2019) showed that the main reasons for the rapid development
of the global financial technology industry are the following:
● more favourable tariffs and prices compared to traditional methods of
service provision;
● ease of creating an account;
● high quality of services;
● access to a variety of innovative services.
However, digitalization also creates new financial risks and cyberthreats. This fact confirms the need to form a flexible approach to
regulating and monitoring digitalization processes in the financial sector,
which contributes to the streamlining of the financial market’s innovative
transformations.
The analysis showed that in 2018 the global volume of attracted
resources in the financial technology services from private investors
Financial Markets: Current Trends and Factors …
25
amounted to 111.8 billion US$ (Sedykh, 2019). Foreign direct investment (FDI), in the form of both mergers and acquisitions (M&As), and
venture capital were the main sources of funding for start-up projects.
In the digital era, financial markets are contributing to the emergence of
new instruments; for example, in 2019, the Chicago Options Exchange
started trading bitcoin futures. It is the practice and subsequent analysis
of such technology in the practice of financial institutions that can be
considered the criterion on which to judge whether such a decision was
appropriate or not.
Economic sanctions against Russia are limiting access to external
sources of borrowing and preventing the Russian financial market from
developing without introducing innovative technologies. It is important
to note that in the “Main directions of development of the financial
market of the Russian Federation for the period 2019-2021” (Bank of
Russia, 2019), the Bank of Russia pays special attention to creating
special conditions for making the financial market more digitalized. The
main goal of the mega-regulator is to create a favourable environment for
introducing financial technologies, which primarily involves the development of infrastructure platforms and the optimization of transnational
banks’ (TNB) activities.
For TNBs, the main fields of concern under modern conditions
include the following:
● ensuring the activities of business entities around the world;
● operating in global financial markets;
● capital strengthening, increasing assets and administrative resources;
● expanding operations with attracted resources;
● developing foreign structures, including industrial ones, with the
participation of banks.
The largest multinational holdings—known as global backbone
banks—include Bank of China, Citigroup USA, JP Morgan Chase &
Co USA, HSBC Holdings UK, Calyon France, Ind. &Comm, Deutsche
Bank Germany, Bank of Tokyo-Mitsubishi Japan, BNP Paribas France,
HypoVereinsbank Germany, UBS Switzerland, etc.
26
I. Yarygina and T. Mamedov
Major transnational institutions form the world’s financial centers
through which international financial flows are most visible. To date, the
borders of two major financial regions—Europe and the United States—
have formed. The market share of FOREX London Stock Exchange is
reportedly 47%. The London Capital Market is a major global center
of financial services, with annual exports of up to US$20 billion. International financial centers are constantly changing, being influenced by
competition and market conditions, as well as new technologies.
The governments of those countries who are importers of world capital
movement strive to provide competitive conditions for participants of
financial markets, taking the measures to improve them. Transnational
corporations’ capital is moving from one world financial centre to
another in search of low costs, soft currency regulation, skilled professionals, and the good mediation of transnational banks. According to
the Bank for International Settlements (in Basel), a change can be
witnessed in the role of American trading platforms and the transfer
of major financial markets to Asia. This fact is also evidenced by the
expansion of export-import operations and their provision by credit
and financial institutions, which are currently concentrated in Asian
countries. The development of transnational corporations impacts the
globalization of the economy. Actually, transnational corporations and
transnational banks are the main driving force behind the internationalization of world finance, strengthening the interconnectedness and
interdependence of participants in global economic relations. Practice
has shown that the effects of transnational corporations and transnational banks on the world economy are the following: impacting market
development and increase of its competitiveness; provision of foreign
investment and migration of capital; influence on the pace of the development of economies of countries and their operations; management of
economic crises of countries and their operations; and the technological development of world economic ties. Transnational banks play an
important part in the advancement of information technologies, carrying
out capital-intensive development of their software products; simultaneously transnational corporations, being a driving force of interconnected
reproduction processes of the world economy, provide international labor
migration. Transnational activities of corporations and banks ensure that
Financial Markets: Current Trends and Factors …
27
the needs of economic entities in the global and regional economy are
met and contribute to multilateral cooperation.
Transnational banks are currently implementing investment policies
in various regions of the world. Foreign investment is the capital that
foreign investors provide to local businesses to make a profit. In turn,
capital includes the following property and intellectual values: real estate,
movable property and property rights, money and deposits, securities,
intellectual property rights, and economic activity rights granted based
on legislative or contractual relations. In the case of direct investment,
the investor has the right to participate directly in the management of
the business.
According to the World Bank, the real indicator of attracting foreign
direct investment (FDI) is the performance index, which is measured by
comparing country and total global FDI flows, taking into account the
national share in the global GDP.
To the authors’ knowledge, global FDI fell by 13% to US$1.3 trillion in 2018. The decline in direct investment was observed for the
fourth consecutive year. According to UNCTAD’s analysts, the decline
in cross-border investments is associated with the repatriation of foreign
income by economic entities to the United States. However, the abolition
of taxation on the accumulated foreign corporate income contributed
to the growth of mergers and acquisitions (M&As) (World Investment
Report, 2019). Global FDI flows are, on the one hand, the increased
protectionist measures for foreign investors and, on the other hand, the
technological transformation brought about by the Fourth Industrial
Revolution.
There is no single model that reveals the motives of investment
by international corporations. For example, according to Buckley and
Casson’s theory, parent companies invest through their subsidiaries that
allow them to manage risks while controlling the market. Government
intervention in international capital markets, in its turn, creates an incentive for transfer pricing (Dinkar & Choudhury, 2014). The essence of
Aliber’s currency award theory, for example, is that weak currencies—
in comparison with strong currencies of the investor countries—are the
most attractive for investment; this can be explained by their ability to
receive a premium on the difference in the exchange rate (Dinkar &
28
I. Yarygina and T. Mamedov
Choudhury, 2014). While this theory has made a significant contribution to economic science, it does not provide an explanation for the
cross-border movement of capital in the developing countries where
national currencies of equal strength are used. The theory of industrial organization suggests that direct investments are aimed at scientific
and technological developments (Dinkar & Choudhury, 2014). After
studying the theoretical aspects of foreign investments, we can conclude
that FDI has the following advantages over the portfolio and other
investments:
● searching for new markets and reducing production costs;
● improving product quality through increased competition from multinational corporations;
● creating new jobs, and as a result, increasing the purchasing power and
income of the population;
● introducing advanced technologies and know-hows, obtaining
useful experience of foreign management, project implementation
(Mammadov, 2019);
● increasing export volumes and foreign currency earnings;
● maintaining a current account surplus, covering the state budget
deficit and alleviating the external debt.
Besides, long-term direct investments contribute to the integration
of individual countries and regional groupings into the world economy.
Thus, FDI is an important development factor affecting the cooperation
between national economies.
Russia is now suffering from capital outflows as well as underdeveloped financial markets and banking systems, which indicate certain
difficulties in using FDI for developing the national economy. The
export of capital from Russia amounted to US$24.3 billion in 2017. By
the end of 2018, the capital outflow significantly increased to US$63.0
billion (Bank of Russia, 2019). Capital flow contributes to a structural liquidity deficit in the banking sector, which could slow economic
growth.
Practice has shown that financial and credit institutions do nothing
but transform savings into investments. In this regard, balanced
Financial Markets: Current Trends and Factors …
29
economic growth can be seen only when financial and credit institutions start to work effectively. Economic agents of developed financial
markets actively interact with each other. This allows them to attract
long-term financial resources and to invest them in the real sector of
the economy. We suppose that private equity funds can be called a key
factor affecting all economic actors and attracting investments in the
national economy. Private equity fund is a financial instrument used by
both transnational corporations and transnational banks to increase the
industrial and infrastructure potential of the national economy. Private
equity funds play an important role in developing the Russian economy,
as FDI inflows help to boost economic development in capital recipient
countries.
Russian Direct Investment Fund (RDIF) is the largest sovereign fund
in the post-Soviet space in terms of authorized capital. This fund aims
to attract investments into the leading companies working in the most
promising sectors of the economy. The volume of funds raised by RDIF
for Russia amounts to US$40 billion. For example, RDIF, as a coinvestor, made a lucrative deal with the Abu Dhabi Finance Department
in 2013 to invest up to US$5 billion in major infrastructure projects
in Russia (RDIF, 2019). The intensification of RDIF will solve the
problem of FDI inflows into the national economy to implement longterm economic development programmes of the national economy by
introducing modern digital technology.
It is worthwhile saying that banks have entered the digital era because
of the trends of the modern economy. A developed digital economy can
meet the business needs of businesspeople, for example, reducing costs.
In this regard, introducing unified principles of making smart contracts
including blockchain and smart technologies will help to reduce transaction costs of both customers and counterparties. It seems appropriate
to note the expediency of using blockchain technologies in the field of
land cadaster, financial operations, banking, passenger transportation,
digital marketing, and project financing, which can contribute to the
expansion of banks’ activities, the reduction of project administration,
and the introduction of innovative management into banking practice.
For example, in real estate transactions, blockchain in the register and
the document flow on real estate, and the tokenization of real estate
30
I. Yarygina and T. Mamedov
(completing real estate transactions using tokens), can both be used.
Blockchains are used in financing infrastructure development projects in
Sweden, Greece, Georgia, and Japan.
Tokenization of real estate is practised in Russia. One such project
is the ATLANT platform, which promotes the deals between the parties
without additional intermediaries. Sberbank also uses an online platform
based on this technology to register real estate transactions. The volume
of such transactions is 7 billion roubles. The Ministry of Digital Development, Communications and Mass Communications of the Russian
Federation is studying a pilot project that allows using blockchain in
shared-equity construction.
The study of using digital technologies in the banking sector revealed
several significant problems, which include a lack of computing capacity,
including graphics cards and other computer tools; limited power supply
and electricity costs, as well as imperfect legislative framework and
regulation.
Addressing these problems contributes to using new technologies
to provide the technological platform for the growth of the national
economy.
Conclusions/Recommendations
The results of the study of actual trends and factors affecting financial markets allowed us to conclude that the Russian Federation is
solving very important problems of developing the national economy
and improving the welfare of the population in the severe environment
of world economic relations. It is important to mention repatriation of
capital and withdrawal of profits in various forms from the country,
which neither improves the balance of payments nor increases the budget
income. In turn, the measures taken by the government of the Russian
Federation aimed at the import substitution of goods and services
contribute to the positive dynamics of GDP, to the promotion of competition, and to a reduction of the dependence of the national financial
system and of the economy from foreign capital—all of this threatens
Financial Markets: Current Trends and Factors …
31
both the economic and the political security of any country. Incentives for the development of national innovations based on forming
modern platforms for ensuring economic growth have been strengthened
in Russia. Under these circumstances, to develop financial markets, it
is advisable to develop a set of measures aimed at improving banking
products and services. It is important to adopt international experiences of electronic banking to transfer banking technologies and financial
products. It seems appropriate to expand mutual investments with the
partner-countries of Russia, including transnational corporations and
transnational banks of the EAEU, BRICS and SCO. In this regard, it
is necessary to improve the conditions for credit and financial institutions and for micro-financial organizations. It is necessary to connect the
support of innovations in the financial sphere (Yarygina & Mamedov,
2018). All these measures will attract long-term investments in the real
sector of the economy, while also increasing the role of banks and the
stock market in developing the national economy. In this regard, it is
advisable to develop targeted programmes, to form agencies for attracting
foreign direct investments (FDI), including those on a share basis, to
create specialized centres in the field of public-private partnership (PPP)
aimed at establishing mutually beneficial relations with private investors.
One of the most important growth areas of investments is creating
collective regional funds of financing. It is also important to form a
single sovereign direct investment fund within the framework of the
EAEU and BRICS, which will allow attracting and effectively using
financial resources in terms of financing and the segregation of market
risks. It could be RDIF, which plays a key role in attracting FDI, who
may become the initiator of the fund. The development of the project
financing sphere will reduce the share of the state in the assets of financial
and credit institutions, increase the role of the private sector, and stimulate the development of project financing instruments (crowd investing,
crowdfunding, etc.).
To ensure the development of digital platforms, it is important to
create a legislative framework that promotes the wide use of blockchain
technologies in the banking sector, as well as to develop a financial policy,
32
I. Yarygina and T. Mamedov
that will stimulate the use of innovative management tools in business
processes.
References
Bank of Russia. (2018). External sector statistics. Available at http://cbr.ru/vfs/
statistics/credit_statistics/iip/55-iip_18.xlsx. Accessed 5 November 2019.
Bank of Russia. (2019). Russian financial market development program for 20192021. Available at https://www.cbr.ru/Content/Document/File/87952/fm_
development_program_2019-2021.pdf. Accessed 15 January 2020.
Dinkar, N., & Choudhury, R. N. (2014). Selective review of foreign direct
investment theories. Asia-Pacific research and training network on trade
(Working paper, No. 143, pp. 2–27).
EY Report. (2019). Global Fintech adoption index 2019. Available
at https://www.ey.com/Publication/vwLUAssets/ey-fai-2019-rus/$FILE/eyfai-2019-rus.pdf. Accessed 15 December 2019.
Mamedov, T. N. (2019). Investment climate of CIS countries: International rating assessments and own methodology. Financial economy, No. 9,
pp. 260–264.
Pertseva, S. Y. (2018). Digital transformation of the financial sector. Innovations
in Management, 4 (18), 48–53.
Russian Direct Investment Fund (RDIF). (2019). Available at https://rdif.ru.
Accessed 12 August 2018.
Sedykh, I. V. (2019). Market of innovative and financial technologies and services.
Available at https://dcenter.hse.ru/data/2019/12/09/1523584041/Pynok%
2520financovyx%2520texnologiЙ-2019.pdf. Accessed 5 January 2020.
Yarygina, I. Z., Mamedov, T. N. (2018). Bank participation in investment
cooperation of the CIS, Banking Services, No. 1, pp. 12–17.
World Investment Report. (2019). Special economic zones. Available at https://
unctad.org/en/PublicationsLibrary/wir2019_en.pdf. Accessed 5 November
2019.
Paradoxes of Financial Market Institutions:
Traditions and Ecosystems
Galina Panova
Introduction
The transformation of financial intermediaries has become one of the
new trends in the financial markets, which manifested itself under the
influence of macroeconomic factors, technological challenges (fintech)
and the increased regulatory burden on financial and credit institutions
after the global crisis of 2008–2009. Traditional banks are gradually
changing their classic look and acquiring new features within new
business models and ecosystems.
Changes in the activities of financial and credit institutions in the
context of the fourth industrial revolution are fuelling discussions among
scholars and practitioners who argue about the prospects for banks in the
near and distant future.
G. Panova (B)
Moscow State Institute of International Relations (MGIMO University),
Moscow, Russia
© The Author(s), under exclusive license to Springer Nature
Switzerland AG 2021
G. Panova (ed.), Financial Markets Evolution, Palgrave Macmillan
Studies in Banking and Financial Institutions,
https://doi.org/10.1007/978-3-030-71337-9_3
33
34
G. Panova
The current traditional banking business model is to provide services
to retail and corporate clients. The range of these operations and
services includes opening and maintaining customer accounts, offering
them credit products, making settlements and payments, etc. The main
problem with this model is that in recent years, in the context of technological transformation at each stage of creating value, a significant
number of suppliers of high-quality personalized financial products and
services offered to the market at low prices have appeared. It is hard
for traditional banks to compete with them and, in order not to lose in
the competition to new market participants, they are forced to optimize
their product offer focusing on the areas in which they have competitive
advantages or strategic importance.
Today, traditional banks are concerned that their business could
be threatened by the developing financial technology. Fintech companies aim to capture at least 33% of the traditional banking
business (http://www.pwc.by/ru/publications/other-publications/edgesblurring.html). According to Citibank’s forecasts, the growing influence
of financial technologies may provoke 30% of bank employees’ losing
their jobs by 2025 (Digital Disruption: How FinTech is Forcing Banking
to a Tipping Pointhttps/Citibank Report, 2016).
The global fintech industry is growing rapidly, using technological
innovation to capture market share from incumbent market players
across many financial service sectors. The main innovative areas of financial engineering include cloud technology, process and service externalization, Robotic Process Automation (RPA), Advanced Analytics, Digital
Transformation, Blockchain, Smart Contracts, Artificial Intelligence (AI)
and Internet of Things.
If until recently fintech was mainly focused on developing such sectors
as payments, remittances, direct (P2P) lending and crowdfunding, in
recent years there has been an increase in activity of the capital markets,
new fintech solutions are emerging and banks around the world have
to deal with them. In these conditions, banks are forced to compete
with fintech companies, on the one hand, and develop cooperation with
them, on the other. Large banks are creating tremendous opportunities
for fintech companies, giving them access to global financial markets
while transforming their own business processes.
Paradoxes of Financial Market Institutions …
35
If we take Industry 4.0, much attention is paid to automation, which
allows accelerating product and service development and creating new
business models that can increase the efficiency of companies, reduce the
time and resources spent. For banks, process automation is no longer
an innovation trend; it is an important component of their innovation
strategy. Today, they are looking for some new business models as well as
transforming the old ones, digitalizing the interaction between business,
customers and the state, creating new platform-type companies that rely
on a wide variety of partners and customers; it was the ubiquity of the
Internet and smartphones that gave rise to such companies.
New terms appear in economic science and in practice to define
the banking business model, for example, neobanks, hybrid banks,
aggregators, platforms, infrastructure providers, etc.
According to Accenture, which analysed the modern financial landscape, the banking business today is determined by the following
main trends: banks are changing their priorities from cutting costs to
finding income; the best neobanks “convert” the benefits of attracting
new customers into real profits; medium-sized banks are paying much
attention to the issue of mergers and acquisitions; intelligent tools
(robots, etc.) increasingly emphasize the importance of people as account
managers; open banking allows one to transform databases into information flows preparing the prerequisites for the transition to the purposedriven banking era; banks donate their commission income in favour
of building trusting relationships with clients and closely monitor the
quality of loan portfolios; the role of cryptocurrencies is changing;
young market players refuse to call themselves challengers (Accenture
– Platform Banking: A Business Model for the Digital Age, 2018).
Methodology
The paper uses comparison methods, benchmarking of market practices and recommendations of international consultants. Among them
are the results of research projects (King, 2020) and other theoretical
and empirical studies.
36
G. Panova
The analysis was based on reports and other materials of the World
Bank, Bank for International Settlements, international audit and
consulting companies, such as PWC, Accenture, McKinsey, as well as
the Bank of Russia, Sberbank, VTB Bank, Tinkoff Bank, Citibank.
The main objectives of the chapter are to reveal a modern problem of
traditional banks change in the finance industry and to show the way for
its further development.
Results
If we take the economic literature, banks’ business models are often
viewed through the prism of such definitions as sustainable development models, product orientation, risk orientation and customer
orientation. However in practice there are already international standards that define the concept of a company’s business model. For
example, the International Standard for Integrated Reporting (clause
4B) defines an organization’s business model as “a system for transforming resources through its commercial activities into products and
results aimed at achieving the organization’s strategic goals and creating
value over the short, medium and long terms”, thus highlighting the
key elements of the business model, including resources, commercial activities, products and results (MeҖdynapodnyЙ ctandapt po
integpipovannoЙ otqetnocti//International Integrated Reporting
Council [‘IIRC’]. dekabpb, 2013).
IFRS 9 Financial Instruments describes a business model as the way
an entity manages its financial assets in order to generate cash flows. At
the same time, three types of business models are distinguished: (a) those
focused on holding an asset to collect cash, (b) those holding an asset to
collect cash or selling an asset and (c) other business models.
The Bank for International Settlements (BIS) uses only a range of
products as a criterion for classifying banks’ business models. McKinsey
identifies two criteria for grouping banks’ business models: the type
of products/services and the way they are sold. In this context, the
company’s report “Banks in the changing world of financial intermediation” (KompaniЯ McKinsey, analizipyЯ bydywee financovogo
Paradoxes of Financial Market Institutions …
37
pocpedniqectva v otqete « Banks in the changing world of financial
intermediation». November 6, 2018) highlights the following promising
business banking models: (1) the innovative, end-to-end ecosystem
orchestrator; (2) a low-cost “manufacturer”; (3) the bank focused on
specific business segments; and (4) the traditional but fully optimized
and digitized bank.
At the same time, from our point of view, all banks can be conditionally divided into traditional (classical) banks and those actively using
innovations.
Applying new business models depends on the nature and scale of
banking activities, profitability, specialization, competitive advantages,
etc. The regulation of their activities greatly influences the choice of business models. After the global financial and banking crisis of 2008–2009,
regulators introduced new requirements aimed at maintaining bank’s
stability, including those with respect to their capital and liquidity levels.
This influenced the profitability of banks and determined the range of
products they offered, which inspired new models such as P2P platforms
offering an alternative to traditional bank lending methods.
New regulatory approaches (e.g. the EU’s Open Banking Initiative—
the PSD2 directive obliging credit institutions to exchange customer
information with service providers at the request of the customer),
initiatives to simplify customer authorization, as well as favourable
macroeconomic conditions as well as the widespread use of technology
have led to the emergence of new financial intermediaries and increased
the need to transform the traditional business model of the bank (Financial Conduct Authority – Strategic Review of Retail Banking Business
Models: Purpose and Scope, 2017).
On the other hand, the international banking standards set out in the
Basel Accords aimed at ensuring the stability of banks require them to
create additional capital buffers, thus, increasing the cost of doing business and the displacing highly risky assets outside the banking industry.
Other directives (e.g. the MiFID II Directive on Markets in Financial
Instruments aimed at protecting investors and standardizing the activities of financial institutions in the EU as well as restoring confidence
in the industry) involve changing the bank’s approach to their business
strategy in the new environment.
38
G. Panova
New Banking Business Models
Hybrid and neobank models that are currently successfully operating
are quite promising because these banks offer low tariffs, flexible and
personalized services, convenient mobile banking, which allows them to
attract more and more customers.
One of the promising new models is an infrastructure provider
for fintech companies and/or banks. The advantages of this model are
that it eliminates the need for other companies to participate in activities that are subject to strict regulation, to take on the additional
costs of complying with supervisory requirements. New market players
choose such a model because they do not have to obtain a banking
licence. These banks are highly profitable and can significantly save up
by expanding their customer base. Infrastructure provider banks tend to
become leaders in national markets, as the number of providers in a given
model depends on the minimum efficiency level of the operation scale
and, accordingly, economies of scale.
Aggregating financial services is becoming a more profitable model
for banks. Aggregator banks do not create new products on their own
but act as distributors of financial products and services that they receive
from their partners or ecosystems. Thus, aggregator banks do not incur
the costs of creating products and their costs for compliance with regulatory requirements are significantly lower than for other banks. At the
same time, such banks provide customers with access to a wider range
of products than if they were trying to create them themselves. In this
case, they actually become “virtual advisors” to clients in choosing more
rational financial and operational solutions, thereby providing the necessary advice and/or service at the right time, using various communication
channels convenient for the client. For many years, the main difficulty
hindering the functioning of this model was not the lack of technologies,
but the insufficient amount of information. Without access to customer
transaction data, it was difficult to provide consulting services. However,
this became possible with the development of the regulatory framework,
in particular with the advent of the PSD2 directive in Europe, which
allows a third party to receive bank data. Currently, Internet platforms
can supplement transaction data with contextual information at their
Paradoxes of Financial Market Institutions …
39
disposal in order to provide timely and appropriate advice to customers.
This model also allows customers to engage in the service, providing
them with a wider range of banking operations and services, as well as
the ability to effectively manage their funds.
Choosing an aggregator model allows the bank to achieve economies
of scale by serving a significant number of customers using a single software platform. In addition, the platform creates network effects, since an
increase in the number of bank customers expands the range of system
partners, who, due to a wider range of products and services, attract more
and more new users.
Another type of business model is platform. Today, the platformbased business model has been implemented in many areas. In particular, there are advertising platforms (Google, Facebook, Yandex), cloud
(Microsoft, Amazon, IBM Cloud), industrial (Mind Sphere—Siemens,
Predix—General Electric) and product platforms (Spotify, Yandex.Drive,
etc.) (H. Cpniqek Kapitalizm platfopm/pep. c angl. i nayq. ped.
M. DobpЯkovoЙ. – M.: Izd. dom BycxeЙ xkoly Эkonomiki,
2019).
The key elements of the digital financial infrastructure include
platforms for remote customer identification, fast payment platforms,
marketplace platforms for financial products and services, as well as new
platforms based on distributed ledger and cloud technologies. Open API
is the key link in the financial market infrastructure.
A platform for remote identification of financial institutions’ clients uses
a database of a unified identification and authentication system and
biometrics to allow banks to provide remote services. The fast payment
platform allows people to transfer money to individuals and legal entities using the maximum number of identification methods, including a
mobile phone number, QR codes, instant messengers and other identifiers. The platform for registering financial transactions allows creating
and maintaining a single register of transactions in the financial market.
Development banking marketplaces has been the trend of recent years.
The marketplace allows customers to receive the necessary financial
services with clear and transparent pricing in a one-stop-shop mode.
For example, a promising payment system is being created in Russia
on the basis of a unified payment platform, that will allow banks to
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G. Panova
manage liquidity more effectively. The Bank of Russia is expanding
the list of services provided by the National Payment Card System.
For example, it is planned that the MIR card will be integrated with
non-financial applications (campus, social, student, etc.). Such innovative services as “Mir-Accept” (with self-authentication of the issuer’s
client) will be introduced. The National Payment Card System is being
introduced among the member states of the Eurasian Economic Union
(EAEU).
The payment platform for transmitting financial messages is being created
using the distributed ledger technology and is intended for transmitting
financial messages in the SWIFT format. At the initial stage, this platform will work only in Russia. However, in the future, the Bank of Russia
expects to organize the intersystem interaction of the EAEU countries on
its basis.
All in all, the bank’s business model based on the platform is
a promising strategic option since it allows banks to simultaneously
achieve network effects and use existing competitive advantages, meaning
primarily trust from consumers of banking services, large customer
databases, access to inexpensive financial resources and sufficient capital.
In addition, banks have many years of experience in collecting and
analysing customers’ information, which is necessary for analysing their
credit record and cooperate with partners in order to obtain data on
consumers of partner’s banking services. The bank’s business model based
on the platform usually tends to a closed development model, which is
associated with the risks of market monopolization, preventing the emergence of new companies, as well as the risks of preserving the data or even
losing key information (e.g. that of cross-border transfers).
In view of the above, a more efficient business model for the bank
includes a vertically integrated open platform that combines high
performance and the bank’s ability to provide high-quality products and
services. Banks using this business model can provide a wider range
of services and products from third-party service providers, as in the
aggregator model, and since the lending institution is vertically integrated and compliant with regulatory requirements, the service becomes
more responsive. Another advantage is that the developers of such platforms are constantly improving them to better meet user needs. Banks
Paradoxes of Financial Market Institutions …
41
using these platforms benefit from continuous innovation without the
need to invest their own resources in non-core technologies and thus
free them up to improve the existing products and create new ideas
and solutions (Accenture – Platform Banking: A Business Model for
the Digital Age, 2018). In addition, functioning on the platform allows
credit institutions to use the so-called cross-subsidization (H. Cpniqek
Kapitalizm platfopm/pep. c angl. i nayq. ped. M. DobpЯkovoЙ.
– M.: Izd. dom BycxeЙ xkoly Эkonomiki, 2019), when one division of the company seeks to reduce the cost of a service or product,
while another, on the contrary, increases prices to compensate for the
resulting losses. To compete with new market entrants such as fintech
and bigtech, banks are creating open channels for delivering products
and services while maintaining strategic opportunities.
The largest and most successful banks create so-called ecosystems. In
practice, the term “banking ecosystem” is interpreted in terms of creating
and managing a banking group which includes various kinds of companies (both financial and non-financial ones) offering various financial and
non-financial services and goods to the bank’s clients in order to satisfy
as many of their needs as possible.
Summarizing the existing theoretical and practical approaches and
relying on our own research, it seems appropriate to us to single out three
main basic business models, which have come to be called ecosystems in
recent years.
1. A business model in which solutions offered by large technology
companies have priority (e.g. FAMGA—Facebook, Apple, Microsoft,
Google, Amazon—in the USA, and BAT—Baidu, Ant Financial,
Tencent—in China). In this case, bigtech companies are the heart of
the ecosystem. Therefore, this model is called the American-Chinese
or “Bigtech” fintech.
2. A business model dominated by solutions offered by startups and new
companies which usually specialize in one or more niche offerings.
In this case, fintech startups make the heart of the ecosystem. This
approach is often called the European model or startup fintech.
3. The traditional fintech includes financial technologies in traditional banks, payment systems and other participants in financial
42
G. Panova
markets when classical financial intermediaries form the heart of
the ecosystem. It is this business model that prevails in the Russian
financial market.
Banks, first of all, begin to carry out daily operations (payments for
cellular communications and the Internet, rent of premises, utilities, etc.)
in the digital mode, and then new products are issued (opening accounts,
accepting deposits and issuing loans, issuing plastic cards, etc.).
At the same time, with the development of remote banking services,
banks not only do not abandon the network of physical offices but
also open new ones. For example, VTB Bank currently has more than
1,500 offices, and their number has been increasing in recent years since
there are operations that cannot be performed without bank employees
(depositing cash by a client into a bank account, obtaining advice on
complex structured products, renting safe cells, etc.).
At the same time, the bank’s offices are being functionally adapted
taking into account the global banking industry digitalization; we can
witness the transition to the format of paperless offices where the client
confirms the operation and signs everything in the bank’s mobile application in the presence of an employee who creates the document itself
and its digital image.
In recent years, banks have been actively using the system of financial incentives for their customers, including loyalty programmes, where
cashback, bonuses, miles and other preferences the bank provides to its
customers for using its programs and partners’ programs are combined in
one mobile application and on the bank’s website. The bank’s client saves
time and money by receiving on-line information about the products and
services he needs at one time or another, and also has the opportunity to
purchase them remotely.
Thanks to modern technologies, part of the information is provided to
the client remotely in a visual format. For example, using virtual reality
glasses, bank customers can see a future apartment or other property.
Then they can remotely apply for a loan, open a personal mortgage office,
get an approval for the loan after which the bank will transfer the funds
to the borrower’s account.
Paradoxes of Financial Market Institutions …
43
Traditionally, in Russia, there are universal banks and specialized
banks, whose activities are focused on any particular types of banking
activities.
A number of large Russian banks, whose share in the banking sector’s
assets is 66%, are leaders in developing new financial technologies
and declare their strategy as development “in the ecosystem paradigm”
(Trushina & Smagin, 2019).
In the economic literature, two main types of banking ecosystems
are often distinguished: (1) the ecosystems that satisfy a wide range
of customer needs for various goods and services (Sberbank), and (2)
the ecosystems that satisfy customer needs in one specific segment
(Rosselkhozbank, VTB).
For example, the largest bank in the country, Sberbank, began to
create its own ecosystem in 2017, when CEO German Gref named
IT giants (such as Google, Yandex, Alibaba) the main competitors of
the bank (https://www.forbes.ru/biznes/387895-german-gref-transform
aciya-sberbanka-eto-vechnyy-process). Sberbank’s shareholders approved
a strategy for the gradual transformation into an ecosystem as the technology platform is created and the bank can aggregate an increasing
number of services. Since then, the bank has gradually developed into
an open ecosystem. In 2017–2019, Sberbank spent US $1 billion (or
3% of profit for this period) to purchase various assets (financial and
non-financial) and create an ecosystem.
Today, the Sberbank ecosystem includes companies that provide
various services to individuals and legal entities, including cellular
communications, a credit bureau, a recruiting service, a real estate portal,
logistics, online cinema and others. In 2019, Sberbank expanded its
business with a number of digital assets, including a joint venture with
Mail.ru and a stake in Rambler, as well as the media assets Gazeta.ru
and Lenta.ru. Sberbank’s ecosystem includes food delivery companies
(Delivery Club) and taxis (Citymobil), a restaurant business (SberFood
platform and R-keeper—ERP for restaurants). Sberbank is considering
the joint venture with Soyuzmultfilm as an important educational
project. It is expected that the capitalization of non-banking business
will eventually equal the capitalization of Sberbank itself, which exceeds
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G. Panova
5 trillion roubles. Sberbank strives to become the largest technology
company.
In 2019, VTB Bank adopted a new strategy in which the task was
to create marketplaces and a banking ecosystem in order to make retail
services for clients a convenient omnichannel service with a high proportion of digital technologies. VTB will have carried out 70% of the bank’s
operations and 50% of sales exclusively via digital channels by 2022.
Marketplace creation allows a bank to integrate many services. For
example, VTB is currently developing the so-called payroll marketplace, creating housing and automotive ecosystems, developing VTB’s
multiservice for e-commerce. The Housing Ecosystem project is being
implemented. Its goal is to satisfy all the customers’ housing needs in
one window mode: choosing a suitable apartment or another real estate
object, conducting a transaction, appraising and registering, insuring,
creating a design project for the purchased object, getting help with
moving and maintenance of the living space, ordering small services for
the house, repairing, etc.; getting a mortgage and consumer loans on the
marketplace, etc.
VTB’s open partner ecosystem is being created. It offers new services
for all market participants, primarily construction companies that sell
their facilities, professional real estate agents, as well as other banks.
In August 2019, VTB launched a new website for selling collateralized non-core assets that received the name “Commission”. In 2020, it is
planned to open a marketplace on its basis. Cars and real estate received
from debtors will be put up for sale, options for buying and registering
the acquired property will also be presented here.
VTB Mobile, the mobile operator of VTB, is presented on the market
as a VTB and Tele2’s joint project. SIM cards of this system will work
throughout Russia and abroad. Moreover, the joint use of banking and
telecommunication products will provide the maximum effect in terms
of security, benefits and convenience.
Russian systemically important banks that are building their ecosystems focused on serving customers in a particular segment of the
financial market include Rosselkhozbank, Rosbank and Alfa-Bank.
Rosselkhozbank plans to create a digital ecosystem for small businesses in rural areas, which will include services for selecting seasonal
Paradoxes of Financial Market Institutions …
45
workers, receiving veterinary care, digital farm management, expanding
sales markets and agritourism.
Rosbank plans to develop an ecosystem to support mortgage lending:
providing a mortgage loan, access to the services of real estate agents,
notaries, insurance companies, as well as services for furniture repair and
purchase.
Alfa-Bank has been developing its “ecosystem” since 2013 by
purchasing financial companies and startups (Alfa Stream, Alfa Leasing,
Alfa Finance).
Gazprombank is developing a financial supermarket, and Otkritie
FC Bank is developing a system of financial services (Otkritie-factoring,
Otkrytie-broker).
In these conditions, banks are constantly working on improving technologies, trying to improve them in order to provide optimal service for
the client in terms of speed, convenience and range of services in digital
channels. Obviously, customers will only be left with those banks that
can solve these problems.
Conclusions/Recommendations
A futuristic view of the future banking is taking shape today. Under
the influence of technological innovation, banks and their businesses are
changing dramatically. Those banks that have great technological potential use their technological capabilities to search for fundamentally new
business models. They analyse the work of aggregators, marketplaces,
ecosystems; create technological services for customers, etc. Banks operating in this new paradigm of digital banking are transforming their
operations and transforming the financial market landscape as a whole.
This study was conducted in order to analyse the current situation and
prospects for the development of banks’ business models, as well as the
potential market response, taking into account the influence of systemic
and individual risks.
The main idea of the study was to determine the efficiency, effectiveness and directions of further developing banks’ respective strategies.
Studying the experience of digitalizing banking activities has made it
46
G. Panova
possible to reflect the modern realities of the developing subjects of the
Russian financial market, identify the existing barriers and determine the
main directions for the development of bank policies during the fourth
industrial revolution. In particular, the approaches of the Bank of Russia
(Bank of Russia, 2018) as a regulator of financial markets often cause
debate among economists. An analysis of the theory and practice of using
the latest technologies made it possible to find an explanation for organizational changes in the banking industry. These changes are confirmed by
the rapidly developing digital platforms and bank ecosystems, as participants in these systems perform financial intermediation for households
and companies much faster and cheaper than traditional banks. At the
same time, along with the advantages of using innovations that ensure
more effective functioning of financial and credit institutions, it is also
necessary to take into account a significant increase in systemic and other
risks.
The development of “ecosystems” has both positive and negative
aspects. If a growing income and value of banks, a lower cost of attracting
customers, growing loyalty, and expanding client base can be attributed
to the positive aspects, then the negative ones include a negative impact
on the competitive environment, since large banks can restrict the access
of other financial market participants to the product and service distribution channels, as well as creating non-market competitive advantages
for those organizations that gained access to the network under the
bank’s brand, strengthening the position of large banks—administrators of the ecosystem and creating obstacles to the growing financial
service providers whose access to the ecosystem was limited. Therefore,
the problem of regulating the activities of banks that have chosen a
strategy for developing their business in the ecosystem paradigm should
be considered from the standpoint of differentiated supervision, since
they have to introduce deeper consolidated supervision and regulation
since when companies from different sectors are actually merged under
a single brand of a bank, new risks arise that can affect the financial
stability of the banking group and the financial market as a whole.
In these conditions, we have to bridge the knowledge gap between
technology developers, bank employees and other participants in the
financial market, as well as develop optimal policy options for different
Paradoxes of Financial Market Institutions …
47
groups of banks: the regulator, large systemically important banks, as well
as small and medium-sized banks, who obviously have to be digitalized.
Each bank will obviously choose an individual model. Banks make
their choice depending on the competitive advantages, specialization or
potential of the model they choose. As a result of the bank transformation, the entire financial market will win, it will become more efficient
and significant for customers and society as a whole.
References
Accenture – Platform Banking: A Business Model for the Digital Age.
(2018, October). https://bankingblog.accenture.com/platform-banking-bus
iness-model-digital-age.
Bank of Russia. (2018). The main directions of the financial technologies
development for the period 2018–2020.
Digital Disruption: How FinTech is Forcing Banking to a Tipping
Pointhttps/Citibank Report. (2016). https://www.citivelocity.com/citigps/
ReportSeries.action?recordId=51.
Financial Conduct Authority – Strategic Review of Retail Banking Business
Models: Purpose and Scope. (2017, October). pp. 5–6. https://www.fca.
org.uk/publication/multi-firm-reviews/strategic-review-retail-banking-bus
iness-models-scope.pdf.
Gref, G. Transformation of Sberbank is an eternal process. https://www.forbes.ru/
biznes/387895-german-gref-transformaciya-sberbanka-eto-vechnyy-process.
H. Cpniqek Kapitalizm platfopm/ pep. c angl. i nayq. ped. M.
DobpЯkovoЙ. – M.: Izd. dom BycxeЙ xkoly Эkonomiki. (2019).
– 128 - c. C.34.
Handbook of Block chain, Digital Finance, and Inclusion. (2017). Edited by
Prof. David Lee Kuo Chuen and Robert Deng.
http://www.pwc.by/ru/publications/other-publications/edges-blurring.html.
King, B. (2020). Bank 4.0, banking everywhere, never at a bank. Wiley. https://
www.ozon.ru/publisher/john-wiley-sons-limited-143665778/.
MeҖdynapodnyЙ ctandapt po integpipovannoЙ otqetnocti. International Integrated Reporting Council (‘IIRC’). dekabpb 2013 g.
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Schwab, K., & Malleret, T. (2020). COVID-19: The great reset. World
Economic Forum. ISBN 978-2-940631-11-7.
Trushina K. V., & Smagin A. V. (2019). The main trends in the development
of the banking system of the Russian Federation at the present stage (Banking
services, № 12, 2019, pp. 7–11). https://www.finvector.ru.
KompaniЯ
McKinsey,
analizipyЯ
bydywee
financovogo
pocpedniqectva v otqete «Banks in the changing world of financial
intermediation». November 6, 2018 Report.
The Role of Financial Intermediaries
in Digital Economy Development
(Chapter23)
Alla Dvoretskaya, Aibota Rakhmetova,
and Gaukhar Kalkabayeva
Introduction
The current trends that have emerged in the world economy, which
include an increase in globalization processes, the influence of the geopolitical situation on the state and dynamics of development of national
economies, an increase in volatility in the world financial and commodity
markets, an increase in local and global financial and economic crises,
give a clear understanding that the basis of sustainable socio-economic
development is the consistency of all sectors of the economy at the
same time and the harmony of relationships between their subjects. For
A. Dvoretskaya
The Russian Presidential Academy of National Economy and Public
Administration (RANEPA), Moscow, Russia
A. Rakhmetova (B) · G. Kalkabayeva
Karaganda Economic University of Kazpotrebsoyuz (KEUK), Karaganda,
Kazakhstan
© The Author(s), under exclusive license to Springer Nature
Switzerland AG 2021
G. Panova (ed.), Financial Markets Evolution, Palgrave Macmillan
Studies in Banking and Financial Institutions,
https://doi.org/10.1007/978-3-030-71337-9_4
49
50
A. Dvoretskaya et al.
countries with emerging markets, this is, first of all, an increase in the
efficiency of subjects of intersectoral interaction, which have a strong
innovative component.
Innovation is shaping a new face of the modern world, which is most
clearly manifested in the exponential growth over the past twenty years
of the latest technologies, which are carried by human capital. These
leading drivers of growth are adequate to the economy at the stage of the
new industrial revolution and the next technological order. Today, industrial production using digital solutions (Internet technologies, artificial
intelligence, smart houses, smart factories, etc.) is added to the rapidly
developing virtual environment that complements reality (online media
market, distance learning technologies, etc.). In other words, humanity
is going through the fourth industrial revolution, which is essentially a
transition from a post-industrial economy to the development and use
of intelligent information technologies.
The economy is being digitally transformed, driven by waves of
increasingly intensified and accelerated innovation. As noted in the
World Bank report, “digital technologies allow companies to quickly
increase or decrease the scale of their activities, blurring company boundaries and challenging old production models” (World Bank, 2019,
p. 3).
Among the main hubs of the digital economy, the most intensively
and dynamically developing sector of digital financial services stands
out. The rapid growth of the financial technology sector is based on the
growth of Internet penetration and digitalization processes. Investments
in the fintech industry are growing at an outstripping pace, the number
of users is growing by 15–20% annually, and the global volume of transactions in key fintech areas exceeded $ 5 trillion in 2019 (Development
Centre, 2019, p. 17).
Advances in financial technology are making it possible to actively
upgrade the range of financial products and services. Actually, the fintech
industry is a functional superstructure over classic financial products
and services. The development of financial technologies is facilitated by
generational changes in the consumer environment, behavioural transformations, technical and mental advancement of modern customers.
Innovative products and services are emerging in three basic segments
The Role of Financial Intermediaries …
51
(payments, financing, asset management), such as online payment and
online transfer services, P2P cryptocurrency exchange, P2P consumer
and business lending, B2B payments and transfers, cloud cash registers and smart-terminals, mass payment services, crowdfunding, social
trading, algorithmic exchange trading, robo-advising, software applications for financial planning. Some of these digital products are digital
versions of traditional solutions, others are fundamentally new opportunities.
There is no doubt about the independent and more rapid growth of
financial innovation due to the very nature of the functioning of financial
intermediaries. A more interesting question for us is: What is the role of
financial intermediaries in the development of a real digital economy in
modern conditions? Analysis of modern economic literature in terms of
the content of the concept of “role” in the economy allows us to single
out the following main classical approaches to the interpretation of this
concept:
● the “functional” approach—the basis is the identification of the interpretation of the definitions “role” and “function”. Supporters of this
approach note that the role of the economic category, first of all,
is expressed through its functions (Bregel, 1948; Kosterina, 2009;
Kravtsova, 2003; Tschelnokov, 2012);
● the “performance” approach—implies the interpretation of the
concept of “role” through a specific result of the activity, as something
for the sake of which any actions are carried out. The adherents of this
approach note that the definitions “function” and “role” are interrelated, but not identical concepts, since “function” presupposes a set of
any actions, and “role” is the result of the implementation of certain
functions (Ivanov, 2011; Shrenger, 1961);
● the “genesis” approach—takes into account the separation of the
concepts of “role” and “function” due to the fundamental difference
in their origin and development. According to Lavrushin O.I. “role”
should be understood as what for the sake of which an object arises,
exists and develops. In particular, the author notes: “a role is not so
much an expression of an objective result of functioning as a purpose
… Realization of a role from the standpoint of macroeconomics is
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A. Dvoretskaya et al.
always an objective process that does not depend on the variety of
forms and types of economic categories” (Lavrushin, 2011, p. 33).
We believe that the very etymology of the two concepts indicates in
favour of the genesis (third) approach. So, in the content of the concept
of “role” (from the English role—gender, character and degree of participation in something, measure of influence or meaning of something),
the main emphasis is on the nature and degree of influence, and in
the concept of “function” (from Latin function—performance, range of
activities and duty)—on the act of carrying out any work (Bagudina,
2004).
Therefore, in the context of this study, the interpretation of the
concept of “role” is manifested in the degree (strong or weak) and the
nature (stimulating or limiting) of the influence of financial intermediaries not only on the development of the digital economy, but also on
the general economic development (external manifestations).
In our opinion, the role of financial intermediaries in the development
of digital technologies is manifested in the fact that the financial intermediation sector in a post-industrial society is a giant platform for the
introduction of innovative technologies for serving consumers of financial products and services. At the same time, the institutional appearance
of the financial sector is radically changing. Leading financial intermediaries are building their own financial ecosystems that allow integrating
all financial products, services and services on a digital basis, taking into
account the increasing personalization and customer focus of financial
relations.
The business ecosystem itself is a new type of organizational structure.
Modern business, including financial business, is not a closed system,
where the input of resources at the entrance ensures the release of products, the provision of services at the exit. It is a set of platforms with
open borders. “Platform” financial intermediaries generate value not in
the traditional way, through individual products and services (lending,
deposits, settlements), but through creating the effect of a network that
unites stakeholders and by simplifying interaction within a multifaceted
model.
The Role of Financial Intermediaries …
53
Within the framework of the business ecosystem, “a single space
for storing and using information is being created; unlimited access
to resources and products of ecosystem agents and mutually beneficial
exchange between them; convenient and safe interaction, interaction,
supported by a plurality of techno-technological compatible variations
of devices and programs” (Sologubova, 2019). Such an ecosystem outline
makes it possible to multiply the competitive position of the business and
at the same time fully satisfy the needs of customers.
The explosive growth of the global financial technology market is
accompanied by a change in its subject structure. The serious expansion of the subjects of the fintech market is a fundamentally new and
important change in recent years. Banks as traditional leading financial
intermediaries are no longer the main players. The key agents and drivers
of the global fintech industry are, in fact, fintech companies—tech startups and large players. Venture capital is an adequate and predominant
source of funding for them (more than 70% in the world). Traditional
sources (direct investments, mergers and acquisitions) and alternative
channels (crowdinvesting, crowdfunding, P2B loans, and sources of
development institutions—grants, soft loans) are used complementary
(Development Centre, 2019, p. 19).
Competitors and at the same time partners of fintech companies are classical financial and credit institutions—banks, payment
systems, insurance companies, pension funds and non-financial organizations—carriers of huge client bases with a wide geographic coverage:
retailers, telecommunications operators, Internet corporations, smartphone manufacturers and car manufacturers. At the same time,
active interaction is being established between non-financial participants in the financial market. There are many examples. So, modern
car concerns have projects with fintech companies (Uber, PayCash,
FlightCar, etc.) manufacturers of payment acceptance systems for
parking/travel/refuelling, with developers of mobile payment services,
blockchain startups, with payment systems MasterCard, Visa. Based on
the development of the Internet of Things, mass production of consumer
electronics with built-in financial services begins to develop.
The emerging configuration of the community of financial market
entities not only reflects the growing competition between them, but also
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A. Dvoretskaya et al.
mutually enriches them. The financial industry is modernizing through
the introduction of innovative technologies supplied by large technology
companies. But at the same time, there is a tendency for bank clients to
leave for non-financial institutions. According to PWC data, more than
80% of banks in the world lose their income due to the development
of the functionality of fintech companies (Development Centre, 2019
p. 24).
Thus, the modern market is increasingly characterized by insufficient
marginality of traditional banking operations, the loss of the banks’
monopoly on payment and other services and the occupation of an ever
larger market niche by non-bank institutions and fintech companies.
At the same time, the development of the fintech market in the face
of increased risks associated with the digital economy format must have
a serious regulatory basis. It is created and maintained by the regulator of financial markets. However, the role of the central bank as a
regulatory financial institution is twofold. First, the central bank is a
direct regulator of the actions of supervised financial institutions in the
development of financial technologies. In modern theory, digital transformation regulation measures are called “analog complements” of the
digital economy. Secondly, it is the direct creator of the digital financial
infrastructure, initiating the most important fintech projects as an operating environment for the direct functioning of financial intermediaries.
This expansion of the central bank’s functionality in the digital economy
is due to the need to moderate the many times more complicated and
accelerating processes in cyberspace in the field of payments, settlements,
provision of other financial products and services, and to reduce the risk
of transactions. This allows us to talk about a serious transformation of
the role of the mega-regulator, the activation of its role as a key subject in
building a digital macro ecosystem. At the same time, the mega-regulator
directly shapes its factors such as technology, access to financing, and
regulation.
In domestic practice, the mega-regulator creates a special regulatory platform for testing innovative financial technologies, products
and services. Its goal is to promptly test hypotheses about the effectiveness of fintech and services, and analyse the associated risks and
threats. Piloting will take the form of either testing (without risks to the
The Role of Financial Intermediaries …
55
consumer) or a limited regulatory experiment conducted in stages under
the control of the regulator. The objects of approbation are learning technologies, biometrics, open interfaces, crowdfunding, cryptotechnologies,
robo-advising and initial coin offering (ICO). Thus, the mechanism for
managing the powers on corporate clients’ accounts in electronic form
has already been tested and received a legal basis.
As a rule, the regulator in the financial market is the initiator and
moderator of the most important fintech projects, which together constitute the financial infrastructure. Goal setting is about creating convenience not so much for market participants as for consumers of financial
services. The creation of a modern digital infrastructure is extremely
expensive, and it is beyond the power of individual banks, even the
largest ones. Therefore, it is logical that the central bank assumes the
infrastructure costs in order to provide players and consumers with equal
access to the opportunities of new technologies.
Thus, in the digital economy, the functions and role of financial intermediaries are rapidly changing. Financial institutions are in the lead,
building financial ecosystems in a competitive environment and at the
same time actively collaborating with non-bank financial institutions
and non-financial companies. Their activities are being revolutionized by
the influence of financial technologies and at the same time optimizing
the processes of consumption of financial products and services by the
ultimate beneficiaries.
Methodology
For a long period of time, there have been discussions in the scientific
literature about the role of financial intermediaries in the development
of the economy, including the digital economy. In particular, representatives of the institutional school, represented by T. Veblen (1984),
D. North (1997) and others, considered the influence of financial
intermediaries on the economy parasitic, insisting on state regulatory
intervention in economic processes (Nort, 1997; Veblen, 1984).
A large number of domestic and foreign authors are devoted to the
study of the problems of the development of the financial sector and
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A. Dvoretskaya et al.
its institutions at the present stage, but we are not interested in the
development of the financial sector as such, in its sovereign form, but
in its relationship and the strength of interaction with the real in terms
of the development of real innovations that act as the basis of digital
economy. Representing various kinds of innovations and innovations,
innovations reflect not only significant shifts in the structure of the
economy, contributing to the progressive development of the economy,
but also form the basis for the development of new forms of interaction between financial organizations and innovative enterprises. On this
score, the opinion of J. Schumpeter (1982) is known, who in his works
emphasized the signs of the dynamic development of society in a nature
of innovations (Shumpeter, 1982).
The channels of positive influence of the financial sector, which is
more deeply rooted in society, consist in the rejection of ineffective
business and innovation projects by banks, in the increase in the capitalization of successful issuers, and in the increase in liquidity and
profitability of their securities. It is impossible to deny the potential for
investment opportunities and accelerated growth based on expanding
the range of sources of financing of various types: direct (through
securities), indirect (through loans), symbiotic (derivatives, securitized
products, crowdfunding). The social impact of the financial sector is
also important, its contribution to the implementation of the concept
of “inclusive growth”, increasing the financial availability of products for
the population and business.
So, being the most important structural elements of the modern
economy, the real and financial sectors make up its base frame; form the
institutional matrix (architecture). Any structural and regulatory changes
and reforms in the financial sector in terms of supporting the innovation
sector will cause changes not only in the status, behaviour and policies
of financial institutions, but also directly affect the dynamics and structure of operations in the innovation sector and, further, multiplying,
in the economy in the whole. Thus, the aggregate national economy
will acquire a fundamentally different qualitative appearance than in the
absence of such reforms in one of the segments.
The Role of Financial Intermediaries …
57
But the degree of “enrichment” of the integral system largely depends
on the type of influence of the financial sector on the real innovation sector and on the prevalence of a particular model of the financial
sector…. In this regard, a scientific case that does not lose its relevance
remains the dispute about which financial system is more effective in
terms of its structure and impact on the economy—bank-centric or
market-centric. The division itself was proposed by Gerschenkron (1962,
1968) and Goldsmith (1969).
Many authors believe that due to financial globalization, the clear
division of countries into banking and market ones has lost its significance even much earlier, since the second half of the twentieth century.
Thus, mixed systems prevail in the modern world—and not only in
the cluster of developing countries. We subscribe to this opinion and
believe that a drift to the financial sector of a mixed instrumental
type is objectively inevitable, even in spite of recurring crises or lack
thereof. Modern finance is increasingly relying on hybrid capital raising
instruments, which means that financial market entities are becoming
complexly structured institutions without the former clear division into
banking and non-banking types.
In modern conditions, social and personal well-being and competitive positions of the national economy largely depend on the quality of
functioning of the innovation sector, growth rates and the availability of
monetary resources from the financial sector. Thus, the effective interaction of the innovative sector of the real economy with the financial sector
is becoming one of the topical cases for the development of modern
society.
Results
In order to confirm the hypothesis put forward about the positive influence of financial and credit organizations on the innovative sector of
the economy, within the framework of this scientific study, economic
and mathematical data modelling was carried out. The analysis of scientific research in the field of studying the problems of the relationship
between the financial and real sectors of the economy, using methods
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A. Dvoretskaya et al.
of economic and mathematical modelling, indicates the presence of a
statistically significant correlation between indicators of the development
of the financial sector and the rate of economic growth (Ahmed, 1998;
Amable, 2001; Baier, 2004; Bekaert & Does, 2005; Levine, 2000, 2002).
A feature of our proposed economic and mathematical model is that
an attempt was made to determine the influence of the assets of financial and credit institutions on the growth of the innovation sector. For
empirical data analysis, we used econometric modelling methods, in
particular, correlation-regression analysis with the construction of paired
and multiple linear regression models. Computer application Stata 13
was used as a modelling tool, graphical illustration of dependencies was
carried out in Excel.
Within the framework of modelling the selected indicators of dependence (the influence of financial assets on the growth of the innovation
sector), we attempted to determine the degree of the greatest influence of various sources of funding for innovation on the growth of
the innovation sector. The sources of statistical data for this group of
dependence were statistical indicators from the World Bank database
(www.worldbank.data.org), the National Bank of the Republic of Kazakhstan (www.nationalbank.kz) and the Committee on Statistics of the
Ministry of National Economy of the Republic of Kazakhstan (www.
economy.gov.kzeconomy.gov.kz) for the period from 1995 to 2018, the
choice of which was justified, the data were preliminarily systematized
and grouped into groups.
In particular, the results of the analysis of the first group of factors
(“investments”) showed that there is an inverse relationship between the
export of high-tech goods in Kazakhstan and the cost of research and
development (R&D). The result obtained confirms the thesis that the
quantitative growth of indicators of innovative activity, including the
growth of the indicator of expenditures on R&D, does not give a guaranteed impact on the quality of work of the subjects of the innovation
sector in the Republic of Kazakhstan and, above all, on the results of
their activities. Moreover, investment in fixed assets and foreign direct
investment also do not show a positive effect on the resulting trait. This
result is not accidental, it confirms the choice of the so-called catch-up
development model by Kazakhstani enterprises of the industrial sector,
The Role of Financial Intermediaries …
59
according to which the owners of enterprises (both domestic and foreign
investors) do not invest resources in innovative developments, but buy
ready-made high-tech equipment. Assessment of the influence of factors
of the second group (“bank loans”) showed the strongest correlation with
the export of high-tech goods indicators of long-term bank lending to
legal entities. At the same time, short-term loans from second-tier banks
do not have a positive effect on the development of innovations (Fig. 1).
This is due to the fact that the terms of short-term lending and the
terms of its provision do not coincide with the duration of the full
innovation cycle.
Taking into account the fact that the indicators of domestic lending
to the private sector and long-term lending to legal entities are interconnected very closely.
All regression coefficients are statistically significant. At the same time,
with an increase in the share of domestic loans to the private sector in
GDP by 1%, the share of exports of high-tech goods in industrial exports
will grow by 0.49%. Similarly, an increase in the share of long-term bank
loans to legal entities in GDP by 1% will contribute to an increase in the
share of exports by 1.8%.
Within the framework of assessing the influence of factors of the
third group (“assets”) on the indicator of the effectiveness of innovation
(export of high-tech goods in the total volume of industrial exports) in
the Republic of Kazakhstan, the assets of insurance companies and, to a
Fig. 1 Diagram of the dependence of the results of innovative activity on the
indicators of bank lending (for legal entities), including in the context of lending
terms in the Republic of Kazakhstan. Note Compiled by the authors based on
simulation results
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A. Dvoretskaya et al.
Fig. 2 Diagram of the dependence of the results of innovation activity on
various types of financial assets in the Republic of Kazakhstan. Note Compiled
by the author based on the results of modelling
lesser extent, pension assets have an impact on the resulting feature. Total
banking assets have a weak effect on the result (Fig. 2).
With an increase in the share of banking assets in GDP by 1%, one
can expect an increase in the share of exports of high-tech goods in industrial exports by 0.33%. In turn, with an increase in the share of pension
assets by 1%, the share of exports of high-tech goods will increase by
1.89%. The increase in the share of assets of insurance companies will
contribute to the growth of exports of high-tech goods by 29.4% of
industrial exports.
Thus, despite the still insufficient role of the subjects of the insurance
sector in the development of the domestic economy (no more than 1 trillion tenge or 1.8% of GDP), the subjects of the insurance sector, due to
the concentration of long-term resources, have great potential for interaction with the subjects of the innovation sector. At the same time, pension
assets play an even greater role in the development of innovations here;
their share in the structure of financing the venture capital business has
reached 25%, outweighing the share of investments of the banking sector
in the development of innovation. Undoubtedly, the similar nature of the
formation of insurance and pension resources, as well as successful world
practice, indicates the prospects for their use.
The study of the degree of influence of the factors of the fourth group
(“stock market”), characterizing the development trends of the stock
market in Kazakhstan, showed that these indicators do not have a significant impact on the indicator “export of high-tech goods”. The paired
The Role of Financial Intermediaries …
61
correlation coefficients between these indicators are, respectively, equal.
The same result is obtained by a regression analysis of the dependence of
innovation on the stock market indicators.
Thus, the obtained results indicate the underutilization of the potential of the financial sector and its subjects in the development of real
innovations and the economy as a whole.
Conclusions/Recommendations
The general volatility in the financial and commodity markets and the
instability of macroeconomic indicators today exacerbate the problem
of resource availability of the industrial and innovative development of
Kazakhstan due to the general decrease in the confidence of potential
investors of long-term resources in financial intermediaries within the
country, which leads to an increase in the risk and the flow of free
funds mainly to the market real estate, currency, investments in other
real assets and in the accounts of foreign financial structures. Against
the background of the presence in the country of very serious savings
from the extraction of minerals, significant accumulations of insurance
and pension resources of a long-term nature, the growth of natural
resources, the problem of free flow of resources to priority sectors of
the real sector and to the development of innovations remains due to
the high concentration of political, country, financial, economic and
industry risks. In turn, the problem of high risks requires an appropriate
restrictive policy of government regulation, which further exacerbates the
situation (deployment of an asymmetric spiral). In addition, there is a
problem of discrepancy between the duration of the innovation process
and the timing of the placement of temporarily free resources by financial intermediaries. As the practice of innovatively developed countries
(Sweden, Denmark and the Netherlands) shows, the average duration of
the innovation cycle reaches 7–10 years, while the term of placing on
deposits in domestic banking practice ranges till a maximum of 5 years.
The similar importance of regulatory issues for the course and results
of the process of interaction between the subjects of the two sectors
necessitates adjusting the current regulatory practice and moving from
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A. Dvoretskaya et al.
one-sided strict restrictive measures designed for a short-term effect
to balanced and preventive regulation designed to achieve long-term
multiplier effects. We believe that such a difficult task in the modern
conditions of the development of the national economy is insoluble
without the proper institutional infrastructure and environment that
would support the trajectory of intersectoral interaction in the vector
necessary for the economy.
In the framework of improving institutional reforms, the models of
state regulation developed in the world can be used. Judging by the
increasing role of the state in economic processes, the Anglo-Saxon
model of regulation is used in Kazakhstan, the basis of which is the
influence of the state on the economy through the financial sector, in
particular banks (this model is widely used in Canada and the UK). The
essence of this model is that the primary assistance of the state is provided
to financial institutions, in the hope that these resources will be directed
to the development of the economy, including innovation. However, the
choice of this model, in our opinion, aggravates the asymmetry in the
development of sectors, since the funds allocated by the state are stuck
in the financial sector due to risk restrictions. The question arises “How
to break this vicious circle?” The answer to this question is given by
the second model of regulation—continental (used mainly in European
countries), in which the state directly supports the subjects of the real and
innovative sectors. If this model is supplemented with a balanced policy
of financial regulation, this will allow solving several unresolved issues
at once: (1) lowering dependency sentiments in the financial sector; (2)
increased competition among financial intermediaries of various types;
(3) activation of the presence of financial intermediaries in priority
sectors of the economy, which are directly supported by the state, which
will reduce industry risks; (4) direct access of enterprises to resources,
which increases their solvency; (5) more accelerated development of the
digital economy, etc.
The Role of Financial Intermediaries …
63
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License: Creative Commons Attribution CC BY 3.0 IGO.
Internationalization of Financial Markets:
World Financial Centres
Vitalii Klevtcov and Artem Zamlelyy
Introduction
Financial markets and the development of financial and credit institutions are inextricably linked to the emergence of technological innovations (He et al., 2017). The change of technological innovations is
continually accelerating and catalysing financial market processes and
products. Simultaneously, the development of new technologies is slower
and not continuous, which negates innovation (Yermack, 2017). This
hypothesis has not yet been properly verified. Thus, the relationship
V. Klevtcov (B) · A. Zamlelyy
Moscow State Institute of International Relations (MGIMO University),
Moscow, Russia
e-mail: vklevcov@inbox.ru
V. Klevtcov
Financial University under the Government of the Russian Federation,
Moscow, Russia
© The Author(s), under exclusive license to Springer Nature
Switzerland AG 2021
G. Panova (ed.), Financial Markets Evolution, Palgrave Macmillan
Studies in Banking and Financial Institutions,
https://doi.org/10.1007/978-3-030-71337-9_5
65
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V. Klevtcov and A. Zamlelyy
between technological development speed and the population’s quality
of life is an object of scientific interest for researchers of different generations and scientific schools. This interest is only growing, especially in
the development of financial markets and financial and credit institutions
that produce relevant financial products. Firstly, this is due to the diffusion of financial relations in almost all spheres of society and human life,
and, secondly, to the increasing penetration of technological innovations
into the financial market.
Given the above, it seems relevant to study the internationalization of
financial markets and global financial centers.
Methodology
The research aims to identify current trends and processes taking place,
under globalization and digitalization, in the internationalization of
financial markets and the development of global financial centers.
The research’s methodological basis is based on theoretical and empirical methods: theoretical analysis, synthesis, analogy, scientific generalization, survey and the results of diagnosing the features of the internationalization of financial markets and the development of global financial
centers.
The research includes a theoretical review of economic, regulatory
and scientific materials on developing the financial market and global
financial centers, before conducting an empirical study, systematizing the
results and developing recommendations.
Internationalization of Financial Markets …
67
Results
Financial Technologies in the Context
of the Internationalization of Financial Markets
and the Development of Global Financial Centers
The competitiveness of a modern company is ensured by the intensive
use of the information space, making it possible to make strategic decisions under the influence of an exogenous environment (Fohlin, 2014).
Financial relations are part of the government’s policy of regulating financial markets, so the digital economy’s financial target has specific features
(Masciandaro and Quintyn, 2016).
Given the objective lag of legal norms and economic relations from
modern digital technologies, elements may appear that do not correspond to the current economic format in financial markets’ digitalization
conditions. Financial technologies are an industry that consists of companies (both technology startups and large companies that improve and
optimize the financial services provided) that use technology and innovation to compete with traditional financial organizations such as banks
and intermediaries in the financial services market (Ammous, 2018).
Despite many financial and technical solutions, internationalization
has provided a subjective split in financial markets. There is a growing
confrontation between traditional financial and credit institutions and
financial market participants with lower costs when selling financial
products and financial services.
Global financial centers (GFCs) are represented by territories of significant capital attraction, the concentration of institutions that provide
a wide range of financial products and financial services, and the
infrastructure potential and legislative framework that ensures economic
entities can develop. Social concerns, communication, logistics and
innovation infrastructure play an essential role in this process. GFCs
themselves determine the development of national economic systems and
financial markets, ensuring the latter’s internationalization.
Based on a theoretical analysis and empirical research, this essay
identifies the opportunities and limitations facing GFCs in their home
countries. Opportunities are associated with several pathways: ensuring
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V. Klevtcov and A. Zamlelyy
the internationalization of the entire economic system, not just financial markets (especially banks that are actively involved in capital flows);
reducing unemployment by increasing employment; replenishing budget
revenues by increasing tax revenues; and increasing the efficiency of
capital redistribution. Restrictions are determined by difficulties in
implementing national monetary regulation and risks of capital outflow
from the country. We believe that a GFC plays the role of a unique
financial haven that can be used to build up capital, and then its
owners—under the influence of the phenomenon of home bias—can
send it to other countries for subsequent investment or consumption.
In this regard, reformatting the business models of financial and credit
organizations and measuring the depth of the digitalization of financial
markets becomes relevant. Russia does not have a good statistical base
to develop an adequate comprehensive indicator of the “depth of digitalization”, but it is possible to note its formation directions. Research
projections can include:
● macroeconomic characteristics (the amount of cash used in GDP);
● the attractiveness of investments into digital finance (the volume of
investment in new financial technologies);
● infrastructure (the market share of internet and/or mobile banks; the
share of banks that use remote identification);
● customer loyalty (the share of banking service users who have access
to the internet and/or mobile banking; structural characteristics of
operations with terminals);
● the intensity of consumption of digital finance opportunities (the
share of loan applications sent via internet banking).
Internationalization as a Condition for the Formation
of an Alternative Financial Market
The concept of “alternative finance” has a significant degree of ambiguity,
and it is possible to distinguish instrumental, institutional and functional
approaches in its interpretation.
Internationalization of Financial Markets …
69
The instrumental approach characterizes alternative finance as objects
of alternative investments widely used in the risk diversification of investment portfolios: venture capital investments, leveraged buyouts (LBO) or
investments in raw materials and real estate. Any form of investment in
closed companies and shares of small-cap companies (microcap) can be
considered alternative investments (Arestis et al., 2015).
The alternative financial market provides additional opportunities for
corporate finance. In the institutional approach, the term “alternative
finance” refers to the online market for alternative financial services, the
perimeter of which is limited to the crowdfunding institute’s range of
services. The functional approach allows us to define alternative finance
as a new model of the financial system that implements functions atypical
for traditional systems (e.g. environmental and social functions).
We consider crowdfunding as the process of attracting and providing
funds based on online platforms. These platforms allow the full potential of internationalization of financial markets, as they adapt financial
products and financial services for potential use almost anywhere.
Diversification of Financial Markets Under
the Influence of Internationalization: Russian
and Global Experiences
The internationalization of financial markets ensures the diversification
of financial markets. This can be identified in the emergence of new
financial products and various digitalization forms of financial and credit
organizations (Haber & Stornetta, 1991). The latter have their own
unique set of characteristics: the product market in which they operate,
the legal environment, consumers, the structure of the organizations
themselves, etc.; thus, each has its digitalization approach. There are
three such approaches:
1. Native digitalization: an approach that involves implementing financial activities based as much as possible on digital financial technologies. This does not mean that the organization excludes classical
production methods and the sale of financial products, but digital
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V. Klevtcov and A. Zamlelyy
ones prevail. Examples include: Tinkoff Bank, Yandex.Money and
Modulbank in Russia, Nubank in Brazil and Starling Bank in the
UK.
2. Satellite digitalization: a financial and credit organization is switching
to new technologies by creating a subsidiary (or brand) that is
positioned as based on digital technologies, while the parent organization is not subject to significant changes. Examples include:
Tochka Bank (a subsidiary of OTKRITIE Bank, Russia), ImaginBank Bank (created by Spanish CaixaBank), ActivoBank (parent
Bank—Millennium BCP, Portugal).
3. Intermediary digitalization: the provision of digital financial services
by an organization to other organizations. The company aggregates
and technologically improves the services of other organizations. This
allows it to carry out fewer expenses (including labour and money) at
the beginning of its activity. FINTECH startups use this model, such
as TalkBank in Russia, WeChat in China and Simple in the USA.
The introduction of modern information and communication technologies has been a channel for internationalization, proven a driver
for the development of financial product suppliers, created new financial services and modernized classic ones, changed the consumption of
these products, and has had a direct impact on the financial market
regulator(s) (Chow & Fung, 2013). This regards the technological
improvement of the processes through which the regulator’s traditional
functions are implemented and a new function that it begins to perform
in the financial sector’s rapid technological development. This consists
of the regulator’s direct participation in the production and consumption of new financial products, as well as the improvement (including
technological and organizational) of their circulation.
Internationalization of Financial Markets …
71
Banking Business in the Context
of the Internationalization of Financial Markets
and the Development of Global Financial Centers
A field study was conducted by the authors in the period December
2019–February 2020. 255 respondents from different age groups were
interviewed, with of 85 people representing each group. The three groups
were users of banking services, divided by generation: Generation X
(born in 1963–1986); Generation Y (born in 1986–2003); and Generation Z (born since 2003); this made it possible to identify their behaviour
in the bank. For people of Generation X, communication with the
bank played a key part; banks may not be their choice of a financialcredit institution due to a wide range of banking products and financial
services. Generation Y are characterized by the transition to digital technologies, banking products across a wide range, and the need for unique
characteristics of the financial services sold. Generation Z, because of
their mobility as a way of life, is focused on remote communication
with the bank, with the choice of banking products being based on
independently set parameters.
The results of the study allow us to conclude that in the conditions
of internationalization of financial markets—which is intensifying under
the influence of digitalization of the economy, demographic shifts, the
business models of financial and credit organizations—must adapt to
new requirements (a corresponding change in the bank’s behaviour):
● individualized approached (customer orientation when forming the
range of financial products and financial services)
● speed of service (change and simplification of processes in all channels
of the bank)
● convenience and simplicity of the service (increased attention to
loyalty and usability issues).
The internationalization of financial markets and global financial
centers’ development have accelerated changing concepts: first from
Bank 2.0 to Bank 3.0, and then to Bank 4.0.:
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V. Klevtcov and A. Zamlelyy
● in the content of banking services—from performing banking operations with an ATM (Bank 2.0.), to eliminating the need for personal
visits to bank offices to use banking products and services (Bank
3.0.), to increasing the bank’s role characteristics for the client (bank
as a financial consultant (assistant) based on artificial intelligence
technologies) (Bank 4.0.);
● in the technological platforms used—from the development of the
ATM network and adoption of the internet (Bank 2.0.), to the use
of smartphones, cloud technologies, Big Data, and the Internet of
Things (Bank 3.0.), to artificial intelligence and augmented reality
(Bank 4.0.).
Global financial centers (GFCs) are represented by territories of significant capital attraction, the concentration of institutions that provide
a wide range of financial products and financial services, and the
infrastructure potential and legislative framework that ensures economic
entities’ development. Social, communication, logistics and innovation
infrastructure play an essential role in this process. GFCs themselves
determine the development of national economic systems and financial
markets, ensuring the latter’s internationalization.
Based on theoretical analysis and empirical research results into
GFC’s potentials, both future opportunities and limitations (related to
the body’s home country) are identified. Opportunities are related to
ensuring the internationalization of the entire economic system, not just
financial markets; reducing unemployment by increasing employment;
replenishing budget revenues by increasing tax revenues; and increasing
capital redistribution efficiency. Limitations are determined by difficulties in implementing national monetary regulation and risks of capital
outflow from the country. The reasons for capital outflow in the case of
an GFC are a shortage or lack of tools for converting savings into investments, different levels of profit in the economy, or different interest rate
dynamics. In this aspect, we believe that the GFC plays the role of a
particular financial haven that allows increasing capital, and its formed
amount of capital owners under the influence of the phenomenon of
home bias (home bias) can be sent to other countries for subsequent
investment or consumption.
Internationalization of Financial Markets …
73
Conclusions/Recommendations
It is concluded that, in the context of the internationalization of financial markets and the development of global financial centers, a timely
adoption of legal norms will change the established order of monetary
relations, transform the philosophy of financial relations, legally consolidate the processes of digitalization of financial markets and legitimize
financial products and financial services.
We found that there is no unique approach to creating an important
financial center. To education and the functioning of the IFC, a set of
financial and non-financial factors are in operation: these include the
level of integration into the international financial market, the capacity of
the domestic financial market, its sector development, the sustainability
and transparency of the political and tax systems, investment climate,
whichever legal framework is required, legal fixation of the rights of
investors, the treatment of financial instruments, and financial services
and others.
Based on the set of proposed metrics, the depth of digitalization within
the Russian financial market gives us reason to highlight its insignificant
pace. The mega-regulator, based on the Bank of Russia, focused on the
legislative registration of digital financial and credit organizations’ status,
digital financial instruments and creating a technological platform for
bank cooperation. It also seems appropriate to pay attention to the main
obstacles to the development of digitalization of the financial market:
● the volume characteristics of cash circulation;
● low investment activity in the field of financial technologies;
● the financial literacy of economic entities that are not only potentially able to consume financial products and financial services but also
produce them (companies in the form of issuing primary securities).
The formation and development of an alternative financial market—
intensified by the internationalization of financial markets and the
formation and functioning of global financial centers—raise many debatable questions about the independent significance of crowdfunding
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V. Klevtcov and A. Zamlelyy
institutions, their impact on the financial landscape and ways of effective regulation (Bruno et al., 2012). Schumpeter’s hypothesis about the
significant role of financial drivers of innovative development is relevant
in the context of the formation of crowdfunding institutions. Financial
and technological convergence, which contributes to the implementation of alternative financial thinking, distorts the traditional structure of
financial markets and creates prerequisites for the expansion of alternative
financial mechanisms, blurring the boundaries of economic territories.
This is due, among other things, to the development of the internationalization channel—financial technologies and the weak flexibility of
financial and credit organizations.
Technological innovations as a channel for intensifying financial
markets’ internationalization have predetermined its change in infrastructure, participants and products (Philippon, 2016).
In order to compete with non-banking organizations that are actively
forming an alternative financial market, the authors recommend that
banks, in the context of the internationalization of financial markets,
ensure mutual integration of communication channels (bank branches,
terminals/ATMs, call centres, internet banking, mobile banking) into
a single system of continuous communication with the client. Omni
Connect will help to harmonize the disparate channels, ensuring their
synergy, not competition.
For various communication channels between the bank and the client,
a specific set of operations is preferred. For bank branches, these include:
product consultations; balance checking; cash withdrawals/deposits; loan
payments; opening accounts and deposits. Operations for internet banks
or mobile banks include: checking the account balance/card; bank
account statement; intra-bank and interbank transfers; viewing transaction history; transfer from the account/card; using templates and regular
payments, pay cell phone, utilities, etc.; searches for the nearest branch.
This ranking is the loading of communication channels between the
bank, and the client allows them to rebuild the bank’s business models
and free up resources for their more effective use in other communication
channels.
Internationalization of Financial Markets …
75
References
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Quarterly Review of Economics and Finance, 70, 38–51.
Arestis, P., Chortareas, G., & Magkoni, G. (2015). The financial development
and growth nexus: A meta-analysis. Journal of Economic Surveys, 29 (3), 549–
565.
Bruno, G., De Bonis, R., & Silvestrini, A. (2012). Do financial systems
converge? New evidence from financial assets in OECD countries. Journal
of Comparative Economics, 40 (1), 141–155.
Chow, W. W., & Fung, M. K. (2013). Financial development and growth: A
clustering and causality analysis. Journal of International Trade & Economic
Development, 22(3), 430–453.
Fohlin, C. (2014). Financial Systems. In C. Diebolt & M. Haupert (Eds.),
Handbook of cliometrics. Cham: Springer.
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Journal of Cryptology, 3(2), 99–111.
He, D., Leskow, R., Haksar, V., Mancini Griffoli, T., Jenkinson, N., Kashima,
M. et al. (2017). Fintech and financial services: Initial considerations (IMF
Staff Discussion Note, No. 17/05).
Masciandaro, D., & Quintyn, M. (2016). The governance of financial supervision: Recent developments. Journal of Economic Surveys, 30 (5), 982–1006.
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22476).
Yermack, D. (2017). Corporate governance and blockchains. Review of Finance,
21(1), 7–31.
New Challenges for Financial Market
Infrastructure Risk Management Systems
Dmitry Panov
Introduction
The globalization of financial markets and market integration—along
with market volatility, developments in IT and modern communications, changes in the operations of central banks and other regulators
(including a transition to consolidated supervision over financial institutions in some countries), and the aim of financial brokers to minimize
transactional costs—have led to increased risks and, as a result, to an
increased complexity of tools, the emergence of new financial market
infrastructure institutions, and more complex financial market structures.
The genesis of financial market development is evidence to the notion
that they have become a risk arena. Financial brokers expressed a rather
natural reaction to the ongoing changes: their answer to market volatility
D. Panov (B)
Moscow State Institute of International Relations (MGIMO University),
Moscow Exchange Group, Moscow, Russia
© The Author(s), under exclusive license to Springer Nature
Switzerland AG 2021
G. Panova (ed.), Financial Markets Evolution, Palgrave Macmillan
Studies in Banking and Financial Institutions,
https://doi.org/10.1007/978-3-030-71337-9_6
77
78
D. Panov
was financial innovations and infrastructure development. Banking regulation and supervision institutions were not ready for such a development
rate at the start of the twenty-first century. Rules of accounting, risk
measurement methodology or risk assessment systems had not yet been
developed by the time the need for them arose.
In the recent past, financial instruments such as derivatives allowed
professional financial market players to hedge risky market positions due
to the sole fact that derivatives were not registered on the bank’s account
in full and, as such, required minimal strain on a bank’s internal funds
for any relevant transactions. This is why many banks utilized derivatives
exclusively for hedging by simply making use of leverage in order to cover
risky positions.
However, the situation has changed radically as of late. In the context
of the economy’s digital transformation, banks and other financial institutions received new opportunities to practice financial brokering on the
basis of technological innovations; clients have become more demanding,
laying down newer and higher requirements; and regulators are facing the
need to change their ways in order to ensure adequate control and supervision over financial brokers in the context of growing risks, including
those caused by the emergence of new business models among financial
institutions due to IT development.
In such conditions since the global financial crisis of 2008–2009,
financial market players have directed their attention to such infrastructural organizations as central counterparties, settlement agents or clearing
houses that help to succeed in crisis and volatility management. At the
current stage of financial market development, with the “too big to go
bankrupt” maxim for the market players no longer undisputable and
systemic risks management issues having gone to the forefront, it is
imperative that we analyze organizations that are directly aiding markets
in meeting new challenges.
New Challenges for Financial Market …
79
Methodology
The studies of Russian and foreign researchers, experts, international
organizations, central banks and individual financial organizations—
touching upon the issues of financial market infrastructure, its particular
institutions and the impact of regulation on economic development to
a greater or smaller extent—served as the methodological basis for the
study.
The study utilized general methods of research: abstraction, going
from abstract to specific, typology, induction, deduction, analysis,
synthesis and community of the historical and the logical.
Results
Development and Regulation of National Market
Financial Infrastructure. Russian Case
Both globally and in Russia, financial infrastructure organizations traditionally include exchange markets, clearing companies, cash settlement
centres, depositaries, payment systems, etc. (Table 1).
In recent times, financial market players have been undergoing consolidation in every market segment: banking, investment companies, asset
management companies of mutual investment funds, insurance companies, non-state retirement funds, microfinance organizations, consumer
loan cooperatives, pawnshops, etc. In many ways this is due to:
a. tightened control over market players and financial market regulation
coming from, above all, the Bank of Russia. This results in the growth
of transaction expenses for meeting all of the statutory requirements
and limitations. This measure is aimed at elevating financial market
players’ reliability rates, protecting the rights and interests of financial
services’ consumers, and at identifying and expelling unconscientious
players from the market;
b. tight competition among market players;
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D. Panov
Table 1 Major Russian financial market players in 2014–2020 (by the start of
the year)
Financial market
player category
Brokers
Dealers
Trustees
Investment
advisers
Depositaries
Registrars
Asset
management
companies for
mutual
investment
funds
Non-state
pension funds
Microfinance
organizations
Consumer loan
cooperatives
Agricultural
consumer loan
cooperatives
Pawnshops
Housing savings
cooperatives
Credit record
bureaus
Debt collection
agencies
Specialized
depositaries
Insurance
companies and
brokers
Loan
organizations
Registered stock
exchange
investors
(individuals and
corporations)
2014
2015
2016
2017
2018
2020
885
888
783
–
803
811
708
–
616
633
520
–
436
469
328
–
380
420
272
–
290
319
202
69
616
37
402
573
39
395
492
39
371
389
35
330
347
35
303
276
32
269
120
120
101
71
66
47
3,865
3,992
3,675
2,497
2,216
1,774
3,288
3,226
3,462
2,183
1,844
1,525
1,617
1,661
1,714
1,182
927
673
–
69
–
66
–
62
–
56
4,787
45
3,599
50
25
26
21
16
17
11
–
–
–
–
177
294
44
38
39
39
31
26
N/d
566
478
358
308
255
838
820
706
598
561
439
874,443 983,968 1,046,049 1,160,914 1,373,463 3,933,152
(continued)
New Challenges for Financial Market …
81
Table 1 (continued)
Financial market
player category
Loan rating
agencies and
their branch
offices
2014
2015
2016
2017
2018
2020
9
9
9
2
5
7
Source Made by the author based on data provided by “DECART” law
firm. https://idekart.ru/articles/uchastniki-finansovogo-i-mikrofinansovogo-rynkav-2020-chast-2
c. cost optimization for sustaining individual market players acting as
part of large financial and manufacturing holdings and state governance, ensuring supervision and regulation of the financial market;
d. international sanctions of the USA and other countries imposed on
Russia, leading to a decline in GDP, which, in turn, leads to erosion
of purchasing power and a decline in the population’s living standard,
as well as the value of the financial market shrinking and reducing;
e. the economic crisis caused by the coronavirus pandemic.
Under the influence of the aforementioned factors, the return rates for
financial market businesses go down, which forces many to consolidate
or leave the market either by themselves or under pressure from the Bank
of Russia as a result of the supervisory measures taken by it.
On 21.12.2018 the Federal Act of 20.12.2017 №397-FA “Amending
the ‘Securities market’” and Article 3 of the “Self-regulated organizations on the financial market Act” entered into force, introducing a
new type of trade on the securities market performed by investment
advisers: investment consulting. Investment consulting is the provision
of consulting services relative to securities, transactions therewith, and/or
entering into derivative contracts by means of providing individual
investment advice. Investment advisers may only be juridical persons
established in accordance with the laws of the Russian Federation, or
a sole proprietor acting as a member of a self-regulated organization
(SRO) on the financial market consolidating investment advisers, which
is included on the Uniform Investment Advisers Register overseen by
the Bank of Russia. There are currently two investment adviser SRO
active (NAUFOR and NFA). The investment consulting market formed
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D. Panov
over 2018–2019. The Bank of Russia has already included 69 investment advisers on the register with a big proportion of them already
active on the financial market prior to inclusion (professional market
players, asset management companies for mutual investment funds, loan
organization).
In recent years, an upward trend in the number of both registered
and active investors on the stock exchange of the main trade platform
in Russia (Moscow Exchange Market Plc. (MOEX)) has been observed,
which proves that there is demand among investors for stock exchange
instruments. This is mainly the result of two factors at play: (1) in
2015 new legislation entered into force pertaining to concessions in individual investment accounts taxation; according to the Moscow Exchange
Market, as of 01.10.2019, the number of registered individual investment accounts came up to 1.17 million, considering that only 598
thousand were in place by the end of 2018 and only 302 thousand by
the end of 2017; (2) the Bank of Russia’s gradual interest rate cut to
4.25% (starting from 27.07.2020) leads to commercial banks cutting
their savings and loan interest rates at the same time. As a result, the
population’s interests shift from bank savings to alternative investment
tools with higher profit margins.
A consistent trend may be observed in the sense that the number
of microfinance organizations is decreasing due to tighter regulatory
and supervisory measures employed by the Bank of Russia in the light
of frequent individual loan debtor rights and interests violations upon
overdue debt recovery.
With the entry into force on 01.01.2020 of the Federal Act of
02.08.2019 №259-FA “On attracting investments with the use of investment platforms and on amending separate legislative acts of the Russian
Federation” the financial market saw the rise of a new player—investment platform providers (so-called crowdfunding platforms). The act
contains the definition of an investment platform: an informational
system on the “Internet” information and communications network
used for making investment contracts with the help of information
technologies and technical devices, access to which is provided by the
investment platform provider. The Bank of Russia oversees the activities
of investment platform providers.
New Challenges for Financial Market …
83
In accordance with the Russian laws currently in force, financial
brokers are defined as follows.
● Listing authority (exchange market): a person providing onexchange trading services on the commodities and/or financial markets
acting under an exchange market license or a trade system licence.
On-exchange trading is commenced regularly in compliance with the
set regulations providing for listing procedures for the purposes of
entering into contracts of sale of goods, securities, foreign currency,
repo contracts and derivative contracts.
Current financial markets provide players with an opportunity
to conclude both bilateral trade contracts and to utilize different
exchange markets and OTC trade systems.
Exchange markets see the conclusion of contracts with relatively
standard instruments with a large number of parties which enables
their market value to be efficiently determined.
One of the exchange instruments currently on the rise is exchangetraded funds (ETFs or exchange mutual investment funds) which
basically allows investment portfolios to exchange value, each of which
may possess its own market value or may be even exchanged separately.
Transactions, made either independently or with the help of
exchange infrastructure, proceed right to the execution stage, the
responsibility for which is now born by the clearing infrastructure—
clearing houses, central counterparties, depositaries and settlement
organizations. The latter are usually banks and non-bank lending
institutions.
OTC trade systems are generally used for making transactions
with over-the-counter liquidity instruments (currency, bonds) or for
making transactions with assets without influencing market value
(dark pools).
Non-standard instruments customized for the needs of an individual client are often used by market players directly between each
other, which, in particular, requires each and every one of them to
exert additional effort to assess and manage the potential risks.
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D. Panov
● Depositary: a professional securities market player listed as a depositary, i.e. providing safekeeping services of security certificates and/or
recording the interests in securities and transfers thereof. Depositaries
providing settlement services for transactions made during tender
procedures overseen by listing authorities (subject to agreements with
the aforementioned listing authorities and/or with clearing organizations providing clearing services for such transactions) are called
clearing depositaries.
The central depositary is another important figure in the financial
infrastructure: a clearing institution in the securities market infrastructure traditionally employed to dematerialize and immobilize securities
on western markets, also playing the role of a securities clearing centre.
Central does not mean “the only one” within a particular jurisdiction.
Central usually means a central clearing institution in a particular
national or international securities market segment. The need for
instituting a central depositary arises due to an increased number of
tenders and a practical necessity of transitioning to a non-certificated
recording system for interests in securities. The appearance of the
central depositary leads to a rise in liquidity and a reduction of costs
for clearing services thanks to transactions being made by all market
players within a single post-trading platform.
In Russia the central depositary is responsible for the following:
– Setting up depositary accounts for securities rightsholders, securities
trustees and nominee holder accounts for depositaries;
– Setting up depositary accounts for clearing services;
– The safekeeping of issued securities certificates coupled with mandatory centralized safekeeping.
It may also provide additional services such as clearing, information
disclosure to issuers and other persons, assigning identification codes
to securities, or transaction settlement.
● Registrar: register holder acting on behalf of the issuer or a person
liable on the securities. A registrar may be a professional securities
New Challenges for Financial Market …
85
market player acting under license to keep a ledger or, subject to statutory provisions, other professional market players. Shareholder register
keeping may be performed only by juridical persons. A person in
charge of keeping the register is called a register holder. The registrar
may not enter into transactions with securities contained in its register.
● Payment system: a consortium of organizations interacting in
compliance with the payment system guidelines for the purpose
of conducting monetary transfers; the system includes the payment
system provider, the payment infrastructure services provider and
payment system members, out of whom at least three organizations
are monetary transfer service providers.
● Clearing organization: a juridical person that may perform clearing,
i.e. provide clearing services in compliance with the clearing guidelines set forth by the clearing organization registered according to the
procedure set out by the Bank of Russia under the appropriate licence.
● Central counterparty: a juridical person acting as one of the parties
to all the contracts obligations under which are subject to inclusion
into the clearing pool.
Currently, the centre of attention is clearing organizations and central
counterparties.
The ever-growing interest in central counterparties arose after the
global financial and economic crisis of 2008–2009 as they managed to
successfully survive in rather unwelcoming conditions that have made
an impact of a large number of financial institutions: asset management
banks, insurance companies. Clearing houses have lived through a harsh
period; however, no severe default occurred in this segment. Moreover,
they greatly contributed to settling one of the biggest defaults (e.g. the
Lehmann Brothers case, one of the largest investment banks in the world
at the time).
Centralized clearing involving the Central counterparty is becoming
more and more popular thanks, in no small part, to government regulators providing incentives to conduct such transactions, having assessed
the efficiency of the central counterparty in terms of minimizing systemic
risks in the economy.
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D. Panov
Market trade involving the central counterparty allows for more efficient price-making thanks to eliminating (or, at the very least, levelling
out) loan risk premiums between players that would otherwise be on
equal footing on the market.
The central counterparty, acting as the vendor for all the purchasers
out there on the market and as a purchaser for all the vendors, replaces
every player’s loan risk for with its own. At the same time, the central
counterparty provides default management services: should one of the
players fail to perform their duties, the central counterparty provides
settlement for the party acting in good faith on a mandatory basis. The
constant provision of such services requires that the central counterparty
structures its own unique risk management systems.
As a result, the financial market players receive a number of advantages: the guarantee that each player acting in good faith will receive
what they are owed; reducing the risk management burden for players;
increased and efficient use of financial assets and transactional costs
reduction (thanks to more efficient price-making).
However, the coin has two sides: there is also a mandatory requirement
for every party involved with the central counterparty (broker/party to a
contract; risk-taker/ risk management; clearing and settlement; securing
the stability of the financial market) to provide collateral (group and
individual). This leads to an additional burden on liquidity and costs to
support the required level of transaction securitization, which allows the
use of such infrastructure only on relatively developed financial markets.
It is important to underline the possibility of combining the various
infrastructures of the financial market. For instance, the roles of listing
authorities or depositaries are often carried out in combination with
that of a clearing organization. With that, one has to keep in mind
that each type of organization has its own set of risks and efficient
methods of managing such risks. In combining the roles of different
financial brokers, focus should be given to the special risks inherent in
such organization; one also has to ensure that no conflict of interests
exists within the organization in the light of combining different roles.
The issue of sufficient resources and expertise for performing individual
infrastructural tasks should also be taken into consideration.
New Challenges for Financial Market …
87
However, the financial market, not unlike modern life as a whole, is
constantly developing. New instruments and organizations of financial
infrastructure are emerging: repositories register and keep an independent list of terms of contracts between market players; marketplaces
are electronic platforms for making contracts without visiting a market
player’s office; other companies provide financial services on the basis
of new information technology (blockchain platforms, cryptocurrency
exchange markets, fintech companies and other companies licensed to
conduct particular financial transactions). This means that the demand
for such services remains high among financial market players, which
presents an optimistic outlook for the future of efficient financial
markets, satisfying the various needs of their players.
Global Risk Management Practices for Financial
Market Infrastructure During the Corona-Crisis
of 2020
Financial markets react to all events caused by political, economic, and
ecological factors. In times of crisis the impact increases and is frequently
felt on a large number of financial markets and in the global economy.
This was observed during the COVID-19 pandemic as well. Due to
uncertainty on the markets, volatility reached critical levels, which had
its effect on rapidly decreasing oil, stock, and interest rate prices. At
the same time, loan spreads expanded. In these unprecedented times
of market volatility, financial market players had to efficiently manage
their risks. Markets with a centralized clearing system in place once again
proved to be safe havens for market players in times of stress.
The coronavirus outbreak and measures to prevent its spread endangered local and global economies. The Organization for Economic
Cooperation and Development (OECD) issued a warning on the 2nd
of March 2020 that “the global economy is in danger” and predicted
that “the annual global GDP growth rate will fall to 2.4% in 2020 from
the already rather poor 2.9% rate of 2019; moreover the first quarter of
2020 may see negative growth rates” (OECD, 2020).
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D. Panov
Being an element of the financial market infrastructure, central counterparties have contributed to sustaining and securing financial markets
during the crisis. In particular, central counterparties have provided
market players with an efficient and valid forum for risk management
while ensuring transparency and operational reliability. This was occurring despite significant operational issues linked to response measures
against the spread of the coronavirus, as well as to critical instability
levels. Central counterparties recorded a significant growth of variance
margins due to observed market movements; however, they were in a
position to process these payments as well as duly calculate large transaction volumes. Whereas variance margins record current risk levels
of a market player’s portfolio (with central counterparties making the
exchange between players easier), the initial margin is retained by central
counterparties in order to cover potential future effects on players’ portfolios, with the former using a 99% confidence interval at the very least.
Central counterparties formulate their claims to the initial margin in
order to cover various potential market shifts; however, market shifts
encompassing “extreme but real market environments” have to be taken
into account when calculating the central counterparty’s Default fund.
Due to extreme volatility levels encountered by central counterparties, the majority of them are forced to provide marginal requirements.
Central counterparties aim to find an appropriate balance between
reaching decent margin coverage levels and minimizing the risk of procyclicality. Upon reaching this balance, central counterparties are to take
into consideration the availability of proper coverage while at the same
time avoiding unwanted pro-cyclical changes to initial margin claims
relative to observed market volatility rates. As a result, central counterparties have once again shown that they provide security and stability of
financial markets, especially in times of crisis.
The analysis of central counterparties during the global financial crisis
of 2008–2009 and the coronavirus pandemic of 2019–2020 has shown
that in both cases they were responsible for market and operational
risks; they also minimized loan and liquidity risks, i.e. they fulfilled their
purpose despite exceptional circumstances (large transaction volumes
and numbers, high financial market volatility rates).
New Challenges for Financial Market …
89
Extreme volatility rates were observed during the coronavirus
pandemic and, in many cases, they mirrored or even surpassed volatility
rates observed during the global financial crisis of 2008–2009. In the
times of the COVID-19 crisis of 2020, the following trends were
observed:
● Stock demonstrated a sustainable increase in volatility according to
the VIX index that amounted to 13.46 in January of 2020 and then
went on to reach its historically highest rate of 82.69. Similarly, the
S&P500 index peaked in February 2020 with over 3,300 points and
then proceeded to fall by over 1,000 points in a month’s time.
● Interest rates in almost all countries went down compared to pre-crisis
rates. In particular the changes in interest rates in the USA and the UK
proved comparable to those observed during the crisis of 2008–2009.
● WTI futures prices plummeted in mid-April and reached negative
values after a slow gradual decline since early 2020.
● The CDS market saw extreme growth rates and a period of significant
risk premium increases. The relative expansion and the tightening of
the spread were twice as large as those observed during the financial
crisis of 2008–2009.
Despite market volatility, central counterparties managed to overcome
it and continue to provide an efficient risk management platform for
market players. A reliable and sustainable operational environment is key
in times of market crisis as players strive to trade and make payments
in order to manage their risks more efficiently in light of the changing
market environment. In is imperative that the day-to-day routine of
central counterparties involved early risk prevention measures and financial market risk management, especially in troubling times. During the
acute phase of the COVID-19 crisis these requirements were fulfilled
unconditionally which allowed central counterparties to ensure additional stability and security on the financial market. They structured
their anti-crisis management systems and implemented daily procedures
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D. Panov
aimed at ensuring security and sustainability of financial markets, particularly in times of crisis. These approaches may differ for different central
counterparties but they usually include the following measures (ESMA,
2020; Eurex, 2020):
● Netting and risk offsetting by means of multilateral clearing.
● Calculating and assessment of claims to variance and initial margins.
● Variance margin settlement.
● Stress tests for determining the sufficiency of financial resources in
order to cover events of default for clearing parties (e.g. “two default
coverage” claims).
● Calculating collateral discounts.
● Keeping of the invested margin and monetary investments.
● Risk monitoring, including interest risks.
● Control over observance of regulatory requirements, limits and limitations currently in force.
● Issuing annual reports on transactions, changes and risk rates.
A case study has shown that during the COVID-19 crisis central
counterparties remained fully operational, offering reliable trading platforms and centralized clearing services to their clients. Market parties
in interest (including the central counterparties themselves along with
market players) acknowledge the need to keep markets open, which
would allows players to efficiently and effectively manage their risks. In
times of the COVID-19 crisis markets did not simply remain open, but
trading and clearing went on unimpeded; not a single member of the
largest central counterparty world organization (CCP12) suspended or
delayed their transactions. On the contrary, some CCP12 members even
extended their clearing systems’ service hours for a specified period of
time in order to help market players to manage the general burden of
the conducted operations.
Suggestions to cut the working time of the financial market—or even
to close financial markets, as proposed by high-ranking government officials—were decisively rejected by market players and trade associations.
For instance, it was declared in the US that “financial markets are a
critically significant infrastructure… and they continue to function as
New Challenges for Financial Market …
91
planned notwithstanding the instability caused by the coronavirus…
market prices allow millions of consumers and businesses to make
rational decisions in terms of purchasing, selling, producing or investing
within the framework of the entire economy” (CME, 2020).
During the COVID-19 crisis clearing volumes went up significantly.
In March 2020 they reached record rates. Upon comparing asset types
clearing volumes in agriculture, in the energy sector, and those of stock
and precious metals indices showcased record growth rates. For example,
the stock market saw the rise in overall volume of transactions subject to
clearing by 146%.
Central counterparties require collateral for transactions in order to
cover potential futures risks of clearing parties’ portfolio in the form
of initial margin and default fund claims. These claims protect central
counterparties from future risks in case of the clearing parties’ default.
The central counterparties ease variance margin exchanges (daily, at the
very least) which reflects the changes in parties’ portfolio market prices.
This is how these operations look like broken down: the variance margin
for the clearing party’s portfolio, the price of which has gone down, is
to be transferred to central counterparties with directions to transfer it
to the clearing party, whose portfolio value has gone up. Central counterparties organize variance margin exchanges (usually on a daily basis)
which minimizes risk accumulation in the system thanks to reassessing
the clearing parties’ portfolio values. Moreover, initial margin and default
fund claims will differ depending on the market environment.
Taking into account the unusual volatility observed during the
COVID-19 crisis, it is imperative to note the different objectives of using
initial margins and default funds. The initial margin is designed to cover
shifts in market prices (including those observed in times of crisis) and
is to correspond to the 99% unwinding risk coverage standard. At the
same time, default funds act as mutual security funds designed to cover
damages in excess of collateral provided by a clearing party acting in bad
faith in “extreme but probable market conditions”. Taking into consideration the objectives and the structure of initial margin and default fund
claims, the central counterparty will inevitably require additional initial
margins and will record inadequate security levels resulting from unusual
volatility levels observed during the COVID-19 crisis. During this crisis
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D. Panov
central counterparties recorded daily volatility spikes which validate the
practical need for a gradual increase in initial margin claims. Besides,
as insufficient margin levels are quite expected due to targeted 99%
coverage, the volatility levels currently observed may also be presented
as “extreme but probably market conditions”. Moreover, average variance margin volumes observed during the COVID-19 crisis are proof of
significant daily shifts in portfolio market values. The central counterparties’ risk management practices (more specifically—margining) were
once again put to the test during the COVID-19 crisis and proved their
efficiency. Shifts in initial margin levels were performed in such a manner
so that the pro-cyclicality impact was lessened while appropriate security levels were maintained in times of unusual daily volatility. At the
same time, central counterparties recorded significant variance margin
volumes in order to cover the severely fluctuating current portfolio value.
For instance, the Bank of England noted that “the peak single-day initial
margin increase was significantly lower than the peak single-day variance
margin increase during the crisis which occurred partly due to reasonable
measures taken by central counterparties before the crisis, having avoided
extreme initial margin decreases during the good times and prevented
big and unexpected spike-like marginal claim shifts as market volatility
begins to grow” (BoE, 2020).
In such conditions the central counterparty is to find a balance
between managing pro-cyclicality and sustaining sufficient security
levels, especially in times of crisis (as was the case during the COVID-19
crisis) in order to minimize the contracting party’s risks. On the other
hand, clearing parties are to have enough resources at their disposal
in order to balance out variance and initial margin claims on volatile
markets. The Bank of England, in acknowledging this fact, declares
that “… taking into account that clearing and margining are important factors serving to minimize systemic risks, the answers may lie, to
a great extent, in financial market players understanding how margin
claims may change in times of stress and remain sustainable enough in
order to manage the relevant liquidity pressure factors” (BoE, 2020).
With that said, despite the critical instability, central counterparties
remained sustainable during the COVID-19 pandemic, as they did back
during the global financial crisis of 2008–2009. Among the CCP12
New Challenges for Financial Market …
93
members only one instance of clearing service suspension was noted:
Ronin Capital LLC, a clearing party on the CME and FICC, a DTCC
subsidiary. Ronin Capital LLC, a Chicago-based private trading firm, did
not fulfil the capital requirements within a week’s time starting from 16th
March 2020. As a result, on the 20th of March 2020, CME announced
that Ronin Capital LLC’s portfolios, previously subject to clearing by
CME, were successfully sold at auction. CME managed to resolve the
situation without any damages for the CME default fund, and moreover,
neither clients nor other clearing parties were affected. FICC managed to
wrap up and liquidate Ronin Capital LLC’s monetary positions without
affecting the Default fund or the general protection level structure in any
way.
Conclusions/Recommendations
The study of financial market infrastructure development in Russia and
abroad enables identifying better, advanced practices, while not forgetting the need for reasonable risk management in new and ever-changing
conditions.
In this regard, the one practice that seems the most useful is the
publishing by many financial infrastructure institutions of public disclosure documents pertaining to qualitative and quantitative information
on their business. The information contained in such publications
makes it possible to compare particular infrastructural elements with its
counterparts and the standards and benchmarks adopted in its sphere.
Assessment of such information may serve as quite an efficient means of
assessing the risks taken by market players upon conducting transactions
with the help of a particular infrastructure institution.
Central counterparties played a key role both during the global financial crisis of 2008–2009 and during the COVID-19 crisis. Despite
increased volatility, central counterparties allowed local and global financial market to avoid severe losses. Clearing volumes have reached record
height, which, however, did not hinder the sustainability of central counterparties. Plans to ensure their uninterrupted activity were to have
been implemented over a long period of time. However, in spite of
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D. Panov
rather short implementation deadlines, sustainability, accessibility and
stability of current business and clearing operations have been achieved,
as well as those of their IT infrastructure. Some central counterparties even reported higher actual main system availability rates compared
to the prior period. The initial margin was incrementally increased to
required levels in order to secure coverage rates up to no less than
99% in most cases, as per the back-testing results. Contrary to this,
the observed increase of the variance margin proved to be significant,
reflecting large-scale daily price fluctuations observed on the market.
Even though default fund volumes also saw increases in some cases, the
only reason why it was measurable, appropriate and predictable was the
transparency of methodology used for setting up the funds. As a result,
central counterparties found a balance between managing pro-cyclicality
and sustaining the required securitization levels for minimizing the
contracting parties’ loan risks.
Many improvements to central counterparties’ regulation and their
risk management practices have been implemented over the last decade,
after the global financial crisis, which served to increase their sustainability. Thanks to these improvements, central counterparties successfully
overcame extreme volatility rates and higher clearing volume during the
COVID-19 crisis. Central counterparties became an essential component in supporting financial markets ensuring sustainability, security and
stability, offering efficient and effective risk management places to market
players.
Understanding that it is cooperation that is key to solving many global
issues (e.g. the crisis caused by the spread of the coronavirus), it is
imperative that we continue to ensure transparency and uninterrupted
financial market activity in the future, especially in times of crisis. The
effects of market closure would have been too grave for local and global
financial markets and economies. Presently and in the future, central
counterparties are to improve their margining models, stress testing
methodologies, and default management rules in order to prepare for the
New Challenges for Financial Market …
95
next crisis. Despite central counterparties having attained a good reputation during the COVID-19 crisis, it is necessary to continue to develop
risk management in consideration of new market conditions.
References
Bank of England. (2020, June 9). Financial system resilience: Lessons from a real
stress. Available at: https://www.bankofengland.co.uk/-/media/boe/files/spe
ech/2020/financial-system-resilience-lessons-from-a-real-stress-speech-byjoncunliffe.pdf?la=en&hash=68025EDB90D936B24560429761646BFEA
E2D2D74.
BIS. (2003). A glossary of terms used in payments and settlement systems. Available
at: https://www.bis.org/cpmi/glossary_030301.pdf.
BIS. (2004). Recommendations for central counterparties. Available at: https://
www.bis.org/cpmi/publ/d64.pdf.
BIS. (2010). Market structure developments in the clearing industry: Implications
for financial stability. Available at: https://www.bis.org/cpmi/publ/d92.htm.
BIS. (2012). Principles for financial market infrastructures. Available at: https://
www.bis.org/cpmi/publ/d101a.pdf.
CME Group. (2020, March 17). CME group statement on U.S. treasury secretary Mnuchin proposal to shorten trading hours. Available
at: https://www.cmegroup.com/media-room/pressreleases/2020/3/17/cme_
group_statementonustreasurysecretarymnuchinproposaltoshorten.html.
ESMA. (2020, June 28). Functional definition of a central counterparty clearing
house (CCP). Available at: https://www.esma.europa.eu/file/5752/download?
token=1Icjakov.
Eurex Clearing. (2020, June 28). Post-trade risk control . Available at: https://
www.eurexclearing.com/clearing-en/riskmanagement/system-based-risk-con
trols/post-trade-risk-control.
Norman, P. (2011). The risk controllers. London: John Wiley & Sons.
OECD. (2020, March 2). Coronavirus: The world economy at risk. Available at: http://www.oecd.org/berlin/publikationen/InterimEconomic-Assess
ment-2-March-2020.pdf.
Pirrong, C. (2011). The economics of central clearing: Theory and practice.
Houston: ISDA.
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WHO. (2020, February 11). Novel Coronavirus—Situation report. Available at: https://www.who.int/docs/defaultsource/coronaviruse/situation-rep
orts/20200211-sitrep-22-ncov.pdf?sfvrsn=fb6d49b1_2.
Federal Laws
FedepalbnyЙ zakon ot 22.04.1996 №39-FZ (ped. ot 20.07.2020) « O
pynke cennyx bymag » .
FedepalbnyЙ zakon ot 07.02.2011 N 7-FZ (ped. ot 27.12.2018)
“O klipinge, klipingovoЙ deЯtelbnocti i centpalbnom
kontpagente”.
FedepalbnyЙ zakon ot 21.11.2011 №325-FZ « Ob opganizovannyx
topgax » .
FedepalbnyЙ zakon ot 07.12.2011 №414-FZ (ped. ot 20.07.2020) “O
centpalbnom depozitapii”.
Payment Systems in Digital Economy
Aleksei Bolonin and Vladimir Balykin
Introduction
Innovative financial technologies have changed the transactions related
to settlements and payments and have created new mechanisms and
payment system processes. The technologies for accounting for the
movement of money in the accounts of participants in the economic
system as a measure of value and means of payment have changed significantly. The main changes have affected the speed of transactions, reduced
costs and commissions, as well as new participants in payment and settlement relations, methods and instruments of payment, have appeared
(Pertceva, 2019).
In this chapter, a payment system is understood as a set of institutions,
instruments and procedures used to transfer funds between economic
agents to pay off the arising obligations (Krivoruchko, 2013). The
A. Bolonin (B) · V. Balykin
Moscow State Institute of International Relations (MGIMO University),
Moscow, Russia
© The Author(s), under exclusive license to Springer Nature
Switzerland AG 2021
G. Panova (ed.), Financial Markets Evolution, Palgrave Macmillan
Studies in Banking and Financial Institutions,
https://doi.org/10.1007/978-3-030-71337-9_7
97
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participants’ monetary obligations arising from their economic activities are ensured by the institutional mechanisms and infrastructure of
payment systems, as well as a variety of payment instruments. Such a
system of elements that ensure the movement of value between payment
participants can be called a “traditional” electronic payment system.
However, the technology has given rise to systems in which we can
move value and make payments by virtual accounting units within
cyberspace. Such payment systems can be called virtual payment systems.
Methodology
The infrastructure mechanisms of traditional payment systems include
operational, clearing and settlement systems, which allow classifying all
payment systems serving the traditional or real economy, according to
the degree of completing the settlements in real-time (Real Time Gross
Settlement System, RTGS) and those with deferred execution, i.e. there
is a time interval between the start of the operation and its execution (Deferred Net Settlement System, DNS). The second important
criterion for classifying payment systems is the way of organizing interaction between participants, where centralized and decentralized types
of interaction are distinguished. In the decentralized type, payments are
made by transferring funds to direct correspondent accounts opened by
participants with each other. In this type of interaction, all participants
perform the same functions and have equal rights and responsibilities.
The centralized type is characterized by the intermediaries who process
payments from other participants. The participants in such a system
differ in their functions and are subject to a certain hierarchy (Pertceva,
2019).
We use these criteria to further compare payment systems serving
the real economy and cyber-economy systems based on blockchain
technology.
The history of blockchain dates back to the early 1990s when physicists Stuart Haber and W. Scott Stornett, trying to solve the serious
problems of the safety, security and resistance to hacking digital data,
published an article describing the use of a chain of cryptographically
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99
protected blocks to preserve the information integrity and its protection
(Haber & Stornetta, 1991). In 1993, in response to the proliferation
of spam and other Internet abuse, a proof-of-work concept was developed to counter these negative phenomena, and in 2008 an article titled
Bitcoin: A Peer-to-Peer Electronic Cash System was published, which
identified the key aspects of the most widely known Bitcoin blockchain
(Nakamoto, 2008).
Concerning blockchain technology, first of all, attention should be
paid to decentralization. There are three main forms of decentralization:
architectural , which determines the number of computers that form the
system and the number of computers that can fail at any time; political ,
which determines the number of people or organizations that control the
computers of the system; and logical , i.e. the interface and data structure
that the system represents and maintains.
Political and architectural decentralization allows blockchains to
reduce the likelihood of failures, since they depend on many separate components and significantly reduce the negative consequences of
cyberattacks by intruders since the networks are distributed over many
computers, which makes the blockchain resistant to such attacks.
The virtual form of banking operations performed in the modern
world assumes that each banking operation is expressed in an instant
change in the content of the central banking database, reduces the reliability and stability of credit institutions, as well as the banking system
as a whole, since any new high-tech innovations increase and complicate
banking risks (Sychev et al., 2017). In this regard, the construction of
payment systems on the principle of peer-to-peer decentralized systems
will increase the transactions’ reliability and the data storage security,
since any accounting operation and changes in the balance of funds on
the client’s account are recorded in a new block and cannot subsequently
be changed. Cryptocurrencies were created for use in decentralized and
publicly available payment systems, so their source code, as a rule,
was open from the very beginning (Tabernakulov, 2019). Concerning
credit institutions, the problems of distributing the digital ledger during
payment transactions and access to payment data are solved through the
use of a non-public or private blockchain, when the source code remains
closed. In private blockchains, dedicated trusted nodes with a higher
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authority level compared to other users connect new users to the network
and also disconnect them. Credit institutions started to use private
controlled blockchains in 2016. The most famous enterprise solution
based on common ledger technology is the R3 Corda project originally
developed by J. P. Morgan Banking Group. and in 2016 transferred to
the R3 CEV blockchain consortium of which J. P. Morgan became a key
investor (Tabernakulov, 2019). Each node of private distributed ledgers
has a pre-assigned access level and, unlike a public (open) blockchain, the
data is not publicly available. Closed distributed ledgers are not decentralized in the strict sense of this definition, since the network is built
on a hierarchical basis. Corporate blockchainsare managed using special
nodes with increased “powers” and “responsible” for the data dissemination policy, identifying users, as well as certifying the data entering the
blockchain.
The use of blockchain technologies for making payments and settlements will change the elements of the traditional payment system since
each operation will be considered final and this will not allow the use
of mechanisms to optimize cash flows through calculating net participants’ positions, there will be no need for a clearing and settlement
centre. Thus, the benefits of netting, which are reduced funding when
making payments, will not be used in blockchain technologies.
The Corda project is not the only example of enterprise blockchains.
Developed under the auspices of the Linux Foundation, the Hyperledger
project allows you to create custom blockchain platforms for business
with almost any set of parameters from the public to fully controlled.
An important problem and task of electronic banking are to ensure
the customer data security in the changing nature of banking services
and, in part, its content, as well as the composition of factors and
sources of risks associated with banking activities, due to which credit
institutions’ risk profiles shift and a fundamentally new phenomenon,
which can be defined as the “information circuit of banking”, appears
(Lyamin, 2011). The main factors contributing to the emergence of
new sources of banking risk components include: first, the clients who
interact with a credit institution remotely and are unable to promptly
respond to fraudulent actions by intruders posing as bank employees;
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secondly, mobile operators, Internet providers that provide communication and communication services between the client and the bank,
that is, a third party that is not related to the banking business and,
thirdly, potential availability arising in open systems and universal protocols of network interaction of automated banking systems and other
information and processing resources of credit institutions, as well as
devices used by customers for remote banking services for unauthorized access and network attacks. Thus, electronic banking technologies,
along with benefits for credit institutions and convenience for their
clients, have significantly expanded the range of potential threats that can
arise without accurately identifying and localizing their source (Lyamin,
2011). Of course, credit institutions are constantly developing ways
to combat cybercriminals, and countering cyber-attacks has shown a
positive result. Thus, for the first three quarters of 2019, Positive Technologies experts recorded 61 attacks on financial companies (for the same
period in 2018, there were 69 of them, and for the whole 2018 there
were 92 attacks). Phishing was used in 74% of attacks and malicious
software was used in 80% of attacks. These are the main methods of
penetrating the local network of financial institutions from the Internet.
It can be assumed that the slight decline in the number of cyberattacks at financial institutions is associated with several factors. First, a
significant decrease in the share of massive attacks on such financial and
credit institutions has been observed. For example, in the third quarter of
2019, only 4% of recorded attacks were massive, and in the same period
a year earlier, this figure was at 32%. This is explained by the fact that
most banks, especially large ones, are currently able to effectively repel a
massive attack (e.g. sending ransomware), and hackers have focused their
attention on other, less secure industries, including digital ecosystems.
Secondly, hackers are updating the arsenal of malware used and their
infrastructure and switching to new regions, targeting the victims who
are less prepared for such attacks.
Studies of the Russian and foreign banking markets indicate that
financial institutions widely use artificial intelligence technologies. First
of all, we are talking about machine learning. Machine learning not only
enhances end-user convenience when dealing with banking services but
also successfully deals with fraud in the banking sector.
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According to the non-profit organization European Association for
Secure Transactions (EAST),1 in the first six months of 2019, the main
damage from cyberattacks on European banks’ self-service systems fell on
attacks of payment terminals (124 million euros)—even though attacks
on ATMs using malicious software (malware) and the black-box technology caused only minor financial damage, which did not exceed 1000
euros.
The number of contactless payment scams is on the rise. This is mainly
due to operations below CVM (Cardholder Verification Method) limits
when the user does not have to enter a PIN to confirm transactions.
15 years ago, the number of financial service providers was limited by
the card-issuing bank, the company providing acquiring services, and the
payment system (Visa, MasterCard), but today, much more people have
access to cards and information: Apple Pay and Samsung Pay, mPOS
terminal manufacturers, mobile network operators, smartphone manufacturers, etc. Thus, the number of “payment witnesses” is increasing,
they all have indirect access to the bank account and information of the
cardholder, and therefore the risk of information leakage and fraudulent transactions increases. A similar situation has developed with online
banking. (For details see Panova et al., 2020.)
The EU countries have begun to implement the new PSD2 payment
transactions directive, which is designed to create conditions for innovating the financial sector and providing additional customers’ protection. The directive implies that banks provide an open API to all
third-party financial service providers (Open Banking) and requires
to strengthen the payer’s authentication (Strong Customer Authentication). This requirement implies mandatory two-factor authentication,
for example, the need to periodically check two of the three elements
(PIN, fingerprint, face biometrics, etc.). Following this requirement,
for example, after every five contactless transactions, the payer will be
obliged to insert the card into the chip reader, and the mobile application
will periodically ask for a PIN. However, these measures are aimed not
only against external attackers but also to counter the so-called friendly
fraud. Comprehensive implementation of such measures will improve
1 https://www.finextra.com/pressarticle/80191/atm-malware-and-logical-attacks-fall-in-europe.
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banking systems security, especially in such sensitive areas as contactless
payment and card payments.
An important feature of crypto-economics is that we can issue cryptocurrencies that are not tied to any jurisdiction, which complicates not
only controlling the monetary sphere and the state’s monetary policy but
also violates the integrity of the monetary space of the circulation zone
of a particular official currency. Autonomous networks, smart contracts,
smart assets and infrastructure will use new value exchange methods optimized around crypto platforms. For example, Sun Exchange, a startup on
the African continent, not only allows you to buy solar panels for local
villages using cryptocurrency but also generates so-called solar coins from
each kilowatt produced. Artificial intelligence, blockchain and the need
for smart contracts will create IP-optimized value exchange systems that
bypass currency controls if needed.
Modern principles of regulating the financial intermediaries’ work
do not allow regulating organizations in which there are no bylaws, a
management structure, a financial or general director who would take
responsibility for the company’s financial management, but there is only
code that follows the instructions.
Even though the legal issue of crypto tokens is currently very complicated (e.g. the Telegram initiative with the Gramm cryptocurrency), it
has not been legally resolved and does not fit into the logic of the
monetary circulation laws. But today, the unsolved problem of cryptocurrencies circulation can make markets where offerings based on
cryptocurrencies are illegal, much less competitive and attractive to
startups.
The main legal problem of companies dealing with artificial intelligence (decentralized autonomous organizations) is that they are
constructed in virtual cyberspace, guided by instructions in the form of
computer code. Regulators can adhere to traditional norms and inhibit
the development of corporations based on artificial intelligence or smart
contracts, or condition the programmers who write the code to adhere to
the rules of securities law and regulations on investment business since
regulators simply have no other experience.
Regulating institutions that accept deposits or issue currency is the
historical role of central banks. But in a world where cryptocurrencies
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can be issued by a group of programmers or a technology company
such as Ant Financial, Microsoft (with Xbox loans) or Starbucks, which
have attracted more deposits on behalf of their customers than a modern
traditional bank, controls and structural elements just do not work.
In this regard, an urgent question arises: What value the banking
license itself will have soon since non-banking entities offer more and
more services and compete with banks in their traditional field? Alipay,
for example, has a payment license in China, but half of its users are
outside of China. Will Alipay have to obtain a payment license in every
country where it works? If we speak from the point of view of modern
regulations, it has. The situation is similar to deposits or funds held
in e-wallets. Does Ant Financial have to obtain a banking license in
every country where its clients keep deposits? But the rules of different
countries can contradict each other.
Cryptocurrencies are clearly in conflict with the traditional forms and
methods of regulating new financial markets and instruments. Even big
companies like Facebook and Telegram face challenges. So, the American Securities and Exchange Commission (SEC) suspended the release
of Gram—Telegram’s cryptocurrency, indicating that, in fact, it is an
issue of securities hiding under the name of cryptocurrency. At the same
time, the legislation requires issuers of securities to provide detailed information about their financial position, management, strategy, plans and
risks (Kiniakina, 2019). Under these conditions, Telegram was forced to
stop the placement, and investors were offered two options: postpone or
return 77% of the invested funds.
The head of the French Central Bank said that cryptocurrencies
cannot be private. Thus, the Libra Face Book currency is issued in accordance with the stock of official state currencies. It was created by the
Association, which includes large companies, like Visa and Mastercard.
The Swiss Central Bank said in December 2019 that most central banks
would not approve of using the Libra and would not accept the currency
basket underlying the cryptocurrency. The heads of the EU Financial
Departments also issued a joint statement in which they noted that the
Libra cryptocurrency threatens the financial system’s stability.
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However, in most cases, financial regulators cannot influence the operations in cryptocurrencies themselves. They proceed from the assumption that these currencies are used to conduct transactions that have been
barred from public money. And additional control is established where
the transition from cryptocurrencies to real money is carried out. These
places are crypto exchanges where you can buy or sell currencies. Until
recently, compliance procedures were not required and exchanges were
not required to identify customers, but now the situation is changing.
At the same time, the crypto exchanges themselves can pose a threat of
losing money for their clients. The example of one of the largest cryptocurrency exchanges in Canada, Quadria CX, shows the vulnerability of
the existing closed-code order. In early 2019, Gerald Cotton, a 30-yearold CEO of Quadria CX unexpectedly died in India. At the same time,
the company’s managers said that only he, the founder and head of the
company, knew the passwords and keys from the wallets of tens of thousands of users, to whom the cryptocurrency exchange now cannot return
the money. The cryptocurrency was stored in so-called cold wallets that
did not have access to the internet. Exchange customers even doubted
Cotton’s death, since two weeks before that happened, he bequeathed
everything to his wife. The company Ernst & Young was hired. They
found that instead of 160 million, which should have been stored in
wallets, there were several hundred thousand left. Besides, it was reported
that the reputation of Cotton and his business partners is also far from
perfect.
All this allows regulators to fairly point out that all the requirements
for internal control and financial stability of financial institutions developed in recent years make sense from the point of view of investor
protection. When issuing licenses, regulators monitor the internal
control organization, managers’ reputation and experience. Sometimes
it really helps to cut off fraudulent schemes at the very beginning. The
increasing risk of money laundering is of particular concern to all regulators in connection with cryptocurrencies. For example, in its annual
report on monitoring the risks to the country’s financial system, the Swiss
Financial Markets Supervision Authority pointed out the increased risks
associated with the new technologies and digital assets. New technologies have the potential to make the financial industry more effective, but
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their anonymity, speed and global nature make them attractive for illegal
transactions.
At the same time, companies that collect funds as technological ones
and use blockchain technologies for collection purposes, in fact, may
work legally, but some of them can be scammers.
Results
Blockchain technology allows payments and settlements in real-time, as
well as eliminates the risk of losing payment data during cyberattacks,
which makes data more reliable and secure. However, blockchain technology also implies issuing a cryptocurrency, which can be used as a
means of payment, which is not tied to a specific jurisdiction and affects
the monetary space’s integrity within a state or a union of states.
Conclusions
Cyberattacks on financial market infrastructure have no boundaries, the
problem of cyber risks is international, and they can affect the entire
financial ecosystem, cause financial shocks such as liquidity dislocation,
credit losses and, ultimately, the financial instability of a market or a
separate region or country. The European Central Bank has developed
two key tools to improve the resilience of financial market infrastructure and counter cyber attacks: cyber resilience oversight expectations
for financial market infrastructures (CROE) and the European framework for threat intelligence-based ethical red-teaming, TIBER-EU. But
at the same time, the centralized architecture of building a traditional
payment system remains dominant, and the risks of cyber-attacks and
data loss remain.
A critical change in the work of the regulator is leadership focused on
technological or digital oversight, rather than policy and process regulation. The skill set required by the regulator is not related to policy
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development and expert compliance. It is almost entirely based on technological supervision and the ability to react and adjust the market in
a very dynamic real-time mode. This evolution will take place, in our
opinion, quickly, in a normative way in just 10–15 years.
References
Cyber resilience oversight expectations for financial market infrastructures. https://www.ecb.europa.eu/paym/pdf/cons/cyberresilience/Cyber_res
ilience_oversight_expectations_for_financial_market_infrastructures.pdf.
Felix, M. (2014). Money: The Unauthorised Biography. From Coinage to Cryptocurrencies. Vintage Books. A Division of Random House LLC.
Haber, S., & Stornetta, W. S. (1991). How to time-stamp a digital document.
https://link.springer.com/content/pdf/10.1007/BF00196791.pdf.
Kiniakina, E. (2019). “There is no TON ecosystem”: Why did the SEC stop
Telegram ICO and what does this mean for the Durov project. Available at: https://www.forbes.ru/tehnologii/385351-nikakoy-ekosistemy-tonne-sushchestvuet-pochemu-sec-ostanovila-ico-telegram-i-chto. Accessed 13
November 2019.
Krivoruchko, S. V. (2013). National payment system: Structure, technology,
regulation. international experience and Russian practice. KNORUS.
Lyamin, L. V. (2011). The use of electronic banking technologies: A risk-based
approach. KNORUS.
Nakamoto, S. (2008). Bitcoin: A Peer-to-Peer Electronic Cash System. https://bit
coin.org/bitcoin.pdf.
Panova, G. S., & others. (2020). Banks and banking in the global economy.
MGIMO-University.
Pertceva, S. (2019). Payment systems in the digital economy. Moscow State
Institute of International Relations, MGIMO.
“Statistics on payment, clearing and settlement systems in the CPMI countries”. Committee on Payments and Market Infrastructures. Bank for International Settlements 2017. Available at: https://www.bis.org/cpmi/publ/
d172.pdf.
Sychev, A. M., Revenkov, P. V., & Dudka, A. B. (2017). Security of electronic
banking. Intellectual Literature.
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Tabernakulov, A. (2019). Blockchain in practice. Alpina Publisher.
What is TIBER-EU? https://www.ecb.europa.eu/paym/cyber-resilience/tibereu/html/index.en.html.
Role of National Currencies in Transforming
International Monetary System
Vladimir Shapovalov
Introduction
For many years some countries have been actively discussing plans to
expand the use of thier national currencies in foreign trade contracts.
With the US dollar dominating the international monetary system,
global trade and investments depend on economic entities’ access to
dollar liquidity and respective financial infrastructure. The current
model of international monetary system does not guarantee uninterapted international transactions of economic entities thus endangering
their economic relations with foreign partners.
Increase of the share of national currencies in international transactions will remove possible barriers that might arise for foreign
V. Shapovalov (B)
Moscow State Institute of International Relations (MGIMO University),
Moscow, Russia
© The Author(s), under exclusive license to Springer Nature
Switzerland AG 2021
G. Panova (ed.), Financial Markets Evolution, Palgrave Macmillan
Studies in Banking and Financial Institutions,
https://doi.org/10.1007/978-3-030-71337-9_8
109
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V. Shapovalov
economic entities. This issue is becoming more relevant as some countries already cannot use the US dollar and the corresponding payment
channels.
In this paper, we consider alternatives to the US dollar for foreign
economic relations on the example of the common European currency
and the Chinese yuan.
Methodology
As per SWIFT in order for a currency to be considered international, it
has to be used:
– in foreign trade financing,
– foreign investments,
– as a reserve currency.
The IMF (according to article XXX, paragraph f of the International
Monetary Fund Agreement) defines a freely used currency in the world
as follows:
– it is widely used for payments in international transactions,
– it is being actively traded in the main foreign exchange markets.
The European Central Bank regularly monitors the international use
of the euro as per the following criteria:
– the share of the euro in the international reserves of foreign central
banks,
– the volume of international debt obligations denominated in euros,
– use of the euro as the currency of international contracts outside the
EU,
– physical delivery of euro banknotes outside the EU.
Role of National Currencies in Transforming International …
111
Results
The Place of the Euro in the International Monetary
System
For 20 years the Euro remains the second most important currency in
the international monetary system. According to statistics from the IMF,
SWIFT and the Bank for international settlements:
– the Euro accounts for 21% of international central bank reserves;
– 23% of international bonds, 19% of bank loans and 24% of deposits
are denominated in euros;
– 36% of international contracts are being conducted in euros;
– transactions with euro account for 38% of all conversion operations.
Thus, euro is being widely used internationally as a store of value,
medium of exchange and means of payment.
The following highlights characterise the use of the euro as an international currency.
1. The share of the Euro in international central bank reserves.
As per ECB the share of the euro in the reserves of central banks
remains stable at the level of 21% while US dollar share is descrasing (to
61%).
In 2018, the Bank of Russia sold more than 100 billion dollars making
Euro the leading currency in its reserves. The People’s Bank of China also
cut its dollar investments in the same year by about $ 60 billion.
2. International investments in euro instruments.
The attractiveness of financial instruments denominated in euros is
declining. This trend reflects forecasts for moderate economic growth
in the Eurozone, as well as global investors’ risk preferences resulting
from COVID-19 pandemic, trade conflicts global political instability.
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V. Shapovalov
According to the ECB, international investment in debt instruments
denominated in euros in 2018 decreased by 190 billion, while net
purchases of European companies’ shares by foreign investors in February
2019 amounted to only 60 billion euros, compared with 490 billion
euros in December 2017.
3. The Euro exchange rate.
The Euro depreciated by 11% against the US dollar from January
2018 to January 2020. At the same time, the Euro depreciated slightly
against the currencies of the EU’s main trading partners over the same
period. The decline was due to strong domestic demand in the US and
weak forecasts for economic growth in the Eurozone. As for the currencies of the EU trading partners, the decline was not significant, due to
the relative weakness of the exchange rates.
4. The share of the Euro in foreign exchange transactions.
According to the CLS system, the Euro is being constantly
ranked second after the US dollar in terms of the conversion transactions’
volume.
5. The share of bonds denominated in euros.
In 2018, 22.8% of international debt obligations were issued in euros.
Issuers from emerging markets began to show interest for bonds in euros
to diversify their currency risks. As a result, from 2015 to 2018 the
share in euro bonds of issuers from developing countries reached 9%
(increasing from 7%), while the share of dollar bonds decreased from 89
to 84%.
6. The share of the Euro in international lending and deposit operations.
In 2018, the share of international loans and deposits in euros reached
19.3%, which is almost 1% more compared to 2017.
Role of National Currencies in Transforming International …
113
The Euro has taken a more important role in international lending
and deposit operations as a result of the ECB’s policy.
7. The share of the Euro as the currency of international contracts.
The share of the Euro in international contracts has been stable for
about 10 years. In 2018, 62% of export and 51% of import contracts
with non-EU counterparties were concluded in euros.
8. The demand for euro banknotes.
In 2018, there was a stable foreign demand for euro banknotes. Euro
banknotes were purchased mainly by countries neighbouring the EU,
Great Britain, Switzerland and, in particular, Russia. Euro cash was also
supplied from EU-neighbouring countries, as well as Eastern Europe and
Turkey.
Chinese Yuan Internationalization
Over the past 10 years, the Chinese yuan has gone through all three
phases of currency internationalization according to the SWIFT criteria.
The Chinese currency is currently being used in trade finance, foreign
direct and portfolio investment, and as a reserve currency.
According to SWIFT, the Yuan was ranked 8th among the most widely
used world currencies in 2013, and it was 5th in December 2020.
According to the People’s Bank of China, the yuan’s share in total
Chinese settlements with foreign counterparties increased by 17% in
2018 compared to 2017, amounting to $761 billion in absolute terms.
According to the IMF, Central banks in 60 countries included the
yuan in their international reserves in 2018, and the total share of global
assets in yuan increased to 1.8% of the total value of reserves, which is
equivalent to $192.54 billion.
As for the IMF criteria of the freely used currency—Chinese currency
is not actively traded in the main financial markets, despite the existence
of direct currency pairs with the main Chinese trading partners (Table 1).
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V. Shapovalov
Table 1 Trading volume on the foreign exchange market of the Moscow
Exchange, RUB billion
bln, RUR
2013
2014
2015
2016
2017
2018
2019
2020
Currency market
156 016
228 546
310 837
329 954
347 671
348 369
308 274
328 946
SPOT
57 297
77 798
103 335
107 169
78 380
86 682
67 370
96 942
USD/RUR
49 327
67 267
92 383
95 530
68 299
72 829
52 210
80 705
EURO/RUR
6 446
8 954
9 159
10 058
8 502
12 227
13 119
13 408
CNH/RUR
20
252
697
285
122
173
221
318
other
79
14
20
72
50
83
102
265
SWAP
98 720
150 748
207 502
222 785
269 291
261 686
240 904
232 003
USD/RUR
77 899
121 555
165 600
182 804
217 663
204 922
190 418
185 911
EURO/RUR
19 644
25 758
34 241
33 007
39 728
47 016
38 452
36 663
CNH/RUR
16
53
161
491
370
908
330
668
other
-
-
4
37
67
126
74
128
Source Moscow Exchange
In terms of the share of the yuan in international settlements it is
still inferior to the Canadian dollar, Japanese yen, British pound sterling, euro and US dollar. In December 2020, according to SWIFT, the
Chinese currency accounted for 1.2% of the total volume of international payments if we exclude payments within the Eurozone (Fig. 1).
In terms of the yuan’s exchange rate stability, a significant difference
in the exchange rate and its dynamics were observed at various stages of
its internationalization. From May 2020 to May 2021 the exchange rate
moved from 7 yuanper dollar to 6.5.
Trends in the Use of Other Currencies
According to the Bank for International Settlements, the positions of the
7 major currencies following the US dollar have remained stable since
2016. At the same time, in April 2019, the aggregate share of emerging
market currencies increased. The shares of the British pound sterling,
Australian dollar, Canadian dollar and Swiss franc did not change.
Role of National Currencies in Transforming International …
115
Fig. 1 Share of currencies in international payments (excluding payments
within the EU). Source SWIFT RMB Tracker https://www.swift.com/swift-resource/
250136/download
The main changes took place in the currencies of developing countries. The share of foreign exchange transactions with the Korean won
(growth from 17th to 15th place), Indian rupee (from 18th to 16th
place), Indonesian rupee (from 31st to 25th place) grew, while the positions of the Mexican peso (from 11th to 15th place) and the Turkish
lira (from 16th to 19th place) deteriorated while the Russian rouble held
17th place with a share of 1.1% in the total volume of conversion operations. 5 international financial centres—London, New York, Singapore,
Hong Kong and Tokyo accounted for about 80% of transactions, half of
which were conducted in London.
116
V. Shapovalov
Conclusions/Recommendations
Today, the US dollar continues to dominate the international monetary system. It is the main instrument of international trade and foreign
exchange transactions. Dollar-based financial instruments are being used
in major international financial centres and by resource rich countries.
The efforts of countries aimed at promoting their national currencies
change the global picture but at an extremely slow pace.
Only the European currency is a competitor to the US dollar today.
The European Union continues stimulating economic growth, maintaining the stability of the financial sector and thus confidence in the
European currency.
Despite the Chinese economic growth and the government policy
aimed to promote the national currency abroad, the yuan makes a
relatively modest part of the total international settlements.
To increase the yuan’s internationalization, China needs to continue
economic reforms and stimulate the financial markets.
Countries that want to offer their economic entities more choice
when conducting international operations and decrease their dependance
from the existing global financial infrastructure need to stimulate reduction of transaction costs and foreign exchange risks in international
settlements.
References
Borio, C. (2019, April 4). Strengthening the international role of the euro:
European and international perspectives. Brussels.
Boz, E., Gopinath, G., & Plagborg-Moller, M. (2017). Global trade and the
dollar (IMF Working Paper, No 17/239).
Casas, C., Diez, F., Gopinath, G., & Gourinchas, P.-O. (2017). Dominant
currency paradigm: A new model for small open economies (IMF Working
Paper, No 17/264).
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Coeuré, B. (2019, February 15). The Euro’s global role in a changing world: A
monetary policy perspective. Speech at the Council on Foreign Relations, New
York City.
Eichengreen, B. (2017). The Renminbi goes global. Foreign Affairs, 96 (2),
157–163.
Eichengreen, B., Mehl, A., & Chitu, L. (2017). How global currencies work—
Past, present, and future. Princeton University Press.
Georgiadis, G., & Mösle, S. (2019). Introducing dominant-currency pricing
in the ECB’s global macroeconomic model (Working Paper Series, ECB,
Frankfurt am Main).
Georgiadis, G., & Schumann, B. (2019). Dominant-currency pricing and the
global spillovers from US shocks (Working Paper Series, ECB).
Gopinath, G., & Stein, J. (2018a, April). Banking, trade, and the making of a
dominant currency (NBER Working Paper, No 24485).
Gopinath, G., & Stein, J. (2018b, May). Trade invoicing, bank funding, and
central bank reserve holdings. AEA Papers and Proceedings, 108.
Landry, D. G., & Tang, H. (2017, September 16). Rise of the redback: Internationalizing the Chinese Renminbi. The Diplomat. https://thediplomat.com/
2017/09/rise-of-the-redback-internationalizing-the-chinese-renminbi/.
Manuel, A. The staggering impact of China’s ‘Belt and Road’ Initiative—The
Atlantic. https://www.theatlantic.com/international/archive/2017/10/chinabelt-androad/542667/. Accessed March 26, 2018.
McCauley, R., & Ito, H. (2018, December). A key currency view of global
imbalances (BIS Working Paper, No 762).
Narkevich, S. (2012). Reserve currencies: Emergence factors and role in the world
economy. Gaidar Institute.
Plubell, A. M., & Liu, S. A snapshot of Renminbi internationalization trends
under one belt one road initiative. EMPEA Regulatory Affairs. https://
www.empea.org/app/uploads/2017/10/Snapshot-of-Renminbi-Internationa
lization-Trends-Under-One-Belt-One-Road-Initiative.pdf.
Prasad, E. (2017). Gaining currency: The rise of the Renminbi. Oxford University
Press.
RMB Internationalisation: Can the Belt and Road Revitalise the RMB?
SWIFT, July 28, 2017, https://www.swift.com/news-events/press-releases/
rmb-internationalisation_can-the-belt-and-road-revitalise-the-rmb.
Monetary Policy: Global Trends
and the Development of Bank of Russia’s
Approaches
Veronika Zagoyti
Introduction
The worsening epidemiological situation, coupled with the reintroduction of restrictive measures in several countries, undermines economic
growth across the globe. According to the International Monetary Fund’s
(IMF) autumn forecasts, the global economy is expected to slow down by
4.4% in 2020 due to the negative effects of the COVID-19 pandemic.
In particular, the USA will face a drop of 4.3%, the Euro area of 8.3%
and Russia of 4.1%. The unprecedented uncertainty of the recovery path
is also compounded by several political factors (i.e. US elections, Brexit).
Meanwhile, most economies are experiencing a low level of inflation
driven by a weak aggregate demand with the consumer price inflation
decreasing further. Thus, in advanced economies, inflation is currently
below pre-pandemic levels, while in emerging market and developing
V. Zagoyti (B)
Moscow State Institute of International Relations (MGIMO University),
Moscow, Russia
© The Author(s), under exclusive license to Springer Nature
Switzerland AG 2021
G. Panova (ed.), Financial Markets Evolution, Palgrave Macmillan
Studies in Banking and Financial Institutions,
https://doi.org/10.1007/978-3-030-71337-9_9
119
120
V. Zagoyti
economies it declined sharply at the early stage of the pandemic with
recovery partially in line with the prices for energy commodities. Against
this background, almost all financial regulators in the world rapidly
eased their monetary policies and have expanded operations to stimulate
economic activity during the lockdowns.
Significantly, the majority of central banks have been lowering their
policy since late 2019, the last time such a simultaneous reduction was
observed being during the global financial crisis of 2008. For example,
the reduction of key rates took place in Australia (by just 75 bps to
0.75% in 2019), Brazil (by just 200 bps to 4.5% in 2019), India (by just
135 bps to 5.15% in 2019), Indonesia (by just 100 bps to 5% in 2019),
Mexico (by just 100 bps to 7.25%) and South Korea (by just 50 bps to
1.25% in 2019). Over the last year, the key rate in Turkey was gradually
reduced by half to 12% in mid-December, while on January 17, 2020,
the Central Bank of the Republic of Turkey announced a reduction of
75 bps, so it fell to 11.25%.
Furthermore, most countries including those listed above use inflation
targeting as their monetary policy regime. Its history goes back 30 years,
to when it was first officially applied in New Zealand in 1990. Notably,
no country has abandoned the regime.
Finally, it is necessary to highlight the global trend of the liberalization of currency regimes. According to the IMF Annual report on
exchange arrangements and exchange restrictions 2018, since April 2017,
the number of countries using soft currency fixing regime increased
significantly. Currently their share is just under half (46.4%) of all
member countries. The second major category includes those countries
with flexible regimes: the floating rate is applied in 35 countries, and the
free-floating rate is applied in 31 countries, including Russia.
These global trends cannot but have an impact on the Russian
economy and its key partners in the Eurasian region which are also
pursing inflation targets.
Monetary Policy: Global Trends and the Development of Bank …
121
Methodology
The idea of inflation targeting as a monetary policy regime was actively
supported by academic economists and financial regulators in the 1990s
after the failure of the exchange rate targeting regime as a nominal
anchor. Among the positive effects of inflation targeting, it is necessary to note a decrease not only in the level of key rates and inflation
but also in its volatility, as well as an increase in the rate of economic
growth (Neumann & von Hagen, 2002). Besides, some economists highlight a reduction in inflation expectations and an improvement in the
quality of inflation forecasts (Corbo et al., 2001; Mishkin & SchmidtHebbel, 2001). At the same time, the benefits of inflation targeting
remain unconfirmed (Ball & Sheridan, 2003), in particular, because of
its relative youth.
Another important element of monetary policy that requires attention
is the exchange rate regime. Economists have been discussing its impact
on exchange rate volatility since the last century. According to some
studies (Canales-Kriljenko & Habermeier, 2004), the greatest volatility is
achieved with a floating exchange rate. Thus, under the sliding corridor
regime, countries were able to reduce the volatility of the nominal effective exchange rate below the level corresponding to their economic
development. In other flexible regimes, this result was not achieved, but
the volatility remained lower.
This paper examines the use of inflation targeting and floating
exchange rates in Russia and other member countries of the Eurasian
Economic Union (EEU) with such scientific methods as analysis,
synthesis, analogy and a structural approach.
Results
The monetary policy of the Bank of Russia has undergone significant
changes in the period of 2014–2019. First of all, the transition to the
inflation targeting regime was implemented at the end of 2014. In this
regard, the refinancing system has been optimized: the main indicator of
monetary policy was the key rate (its value was 5.5% at the time of the
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V. Zagoyti
announcement at the end of 2013, while in January 2020 it was 6.25%).
The previously effective refinancing rate became reference only and had
been adjusted to the key rate level by 2016.
Besides, since February 2014, the Bank of Russia has suspended all
permanent operations for more than one day. REPO auctions have
become the main tools for regulating the banking sector’s liquidity (with
a period of one week, and with a period of one to six days, they have
been used as a fine-tuning tool). Auctions for providing loans secured by
non-market assets at a floating interest rate for a period of three months,
as well as auctions for providing the loans secured by non-market assets
or guarantees at a floating interest rate for a period of up to 12 months,
served as an additional mechanism.
Secondly, the exchange rate regime changed in 2014: from managed
to floating, which allowed the Bank of Russia to focus on achieving the
inflation target. Currency swap transactions for buying and selling US
dollars, as well as REPO operations in foreign currency, remain the main
channel of the Bank of Russia’s influence on the foreign exchange market.
As noted above, the IMF defined the Russian ruble regime as freefloating in 2019, which confirms the success of the chosen path.
Thirdly, the Bank of Russia’s communication policy has been
expanded: the dates of Board meetings for the upcoming year have been
published on the official website, as have analytical materials, including
the annual “Main directions of the unified DCP”, a quarterly report on
monetary policy issued following the results of reference meetings of the
Board of Directors, interviews with the Bank of Russia’s management,
and various statistics. Besides, meetings with financial market participants (investors and analysts) have been held to explain the current
policy of the Bank of Russia. This helps to increase the level of confidence in the central bank, reduce the level of uncertainty about its future
actions, form stable inflation expectations, and effectively operate the
transmission mechanism of monetary policy in general.
The successful transformation of the Bank of Russia’s monetary policy
has increased the overall level of financial stability, which has affected
the country’s economic position within the most important integration
association for Russia within the post-Soviet space, the EEU.
Monetary Policy: Global Trends and the Development of Bank …
123
The EEU treaty, signed between Russia, Kazakhstan and Belarus in
2014, provides for a coordinated macroeconomic and monetary policy.
At the moment, all member states have switched (or are switching) to
the inflation targeting regime, and the inflation targets are in the range
from 2.5 to 7%. At the same time, the spread of the key rates varies from
4.25 to 9.25%. Historical data (see Fig. 1) indicates a continued trend
towards the convergence of the policy rate curves.
The inflation range is also narrowing gradually (see Fig. 2). According
to the data as of December 2019, the lowest inflation level was registered
in Armenia (0.9%), and the highest one was in Kazakhstan (5.4%). In
Belarus, it was 4.7%, while in Kyrgyzstan and Russia it was 3.1%.
At the same time, there are still certain differences in the monetary policies conducted by the central banks of the EEU countries. For
instance, the Central Bank of the Republic of Armenia switched to the
inflation targeting regime in 2006, setting an inflation rate of 4% with
a range of ±1.5% of acceptable fluctuations as an interim target, and a
short-term interest rate as an operating target. It also has absolute independence in choosing the monetary policy strategy and its intermediate
and operational goals.
Fig. 1 Policy rates in the EAEU countries (Source Refinitiv)
124
V. Zagoyti
Fig. 2 CPI, % year on year, standardized, not SA (Source Refinitiv)
Its system of monetary policy instruments includes open market
operations (main refinancing operations, short-term regulation tools,
structural regulation tools), permanent instruments (pawn REPO operations and deposit operations, used at the initiative of counterparties), and
the refinancing rate. Meanwhile, rates for permanent instruments indicate the limits of the market interest rate’s allowable deviations from the
target value (the refinancing rate). Today, the upper limit is represented
by the Lombard REPO rate (5.75%), and the lower limit is represented
by the deposit rate (2.75%). Since February 2017, the key rate of the
Central Bank of the Republic of Armenia has remained at the level of
6%, only since 2019 seeing a reduction against the background of low
inflation. Moreover, the regulator conducts a sufficient communication
policy: the main documents include the central bank’s three-year strategy,
a quarterly review of inflation and press releases on the decisions taken.
The National Bank of the Republic of Belarus (NBRB) announced
the transition to inflation targeting regime in October 2019 (since 2015,
monetary targeting had been used). The main goal of the monetary
policy is to reduce inflation to 5% by the end of 2020. NBRB uses the
refinancing rate as a basic tool for regulating the level of interest rates in
Monetary Policy: Global Trends and the Development of Bank …
125
the money market. Liquidity is provided to the banking sector through
REPO transactions, swap transactions, and loans on an auction basis.
Besides, swap transactions and loans are used as permanent instruments.
Notably, due to another decline in the exchange rate of the Belorussian
rouble against foreign currencies, the currency regime was changed from
fixed to managed floating in 2015.
In terms of communication policy, the National Bank of the Republic
of Belarus publishes its annual “Main directions of monetary policy”, a
quarterly report on inflation, inflation expectations, a monthly review of
inflation, and press releases on the results of the decisions taken by the
Board of Directors.
The National Bank of Kazakhstan (NBK) has switched, since 2015,
to the floating exchange rate of tenge and IT mode. As a result, the
tenge exchange rate has almost halved against the US dollar (from 187
to 367) and has exerted strong pro-inflationary pressure: inflation, which
was in the range of 4.8–7.8% from 2009 to 2014, reached double-digit
values (the maximum is 17.7%) and remained at this level for about a
year. To contain inflation, NBK raised the base rate from 5.5 to 12% in
September 2015, to 16% in October 2015 and 17% in February 2016.
The increase in the rate contributed to a slowdown in the overall price
level. Furthermore, the following intermediate goals were set:
● 5–7% at the end of 2018,
● 4–6% at the end of 2019,
● lower, but close to 4% at the end of 2020 and beyond.
The main instrument of monetary policy of the NBK is the base
interest rate, set with a corridor of ±1 percentage points, and the shortterm one-day interest rate of the money market (TONIA1 ) acts as the
operational target. To set the level of interbank interest rates near the base
rate, as well as to limit the volatility of short-term money market interest
rates, NBK conducts the operations aimed at providing or withdrawing
1 TONIA
(Tenge OverNight Index Average) is a weighted average interest rate on REPO
opening transactions on the Kazakhstan stock exchange for one business day.
126
V. Zagoyti
liquidity in the money market (open market operations, permanent
access operations).
Since 2016, NBK has gradually reduced the key rate from 17 to 9%
(in June 2018). Due to the 2% drop in the tenge exchange rate due to the
possible restrictive measures against Russia (Kazakhstan’s main trading
partner), NBK conducted currency interventions in the amount of US$
0.5 billion. As a result, in October 2018, the base rate was raised by 25
bps to 9.25% (from April to September 2019, it was 9%). NBK defines
the current key rate as close to neutral.
Following meetings, NBK issues press releases and also regularly
publishes quarterly inflation reports, monthly economy overview and
annual main focal points of the monetary policy.
The National Bank of the Kyrgyz Republic (NBKR) announced a
gradual transition to inflation targeting regime in the medium term in
2017. Since 1992, the NBKR has been regulating the volume of monetary aggregates, ensuring a relatively stable exchange rate of the national
currency at their expense having switched to the interest rate targeting
regime in 2014.
The system of monetary policy instruments includes operations in the
open market (auctions for NBKR notes, operations on the secondary
securities market, REPO operations, credit auctions); permanent operations (intraday credit, overnight credit, seven-day credit, overnight
deposit); operations on the foreign exchange market (currency interventions, currency swap operations of the NBKR); a key (discount) rate; and
mandatory reserve requirements. In addition to the above, an operational
benchmark (short-term money market rates) is used. The lower limit of
the corridor is determined by the overnight deposit rate, while the upper
limit is determined by the overnight loan rate.
Since 2015, the NBKR has gradually reducing the official discount
rate, going from 10 to 5.0% per annum. It also applies the floating
exchange rate regime with the currency interventions carried out to
mitigate sharp fluctuations in the exchange rate. Thus, in 2018 NBKR
conducted 11 interventions, buying 20 ml USD and selling 154 ml
USD.
The communication policy of the National Bank of the Kyrgyz
Republic should end up producing a joint statement of the government
Monetary Policy: Global Trends and the Development of Bank …
127
of Kyrgyzstan and the NBKR on the main focal points of the economic
policy for the corresponding year, as well as a number of documents: the
main focal points of the monetary policy for the medium-term period, a
quarterly report on monetary policy, and press releases on the decisions
taken.
Recommendations
Currently all EEU countries are heading for a single monetary policy
regime—inflation targeting—while being at different stages of the path
and preserving some national characteristics. Meanwhile, the range of
key rates in the member countries and that of the inflation level is
narrowing.
In general, creating a single monetary policy for EEU member states
seems feasible in the long term. However, these countries need to go
through several preparatory stages. Firstly, this requires introducing a
single medium-term target for inflation. At the same time, effective
interest rate channels would help to set inflation expectations and real
interest rates at the same level across all the EEU countries.
The second stage requires implementing a unified exchange rate policy.
The analysis revealed some differences between the actual exchange
rate regimes of the EAEU member states. Nevertheless, the steps taken
to ensure a flexible exchange rate contribute to the harmonization of
approaches to creating a single currency policy. Higher confidence in the
national currencies of the EEU member states enables the use of such
currencies more frequently in mutual settlements under trade contracts
with the lower shares of the US dollar or the euro.
Finally, it is necessary to coordinate monetary policies implemented
by the EEU countries at the supranational level with the elaboration
of a single monetary policy strategy in the long run. We believe it is
appropriate to use the positive European experience (in particular, that
of establishing the European Central Bank) and to make the supranational body of the EEU fulfil this function, as envisaged by the concept
of creating a common financial market by 2025.
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V. Zagoyti
All things considered, a common monetary policy for EEU countries should help normalize the inflation rate, reduce the exchange rate
volatility, distribute capital effectively, increase competition and increase
foreign and mutual trade; thereby, this should promote macroeconomic
stability, both in member states and in the region as a whole. Though the
COVID-19 pandemic has had a significant impact on these economies,
it might be an opportune moment to strengthen cooperation and walk
together on the path of recovery with similar monetary policy tools.
References
Ball, L., & Sheridan, N. (2003, January). Does inflation targeting matter? Paper
for the National Bureau of Economic Research conference on Inflation Targeting,
Bal Harbor, Florida.
Bank of Russia. (2019). Monetary Policy Review. Available at https://
www.cbr.ru/Collection/Collection/File/25679/2019_04_ddcp.pdf. Accessed
30 January 2020.
Canales-Kriljenko, J., & Habermeier, K. (2004). Structural factors affecting
exchange rate volatility: A cross-section study (IMF Working Paper,
WP/04/147). Available at https://www.imf.org/~/media/Websites/IMF/imp
orted-full-text-pdf/external/pubs/ft/wp/2004/_wp04147.ashx. Accessed 30
January 2020.
Corbo, V., Landerretche, O., & Schmidt-Hebbel, K. (2001). Assessing inflation
targeting after a decade of world experience. International Journal of Finance
and Economics, 6 (348), 168.
International Monetary Fund. (2019). Annual report on exchange arrangements
and exchange restrictions 2018. IMF. Available at https://www.imf.org/~/
media/Files/Publications/AREAER/areaer-2018-overview.ashx. Accessed 31
January 2020.
Mishkin, F. S., & Schmidt-Hebbel, K. (2001, July). One decade of inflation
targeting in the world: What do we know and what do we need to know?
(Working Paper No. w8397), National Bureau of Economic Research,
Cambridge, MA.
Neumann, M. J. M., & von Hagen, J. (2002). Does inflation targeting matter?
Federal Reserve Bank of St Louis Review, 84 (4), 127–148.
Financial Innovations, Financial
Engineering and Financial Technologies:
Risks or New Opportunities? Innovations
and New Financial Technologies
in the Practice of Banking
Aleksei Bolonin, Igor Turuev, and Vladimir Balykin
Introduction
Until recently, FinTech primarily developed in such fields as payments,
money transfer, P2P lending and crowdfunding. Solutions for complex
office operations in the form of FinTech innovations (robotisation,
BigData) have been offered. The implementation of achievements in
the field of AI systems is underway. Beginning in the mid-2000s, CIs
have been investing a significant portion of their budgets in the funding
of innovations and the development of new financial instruments. The
combination of innovative start-ups and major technology players has
shaped the evolution of a global FinTech industry. The utilisation of
A. Bolonin (B) · I. Turuev · V. Balykin
Moscow State Institute of International Relations (MGIMO University),
Moscow, Russia
I. Turuev
e-mail: ituruev@yandex.ru
© The Author(s), under exclusive license to Springer Nature
Switzerland AG 2021
G. Panova (ed.), Financial Markets Evolution, Palgrave Macmillan
Studies in Banking and Financial Institutions,
https://doi.org/10.1007/978-3-030-71337-9_10
129
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technology innovations helps actors expand their market shares in many
fields of financial services in the retail segment of the market.
Methodology
Over 12,000 start-ups in the field of financial innovations are currently
active worldwide.
Innovations in customer service. By analysing a consolidated list of
customer requirements with respect to banks, we have established the
existence of a stable demand for certain services and products including
the obtaining of loans, the opening of deposits, online account management, money transfer, etc. New technologies enable the creation of
banking services integrated with the contemporary world (Skinner,
2014). The development of digital ecosystems (“DEs”) capable of satisfying the entire range of customers’ vital needs, including non-financial
ones, will be the next stage in the evolution of credit institutions. It is
vital for banks to retain their customers within their respective DEs by
offering risk assessments with respect to their transactions.
Remote banking service (RBS) and the problem of customer involvement.
Convenience and cheapness are the key benefits that the new services
offer to their customers; despite financial innovations contributing to a
significant increase in the number of financial service users, non-banking
institutions are also growing rapidly by offering account management
services to their customers for the purpose of purchasing goods within
trading systems. For instance, money flowing into the Chinese WeChat
or Alipay remains beyond the control or use of credit institutions.
Over 40% of the population currently use the bKash system and make
payments from their mobile devices. Almost 100% of the economically active population in Kenya regularly use M-Pesa for their mobile
payments, thus saving up to 20% on bank changes. Between 2011 and
2015, the number of financial service users doubled due to the deployment of RBS and new Aadhaar identification services. In 2018, Paytm,
a mobile wallet service, boasted 280 million users and planned to hit
the 0.5 billion level within the 3 subsequent years. The involvement of
companies who utilise the omnichannel infrastructure of debit cards in
Financial Innovations, Financial Engineering, and Financial …
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order to process money debit/credit transfers for transaction parties—
Alipay, SoftBank (Japan), banking innovations by Uber, Alibaba and
Amazon—are a powerful infrastructure-related factor.
The bank account going virtual pushes down the share of conventional
payment tools (for instance, the use of cheques in the United States has
decreased by 70% since 2000) and expands the opportunities for making
banking transactions independently.
Customer needs and product analytics. During the 1960s and 1970s,
the first ATMs automated basic teller operations with respect to cash
delivery. In 1995, Wells Fargo launched a web site which showed a client
their account balance. As a further step, statements of customer accounts
were moved online. Transfers among accounts were later also enabled.
By launching their iPhone with NFC support, Apple brought about a
revolutionary upheaval in banking innovations in the form of mobile
payments.
The demand for advice in any place and at any time has provided
the momentum to develop a service for communications with chatbots.
Product range standardisation easily makes communication between a
human being and a machine more formal. In most cases, people ask
the same questions when approaching a bank. The banks have seen
voice control and chatbots as another channel for promoting their
conventional products. A human-centred design facilitates the development of banking products with due regard for consumer needs and
provides additional profits for CIs. Chatbots collect and process information on customer needs and generate a product based on emotional
banking, whose principal advantage is the ability to obtain more precise
information on any customer from various sources (the Internet, mail,
payment systems, geo-location, etc.); through this process, the personalised features of the product itself can be determined objectively, it can
be offered at the right time, and it can be linked it to a broad context
associated with the customer’s smartphone.
This brought into existence the concept of virtual financial advisor
that largely pre-determined the potential for the expansion of RBS functionality. In December 2015, almost 40% of the US residents had not
visited any branches of their banks for 6 months—the fact that demonstrated the new trend for the formation of a cluster of banks without
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physical networks (neo-banks). The structure and contents of KPIs for
CI network staff have been modified by introducing more indicators
reflecting sales via the Internet, where the branding platform will be
moved and an environment for evaluating customer needs will be set
up. Within a period of 3–5 years, as one could reasonably expect, most
branches of retail banks will migrate into the omnichannel online dimension (Moven and Monzo) and the experience of managing customer
relations enriched by FinTech will create additional components in the
capital base of a bank. In July 2017, the Korean Internet platform Kakao,
the owner of its own messenger and the Kakao Taxi service, launched its
digital Kakao Bank. For the first 5 days of the bank’s operations alone,
more than one million accounts were opened, the aggregate account
balance reaching $0.5 billion. According to data from May 2019, the
highest number of settlement accounts has been opened by NUbank
(Brazil), in operation since 2013, with 12 million users; the Korean
Kakaobank, in operation since 2016, has 10 million accounts, and
Chime, a digital bank headquartered in San Francisco, has 6.5 million.
The FinTech start-up Revolut is next with 6 million customers. These
companies have no branches, but they have convenient applications, and
almost each of them positions itself as a free-of-charge alternative to bank
charges. At the same time, these FinTech companies either co-operate
with conventional banks or obtain a banking licence themselves. For
example, Revolut has obtained a licence from the European Central Bank
as a Lithuanian Bank.
The Chinese bank ICBC, in an attempt to compete with Alibaba and
Taobao, launched its own e-commerce service, Rong E-Gou. In 2015,
ICBC offered its platform to businessmen who sold goods and services
worth almost $218 billion. In 2018, Sberbank, jointly with Yandex,
established a very similar platform called Beru in Russia as a further
example of developing a new ecosystem-based environment.
Lending and financial market transactions. Some inconsistency
regarding credit risk assessment between conventional banking regulation and the new technologies. Lenders use new types of data and
machine learning tools in order to fine-tune the risk assessment models
that were developed when computer capacities were weak or did not
exist at all. Credit risk assessment produces different results for different
Financial Innovations, Financial Engineering, and Financial …
133
groups of borrowers, differences which are often disadvantageous to
small and medium-size businesses characterised by low revenues and
high market volatility. Approved models are typically based on the use
of credit points and therefore show positive results for those consumers
whose scores are high in terms of the chosen model; however, such
models may inadvertently exclude people without a credit history or
with complicated credit histories, which are hard to assess effectively
using available data (such as past financial failures due to health problems). Such a model may exclude those customers who are creditworthy
and could prove that in case the lender had more objective information
about them. Technologies based on a customer’s metadata review make
the evaluation of his or her creditworthiness much more unbiased. Now
banks can learn much more about people besides their credit histories
and accounts, which is also important in order to reveal fraud and money
laundering situations.
The use of scoring models has allowed an increase in the quantity and
quality of loans. The customer provides replies to questions, and, if the
situation is standard, decisions will be made without human involvement. The collection of all available information on the customer’s
behaviour and financial discipline has become part of technology development. Among the practical results of this activity is the generation of
customer-specific offers where the bank offers pre-approved loans under
individual terms and cross sales; these practices not only raise the bank’s
revenues but can also be viewed as a tool to enhance customer loyalty.
The use of robots for the purpose of dealing in financial markets is
one of the ways to enhance the efficiency of banking operations. Theoretically, a robo-advisor should assist a new investor in putting together a
portfolio in accordance with the customer’s risk profile that the robot
should correctly determine. In this regard, credit institutions and the
regulator should monitor the emerging new risks, such as potential
market manipulation associated with simultaneous movement of funds
and papers upon the formation of identical portfolios and the abuse of
customer trust.
Robotised software—replacing human actions and capable of working
24/7 without errors—can be used to carry out standard operations. For
the purposes of operational and bookkeeping activities, AI produces a
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significant improvement in terms of quality, speed and risk abatement.
Automated liquidity management systems analysing and predicting cash
requirements have begun to appear.
Many opportunities are currently impeded by data quality. As data
storage and processing methods improve, the processes could become
cheaper and safer.
Financial and regulatory reporting. In November 2017, the UK Financial Conduct Authority (FCA) held an experiment involving the preparation of a regulatory protocol based on the use of flexible digital models.
Having assembled an aggregate code for all financial market players,
they coded an amendment to the statutory reporting mandate, applied
it to a set of fictional data, and successfully prepared a new procedure reflecting the revised “machine-to-machine” rule. The reporting
update—that could take several months or even years to complete if
conventional tools were used—was made in approximately 10 seconds.
Highly automated regulation will not, of course, be used in any and every
areas, but, wherever possible, it will enable time and money saving both
for governments and for businesses and individuals.
Changes in missions, culture, skills and protocols. The majority of regulatory authorities working today would require the redefining of missions,
coverage and protocols. First of all, this means the need to rethink the
problems of cryptocurrency regulation and the very nature of banking
business in an open banking environment. In this regard, it would be
advisable to declare new principles of regulation: the principles of platform flexibility and openness. The regulators are required to speed up
their cycles for the creation and updating of rules. Some of them might
be structured so that to operate as an open-platform service similar
to GitHub or App Store, which would prescribe standards and then
enable the implementation of the innovations subject to compliance with
regulatory requirements. The regulatory authorities might also publish
certain rules in the form of a software code so that it could be input into
industry systems and automatically ensure consistent conformity.
One important area of digitalisation and banking innovation is
addressing the problem of customer identification. Facebook, Apple,
Tencent, Amazon, Alibaba/Alipay, Uber, Snapchat and other worldwide
platforms are currently the largest holders of extensive identification data
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sets; they not only possess basic identification data, but also maintain
complex sets of behaviour-related data, as well as biometric data, such as
facial recognition. It is quite likely that, in the near future, most banks
will outsource customer identification to identity brokers, such as Facebook or the Aadhaar card system. In the future, it will be of no benefit
to banks to act as identification data holders; they will interact with
identification services and simply make available enough information
to correctly certify the identity of any new customer, since softwarebased face recognition technologies identify customers more precisely
that face-to-face interaction with a bank employee.
In the immediate future, the prevention of money laundering and
terrorist financing will not be based on a reporting mechanism requiring
banks to act as a virtual police in order to trace suspicious transactions or
suspicious account holders. Instead of that, information systems will be
tracing transactions en masse, searching for suspicious flows and identifying activity centres requiring police response, as now occurs within the
SWIFT system.
Cyber security. Cyber security compliance is a separate aspect of the
matters under discussion. This is required to detect any attack and the
attacker in the system as soon as possible and to reduce the attacker’s
capabilities so as to rule out any irreparable damage to the system (the
so-called ability to detect). In this regard, there is demand for highly
intelligent protection tools enabling timely detection of any attacks or
incidents.
For the first three-quarters of 2019, Positive Technologies’ experts
recorded 61 attacks on financial companies (compared to 60 for the
corresponding period in 2018 and 92 for 2018 as a whole). 74% of those
attacks used phishing and 80% used malware. These are the key methods
for penetrating the local networks of financial entities from the Internet.
New regulatory requirements for cryptocurrencies. Regulating cryptocurrencies is undoubtedly complicated by the decentralised nature of most
cryptocurrencies, the lack of any clear internal supervision, and seeming
anonymity. Some countries have issued rules making cryptocurrencies technically illegal, whilst others have introduced major restrictions and licensing on crypto exchanges. The evolution of autonomous
networks, smart contracts, intellectual assets and infrastructure will likely
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include the creation of new value exchange methods optimised around
crypto platforms. Financial innovations certainly include new formats
of venture investment funds operating as decentralised autonomous
organisations.
A decentralised autonomous organisation (“DAO”) is a venture
investment fund based on a computer code and using the Ethereum
blockchain infrastructure. Doing without any typical structure of corporate governance, the fund uses Ethereum cryptocurrency as the basic
architecture for its assets. Technically, a DAO is based on an automated
smart contract among the community members involved in the experiment and represents a template for future business transactions, which
will become a typical phenomenon in 10–15 years. Currently, however,
the regulators would prohibit such types of organisations in most jurisdictions worldwide, since a DAO lacks a management board, charter or
business licence, and there are no officers who could be fully responsible
for any decisions being implemented within the operational structure
of the DAO. In addition, a contemporary financial system is not ready
to embrace such companies, since there is no technical solution available with respect to the taxing of economic agents that can be classified
neither as legal entities nor as individuals.
Such investment funds operating in a virtual space and using cryptocurrencies as their units of account are distinguished by the fact that
the units of account themselves are issued without being linked to any
jurisdiction, so that the enforcement of any specific state’s laws and regulations is ruled out. No solution has been found yet with respect to the
regulation of capital movement into funds incorporated in one country,
operating in another country, accepting investments from investors in
cryptocurrencies worldwide and capable of relocating their crypto coins
into a different jurisdiction without any operational consequences, a fact
which is a challenge to regulators on a global scale. Nevertheless, the
process of cryptocurrency conversion into fiat money that constitutes
legal tender in a particular jurisdiction having its own courts and tax
legislation partly contributes to solving the problem of capital movement
regulation.
Those regulators, which will promptly find a solution addressing
the regulation of new financial technologies and choose not to impose
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137
administrative restrictions upon potential innovations at the market
level, will promote investment in the emerging FinTech ecosystem and
contribute to the migration of capital into their respective markets.
The regulation of institutions accepting deposits or issuing currency
has played a historical role of central banks, but control and structural
elements have begun to crumble in a world where cryptocurrencies can
be issued by a team of programmers or a technology company.
In this regard, one could appropriately ask whether the banking
licence itself will still be valuable in the immediate future, since nonbank entities offer ever more services, thus competing with banks in their
traditional field.
Financial technologies imply progress not only with respect to new
formats of customer care and service, but also in terms of fraud.
The evolution of cryptocurrencies and their active deployment in the
financial world clearly contradicts the conventional forms and methods
for the regulation of new financial markets and instruments (Kiniakina,
2019). In most cases, regulators cannot influence cryptocurrency transactions themselves. They rely on the fact that these currencies are used
to perform transactions banned in the field of official money and impose
more controls on crypto exchanges, where cryptocurrencies are converted
into real money.
All requirements for the internal controls and stability of financial
institutions that have been developed over recent years make sense
from the standpoint of investor protection. When issuing licences, regulators monitor internal control arrangements and the reputation and
experience of managers. Sometimes it actually helps them eliminate
fraud-related schemes from the very outset. In connection with cryptocurrencies, all regulators are especially concerned with the growing risk
of money laundering. The new technologies are potentially capable of
increasing the efficiency of the financial industry, but their anonymity,
speed and global coverage make them attractive for use in illegal transactions. In this regard, entities that collect funds as technology companies
are actually different in nature and can simply be fraudsters.
Antoine Gara notes that bank securities are traded on exchanges at a
price significantly lower than shares in many technology companies. That
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is why many FinTech start-ups seek to position themselves as technology
rather than financial firms (Gara, 2019).
Results
Listed below are banking products that may significantly change in the
immediate future: the credit card and overdraft will transform into a
smart solution with a dynamic credit limit on the basis of predicting
algorithms; cheques, the settlement account and the debit card will
transform into a cloud-based personal money storage linked to a multicurrency mobile wallet; the savings account will be supplemented with
tools and tips encouraging saving behaviour; consumer credits will be
associated with advice as to payment options when making purchases;
mortgages will be reshaped in order to act as a home purchase assistant; auto loans/leases will give way to subscriptions for access to
autonomous vehicles; the bank account for small businesses will be
replaced with a smart solution for the holding of funds (including bookkeeping, tax calculation and payments using AI-based technologies); the
credit facility for business needs will be supplemented with predictive
analytics and tools to ensure even distribution of cash flows; the fixedterm deposit, savings certificate, investment account or interest-bearing
savings account will become a robotic assistant for capital accumulation.
Flexibility and the absence of regulation are the key advantages of
FinTech start-ups, but their disadvantage is the lack of reliable information on their status, their ability to generate revenues and even the
availability of the technologies promised to investors.
Automation has penetrated all areas related to the provision of standard products to such an extent that it is replacing practically all human
personnel.
Conclusions
Credit institutions have entered a virtual cyberspace, and this opens up
new opportunities, creates new factors of risks and modifies the profile
Financial Innovations, Financial Engineering, and Financial …
139
of these risks. The expanded information space of credit institutions
requires, in its turn, a shift of a regulator’s supervisory functions towards
the new information perimeter of banking business.
IT and AI capabilities transform the financial space from a real into
a virtual one. If, therefore, regulators seek to promote capital flows and
investments in business activities, then the closing of investment funds
using cryptocurrencies would hamper free capital movement and restrict
a number of innovative start-ups, thus increasing risks for such funds’
customers, whose number is rising worldwide.
The regulator should implement the intense, AI-based monitoring of
business behaviour and market models of transactions using RegTech or
a supervision technology called SuperTech or SupTech.
A reform in banking supervision should create systems based on digital
infrastructure, since no improvement of old analogue processes would
become an appropriate response to the challenges of the digital era. To
this end, it is necessary to determine the data and analysis required to
achieve the goal and then to digitalise the regulatory framework in order
to make its functionality better and its operation cheaper.
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pdf.
Banks and Banking: New Trends
and Challenges
Marco Ricceri, Valentina Tarkovska, and Irina Yarygina
Introduction
Despite the initial efforts—this is the clear complaint contained in the
Introduction of the UN Report—the world is not on track for achieving
most of the 169 targets that comprise the Goals. The limited success in
progress towards the Goals raises strong concerns and sounds the alarm
M. Ricceri
Rome, Italy
e-mail: info@eurispes.eu
V. Tarkovska
Dublin, Ireland
e-mail: valentina.tarkovska@dit.ie
I. Yarygina (B)
Moscow State Institute of International Relations (MGIMO University),
Financial University Under the Government of the Russian Federation,
Moscow, Russia
© The Author(s), under exclusive license to Springer Nature
Switzerland AG 2021
G. Panova (ed.), Financial Markets Evolution, Palgrave Macmillan
Studies in Banking and Financial Institutions,
https://doi.org/10.1007/978-3-030-71337-9_11
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for the international community. Much more needs to happen—and
quickly—to bring about the transformative changes that are required.
An important role in this respect plays multilateral banking institutions
that contribute to the global economy by introducing profound standards of financial activity and new instruments for meeting the needs
of their clients. Considering the fast paste of the technological development and the role technology plays in improvement of business efficiency
and productivity, there is a need for open discussion of the changes
technology brings to every day operations and to the processes inside
the boardroom. Boards have to be, at least, aware of the forthcoming
technological destructions and to be able to navigate their companies in
the right direction, that guarantees sustainable performance and satisfy
interests of different groups of stakeholders including shareholders and
society at large. It is especially important for banks and financial institutions. Banks serve interest of much broader pool of stakeholders and,
in comparison with other companies, the role of corporate governance
in financial institutions is to balance their [stakeholders’] interests and
to provide protection to parties. This requires a much deeper involvement of the board of directors in strategic issues and risk oversight.
In the era when technology is growing exponentially and leaders and
boards are only changing incrementally (Bonchek, 2016), incorporation
of smart technologies to support decision-making process at the board
level becomes inevitable. Pairing smart people with smart technologies
and augmenting board intelligence using artificial intelligence (AI) can
improve board performance and benefit banks and financial services
companies in the long run. AI can result in reduction of agency and
monitoring costs (Fenwick & Vermeulen, 2018) of financial institutions,
and it is not far-fetched anymore as we have, for example, Einstein and
Vital, who are “seating” on boards and are consulted for advice with their
voices being considered for the final decisions.
Banks and Banking: New Trends and Challenges
145
New Challenges for the Multilateral
Development Banks
In a specific passage—with reference to the dual objective of promoting
a decisive transition towards new economic systems, truly sustainable
and just, and in parallel to organize a different governance system, by
goals and inclusive—the UN Report explicitly recognizes the role of the
development finance institutions, including public development banks,
operating at the multilateral, national and regional levels, a role that is
defined as “significant” (GSDR, 2019, p. 34). There is a clear awareness
that the organization of a new development model presents enormous
financing needs and that a targeted increase in public spending by states,
however important, will never be sufficient to achieve the objectives of
the 2030 Agenda. In this situation, the choices of private investors are
decisive. It is therefore necessary to promote a common effort by public
and private sector operators: “all public development banks – national,
regional and multilateral – as well as business and private finance sectors,
should put the onus on investors to take account of sustainability when
making investment decisions or engaging with investees on their portfolios. Through regulatory and behavioral changes, market practices should
better reflect the need to orient financial flows towards sustainable development and adopt sustainability standards” (GSDR, 2019, p. 136).
To this end, states are urged to define regulatory systems suitable for
promoting effective public-private partnerships, “designed to ensure that
risk is allocated fairly and that the public interest is not subsumed into
private or corporate interests”; furthermore to “encourage private sector
investments in public goods. If it is to invest more in human well-being,
the private sector will require greater incentives. Those can come in the
form of government regulations and taxation that direct profits towards
the necessary public goods”. “However – the Report specifies - it should
also be noted that prioritizing human well-being could generate enormous business opportunities for welfare investments” (GSDR, 2019,
p. 45).
To understand the value of these recommendations it is useful to
remember that the United Nations had approved the guidelines and
concrete actions to be promoted in this area in a previous document,
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“The Addis Ababa Action Agenda”, that was adopted at the Third
International Conference on Financing for Development (Addis Ababa,
Ethiopia, 13–16 July 2015) and subsequently endorsed by the UN
General Assembly in its resolution 69/313 of 27 July 2015. We are,
therefore, about two months before the General Assembly which on
September 25 of same year approved the 2030 Agenda. The Action
Agenda establishes a strong foundation to support the implementation
of the 2030 Agenda for Sustainable Development. It provides a new
global framework for financing sustainable development by aligning all
financing flows and policies with economic, social and environmental
priorities. It includes a comprehensive set of policy actions, with over
hundred concrete measures that draw upon all sources of finance, technology, innovation, trade, debt and data, in order to support achievement
of the Sustainable Development Goals. It is important to stress the
point, that multilateral development banks can provide countercyclical
lending, including on concessional terms as appropriate, to complement
national resources for financial and economic shocks, natural disasters
and pandemics, as well as contribute to providing both concessional
and non-concessional stable, long-term development finance by leveraging contributions and capital, and by mobilizing resources from capital
markets (Action Agenda, point 70, p. 33). It is worth, while mentioning
the growing role of Development banks in global environment that
reveals an important tendency in global finance, alleviating constraints
on quality infrastructure investment, sub-sovereign loans and encourage
develop new instruments to channel the resources of long-term investors
towards sustainable development, including through long-term infrastructure, green bonds, new financing mechanisms to support economic
development (Action Agenda, point 75, p. 35). Modern economy is
characterized by technological progress, that plays an important role in
banking and forms the basis for a key trend, related to the introduction
of Artificial intelligence in practice.
Banks and Banking: New Trends and Challenges
147
Artificial Intelligence in the Modern Banking
The financial sector always has been one of the frontrunners of IT
technologies. IT contributes to stronger profitability by improving operational efficiency. This is true not only for back and middle office but
also for the front-end of a bank. IT solutions have been focusing on the
automating repetitive tasks that would otherwise require human involvement. For example, the automated teller machines (ATMs) replaced the
repetitive tasks of bank cashiers (Kaya, 2019). They made it easier for
clients to access the banking service while also making banks more efficient. Online banking is another example of client-facing IT adopted
by banks. With banks and their clients meeting on virtual platforms,
banking is becoming less and less branch dependent. Nowadays, AI is
something to consider regardless of whether a bank wants to improve or
personalise customer service or optimise processes. AI can bring exceptional value and lower cost to a business and its customer, and it does
so. AI will have a huge impact on financial services sector. It will redefine banking processes, products and services, and user experience. AI
allows banks to become analytics-driven and use the data to dynamically inform and share what they do in real time. Banks, which fail to
keep pace with technology, will not be able to compete and might lose
their customers (Jubraj et al., 2018). AI in banking is implemented in
the real-time identification, and prevention of fraud in online banking,
know-your-customer (KYC) process, and also use of robo-advisors. There
are three broad roles of AI in banking: assisted AI, advisory AI and
autonomous AI (Thomas et al., 2016). In the banking context, there are
several specific autonomous AI applications, which include autonomous
robotic trading and handling of loan applications, and becoming more
and more commonplace.
AI and Banking Governance
Corporate governance is important for the proper functioning of the
banking sector and the economy as a whole (BIS, 2015). The revised
corporate governance principles for banks emphasise the importance of
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keeping abreast of development in banking for board members (BIS,
2015). The board of directors is the main governing body in any
modern corporation including financial services firms. The main boards’
functions are outlined by the G20/OECD Principles of Corporate governance (OECD, 2015). Directors’ main duties include but not limited to
advice, monitoring and supervision. Boards also retain certain managerial duties and are responsible for the appointing and terminating senior
management and approving major transactions. On top of this, boards
also have to fulfil service and relational functions and provide advice to
management and, in particular, to CEO, and to act as a liaison with
company stakeholders.
Artificial intelligence in the board room is not far-fetched anymore.
Einstein and Vital are just two examples of AI “board members”, who
are consulted for the advice with their voices being considered for the
final board decisions. Cost of bad decisions is very high and this is one
of the main factors that accelerates the use of AI in the boardroom.
Business has become too complex and, in many cases, it is difficult for
boards and CEOs to make good decisions without assistance of intelligent systems. Boardroom decisions are often made with the emphasis on
gut feelings. Only 16% of board members fully understood the trends
in their industries and the changes that technologies can make to these
trends. Libert et al. (2017) advises on the necessity of development of a
usable “corporate genome” to allow for AI integration into the decisionmaking process at the board level. With AI assistance, board decisions
can be based on the analysis of corporate patterns and industry trends.
Data-driven decisions, such as capital allocation, earnings distribution,
risk management, to name a few, will be improved with the supplement
of AI. Thus, AI doesn’t merely replace board members but augments
already intelligent guidance. Artificial intelligence for both operating
and strategic decisions can become an essential competitive advantage
(Libert et al., 2017). At the same time Kolbjørnsrud et al. (2016) report
that managers across all hierarchical levels spend half of their time on
administrative and control tasks, and remaining 50% of time is spent on
so-called judgement work, including problem solving and collaboration,
strategy and innovation, and relations with different groups of stakeholders. In contrast, board members spend approximately 75% of their
Banks and Banking: New Trends and Challenges
149
time on judgement work with the rest being spent on the administrative
work (McKinsey‚ 2018a). Academics and practitioners alike agree that
AI can be used for the almost all administrative duties but disagree when
it comes to the judgment work. On the one side, Kolbjørnsrud et al.
(2016) suggests that human managers will dominate the judgment work
and advise that in the context of judgement work, the role of AI will
remain advisory. And in this kind of support with the judgement tasks,
AI will realise its greatest potential for value creation. Human judgement
cannot be replaced by AI, as it may result in short-termism and jeopardy
of the long-term profitable strategies, which cannot be easily identified
from data. Thus, board members have to be able and willing to combine
their experience and insight with data analytics to balance short-term and
long-term goals. Hence, the role of managers as ultimate decision-makers
is unquestionable when it comes to judgment tasks. Agrawal et al. (2017)
question the ability of AI to initiate the reliable actions even though
AI excels in forecasting. Agrawal et al. (2017) and Beck and Libert
(2017) suggest that organisations will have demand for people who
can make responsible decisions (requiring ethical judgement), engage
customers and employers (requiring emotional intelligence) and identify
new opportunities (requiring creativity). They also suggest that human
judgement will be required when deciding on how to apply AI in the
best possible way. Beck and Libert (2017) also suggest that AI should
not replace directors or automate the leadership on the board room but
can be used for the board intelligence augmentation. AI can be used
when assistance and advice is needed by board members rather than
as a replacement, for the board. Frey and Osborne (2017) hypothesise
that “generalist” work might be difficult to replace by machine because
this work requires high degree of social intelligence for the tasks associated with negotiations, coordination and problem resolution. Frey and
Osborne (2017) predict that over the next decade or two management,
business and finance occupations, which require a high degree of the
generalist skills, face very low risk of automation.
On the other side, we have strong proponents who believe that AI
will replace the management in the nearest future. Bostrom (2016),
Susskind and Susskind (2015) among others advocate the possibility that
machines will assume leadership positions. Bostrom (2016) argues that
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machines can excel in strategizing, social manipulation and economic
activity, which are the important skills for management and, if replicated by machine, will allow creating of an artificial director or manager.
Predicts that machines can be better than humans when it comes to the
judgement work due to the emergence and improvement of emotionally intelligent AI. Kaku (2018) even speculates that by the end of
century there will be machines with innovative learning capabilities
and self-aware robots. Thus, if technology will progress exponentially,
we can witness the unprecedented “technological unemployment” with
machines mastering even judgement tasks. And, in accordance with this
view, managerial tasks, which rely on data and results of the analysis,
might be easily automatable (Petrin, 2019). Assuming the scenario that
board tasks can be fulfilled by the advanced AI, we might expect the
boards to be smaller and/or also boards with the AI director/software,
which might combine all benefits of diverse group of board member
with a broad variety of knowledge, expertise, ethnical and cultural
backgrounds. Technologies are even well-placed to facilitate more “inclusive” models of organizations that empower more stakeholders; they can
help to increase engagement and responsibility of all stakeholders in a
company (Fenwick & Vermeulen, 2018). And this is what will change
the traditional corporate governance. In the new model when cryptoroute is used to raise money, tokens can provide the right incentives to all
stakeholders. In this model, traditional roles such as investors, executives,
managers and consumers will become blurred, and information asymmetries—one of the main issue that corporate governance has to deal
with—will become much less significant (Fenwick & Vermeulen, 2018).
Decentralized forms of organization can use AI to improve company’s
communication process. This allows for continuing reporting instead
of annual report. AI will make accountability stronger and reduce the
temptation to act opportunistically (Fenwick & Vermeulen, 2018). All
these technologies characterized by a fast pace of development, multitude of application, huge uncertainties about risks, advantages and
future directions create enormous challenges for regulators. Regulators
can find themselves in a situation when they have to regulate blindly
without sufficient facts or opt for doing nothing (Fenwick & Vermeulen,
2018). Regulators need much more flexibility than before; they have to
Banks and Banking: New Trends and Challenges
151
move from traditional fact-based model and have to adopt a polycentric
approach when companies, experts, regulators and public is involved, as
they do in financial services, for example (Zetzsche et al., 2017).
Conclusions
Modern banking is based on the mechanism that regulates the relationship between the banks, especially the multilateral ones and their
customers in all phases of the project, from conception to implementation and monitoring of the results achieved, is based on continuous
collaboration between the parties involved, where necessary, it provides
for a continuous adjustment of the initiatives to be promoted with the
help of both parties and with the involvement of third parties who
are directly or indirectly interested in the project. There is no doubt
that such a participatory mechanism must be further defined and specified to play a proactive role with the customer in identifying the most
suitable standards to be respected on the occasion of the projects and
technologies. Three core areas that AI will affect are people, processes
and data. Financial institutions have to compete in the AI-dominated
world, which places enormous pressure on their old hierarchical structures and corporate governance. By implementing AI technologies, banks
can reduce costs and improve labour productivity, fight weak profitability
and to remain competitive. Artificial intelligence for both operating
decision-making and strategic decision-making will become an essential
competitive advantage. Boards of directors are going to see more AI in
corporate governance as board members next to them if they want to
compete in data-driven decision-making. If regulators and other policymakers will not act and respond to a change, the more competitive
jurisdiction will gain a competitive advantage in attracting the best new
business and the most creative talent.
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M. Ricceri et al.
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Transnational and Regional Banks
Elena K. Volkova
Introduction
Transnational banks (TNB), formed on the basis of the largest banks
of industrialized countries, play a critical role in the national and
international financial markets. These are universal credit and financial institutions with a wide network of branches, representative offices,
departments and subsidiaries. The main TNB’s clients are transnational
corporations (TNCs), international organizations, foreign representations, government institutions and large enterprises from various sectors
of the economy.
The level of capital concentration and capitalization of transnational
banks is becoming a defining indicator of financial globalization. With
E. K. Volkova (B)
Moscow State Institute of International Relations (MGIMO University),
Moscow, Russia
Belarusian State University, Minsk, Republic of Belarus
© The Author(s), under exclusive license to Springer Nature
Switzerland AG 2021
G. Panova (ed.), Financial Markets Evolution, Palgrave Macmillan
Studies in Banking and Financial Institutions,
https://doi.org/10.1007/978-3-030-71337-9_12
155
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E. K. Volkova
TNBs, financial relations between economic entities are not limited to
the boundaries of the nation states and are formed as an inter-state and
cross-country. TNB’s accumulated capital allows lending to the largest
projects on an international scale.
Financial globalization manifested in the twentieth and twenty-first
centuries through the strengthening of all countries’ mutual economic
dependence, the developing foreign trade, fundamental changes in the
means of transportation and communication, the developing international transport, the Internet and the creation of an extensive legal framework for servicing foreign economic and international financial relations,
contributed to expanding international financial relations, increasing
volume of transactions in financial markets, as well as cross-country
cash flows, digitalizing financial services and significantly strengthening
TNB’s positions.
Considering that TNB’s main clients are TNCs, the largest of which
are high-tech companies, it is becoming obvious that we need to introduce the latest financial technologies in the activities of largest banks.
International financial relations are also influenced by internal changes
in the financial sphere itself. The share of financial services in international trade is increasing, international loans, securitization of bank assets
have become widespread, new types of financial services and instruments
appear along with the development of remote banking.
Despite the obvious positive result of achieving a high concentration
of capital for TNBs, the largest banks have to deal with a constraining
environment of low and negative interest rates, increased competition,
especially that of fintech companies, increased risks of economic crises
and global recessions, significantly slowing global economy’s growth
rates, trade wars between major economic powers, increased regulation
of banking, increased international requirements for the level and quality
of equity capital, bank liquidity indicators and improved corporate
governance.
Regional banks are defined as credit institutions operating in one
region of the country. The activities of regional banks complement the
activities of the largest and large banks in the regions. The latter work
either in several regions or throughout the country (if we take the Russian
Transnational and Regional Banks
157
Federation they include PJSC Sberbank and other systemically important banks). In modern conditions, regional banks are being tested for
strength and compete with the regional divisions of the largest banks,
taking into account, on the one hand, the state support of the latter and
the inevitable capital consolidation and concentration, and, on the other
hand, the impact of the banking sector digitalization.
Methodology
The research uses such scientific methods as analysis and synthesis,
comparison, grouping of statistical and historical data, methods of expert
assessments in information processing.
Results
The Concept of Transnational Banks’ Functioning
and Development
Preconditions for Transnational Bank Formation
and Functioning in the Context of Globalization
TNBs are fundamental, key elements of economic regulation in the
global financial economy; they play the role of a basic link in the banking
system acting as leaders in banking on a global scale and have the
following characteristics:
– they are highly capitalized high-tech financial and credit institutions in
international markets; they carry out a wider range of international
transactions compared to national and regional banks, provide a full
range of traditional and innovative banking products everywhere (on
a global scale);
– TNB head structures are often leaders with many years of experience
in the national markets of foreign banking services, which indicates a
solid and reliable base for the entire holding;
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– they carry out banking operations in the interests of the founders and the
country of the capital’s origin forming a network of dependent foreign
organizations in various regions of the world. This phenomenon often
raises concerns on the part of national credit institutions, in order to
protect which local regulators (central banks) restrict the penetrating
foreign capital.
TNBs are subdivided into global and regional , depending on the
coverage of the places of activity. Global TNBs penetrate a significant
part of the regions of the world economy. The development strategy of
regional TNB is aimed at a specific region. For example, small Western
European banks are expanding their activities on a regional scale, while
their geography is often limited to Central and Eastern Europe. Regional
TNBs can also include large CIS banks, which are expanding their activities in neighbouring post-Soviet countries in accordance with a strategy
aimed at developing outside the national economy and overcoming the
growth restrictions within the country. Regional TNBs are, as a rule, the
leaders of the banking sector in the countries where the parent company
is based.
First TNBs date back to the seventeenth century, when the objective prerequisites for a change in the position of banks and banking
in Europe were formed. Thanks to the world commodity market that
appeared during the great geographical discoveries of the fifteenth and
sixteenth centuries, strengthening national interests and economic claims
of individual European states, a qualitative increase in the economic
opportunities, internationalized financial ties and aggravated riskiness
of entrepreneurial activity, banking could not help joining the general
globalization of world economic relations (Lavrushin, 1999).
TNBs were formed alongside the developing transnational corporations (TNCs), increasing production volumes, labour productivity and
large-scale innovations in production and services. The work of TNCs
is closely related to the foreign exchange and credit sectors of the global
financial market. One of the fundamental methods of creating TNC is
the merger of large corporations from different countries, while the internationalized production provides an incentive for international finance
and TNBs.
Transnational and Regional Banks
159
According to the Global Top 100 rating, published annually by the
auditing company PriceWaterhouseCoopers (PWC), the total capitalization of the 100 largest TNCs in the world exceeded $25 trillion in 2019.
The leading positions in the ranking are occupied by American TNCs.
They account for more than half of the positions in this rating and 63%
of the global corporate market capitalization. It should be emphasized
that the technology sector is dominant in 2019.
The top 10 largest TNCs by market capitalization by December of
2019 include companies such as Microsoft (technology sector, USA,
$905 billion), Apple (technology sector, USA, $896 billion), Amazon
(consumer services, USA, $875 billion), Alphabet (technology sector,
USA, $817 billion), Berkshire Hathaway (financial sector, USA, $494
billion), Facebook (technology sector, USA, $476 billion), Alibaba
(consumer services, China, $472 billion), Tencent (technology sector,
China, $438 billion), Johnson&Johnson (health & biotechnology sector,
USA, $372 billion), ExxonMobil (oil and gas sector, USA, $342 billion).
The largest Russian TNC in 2019 was PJSC Gazprom with a market
capitalization about of $56 billion.
In 2020 technology sector continues to dominate. In the top 10
largest TNCs by market capitalization includes five above-mentioned
technology companies, two consumer service companies (Amazon and
Alibaba), one financial company (Berkshire Hathaway), one healthcare
corporation (Johnson & Johnson), and one oil & gas company (Saudi
Aramco). In 2020, Saudi Aramco took first place in the top 10 due to its
historical IPO in December 2019 (market capitalization—$1.6 trillion).
Taking into account TNCs’ activities, the organizational infrastructure of the global financial economy has developed with the world’s
leading financial centres in New York, Tokyo, Hong Kong, Frankfurt
am Main, London, Paris and other megacities, the subjects of which,
in addition to TNCs, are official international and regional financial
organizations operating under the United Nations Organization (International Monetary Fund and World Bank Group), Parisian, London,
Rome and Tokyo clubs of creditors, TNB, institutional international
investors, stock and currency exchanges, organizationally formalized as
national and international financial markets (Slepov & Zvonova, 2007).
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Since the second half of the twentieth century, there has been an
especially acute competition between TNBs, as a result of which the
composition of the largest TNBs and their positions in the ratings of
the largest banks in the world are continually changing. The US TNBs
topped the list of the largest banks in the world for a long time (until
the mid-1980s), then the Japanese TNBs took the leading positions
(until the Asian banking crisis of the late 1990s). Further trends towards
concentration, mergers and acquisitions affected banks in Europe, US
and Japan, while the positions of European banks significantly strengthened. As a result of the competition, the balance of power in the world
banking system has changed. Four Chinese banks occupied the first
places of the 2019 rating, and this is quite natural, given the high rates
of economic growth and productivity in China.
The toughening regulatory requirements for banks’ performance on
an international scale, and the increasing importance of banks’ reliability
during economic crises, made ranking TNBs by the Tier 1 capital indicator (Tier 1 capital a key measure of a bank’s financial stability from
the point of view of regulators) presented by The Banker (Table 1).
All TNBs represented in the rating are included by the International
Financial Stability Board in the list of global systemically important banks
(G-SIBs) formed using the assessment methodology developed by the
Basel Committee on Banking Supervision (BCBS).
Table 1
Top 10 World Banks 2019
Rank
Bank
Country
Tier 1 capital ($bn)
1
2
3
4
5
6
7
8
9
10
ICBC
China Construction Bank
Agricultural Bank of China
Bank of China
JP Morgan Chase
Bank of America
Wells Fargo
Citigroup
HSBC
Mitsubishi UFJ Financial Group
China
China
China
China
USA
USA
USA
USA
UK
Japan
338
287
243
230
209
189
168
158
147
146
Source www.thebankerdatabase.com
Transnational and Regional Banks
161
If we take the Top 50 World Banks 2019 made by The Banker, the
largest Russian bank, Sberbank, occupies the 32nd position. Its Tier 1
capital is $54.21 billion.
In 2020, the above-mentioned TNBs remain in the same rating
positions.
Sberbank’s branch network in the Russian Federation consisted of
eleven regional banks and about fourteen thousand divisions in 2019.
Subsidiary banks of PJSC Sberbank operate in Kazakhstan, Ukraine,
Belarus and Central Europe (Germany and Switzerland), a representative
office in Beijing and a branch in India have been opened. Considering
the presented data, the largest Russian bank, PJSC Sberbank, can be
ranked as a regional TNB. Besides, a significant part of other Russian
large banks’ foreign divisions is located in the former Soviet republics, as
well as in a very limited number of Western countries, which indicates
an insignificant presence of Russian banks in the global financial market.
The Bank of Russia publishes data on the activities of foreign credit
institutions in the Russian Federation on the official website in its quarterly reports “Information on credit institutions with the participation
of non-residents”. As of July 1, 2020, 132 credit institutions with the
participation of non-residents in the authorized capital were registered
and licensed to carry out banking operations in the Russian Federation.
The size of non-residents’ participation in the total authorized capital of
operating credit institutions as of July 1, 2020 was insignificant—about
14.28%.
Impact of Transnational Banks on the Emergence
and Neutralization of Economic Crises
Modern TNBs are the largest operators in various segments of the
financial market. By their very nature, banks are primarily designed
to accumulate, mobilize and redistribute capital (work as intermediaries), regulate money circulation and minimize financial risks for capital
suppliers. But most TNBs are also active participants in international
cash flows, including the securities markets, foreign exchange markets
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and financial derivatives markets, often carrying out high-risk and speculative transactions in order to achieve high performance indicators. Due
to the negative impact of ineffective risk management and increased risk
appetites both on the activities of TNB and on the entire global financial
market, large-scale economic crises arise (Krugman, 2009).
To understand why the largest operators of international capital
markets have such a huge influence on the global financial instability,
let us group the main reasons for economic crises of the twentieth and
twenty-first centuries:
– uneven distribution of capital in international markets, the problem of
exporting capital from several countries, which, with an actual surplus
of capital on a global scale, contributes to its deficit—the liquidity
crises in national markets (Matyukhin, 2016);
– currency speculation in international money markets in the context of
non-fixed and flexible exchange rates after the abolition of the “gold
standard”, the division of currencies into “strong” and “weak”;
– speculative capital movement—the so-called hot money that has not
found direct application in industry, trade and services;
– priority for the largest banks to receive profit, rather than achieving
equilibrium in the system “social significance and responsibility of the
bank - risk - liquidity - profit”;
– the growing instability of the financial sector caused by the excessive
bank lending (economy “overheating”), the imbalances in lending to
certain sectors and segments of the economy;
– large-scale “financial pyramids” (the concept of “blowing up financial
bubbles” is also widely covered by experts) in the stock markets and
real estate markets;
– a significantly decreasing value of assets, including those registered as
collateral for bank loans, in the event of market overheating;
– securitization of doubtful assets;
– insufficient regulation and supervision over several economic entities in financial markets, which contributed to the “shadow” banking
systems, whose organizations carried out unregulated financial transactions, which were essentially banking (e.g. the US trust and hedge
funds’ unregulated financial transactions) (Krugman, 2009);
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– national banking systems are insufficiently protected from the external
negative influence in global financial markets;
– the controversial issues in assessing the effectiveness of the IMF’s
recommendations to developing countries on achieving high rates
of economic growth and overcoming economic problems (Krugman,
2009).
Even though TNBs provoke economic crises, competitive banks also
provide for overcoming crises and further developing the economy by
taking, together with state and regulatory authorities, important and
interrelated measures aimed at overcoming crises.
Anti-crisis Regulation of Transnational Banks
on an International Scale
When the Jamaican monetary system came into force and many countries refused to peg national currencies to gold (the Bretton Woods
agreement on the “gold standard” was cancelled), we faced the highly
volatile exchange rates, TNBs intensively rushed to the international
market carrying out high-risk foreign exchange transactions. As a result
of the liquidity crisis, several large international banks went bankrupt or
became unprofitable in a short time (Matyukhin, 2016).
In response to the crisis of international banking in the 1970s, BCBS
(r. Basel, Switzerland) started to actively develop recommendations on
financial and credit organizations’ anti-crisis regulation. The banking
sector of industrialized countries realized that they had to create uniform
rules for regulating the banking systems that would be acceptable on an
international scale. BCBS approved three main packages of documents
with recommendations and directives for banks: the so-called Basel I,
Basel II and Basel III. Today, the BCBS oversight principles are binding
on all G-20 countries.
The BCBS recommendations, presented in the Basel III package
of documents, deal with the bank capital’s structure and sufficiency,
liquidity, advanced approaches in the field of risk management, the principles of effective corporate governance. Capital is precisely that part of
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the banking structure by which the bank’s shareholders directly guarantee its work. The higher the quality of equity capital, the higher the
bank’s reliability. A competent risk assessment also plays a great role in
banking, given the fact that banks carry out a lot of operations at the
expense of clients’ funds (deposits, funds in current accounts), respectively, they should not pursue an unreasonably risky policy that would
lead to losing the funds raised.
Besides, national regulators have identified a range of systemically
important banks (in addition to the list of global systemically important banks (G-SIBs) approved by the Financial Stability Board), whose
activities are more closely monitored than those of other banks.
If we take the Russian Federation, systemically important credit
institutions as of October 29, 2020, include JSC UniCredit Bank,
JSC Gazprombank, PJSC Sovcombank, PJSC VTB Bank, JSC AlfaBank, PJSC Sberbank of Russia, PJSC MKB, PJSC Bank FC Otkritie,
PJSC ROSBANK, PJSC Promsvyazbank, JSC Raiffeisenbank and JSC
Rosselkhozbank (the order of banks in the list is presented by the Bank
of Russia in accordance with the bank’s license serial number).
The above anti-crisis measures indicate the important role of regulating TNBs as well as systemically important financial and credit
institutions, which indicates positive trends in achieving balance and
financial stability on a global scale.
Years of reform following the 2007–2008 global financial crisis have
meant that the global banking system has become more capitalized and
must be more resilient in the face of 2020 economic instability. Regulatory requirements introduced after the 2007–2008 crisis can prove their
worth.
Regional Banks’ Areas of Activity
Regional Banks’ Development from the Historical Point
of View
The activities of regional banks complement the activities of the largest
banks operating either in several regions or throughout the country. This
Transnational and Regional Banks
165
division is especially typical for the USA, where, taking into account the
peculiarities of national and regional regulation, banks are legally divided
according to the subordination level. If we take other countries, regional
banks there include those with limited types of activities and peculiarities
of organizational and legal ownership, for example, in Germany, there
are land banks and savings banks, while in China, there are urban and
agricultural banks, Kazakh banks do not have subdivisions in one of the
capital regions (Almaty or Astana) and can have a small equity capital
(Leonov, 2015).
The Bank of Russia classifies the credit institutions that are not registered in the Moscow region as regional banks. According to the Bank of
Russia, as of January 1, 2020, 442 credit institutions operate in Russia, of
which 210 are registered in the regions (almost half of the total), while
232 of them are registered in the Moscow region. Over the past five
years, the number of Russian banks has decreased by more than 50%,
while most of them were registered in the regions.
However, the reducing number of non-viable banks is not a unique
national experience, similar trends can be found in international practice:
this phenomenon is associated with the active mergers and acquisitions
of regional banks by large banks. The same processes took place in Russia
before the 1917 Revolution: local banks gave way to large banks that
opened their branches in the regions. Regional institutions could not
compete with them either in terms of capital or in terms of lending
opportunities, which is why many local credit institutions were closed
or transformed into branches of the capital’s banks. Capital concentration and centralization in Russia increased the number of large banks’
branches in the regions 21 times—from 39 to 82,217 during the period
from 1885 to 1914 (Zverkova, 2012).
At the same time, one can positively assess the experience of the
city public banks in pre-revolutionary Russia, given their exceptional
value for urban residents. The city banks were active in making loans
to local merchants, industrialists and homeowners. During the period
1900–1914, the number of city banks increased from 241 to 317,
and the volume of their resources grew from 136 to 258 million
roubles. However, the share of urban banks in the money market was
insignificant—less than 4% (Parusimova, 2004). Urban real estate loans
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E. K. Volkova
dominated the city banks’ list of operations, but they often carried
out risky and speculative operations providing local entrepreneurs and
homeowners with large loans against unreliable collateral, which was
also associated with the increased competition with regional divisions of
large joint-stock banks. At the same time, city banks helped to meet the
demand for lending to the urban population at a reasonable price, replenished the city budget by transferring significant amounts of retained
earnings, provided loans to the city, including those at times when the
city did not have other sources to cover costs, carried out charitable
activities.
The experience of urban public banks is valuable, first of all, taking
into account the synergy effect, which was facilitated by the cooperation between the city authorities and banks, the approximate interests of
banks, residents, small- and medium-sized businesses, the effective ways
to resolve conflicts of interest between the bank management and city
authorities.
Despite the variety controversial points of view on the prospects of
the modern Russian regional banks and the results of rehabilitating
the Russian banking sector (Tsai, 2019), as well as the multidirectional proposals for approving the criteria for separating regional banks
from the entire set of credit institutions, today, the following objective
characteristics of their activities can be distinguished:
Positive Aspects (Competitive Advantages)
– forming a competitive environment in the region, making banking
services more available for the population and organizations;
– a real niche for the banks’ activities in the regions, the flexible interaction of regional banks with loyal subjects of the regional economy and
the population;
– banks’ management and employees are experts in the business environment, cultural environment, as well as the development of the region
they deal with;
– a certain range of operations are carried out in cooperation with local
authorities and with their support;
– the approach to regulating banking activities in the Russian Federation changed for the better in 2017, the legislation simplified the
Transnational and Regional Banks
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requirements of the regulator to comply with standards and reduced
the volume of reporting for banks with a basic license, and, at the
same time, clarified the list of permitted banking operations that carry
acceptable risks.
Negative Aspects
– strong territorial differentiation of the regions’ economic development
(Zubarevich, 2017) prevents the regional banks from developing effectively and makes their prospects unclear when carrying out activities
in a subsidized or economically undeveloped region (according to the
Bank of Russia as of January 1, 2020, there are no regional credit organizations in several Russian regions. It is the structural divisions of
credit institutions registered in other regions of the Russian Federation
who carry out all activities);
– they deal with the concentration and centralization of the Russian
banking sector and compete with branches of systemically important
banks that are actively introducing new financial technologies with the
support of the Bank of Russia. These facts affect the regional banks’
competitiveness;
– low income of the regional banks’ main clients—small- and mediumsized businesses, the population;
– a significant number of clients of the Russian banking sector have
preferences in servicing high-tech and reliable large banks offering a
wide range of banking products, implementing convenient remote
customer service systems (Internet banking, mobile banking, mobile
applications for investments, ecosystems and marketplaces) and participating in high-tech projects of the Bank of Russia (e.g. the Rapid
Payments System), that is why people prefer to deal with the branches
of systemically important and large banks (Volkova, 2019);
– difficulties in the development of active, including high-quality
lending operations due to the lack of small regional banks’ capital,
which may force them to carry out high-risk and speculative operations, and keep on playing unfairly;
– prevalence of short-term liabilities in the structure of attracted fund
sources, which may cause difficulties in managing banks’ liquidity.
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E. K. Volkova
The Main Reasons Why Regional Banks Stop Working
According to the Bank of Russia, the share of regional banks in the total
assets of the banking sector continued to decline in 2018 (from 9.3 to
9.1% with a further downward trend).
A significantly lowering number of non-viable banks in the period
from 2013 to 2020 was the result of the Bank of Russia’s policy to rehabilitate the Russian banking sector, including revocation of banking licenses
(except for cancellation of bank licenses due to reorganization) and financial rehabilitation procedures. The Bank of Russia revoked licenses from
Russian banks with the following wording: in connection with failure
to comply with federal laws regulating banking activities and Bank of
Russia regulations, the facts of material unreliability of reporting data, as
well as the inability to satisfy creditors’ claims on monetary obligations.
In practice, the revocation of banking licenses was caused by high-risk
transactions carried out by Russian banks, negative capital and problem
assets, as well as unfair banking practices and banking fraud (e.g. lending
to affiliated, often insolvent organizations, withdrawing capital from the
country).
As a result of the banking sector rehabilitation policy, the concentration of the banking business in the Russian Federation has sharply increased
(the share of assets of the Top 10 Russian banks exceeds 60%, there is a
growth trend).
The Bank of Russia says that concentration of the Russian banking
sector can be compared to the processes taking place in Western Europe
(the regulator said that “according to the widely used indicator of asset
concentration, such as the share of the Top5 banks, Russia is in the
middle of the range, typical for European states, and much closer to
the countries with developed banking systems. The share of the Top5
Russian credit institutions from the point of view of the banking assets as
of January 1, 2020 is 60.4% (if we take the statistics of January 1, 2018,
it was 55.8%), while the indicators of 16 EU countries are significantly
higher: the maximum concentration was recorded in such countries like
Greece (97.0%), Estonia (90.3%), Lithuania (90.1%), while the concentration is lower in 12 EU countries including Luxembourg (26.2%),
Germany (29.7%) and Austria (36.4%).”).
Transnational and Regional Banks
169
New Bank of Russia’s Approaches to the Regional Banks’
Regulation
Starting from June 1, 2017, under Federal Law No. 92-FL dated May
1, 2017 “On Amendments to Certain Legislative Acts of the Russian
Federation”, a new structure of the banking sector operates in Russia
within the framework of its proportional regulation system:
1. Systemically important banks, whose activities are regulated with additional requirements: additional standards and capital surcharges for
systemically important credit institutions have been added to the rules
of regulation of banks with a universal license, the latter are also
allowed to apply advanced approaches to risk management when such
approaches are approved by the Bank of Russia.
2. Banks with a universal license (the minimum amount of own funds
(capital) is 1 billion roubles) can perform all types of transactions,
including international ones, and are fully regulated under the BCBS
standards (Volkova, 2020).
3. Banks with a basic license—the minimum amount of their funds
(capital) can be 300 million roubles.
The Bank of Russia has significantly simplified the regulatory process
for such banks since they believe that their activities are less risky than
those of systemically important banks and banks with a universal license.
Besides, banks with a basic license will not be able to carry out very
complex operations, including international ones.
In our opinion, a significant number of advantages come along with
the new approaches to regulating the activities of banks with a basic
license:
– the number of mandatory standards has been reduced to five;
– technically complex international standards are allowed not to be used;
– reduced reporting requirements, including reporting under international financial reporting standards, and reduced reporting volume;
– international transactions are allowed to be carried out through
accounts in banks with a universal license;
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E. K. Volkova
– reduced requirements for information disclosure;
– it is possible to combine the positions of the head of the internal
control service and the risk management service;
– a two-year cycle for assessing the quality of risk and capital management systems has been introduced (if we take the banks with a
universal license, the regulator has introduced a one-year cycle for
assessing the quality of their risk management systems);
– a shortened list of indicators involved in the calculation of summary
results for a group of asset and liquidity assessment indicators has been
introduced;
– it is allowed to carry out banking operations and transactions not
provided for by this type of license until the previously concluded
agreements are terminated, but not more than 5 years.
According to the Bank of Russia, as of the new procedure on the
proportional regulation of banks’ activities (July 1, 2017) entered into
force, 230 banks with a capital of up to 1 billion roubles were operating
in the Russian Federation.
The Bank of Russia also reports the following information on banks
with a basic license and on the banking activities in the regions at the
end of 2018:
– there were 239 regional banks at the end of 2018;
– 149 banks with a basic license operated at the end of 2018. If we
take the 149 banks with a basic license, the majority of them—102
banks—are regional;
– the share of banks with a basic license in the main indicators of
the banking sector is insignificant: they account for 0.4% of assets,
0.7% of capital, 0.3% of loans to non-financial organizations and
individuals, 0.5% of household deposits.
– in 2018, regional banks lost 227 billion roubles (in 2017 they
received a profit of 55 billion roubles). However, this happened due
to the negative financial results of certain large regional banks undergoing financial rehabilitation; if we exclude them, the regional banks
remained generally profitable in 2018 (they made a profit of 87 billion
roubles).
Transnational and Regional Banks
171
– capital adequacy (own funds) of regional banks decreased in 2018
from 12.7 to 8.3%, which was also significantly affected by
banks undergoing financial rehabilitation (excluding these banks, the
regional banks’ capital adequacy ratio increased to 15.9%).
Thus, as of January 1, 2019, 239 regional banks were operating in
Russia, and 210 regional banks as of January 1, 2020, which is less than
half of the total number of registered credit institutions. The regional
banks were not profitable in 2018 due to the negative financial result
of large regional banks undergoing financial rehabilitation. If we exclude
this factor, the regional banking sector was profitable. However, the share
of regional banks in the banking sector’s assets is insignificant with a
downward trend.
Conclusions/Recommendations
Transnational Banks
TNBs are becoming more concentrated and the banking sector is
becoming more universalized due to the consolidation that has dominated on a global scale in recent decades. TNBs have accumulated
significant experience in the banking activities, including that in highquality risk management, introduced the latest financial technologies,
worked in the conditions of qualified banking regulation and supervision, which is very important for building customer confidence as it is
the basis of banking activities.
According to the results of the study, it can be argued that TNBs
and systemically important banks are the largest operators of financial
markets and have a significant impact on them, both positive and negative, which requires improving the methods of internal and external
regulation.
In these conditions, we recommend to use the following principles to
develop TNBs and regulate their activities:
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E. K. Volkova
1. Implementation by national regulators, on the one hand, of a
balanced monetary policy and macroprudential policy aimed at
supporting the national banking sector and, on the other hand,
consistent measures to regulate the work of systemically important
banks, taking into account the growing risks of cyber fraud in the
context of large-scale banks digitalization.
In general, while positively characterizing the BCBS’s approaches
to establishing new instruments for the global banking system’s
macroprudential regulation, we recommend that national regulators
apply their proposed instruments for regulating large national banks
selectively, taking into account the state of the national economy, the
banking sector and the monetary policy’s priorities. Besides, taking
into account the international practice of overcoming crises in financial and credit institutions, we recommend to flexibly and timely
apply the limits on systemically unstable financial markets, including
setting the loan-to-value limits, income-gearing limits and sectoral
capital buffers.
2. TNBs and systemically important banks are recommended to pursue
a weighed good faith policy that balances the fundamental categories of “social importance and responsibility”, “risk”, “liquidity” and
“profit”, which, given the important role of these credit and financial
institutions in financial markets, will help reduce the risks of new
economic crises.
3. TNB and systemically important banks are recommended to use the
risk management system paying much attention to the role of the risk
prevention method (analysing and assessing risks) over other methods
of minimizing risks to prevent negative consequences of unbalanced
decisions.
Regional Banks
According to the results of the study, it can be said that the regional
banks in the Russian Federation are generally unstable. At the same time,
their positions are being strengthened in the background of reducing
regulatory requirements and banks’ costs.
Transnational and Regional Banks
173
In these conditions, we recommend applying the following principles
for developing Russian regional banks:
1. Implementing an active stimulating policy for developing the regions
to level territorial differentiation and eliminate the weakness of their
economic development in comparison with the centre.
2. Preserve and improve the regional banks’ competitive advantages in
their business segments (including servicing small- and medium-sized
businesses in terms of the state program for supporting SMEs and the
population, implementing effective projects in cooperation with local
authorities).
3. Dealing with unfair banking practices.
4. Considering and applying the experience of large banks in the implementing successful projects for developing remote banking client
services (Internet banking, mobile banking) and other projects aimed
at digitalizing business to increase competitiveness and achieve a
decent level of banking services.
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Analysis of Banks with State Participation
Functioning the Role of Development
Banks in the Global and National
Dimensions
Vitalii Klevtcov and Artem Zamlelyy
Introduction
Research on state participation in banks’ capital focuses on identifying the feasibility of such participation, the generated effects and
the consequences. Financial markets and the banking system, determined by the digital economy’s features, play a significant role in
society’s life, regardless of the type of financing of the economic system.
Endogenous financing of the economy focuses on developing banking
system institutions as the primary vehicles of capital overflow. Exogenous
V. Klevtcov (B) · A. Zamlelyy
Moscow State Institute of International Relations (MGIMO University),
Moscow, Russia
e-mail: vklevcov@inbox.ru
V. Klevtcov
Financial University under the Government of the Russian Federation,
Moscow, Russia
© The Author(s), under exclusive license to Springer Nature
Switzerland AG 2021
G. Panova (ed.), Financial Markets Evolution, Palgrave Macmillan
Studies in Banking and Financial Institutions,
https://doi.org/10.1007/978-3-030-71337-9_13
177
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V. Klevtcov and A. Zamlelyy
finance defines the leading role of financial markets and actualizes its
sector expansion tasks to ensure sustainability. Mixed financing enables
harmonizing financial sources and activating favourable economic development opportunities, considering internal and external capital owners’
economic interests. On this basis, it is relevant to the role of banks with
state participation, such as development banks.
Methodology
The research aims to identify and reveal current theories of state-owned
banks, to justify the role development banks play in both global and
national dimensions.
The research’s methodology is based on theoretical and empirical
methods: theoretical analysis, synthesis, analogy, scientific generalization,
the results of evaluating the development of state-owned banks in Russia
and the functioning of development banks in both global and national
dimensions.
The research includes a theoretical review of regulatory and scientific
materials on the development of state-owned banks using the example of
Russia as a country with an endogenously funded economy, conducting
an empirical study, systematizing the results and developing proposals.
Results
Theories of State-Owned Banks
There are three theories of state-owned banks (SOB): social, political and
agency. Social theory of SOBs defines them as institutions for neutralizing market imperfections that solve underfunding social investments
(e.g. Atkinson & Stiglitz, 1980; Stiglitz, 1993; etc.). There are views (e.g.
Stiglitz, 1994) that state the need for state intervention in the economy,
which is characterized by a lack of liquidity, a low level of public confidence, and fraudulent actions on the part of debtors. All these obstacles
Analysis of Banks with State Participation …
179
may be too much for the market to overcome on the way to the formation of the financial sector (Bruno et al., 2012). We believe that the
popularized imperfections of the financial market—“market failures”—
can only be a theoretical construction. On a long-term basis, the practice
has not refuted the market’s ability to self-regulate.
Government intervention in the economy through subsidies, grants,
and other financial methods and instruments, including the ownership
of the capital of economic entities, distorts the fair value of the factors
of production used. For example, it can be hypothesized that quantitative easing, which is used as a situational (alternative) monetary policy
tool that activates economic entities’ economic activity, has a strategic
disadvantage. It consists of underestimating the fair value of the factor
of production—“capital” (cash)—and potentially incubates factors that
subsequently determine macroeconomic instability and (or) financial
turbulence and even global crises.
Political theory justifies SOB; the participation of state capital in banks
is not to solve the underfunding of social investment, but to maximize
the ruling elites’ personal political goals of the redistribution and the
appropriation of rents derived from control over bank assets.
The agency theory of SOB represents synthesizing views of social and
political theories and proceeds from a compromise that is formed from
the answers to the questions: Are there market imperfections that justify
state participation in the bank’s capital, and what is most effective in
eliminating existing market imperfections-subsidies or state participation
in the capital?
Determinants of SOB Existence in the Modern
Economic Context
Based on our research, we conclude that an SOB, as a full-fledged (sometimes even dominant) participant in market relations, is the result of
positioning the need to achieve the following goals:
● ensuring the security and stability of the banking system
● levelling market failures due to information asymmetry
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V. Klevtcov and A. Zamlelyy
● financing social investments
● ensuring the population of isolated territories can develop financially
and have access to competitive banking products and services
The security and stability of the banking system, in our opinion, is a
dangerous justification for state participation in the capital of banks. We
recognize the unique role of banks in the economy and their following
characteristics, including reformatting in the digital economy:
– a reserve source of liquidity for other economic entities and a channel
for transmitting monetary policy impulses (Fohlin, 2014);
– fragility inherent in banks that, among other things, carry out socially
significant intermediation—long-term financing through short-term
deposits (Masciandaro & Quintyn, 2016);
– high financial leverage ratios can determine the choice of investment
objects by bank managers with higher risks than those preferred by the
owners of funds placed in the bank. This line of thought is consistent
with Diamond’s (1984); the problem of free access is relevant in bank
monitoring, since the bank’s obligations are mainly the remit of small
depositors who have minimal opportunities to control its activities.
If institutions, norms, rules and procedures regulate the bank’s activities in current conditions, the state’s entry into the bank’s capital to
ensure the banking system’s stability seems pseudo-dichotomous. It can
be justified by the provisions of SOB political theory. There are two
assumptions here worth highlighting. The first assumption is the institution of trust in society, which should minimize opportunistic goals
and focus economic actors on reducing transaction costs and forming
social capital. The second assumption is the economic system’s ability to
generate a significant number of financial and credit pyramids, which are
based on financial fraud technologies, the appearance of which is mediated by many factors, including the deformation of the institution of
trust.
We do not consider financial and credit pyramids a negative
phenomenon, since we can identify financial and credit pyramids in most
economic entities, particularly institutional investors—pension funds,
Analysis of Banks with State Participation …
181
insurance organizations, banks, etc. Any organization that forms its
debt load also, in our opinion, bases the provision of its performance
on the opportunities provided by financial and credit pyramids. The
company’s debt is often generated to extract future cash flows that are
not currently available. Each monetary unit of debt is converted into
a potential increase in value. We share the point of view of Toprover
(2007), who identified the main necessary components (in our opinion,
signs) of credit and financial pyramids—the monetary base, the credit
mechanism, the mechanism for issuing securities—although we would
like to correct the last component. We believe that it is a financial
instrument. This clarification is critical because pension funds, banks,
insurance companies and other organizations do not always issue securities. However, a loan agreement that is a financial instrument, not
security, allows identifying a financial and credit pyramid sign.
Trust is an important characteristic for the state to have. The economic
system’s ability to generate a significant number of financial and credit
pyramids in a particular economic system may interfere with the provisions of the political theory of the SOB; this means satisfactory conclusions can be formulated only after additional research. Note that it
is potentially possible to deliberately destroy the institution of trust
through the pseudo-dichotomous justification that there is the “need”
for state participation in banks’ capital and the extraction of benefits,
according to the SOB’s political theory.
The transition to a market economy in Russia was accompanied by
the destruction of the institution of trust; distrust of most economic
entities was scaled, and the state, as the primary guarantor (especially
in conditions of instability), withdrew from most societal processes. This
was accompanied by low competitiveness of industries, hyperinflation,
debts on wages, social payments and benefits, depreciation of savings of
the population, the growth of financial and credit pyramids based on
financial fraud technologies aimed at deceiving citizens, etc.
The need to level out market failures due to information asymmetry
is determined by the fact that the banking business appears to be
an information-filled sphere. The information accumulated by banks
allows, by analogy with the hypothesis of Fama (1970), scientific views
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V. Klevtcov and A. Zamlelyy
(Sharpe, 1964) to diagnose banking systems according to the degree of
information efficiency as weak, medium and significant.
Financing of social investments may be reduced due to limited incentives for banks to commit to financial projects that generate mainly
external effects. An SOB can implement non-commercial goals, eliminate the problem of the banks’ underestimation of the countercyclical
nature of monetary policy, and (in the context of emerging capital
markets) complete the system of financing companies through their
socially-oriented investments.
Providing access to banking products and services to the populations of
isolated territories may not be economically profitable for banks. The
SOB is designed to fill the deficit of financial institutions and form the
appropriate infrastructure for the financial development of territories and
solve poverty.
SOB in Russia
When formulating national goals, the state considers SOBs as an intermediary for their achievement; the state’s participation in the bank’s
capital provides it with the opportunity to support strategically important and socially significant long-term projects that could otherwise be
rejected, should the results of the project’s financial model be unacceptable in the ordinary course of a banking business.
In fact, through the SOB, the state forms groups of potential
borrowers who are financed based on state support, orients some banking
system subjects to perform socio-economic tasks, and improves the
welfare of bank users beyond bank owners. Domestic SOBs, as agents
of state policy, implement both commercial (intermediary, cost, etc.)
and non-commercial (social, developmental) functions, and participate
in the formation of a particular structure of the banking system, in which
the state is present both as a regulator and as a subject of a banking
business. At the legislative level in Russia, the SOB functions and their
roles are not regulated, which would reduce the gloomy background
of possible manifestations of the SOB political theory’s provisions. We
Analysis of Banks with State Participation …
183
found that the banking system design, which includes the SOB, is typical
for endogenously funded economic systems.
Studying the activities of Russian SOBs, which have direct or indirect state participation, we conclude that they function as stabilizers of
the banking system, accounting for more than half of the state’s assets.
We believe that large-scale state participation in the banking sector, in
tandem with the elimination of its participants through the mechanism
of revocation of licences, can hinder competition, reduce the quality
of services provided, and develop the banking system as a whole. This
is especially dangerous due to globalization, the internationalization of
financial markets, the development of digital economy institutions and
the desire for a state of perfect competition in the global financial market.
Development Banks in Global and National
Dimensions
The end of the twentieth century can be characterized as finalizing the
system most financial institutions take, as based on the principles laid
down in Bretton Woods in 1944. Our research suggests that developing countries in these institutions are limited by voting distribution
and capital subscriptions. This practice determines the predominance of
developed countries and the creation of new development banks (New
Development Bank-KFW, Asian Infrastructure Investment Bank-AIIB)
as analogues of the IMF and the World Bank in terms of the set of tasks.
In recent decades, changes in the global economy have included transforming the share of emerging market countries in global GDP, including
the accumulation of a large number of foreign exchange assets placed
in sovereign wealth funds and an increase in gold and foreign exchange
reserves. At the end of the global debt crisis in the early 1980s, the World
Bank and the IMF have harmonized their lending activities. The Asian
financial crisis that broke out in 1997–1998 revealed the limitations of
this practice.
The new development banks featured major differences in several
areas: in the structure of capital and votes (they adopted the principle of
equality, whereas the Asian infrastructure investment Bank adopted the
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V. Klevtcov and A. Zamlelyy
principles of traditional development banks); in approaches to providing
resources; in models of cooperation with other financial institutions.
In the national dimension, Russia’s case should be noted to weaken
interaction with most traditional development banks and increase participation in the NDB and AIIB. We note that there are opportunities to
use the potential of new development banks to achieve national interests, and there is a need to solve the problem of expanding the set of
financing sources for capital-intensive infrastructure projects, but there
has been little uptake of this opportunity.
Conclusions/Recommendations
State intervention in the economy and economic entities, rather than
solving issues, can instead be a factor of destabilization and of potentially
deepening problems. Our point of view is that among other production
factors, we have distinguished a new factor of production: risk, which is
directly related to the pricing of financial goods and financial services.
Each factor of production used in the creation of any product must have
a cost. The absence of its fair cost, from our point of view, incubates
economic problems.
According to the study results, we believe that potential failures by
banks, due to the mismatch in loan repayment by borrowers and the
return of deposits to depositors, cannot justify the state’s participation
in banks’ capital. A bank is a unique economic entity that concentrates
the amount of funds raised, often exceeding its capital, and is subject to
regulatory influence. This regulation is aimed at ensuring that its possible
fragility is levelled.
The information accumulated by banks allows for diagnosing banking
systems according to the degree of information. In contrast to the
hypothesis of Fama on the information efficiency of the banking system,
we believe that banking information can be used to perform the role of a
public good—to provide an impact on investment through: the impact
on the volume characteristics of domestic savings; the cost of bank failures; the emergence of situations that require banks to solve problems of
Analysis of Banks with State Participation …
185
false choices and moral hazards (e.g. credit rationing); and the formation
of the bank’s resource base through deposits.
The dual issues of the weakening of international channels of capital
inflows (against the background of sanctions, impacting the functioning
of the Russian banking system), on the one hand, and the dominance
of the SOB, on the other, can provoke atrophy of market institutions
of the banking system. An SOB can use cheaper (non-market) financing
sources and, as noted, provoke banking products’ unfair pricing, incubating economic problems. By diversifying its activities, providing them
with stability, and withstanding macroeconomic instability, like any
other bank that pursues commercial goals, an SOB can act as a conduit
for strengthening the state’s participation in other areas of the economy
through the acquisition of non-financial companies. We state that there
is a risk of implementing the provisions of the SOB political theory.
However, the non-commercial functions of SOBs in Russia do not
conflict with commercial ones, the implementation of which can be
identified by analysing the financial statements under IFRS—identifying
the effectiveness and efficiency of the bank’s activities.
The global financial crisis of 2007–2009 demonstrated the inability
of traditional development banks (e.g. the IMF and The World Bank) to
anticipate the crisis and take measures to counter its growth in global and
national dimensions. The study of development banks—their role and
significance for developed and developing economies—revealed that the
emergence of new international development banks is determined by the
discrepancy between the positions of developed countries or countries
with emerging capital markets in the global economy, and their significance in the activities of traditional international financial institutions,
in particular the IMF.
We believe that, regarding Russia’s cooperation with international
development banks, the country’s priority should be active participation
in new banks, especially in terms of providing a resource contribution
to the activities of the NDB and AIIB and the projects they finance. As
a key shareholder, Russia should focus its activities on participation in
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V. Klevtcov and A. Zamlelyy
new financial institutions, strengthening its position in the global financial system based on management mechanisms and the distribution of
votes in new development banks.
References
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work. Journal of Finance, 25, 383–423.
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perspective. In Forthcoming in Handbook of Cliometrics. Springer. Available
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31–36.
Insurance Companies: Prospective
Business Models
Natalia Adamchuk, Vladimir Osipov,
and Lyudmila Tsvetkova
Introduction
The development of the insurance market as a system suggests that the
organization or architecture of this system can and should affect the
effectiveness of its development.
The elements of this system are insurance companies. According to
Freeman, who considered the company as a set of parties involved into
its activities, the management is to satisfy their conflicting requirements
N. Adamchuk (B) · V. Osipov · L. Tsvetkova
Moscow State Institute of International Relations (MGIMO University),
Moscow, Russia
V. Osipov
e-mail: vs.ossipov@inno.mgimo.ru
L. Tsvetkova
e-mail: l.tsvetkova@inno.mgimo.ru
© The Author(s), under exclusive license to Springer Nature
Switzerland AG 2021
G. Panova (ed.), Financial Markets Evolution, Palgrave Macmillan
Studies in Banking and Financial Institutions,
https://doi.org/10.1007/978-3-030-71337-9_14
187
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N. Adamchuk et al.
to maintain communication with each, as ensuring the existence of the
company as a system (Freeman, 1984).
Systems exchange signals have various elements; their accurate recognition provides an adequate response to such signals and the stability of
systems. The approach applied (including an integrated approach) was
aimed at summarizing the views of scientists, economists and insurance
professionals; it reduced the signal’s characteristic of the insurance market
to the following:
1. a signal from one insurer to another competing insurer, giving a direct
or an indirect indication of the intentions, goals or internal situation
of this insurer;
2. a signal in the insurance market may be a bluff (false signal) or
warning, or
3. the signal in the insurance market acts as an indirect way of communication in the market.
Savage, Nix, Whitehead and Blair spoke about the problem of
assessing the different importance of each stakeholder in terms of the
impact of their resources and behaviour on company development
(Savage et al., 1991). Recognizing such views as fair, they defined the
management task as that of creating a company’s strategy in such a way
that its implementation would satisfy the needs of all stakeholders, taking
into account everyone’s contribution to the common cause (Yanga et al.,
2011).
In the light of this, and from the perspective of a resource approach
based on stakeholder theory (asserting differences in the importance of
the company’s communications with each of them), promising business
models were identified. A sufficient number of studies in foreign practice are devoted to the analysis of microinsurance (Biese et al., 2016;
Brown and Churchill, 1999; Clarke, 2011) and others, and if earlier
there was lack of understanding why someone would need insurance
products (Braun et al., 2006; Kunreuther et al., 2013; Zaman, 1999),
then the development of technology helped to fill this gap and create a
digital insurance landscape.
Insurance Companies: Prospective Business Models
189
Method
The problem-oriented method of studying the insurance market and the
processes associated with digitalization helped us to identify the need to
use general scientific and special methods, as well as economic research
tools, when analysing the formation of its architecture, the organizational
form of the insurer, and promising business models; the institutional
analysis method, and a set of scientific techniques of abstract-logical and
qualitative methods, were the main provisions of the resource theory as
the basis of strategic management.
The method of analysing market architecture requires assessing market
signals (Spence, 1973, 1974):
● the signals generated by stakeholders of insurance organizations may
result in signals of readiness to exchange resources for the desired
preferences; shareholders, as suppliers of capital, expect profit;
● insurers, as providers of insurance capital, expect the payments
exceeding paid premiums;
● the state, providing the insurance company with the right to conduct
socially significant business and providing institutional values for it,
expects the budget to be exempt from sudden expenses to help victims;
● hired managers, providing key competencies that ensure effective decisions in favour of other stakeholders, rely on their high payment both
in the form of wages and bonuses.
Signals about the need for insurance products from consumers
working in the conditions of a lack of financial resources confirm the
need for new insurance models:
1. microinsurance is becoming a new market driver;
2. this business model promotes wider access to financial services since
insured citizens, households and farms are considered more solvent;
3. microinsurance allows the formation of methodological approaches to
the development of this form as an important tool of states to solve
the problems of economic development.
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N. Adamchuk et al.
According to Russian researchers Kotlabovsky, Tsyganov, Bryzgalov,
Malkovskaya, and Adamchuk (Adamchuk, 2019; Malkovskaya, 2019;
Kotlobovsky et al., 2017; Tsyganov & Bryzgalov, 2018), as well as foreign
ones (Piroozram, 2017), today, a new type of consumer has emerged.
This new type of customers was formed by IT, so a significant signal
is the one associated with the need to simplify communication. These
new technologies, on-demand products, and those that use peer-to-peer
insurance (P2P) highlight this trend (Lee, 2018; Raisbeck, 2017).
A response to the stated need is the trend towards digitalization of
insurance activities, leading to:
1. increased competition in the insurance market due to the increasing
number of InsurTech not regulated by insurance legislation;
2. the appropriateness of classic insurance companies to more actively
increase both operating and user efficiency, based on AI and automation of the processing of insurance applications and claims according
to IoT.
Another signal from the consumer is a request for the most individualized insurance product, taking into account consumer interests. In
reviews (Ansari & Riasi, 2016), it is noted that traditional insurers are
beginning to actively use intelligent insurance to meet such a need.
Results
An analysis of the insurance market’s architecture showed that for the
insurance market, as for any other market, the number of sellers and
buyers operating within it is important, and the development of the
market is a synergistic result of satisfying the needs of all its participants. Buyers of insurance policies (policyholders) find themselves in
cramped conditions when their interests are not taken into account
during the development of an insurance product. That is why customers
are less satisfied with insurance services, which in turn reduces the
demand for insurance. The state policy in insurance should be focused on
expanding the range of insurance services, which is impossible without
Insurance Companies: Prospective Business Models
191
increasing the number of insurance companies. An important criterion
for analysing the architecture of the insurance market is the size of
insurance companies, policyholders and their market share. It is important to note that the enlargement of insurance companies is a result of
both mergers and acquisitions, as well as of curtailing the activities of
small insurance companies, which occupy an insignificant position in
the market.
To characterize the architecture of the market, it is essential to evaluate
not only the influence of the insurance service on the market price but
also the actions contradicting the antitrust laws.
Another important characteristic of the insurance market architecture
is the freedom of entry and exit from the market; this refers to how easy
it is to enter and to exit the market depending on the decision is made
by shareholders/participants of the company. Huge authorized capital,
special legal capacity and restrictions on engaging in activities other than
insurance have a significant impact on freedom of entry into the market,
which to a large extent can affect the decision to invest in the insurance market. The degree of freedom to withdraw from the insurance
market (i.e. going out of business) characterizes the investor’s ability to
reinvest the capital into another type of activity. If the withdrawal from
the insurance market is accompanied by additional costs, such as fines
or administrative costs associated with control and supervisory measures,
the investor has additional incentives not to invest in such a market.
The permitted list of insured risks is essential for analysing the market
architecture. The common law system is characterized by the provision
that everything that is not expressly prohibited by law is allowed. As
for the system of continental law, it is better to talk about the need for
direct permission to act (Silvestrov et al., 2015). In terms of the insurance
market, this translates into formalizing the regulatory legal acts of those
risks that can be insured in this jurisdiction. Accordingly, in the second
case, insurance products turn out to be more standardized; they take into
account the features of a particular insurer and his situation to a lesser
extent.
In addition to the degree of freedom of entry and withdrawal from the
insurance market, it is important to assess the presence and size of the
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barriers in the insurance market of national jurisdiction. Thus, administrative pressure, corruption in the control system and supervision can
affect the development of the insurance company when, due to the high
corruption of the supervisory authorities, the insurance company may
violate the law to the detriment of the policyholders’ interests. The opposite is also possible when administrative pressure necessitates winding up
a business and surrendering a license for insurance activity. Such risks of
the insurance business have a great influence on the decision to invest in
the insurance market.
The identified signals—characteristic of the insurance market—show
that the connections between its participants are an essential element of
architecture. The unfavourable psychological environment in the structure of the insurer, as well as low wages, can give a signal to the market
that highly professional specialists from this company can be employed
by other insurance companies. This affects the work of both headhunters
and HR departments. It is important to evaluate the quality characteristics of the insurer’s signal: whether the signal is true or false and is aimed
only at hiding the real goals of a particular insurer. Such signals become
indirect ways of communication in the market; they activate the mechanism of the insurance market from the standpoint of prices, the range of
insurance services, service quality, etc. Recognition and interpretation of
the signals in the insurance market are becoming very important in the
methodology of the insurance market architecture analysis.
The result of the analysis of the insurance company’s optimal organizational form, depending on the key resource for its functioning, is the
following. The Mutual Insurance Society is the best way to form a guarantee fund. Such a society is the main point to protect the interests of the
policyholder as a key stakeholder. In general, MIS includes its insurers
who compensate the losses incurred to the extent and time when these
losses occurred, without losing, however, the rights to get the premium
or its part if the losses were less than the established insurance fund. In
the case when the founders-shareholders are the key stakeholders, taking
into account the risk to their capital, the best form of capital protection is starting Limited Liability Companies, since each participant can
withdraw its share of capital in its original volume. However, this circumstance poses a threat to policyholders, since the authorized capital must
Insurance Companies: Prospective Business Models
193
assume the entrepreneurial risks of the insurer, and its reduction affects
the security of policyholders.
The form of the Joint Stock Company best protects the interests of
managers, making it easier for them to establish consistent relations
between those policyholders who have formed an insurance fund and
those who provide profit to the shareholders, who at the same time have
the opportunity to extract their capital only by selling shares. However,
with such an organizational form, when the owners cannot run the business, there is an “agent conflict”, which deserves special attention when
choosing the organizational form of the insurance company.
The essence of the conflict described by Jensen and Meckling is that,
in pursuit of their interests, the manager focuses on such indicators of the
company’s activities (such as the correlation of risk and return on assets),
which maximizes their interests, although they may not be optimal for
other stakeholders, in particular for the shareholders who do not run the
company (Jensen & Meckling, 2004).
Analysis of prospective insurance models shows that microinsurance,
being one of the microfinance segments, is becoming a more popular
model of insurance coverage for low-income households, farmers, businesses and the poor. A serious interest in microinsurance in developing countries has been noted with the development of microfinance
programs. Chua et al.’s study (2000) emphasizes that, along with microfinancing, microinsurance increases security by reducing vulnerability to
unforeseen circumstances, increasing resistance to shocks. The “Strategy
for the Development of Insurance of the Russian Federation until 2020”
also defines the need to expand insurance services for the disadvantaged.
This makes sense since microinsurance often includes insurance against
risks, such as the loss of a breadwinner or the death of livestock, medical
expenses, funeral expenses or property damage from theft/fire. These
risks are usually autonomous, i.e. they do not cover the entire region or
all-risk pools at the same time. A comparative analysis of microinsurance
and traditional insurance by the authors showed that there are no strict
distinctions between them, but the features highlighting the products of
the first are noted (Churchill, 2012); these are: low insurance sums and
premiums, simplified underwriting, and easily comprehensible terms of
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insurance and compensation for the damage that contributes to the rapid
performance of the compensation duties by the insurer.
Understanding the nature of poverty and customer risk management
strategies developed on this basis can help to design products and services
that are suitable for different groups of users. As our study shows,
the desire to increase profits stimulates competing insurers to provide
profitable offers to consumers, which becomes especially relevant if the
demand for specific insurance products can be offered for various layers
of society. But, as Hulme and Mosley rightly note (1998), the poor, as a
heterogeneous group, are provided with personalized microfinance products. It seems that the provision of microinsurance should be carried out
on the same principle. To ensure this, different models can be applied.
Some experts identify three models (Chandani, 2009), while the authors
of this study argue that there are at least four.
The first model is the joint provision of both traditional and microinsurance with the support of public organizations. The second partneragent model implies the participation of the insurer and their partner
in the joint development of products. The motivation for this model is
to use the strengths of both parties. The partnership allows the product
to cover that part of the population which would be difficult or impossible to access without a partner dealing with the target market. In turn,
the insurer covers the risks of the agent providing the product. Such a
partnership increases the availability of a product/service, reducing transaction costs. The third model involves mutual insurance principles. The
difference between this model and MIS is that it is an association of
people only with uniform risks (community-based schemes). Such risks
can be managed by both microfinance organizations and cooperative
societies, as well as non-governmental organizations that absorb them.
With the development of digital technologies, we can see the fourth
(“Provider”) model, in which microinsurance becomes a platform for
classic insurance services (freemium service). Insurance has embarked on
a path of new technological development, and many insurance companies use it to increase market share due to changes in the insurance value
chain.
Insurance Companies: Prospective Business Models
195
Conclusion
The study allows us to confirm that the stability of an insurance company
is the result of a synergistic combination of the entrepreneurial interests
of all its stakeholders, recorded as the signals they give. Such a consistent
association is the main task of management. The result of the analysis
of stakeholders’ resources, taking into account risks, may help with the
choice of the insurance company’s organizational form. Since the sustainability of the insurer’s development as a financial intermediary depends
on the competencies of its management, the form of a joint-stock
company is recognized as the most effective one. An agent’s conflicts,
connected with the organizational form that ensures management interests, can be resolved through the emergence of the “entrepreneurial
management” paradigm (Meskon et al., 2009), the essence of which is
to combine the private interests of employees with the interests of the
company, which can happen when employees consider it as an object of
their business.
The signals of a consumer operating with a lack of financial resources
make the development of microinsurance promising as a new driver of
the insurance market, which is becoming an affordable way to minimize the vulnerability of citizens to adverse events, is already being
confirmed in practice. This insurance model allows its user to fill in the
gap between those who can use conventional insurance products and
those who receive social protection.
Changing preferences among customers, including millennials (one of
the largest age groups who prefer simple and fast digital interaction), has
led to an increase in the use of digital channels and technologies such as
“telematics”, “Internet of Things” (IoT) and artificial intelligence (AI). In
turn, these processes have stimulated the development of new insurance
models based on data and analytics.
As partnerships with providers expand, an important model of digital
insurance is the provision of freemium services, which offer free insurance products with minimal coverage, such as health insurance, in
addition to mobile operators’ services, thereby not only providing insurance coverage but also increasing customer awareness of insurance,
reducing fraud. At the same time, subscribers have the opportunity to
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choose additional insurance in a drop-down menu or a voice response
system on phones or by contacting a call centre. This model successfully
works beyond the microinsurance segment, providing travellers with
cover against accident, insurance of the phone itself, etc.
The development of digital interaction through personalized responses
in real time, and social media as a new digital trend used, including for
comments and assessments when choosing an insurance company and
products, encourages insurers to switch from protective to preventive
business models.
The introduction of telematics’ solutions allowed us to develop a
promising UBI (Usage-Based Insurance) model, which offers highly
dynamic products divided into micro-coating elements. The combination of telematics with IoT gave away to smart insurance.
To select personalized content, products, cross-selling and companies,
traditional insurers are increasingly resorting to using artificial intelligence (AI). AI algorithms instantly create risk profiles, so the cycle time
to purchase an insurance plan is reduced to minutes or even seconds,
thus making insurance more attractive, contributing to the development
of the industry market.
References
Adamchuk, N. (2019). New drivers of the insurance market. Journal of
Insurance Business, 3(312), 31–34.
Ansari, A., & Riasi, A. (2016). Modeling and evaluating customer loyalty using
neural networks: Evidence from the startup insurance companies. Journal of
Future Business, 2(1), 15–30.
Biese, K., McCord, M. J., & Sarpong, M. M. (2016). The landscape of
microinsurance Africa 2015. Microinsurance network, Munich Re Foundation
and microinsurance centre. Available at: http://www.microinsurancecentre.
org/resources/documents/the-landscape-of-microinsurance-in-africa-2015.
html. Accessed 25 December 2019.
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Braun, M., Fader, P. S., Bradlow, E. T., & Kunreuther, H. (2006). Modeling
the “pseudo deductible” in homeowners’ insurance. Journal of Management
Science, 52, 58–72.
Brown, W., & Churchill, C. (1999). Providing insurance to low-income households: Part 1: A primer on insurance principles and products. USAID.
Chandani, T. (2009). Microinsurance business models. Available at: http://sit
eresources.worldbank.org/EXTFINANCIALSECTOR/Resources/2828841242281415644/Microinsruance_Business_Models.pdf. Accessed 9 January
2020.
Chua, R. T., Mosley, P., Wright, G. A. N., & Zaman, H. (2000). Microfinance,
risk management, and poverty. The World Bank. Available at: http://docume
nts.worldbank.org/curated/en/610041468743654905/pdf/wdr27900.pdf.
Accessed 20 December 2019.
Churchill, C. (2012). Protecting the poor: A microinsurance compendium.
Munich Re Foundation (Munich, Germany) and International Labour
Office (Geneva, Switzerland), Volume II. Available at https://www.mun
ichre-foundation.org/dms/MRS/Documents/ProtectingthepoorAmicroinsu
rancecompendiumFullBook.pdf. Accessed 5 January 2020.
Clarke, D. (2011). Insurance design for developing countries. Trinity.
Freeman, E. (1984). Strategic management: A stakeholder approach. Pitman.
Hulme, D., & Mosley, P. (1998, May 5). Microenterprise finance: Is there
a conflict between growth and poverty alleviation? World Development
(Vol. 26). Available at: https://www.sciencedirect.com/science/article/abs/
pii/S0305750X98000217. Accessed 9 January 2020. https://doi.org/10.
1016/S0305-750X(98)00021-7.
Jensen, M. K., & Mekling, U. H. (2004). Theory of firms: Behaviour of
managers, agency costs and structure of property. St. Petersburg University
Bulletin, 2(4), 118–191.
Kotlobovsky, I. B., Shestakov, D. B., & Kirichenko, N. I. (2017). Innovative information technologies for the insurance industry. Journal of Finance
Magazine, Finance Publishing House (Moscow), 9, 38–44.
Kunreuther, H. C., Pauly, M. V., & McMorrow, S. (2013). Insurance and
behavioral economics. Cambridge University Press.
Lee, J. (2018, February 19). Takaful and the opportunity for Peer-To-Peer
insurance. Brink News. Available at: https://www.brinknews.com/takafuland-the-opportunity-for-peer-to-peer-insurance/. Accessed 25 December
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Raisbeck, M. (2017). Is P 2P insurance a sustainable business model? Available at: https://home.kpmg/xx/en/home/insights/2017/09/is-p2p-insurancea-sustainable-business-model.html. Accessed 16 January 2020.
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Insurance of Financial and Credit
Institutions
Natalia Adamchuk, Vladimir Osipov,
and Lyudmila Tsvetkova
Introduction
Investments are an important component of GDP, and their increase
provides economic growth. Understanding this fact has a direct impact
on the economic policy of any state. The desire to ensure the flow
of investments (private, domestic and foreign) contributes to creating
special institutional policies aimed at stimulating and/or revitalizing the
investment process. The essence of institutional policy, in this case, is
to develop investment priorities (Bogoviz et al., 2018), create favourable
N. Adamchuk (B) · V. Osipov · L. Tsvetkova
Moscow State Institute of International Relations (MGIMO University),
Moscow, Russia
V. Osipov
e-mail: vs.ossipov@inno.mgimo.ru
L. Tsvetkova
e-mail: l.tsvetkova@inno.mgimo.ru
© The Author(s), under exclusive license to Springer Nature
Switzerland AG 2021
G. Panova (ed.), Financial Markets Evolution, Palgrave Macmillan
Studies in Banking and Financial Institutions,
https://doi.org/10.1007/978-3-030-71337-9_15
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conditions for investments, reduce administrative barriers and streamline state control and oversight activities, and ensure an effective judicial
system that can protect private property rights (Osipov et al., 2017).
These are the general factors of institutional policy, special factors should
also be kept in mind, among which there are industry priorities (Zeldner,
2019) and investment tools.
Long-term financial assets play a fundamental role in ensuring higher
growth and welfare. Without this, investments cannot be made, especially those into complex infrastructure projects. The largest investment
inflow can be achieved through large projects related to updating or
creating new infrastructure; large-scale projects, though, also require
special structuring of all participants’ activities, financing of the project
using specific mechanisms. However, it is often difficult to mobilize the
private sector’s capital and institutional investors, not only because of
income inequality but also because of a low insurance culture.
Smith attributed the nature of poverty to subjective assessments of
one’s position as a feeling of social shame for one’s inability to adhere to
generally accepted standards of consumption (Smith, 2016). Townsend
defined such poverty as qualitative, agreeing with its relative nature
(Townsend, 1979).
In the nineteenth century, the criterion of absolute poverty was introduced. It was associated with such a level of income that ensured that the
individual’s needs for only maintaining his working capacity and health
were satisfied (Foster et al., 1984).
It is known that the state of poverty can be either permanently renewable (i.e. chronic) or temporary (arising after an accident, extraordinary
circumstances or difficult periods of family life). Acquiring a loan in
conditions of poverty can be considered as an opportunity to get out
of adversity by creating an independent enterprise or entrepreneurial
activity as a source of income. However, in this case, it can only be
secured by an insurance policy. An objective opportunity to repay a loan
will be the insured entrepreneurial activity, which can only be prevented
by an “insured event”, but payment will require additional costs from
the borrower.
Insurance of Financial and Credit Institutions
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Linking the state when the household is not ready to divert funds
to insurance with definitions of economic poverty, so-called insurance
poverty (Zubetc, 2001) is related to economic poverty as follows:
– in conditions of absolute chronic poverty, a household cannot be a
borrower, because payment for insurance of borrowed obligations will
reduce the vitally necessary consumption, and members of such a farm
will be “trapped in poverty” without being inclined to entrepreneurship (Kovacevic & Semmler, 2020);
– an incentive for acquiring insurance in conditions of relative poverty
may be the opportunity to improve its distress with the help of
acquired loans that require insurance guarantees, and the impossibility
of acquiring them is identified as a manifestation of poverty only in
societies where the bulk of insurance contracts is the norm (Wolff,
2019).
It turns out that “insurance poverty” is not a state of an individual
household or group of households, but a state of some society in which
there is no tradition to use this tool to solve the problem of increasing
wealth (Kovacevic & Semmler, 2020). A solution to the problem can be
found in public-private partnerships that contribute to the expansion of
investment activity (both through the distribution of risks and through
joint [state and business] decisions on how to provide the public with
public goods).
Methodology
To conduct the study, the method of joint analysis was used, looking
across time at selected indicators for characterizing the incomes of the
Russian population. At the same time, there was the basic assumption
that the qualities of a good borrower are present among the people who
are prone to savings. The hypothesis of a joint propensity to save and to
ensure, able to protect both savings and acquired credit, was tested.
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The analysis revealed a correlation between the dynamics of changes in
the share of savings and the average per capita income of the population
(Fig. 1).
It can be seen on the graph that the share of savings grew fastest in
2015 after the threat of an economic recession that was to start after
sanctions were imposed. Savings were made by households at the risk of
lowering their stable permanent income (Friedman, 1957) to maintain a
standard of living.
An assumption was made that if the propensity to save is growing
when there is the risk of permanent income decreasing, then there should
be a correlation between the dynamics of savings and the demand for
insurance. The statistical analysis confirms this hypothesis (Fig. 2).
The hypothesis was confirmed; it was shown that insurance is considered as a tool to maintain the standard of living for those consumers who
2.50
2.07
2.00
1.50
1.12
1.07
1.01
1.03
1.04
0.78
0.73
0.77
2016
2017
2018
1.00
1.10
0.99
0.50
0.70
0.00
2013
2014
2015
Dinamic of the average per capita income
Dinamic of the share of savings
Fig. 1 Correlation of per capita income and share of the income saved (Source
calculated by the author using the website of the Federal State Statistics Service
where the average per capita income by years was given [electronic resource])
Insurance of Financial and Credit Institutions
203
2.50
2.07
2.00
1.50
1.12
1.00
1.15
1.09
0.95
0.96
0.96
0.70
0.78
0.73
0.77
2016
2017
2018
0.99
0.50
0.00
2013
2014
2015
Dinamic of the average insurance premium
Dinamic of the share of the income saved
Fig. 2 Correlation of the average insurance premium and the share of the
income saved (Source calculated by the author using the website of the Federal
State Statistics Service where the collected insurance premiums by years were
given [electronic resource])
are interested in maintaining the “permanent income” when there is a
risk that it can decline, to prevent the transition to “absolute poverty”.
In this regard, the demand for mechanisms expanding access to the
credit market comes to the fore. Among such mechanisms, infrastructure mortgage stands out. A mortgage is a form of lending secured
by the property created. This becomes especially true in the context
of using analytical technologies in the economy. Institutional analysis,
as well as analysis, synthesis and comparative analysis are used as the
main methodological approaches in the study of the role of insurance in
implementing infrastructure mortgage projects. The methods of systematic and comparative analysis, qualitative assessments and an integrated
approach aimed at summarizing the existing risk management practices
allowed us to determine the role of insurance companies in the practical
approaches of risk management institutions to manage the risks they face
in the conditions described above.
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Providing the theoretical basis for the analysis of those risks to which
the activities of financial and credit institutions and their management are exposed, the works of Pechalova, Adamchuk, Panova and
Tsvetkova were used (Voitsekhovich & Adamchuk, 2017; Panova, 2018;
Pechalova, 2015; Tsvetkova, 2019). To systematize and interpret the
results of research conducted by economists, regulators and professional
risk managers (Borio & Filosa, 1994; Lamarre et al., 2010), particularly
those who identified and proposed techniques and methods of controlling entire risk management systems of financial and credit institutions,
both abstract logical and complex analysis were chosen as research
methods.
Results
To engage households at a relative poverty level in insurance, it is necessary to focus on the insurance products that can increase the consumer’s
ability to provide themself with additional income (Bohn, 2018). This
is usually possible when obtaining a loan. Depending on the financial
situation of the household in terms of poverty, from these positions, it is
possible to propose appropriate types of insurance contracts.
1. The cost of insurance for households that are not included in the
“poor” category has little effect on fears of lower consumption when
deciding on a loan. Moreover, the insurance mechanism may provide
for a significant amount of deductions from the reimbursement,
providing protection only for the losses exceeding the financial capabilities of the consumer and at the same time reducing the insurance
fee.
2. In cases of households whose permanent income is “slightly above
the threshold of absolute poverty”, the premium paid for collateral or
borrower liability insurance is compared in terms of its utility with
potential payments and based on an individual utility function.
The following mechanisms are proposed to increase the usefulness of
insurance to transfer this group of farms to the “good borrowers”:
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– state support for subsidizing a part of insurance premiums for the
households that have slightly overcome the threshold of relative
poverty (following the model of agricultural insurance contracts with
state support), because government subsidies will be significantly lower
than the compensation for potential losses from the budget if these
households become poor;
– providing the possibility of insuring the borrower’s liability of microloans for the households that do not have a significant guarantee
for getting it to ensure that they receive additional income from
entrepreneurial activity.
Infrastructure mortgages obviously relate to the fact that the created
infrastructure acts as a pledged object. Such facilities are formed based
on concessions, and financing is secured by collateral. At the same time,
the choice of collateral is very important. In the case of concession, it
can be budget guarantees (state guarantees) that will serve as collateral,
while the infrastructure mortgage improves security deposit using collateral, as well as insurance of the subject to mortgage. It is insurance that
helps infrastructure mortgage as a mechanism of a public-private partnership to develop and expand its presence in the investment products’
market. Insured collateral securities become low-risk and profitable (after
all, the return on investment is carried out by paying for the use of public
goods—the created infrastructure). A comparison of the insured collateral object and the uninsured, from the investment point of view, gives
higher risks in the second case, but also higher profitability due to lower
costs (insurance costs of the collateral object).
On the other hand, the insured collateral object gives lower profitability but provides a significantly lower risk. Risks are assumed by
insurance companies or the insurance pool. It is important to note that
taking on the risk of the insurance company also makes it control the
project execution. The insurance company will have a direct interest in
completing a new infrastructure or improving the old one since the risk
of failure will entail insurance payments, which the insurance company is
not interested in. Thus, the insurance company dealing with infrastructure mortgage projects can act not only as a passive risk insurer but also
as an active participant assuming the function of monitoring the project.
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That is why insurance companies are advised to take part in infrastructure mortgage projects; it is not only the risks of failing the project,
but also several other risks that could be attributed to the operational
ones (construction quality, terms of the project, logistics, legal risks, etc.),
which will be removed. Using a special knowledge of insurance companies reduces the risk of the project’s failure and it will more likely to be
completed in the best configuration. The government also observed a
positive agenda with the insurance company participating in the infrastructure mortgage project (Peery, 1995; Post et al., 1996). Even if the
state acts as an investor, the investment body will be returned if the
project is not fulfilled or is completed unsuccessfully. The developer
dealing with the infrastructure mortgage project also consolidates their
confidence in its successful completion and its financing, as the insurance company will strive to reduce legal risks, including those associated
with excessive administrative pressure. This makes it clear that the insurance company in the infrastructure mortgage projects acts as a substitute
for trust, which is scarce in emerging markets.
The problem of trust is often the main obstacle to the investment
process, since neither the state, nor the business, nor society itself are
confident in each other’s actions when they fulfil the project (Azfar &
Cadwell, 2006; Hosking, 2011). A lack of trust is a powerful barrier
to expanding investments into emerging markets, and this factor ultimately leads to dampened economic growth. However, the transfer of
risk on credit and mortgage operations to insurance companies reduces
these barriers, and taking into account the fact that new technologies are
now emerging, the efficiency of financial and credit institutions is being
increased. This happens because all the information is obtained directly
from large technology platforms, including transactions (sales volumes
and average selling prices); information about the reputation (the ratio of
claims, processing time, reviews and complaints) and industry characteristics (seasonality of sales, demand dynamics, macroeconomic sensitivity)
now form the basis of the decisions made by the bank on lending, as well
as when agreeing on the insurance of banks’ credit risks (entrepreneurial
risks) and credit insurance by the lender. They can be supplemented
by the unstructured data obtained through social networks and other
channels. On the other hand, the practice has shown that the more
Insurance of Financial and Credit Institutions
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data collection and exchange points, the more potential targets exist for
attackers; this is why more new technologies (e.g. machine learning and
artificial intelligence (AI)) are needed.
Since the financial institution is obligatory for those who use the
aforementioned insurance products, insurance companies cannot but be
interested in the risk profile of those with which they cooperate. In
particular, insurers cover such traditional risks as damage to movable and
immovable property, financial and business risks, employee’s life insurance, liability insurance for fulfilling the obligations of financial and
credit institutions (deposit insurance, money and valuables in cells, etc.)
and so on.
However, the integral risk of a financial institution depends not only
on external factors but also on internal sources. In parallel with the
development of technical capabilities that improve the operational and
informational capabilities of banks, the range of risks accompanying their
activities has changed.
The financial institutions that people turn to in everyday life have
seen technological changes since the 1960s, when the MICR code was
recognized for automated check processing, i.e. banking was one of the
first sectors of the economy to introduce digitalization. As IT developed,
ATMs appeared, and insurers began to cover the risks associated with
bank cards. Thus it would seem that the risks of digitalization should
be familiar to financial and credit institutions and understandable for
their managers. However, the revolutionary technological transformation taking place in the economy today has led financial institutions
to not only ever-increasing competition with digital companies and
FinTech startups but also to still unknown digital risks (Frost et al.,
2019; Hornuf et al., 2018). The authors of this study define digital risk
as an unexpected and undesirable event for an object that uses digital
business processes and related technologies to carry out its activities, the
consequences of which are material losses.
Increasing consumer demands and changes in interaction with new
generation customers have led to the need to upgrade the technological
infrastructure providing automation of responses, for example, to retail
and corporate credit solutions, as well as the simple and quick opening
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of an account on the Internet, where most of the requested data can be
obtained from open sources.
New methods for collecting, transferring and owning virtual assets, as
well as the architecture and diversity of big data, pose additional risks
in terms of generally accepted classifications, not all of which can be
considered insurance.
Operational risks, in most cases, are associated with insufficient
control and data management (Kasperskaya, 2018; Yakunina & Popov,
2018), and this fact sets unique problems: How one can identify,
measure, control and mitigate such risks as, for example, cybersecurity,
reputation risks or risks of confidential data loss? To solve these problems, governments of several countries have begun to carry out serious
reforms concerning the policy regulating personal data protection.
Although it is impossible to counter cyber threats, the consequences of
these can be mitigated. It is in this sphere where new prospects for new
insurance products arise, the effect of which develops in two directions:
– increased protection of banks from the losses caused by digital risks;
– higher security of insurers purchasing “convergent” insurance products.
Cyber insurance introduces a new product that protects the operator
of third parties’ data from possible costs and any direct losses associated
with data breach (both from external threats and due to a failure in its
own IT infrastructure). The programmes provided by insurance companies to protect against cyber risks may vary, but the main risks—such as
liability for violation of personal data and corporate information, risks of
virtual extortion, fraud and damage, interruption of the company after
DDoS attacks, etc.—are covered by most of them.
The situation is aggravated by the fact that many organizations
continue to use outdated IT systems. That is why, when insuring against
cyber threats, it should be understood that this protection is “secondary”,
in comparison with the measures for providing the company’s cybersecurity. This is true because the cornerstone of insurance is the principle of
highest integrity on the part of the policyholder in relation to the insurer,
as they are more aware of the transmitted risk.
Insurance of Financial and Credit Institutions
209
While cyber insurance programmes are quite new, in the banking
sector, there is a long-standing practice of a comprehensive professional
liability insurance policy that provides insurance protection against the
claims for losses incurred by customers of a financial institution as a
result of unintentional erroneous actions, inaction or the negligence of
its employees (Bankers Blanket Bond, BBB).
As for Western countries, the CEO and officers’ liability insurance
policies are very popular (Directors & Officers Liability—D&O). This
insurance plan covers risks of erroneous decisions or negligent actions of
the heads of organizations that entailed losses from third parties. This
product gains new significance with the introduction of Big Data technology, as the business model of this technology is based on providing
direct interaction between a large number of users. An important byproduct here is a large amount of user data that is used as input for
services, which entails the risk of incorrect decision-making.
Conclusion
The study allows us to draw the following conclusions.
The lack of trust in the institutional field primarily affects the financial sector (Fuchs, 2002). If trust cannot be ensured by the institutional
policy of the state, this can be achieved by attracting those insurance
companies that are actively involved in technological trends, although,
given the existing technical capabilities of modern ecosystems, obtaining
the necessary information for risk management can be limited. Nevertheless, prioritizing the interaction between the financial and credit
organization and its customers has provided clear, easy-to-use and affordable products, the distribution of which—through online and mobile
services—helps to create a key platform for personalized relationships
(especially for “good borrowers”) and, as a result, the offer of personalized
insurance services. Access to unstructured data increases the ability of a
financial institution to assess risks for insurance and for understanding
its client portfolio. The transition to digital interaction will significantly
reduce the number of retail outlets, which contributes to the growth
of cyber threats and involves interaction with FinTech, including the
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so-called RegTech and RiskTech, which assess the compliance with the
established requirements of the financial institution’s risk management
system.
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Pension Funds and Prospects for Reforming
the Russian Pension System as a Condition
for the Qualitative Implementation
of the State’s Social Policy
Aleksei Bolonin
Introduction
The pension system is a system of state and non-state financial institutions created to provide citizens with material support in the form of
cash payments after meeting certain conditions for age, health, or family
composition.
Pension savings in Russia are the funds reflected in the individual
personal account of the insured person with the Russian Pension Fund.
Pension savings funds include the insurance contributions for the labour
pension’s fund, transferred by the employer within the framework of
compulsory pension insurance; for participants of the State Pension CoFinancing Program (the amount of additional insurance contributions
paid by citizens for the funded part of the labour pension); the amount
of contributions made by employers if they are a third party to the State
A. Bolonin (B)
Moscow State Institute of International Relations (MGIMO University),
Moscow, Russia
© The Author(s), under exclusive license to Springer Nature
Switzerland AG 2021
G. Panova (ed.), Financial Markets Evolution, Palgrave Macmillan
Studies in Banking and Financial Institutions,
https://doi.org/10.1007/978-3-030-71337-9_16
213
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A. Bolonin
Pension Co-Financing Program; the amount of contributions transferred
by the state to co-finance pension savings; the amount of funds (part of
funds) of maternal (family) capital, aimed at creating the funded part of
the labour pension; and income from investing these funds. Those who
took part in the programme of state pension co-financing or sent maternity capital funds to form the funded part of the pension were given the
right to receive funds from these programmes at their choice: either in
the form of an urgent pension payment or as part of the funded share of
old-age labour pension.
Methodology
The Russian pension provision system is mainly associated with the State
Pension Fund. Russian citizens born between 1967 and 31 December
2015 were allowed to choose: either to form only an insurance pension,
or to form an insurance and funded pension at the same time. Those
born in 1967 or later retain the choice of a pension option if, from
1 January 2014, employers first charged them with mandatory pension
insurance contributions. The insurance pension will be increased by the
state through annual indexation. As for the funded part of the pension,
it is invested by a non-state pension fund or a management company
of choice. Pension savings profitability depends on the results of their
investment; that is, one can lose from their investment. In this case,
only the amount of paid insurance premiums is guaranteed to be paid.
Pension savings are not indexed. In 2016, regardless of the choice of
the pension option in the MPI system, all citizens have pension rights
only for an insurance pension based on the entire amount of accrued
insurance premiums. Among the actual problems of the Russian pension
system, the following can be distinguished (Krutikova, 2016).
1. The state guarantees the amount of paid contributions through the
Deposit Insurance Agency, but without taking into account inflation
(i.e. only in par). Therefore, it will be impossible to increase pension
savings.
Pension Funds and Prospects for Reforming the Russian …
215
2. The results of the funded system depend on the manager’s skills. If we
take the experience of developed countries, 80–90% of investment
efficiency depends on the assets in which the funds were invested.
This is especially true in the context of the globalized financial
markets, the overflow of capital from one sector to another, financial
instability, economic sanctions, etc. In Russia, there is no system of
financial institutions and large financial players that provide a stable
income from long-term investments. Besides, it should be noted that
both people and economic entities mistrust the ongoing reforms.
3. People are not financially literate and are not interested in the
transition to a voluntary accumulative pension insurance system.
4. A protracted transition period puts distance between a joint generations’ responsibility system and individual personal accounts and, in
this regard, preserving the steam principle of pension fund resources’
distribution.
5. The obvious and most significant problems of the Russian pension
system include the pension fund’s budget deficit and incorrectly
calculated pensions (Lebedeva, 2014). The pension fund’s deficit is
a long-term problem, since the transition from the USSR’s pension
system (in the form of joint responsibility across several generations)
to the system of individual personal accounts in the pension fund
(which took into account the accumulations of working citizens in
the form of compulsory social contributions) affected that part of the
population which has reached the retirement age but did not have an
individual personal account with the pension fund.
Results
The Russian pension reform is based on the idea of voluntary pension
insurance. Mandatory pension insurance acts as a guarantee of the
citizens’ rights to receive an old-age pension. In this case, voluntary
insurance adds to the obligatory one. However, the state pension cannot
provide the overwhelming majority of pensioners with acceptable and
decent living standards. In fact, the state undertakes to provide only the
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minimum required pension, and the rest will depend on the opportunities and the desires of the person. In such a situation, either taxes or the
retirement age must be raised (Chernykh, 2016).
In Russia, in the current situation, the total contributions to the
pension system are almost twice the size of lifetime pension payments,
which characterizes the system as ineffective and is due to the low life
expectancy of the retired (Zabolotsky, 2017).
The ongoing Russian reform aimed at creating a self-sufficient insurance system has not solved the existing problems, and the funded
pension system has not been proved effective (Popov, 2013). To solve
this problem and improve the pension system, its funded part should be
transformed into a voluntary funded programme (Startseva et al., 2019).
There are two main pension systems: pay-as-you-go, and the funded
one. A purely funded pension system is used in Chile, El Salvador,
Bolivia, Mexico, and Kazakhstan. In most developed countries, pension
systems are a combination of pay-as-you-go and funded systems, i.e.
a mixed pension system (Zabolotsky, 2017). In such systems, their
first level is a mechanism for protecting people against poverty. This
is the state pension, which is built on the pay-as-you-go principle. At
the same time, a basic pension is guaranteed, the amount of which
does not depend on the participant’s contribution to the system. It
is financed by budgetary contributions or by contributions from the
working population (Zabolotsky, 2017).
The second level is compulsory pension insurance, which is built on
the principles of the pay-as-you-go and funded system. When determining the pension amount, the participant’s contribution to the system
is taken into account; this serves as a safety mechanism and is a supplement to the basic pension, which is funded by contributions from the
working population. In this case, rebates can go both to the pay-asyou-go system for current pensioners’ payments and to the individual
accounts of insured persons depending on the specific regulatory regime.
The third level involves a personal, or additional, pension, which is
built on the principles of a funded system. The amount of the additional
pension depends solely on the funds accumulated by the insured person
Pension Funds and Prospects for Reforming the Russian …
217
on an individual personal account; in most countries, it is a private initiative and serves as a tool to ensure a decent standard of living. At this level,
funds are invested by financial institutions (Zabolotsky, 2017).
Both pay-as-you-go and funded systems have advantages and disadvantages. The goal of a distributive pension system is to protect against
poverty, but at the same time it is not adapted to demographic changes;
the cumulative pension system is aimed at achieving economic efficiency,
which is typical of market economies. However, a cumulative pension
system cannot be implemented all at once, and it is highly sensitive to
financial market changes.
In recent decades, many countries have carried out the reform of
national pension systems and started to use the system of voluntary
accumulative pension programmes (plans).
The main reason for such reforms is to increase life expectancy.
According to Eurostat Social Protection Database, by 2030, average life
expectancy in the Netherlands and Luxembourg is expected to reach
81.6, in Austria it will be up to 81, in Denmark 80.8, in Belgium 80.5, in
Estonia 75.7, in Lithuania 73.6, in Romania 75.5, and in Bulgaria 75.3.
As a result of the growing life expectancy, there is a projected shortage of
funds for pension payments, which also grow over time.
The components of the main EU pension policy priority areas include,
firstly, an increase in the duration of employment—which is achieved
by increasing the retirement age, stimulating employment after reaching
retirement age, and reducing the share of early retirement benefits—and,
secondly, increasing the share of savings—which is achieved by increasing
the amount of savings on compulsory pension insurance and additional
pension provision.
For example, in Italy, the Czech Republic, and France, the means
of prolonging working life is an increased minimum work experience,
the Portuguese are stimulated to save up as the amount of their savings
defines the established pension, and other EU countries have increased
the retirement age. The maximum increase in the retirement age by 2060
is predicted in the Czech Republic (up to 69.3 years old), Slovakia (up
to 67.8 years old), and Denmark (up to 72.5 years old). There is no
such increase in Luxembourg, Finland, and Sweden. In the EU, there is
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a tendency to equalize the retirement age for men and women. A twoyear gender differentiation is predicted only in Bulgaria and Romania.
The governments of Denmark, Italy, Greece, and Hungary are going to
launch a mechanism for linking the retirement age to the projected life
expectancy, which will reduce the financial burden on the pension system
(Zabolotsky, 2017).
The national pension system reforms implemented in many countries are aimed at reducing the state role in the first pay-as-you-go level
and at transferring the management of the poverty risk upon reaching
retirement age to the third, individual level (Shmigol, 2016). Individual
pension savings are formed by transferring part of the salary (either
independently by the employee or by his or her employer) to individual pension accounts opened, in addition to private pension funds, in
various financial institutions: banks, credit unions, mutual funds, trust
companies, etc. Among the voluntary funded pension plans, one can
distinguish corporate plans that are related to the employment relationship between the employer and the employee and which are accepted
and controlled by the employer, and individual plans not related to
the employment relationship with the employer, which are adopted and
controlled by an authorized financial institution.
At the same time, the problem of motivating people to participate
in the funded component of the pension system arises clearly. Applied
incentive instruments can be divided into general (typical for most countries) and individual (related to the national characteristics of a particular
country’s financial institutions). Common factors include the model of
the state’s economic policy (liberal, conservative, social-democratic and
their combinations), the model of the current social policy (Anglo-Saxon,
Scandinavian, European), the initial conditions for the pension system
formation and pension reforms, and historical and cultural traditions
(Shmigol, 2016). It is obvious that these factors affect the forms of
the voluntarily funded pension system’s components. For example, individual pension insurance is actively developing in the USA, Canada,
Great Britain, and Switzerland, which can be explained by high salaries
and the significant wage gap. In countries with a moderate and evenly
distributed wages (Sweden, the Netherlands, Poland), corporate pension
Pension Funds and Prospects for Reforming the Russian …
219
insurance is used to a greater extent as an addition to the compulsory
state pension insurance system.
With low wages at the time of the pension reform, administrative
levers are actively used to change for the new forms of pension provision
based on a strict regulatory model, which was typical for Singapore and
Latin America, where employers were required to ensure the corporate
pension programme (quasi-voluntary pension plans).
Germany, Belgium, USA, UK, Canada, and France are the leaders
among the countries where employees are actively involved in the
employer’s voluntary professional pension plans. Among the countries
actively using voluntary individual pension plans in the pension system,
one can single out New Zealand, the Czech Republic, Sweden, Germany,
and Canada (Shmigol, 2016).
Today’s Russia is similar to Latin American countries in terms of the
working-age population with low income. In this regard, when implementing reforms in Russia, it is advisable to consider the negative consequences of a non-state funded pension system in Latin America. These
include a reduced coverage of the working-age population with additional pension programmes, violated payment deadlines and increased
arrears in contributions to the non-state pension system, weak diversification of the investment portfolio, gender discrimination in the private
pension system, and a monopoly on the pension savings management
market (which led to high administrative costs in private retirement
plans, which sometimes exceeded the investment income earned). At the
same time, both in Latin America and in Russia, there is a threat of an
increasing proportion of the elderly population not covered by pension
provision either at all (if the state pension system is abolished), or in
terms of funded pension provision (Shmigol, 2016).
Experts draw attention to the fact that the principle of private-funded
pension programmes’ equivalence, which implies increased pension
payments with an increased amount of contributions, also did not have
the expected effect on an increase in the accumulated funds of the
non-state pension system in Latin American countries (Clark et al.,
2009).
220
A. Bolonin
The experience of foreign countries also shows that, in order to
compensate for the increasing burden of contributions to private quasivoluntary pension programmes, tax benefits in the form of tax deductions have proven to be the best voluntary pension savings systems in
terms of determining the tax base and tax credits.
Conclusions
Increased maintenance costs, dependence on budget receipts and contributions, low assets, and an expected increase in the budget deficit of the
Russian Pension Fund dictate the need to transform the Russian pension
system. The pension system reforms carried out by introducing corporate
pension programmes with automatically registered company employees
will reduce labour migration within the industry, mobilize financial
resources that can be invested in the economy, and increase people’s
responsibility for their future by redistributing the risk of poverty when
reaching retirement age. At the same time, pensions can be increased in
absolute terms by increasing the contributions’ share to the funded part
of the pension.
An effective stimulus that will make people take part in voluntary
pension programmes is tax incentives, when the state can reduce the
income tax rate (the personal income tax, if we speak about Russia),
provided that the taxpayer participates in such programmes, as well as
state subsidies for the initial and subsequent contributions. National
Welfare Fund can become the source of subsidies.
The development of voluntary and quasi-voluntary pension
programmes should be carried out openly. We should discuss their
advantages and disadvantages, which will allow participants and financial consultants to help people in pension planning, choosing a pension
plan, and assessing investment risk.
The transition to corporate pension programmes should begin in
test mode in the form of several pilot projects in some sectors of the
economy distinguished by contributions from employees and employers,
Pension Funds and Prospects for Reforming the Russian …
221
state co-financing, schemes of pension savings that will allow one to identify each project’s advantages and disadvantages and work out the best
quasitopological corporate security option.
References
Chernykh, A. A. (2016). Features of pension reform in Russia. Business
Education in the Knowledge Economy, 1, 72–76.
Clark, G. L., Munnell, A. H., & Orszag, J. M. (Eds.). (2009). Oxford handbook
of pensions and retirement income. Oxford University Press.
Eurostat. (n.d.). Social protection database. Available at: https://ec.europa.eu/eur
ostat/web/social-protection/data/database.
Krutikova, V. V. (2016). Pension accumulations in Russia: Myths, reality and
alternatives. Social-Economic Phenomena and Processes, 11(5), 32–37.
Lebedeva, L. F. (2014). Federal program of pension provision in the USA.
Russia and America in the 21st Century, 2, 77–81.
Pensionnyj fond Rossijskoj Federatsii grazhdanam [Pension fund of the Russian
Federation to citizens]. https://www.pfrf.ru/grazdanam/pensions/pens_nak/
chto_nuzh_pens_nak/.
Popov, A. A. (2013). The American pension system in a crisis and comparison
with Russia. USA and Canada: Economics, Politics, Culture, 11(479), 15–32.
Shmigol, N. S. (2016). Foreign experience of stimulating people’s participation in voluntary funded pension systems and prospects of its application in
Russia. Economy. Taxes. Right., 6 .
Startseva, S. V., & Vorobyeva, K. A. (2016). Consolidation of the right to social
security in the Constitution of the Russian Federation. Aspirant, No, 3(19),
85–86.
Startseva, S. V., Starodubova, V. S., & Timokhina, M. I. (2019). Comparative
characteristics of the pension system of Russia and the USA. International
Journal of Humanities and Natural Sciences, 12(2).
Zabolotsky, E. D. (2017), Experience of reforming pension systems of countries
in the European Union and opportunities for its use in Russia. Bulletin of
St. Petersburg State University. Economy., 33(3), 472–497.
Microfinance Organizations in Russia
and Abroad
Ksenia Trushina and Olesya Gracheva
Introduction
Despite the small share of both Russian and foreign financial markets,
microfinance organizations play an important role in developing the
economy and making financial services more available for the most
economically vulnerable business entities.
In Russia, in accordance with Federal Law No. 151-FZ dated
02.07.2010 “On Microfinance Activities and Microfinance Organizations”, a microfinance organization is understood as a legal entity that
carries out microfinance activities (i.e. providing microloans or microfinance), and information about it is included in the state register
of microfinance organizations. Microfinance organizations can operate
in the form of a microfinance company or a microcredit company
(Federal Law No. 151-FZ, 02.07.2010). Microloans can be considered
K. Trushina (B) · O. Gracheva
Moscow State Institute of International Relations (MGIMO University),
Moscow, Russia
© The Author(s), under exclusive license to Springer Nature
Switzerland AG 2021
G. Panova (ed.), Financial Markets Evolution, Palgrave Macmillan
Studies in Banking and Financial Institutions,
https://doi.org/10.1007/978-3-030-71337-9_17
223
224
K. Trushina and O. Gracheva
as analogues to loans since they are also issued on terms of urgency,
payment, and repayment, but, as a rule, for small amounts and a short
period (Tsvetkov et al., 2019).
Initially, microfinance was the name for services related to smallvolume loans (microloans) to individuals for whom access to traditional
bank lending is limited for one reason or another (remote settlement,
lack of credit history or bad credit history, an insignificant amount with
an insignificant term, etc.). Also, microfinance organizations can provide
services related to saving money, insurance, leasing, money transfers, and
payments.
It is well known that microfinance was first introduced in developing countries such as India, Bangladesh, and Brazil at the end of the
twentieth century. One of the first microloans for starting a business
was issued in Bangladesh by the Nobel Peace Prize winner and banker
Mohammed Yunus. Initially, microfinance was popular only in rather
poor countries, and then microfinance organizations appeared all over
the world (Lenderwood et al., 2013).
The work of Russian microfinance organizations can be assessed in two
ways: on the one hand, they provide loans to those clients who cannot
get them in other sectors of the financial market, and they are widely and
easily accessible; but, on the other hand, the loans provided are offered at
very high interest rates, the borrower’s creditworthiness is assessed poorly
or not at all, and, when collecting debts, microfinance organizations do
not always use legal methods (Shaker, 2019).
Methodology
The research is based on the study, systematization, generalization, and
analysis of official documents and economic literature, done so via
using a systematic approach and statistical methods. Official documents
included Russian legislative and regulatory acts regulating microfinance
organizations in the territory of the Russian Federation, as well as in
some other countries. Analytical and statistical data of the Bank of Russia
and other open sources were analysed.
Microfinance Organizations in Russia and Abroad
225
Results
Until the Federal Law “On Microfinance Activities and Microfinance
Organizations” entered into force in 2011, the development of microfinance in Russia can be seen as chaotic. In the period from 2004 to
2010, the number of microfinance service clients increased more than 5
times (the number of borrowers exceeded 100 million people), and the
number of small businesses serviced amounted to about 400 thousand
people. At the same time, microfinance organizations were presented in
different forms, the main of which was credit consumer cooperatives
(Tsvetkov et al., 2019). After the legislative regulation was introduced,
the following types of microfinance organizations began to be distinguished (depending on the activity scale and the amount of capital):
microfinance companies (MFC) and microcredit companies (MCC).
Legal amendments first divided microfinance organizations into
microfinance companies and microcredit companies in 2015. Microfinance companies are those that have funds of at least 70 million roubles.
They can perform the entire range of operations permitted for microfinance organizations: issuing bonds, or attracting funds from citizens (in
the amount of 1.5 million roubles) and legal entities (issuing microloans
for up to 1 million roubles per borrower).
Microcredit companies include those with a capital of fewer than 70
million roubles. They cannot attract and invest funds obtained from
the population, and such companies can provide microloans only at the
expense of their funds and the funds of their owners. The bill reduces
the limit for issuing microloans to 500 thousand roubles (instead of 1
million roubles established earlier).
Under current legislation, MFOs have several restrictions in Russia,
namely:
1. microfinance organizations cannot issue loans in foreign currency;
2. a microloan to an individual cannot exceed the principal amount of
one million roubles;
3. microfinance organizations cannot change (increase) the rates and
commission fees on loans unilaterally;
226
K. Trushina and O. Gracheva
4. microfinance organizations cannot apply penalties to borrowers for
full or partial early loan repayment, provided that the MFI received
notification of this no later than 10 days before the repayment date;
5. microfinance organizations cannot carry out any types of professional
activities in the securities market;
6. microfinance organizations cannot issue microloans to a borrower
(defined as a legal entity or an individual entrepreneur), if the main
borrower owes to this microfinance organization more than 5 million
roubles under contracts, if such a microloan is provided.
In Russia, microfinance organizations mainly provide microloans to
ordinary people, individual entrepreneurs, and legal entities (small- and
medium-sized businesses).
The main body that regulates the work of Russian microfinance organizations is the Central Bank of the Russian Federation. Following its
requirements, microfinance organizations are to have the status of a legal
entity, make reports under the regulator’s requirements, and also comply
with its standards. The Bank of Russia also maintains the official state
register of Russian microfinance organizations and analyses their work.
According to the Bank of Russia, as of January 2020, about 1,750
MFOs are operating in Russia. Considering the growing number of
Russian MFOs, we can say that since 2015 their number has been
decreasing. At the beginning of 2012, there were 998 MFOs in the
register, and by the beginning of 2015 there were already 4153 such organizations. At the same time, 1000–1500 of these are annually included
and excluded from the register. The growing number of MFOs in 2015
compared to 2012 can most likely be explained by the fact that many
companies have emerged from the shadows, rather than by the rapid
creation of new MFOs. We can explain the decreasing number of MFOs
by the fact that the Bank of Russia is supervising MFOs more attentively,
thus unscrupulous companies have been withdrawn from the market.
As of January 2020, the following main groups of MFOs can be
distinguished in Russia:
Microfinance Organizations in Russia and Abroad
227
1. large MFOs with a wide sales network throughout the country,
consisting of their own and agency sales offices, as well as pursuing
an aggressive advertising policy through the media and the Internet.
Such MFIs often attract financing by issuing bonds, obtaining Bank
loans, or attracting loans from the public;
2. regional MFOs that have one or more sales offices in small towns
or urban-type settlements exclusively within one region, where there
is a stable demand from the population for obtaining microloans.
Such MFOs take advantage over the features of the regional economic
development, taking into account the standard of living there. Typically, these MFOs are well-recognized in their region;
3. specialized MFOs, that, as a rule, specialize in a certain type of
lending: for example, a loan secured by real estate or a car, tender
loans, etc.;
4. MFOs affiliated with banks or large companies that have access
to a wide range of potential borrowers: for example, housing and
communal services, industrial enterprises, public associations or
unions, including SROs;
5. MFOs created for lending to small- and medium-sized businesses in
the region. Such MFOs are created by local authorities (a municipal formation or constituent entity of the Russian Federation) in the
form of non-profit organizations and take part in various regional and
federal programmes to support small- and medium-sized businesses;
6. “empty” MFOs that were specially created for sale or stopped
performing microfinance activities as they failed to achieve the
planned result;
7. Internet MFOs operating only on the Internet and issuing online
microloans to clients without visiting their office. Online MFOs
already have a significant market share (over 30%) and continue to
actively develop. Besides, since October 1, 2019, the work of online
MFOs has been legalized by introducing appropriate amendments to
the legislative framework. (Federal Law No. 151-FZ, 02.07.2010).
The regional aspect of MFOs is also of interest: although the bulk
(about 60%) of banking, insurance, and several other financial market
228
K. Trushina and O. Gracheva
sectors are located in Moscow, the Moscow Region, and St. Petersburg,
the share of MFOs working there is only 22%.
Clients of microfinance organizations are mainly individuals (82%),
individual entrepreneurs (9.5%), and legal entities (small- and mediumsized businesses) (8.5%).
The microfinance sector is characterized by an increased share of
overdue debt. Thus, the share of outstanding debt, for which the
payment of the principal and interest was overdue by 90 days or more,
made 28.7% for microfinance organizations at the end of September
2019 and had an upward trend.
The return on equity of Russian microfinance organizations is quite
high, but it tends to decline, which is the result of the new legislative
requirements limiting microloans’ interest rates. The return on equity in
the industry as a whole as of September 30, 2019 was 14.4%. Despite
the rather high indicator, there is a tendency to lower profitability, since
in March 2019 this indicator was 18.5%.
The profitability of IFRS in Russia is in line with the global average for
countries where microfinance mostly meets consumer needs. In advanced
economies, where MFOs mainly finance SMEs, the sector’s ROE is
lower, at 6–7%.
One of the most important trends in the development of Russian
MFOs is the active involvement of online channels into microcrediting.
In such an important segment as PDL loans (payday loans), about 60
MFOs currently issue more PDL loans through online channels than the
remaining MFOs, which have only an offline disbursement channel. This
trend has both positive and negative sides: on the one hand, the number
of PDL-issuing units (more than two thousand units in six months)
in crowded places is decreasing, which will decrease in the number of
spontaneously made decisions; searching for and obtaining a loan on the
Internet requires minimal qualifications, technical devices, and a clear
understanding of the need for the borrowed funds. On the other hand,
one can also note the availability of online loans and more room for
fraud.
In Russia, both society and the state pay special attention to smalland medium-sized businesses. State policy plays a special role in stimulating small businesses, which includes dealing with a system of financial
Microfinance Organizations in Russia and Abroad
229
support for small businesses. It should be noted that the most common
form of financial support for small businesses is a bank loan (including
the sort with a guarantee of special funds and the funds supporting the
development of small- and medium-sized businesses). If a small business
cannot use this form of financial support—for example, at the start-up
stage, due to the lack of credit history—then it is advisable to lease expensive equipment. Besides, small businesses often need short-term funding,
subject to quick financial support. In this case, it is advisable to use a loan
from a microfinance organization. The advantages of this form of financial support are quick decision-making and prompt funds’ disbursement
upon approval. Today this financial product is quite expensive (high
interest rate), and a small loan amount also makes a significant drawback. Besides, it should be noted that microfinance organizations issue
funds for a short period. These factors significantly reduce the number of
microloans issued to small businesses, since most small businesses need
long-term loans to buy expensive equipment. However, it must not be
forgotten that in such areas as trade, medicine, or consulting services,
a small business sometimes needs small short-term loans to purchase
materials and components.
When referring to microloans issued to small businesses, it is advisable to consider how many such agreements were concluded during the
study period. Table 1 provides information on the number of microloan
agreements.
Table 1 shows that the number of microloan agreements with smalland medium-sized Russian businesses for the period under review is very
low—about 0.1% of microloan agreements were concluded with smalland medium-sized businesses. It is nevertheless worth noting that the
number of microloans issued during the reporting period is growing
every year.
Regarding microloans to small- and medium-sized businesses, as of
September 30, 2017, a tenth of the total amount issued under microloan
agreements falls on small- and medium-sized businesses. Over the next
two years, a growing number of microloans can be seen, both in general
and for small- and medium-sized businesses. It should be noted that
230
Table 1
K. Trushina and O. Gracheva
Microloan agreements concluded in 2017–2019
Index
Number of microloan agreements
concluded during the reporting
period, including the structure of
concluded microloan agreements:
(units)
With SME companies
Total
The ratio of microloan agreements
with SMEs to the total number
of agreements concluded
Amount of microloans issued
during the reporting period,
including the structure of
microloans issued by MFOs:
(million roubles)
SP
SME
LE
SME
Total
30.09.2017
30.09.2018
30.09.2019
26,804
16,683,647
0.16%
21,759
21,245,181
0.1%
23,321
24,938,852
0.09%
8,238.9
7,663.7
11,797.1
10,763.1
179,732.2
8,947.0
8,739.7
12,420.1
12,203.8
237,204.8
13,469.8
12,816.5
16,089.9
15,346.5
299,374.8
Source Compiled by the authors based on www.cbr.ru
with such a trend, the proportion of funds issued to small- and mediumsized businesses to the total amount of funds issued decreases: 8.8% as
of September 30, 2018, and 9.4% as of September 30, 2019.
Table 1 shows that the largest growth in the amounts of microloans
issued to small- and medium-sized businesses was observed for the period
2018–2019 (approximately 50%).
It is important to consider not only the Russian experience of issuing
microloans to small- and medium-sized businesses, but also the international one. However, it may be fallacious to compare these indicators,
since there are different criteria for classifying companies as smalland medium-sized businesses. These criteria for Russia are presented in
Table 2.
For example, in the USA, an enterprise is classified as a small business in retail trade, provided that its average annual income for the last
three financial years did not exceed $5 million, with about 11 types of
activities being exceptions to the rule. US law does not contain criteria
Microfinance Organizations in Russia and Abroad
231
Table 2 Categories of small- and medium-sized businesses in Russia and the
USA
Russia
Category of smalland medium-sized
businesses
Revenue
USA
Year-end
average
staff
Microenterprise
up to 120
million
roubles
up to 15
Small business
up to 800
million
roubles
up to 100
Medium business
up to 2
billion
roubles
from 101 to
250
Revenue
no more
than 2
million
euros
no more
than 10
million
euros
no more
than 50
million
euros
Year-end
average
staff
up to 10
up to 50
from 51
to 250
Source Compiled by the authors
for classifying a business as a medium one. Legal acts operate exclusively
within the concept of “small business".
In terms of structure, the closest to Russia is the EU’s gradation of the
SME segment adopted, but it is rather difficult to compare Russian and
foreign experience.
Conclusions/Recommendations
The article has briefly discussed the history of Russian microfinance
organizations, has studied and summarized the main regulatory and
legislative documents in this area, and has also carried out a comparative
analysis with foreign microfinance organizations. The available official
statistic data has been analysed. The Russian microfinance market is
facing the following trends:
232
K. Trushina and O. Gracheva
– a reduced number of MFOs of a higher quality;
– MFOs are reoriented from lending to small- and medium-sized businesses to individuals, mainly in the online segment and for consumer
purposes;
– lower MFO profitability due to the new requirements of the Bank of
Russia;
– significantly growing and concentrating MFOs issuing loans through
online channels;
– stronger negative tendencies in the work of MFOs, namely: constantly
growing overdue debts, collecting debts using illegal methods, the debt
load.
After comparing Russian MFOs with foreign ones, we concluded that
Russia has some specific features, such as high profitability or a high individual share in the portfolio of consumer loans. Microfinance does not
play a significant social role in Russia, as it happens in many developing
countries: the high debt load of the poorest population segments, financial illiteracy, and using MFOs for the consumer rather than production
purposes do not allow the poorest people, who are usually MFO clients,
to improve their well-being.
Despite the measures already taken by the Bank of Russia, which
undoubtedly have brought positive results, it is worth further focusing
efforts on the more effectively using microfinance organizations’ proportional regulation.
References
Lenderwood, J., Earne, J., & Nelson, C. (2013). The new microfinance handbook: International bank for reconstruction and development. Washington,
DC: The World Bank. Available at: https://openknowledge.worldbank.org/
bitstream/handle/10986/12272/9780821389270.pdf. Accessed 16 January
2020.
Shaker, N. S. (2019). Risk of intermediary activity of microfinance organizations. Finance Money Investment, 2, 20–27.
Microfinance Organizations in Russia and Abroad
233
Tsvetkov, V. A., Dudin, M. N., & Saifieva, S. N. (2019). Problems and
prospects of development of microfinance organizations in the Russian
Federation. Finance: Theory and Practice, 23(3), 96–111.
Zaitsev, V. B., & Ternovoy, S. M. (2018). Prospects for the development of
proportional regulation in microfinance organizations. Banking Service, 6,
2–6.
Federal Laws
Federal Law No. 151-FZ of 02.07.2010 “On microfinance activities and microfinance organizations” (current version, 2020). Available at: https://www.consultant.ru/document/cons_doc_LAW_102112/b81
9c620a8c698de35861ad4c9d9696ee0c3ee7a/.
Federal Law No. 353-FZ of 21.12.2013 “On consumer credit (loan)”
(current version, 2020). Available at: https://www.consultant.ru/document/
cons_doc_LAW_155986/.
Federal Law of 24.07.2007 N 209-FZ (ed. FZ of 23.06.2016 No. 222-FZ)
“On the development of small and medium-sized businesses in the Russian
Federation”.
Resolution of the Government of the Russian Federation No. 265 of
04.04.2016 “On the maximum values of income received from business
activities for each category of small and medium-sized businesses”.
Sustainability Trend in Russian Banking
Sector
Amin Babazade
Introduction
Today, the concept of sustainable development is becoming a new
paradigm of modern socio-economic relations, involving more and more
agents of economic activity. By performing the most important function
of financial intermediation, banks have a significant impact on society
and, accordingly, on “sustainable development” (Miralles-Quirós et al.,
2018). Sustainable development, in turn, is defined as “development
that meets the needs of the present without compromising the ability of
future generations to meet their own needs” (Geissdoerfer et al., 2017).
Starting in the late 1970s and early 1980s, banks, like large corporations, followed the advice of Milton Friedman, a Nobel prize-winning
economist: “social responsibility of business implies increasing profit”
A. Babazade (B)
Moscow State Institute of International Relations (MGIMO University),
Moscow, Russia
© The Author(s), under exclusive license to Springer Nature
Switzerland AG 2021
G. Panova (ed.), Financial Markets Evolution, Palgrave Macmillan
Studies in Banking and Financial Institutions,
https://doi.org/10.1007/978-3-030-71337-9_18
235
236
A. Babazade
(Friedman, 1970). In fact, Friedman’s doctrine recognized the responsibility of business only to shareholders. The situation changed due to the
economic crisis of 2008–2009, which began with the banking crisis. The
crisis has shown that banks do not affect only the shareholders’ interests.
As a result, banks have begun to focus on corporate social responsibility
in order to regain public trust (Miralles-Quirós et al., 2019). Historically,
there have been three main approaches to determining an organization’s
contribution to sustainable development. The first approach, which was
described above, states that the only task of the company is to maximize
the shareholder profit. The second approach encourages organizations
to consider environmental, social and governance aspects in their operations, regardless of the associated costs and benefits (Post et al., 2002).
The third approach combines, to some extent, the first and second ones
stating that organizations should strive to maximize shareholder profit,
but at the same time, whenever possible, take environmental, social
and governance aspects into account when making decisions (Porter
& Kramer, 2011). Therefore, when contributing to sustainable development, economic efficiency and profitability must be accounted for.
A survey study of 132 scientific publications in reputable international
journals shows that 78% of scientific articles state a positive correlation between business sustainability and financial performance (Alshehhi
et al., 2018). According to research, sustainable banking contributes to
improved bank profitability indicators (Esteban-Sanchez et al., 2017;
Forcadell & Aracil, 2017; Miralles-Quirós et al., 2018; Shen et al., 2016;
Wu & Shen, 2013). corporate social responsibility and a company’s
contribution to sustainable development rather positively affect its financial results. In other words, social responsibility creates a shared value for
both the company and society (Porter & Kramer, 2011).
Definition of “Sustainable Banking”
As noted above, banks, being important players in the economy, also
share the new sustainable development paradigm. For example, in 2018,
26% ($ 12 trillion) of all US assets held in trust were sustainable
responsible investments (Méndez-Suárez et al., 2020). There are several
Sustainability Trend in Russian Banking Sector
237
approaches to defining a sustainable (green, ethical, socially responsible)
bank. In this article the concepts of sustainable bank, green bank, socially
responsible bank, an ethical bank, etc are equivalent and have the same
semantic and conceptual meaning. The first approach to defining a
sustainable bank is as a bank that makes socially responsible investments,
i.e. investments that take into account not only economic criteria (such
as profitability and risk) but also environmental, social and management aspects, which are known as ESG-factors (environmental, social,
governance) (del Carmen Valls Martínez et al., 2020). The second
approach to the determining the concept is that the bank recognizes
corporate social responsibility (Nosratabadi et al., 2020): this approach
means that the bank recognizes its responsibility not only to shareholders
but also to other stakeholders (customers, bank employees, partners,
society). The third approach is when a sustainable bank takes action
to reduce its “harmful” environmental impact, reduce carbon emissions
and mitigate climate change (Weber, 2012). Finally, the fourth approach
to defining a sustainable bank assumes that banks offer products that
contribute to sustainable development (Nosratabadi et al., 2020): for
example, banks can help to achieve 6 of 17 UN Sustainable Development Goals: eradicate poverty, eliminate hunger, improve health and
well-being, education, achieve gender equality, provide clean water and
improve infrastructure (Nosratabadi et al., 2020; Nwagwu, 2020).
Research Problem
According to Shershneva & Kondyukova (2020), of the BRICS countries, Russia occupies the last position in terms of implementing the
“principles of sustainable development” in the banking sector. The same
study notes that large Russian banks are taking certain steps to implement the principles of responsible financing. However, there is still a
misunderstanding of this area’s importance. According to the Bank of
Russia—set out in the Concept for the Organization of a Methodological System for the Development of Green Financial Instruments
and Responsible Investment Projects in Russia—Russia does not have
a consolidated position of the state, methodology and institutions for
238
A. Babazade
assessing the risks of ESG investments and representing Russian interests in this area at the global level (Central Bank of Russia, 2019). At
the same time, Russia is taking the first promising steps towards responsible investment and green finance. In 2019, the Moscow Exchange,
Russia’s largest exchange holding, created a “sustainable development”
sector to finance socially significant and environmental projects (Moscow
Exchange, 2019), one of the largest Russian asset management companies, Alfa Capital, launched a new ESG product, Alfa Green Investments,
(Alfa Capital, 2019), Sberbank Private Banking, another major management company, launched the SPB Women Impact EUROPE Index
investment strategy, which deals with investments in companies with
a high gender balance (gender equality) (Sberbank Private Banking,
2019). Russia is accumulating experience in implementing the “sustainable development” concept in the financial sector. Today, there is a need
to analyse the market development trend and systematize it. As noted
above, Russia does not yet have a systematic approach and methodology
for assessing the compliance of financial institutions with ESG principles
and standards. This article examines the trends and quality of responsible
financing in the Russian banking sector in order to determine the degree
and nature of the Russian banks’ involvement in the implementation of
the sustainable development concept.
Methodology
To analyse the degree and nature of the Russian banks’ involvement in
sustainable development programmes, the Sustainable Banking Performance Framework (SBPF) proposed by Kumar and Prakash (2018) was
used. This analytical framework has been developed, supplemented and
reproduced many times in different countries. As a result, it was adapted
for developing countries as well (Amacanin, 2005; Jeucken, 2001; Kumar
& Prakash, 2018; Papastergiou & Blanas, 2011; Scholtens, 2009). The
reasons why this analytical framework was chosen as the main method of
analysis are as follows: firstly, it was developed specifically for the banking
sector; secondly, it was adapted for developing countries; and, thirdly,
Sustainability Trend in Russian Banking Sector
239
it was tested in the Indian banking sector, which, according to Shershneva and Kondyukova (2020), is close in terms of “sustainability” to
the Russian one, out of the BRICS countries. At the same time, this
methodology (SBPF) has not previously been used for analysing Russian
banks.
SBPF (Sustainable Banking Performance
Framework) Analytical Framework
SBPF analytical framework evaluates the environmental and social
aspects of banks’ activities to determine their sustainability level. It
includes 40 indicators, which are grouped into 5 categories: (1) sustainable banking products and services, (2) indicators of the environmental
management system, (3) social development indicators, (4) internal
socio-ethical indicators, and (5) indicators of compliance with international principles of sustainable development and reporting. The first
group of indicators characterizes the bank’s financial and credit offers
that contribute to sustainable development (loans for environmental
purposes, so-called green mortgage loans, socially responsible investments, “green” bonds). The second group of indicators reflects the bank’s
commitment to transition to an environmentally friendly management
system (using environmentally friendly technologies, accounting for
environmental risks). The third group of indicators reflects the way banks
contribute to social development (charity, increased financial literacy,
special conditions for accessing banking services for disabled people).
The fourth group of indicators assesses the social and ethical standards
within the bank (gender balance, respect for human rights, work ethics).
Finally, the fifth group of indicators reflects the adherence of banks to
international rules of sustainable development and information disclosure (membership in GRI and in the Dow Jones Sustainability Index)
(Appendix).
Each of the five groups is assigned 20 points. At the same time, if
the bank implements full practice on sustainable development for all 40
indicators, then it is assigned 100 points. To improve the accuracy of the
study, each group of indicators is assigned a weight. For example, in the
240
Table 1
A. Babazade
Sustainable banking practice implementation
Levels of sustainable banking
practice implementation
Points
Description
First level
0–5
Second level
Third level
6–10
11–15
Fourth level
16–20
Low level of implementing SB
practice
Initial steps to implement SB
Active SB practice
implementation
SB practice is one of the main
aspects of business
Source Compiled by the author based on Kumar and Prakash (2018)
case of the Russian banking sector, the situation is as follows: the group of
indicators “sustainable banking products and services” is assigned 40%;
the group of social development indicators received 20%; the group of
“indicators of compliance with international sustainable development
and reporting principles” received 20%; the group “internal socio-ethical
indicators” received 10%; and the group of “indicators of the environmental management system” received 10%. The weights are established
based on the priorities of the Concept for the Organization of a Methodological System for the Development of Green Financial Instruments
and Responsible Investment Projects in Russia (Central Bank of Russia,
2019). Table 1 provides an assessment of the extent to which banks have
adopted sustainable banking (SB) practices.
Sample, Data Collection and Analysis.
The SBPF analytical framework was applied to a sample of 7 of
the largest Russian banks: Sberbank, VTB, Gazprombank, Alfa-Bank,
Moscow Credit Bank, UniCredit Bank and Raiffeisen Bank. To ensure
that the established sample is representative, there are 3 banks with a
significant share of state ownership (Sberbank, VTB, Gazprombank); 2
private Russian banks (Alfa-Bank, Moscow Credit Bank) and 2 foreign
banks (UniCredit Bank and Raiffeisen Bank). The banks were selected
from the list of the largest banks by asset value: Sberbank, VTB, and
Gazprombank are the largest state-owned banks; Alfa-Bank and Moscow
Sustainability Trend in Russian Banking Sector
241
Credit Bank are the largest private banks; UniCredit Bank and Raiffeisen Bank are the largest subsidiaries of foreign banks (Statista, 2020).
According to a study by Korzeb and Samaniego-Medina (2019), banks
with national capital are more likely to use sustainable development
opportunities than foreign ones. The method we used in the study
is content analysis. This method has been repeatedly used in similar
studies and has demonstrated high reliability and validity (Kumar &
Prakash, 2018; Weber et al., 2014). Due to the lack of uniform reporting
standards, data are collected from annual reports, sustainability reports,
corporate social reporting reports, press releases and official websites of
the above-named banks (Ngwakwe, 2012; Weber et al., 2014). Content
analysis is applied to the collected data based on the “keywords” of the
SBPF’s analytical framework (Appendix), which is then used to quantify
the collected data.
Results
The content analysis of data collected from annual reports, sustainability
reports, corporate social reporting reports, press releases and official
websites is shown in Table 2. The data are given for 5 main categories of
sustainability, which together make up the overall indicator of the bank’s
sustainability.
Table 2 Bank sustainability indicators (in points)
Bank
Sberbank
VTB
Gazprombank
Alfa-Bank
Moscow credit
bank
UniCredit Bank
Raiffeisen Bank
1st
group
2nd
group
3rd
group
4th
group
5th
group
Resilience
indicator
4
5
2
4
3
1
1,5
1
1
2
3
3
3
3
3
1
1,5
1
1
2
2
3
2
2
3
11
14
9
11
13
2
2
1
1
3
2
1
1
2
1
9
7
Source Compiled by the author
242
A. Babazade
For example, VTB’s overall sustainability indicator is 14, while the
bank’s indicator for the third category (social development indicators)
is 3. The degree to which Russian banks have adopted sustainable
banking practices by 5 categories of indicators (1—sustainable banking
products and services, 2—environmental management system indicators,
3—social development indicators, 4—internal socio-ethical indicators,
5—indicators of compliance with international of sustainable development and reporting principles) is shown in Fig. 1. The blue bar
shows the aggregate indicator of these Russian banks’ involvement in
sustainable development in 5 main groups. According to Fig. 1, Russian
banks demonstrate the greatest involvement in sustainable development
in terms of social development (increasing the financial literacy, organizing charitable, social and cultural events, facilitating access to banking
services). At the same time, the minimum involvement of Russian banks
is observed in providing sustainable banking products (loans in the field
of ecology, “green” mortgages, socially responsible investments, “green”
bonds).
1
2
3
4
5
Fig. 1 Degree of sustainable banking practice by Russian banks by 5 categories
of indicators (Source Compiled by the author)
Sustainability Trend in Russian Banking Sector
243
Discussion and Conclusion
The study is aimed at determining the degree and nature of Russian
banks’ involvement in sustainable development programmes. According
to the results, the degree of Russian banks’ involvement in sustainable
development is defined as follows: large Russian banks are either actively
introducing sustainable banking practices, or are taking initial steps in
this direction. At the same time, there is not a single large bank, which
has turned sustainable banking into one of the main areas of its business.
The analysis also showed that Russian banks can ensure the sustainability
of their business by dealing with social projects, for example, increasing
financial literacy. At the same time, Russian banks show minimal interest
in offering “sustainable” banking products, (for example, “green” bonds),
although the first steps are being taken in this direction. Moreover,
Russian banks are more actively implementing sustainable banking practices, while subsidiaries of foreign banks are lagging. This conclusion is
consistent with that of Korzeb and Samaniego-Medina (2019).
Therefore, within the Russian banking sector, the first steps are being
taken to introduce the practice of sustainable development, but these
steps are not comprehensive nor significant. This conclusion is consistent with the conclusion made by Shershneva and Kondyukova (2020).
Speaking about the definition of sustainable banking in the Russian
context, it is more in line with the second approach: the bank recognizes
corporate social responsibility (Nosratabadi et al., 2020). Regarding the
Russian banks’ attitude towards sustainable development, it is as follows:
the company should strive to maximize shareholder profit, but at the
same time, whenever possible, take environmental, social and managerial aspects into account when making decisions (Porter & Kramer,
2011). In addition, studies show that business sustainability contributes
to the improving financial results (Alshehhi et al., 2018) and, in particular, sustainable banking contributes to growing, the bank’s profitability
(Esteban-Sanchez et al., 2017; Forcadell & Aracil, 2017; Miralles-Quiros
et al., 2018; Shen et al., 2016; Wu & Shen, 2013). Therefore, Russian
banks should expand their sustainable development practices: Firstly,
actively dealing with social and environmental components; secondly,
dealing with a segment of green and sustainable banking products
244
A. Babazade
in the Russian banking and financial markets; and thirdly, adopting
internationally recognized reporting standards, for example, GRI and
developing international cooperation in this sphere.
Appendix: Sustainable Banking Performance
Framework (SBPF)
Indicators
Points: yes (2), no
(0)
First group: sustainable banking products and services (40%)
1. Sustainable financing
2. Climate fund
3. Environmental loan
4. Micro-finance
5. Sustainable advocacy services
6. Green mortgage
7. SOI/Socially responsible investment
8. Financial inclusion product
9. Venture capital for environmental saving product
10. Green bond
Second group: indicators of the environmental management system (10%)
11. ISO 14,001 / ISO 14,001 certification
12. Sector-specific exclusion
13. Environmental risk management in lending policy
14. Quantitative information about environment care
initiatives
15. Environmentally friendly technologies
Third group: social development indicators (20%)
16. Community involvement programme
17. Charity and sponsoring
18. Increasing financial literacy and credit counselling
19. Training and Skill development programme
20. Community consultations
21. Targets for community investment
22. ISO 26,000 / ISO 26,000 certification
23. Health care and sanitation programme
24. Access points for financial services in low populated
or remote areas
25. Improved access to financial services for
disadvantaged people
The fourth group: internal socio-ethical indicators (10%)
(continued)
Sustainability Trend in Russian Banking Sector
245
(continued)
Indicators
Points: yes (2), no
(0)
26. Policy and procedure concerning Anticorruption
27. Policy and procedure concerning Human right
28. Policy for business ethics/values
29. Labour practices
30. Gender equity and diversity
Fifth group: indicators of compliance with international sustainable
development and reporting principles (20%)
31. Sustainability report disclosure
32. Business responsibility report disclosure
33. Environment policy
34. GRI membership
35. Signatory to Equator Principles
36. Adherence to UN Global Compact principles
37. Signatory to UNEP FI
38. Adherence to NVGs disclosure
39. BSE GREENEX Indexing
40. Member of Dow Jones Sustainability Index
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Responsible Principles in Banks: Short-Term
Trend or Inevitability?
Inal Kishmariya
Introduction
Amid escalating global environmental problems, economic instability,
and social upheaval—partly linked to the spread of COVID and riots
in different parts of the world—interest from regulators, investors, and
clients in the level of environmental, social, and corporate risks facing
companies have increased. The desire to minimize ESG business risks is
a global trend supported by many banks around the world.
Implementing the responsible investment principles, transforming the
loan portfolio towards more environmentally friendly industries, and
other steps aimed at minimizing environmental, social, and corporate
risks have a positive impact on improving the prospects for sustainable
development and achieving the UN Sustainable Development Goals.
I. Kishmariya (B)
Moscow State Institute of International Relations (MGIMO University),
Moscow, Russia
e-mail: i.kishmaria@inno.mgimo.ru
© The Author(s), under exclusive license to Springer Nature
Switzerland AG 2021
G. Panova (ed.), Financial Markets Evolution, Palgrave Macmillan
Studies in Banking and Financial Institutions,
https://doi.org/10.1007/978-3-030-71337-9_19
249
250
I. Kishmariya
However, when it comes to commercial banks, such steps can also be
economically feasible.
We can distinguish several hypotheses which will indicate that sticking
to responsible investment principles is economically justified in the
bank’s activities:
• the inclusion of environmental, social, and corporate factors in the
process of making credit decisions can improve the effectiveness of the
bank’s credit policy;
• environmental, social, and corporate risks affect the cost of the bank’s
funding;
• low environmental, social, and corporate risks is a bank’s competitive
advantage in the fight for talent.
If the above hypotheses are scientifically proven, then low environmental, social, and corporate risks will become an obvious competitive
advantage of the company and everyone will inevitably implement the
responsible investment principles.
Methodology
The responsible investing principles are understood in this study as PRI
principles, which, in particular, require companies (including banks)
to include the environmental, social, and corporate factors’ assessment
(hereinafter ESG factors or ESG risks) in investment analysis and
decision-making processes, as well as to disclose information about ESG
risks and the effectiveness of implementing the responsible investment
principles in practice.
Within the framework of the study, the term “ESG factors” defines
a set of indicators that reflect the business’ environmental, social, and
corporate risks.
“Environmental risks” imply a combination of risks of losses caused
by the negligent attitude to the environment when doing business and
the business’ vulnerability from the negative environmental events, such
as climate change or natural disasters.
Responsible Principles in Banks …
251
“Social risks” imply a combination of losses caused by the negligent
attitude to social problems when doing business as well as businesses’
vulnerability to negative social events, such as the talented personnel’s
outflow from the country, lower education quality, growing poverty, or
political upheavals.
“Corporate risks” imply a combination of losses caused by the negligence to corporate governance in doing business and the business’
vulnerability to negative events caused by bad corporate governance, such
as conflict of interest, fraud, conflict of shareholders or top management,
risks of a key person, or the state’s attempts to influence on management
decisions.
The study analysed the current methodologies for assigning credit
ratings used by the top international rating agencies: Moody’s Investments Services, S&P Global Ratings, and Fitch Ratings.
To confirm hypotheses about the impact of ESG risks on the cost of
bank funding, we analysed the issuance of Russian sovereign and corporate bonds of financial companies, using the data from Bloomberg. The
data includes information on 126 corporate issues and 31 sovereign bond
issues with a total issue volume of RUB 9,185.2 billion.
We used the demographic data of World Population Prospects 2019,
which allowed us to estimate the dynamics and the share of different
generations in the structure of the world’s working population. In this
paper, we will understand “generation” as defined by the authors of
the theory of generations, William Strauss and Neil Howe, who interpreted generation as the totality of all people born in a time interval of
approximately 20 years (Howe & Strauss, 1992, 1993, 1997). Experts
still argue about the exact boundaries of generations, but we will use
the boundaries proposed by the authors of the theory: the progressive
generation of 1843–1859, the missionary generation of 1860–1882, the
lost generation of 1883–1900, the great generation of 1901–1924, the
quiet generation 1925–1942, the baby-boomer generation 1943–1960,
Generation X (Generation 13) of 1961–1981, Generation Y (Millennials) of 1982–2004, and Generation Z of 2005–the present. By the
“working generation”, we mean people from 16 to 62 years old.
252
I. Kishmariya
Results
Based on the definition, the environmental, social, and corporate risks
can affect businesses. However, in order to confirm the hypothesis that
ESG factors can improve the credit policy’s effectiveness when making
credit decisions, it is necessary to prove that these risks are substantial
for the potential borrowers’ financial stability.
To do this, we analysed the methodologies of the leading rating agencies: Moody’s Investments Services, S&P Global Ratings, and Fitch
Ratings.
Credit ratings are a universally recognized and widely used tool for
assessing companies’ and countries’ financial strength. One of the best
practices for analysing credit risk in banks, which appeared with the
Basel Committee’s recommendations on Banking Supervision “International Convergence of Capital Measurement and Capital Standards: New
Approaches” (Basel II), implies using internal ratings (IRB Approach)
calculated for each borrower concerning bank models (BIS, 2004). These
models take into account the probability of a counterparty’s default (PD);
the share of losses in case of a counterparty’s default (LGD); the absolute value of losses in case of default (EAD); and the remaining loan
term (M). Based on these indicators, expected losses (EL) and unexpected losses (UL) are determined, the value of which is included in
the capital adequacy and reflects the credit risk magnitude. As part of
this approach, banks assess the borrower’s internal rating, which reflects
the default probability (PD). In practice, such an assessment includes
not only financial indicators but also the data on the company’s external
credit ratings—ratings of international and national agencies. In fact,
banks compare their own analysis of the borrower’s creditworthiness with
an external assessment—its credit rating. If the last rating is higher than
the internal rating, then the bank can raise the internal rating and, as a
result, lower the borrower’s credit risk assessment, and vice versa. At the
same time, the objects of analysis differ when assessing an internal rating
by a bank and when assessing a credit rating by a rating agency.
The rating agencies actively worked with PRI to develop tools for
taking into account the issuers’ ESG risks in assessing their credit rating,
Responsible Principles in Banks …
253
and they are practically not taken into account in the internal rating
(Nuzzo, 2018).
Even though the methodologies of rating agencies differ significantly,
they include similar areas. When assessing a bank’s credit rating, for
example, the quality of its assets, capital adequacy, profitability, and
liquidity are analysed. It is also important to assess the operating environment, the bank’s position in the market, and the likelihood of
receiving extraordinary support from shareholders or the state if necessary. The scores obtained in each area are combined with different
weights, depending on the “architecture” of the applied rating model,
and the credit rating is finally assessed. An important component of
such models is the expert adjustments, which, if applied, can change
the assessment in the field of research if the analyst believes that certain
factors may affect the company’s financial condition but were not taken
into account in the initial model.
According to the study’s results, the rating models of Moody’s Investments Services, S&P Global Ratings, and Fitch Ratings include only a
few indicators that assess the issuers’ corporate risk. These indicators are
related to the transparency of the company’s ownership structure and
the key person’s risk. At the same time, all agencies take into account
environmental, social, and corporate risk factors when using expert
adjustments, and such adjustments often affect the issuers’ credit ratings.
For example, when assessing ESG banks’ credit rating, risks can affect
the asset quality assessments, business position, and bank profitability
if analysts conclude that these risks could affect the business’ financial
performance in the future. Besides, unstable environmental conditions
and social problems, in turn, can affect the assessment of the operating
environment—one of the most important factors in calculating credit
risk. Changes in the operating environment assessment often affect the
ratings of many issuers of certain industries or countries at once.
The analysis of the agencies’ work with ratings revealed many examples of the high or realized effect of ESG risks on rating actions. These
examples demonstrate the impact of environmental, social, and corporate
factors on the companies’ financial stability:
254
I. Kishmariya
• In October 2016 S&P ungraded credit rating of Carnival Corp. (a
cruise company operating in North America, Europe, Asia-Pacific)
to A- from BBB+, due to the background of improved working
conditions and safety standards on ships, which significantly reduced
financial losses from emergencies.
• In July 2017 S&P downgraded Thames Water Utilities to BBB+ from
A-, as the company’s operations lagged significantly behind the regulatory requirements for water use in the country, resulting constant fines
and affecting the company’s financial performance.
• In September 2017 S&P changed the outlook for credit rating of
Banco Agropecuario SA (Peru) to ‘negative’ due to climate change,
which, according to experts, significantly affected the quality of the
bank’s assets concentrated in the agricultural sector.
• In September 2018 Fitch Ratings revised the outlook for credit
rating of Danske Bank (Denmark’s largest bank) to ‘negative’ on the
back of the publication confirming the bank’s involvement in money
laundering in September 2018.
• In November 2018 Moody’s downgraded credit rating of Yes Bank
Limited (a private bank in India) to Ba1 from Baa3, amid the unexpected resignation of several members of the Board of Directors after
regulatory tightening, which raised many questions about the bank’s
corporate policy.
• In March 2019 S&P upgraded credit rating of International Investment Bank (an international organization, IIB) based on improved
assessment of the business profile after the IIB strengthened corporate
governance and management through the introduction of a proportional voting system, structure diversification, and a clear business
expansion strategy.
COVID-19 pandemic is a good example of realized ESG risk. The
consequences of the pandemic—for example, limited mobility due to the
introduced quarantine measures and a decreased disposable income—
are nothing more than a realized social risk. During the period from
March to June 2020, the Fitch Ratings rating agency, which assigned
more than 1,440 valid credit ratings to financial institutions, performed
Responsible Principles in Banks …
255
659 rating actions on the ratings of financial institutions, 620 of which
were negative and were associated with increased social risks.
Taking into account these facts, we can conclude that ESG risks affect
the companies’ financial stability and to make the internal ratings of
banks and external credit ratings effectively complement each other, as
well as be comparable; that is why, when assessing internal ratings of
borrowers, environmental, social, and corporate risks must be analysed
too, thus, making the banks’ credit policies more effective.
To test the second hypothesis about the impact of ESG risks on the
funding cost, we have collected data on issued sovereign bonds and bonds
of Russian financial companies. It was demonstrated above how ESG
risks affect the credit rating. Next, we analyzed the impact of a financial institution’s credit rating on its funding cost. To do this, we used
the data on sovereign bonds and bonds of financial companies to build
logarithmic functions of the type:
Y = a + b ∗ Ln(DT W )
where, Y is the bond yield, and DTW is the Macaulay duration calculated based on the earliest call or retirement date (duration-to-worst).
The a and b coefficients for sovereign bonds are 4.476 and 0.588,
respectively. Equivalent figures for corporate issues are shown in Fig. 1.
Using the difference in the coefficients of logarithmic models of bonds
with different ratings, we calculated the economic benefit from raising
the issuer’s rating one notch, which is shown in Fig. 1.
Fig. 1 Analysis of bond issue yield functions (Source Compiled by the author,
based on Bloomberg)
256
I. Kishmariya
According to the study, increasing a bank’s rating by one notch saves
between 4.2 million roubles (when moving from BB+ to BBB–) and
24.4 million roubles (when moving from B+ to BB–), depending on the
initial rating when the issue is 1 billion roubles and the average duration
is 1.4 years (the weighted average duration of all outstanding bonds of
Russian financial companies).
Thus, the credit rating, which is influenced by ESG risks, significantly
affects the banks’ bond issue rate, that is, the funding cost.
In order to confirm the hypothesis of the increasing importance of
environmental, social, and corporate factors in the struggle for talent,
we transformed the UN data on the population age structure in such a
way so we can obtain the population structure in terms of generations
presented in Fig. 2.
According to the data obtained, the share of Generation Y peaked at
46% in 2005, as of June 2020 it is 38%, and it will be 36% in 2025.
Representatives of this generation are now between 16 and 38 years old.
They have fully become part of the working-age population in 2020, and
they will constitute its absolute majority by 2025.
According to the theory of generations, developed by William Strauss
and Neil Howe, representatives of the same generation tend to share
a special set of beliefs, attitudes, values, and behaviours, as they grow
Fig. 2 Generation change model (Source Compiled by the author, based on UN
World Population Prospects 2019)
Responsible Principles in Banks …
257
up in the same historical conditions (Howe & Strauss, 1992). Representatives of Generation Y are very different from previous generations,
as, for example, their value system is different. A study by the international agency Deloitte notes that socially useful activities are essential for
them: they are quite sceptical about business in terms of the companies’
integrity and are ready to immediately reconsider or even terminate their
relations with the companies whose activities or policies contradict their
beliefs. According to a study by the Governance & Accountability Institute, 40% of the surveyed representatives of Generation Y chose their
job guided by its sustainability in terms of environmental, social, and
corporate responsibility. Of the baby-boomer generation, this figure was
only 17%. Moreover above 70% of Millennials surveyed said they would
prefer to work for a company with a transparent sustainability policy and
would be willing to sacrifice a portion of their salary for this.
The above research results, as well as the increasing share of Generation Y in the labour market, indicate an increasing role of ESG factors in
making job decisions. Banks have to adapt to changing realities, and the
ESG agenda can become a competitive advantage in the fight for talent.
Conclusions/Recommendations
Based on the results obtained, we can conclude that environmental,
social, and corporate risks affect the companies’ financial stability, and
this data can be used when making credit decisions to make the bank’s
credit policy more effective. The risks also affect the bank ratings and,
as a result, the cost of funding. Besides, we should take into account
the fact that, generationally, the growing proportion of Millennials is
already of working age and Generation Z are entering working age. These
groups have a different system of values, and therefore high environmental, social, and corporate responsibility, reflecting a better attitude
towards personnel, while low ESG risks, a potential employer’s commitment to the principles of responsible investment, and the Sustainable
Development Goals (not salary only) will guide them when choosing an
employer.
258
I. Kishmariya
Thus, the principles of responsible investment and effective ESG risk
management give banks a competitive advantage.
Today, Russia is actively introducing the principles of “responsible”
investment in financial and credit institutions (Panova & Kishmaria,
2020). At the same time, practice shows that the responsible investment
principles cause many problems associated with different approaches to
assessing banks’ ESG risks, verifying green financing instruments, and
recommending various international agencies that deal with responsible
investment. These problems are extremely relevant for Russian banks,
which are just beginning to stick to the responsible investment principles. Today, UFG Asset Management is the only Russian company
to sign the PRI principles. At the same time, several banks, such as
VEB.RF, Sovcombank, and Bank Center-invest, have signed the UNEP
FI’s responsible banking principles, whose goals are similar to the PRI
principles. In 2019, the Moscow Exchange joined the global Sustainable Stock Exchanges initiative, and as conferences held by it jointly
with international credit rating agencies and ESG agencies show, Russian
banks are showing increasing interest in the principles of responsible
investment and monitoring ESG factors. In this regard, an increasing role
in the practices for implementing the responsible investment principles
in Russia is played by the consulting companies. Among such companies, we can highlight the Gazprombank ratings and esg advisory center,
which provides consulting services for issuers of green and social bonds,
and also supports those companies who are obtaining credit and ESG
ratings from international and national agencies. It is also important to
note the activities of the National Association of Concessionaires and
Long-Term Investors in Infrastructure (NAKDI), which has established
the Competence and Green Expertise Center—a platform that brings
together top Russian experts in the field of green financial instruments.
The joint work of the financial market entities mentioned above,
together with the increasingly obvious importance of the formation of
mechanisms for managing environmental, social, and corporate risks for
banks, will further expand the practice of introducing the responsible
Responsible Principles in Banks …
259
investment principles in banks, including the Russian ones, and will
make this trend global and inevitable.
References
BIS. (2004). International Convergence of Capital Measurement and Capital
Standards. Basel Committee on Banking Supervision. Available at: https://
www.bis.org/publ/bcbs128.pdf. Accessed 18 June 2020.
Deloitte. (2019). The Deloitte Global Millennial Survey 2019. Available at: https://www2.deloitte.com/content/dam/Deloitte/global/Docume
nts/About-Deloitte/deloitte-2019-millennial-survey.pdf. Accessed 18 June
2020.
Fitch Ratings. (2019). Introducing ESG Relevance Scores for Corporates.
Available at: https://www.fitchratings.com/research/corporate-finance/introd
ucing-esg-relevance-scores-for-corporates-07-01-2019. Accessed 18 June
2020.
Fitch Ratings. (2020). White Paper: ESG in Credit. Available at: https://your.
fitch.group/esgwhitepaper.html. Accessed 18 June 2020.
Governance & Accountability Institute. (2019). Millennials really do want to
work for environmentally-sustainable companies, according to a new survey of
large company employees. Available at: https://www.ga-institute.com/newsle
tter/press-release/article/millennials-really-do-want-to-work-for-environme
ntally-sustainable-companies-according-to-a-new-su.html. Accessed 18 June
2020.
Howe, N., & Strauss, W. (1992). Generations: The history of America’s future,
1584 to 2069. HarperCollins.
Howe, N., & Strauss, W. (1993). 13th Gen: Abort, retry, ignore, fail . Vintage
Books.
Howe, N., & Strauss, W. (1997). The fourth turning: What the cycles of history
tell us about America’s Next Re ndezvous with destiny. Broadway Books.
Moody’s Investment Services. (2019). The impact of environmental, social and
governance risks on bank ratings. Available at: https://www.eticanews.it/wpcontent/uploads/2019/07/Banking_fullreport.pdf. accessed 18 June 2020.
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Moody’s Investment Services. (2020). ESG risks material in 33% of Moody’s
2019 private-sector issuer rating actions. Available at: https://www.moodys.
com/research/Moodys-ESG-risks-material-in-33-of-Moodys-2019-privat
e–PBC_1218114. Accessed 18 June 2020.
Nuzzo, C. (2018). Shifting perceptions—Part 3: Exploring the disconnects.
Principles for Responsible Investment. Available at: https://www.unpri.org/dow
nload?ac=5819. Accessed 18 June 2020.
Panova, G. S., & Kishmaria, I. L. (2020). Principles of responsible investing in
Russian Banks. Banking (Bankovskie uslugi), 4, 2–10.
S&P Global Ratings. (2019). The Role of environmental, social, and governance
credit factors in our ratings analysis. Available at: https://www.spglobal.
com/ratings/en/research/articles/190912-the-role-of-environmental-socialand-governance-credit-factors-in-our-ratings-analysis-11135920#:~:text=S%
26P%20Global%20Ratings%20incorporates%20environmental,rating%
20outlooks%2C%20and%20ratings%20headroom. Accessed 18 June 2020.
Managing the Risks of Financial
Intermediaries: Transforming Approaches
and Reality
Dmitry Panov and Irina Larionova
Introduction
The activities of financial intermediaries constitute a very important
sphere in the modern economy, since they ensure the transformation
of the accumulated free resources of economic entities and households
into investments, carry out settlement transactions, hedge the risks of
their counterparties and their own, facilitate cross-border movement of
capital, etc. At the same time, this activity is highly risky and not so much
for the intermediaries themselves but for their counterparties. In the case
D. Panov (B)
Moscow State Institute of International Relations (MGIMO University),
Moscow Exchange Group, Moscow, Russia
I. Larionova
Moscow State Institute of International Relations (MGIMO University),
Finance University under the Government of the Russian Federation,
Moscow, Russia
© The Author(s), under exclusive license to Springer Nature
Switzerland AG 2021
G. Panova (ed.), Financial Markets Evolution, Palgrave Macmillan
Studies in Banking and Financial Institutions,
https://doi.org/10.1007/978-3-030-71337-9_20
261
262
D. Panov and I. Larionova
of an unprofessional risk management by a financial intermediary, there
may be negative consequences for the intermediaries themselves, even
leading to undesirable macroeconomic effects, an economic downturn,
and in an extreme case a crisis. In this regard, the boundaries of risks
accepted by financial intermediaries are rather strictly regulated.
It is known that regulation is internationally recognized as important
in order to ensure financial stability, which is required to allow the development of unified standards, primarily in the field of microprudential
regulation. The centre for the development of such standards was the
Banking Committee on Banking Supervision, created under the Bank
for International Settlements (Committee of the Bank for International
Settlements). However, to be fair, it should be noted that some scientists (Demirgüç-Kunt & Detragiache, 2011; Klomp & de Haan, 2012),
based on empirical data, have not found a close relationship between the
desire to limit risks through regulation and financial stability.
In the sphere of regulation, which has a significant impact on the
construction of risk management systems and their transformation, the
problem of the intermediary’s risk profile is increasingly raised, due to
the peculiarities of its business model. The scientific literature and regulatory documents provide different classifications of business models,
which consider different criteria. In particular, in the banking business
(e.g. in Russia), the regulator singles out the model of a universal, retail
bank (a captive model). The IMF methodology lists the following types:
universal banks, corporate banks, investment, transactional, retail banks,
and property management banks (Deminguc-Kunt & Huizinga, 2010).
The Bank for International Settlements, within the framework of the
study, identifies four business models: (1) retail funding; (2) funding
in the capital markets; (3) specialization in trading operations; and (4)
a universal bank (Deminguc-Kunt & Huizinga, 2010). Other classifications can be cited; however, we believe that there is no convincing
evidence to support the claim that universal banks are more risky than
specialized banks (Benston, 1994; Dietrich & Vollmer, 2012; Curi et al.,
2015).
Currently, the meaningful construction of risk management systems is
distinguished by its integrated nature, a shift in emphasis on managing
aggregate risk, ensuring operational efficiency at a sufficient level,
Managing the Risks of Financial Intermediaries …
263
adjusting capital requirements taking into account the risk profile, and
so on. Focusing on portfolio risk and economic capital models together
however does not relieve the problem of model risk.
Methodology
The research methodology is based on our analysis and generalization
of Russian and foreign scientific literature, tackling the topics of risk
management systems, modern regulations in the field of financial intermediation, general and local trends, and the results of empirical research,
mainly based on the example of banks.
While researching the impact of the effectiveness of financial intermediation on the risk of its business and capital, we relied on the work
of Repullo (2004), Allen and Gale (2009), Gropp and Heider (2010),
Casu and Girardone (2009), and Haldane and Alessandri (2009), among
others; also, reviews from the European Central Bank were used. Of
particular interest were some studies assessing the impact of banking
regulation on risk in developing countries (Ben Naceur & Omran, 2011;
Klomp & de Haan, 2014; Demirgüc-Kunt & Huizinga, 2010; LozanoVivas & Pasiouras, 2010) were used on the problems of building risk
management systems taking into account the bank’s business model. In
matters of income-oriented risk management, materials were used from
the book by Schirenbeck, Lister, and Kirmse “Income-Oriented Banking
Management”. Among Russian researchers, the works of Aleksashina
et al. (2012), Isaev (2011), and others were used.
The results obtained by Petriaa et al. (2019) were used on the problems
of profitability of financial intermediaries’ activities.
Results
Financial intermediation, like any other business, is focused on maximizing the financial result (profit) in the interests of the owners.
However, this target, as already noted, implies at the same time
compliance with regulatory norms and rules, alongside the specifics of
264
D. Panov and I. Larionova
100
80
60
40
20
89.1
NBFIs
mutual funds
private pension funds
insurers
banks
0
Fig. 1 Structure of the Russian financial sector, % (Source Central Bank of the
Russian Federation, Annual report, 2019. http://www.cbr.ru/Collection/Collection/
File/19699/ar_2019.pdf)
the business model, its conduct, and its capital adequacy to cover the
risk profile. In Russia, banks have a special place among financial intermediaries. Thus, according to the national regulator, the banking sector
remains the main segment of the financial market (Fig. 1). It currently
accounts for almost 90% of assets.
In this regard, the study of the construction problems and development prospects of risk management systems in this article will be based
on the materials of banks prevailing in the financial markets.
Under the pressure from the recent downturn in the world’s leading
economies and emerging markets, the profitability of financial intermediaries has been on a steady downward trend. In the context of persisting
extremely low interest rates, the profitability of banking activities are
also declining. The return on equity (ROE) of European banks in 2018
was 6.1% for the 28 EU countries, which in 2019 fell to 5.2%. The
ROE level is significantly lower than the registered values in the pre-crisis
period (before the crisis, ROE on average across the EU was 10.6%). At
the same time, the range of fluctuations of the indicator was quite wide
at the end of 2019: from a negative number (Greece - (−) 0.3) to a very
high value at the level of 14.6% (Hungary) (EBF 2020).
In the United States, ROE at the end of 2019 was 2 times higher than
in the EU banking sector, but remained below the maximum values of
the zero years (Fig. 2).
The factors constraining the growth of return on capital indicators
remain macroeconomic (negative interest rates); these include a high
share of operating costs per $1 of gross income, a decrease in the quality
Managing the Risks of Financial Intermediaries …
265
20
15
14.36
11.38
10
5
-5
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
0
US Banks ROE
Fig. 2 Dynamics of return on equity metric for US Banks (Source Federal
Reserve Economic Data [Electronic resource] https://fred.stlouisfed.org/series/
USROE)
of borrowers (and, as a result, a decrease in the repayment of loans and
bank income), regulatory restrictions, competition from fintech companies, and some others. In the COVID-19 pandemic, these negative
factors have only increased their negative impact. Thus, according to the
Bank of Russia, the depth of the fall in GDP in 2020 will be from 4
to 6% (CBR 2020). According to IMF forecasts, the decline in GDP
in developed countries will reach (−) 8%, while developing countries,
respectively, (−) 3%, which is 2 pp. below the previous forecast. In some
European countries, the drop in GDP is expected to be more noticeable
(France (−) 12.5%, Italy and Spain (−) 12.8%) (EBF 2020).
The profitability of Russian banks before the pandemic was distinguished by high values and amounted to 19.7% at the end of 2019;
however, every fifth bank was unprofitable. The share of problems and
bad loans in the total portfolio of the banking sector is 3 times higher
than in EU countries, and the level of capital adequacy is significantly
lower (EBF, 2020).
The current conditions impose increased requirements on risk
management systems in credit institutions and necessitate the development of optimization mechanisms in the coordinates: risk—return—
economic capital. At the same time, the optimization mechanism is
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D. Panov and I. Larionova
inherently contradictory. Unfortunately, it is not possible to simultaneously minimize the level of risk, increase the profitability and ensure
compliance with regulatory requirements in line with ensuring financial
stability. In this regard, management is always faced with the difficult
task of achieving the target level of some indicators with minimal damage
to others.
In general, building risk management systems on an integrated basis
requires simultaneously taking into account the volatility of the external
environment, evaluating new projects and complex products that involve
various options for clients, constantly assessing and monitoring the effectiveness of individual operations, counterparty risks, and products, and
achieving a balanced portfolio of assets.
B covpemennyx ycloviЯx, c yqetom meҖdynapodnyx
tpebovaniЙ, banki dolҖny vyctpaivatb vnytpennie
ppocedypy ocenki pickov c yqetom cootvetctviЯ nopmativam
ocenki doctatoqnocti kapitala (libo vnytpennim opientipam
doctatoqnocti kapitala).
In modern conditions, considering international requirements, banks
must build internal procedures for assessing risks, while adhering to
compliance with the standards for assessing capital adequacy (or internal
benchmarks for capital adequacy). One of the problem areas in this part
is the assignment of certain weights to various risks. At the same time,
there is empirical evidence that the risk weights used to assess capital
adequacy do not adequately reflect the actual risk of the banking portfolio, which can result in non-compliance with capital requirements and
the threat of bankruptcy (Berger et al., 1995; Vallascas & Hagendorff,
2013).
In the process of assessing risk and capital, at least two problems
arise. The first consists of identifying and assessing the model risk, and
the second is related to the advisability of using regulatory norms for
weighting assets against risk. The first problem, regarding model risk,
stems from management being always tempted to calibrate the level of
risk in order to comply with standards, which will distort the adequacy of
the formed capital up or down. The second problem, on using regulatory
norms, is due to the fact that, in the case of objective measurement of
the level of risks and their management in the bank, the question arises
Managing the Risks of Financial Intermediaries …
267
as to how expedient it is to apply complex regulatory requirements for
weighing risks and assessing capital adequacy.
The indicator of economic capital as a measure of risk is currently
widely used in banking practice. Economic capital is based on a probabilistic assessment of the potential for future losses in the event of a risk
materialization, being in this regard a more significant measure of capital
adequacy. Schematically, the construction of a risk management system
focused on the concept of economic capital can be represented as follows
(see Fig. 3).
It is well known that financial intermediaries cover expected losses
from risk realization by forming reserves, the formation ratio of which,
in turn, is either determined by the regulator or the bank’s use of internal
models for assessing the probability of default while noting the loss ratio
recorded in the assessment process. This approach theoretically allows
credit institutions to form reserves for expected losses in asset value, based
on the risk profile inherent to their chosen business model.
Risk and capital management is based on the principles of its close
integration into the activities and main processes of a bank. At the same
time, for credit institutions and banking groups, the respective stages of
risk management may differ.
Risk
identification
Identification
of significant
risks
Quantitative
assessment
of risk
Improving the
management system
Qualitative
assessment
of risk
Conformity
assessment
and audit of
the risk
management
system
Credit risk
Market risk
Interest rate risk
of banking book
Operational risk
Business risks
Compliance
IT risks
Risk
appeti
te
Risk
aggregation
Capital allocation
Analysis of
compliance
with internal
requirements
Pricing
Economic
capital
Limits
Fig. 3 Relationship between risk assessment and the formation of economic
capital scheme
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D. Panov and I. Larionova
Regulators today instruct all banks to determine their appetite for risk,
which quantitatively estimates the level of risk acceptable for them, in
accordance with their development strategy, and which is considered
when assessing capital adequacy. The task of identifying the propensity of a financial intermediary to take risks is to determine its target
level, which allows them to maintain long-term financial stability under
various scenarios, including stressful ones. As a rule, a company’s propensity to take risks (risk appetite) is defined as a combination of quantitative
and qualitative indicators.
A feature of recent years is the constant expansion of the list of
risks, among which—along with traditional financial risks—a special
place belongs to operational risks. Managing technology and cyber risks
requires critical thinking and hands-on experience in technology, business, and risk. It is difficult to find specialists of this profile with
knowledge and competencies in all these areas. Therefore, financial intermediaries need to fund training and retraining of staff, invest in people
who can effectively collaborate with IT departments, and act as a partner
in making strategic decisions. Currently, there is a growing demand for
candidates with the Threat Hunter skills, who have the ability to independently conduct proactive monitoring and prevent incidents in the
early stages of their occurrence, which is facilitated by many global trends
in the development of narrow areas of cybersecurity.
The risk management process has and will (to an even greater extent)
acquire the features of minimal manual intervention in risk assessment,
which will reduce operating costs and the inherent risks of erroneous
actions. It is expected that the advisory support of financial intermediaries to their clients will increase, and the need for corporate values and
culture will increase. The operating model of financial intermediation
will undergo a revision, which may change significantly due to the penetration of the latest technologies into the field of valuation. However,
these processes will lead, in our opinion, to the strengthening of the
analytical function as the basis for making managerial decisions.
Managing the Risks of Financial Intermediaries …
269
Conclusions/Recommendations
The sphere of financial intermediation—due to the specifics of this business and its weak connection with the processes of creating real value, but
also its simultaneous accumulation of significant financial resources—is
under the close scrutiny of regulators who establish rules and regulations
in the form of risk limits. Operating with intangible assets, institutions
of financial intermediation find themselves in a very sensitive zone of
risks, which makes higher demands on management in terms of timely
identification, assessments, and making lightning-fast management decisions. The current situation is developing in such a way that regulators
are constantly expanding and complicating the rules and norms for
assessing risks, while simultaneously being one step behind reality. This
trend is developing against the background of a significant slowdown in
economic growth in developed and emerging markets, leads to a decrease
in the quality and depreciation of assets, and affects the marginality of
activities. In this regard, the risk management process is based on the
search for effective ways to aggregate risk, assess of compliance with the
risk appetite, and take into account the chosen business development
model and capital adequacy for absorbing risks if they are realized.
The rapid introduction of innovations and technologies significantly
facilitates the risk assessment process and contributes to cost reduction, while increasing the need for an objective analytical assessment of
management results, including the implementation of stress scenarios,
as well as making additional requirements for reliability and operational
risk management, especially in terms of cybersecurity.
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banking. Journal of Financial Intermediation, 13(2), 156–182.
Schirenbeck, H., Lister, M., & Kirmse, S. (2019). Income-oriented banking
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Finance, 17 (6), 1947–1988.
Problems of Ensuring the Financial Stability
of Financial and Credit Institutions
in the Digital Economy
Irina Larionova and Dmitry Panov
Introduction
The decline in global economic growth rates against the continuing risks
of uncertainty and global economic imbalances makes it necessary to
search for methods to stimulate economic development while maintaining financial stability in financial markets and preventing systemic
risks. In most developed countries, central banks focus on monetary
methods, either keeping the official interest rate low or lowering it by
pursuing a cheap money policy. However, this incentive measure has not
I. Larionova
Moscow State Institute of International Relations, Financial University Under
the Government of the Russian Federation, Moscow, Russia
e-mail: ILarionov@fa.ru
D. Panov (B)
Moscow State Institute of International Relations, Moscow Exchange Group,
Moscow, Russia
© The Author(s), under exclusive license to Springer Nature
Switzerland AG 2021
G. Panova (ed.), Financial Markets Evolution, Palgrave Macmillan
Studies in Banking and Financial Institutions,
https://doi.org/10.1007/978-3-030-71337-9_21
273
274
I. Larionova and D. Panov
yet produced tangible results. Global GDP is still growing slower than
expected. According to some estimates, there was a decrease in GDP by
0.3 percentage points in 2019 compared to the previous year (up to
2.1%) in the Eurozone countries. On the other hand, the situation is
different in the United States, where the economic growth rate is significantly higher than in Europe and the world as a whole (EBF, 2018).
In other words, national regulators pursuing a cheap money policy rely
on the stimulating demand for credit resources from economic entities
and households. The current favourable macroeconomic situation in the
Russian economy has allowed the Bank of Russia to consistently lower
its key interest rate over the past five years.
At the same time, a series of crises that affected both developed and
developing countries at different periods, along with the echoes of the
global financial and economic crisis of 2007–2009, reduced the number
of operating credit institutions, their branches, and the number of people
employed in this sector, yet also increased the number of clients served
per employee, partly owing to technological innovations. At the same
time, a moderate inflow of funds to the banking sector, for example in
the Eurozone, continues against the background of some reduction in
credit activity. The EU’s financial and credit institutions have formed
a capital adequacy level that meets the regulatory norms. There is a
decrease in the volume and share of non-performing assets compared
to the crisis and post-crisis periods. However, not all Eurozone countries
show signs of financial stability.
The situation in the Russian banking sector is somewhat different. On
the one hand, the financial stability of the sector is supported by positive
macroeconomic indicators (low inflation, relatively stable prices, sufficient reserves, etc.), while on the other hand, the revocation of banking
licences continues, the quantity of banks and their branches is decreasing,
the share of a limited number of banks occupying dominant positions is
growing, the competitive environment is deteriorating, regulatory costs
are increasing, etc. These phenomena are also accompanied by positive microeconomic indicators that point at the financial stability of the
Russian banking sector.
This brief overview of current trends allows us to highlight the most
urgent problems faced by modern economies and, above all, those faced
Problems of Ensuring the Financial Stability …
275
by the banking sector: (1) ensuring financial stability in financial markets
and the banking sector is a priority policy of monetary authorities
and regulators; (2) financial stability is ensured by restrictive measures
proposed by regulators to the detriment of economic growth; (3) regulatory costs have negative macroeconomic effects; and (4) international
regulatory standards broadcasted by the Bank for International Settlements and consistently implemented by national regulators increase the
risk of information asymmetry lead to a decrease in mutual trust of financial market participants, and may become a source of a new banking
crisis.
Methodology
The methodological basis of the study consolidates the works of
both Russian and foreign scientists, experts, international organizations,
central banks and individual credit organizations, which to some extent
addressed the financial stability of the banking sector, its institutions and
the impact of regulation on economic development.
The study used general scientific methods: abstraction, an ascent from
the abstract to the concrete, typology, induction, deduction, analysis,
synthesis and unity of both historical and logical paths.
Results
Problems of ensuring financial stability include theoretical and applied
aspects. Unfortunately, the interpretation of the term “financial stability”
is quite ambiguous. This term is widely used in foreign academic literature and regulatory norms, while in Russia the term “financial sustainability” is preferred. Some believe that the term “financial stability” was
originally proposed in 1986 by Minsky (Macmillan, 2019).
However, in our opinion, it is impossible to say that these terms define
the same phenomenon. We believe that financial stability is a complex
character of a monetary institution’s activity, reflecting the potential for
restoring stability being both externally and internally influenced. It is
276
I. Larionova and D. Panov
the probabilistic characteristic that reflects compliance with the normative values of traditional quantitative and qualitative indicators (asset
quality, capital adequacy ratios, liquidity, profitability and management)
at a certain date. Financial stability is a broader concept that characterizes
the ability of the system to be in equilibrium (stability) and to maintain it
under the influence of external and internal factors during the transition
from one state to another. This interpretation emphasizes the dynamic
nature of stability, although there is another approach when stability is
considered as a state close to stagnation.
Foreign (non-Russian) authors define financial stability as a
continuum with a corresponding set of combinations of financial
components in different periods (Schinasi, 2004). Others associate this
term with constancy (Hung et al., 2018).
Despite the differences in interpretations of the term, almost all
authors agree on one thing: financial stability is the ability of financial
markets to limit, prevent and eliminate imbalances before they become a
threat to the economic system itself or its processes. In this regard, financial stability can be examined from two points of view: on the one hand,
it is achieved using a strict model of banking regulation and risk limitation; on the other hand, it prevents banks from expanding their business
activity in the market. In other words, financial stability does not have
a direct impact on economic growth. Given the financial stability of
the banking sector and the financial market, we can see a slowdown in
economic growth. At the same time, financial stability has time limits.
Both developed and developing economies are currently trapped in this
situation. In general, the banking sector and the financial market have
achieved a stable position, but it is not a source of economic growth.
It is no secret that the Basel Committee on Banking Supervision
(BCBN) has been periodically reviewing international standards for
microprudential regulation for several years. Today, following the BCBN
recommendations under Basel III, new standards for capital structure
have been introduced, and the list of capital adequacy standards was
expanded; monetary institutions are obliged to create multiple buffers
of capital and adjust profit if the funds are insufficient; systemically
important institutions in the banking market must comply with two
additional liquidity ratios, short-term (Liquidity Coverage Ratio (LCR))
Problems of Ensuring the Financial Stability …
277
and long-term (Net Stable Funding Ratio (NSFR)); an indicator of
financial leverage was introduced; large banks are required to conduct
regular stress testing; and this is not a complete list.
Furthermore, the regulator constantly adjusts its requirements in
attempts to prevent the appearance of financial bubbles, thus increasing
the risk factors for credit requirements in certain market segments, which
leads to an additional burden on the profit and capital of commercial
banks. Also, the factor caused by a decrease in the key interest rate has
been added to the number of external factors of instability, which affects
the spread range (the difference between deposit and credit interest rates),
leads to a rise in the cost of long-term resources, and reduces the demand
from banks for this type of resources. Moreover, narrowing the spread
increases the negative effects, significantly reducing the interest margin
compared to changes in the level of interest rates.
Following the new financial stability standards (Basel II and III),
monetary institutions faced high transaction costs. Developing the
methods for assessing the risk of borrowers based on the probability of
default was the most expensive stage. Banks (subject to the validation
of individual models by the regulator) can use them in their activities,
forming reserves in accordance with their asset rating levels.
There is a danger in allowing a certain amount of freedom in risk
assessment based on advanced quantitative models rather than on standardised BCBS approaches. These tools can be used to optimize the
ever-increasing regulatory costs. For example, they can be used to create
an illusion that risks have been properly assessed and protected by the
specially allocated reserves and capital. In other words, despite the attractiveness of creating individual metrics for assessing the probability of
counterparties’ default and of forming reserves adequate to the accepted
risks to respond to the resulting claims, their application can be quite
costly. Besides, banks may also be tempted to optimize the cost of the
reserves formed at the expense of reliability.
The need for commercial banks to meet new risk assessment standards in the face of declining market returns harms the profitability of
their operations and the investment attractiveness of the banking business. Small banks that have limited development opportunities are now
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I. Larionova and D. Panov
in a more difficult position, despite the transition in the Russian Federation (as an example) to a system of proportional regulation, i.e. a more
lenient model that takes into account the small scale of their activities
and capital.
It is also important to note that we can distinguish two types of
regulation impacts on the banking sector’s financial stability: direct and
indirect. The sphere of direct impact is related to the microprudential
requirements for credit institutions, as discussed above.
The sphere of indirect impact in the Russian Federation implies
monopolizing the financial services market, weakening the competition,
making financial market institutions asymmetrical from the territorial
and geographical points of view, initiating conflicts of interest and so on.
As a result of a series of crises and the pressure sanctions place on the
subjects of the Russian banking sector, a dissonance has formed: most
assets and capital of the sector are owned by the state. By the start of
2019, the state’s share in the assets of the Russian banking sector reached
73% and remained the same for a year, exceeding the previous year’s
figures by 10 percentage points (Association of Banks of Russia, May
2019).
At the same time, the state can put dual pressures on the development
of the banking sector. On the one hand, the presence of the state in the
capitals of large banks contributes to the systemic stability of the sector,
since this group of banks can count on support, if necessary. On the
other hand, this support undermines the very essence of the institution’s
financial stability, thus disturbing the balance between private and state
banks. It is also worth mentioning that state-controlled banks are very
important for keeping the system balanced, and the history of banking
systems shows that it is the major players who usually carry the systemic
risks and reduce the barrier to ensuring financial stability.
The dominance of banks with state ownership of capital affects the
competitive environment, reduces the effectiveness of financial intermediation and affects the price of banking services, their availability and
their compliance with customer requests.
The observed consolidation of banking institutions against the
national regulator’s policy aimed at getting rid of unscrupulous participants, pursuing a strict microprudential regulation policy, has radically
Problems of Ensuring the Financial Stability …
279
reduced the number of credit institutions and their divisions. Despite
compliance with global trends in this area, while also taking into account
the rapid development of technologies, this trend does not cause concern
at first glance. This phenomenon increased the number of operating
credit institutions in Central Russia and lowered the presence of banks
in other regions.
Another worrying factor was the unprecedented rate of introducing
technological innovations; individual large banks created ecosystems that
have become inconvenient to control. Rapidly developing technologies
have made room for unprecedented risks of cyber threats and fraud.
Currently, existing regulatory rules and regulations are aimed at
limiting risks, which means that they contribute to ensuring financial
stability, both for individual institutions and the system as a whole.
However, the downside of this generally correct direction is restricting
business activity and losing a close relationship between the banking
and the real sectors. In this regard, it is wrong to consider the financial stability of the banking sector in isolation from the economy and its
sustainable development.
The main trend in the Russian banking sector over the past two years
has been a slowdown in the growth rate of its institutions. In the growth
rate of individual deposits’ inflow, there has been a decrease, as has also
been observed in the funds of the enterprises’ accounts against the background of high credit growth in certain segments of the credit market,
particularly for consumer lending (SberDannye, 2019).
We believe that, to a large extent, financial stability in the national
economy is provided by reduced demand, including that for banking
services, alongside unprecedented regulatory restrictions that have
exceeded the standards applied in several developed and developing
countries.
According to some experts, with whom it is difficult to disagree,
the introduction of microprudential restrictions based on international
Basel III standards is justified during periods of economic overheating
rather than stagnation. We believe that the current actions performed
by the Russian national regulator (the Bank of Russia) do not fully
meet the needs of the national economy, sometimes even harming the
business climate and the interaction of the banking and real sectors
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I. Larionova and D. Panov
of the economy. The results of research conducted by the Long-term
Economic Impact Group (LEI) and the Macroeconomic Assessment
Group (MAG) in 2010 confirm that the costs associated with higher
capital and liquidity level requirements slow down the development of
lending, affecting economic activity.
In this regard, it is interesting to analyse the results of some studies
on the impact of capital requirements set by Central Banks following
the BCBN standards of loan interest rates, on the spread between credit
and deposit interest rates, and on credit growth. Experts assessing the
relationship between interest rate spreads and bank capital adequacy
indicators, taking the example of UK statistic data for the period from
1992 to 2012, found that, in the long term, with an increase in capital
adequacy by 1 percentage point, the spread will grow by 9.4 basis points
(de-Ramon et al., 2012).
Other authors (Šutorova & Teply, 2013), using a significant sample of
banks (out of 594 European banks) for the period from 2006 to 2011,
demonstrated that loan rates increase by 19 basis points, with an increase
in capital adequacy by 1 percentage point. It was also found that full
implementation of the Basel III package will lead to a 2% reduction in
lending in Europe (Fraisse et al., 2015), while clarifying that an increase
in capital requirements by 1 percentage point leads to a 1% reduction in
lending due to a reduction in the number of loans granted to customers.
In the above works, the multidirectional effects of the microprudential regulation’s transmission mechanism are highlighted. The authors
concluded that the potential for interest rate spreads on corporate loans
is higher in the short term, compared to the spreads on consumer loans
(de-Ramon et al., 2012); the impact on the number of loans granted is
significantly higher than that on the volume of lending (Fraisse et al.,
2015).
In general, the available empirical data shows that stepping up in
capital adequacy requirements by one percentage point makes banks
reduce lending volumes in the long term by 1.4–3.5% or reduces the
growth rate of lending by 1.2–4.6% (Table 1).
According to some expert estimates, introducing short-term liquidity
coverage ratio (LCR) and net stable funding ratio (NSFR), as well as
increasing capital ratios, can lead to a decrease in GDP growth rates.
Problems of Ensuring the Financial Stability …
281
Table 1 Assessing the impact of increasing the capital adequacy ratio by 1
percentage point on the credit volume and growth
Works
MAG
(2010)
Fraisse
et al.
(2015)
Aiyar
et al.
(2014)
Bridges
et al.
(2014)
Messonier
and
Monks
(2014)
Noss and
Toffano
(2014)
Meeks
(2014)
Šutorova
and
Teply
(2013)
DeRamon
et al.
(2012)
Reduction
in lending
volumes
(%)
Reduction of
credit
growth rates
(%)
1.4
Country
Period
evaluated
Accumulated
effect period
(months)
15
countries
France
2008–
2011
24
England
1998–
2007
<3
England
1990–
2011
36
France
2011–
2012
9
1.4
England
1986–
2010
Long term
0.2
(mortgage)
0.5
(enterprises)
1.4–3.5
1.2–4.6
England
1989–
2008
Long term
Europe
2006–
2011
Long term
1.6
England
1992–
2010
Long term
1–8
4.6
3.5
1.2
12
Source Compiled by the authors
According to the Statistical & Forecast data Trading Economics, an
increase in the level of liquid assets by 25% over four years and an
increase in the terms of liabilities to maintain the net stable funding ratio
may lead to a decrease in the annual GDP growth rate by 0.08% (Bridges
et al., 2014).
282
I. Larionova and D. Panov
The calculations of the Bank for International Settlements also
confirm this conclusion: an increase in the net stable funding ratio by 1
percentage point leads to a deviation of GDP down from the base level
by 0.08% (Cohen, 2013)
Considering the above, it can be concluded that, in different countries,
the financial stability of the banking sector is currently provided by a
more stringent model of regulation regarding the activities of actors in
the sector. However, the history of banking systems shows that a strict
regulatory regime is not a guarantee of stability (Wallison, 2005).
Conclusion
Problems with financial stability in many countries now dominate
the need for economic growth. Positive results have been achieved in
this area. At the same time, the important question of whether it is
possible to ensure the financial stability of the banking sector in a weak,
non-developing economy remains open. In our opinion, the answer
may be yes, but only for a short-term period—this would happen by
limiting risks and attracting budget funds. In the long term, if there
is no economic development, this is impossible—the accumulation of
resources by the banking system will slow down, which will cause a slowdown in lending and a deterioration in the quality of credit portfolios,
profits and capital replenishment. We believe that any central banks‘
policy should prioritize harmonizing the monetary policy targets and
ensuring the financial stability of the banking sector.
At the same time, a new micro-prudential regulation model, in our
opinion, can be called pro-cyclical. The complexity of methods and
tools used by banks for risk assessment (based on internal models,
including sampling and big data processing) can determine the level of
risks inherent in a particular bank, on the one hand, though, on the
other hand, it is difficult to control, both at the macro- and micro-levels.
This approach may inspire confidence that risks are properly assessed and
protected, but real life may sometimes bring surprises.
Problems of Ensuring the Financial Stability …
283
References
Aiyar, S., Calomiris, C., & Wieladek, T. (2014). Identifying channels of credit
substitution: when bank capital requirements are varied (Bank of England
Working Paper No. 485). https://www.bankofengland.co.uk/research/Doc
uments/workingpapers/2014/wp485.pdf.
BIS. (2010, August). An assessment of the long-term economic impact of stronger
capital and liquidity requirements [Electronic resource]. Available at: http://
www.bis.org/publ/bcbs173.pdf.
BIS. (2016, March). Literature review on integration of regulatory capital and
liquidity instruments (Basel Committee on Banking Supervision. Working
Paper No. 30) [Electronic resource]. Available at: http://www.bis.org/bcbs/
publ/wp30.pdf (accessed 1 May 2017).
Bridges, J. et al. (2014). The impact of capital requirements on bank lending
(Bank of England Working Paper No. 486).
Cohen, B. H. (2013, September). How have banks adjusted to higher capital
requirements? BIS Quarterly Review, 25–41.
De-Ramon, S., Iscenko, Z., Osborne, M., Straughan, M., & Andrews, P.
(2012). Measuring the impact of prudential policy on the macroeconomy: A
practical application to Basel III and other responses to the financial crisis (FSA
Occasional Paper, No. 42) [Electronic resource]. Available at: www.fsa.gov.
uk/static/pubs/occpapers/op42.pdf. Accessed date 1 May 2017.
EBF. (2018). Banking in Europe: EBF facts & figures 2018. Brussels, Frankfurt:
European Banking Foundation.
Fraisse, H., Lé, M., & Thesmar, D. (2015). The real effect of bank capital
requirements (Bank of France Working Paper) [Electronic resource]. Available at: acpr.banquefrance.fr/fileadmin/user_upload/acp/publications/Deb
ats_economiques_et_financiers/20130802-The-Real-Effects-of-Bank-Cap
ital-Requirements.pdf. Accessed date 1 May 2017.
Hung, C.-H. D., Jiang, Y., Liu, F. H., & Tu, H. (2018). Competition or
manipulation? An empirical evidence of determinants of the earnings persistence of the U. S. banks. Journal of Banking & Finance, 88, 442–454.
https://doi.org/10.1016/j.jbankfin.2018.01.010.
Jean-Stéphane Mésonnier & Monks, A. (2014). Did the EBA capital exercise
cause a credit crunch in the Euro area? (Banque de France Working paper).
Macroeconomic Assessment Group (MAG). (2010). Assessing the macroeconomic impact of the transition to stronger capital and liquidity requirements.
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Noss, J., & Toffano, P. (2014). Estimating the impact of changes in aggregate
bank capital requirements during an upswing (Bank of England Working
Paper, No. 494). https://www.bankofengland.co.uk/research/Documents/
workingpapers/2014/wp494.pdf.
SberDannie. (2019, December). Bankovskie itogi 2019, SberDannie [Electronic resource]. Available at: https://www.sberbank.ru/common/img/upl
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SberDannye. (2019, December). Banking year results [Electronic resource].
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lytics/bankovskoe.pdf.
Schinasi G. J. (2004). Defining financial stability (October 2004) (IMF Working
Paper No. 04/187). Available at SSRN: https://ssrn.com/abstract=879012.
Šutorova, B., & Teply, P. (2013). The impact of Basel III on lending rates
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Wallison, P. J. (2005). Why do we regulate banks? Regulation, 28(4), 14–19.
Crisis Regulation by Financial
Intermediaries
Irina Larionova and Kirill Gorelikov
Introduction
Unfortunately, crises—which are phases of financial and business
cycles—have become a sign of the times in recent years. History shows
numerous crises—periods when the economy and/or the financial sector
reach the lowest phase of the cycle.
The first mention of a financial crisis dates back to 33 AD when
Emperor Tiberius was forced to send 100 million sesterces to the Roman
financial markets in order to prevent financial panic. Later, there was the
I. Larionova
Moscow State Institute of International Relations (MGIMO University),
Financial University under the Government of the Russian Federation,
Moscow, Russia
K. Gorelikov (B)
Moscow State Institute of International Relations (MGIMO University),
Moscow, Russia
© The Author(s), under exclusive license to Springer Nature
Switzerland AG 2021
G. Panova (ed.), Financial Markets Evolution, Palgrave Macmillan
Studies in Banking and Financial Institutions,
https://doi.org/10.1007/978-3-030-71337-9_22
285
286
I. Larionova and K. Gorelikov
credit crisis of 1294, when the Ricciardi of Lucca—the bankers of the
English crown—were unable to raise money from merchants to finance
the army of King Edward I during the English-French war. Some letters
from Ricciardi’s personal correspondence said: “everyone to whom we
owed money ran to us and wanted to be paid, and because of this we were
held very tightly everywhere … it seems that the money disappeared”
(Kaeuper, 1973). Subsequently, financial crises have oft been observed: in
1837–39, 1873, 1907, 1914, and 1962; the Great Depression of 1929;
the Latin American sovereign debt crisis of 1982; the collapse of savings
and loan associations in the USA in the 1980s and early 1990s; the
Asian crisis of 1997–1998; the dot-com bubble 1999–2000; the global
financial and banking crisis of 2007–2009; and the subsequent eurozone
sovereign debt crisis of 2011–2014.
At the same time, the origins of crises are not fully understood,
although one thing is clear—crises have no historical roots, a fact which
emphasizes the relevance of studying their causes and the ways of neutralizing their consequences. Studies confirm that financial crises are caused
by diverse and multidirectional factors (Babus et al., 2009). In addition,
many authors identify several underlying causes, which, on the one hand,
have characteristics common to most financial crises, and on the other
hand, have features caused by changes in the modern market system that
violate the fundamental foundations of financial stability.
The main emphasis in this chapter will be shifted to the study of anticrisis regulation measures, identification of potential sources of financial
instability, and ways to overcome the growing problems in the financial sector of developed and developing countries. At the same time, the
authors believe that we cannot avoid crises when dealing with economic
systems: we make new demands on regulatory systems, which, among
other things, smooth out negative macroeconomic effects.
Methodology
The research methodology is based on analysing and generalizing the
ideas about financial crises, theories of economic cycles and anti-crisis
management, and practical measures aimed at overcoming the crisis
Crisis Regulation by Financial Intermediaries
287
(during the global financial and economic crisis of 2007–2009, for
example) in different countries.
The analysis of scientific literature and approaches of international
institutions to defining “financial crisis” shows that, despite the centuriesold history of crises, these phenomena have not been clearly understood.
For example, some scholars associate the banking crisis with shocks
of the banking sector, which have an impact on the economy as a
whole (Khlopunova, 2015); another group of scientists believes that
the banking crisis is manifested in decreasing bank efficiency, as well
as a bank’s inability to fulfil obligations to all subjects and participants of banking turnover (Reinhart & Rogoff, 2008); a third group of
researchers associates banking crises not only with the fact that a significant number of banks cannot fulfil their obligations but also carry out
settlement and cash services, service depositors, etc. (Bartholomew et al.,
1995).
The International Monetary Fund (IMF) identifies a group of indicators that show clear signs of a banking crisis. Among them:
– the share of banks’ problem assets exceeds 2% of gross domestic
product (GDP);
– the volume of support for banks in order to overcome the crisis is more
than 2% of GDP;
– mass nationalization of banks and a moratorium on payments on
deposits, etc. takes place;
– the central bank cannot provide guarantee payments (Lomakin,
2016).
The analysis showed that when interpreting the definition of “crisis”,
scientists mainly focus on its consequences: shocks, default on obligations, contractual conditions, suspension of payments on deposits and
crisis indicators. It seems to us that the banking crisis is caused by the
banking system’s unbalanced development and is expressed in an intermittent movement of capital due to the partial or complete failure of
banks to fulfil their functions of accumulating and redistributing free
funds, which is accompanied by contracting the loan offer, violating the
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I. Larionova and K. Gorelikov
terms of contractual obligations, refusing to carry out settlements and
payments, massive bank failures and panic among depositors.
In the context of the subject area under study, we also addressed the
problems of economic cycles, including credit cycles, which explain the
causes of crises. Some scientists have reasonably identified the influence of excessive (rather than insufficient) investment, as well as the
lack of optimal proportions between industries and state intervention in
market relations as factors of business cycle fluctuations (Hayek, 1966;
Mises, 1971). The inflow of investments accelerates expansion, causing
imbalances in the system of the financial and economic mechanism, at
the same time stimulating its disruptions. The repetitive financial cycles
and the instability inherent in financial markets, as well as the growing
systemic risk, explains the inevitability of future financial crises, which,
in turn, requires adequate anti-crisis regulation.
Regulation, including anti-crisis regulation, is understood as a
purposeful impact on a managed object (financial market, financial
market institutions) in order to maintain their stable balance and provide
conditions for development.
A review of anti-crisis measures during the global financial and
economic crisis shows that two countries (the USA and Great Britain)
used all of the following methods (see Table 1) of supporting the banking
sector; almost all countries increased the amount of compensation for
insured deposits (in order to avoid panic), guaranteed obligations, carried
out debt buybacks, and injected capital into banks. The USA, Great
Britain, Iceland and Ireland used nationalization as a method of anticrisis regulation. These same countries have resorted to buying out
problem debts.
Even though we have overcome the crisis, some of the anti-crisis
regulation measures usually used during its acute phase are still being
applied. These include the problem debt redemption by special institutions, additional capitalization of credit institutions, reorganization,
creating countercyclical and conservation capital buffers, etc.
An interesting problem in this regard is whether anti-crisis regulation
is a measure applied exclusively during the acute crisis phase or whether
it also has preventive features. Practice shows that the modern regulation
model includes anti-crisis measures, i.e. anti-crisis mechanisms are built
USA
Japan
Germany
France
Italy
United
Kingdom
Canada
Australia
Austria
Belgium
Denmark
Finland
Greece
Hungary
Iceland
Ireland
Korea
Luxembourg
Netherlands
Country
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
Increase in
compensation
for insured
deposits
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
Guarantee
of
obligations
and bank
debt
redemption
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
Capital
injection
x
x
X
X
Nationalization
x
x
Guaranteeing
“bad” assets
x
x
x
x
Repurchasing
“bad” assets
x
x
x
x
x
Financing
commercial
paper
x
x
x
x
x
x
Funding
ABS
(continued)
x
x
x
x
x
x
x
x
x
x
x
X
x
x
Banning or
restricting
short
selling
Table 1 Measures to support the banking sector in different countries during the global financial and economic crisis
of 2007–2009
Crisis Regulation by Financial Intermediaries
289
x
x
x
x
x
x
Country
Norway
Slovakia
Poland
Portugal
Sweden
Spain
Switzerland
x
x
x
x
Guarantee
of
obligations
and bank
debt
redemption
x
x
x
x
x
Capital
injection
Nationalization
Guaranteeing
“bad” assets
x
Repurchasing
“bad” assets
x
Financing
commercial
paper
x
x
x
Funding
ABS
x
Banning or
restricting
short
selling
Source Trushina, K. V. Anti-crisis regulation of banking : Methods and trends of development. Thesis for a Ph.D. in
Economics. Financial University under the Government of the Russian Federation. Moscow, 2012
Increase in
compensation
for insured
deposits
Table 1 (continued)
290
I. Larionova and K. Gorelikov
Crisis Regulation by Financial Intermediaries
291
into the classical model of banking sector regulation. At the same time,
the area of regulation refers not only to the macro- but also to the microlevel.
Results
Anti-crisis Measures to Regulate the Banking Sector
in the Post-crisis Period
Understanding the causes of the 2007–2009 global crisis changed
banking regulation, harmonizing its principles and regulatory standards.
It was during this period that the Basel Committee on Banking Supervision (BCBS) became, an international regulator declaring banking
standards that were accepted by central banks and are observed at the
global level.
National regulators of financial markets are consistently introducing
international BCBS standards into regulatory practice at the macro- and
micro-levels. In the post-crisis period, the requirements for the quality of
elements and the capital structure of monetary institutions were changed;
more stringent liquidity requirements have been adopted to manage
access to external funding sources and provide short-term liquidity in
a stress scenario; innovations in assessing credit, market and operational
risks were introduced; stress-testing has become a widely used tool for
assessing the financial intermediaries’ vulnerability to external factors,
etc. At the same time, more serious requirements began to be imposed
on the risk management systems of banks and other financial and credit
institutions, and the quality of aggregate risk management began to be
viewed as an important protection level, since even sufficient capital and
the liquidity reserve cannot prevent them from going bankrupt.
New regulatory norms forced banks to create an additional “safety
bag” that can be used if the macroeconomic environment becomes worse.
Several capital buffers were introduced as macroprudential anti-crisis
measures. They include countercyclical buffer, a capital conservation
buffer and buffers for systemical significance.
292
I. Larionova and K. Gorelikov
The purpose of creating a countercyclical buffer is to curb excessive
credit growth during the recovery phase and, accordingly, to release the
funds of the formed reserve during the economic downturn. The capital
conservation buffer is designed to keep the bank’s financial stability. This
is created in the form of a surcharge to the minimum capital requirements, which makes it possible to create a reserve to cover losses in the
case of reaching the systemic risk limits in the banking sector.
Besides, systemically important credit institutions are to additionally
calculate and form a capital surcharge for systemic importance in the
amount of 0.15% of risk-weighted assets with an annual increase up
to 1% (from January 1, 2019). This buffer is designed to maintain
the systemically important market players’ capital adequacy of potential
systemic risk carriers.
It was expected that introducing international standards into macroprudential regulation (Basel III) would increase the banks’ need for
additional capital in EU countries by almost 24%. Similar concerns were
expressed in the banking community and in Russia. However, banks can
assess risk using internal models. This has slightly decreased the burden
on capital, which made it possible to partially offset the costs of creating
buffers. In other words, as practice shows, this justifies the higher requirements to bank’s capital adequacy and adherence to regulatory rules. The
banking sector has paid a “low” price in exchange for financial stability
(Lautenschläger, 2017).
Thus, new approaches implemented in regulatory practice following
BCBS standards have achieved the goal of establishing control and
reducing risks in the banking sector, yet have had negative macroeconomic effects. The flip side of the measures taken was the slowdown
in economic growth, faced by both developed and developing countries.
Some undesirable phenomena arose in the banking sector: problem debts
have grown, while the banking business’ profitability and investment
attractiveness have decreased. These phenomena are being closely studied
by regulators and bank managers.
At the same time, developing countries doubt whether they should
constantly increase the countercyclical capital buffer when there is a business activity downturn. It is obvious that macroprudential regulatory
Crisis Regulation by Financial Intermediaries
293
standards in forming capital buffers remain relevant for those jurisdictions which witnessed a prolonged growth that made them underestimate credit risk. However, today, this measure requires additional
understanding and evaluation.
Anti-crisis Regulation Measures. Micro-Level
Problems
The set of macro-level regulation standards in the post-crisis period was
supplemented with several microprudential measures, some of which
were mentioned above (requirements for the capital structure and quality,
additional indicators of capital adequacy; liquidity standards; financial
leverage, etc.). In addition to these norms, innovations were introduced in the field of countercyclical regulation: International Financial
Reporting Standard (IFRS) 9 “Financial Instruments”, characterised by
the following: (1) accounting converged with the practice of assessing
and managing credit risk; (2) the reserves were formed taking into
account expected losses and the forecast on changes in micro- and
macro-levels.
The main motive behind the transition to a new procedure for
forming and reflecting reserves for possible losses in the bank statements
were those gaps identified during the last global financial and economic
crisis. It was considered that if reserves for impaired financial assets had
been created promptly and sufficiently during the crisis, serious shocks
could have been avoided.
At the same time, despite the progress achieved in reducing overdue
loans, the problem of so-called non-performing bank loans (loans
overdue for more than 90 days) still remains in developed and developing countries. In this regard, measures are being taken to work with
problem assets. For example, at the beginning of 2018, their share in
the loan portfolio of Russian banks exceeded the maximum value of
2009 and amounted to 10%, which was significantly higher than in
EU countries. Meanwhile, in Europe, measures were being developed to
reduce problem loans (the Action plan to tackle non-performing loans
was approved), which obliges measures to be taken at various levels to
294
I. Larionova and K. Gorelikov
reduce the volume and share of problem loans in the total banking
sector portfolio. This concerned, most of all, Eurozone countries with
weak economies. Other measures were also taken. In particular, in 2018,
the European Commission published a guide describing the EU’s experience in setting up “bad-debt banks” and providing recommendations
for them. A similar institution was created in Russia based on TRUST
Bank (PJSC).
The cyclical and structural imbalances that persist today, and the risks
of accumulating bad debts, have affected financial market institutions
and banks’ profitability. The return on equity of the banking sector in
the Eurozone fell to 6% in 12 months to June 2019. Many market
analysts noted concern about the declining banks’ profitability, which
was fixed against the background of low interest rates. There was an
opinion about the monetary policy’s negative impact on the net credit
institutions’ interest margin. The Russian banking sector’s average return
on equity is currently twice higher than in the Eurozone. This indicator
was 20% as of 01.01.2020 for large banks (top-5 in terms of assets), 8%
for top-20 banks, and ranged from 6.9% to −25.7% in the group of
local banks. Every fifth Russian bank was not profitable at the end of
2019.
Overall, the banking sector’s net interest margins in developed and
emerging markets came under pressure, with the share of costs in total
spending being significant. This press usually affects small banks. Such
phenomena and their indicators require anti-crisis measures as a tool to
prevent a crisis.
Results
The history of crises shows that, unfortunately, regulation, including
anti-crisis regulation, does not make it possible to avoid shocks. We aim
to create anti-crisis mechanisms in order to minimize costs in case of a
crisis.
In this part, some macroprudential measures of an institutional nature
have been adopted and developed, improving international standards
for countercyclical regulation, which allows timely risk monitoring and
Crisis Regulation by Financial Intermediaries
295
teaches the systemically important market players to absorb losses. In
particular, several countries have established Financial Stability Councils, Financial Policy Committees (UK) or Financial Services Oversight
Councils (the USA and the European Council on Systemic Risks of the
EU). At the same time, in the conditions of the economic downturn,
many problems await their solution.
Conclusions/Recommendations
The objective regularity of the changing economic and financial cycles
inevitably provokes the crises that have common and specific features.
At the same time, the origin of crises is not understood well enough,
although one thing is clear: crises do not have historical roots, which
is why we should study their causes and ways to neutralize their consequences. The history of crises and ways to overcome them testifies to
the fact that sufficient experience has been accumulated in this area.
From this point of view, measures to overcome crises in recent decades
are of particular interest. Anti-crisis regulation as a set of measures
of purposeful impact on a managed object (financial market, financial
market institutions), in order to maintain their stable equilibrium and
provide conditions for development, has become an integral part of the
classical regulation.
Understanding the causes of the 2007–2009 global crisis changed
banking regulation, harmonizing its principles and regulatory standards
at both micro- and macro-levels. Using special capital buffers to mitigate the impact in the case of a crisis has played a positive role, despite
the concerns expressed. Supplementing this measure with microprudential innovations for monetary institutions can be recognized as successful.
These include new standards for ensuring short- and long-term liquidity,
taking into account stress factors, considering new requirements for
forming reserves, taking into account expected credit losses, taking into
account forecasts on changes at the micro- and macro-levels, etc.
At the same time, against the background of decreased business
activity in developed and developing countries, as a result of the
introduced regulatory restrictions on the systemic risks, new problems
296
I. Larionova and K. Gorelikov
emerged: so-called problem debts were accumulated, and additional pressures arose on the commercial banks’ profitability. It was developing
countries and banking systems who noticed the first impact, while developed countries noticed the second one, which does not exclude deferred
effects for developing banking systems.
In this regard, anti-crisis regulation requires new measures and actions
that have had a positive experience: for example, buying out problem
assets from banks to restore their activity in the market, or the regulators’
policy of mitigating regulatory norms to limit risks.
References
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Anti-crisis regulation of banking: Methods and trends (p. 72). PhD
Dissertation. - M.: Financial University.
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von Mises, L. (1971). The theory of money and credit. New Haven: Yale
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Voylukov, A. A., & Pachkovsky, D. A. (2010). Anti-crisis measures in the banking
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ons=RU.
Banking Stress Testing
Elena Meshkova
Introduction
Stress testing is widely used for evaluating the solvency, both at the
level of each credit institution and at the level of the banking system
in general, as it allows to evaluate the influence of rare but possible
stress events on solvency, liquidity and other features of the banks. At a
macro-level, stress testing is used for evaluating the banking sector ability
to operate flawlessly. As related to the micro-level, stress tests show the
banks’ ability to ensure liquidity and compensate for potential serious
losses using own capital. Stress testing serves to keep the risks at a level
reasonable for the banks.
During crises, regulators intensify supervision to maintain solvency.
Studies show that the banks opacity tends to grow under recessions (Flannery et al., 2013). For this reason, regulators use stress tests to evaluate
E. Meshkova (B)
Financial University Under the Government of the Russian Federation,
Moscow, Russia
© The Author(s), under exclusive license to Springer Nature
Switzerland AG 2021
G. Panova (ed.), Financial Markets Evolution, Palgrave Macmillan
Studies in Banking and Financial Institutions,
https://doi.org/10.1007/978-3-030-71337-9_23
299
300
E. Meshkova
severity of possible recessions and vulnerability of the banking system
(Besancenot & Vranceanu, 2011; Sorge & Virolainen, 2006).
At the same time, stress testing is particularly relevant in favourable
environment where market players feel complacent regarding a crisis
possibility.
Informing the regulator or external users on stability of the banking
segment, of a bank group or a certain credit institution is not suggested
to be the main purpose of stress testing, which is definitely a tool needed
in a bank’s practical activities. The tool, being used to develop mitigations reducing the risks to a level acceptable for the bank, could and
should be considered by the bank as one of basics for the limit policies
of the credit institution and the risk hedging policies. Stress testing is
eminently important as part of crisis management in the credit institution. Upon a stress test outcome, banks decide on whether it is necessary
to implement the solvency recovery plans.
Despite the fact that after 2007–2009 recession, attention of international organizations and national regulatory bodies has been constantly
focusing on stress testing issues, improving the stress testing methods
with due regard to national banking segment features is still an urgent
matter. The chapter is dedicated to designing a stress test to evaluate the
exposure of Russian banking sector liquidity to macroeconomic risks.
Particularly, due to its significance, stress testing of the banks’ loan
portfolio quality is reviewed.
Methodology
International institutions use two different methods to assess solvency
of the banks: stress testing and estimation of the capital sufficiency
as per Basel Committee on Banking Supervision standards (Basel III).
The differences between these methods are outlined by specialists (Wall,
2014). Basel III offers a static evaluation of the bank assets risk exposure
against own capital, i.e. stress testing provides a possibility to evaluate whether the capital is sufficient, using a conditional approach—a
dynamic one. The same arguments are applicable to assess the banking
sector liquidity.
Banking Stress Testing
301
Conventional methods are used to form a liquidity stress test. Any
stress test implies the following units (Quagliariello, 2009): case—
model—resulting effect. Each of the units includes a combination of
certain components.
One of crucial components of a stress test is selecting the cases. The
authors offer a number of practical guidelines to form a credible stress
test scenario (Quagliariello, 2009). In their opinion, these principles can
be used to form stress tests for financial institutions as well as macroeconomic stress tests at a national level. The follows principles are deemed
the main ones:
• Rigidness level composition;
• Link with the stress testing targets;
• Sufficient coverage of the risk factors;
• Relevant assessment of the technical restrictions for the model and the
data used in risk management;
• Significance for individual portfolios and impact on the bank management;
• Case forecasting;
• Compliance with the economic conditions.
Considering the model used to set up a stress test, it can be a statistic,
a market, a fundamental, an expert model or another type normally
involved for a standard risk evaluation. The resulting effect depends on
the stress test purpose: it can be either the bank’s soundness, its liquidity
or other parameters.
Results
Interrelation Between the bank’s Liquidity
and Soundness
Liquidity stress test allows to verify whether the cash and liquid assets
inflow are sufficient to enable the financial institution withstanding the
cash outflow in a stress case. The track record shows that liquidity serves
302
E. Meshkova
as an ultimate indicator for the stress test and is considered along with
assessing the credit institution solvency. At the same time, it is important to interlink the bank soundness and liquidity within the stress test
programmes. The task is accounted for by the need to have additional
expenses and a considerable reduction, or even closing, of financing
markets under a severely declining financial situation.
The interrelation between financial soundness and additional expenses
consists of two components: (a) increasing price of the resources to
be involved—e.g. wholesale funding and retail deposits are particularly sensitive to market evaluation of bank’s soundness; (b) raising the
requirements to a pledge for secured funding sources (margin).
The above parameters may be derived from empirical data, e.g.
using econometric models based on evaluating the dependence of the
borrower’s rating class and the cost of funding and/or net interest
margin. For secured funding, the counterparty’s credit risk plays a critical role, as securities-related requirements depend on the counterparty’s
rating. Financial stability lowering (i.e. downgrade) entails increased
requirements to pledged collaterals and, thus, cutting the funding. E.g.
according to Deutsche Bank, their rating downgrade by one level means
losing two per cent of funding (Schmieder et al., 2012).
Components of Bank Liquidity Stress Testing
Defining the liquidity risk method is deemed to be the main component
of the stress testing programme. The bank should definitely select the
method based on the current risk management practice implying one
of the three methods to be used: the Ratio Analysis, the GAP Analysis
or the Cash Flow Analysis. If several methods are used by the bank, an
additional stress testing stage is introduced to review and consolidate the
evaluation figures obtained with different methods. Consequently, the
resulting stress test effect stems from the liquidity evaluation method. If
GAP Analysis is adopted as the main evaluation method and the liquidity
gap for a period of up to one year is assessed, the stress test outcome will
show additional liquidity redundancy/lack for a one year period.
Banking Stress Testing
303
In line with material risk sources, a set of case parameters is formed
based on which the bank’s liquidityposition is simulated (estimating the
need to involve additional liquidity). We deem it advisable to consider
the following sources for setting up the case parameters.
Main Sources of Liquidity Risk
1. Modelling of the bank’s loan portfolio quality. The macroeconomic
model engaged by the bank while assessing the credit risk as part of
stress testing the financial stability, or other approaches in accordance
with the up-to-date bank practice, can be used for that purpose. For
instance, risk of the interbank lending market counterparties failing
to comply with their obligations towards a credit institution or risk
related to transactions with debt instruments may be estimated in
a simplified manner, based on the probability of default for each
rating group and the Rating Migration Matrix provided by international rating agencies. In some cases, for banks not being systemically
important, simplified (standardized) stress tests may be enough. Stress
test plans recommended for estimating the soundness of local US
banks not covered by the general stress test requirements set by DoddFrank, USA (Baxter & Lyons, 2012), can be taken as an example.
The first stress test option is evaluating the bank loan portfolio based
on two cases, one for the medium stress level and one for the hard
one. The evaluation may be formed following the bank’s historical
experience under stress environment or expert reviews. The second
option implies a stress test based on the Risk-Stratification Matrix, a
method formed by a loan portfolio assessment using two main indicators: the DSC (debt-service coverage)—debt vs. monthly income, and
the LTV (loan-to-value)—loan vs pledge value. The loan portfolio is
evaluated before the stress test and after it, conclusion on the bank
loan portfolio to be made based on the loan distribution considering
the indicator levels.
2. Modelling of changes in the instruments portfolio cost, as evaluated
by a fair cost through the profit and loss statement or withheld to
maturity. In such case, it is feasible for the bank to implement the
304
E. Meshkova
auxiliary model of stress testing the securities-related risk using the
VaR analysis methods, for example.
3. Modelling of changes in the bank’s loan repayment capacity at the
monetary market, as related to adjusting parameters of evaluating
the bank soundness under stress, specifically due to counterparties’
changes in requirements to the level of securities provided. This stage
of simulation is to be based on results of the bank soundness stress
testing.
4. Modelling of cash outflow on settlement accounts and checking
accounts of legal entities as well as on deposit accounts of individuals under various stress scenarios. As a rule, banks have the data
required for statistical modelling of how such accounts would behave
in a recession. In such case, an auxiliary model or evaluation based on
expert opinion should be also used.
5. While modelling the stress test, the bank can consider currency
exchange rate fluctuations, and therefore, their influence on the
aggregate liquidity position, as a risk factor.
6. Modelling can imply performing obligations on debt instruments
repayment under a firm offer, the risk of failing to comply with
the covenant under an interbank loan agreement or raising funds by
placing bonded loans. The bank can also estimate modelling other
situations critical for its liquidity, for itself, and include them in the
stress test.
The liquidity risk stress test diagram for banks is shown on Fig. 1.
Operation system data, analytical data and external data serve as
information sources. Apparently, the report forming method using the
liquidity risk evaluation, as adopted by the bank, may be taken as basis
for the stress test.
Fundamentals of Modelling the Bank Loan Portfolio
Quality
When developing the liquidity stress test, the bank loan portfolio quality
should be the main focus area to be considered. Indeed, credit risk is the
Banking Stress Testing
Credit risk
stress test
305
Resource
base stress
test
о рискаrisk
Market
stress test
Data
Ratio Analysis
GAP Analysis
Result
Fig. 1 Liquidity risk stress test diagram
crucial point for the banking sector in the Russian Federation. According
to the International Monetary Fund, the share of loans not gaining profit
in the aggregate bank loan portfolio amounts to 10%; at the same time,
in line with the latest report data, the loan percentage exclusive of debt
provisions has reached 17% of the regulatory capital, which means that
almost 17% of the bank capital is to be absorbed to cover bad debts.
Macroeconomic models based on regression analysis are most
frequently used for stress testing. Such models, for instance, were used
in 2011, 2013 and 2016 (Gambetta et al., 2019) for stress testing the
EU banks. We shall apply a similar approach to form the stress test for
evaluating the bank loan portfolio quality noting that it is rational to
use a simpler model not incorporating the cross-sectoral analysis, i.e. a
simple and meaningful model giving results that are easy to interpret.
As part of the stress test formation, the following stages are implemented.
1. Defining the Stress Test Elements: Case, Model, Resulting Effect
(Ultimate Indicator);
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E. Meshkova
2. Next issue to be solved: defining the risk factors relevant for the bank,
such as borrowers’ default probability, loss level in case of default,
reduction in the loan portfolio securities coverage level, etc.
3. An important stage in forming the stress test is defining the dependence between the risk factor and the input variable. The same
stage is used to process the data to make them suitable for statistical evaluation. Then, the correlation between the macro-parameters
and the output variable is to be defined. As a result, statistical analysis methods determine the optimum functional dependence between
the parameters in question, and the econometric model is built. After
verifying the model adequacy and precision, the next stage is taken.
4. The stage implies forming a macro-scenario resulting in changes of
the selected macroeconomic parameters for various stress test cases.
5. Based on the risk factor functional dependence on the macroparameters, as defined in item 3, the stress test results are calculated
case by case.
6. The stress impact on the risk factor level is assessed by simple comparison of actual data vs. data obtained by stress testing, to be followed
by arithmetically calculating the change in the ultimate stress test
indicator.
7. The Last Stage is the Experts Interpreting the Results Obtained.
Modelling the Bank Loan Portfolio Quality
Change
1. We define two cases (the base case and the negative case) as the
main stress test components and apply the macroeconomic based
on a regression analysis that describes interconnection between the
macroeconomic parameters and the bank’s corporate loan portfolio
quality indicator (ultimate indicator).
2. The overdue indebtedness share in the portfolio can be applied as the
bank’s corporate loan portfolio quality indicator, which in our case
can be accounted for by the data available for evaluation.
3. We deem it sensible to generate the regression equation through
increments of input variables in line with the statistical data for
Banking Stress Testing
307
2006–2018. Having generated correlation matrices for the regression
equation, taking the corporate borrowers’ overdue debts dynamics
and a set of macroeconomic variables as basis, we can see the statistic
interlink between the input variable and the output variable, which
enables building a linear regression model. The following parameters
were considered as macroeconomic variables:
• x1—dynamics of annual inflation in the Russian Federation;
• x2—dynamics of the economic growth rate in the Russian Federation;
• x3—BRENT oil price dynamics;
• x4—average annual RUB/USD exchange rate dynamics;
• x5—dynamics of the Bank of Russia key interest rate;
• x6—dynamics of the labour productivity index in the Russian
Federation;
• x7—dynamics of the industrial production index in the Russian
Federation;
• x8—dynamics of the wholesale turnover physical quantities index;
• x9—dynamics of capital investments in the Russian Federation;
• x10—dynamics of the population’s actual disposable income;
• x11—MOEX index dynamics;
• x12—dynamics of changes in deposits by legal entities and individuals.
Let us consider Pearson correlation coefficient with the target variable against the other factors; the following parameters have shown
the highest correlation vs. the target variable:
• x7: −0.816508
• x6: −0.794864
• x2: −0.742868
• x9: −0.598958
• x10: −0.507528
• x4: 0.490989
Table 1 shows the cross-correlation between the selected factors.
As seen from the factor cross-correlation table, X7 correlates with
X6 (0.818), X2 (0.736), X9 (0.822); X2 correlates with X6 (0.904);
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E. Meshkova
Table 1 Cross-correlation between the most evident factors defining the target
variable
X7
X6
X2
X9
X10
X4
X7
X6
X2
X9
X10
X4
1.000
0.818
0.736
0.822
0.430
− 0.362
0.818
1.000
0.904
0.475
0.297
− 0.275
0.736
0.904
1.000
0.420
0.210
− 0.272
0.822
0.475
0.420
1.000
0.201
− 0.608
0.430
0.297
0.210
0.201
1.000
0.269
− 0.362
− 0.275
− 0.272
− 0.608
0.269
1.000
X9 correlates with X7 (0.822), X4 (0.608). Therefore, in order to
avoid the multicollinearity among the factors, we exclude X7 and X4.
As a result of the modelling, we have a regression equation
where the output variable represents the dynamics of overdue debts
under loans to borrowers not belonging to financial sector (∆O D),
while the most important factors are the dynamics of the labour
productivity index in the Russian Federation (X6), the MOEX index
dynamics (X10), the RUB/USD exchange rate dynamics (X4):
∆O D = −0.2063 ∗ x6 − 0.0089 ∗ x10 + 0.0299 ∗ x4 − 0.3760
(1)
Coefficient of determination for the model (R2 ) is 89.3. Statistical values for the Student’s t-test are: X6 = −4.196, X10 = −
3.893 and X4 = 3.888. In addition, a calculation was made for X9
to get the relevant statistical t-value of 0.655, which can evidence its
negligibility for the model.
Let us compare the linear model results we obtained with the actual
values of the overdue debt dynamics. The comparison shows that the
way the model describes the dynamics is quite close to the actual data.
This means that the regression equation has a predictive feature and
therefore can be used to evaluate the factors impact on the overdue
debt.
Therefore, by performing the modelling we justified the use of and
defined the dependence of the bank corporate portfolio overdue debt
on certain macroeconomic indicators.
Banking Stress Testing
309
4. Next stage is forming the macro-scenario so that the result can be
found as changing selected macroeconomic parameters to match the
various stress test scenarios. Let us assume that for the base case,
dynamics of the labour productivity index in the Russian Federation
(X6) makes − 2.7% (2008) while for the negative case, the dynamics
make 8.9% (2009); the MOEX index dynamics (X10) to be −100%
(2008) for the base case and −220% (2009) for the negative one; the
RUB/USD exchange rate dynamics (X4) to be 19% (2009) and 72%
(2015), respectively.
5. Based on the defined functional dependence of the risk factor
(dynamics of the corporate clients’ overdue debt share) on the parameters impacting it, we have concluded that the overdue debt grows by
1.66% (base case) or by 5.6% (negative case).
6. On the whole, the stress test outcomes show that the bank corporate portfolio overdue debt grows by 1.66% in the base case (against
the reporting date) to make 9.66% (RUB 3,290 bln), while in the
negative case the same indicator amounts to 13.6% (RUB 4,632 bln).
Consequently, the stress test allowing us to estimate the impact of
the corporate portfolio credit risk on liquidity of the banks with two
cases (scenarios) provides us with the following results: the share of liquid
assets of the banks drops to 18.3% from 21.7% (base case) or to 16.9%
(negative case). The results justify the importance of monitoring activities as well as of minimizing banks’ credit risk: even in 2009, under the
recession, the liquid assets ratio was as high as 25%.
Conclusions/Recommendations
Stress testing is an important method of evaluating the exposure of both
certain banks and the banking segment in general, to extraordinary (but
still possible) negative events.
The stress testing practice is evolving from using the simplest models
of assessing the ultimate stress test indicators sensitivity to impact
from certain parameters towards using comprehensive models. Advanced
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E. Meshkova
stress scenarios are absolutely formed using macro-econometric forecast
models.
Bank liquidity stress testing is at least as relevant as stress testing their
soundness. A number of mandatory stages have to be followed while
preparing the stress test, inter alia:
– defining the liquidity risk evaluation method that is taken as framework for the stress testing programme to be built on;
– defining the frequency and the timeline of the stress tests;
– defining the main risk factors to be introduced into the stress testing
programme;
– estimating the data sufficiency and quality;
– consolidating the stress test results, which includes defining the models
used while forming the scenarios;
– expert review of the scenario parameters quality;
– carrying out the stress test, interpreting the results, preparation of
proposals to take executive decisions.
The article proves that the most important factor determining the
bank liquidity under stress is the loan portfolio quality, which serves as an
evidence that managing the loan portfolio quality in the Russian banking
sector is a matter that needs thorough attention.
References
Baxter, W., & Lyons, T. (2012). Stress Testing Credit Risk at Community Banks.
Available at: https://www.fdic.gov/regulations/examinations/supervisory/ins
ights/sisum12/stress.html. Accessed 29 January 2020.
Besancenot, D., & Vranceanu, R. (2011). Banks’ risk race: A signaling
explanation. International Review of Economics & Finance, 20 (4), 784–791.
Flannery, M., Kwan, S., & Nimalendran, M. (2013). The 2007–2009 financial
crisis and bank opaqueness. Journal of Financial Intermediation, 22, 55–84.
Banking Stress Testing
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Gambetta, N., García-Benau, M., & Zorio-Grima, A. (2019). Stress test
impact and bank risk profile: Evidence from macro stress testing in Europe.
International Review of Economics & Finance, 61, 347–354.
Quagliariello, M. (2009). Stress-testing the banking system. Cambridge University Press.
Schmieder, C., Hesse, H., Neudorfer, B., Puhr C., & Schmitz, S. (2012).
Next Generation System-Wide Liquidity Stress Testing (IMF Working
Paper). Available at: https://www.imf.org/external/pubs/ft/wp/2012/wp1
203.pdf. Accessed 29 January 2020.
Sorge, M., & Virolainen, K. (2006). A comparative analysis of macro stresstesting methodologies with application to Finland. Journal of Financial
Stability, 2, 113–151.
Wall, L. (2014). The adoption of stress testing: Why the Basel capital measures
were not enough. Journal of Banking Regulation, 15, 266–276.
Mega-Regulation of Financial Markets
Vitalii Klevtcov and Artem Zamlelyy
Introduction
Trends in financial regulation can only be understood and predicted
based on long-term trends dating back to the nineteenth century. Establishing this fact requires the analysis of an extensive empirical base. The
development of any object is accompanied by an adequate complication of the management system and its ability to respond to increasingly
substantial risks. Otherwise, it leads to increased risks, conflict, and
destruction. The principle of the system adequacy and its management
V. Klevtcov (B) · A. Zamlelyy
Moscow State Institute of International Relations (MGIMO University),
Moscow, Russia
e-mail: vklevcov@inbox.ru
V. Klevtcov
Financial University under the Government of the Russian Federation,
Moscow, Russia
© The Author(s), under exclusive license to Springer Nature
Switzerland AG 2021
G. Panova (ed.), Financial Markets Evolution, Palgrave Macmillan
Studies in Banking and Financial Institutions,
https://doi.org/10.1007/978-3-030-71337-9_24
313
314
V. Klevtcov and A. Zamlelyy
fully applies to financial markets (Peek et al., 1999). One of the stable
patterns of global financial development in the nineteenth—twenty-first
centuries is the deepening of their regulation as the global economy is
being financed. The system of global financial control has evolved from
disparate elements and simple forms to an increasingly complex, multilevel, and all-encompassing architecture that is adequate to the increasing
financial depth of the reproductive sphere (Goodhart & Schoenmaker,
1995).
In the nineteenth century, financial systems were regulated only at
their extremes—central banks’ mutual assistance in liquidity, the first
currency blocs (the Latin and Scandinavian monetary unions), and
international monetary conferences. The twentieth century brought
many innovations, including the institutionalization of regulation. The
following forms were found: the Bank for International Settlements
(BIS), a global financial institution designed to solve problems common
to several countries founded in 1930; the Financial Committee of
the League of Nations, a supranational financial regulatory body; and
the Geneva conventions of 1929–1931, international legal acts directly
regulating financial transactions (Melecky & Podpiera, 2013).
At the new stage (the period of the 1940s–1960s), as it was
100 years before, the centre of regulation remained monetary systems,
payments, exchange rates, gold, the balance of payments, and stabilization. However, since 1944, financial regulation and its institutions
have become global rather than local for the first time (Di Noia &
Di Giorgio, 1999). After the crisis of 1997–1998, tasks were set to
reduce global risks and move to a more secure global financial architecture. Global regulation has entered a new area—national financial
systems: an architecture for all types of activities, services, products
and financial technologies, risk management, accounting, and interaction with regulators. They began to be harmonized (primarily by
banks), connected to reference models (most often from the US practice), and transferred to international standards; a platform was created
for capital flows and cross-border mergers of financial intermediaries
and their infrastructure (in the 1990s). In this regard, a large block of
Mega-Regulation of Financial Markets
315
self-regulation has emerged, as well as numerous associations of financial market participants (global and regional) that develop common
standards.
The current stage of financial intermediation development can be
described as digital financial intermediation. This serves as a form
of resolving the contradiction between the growing general economic
uncertainty and the needs of economic agents at the stage of transition
from the financial economy to the digital economy. The digital economy
has become a characteristic feature of intellectualization, the digitalization of economic activities, and the development of financial networks.
In an environment where digital data is a critical factor of production,
the primary area of financial intermediation is the generation of products
in electronic form by the needs of economic agents.
The great economic depression of the 1930s, the oil crisis and the
crisis of the monetary system in the 1970s, the Asian crisis in 1998,
the Dot-com crisis in the 2000s, the financial crises of 2007–2009
and 2012–2014—all these negative economic phenomena were initially
local (Mandron, 2008). Later, nonetheless, they developed into regional
and global crises for the financial system. The frequency of systemic
economic failures has increased dramatically over the past century,
despite the repeated strengthening of international and national regulation in this area. These have determined the need to study the practice
of mega-regulation of the financial markets.
Methodology
The purpose of the research is to reveal the process of reforming financial market management systems, to show the state regulators’ role in
managing financial markets, and to analyse the implementing practice of
a single regulatory body for financial markets.
The methodological basis of the research consists of both theoretical
and empirical methods, including theoretical analysis, synthesis, analogy,
scientific generalization, data envelopment analysis, and results from the
evaluation of financial markets development.
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V. Klevtcov and A. Zamlelyy
The research includes a theoretical review of economic, regulatory,
and scientific materials on the functioning of financial market regulators,
conducting an empirical study, systematizing the results, and developing
recommendations.
Results
Digital Financial Intermediation Products as the Basis
of Mega-Regulation Practice Development
The result is the emergence of digital financial intermediaries, a cluster
of which is represented by the activities of financial and technology
companies—a dynamically developing segment at the intersection of
the financial services and technology sectors. Technology start-ups and
new market participants are applying innovative approaches to the products and services of the traditional financial sector. We have grouped the
key products generated by them, depending on the sphere of circulation
(Table 1).
One of the characteristics of digital financial intermediaries is the
shadowy nature of their activities—this does not fall under the supervisory regulation authorities of the financial market, which therefore pose
a specific threat to the stability of the financial sector. At the same time,
in the context of financial networking, the activity of digital intermediaries encourages traditional financial intermediaries to optimize their
product line, improve business processes, use modern methods of information processing, and actively develop innovative technologies and
channels for attracting customers. The transformation of information
into a critical asset and the transition to open interfaces is changing the
landscape of financial activity. In essence, brand competition is replaced
by competition in the consumer characteristics of financial products and
services. We believe that the most likely results of the development of
financial intermediation in the future will be various forms of cooperation between traditional financial intermediaries and FinTech companies
or the market division between them, which will require taking this
into account when implementing mega-regulation of financial markets.
Mega-Regulation of Financial Markets
317
Table 1 Digital financial intermediation products
Financial market
segment
Credit market
Stock market
Insurance market
Currency market
Digital financial intermediary
products (in the form of
technologies)
Instant lending; peer-to-peer
lending (P2P, P2B) based on
crowdlending; online
payments and transfers
using e-wallets
Robo-advising (investment
robotization); equity
financing based on
crowdinvesting; capital
raising using the initial coin
offering (ICO) model; social
trading; online payments for
transactions using e-wallets
Decentralized digital sales of
policies; formation of
reserve funds based on
crowdsourcing (P2P
insurance)
Online payments in foreign
currencies; cryptocurrency
mining and transactions
with them
Digital infrastructure
and software
Marketplaces;
platforms for
registering financial
transactions in a
single register;
platforms for fast
payments; systems
for transmitting
financial messages;
unified identification
and authentication
systems, including
using biometrics;
end-to-end customer
IDs; platforms for
cloud services;
platforms based on
distributed registries;
open interfaces;
mobile acquiring;
platforms for
processing large
amounts of data
using artificial
intelligence (Big
Data); software for
data analysis and
modelling
Source Compiled by the authors
We systematize models of financial intermediation in foreign countries
(Table 2).
Only banks, due to their generic functions and the peculiarities of
capital base formation, are present in all segments of the financial market,
both historically and currently. In contrast, other financial intermediaries are usually direct participants in one or two sectors, providing
indirect financing or not at all in the rest. At the same time, only
banks can combine the functions of a deposit and infrastructure intermediary: being direct participants in the financial market as a supplier
High level of capital
accumulation
Not particularly well
developed
Level of financial market
development
Existence of development
institutions
Source Compiled by the authors
Equal presence of universal
and specialized financial
intermediaries
Restrictions on financial
intermediary operations
Broad internationalization
and high level of all
financial intermediary
development
Non-deposit financial
intermediaries (mainly
investment intermediaries),
digital financial
intermediaries
Securities issue
Prevailing type of financial
intermediaries
Preferred channel for
raising capital and
economy financing
Nature of activities
performed by financial
intermediaries
American (stock)
Specifications/model
Table 2 Financial intermediation models in foreign countries
A small number of
operations
Very developed
The attraction of deposits
and issuance of bank
loans
Relative underdevelopment
of individual financial
institutions, preferential
development of financial
intermediaries with state
participation
Preferential development
of universal financial
intermediaries
Deposit-type financial
intermediaries (mainly
banks)
European (banking)
The needs of economic
agents determine the
presence of universal or
specialized intermediaries
in financial market
segments
High level of capital
accumulation
Developed
Extensive
internationalization and
high level of
development of all
financial intermediaries
Securities issue, issuing
loans
Equivalent to the presence
of deposit and
non-deposit financial
intermediaries
Mixed
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V. Klevtcov and A. Zamlelyy
Mega-Regulation of Financial Markets
319
and consumer of financial capital, banks also represent the financial
infrastructure as a trade intermediary.
Financial Regulation and Supervision Development
An analysis of the global process of the emergence and financial regulation and supervision development allows us to conclude that, having
formed as an economic institution after the financial crisis of 1929–
1933, it has now passed through several stages in its development:
● Pro-industry, in which financial regulation as a full-fledged economic
institution did not exist, but regulatory and supervisory functions in
the financial market were performed by government agencies.
● Industry-specific, characterized by the creation of a body to regulate
and supervise one or two related sectors of the financial market.
● Consolidated, in which the regulation and supervision of the financial market are carried out by a single body or two bodies that share
regulatory functions for all its functions.
At each of these stages (except for the pro-industry stage), appropriate
supervisory approaches were developed and applied, leading to the
formation of a specific type of financial regulation and supervision model
(Repullo, 2018). This process was significantly influenced by various
economic and political factors, including the processes of financial deregulation that took place at the end of the twentieth century, increased
integration in financial markets, the emergence of financial conglomerates and complex-structured investment financial products, and so
on.
Models of Financial Market Implementation
Regulation and Supervision
World practice of the implementation, regulation, and supervision of the
financial market shows that there are four models of its organization:
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V. Klevtcov and A. Zamlelyy
● Institutional model: the company’s legal structure determines the
supervision of the regulator (China, Hong Kong, Mexico).
● Consolidated model: a single regulator oversees all financial sectors
(Canada, Germany, Norway, Iceland, Denmark, Sweden, Russia,
Japan, Qatar, Singapore) (Vavulin, 2014).
● Functional/hybrid model: the company’s business determines regulatory oversight (USA, France, Italy, Brazil, Spain).
● The Twin Peaks model: the purpose defines regulatory oversight (UK,
Australia, Netherlands).
In practice, there is no country in which a model would be implemented in its pure form. Each country chooses a model and regime for
financial regulation and supervision based on experience, set goals for
economic development, internal and external circumstances, the system
and distribution of power, its level of development and institutional
maturity, political attitudes, and legal traditions. In different countries,
groups of these factors may have different weights, which explains the
variety of control and supervisory models, regulatory mechanisms, and
various schemes (Ampudia et al., 2019).
The most widely used model in the modern world is the integrated
model of financial regulation and supervision. The aforementioned is
confirmed by the results of a study conducted by Maschiandaro and
Quintin. Until the 2000s, out of 102 countries selected by economists
for analysis, 35% were characterized by an institutional model of financial regulation and supervision, 24% by the integrated model, 2% by the
Twin Peaks model, and 39% by the functional model. After 2000, 30%
of the sample switched to the integrated model, 33% to the institutional
model, 33% to the hybrid model, and 4% to the Twin Peaks model
(Masciandaro & Quintyn, 2010). Before the financial crisis of 2007–
2009, integration was mainly expressed in the formation of specialized
agencies for regulating financial markets. After the crisis, the situation
changed to the opposite, increasing the importance of central banks as
mega-regulators.
It is important to clarify that there were several reasons for the active
transition of financial regulation and supervision to the consolidated
stage after 2009.
Mega-Regulation of Financial Markets
321
In addition to being expensive, industry models of financial regulation and supervision did not consider emerging new trends in the
development of financial markets which required their transformation.
Consolidated supervision of the financial market has resulted in:
● the deepening of financial globalization;
● the blurring of borders between credit and financial institutions;
● the emergence of new forms of financial intermediation that link
different sectors of the single financial market in each country and
lead to the transfer of risks between them;
● the convergence of principles and standards of regulation in various
sectors of the financial market and the need to unify them;
● the accumulation of systemic risks in the financial sector and the need
to ensure financial stability on a global scale;
● the need for comprehensive protection of the interests of financial
services consumers in a financial conglomerate and the creation of
equal competitive conditions for all types of financial intermediaries;
● the relevance of reducing regulatory costs.
In 2010, there were three regulators in the world using the Twin Peaks
model, 9 in the form of a mega-regulator (a Central Bank), and 27 in
the form of a mega-regulator (a specialized agency). However, by the
end of 2016, the figures were as follows: 8 countries used the Twin Peaks
model, 15 used a mega-regulator based on the Central Bank, and 29 had
a system based on specialized financial agencies.
Conclusions Obtained by Applying DEA Analysis
In this regard, the conclusions obtained by this investigation while evaluating the effectiveness of national models of financial market regulation
using the DEA analysis methodology are important. Models with a
higher level of integration amongst regulators, in general, are currently
more effective than institutional and functional models. Besides, for
states with a banking model of building financial intermediation, it is
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V. Klevtcov and A. Zamlelyy
advisable to create a single regulator based on a monetary authority
(mainly the Central Bank).
Our analysis of modern models of financial intermediation in developed countries has shown that most of these are currently three-level.
The first level is represented by a regulatory and supervisory authority,
the second level by banks and non-bank financial intermediaries, and
the third by numerous institutions of small credit and credit cooperation. There was no correlation between the choice of the model
of financial regulation/supervision and the model of financial intermediation (banking/stock/mixed) in the states we reviewed (USA, UK,
Germany, France, Switzerland, Japan, China). Thus, most of the countries we have reviewed are currently at the consolidated stage of the
evolution of financial regulation and supervision, mainly in the form of
a mega-regulator.
Conclusions/Recommendations
The post-crisis period was accompanied by the active implementation
of international regulatory standards. A significant number of the rules
are aimed at providing some freedom of choice for banks in the quantitative assessment of the risks they take, as well as in the broader use of
quantitative methods of analysis and evaluation. The aforementioned led
to an increase in transaction costs, but a decrease in the interest margin
and the profitability of monetary institutions. New regulatory requirements encourage banks, on the one hand, to maintain more liquid assets,
and, on the other, to pursue more risky credit policies to compensate
for lost profits. Excessive regulatory requirements under current conditions and their high cost for medium and small banks have led to the
need for different regulatory requirements: this includes the introduction
of proportional regulation, the establishment of simplified regulatory
requirements for banks with a small scale of activity, and a limited range
of operations performed by them.
Empirical studies show that in countries with independent banking,
supervisory authority operates outside the Central Bank. If some parameters are controlled (the level of inflation and per capita income), the level
Mega-Regulation of Financial Markets
323
of overdue debt is lower. The deposit rates are higher in this situation.
Central banks that exercise banking supervision are less conservative in
terms of inflation processes and allow more elevated and more volatile
inflation rates.
Technological challenges remain serious. On the one hand, the introduction of new technologies based on distributed networks, smart
contracts, machine learning and pattern recognition, and big data analysis is increasingly being used in the financial sector. Their implementation improves the efficiency of banking services, reduces bank costs,
increases financial accessibility, and makes services genuinely global. On
the other hand, it increases the risks around the confidentiality of financial and personal information, the risks of operational stability to various
technological shocks, and the risks of financial stabilities. This is due
to increased interdependencies in the system, the acceleration of the
spread, and the scale of the impact of adverse events due to increased
susceptibility to technological shocks. As a factor in the globalization of
services, FinTech increases the sensitivity of national financial systems to
global system shocks. The latter is a challenge for market participants,
especially systemically important banks, and for the regulator, since the
regulatory environment in this area is only in the process of formation.
We believe that global challenges require finding the optimal balance
between two needs: the need to ensure financial stability in the financial market and the banking sector, and the need to ensure sustainable
economic growth at the level of global averages. Regulation should make
a serious contribution to its achievement.
As a short-term scenario for regulation development, we believe that
we should expect the national mega-regulator to remain committed to
international standards of micro-prudential regulation, which will not
enable achieving high rates of economic development. The model of
regulating the activities of monetary institutions will increasingly acquire
the features of administration and control and may damage the market
initiative. Providing banks with easier separate regulation only partially
weakens the regulatory pressure but may not lead to the expected stimulation of business activity, deepening interaction between the banking
and real sectors of the economy. In the long term, we should expect a
transformation of the Bank of Russia’s functionality, which is currently
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V. Klevtcov and A. Zamlelyy
overly concentrated. It seems that there will be a gradual rethinking
of the advantages of mega-regulation in terms of supervisory practices
(Burlachkov, 2014). We believe that in the future, the Bank of Russia
will focus its efforts on implementing the goals and objectives set out
in its monetary policy, cross-sectoral stress-testing of financial market
institutions, and the supervision of systemically important credit institutions. At the same time, in our opinion, the danger of the procyclical
nature of the new model of regulation will remain, which may become
an additional source of the emergence of crisis phenomena.
We believe that a reorientation will accompany the further development of the global process of regulation and supervision in the financial
market, moving from the industry stage to the consolidated stage, as well
as encouraging a transition to an integrated model of financial regulation
and supervision or the Twin Peaks model.
References
Ampudia, M., Beck, T., Beyer, A., Colliard, J. E., Leonello, A., Maddaloni,
A., & Marques-Ibanez, D. (2019). The architecture of supervision (European
Central Bank Working Paper Series, No. 2287).
Burlachkov, K. V. (2014). Policy of the Bank of Russia: Trends and contradictions. The Economist, 12, 21–26.
Di Noia, C., & Di Giorgio, G. (1999). Should banking supervision and monetary policy tasks be given to different agencies? International Finance, 2(3),
361–378.
Goodhart, C., & Schoenmaker, D. (1995). Should the functions of monetary
policy and bank supervision be separated? Oxford Economic Papers, 47 (4),
539–560.
Mandron, V. V. (2008). The system of the performance of the Russian financial
market single regulator. Bulletin of the Bryansk State University, 3, 29–33.
Masciandaro, D., & Quintyn, M. (2010). Regulating the regulators: The
changing face of financial supervision architectures before and after the
crisis. European Company Law, 6 (5), 5–30.
Mega-Regulation of Financial Markets
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Melecky, M., & Podpiera, A. M. (2013). Institutional structures of financial sector supervision, their drivers and historical benchmarks. Journal of
Financial Stability, 9 (3), 428–444.
Peek, J., Rosengren, E., & Tootell, G. (1999). Is bank supervision central to
central banking? Quarterly Journal of Economics, 114 (2), 629–653.
Repullo, R. (2018). Hierarchical bank supervision. SERIEs—Journal of the
Spanish Economic Association, 9, 1–26.
Vavulin, D. A. (2014). The central bank of Russia as a mega-regulator of the
Russian financial market. Banking, 5 (581), 21–32.
Conclusion
Galina Panova
Introduction
Radical changes took place in the political and economic life of society at
the beginning of the twenty-first century. Internationalization of financial markets, on the one hand, and their isolation, de-globalization,
which intensified after the COVID-19 pandemic, were going on simultaneously.
Changes in the global economy, crises, as well as the changing balance
of power between states and regions, predetermined an active discussion
about the ways we can transform the global financial architecture. It is no
coincidence that in July 2020 UN Secretary-General Antonio Guterres
called for reforming major international organizations, including the
G. Panova (B)
Moscow State Institute of International Relations (MGIMO University),
Moscow, Russia
© The Author(s), under exclusive license to Springer Nature
Switzerland AG 2021
G. Panova (ed.), Financial Markets Evolution, Palgrave Macmillan
Studies in Banking and Financial Institutions,
https://doi.org/10.1007/978-3-030-71337-9_25
327
328
G. Panova
institutions of the Bretton Woods system—the International Monetary Fund (IMF) and the International Bank for Reconstruction and
Development (IBRD) (Reuters, 2020).
The monograph presents the most pressing issues of financial markets’
optimal growth and development in the context of the financial intermediaries’ transforming business models, identifies the main barriers, risks
and opportunities to build up capital, assets, expand the client base,
scope of activity, increase profitability, taking into account liquidity and
adherence to the principles of sustainable development proclaimed by
the UN.
One of the new trends in the financial markets, which manifested itself
under the influence of macroeconomic factors, technological challenges
(fintech) and the increased regulatory burden on financial and credit
institutions after the global crisis of 2008–2009 included changes in the
activities of financial and credit institutions in the context of the fourth
industrial revolution. The triggers for the increased influence of the above
factors were the coronavirus pandemic and the 2020 oil crisis.
The transformation of financial and credit institutions, the change
in the traditional banks’ classic appearance are gradually acquiring new
features in the digital economy New business models and ecosystems
provide food for discussions about the prospects for financial markets
in the near and distant future.
Methodology
The methodological basis of the study was made up of the works of
both Russian and foreign scientists, experts (Gref, 2019; King, 2020; Lee
Kuo Chuen & Deng, 2017; Salikhov, 2020; Srnichek, 2019; Trushina &
Smagin, 2019), international organizations (Accenture, 2018; European
Systemic Risk Board, 2019; https://www.pwc.by/ru/publications/otherpublications/edges-blurring.html; IIRC, 2013; McKinsey, 2018; Schwab
& Malleret, 2020), central banks and individual credit organizations,
which to some extent addressed the financial stability of the banking
sector, its individual institutions, as well as the impact of regulation on
economic development.
Conclusion
329
The study uses comparative methods, benchmarking to market practices and international consultancy recommendations.
The global fintech industry is growing rapidly, using technological
innovation to capture market share from incumbent market players
across many financial service sectors. If until recently fintech was mainly
focused on developing such sectors as payments, remittances, direct
(P2P) lending and crowdfunding, there has been an increase in capital
market activity, new fintech solutions are emerging and banks around
the world have to deal with them. In these conditions, banks compete
with fintech companies, on the one hand, and cooperate with them, on
the other hand. Large banks are creating tremendous opportunities for
fintech companies, giving them access to global financial markets while
transforming their own business processes.
The new approach sparked a debate in the economic literature and
provided an explanation for organizational changes in financial markets.
These changes were confirmed by the rapidly developing “shadow”
(unregulated) banking system. Participants in this system perform intermediary and lending functions for households and companies faster and
at lower costs than traditional banks. However, innovations support more
effective functioning of financial and credit institutions, at the same time,
they have increased systemic risks that materialized during the global
financial and banking crisis (2008–2009).
Today, we are looking for some new business models as well as transforming the old ones, digitalizing the interaction between business,
customers and the state, creating new platform-type companies that rely
on a wide variety of partners and customers; it was the ubiquity of the
Internet and smartphones that gave rise to such companies.
New economic terms appear to characterize financial intermediaries’
business models (e.g. those of neobanks, hybrid banks, aggregators,
platforms, infrastructure providers, ecosystems); their advantages and
disadvantages are being compared with the traditional business models,
but at the same time the need for financial and credit institutions to
perform their main functions under the control and regulation of their
activities by supervisory authorities is emphasized.
The analysis was based on the reports and other materials of the
World Bank, Bank for International Settlements, PwC, Deloitte Center
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G. Panova
for Financial Services, Accenture, McKinsey, Bloomberg, Citibank, La
Caixa Bank (Spain), Banking Association for Central and Eastern Europe
(BACEE, Hungary), Association of Russian Banks (ARB), Bank of
Russia, Sberbank, VTB-Bank, etc.
Results
This monograph focuses on the analysis of financial markets’ functioning
and development in the digital economy.
Analysis of modern trends and factors in the development of financial
and credit institutions has made it possible to assess the digital evolution of financial markets and their participants within the framework
of new business models and ecosystems. The monograph explores the
issues of financial markets’ internationalization and shows the prospects
for forming new world financial centres in the context of global changes.
Particular attention was paid to the risk management of the financial market infrastructure, i.e. the evolution of payment systems, the
role of national currencies in reforming the global monetary system,
the peculiarities of financial law, taxes and taxation of financial market
institutions and the prospects for the international financial reporting
standards in the context of the economy digitalization.
Based on the definition of financial markets given in the monograph,
which differs from the existing approaches (set forth, for example, in the
Financial and Credit Encyclopedic Dictionary (Finance and Statistics,
2004), the authors investigated modern transformation and development
prospects of financial market institutions: banks, insurance companies,
pension funds and microfinance organizations in the development of
financial innovations, financial engineering and financial technologies,
taking into account risks and new opportunities.
The monograph shows that currently successfully operating models of
hybrid banks and neobanks are promising since these banks offer low
tariffs, flexible and personalized services, convenient mobile banking,
which allows them to attract more and more new customers.
Promising business models also include: an infrastructure provider
for fintech companies and/or banks; aggregator banks; business models
Conclusion
331
based on the platform (platforms for remote customer identification,
fast payment platforms, marketplace platforms for financial products
and services, as well as new platforms based on distributed ledger technologies and cloud technologies). Open interfaces (Open API) make the
key element of the financial market infrastructure. The largest and most
successful banks create the so-called ecosystems.
Banks begin to carry out daily operations (payments for cellular
communications and the Internet, rent of premises, utilities, etc.) in
the digital mode, and then new products appear (opening accounts,
accepting deposits and issuing loans, issuing plastic cards, etc.).
At the same time, with the development of remote banking services,
banks not only do not abandon the network of physical offices but also
open new ones. For example, VTB Bank currently has more than 1,500
offices, and their number has been increasing in recent years since there
are transactions that cannot be performed without a bank employee
(depositing cash by a client into a bank account, getting advice on
complex structured products, renting safe cells, etc.).
At the same time, bank’s offices are being functionally adapted taking
into account the global banking industry digitalization; we can witness
the transition to the format of paperless offices where the client confirms
operations and signs all the documents in the bank’s mobile application
in the presence of an employee who creates the document itself and its
digital image.
Thanks to modern technologies, part of the information is provided to
the client remotely in a visual format. For example, using virtual reality
glasses, bank customers can see a future apartment or other property.
Then they can remotely apply for a loan, open a personal mortgage office,
get an approval for the loan after which the bank will transfer the funds
to the borrower’s account.
Bank’s clients save time and money by receiving online information
about the products and services they need and also have the opportunity
to purchase them remotely.
The monograph pays special attention to new approaches to regulating the activities of financial intermediaries and financial markets in
general. In particular, the issues of sustainable development and the
practice of implementing the principles of responsible investment by
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G. Panova
banks have been investigated; we have also substantiated new approaches
to risk management of financial intermediaries to ensure the financial
stability of financial and credit institutions in the digital economy. Particular attention in this part of the monograph was paid to the issues of
anti-crisis regulation, stress testing and regulating the work of financial
intermediaries at the macro-level.
The fastly transforming banking sector often creates problems for
the regulators who are forced to balance between two opposite goals:
maintaining the stability of financial markets and stimulating the development of banks and other financial and credit institutions.
In international practice, the European Systemic Risk Commission
(ESRB) proposes the following principles of modern financial regulation,
taking into account the new business models (European Systemic Risk
Board, 2019):
● Adaptability: The regulator has to evolve with the financial system,
foster development, innovation and new business models. Regulatory
sandboxes are an effective mechanism for bringing innovation to the
market and updating the regulatory environment.
● Diversity: a variety of organizations and business models operating in
the financial market ensures its stability.
● Proportionality: we should regulate the work of financial institutions
according to the risks they pose.
● Renewability: “non-viable” organizations should terminate their activities without compromising the financial system’s integrity and stability
of.
● Consistency: fulfilling the functions of the financial system in the
economy and the life of society as a whole.
● Information accessibility: information should be complete and accessible, timely, to identify vulnerabilities and quickly respond to new
complexities in relation to the financial system.
● Discipline in accordance with the principles of responsible investment:
regulatory discipline should not cause the depreciation of alternative
factors that also ensure the financial system’s stability, for example,
ethics, social responsibility, trust, etc.
Conclusion
333
At the national level—in Russia—the Central Bank of the Russian
Federation, as a regulator of financial markets, develops financial infrastructure, coordinates the actions of financial market participants and
government agencies. The Bank of Russia’s strategy defines developing
financial technologies, legal regulation, information infrastructure and
information security as the key factors. “The main directions of developing financial technologies for 2018–2020” (Bank of Russia, 2018)
are synchronized with the national program “Digital Economy of the
Russian Federation” and other projects in the field of financial technologies’ development. Dealing with the projects within the framework of
the strategy in the field of financial technologies contributes to the digitalization of financial markets and increases the availability of financial
intermediary services for the population in all regions.
The main goals of the Bank of Russia in implementing the program
documents on the development of financial technologies include
promoting competition in the financial market, increasing the financial
services’ availability, quality and range, reducing risks and costs in the
financial sector as well as making Russian technologies more competitive
in general. The Bank of Russia views financial and credit institutions
in the long term as a driver of economic growth and development of
the financial service sector, allowing the creation of a broad infrastructure into which other (including government) services will be integrated
(Central Bank of the Russian Federation, 2019).
The development of financial technologies for the regulator—the
Bank of Russia—and market participants is becoming a fundamental
direction for changing their business models and developing the financial
market as a whole.
Today, the Bank of Russia is actively promoting new technologies,
including the so-called end-to-end customer identifier and a platform
for cloud services.
The distributed ledger technology is represented in the strategy of the
Bank of Russia mainly by the Masterchain platform, which the Bank is
developing together with the members of the fintech association. Pilot
projects are being implemented in the field of accounting for electronic
invoices, digital letters of credit and digital bank guarantees.
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G. Panova
A new financial infrastructure allows creating equal conditions for all
market participants and contributes to the competition in the financial market. At the same time, the development of digital technologies
is accompanied by the growth of cyber-threats, which require financial
market participants and the regulator to quickly prevent or minimize
them. That is why the Bank of Russia pays special attention to the legal
regulation of breakthrough technologies and their direct implementation and development in the Russian and EAEU financial markets. For
example, new digital tools and services are being tested at the RegTech
site (regulatory sandbox—test site), which is a tool for quickly checking
the consequences of introducing innovations in the financial market,
analyzing risks and generating proposals for changing the current regulatory legal regulation, which makes it possible to select those projects that
are significant for the population and the national economy (Salikhov,
2020).
The introduction of SupTech (Supervision Technology) allows the
Bank of Russia to more actively analyse the affiliation of borrowers,
determine the current demand for cash and its prospects, analyse and
maintain banks’ financial stability and identify fraudulent transactions.
At the same time, the Bank of Russia promotes electronic interaction
between government agencies and financial market participants and their
clients, as well as contributes to using new products and services safer,
creating conditions for increasing the people’s financial literacy.
In the monograph, all banks are conditionally divided into traditional (classical) and those that actively use new business models. The
nature and scope of financial intermediaries, profitability, specialization, competitive advantage, and the need to comply with regulatory
requirements have a large impact on the choice of a promising business
model.
After the global financial and banking crisis of 2008–2009, regulators introduced new requirements aimed at maintaining bank’s stability,
including those with respect to their capital and liquidity levels. This
influenced the banks’ profitability and largely determined the range of
products they offered, which in turn predetermined the new models,
such as, for example, P2P platforms that offer an alternative to traditional
methods of bank lending.
Conclusion
335
On the international level, new regulatory approaches (e.g. the EU’s
Open Banking Initiative—the PSD2 directive obliging credit institutions
to exchange customer information with service providers upon customer
request), initiatives to simplify customer authorization processes, and
favourable macroeconomic conditions, as well as wider use of technology, have created new financial intermediaries and increased the need
to transform the traditional banking business model (Financial Conduct
Authority, 2017).
On the other hand, the international banking standards set out in the
Basel Accords aimed at ensuring banks’ stability require them to create
additional capital buffers, thus, increasing the cost of doing business and
displacing highly risky assets outside the banking industry. Other directives (e.g. the MiFID II Directive on Markets in Financial Instruments
aimed at protecting investors and standardizing the activities of the EU
financial institutions as well as restoring confidence in the industry)
involve changing the bank’s approach to their business strategy in the
new environment.
Conclusions/Recommendations
A futuristic view of the future banking is taking shape today. Under
the influence of technological innovation, banks and their businesses are
changing dramatically. Those banks that have great technological potential are using it to search for fundamentally new business models, analyse
the aggregators’ activities, marketplaces, ecosystems and create technological services for clients on their basis. The banks working in the new
digital banking paradigm are transforming their operations as well as the
financial market landscape.
This study was conducted in order to analyse the current situation and
prospects for the development of banks’ business models, as well as the
potential market response, taking into account the influence of systemic
and individual risks.
Studying the experience of digitalizing banking activities has made it
possible to reflect the modern realities of the developing subjects of the
Russian financial market, identify the existing barriers and determine the
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G. Panova
main directions for the developing bank policies during the fourth industrial revolution. In particular, the approaches of the Bank of Russia as
a regulator of financial markets often cause debate among economists.
An analysis of the theory and practice of using the latest technologies
made it possible to find an explanation for organizational changes in
the banking industry. These changes are confirmed by the rapidly developing digital platforms and bank ecosystems, as participants in these
systems perform financial intermediation for households and companies
much faster and cheaper than traditional banks. At the same time, along
with the advantages of using innovations that ensure more effective functioning of financial and credit institutions, it is also necessary to take into
account a significant increase in systemic and other risks.
Building “ecosystems” has both positive and negative sides. If the
growth of banks’ income and value, a decreasing cost of attracting
customers, their increasing loyalty and growing client base can be
attributed to the positive aspects, then the negative ones include a
negative impact on the competitive environment, since large banks can
restrict the access of other financial market participants to product distribution channels and services, as well as creating non-market competitive
advantages for those organizations that gained access to the network
under the bank’s brand, strengthening the position of large banks—
administrators of the ecosystem and creating obstacles to the growth of
financial service providers whose access to the ecosystem was limited.
Therefore, the problem of regulating the activities of banks that have chosen
a strategy for developing their business in the ecosystem paradigm should
be considered from the standpoint of differentiated supervision, since they
have to introduce deeper consolidated supervision and regulation since
when companies from different sectors are actually merged under a single
brand of a bank, new risks arise that can affect the financial stability of
the banking group and the financial market as a whole.
In these conditions, it is important to bridge the knowledge gap
between technology developers, bank employees and other financial
market participants, as well as to develop optimal policy options for
different groups of banks: the regulator, large systemically important
banks, as well as small- and medium-sized banks, whose digitalization
needs are dictated by life itself.
Conclusion
337
The optimal type of business model for each bank and/or another
financial market participant will obviously be an individual one. Financial intermediaries make their choice depending on the availability of
competitive advantages, specialization or prospects of the model they
have chosen for themselves. As a result of the transformation of their
activities, the entire financial market will win. It will become more
efficient and significant for clients and society as a whole.
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technologies for the period 2018–2020.
Central Bank of the Russian Federation. (2019, November). Approaches of
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Index
A
aggregator 39, 40, 45, 335
analytics value chain 194
app-based platforms 134
application programming interfaces
(APIs) 39, 102, 331
artificial intelligence (AI) 34, 50, 72,
101, 103, 129, 133, 138, 139,
144, 146–151, 190, 195, 196,
207, 317
B
bank 1–4, 6–17, 21–25, 28, 29, 31,
33–47, 53–57, 59, 62, 67, 68,
70–74, 78, 79, 81–83, 85, 92,
100–102, 104, 111, 113, 114,
121, 122, 124–126, 130–133,
135, 137, 138, 144, 147, 151,
155–158, 160–162, 166, 167,
169–173, 177–182, 184, 185,
206–208, 218, 224, 226, 227,
229, 232, 235–237, 239–243,
249–253, 255–259, 262–268,
274–280, 282, 287–294, 296,
299–307, 309, 314, 317–319,
322–324, 328–337
bank-aggregator 35, 38, 39, 329
banking 1–4, 6, 7, 9–17, 22, 23,
28–31, 34, 35, 37–41, 43–46,
54, 57, 60, 61, 68, 71, 72,
74, 79, 99–102, 104, 122,
125, 130–134, 137–139,
144, 146–148, 151, 156–158,
160–162, 166, 167, 170–173,
180–185, 207, 209, 227,
236–240, 242–244, 258,
262–267, 274–279, 282,
286–292, 294, 299, 300, 305,
© The Editor(s) (if applicable) and The Author(s), under exclusive
license to Springer Nature Switzerland AG 2021
G. Panova (ed.), Financial Markets Evolution, Palgrave Macmillan
Studies in Banking and Financial Institutions,
https://doi.org/10.1007/978-3-030-71337-9
339
340
Index
310, 318, 321–323, 328–330,
332, 334–336
banking innovations 131, 134
banking regulation 2, 18, 78, 132,
171, 263, 276, 291, 295
banking risks 100
banking supervision 9, 139, 252,
262, 323
banking system 2, 3, 6, 11–15,
28, 99, 101, 103, 157, 160,
162, 163, 172, 177, 179, 180,
182–185, 278, 282, 287, 296,
299, 300, 329
banking technology 31, 101
bank’s business strategy 37, 335
bank’s liquidity 301, 303
Basel Accord 9, 37, 335
Basel Committee on Banking
Supervision (BCBS) 7, 160,
169, 172, 276, 277, 291, 292,
300
Big Data 72, 208, 209, 282, 317,
323
blockchain 6, 29–31, 34, 87,
98–100, 103, 106, 136
business ecosystems 52, 53
business model 12, 13, 33, 35–37,
40–42, 45, 68, 71, 74, 78,
188, 189, 196, 209, 262–264,
267, 328–330, 332–335
business model innovation 332
business-specific factors 37, 263, 269
C
capital buffer 37, 172, 288,
291–293, 295, 335
central bank 4, 8, 10, 14, 15, 54, 55,
77, 79, 103, 104, 106, 110,
111, 113, 120, 122–124, 127,
132, 137, 158, 226, 238, 240,
263, 264, 273, 275, 280, 282,
287, 291, 314, 320–323, 333
classical economics doctrine 236
closed ecosystem 68
closed innovation 40
cloud computing platforms 39
cloud technology 34, 39, 72
collaborative business networks 268
commercial bank 2, 4, 5, 10, 14, 17,
82, 250, 277, 296
comparative advantage 329
comparative costs 205
conglomerates 319, 321
consolidated supervision and
regulation 46, 336
core ecosystem platform 151
corporate pension plan 218–220
corporate social responsibility 236,
237, 243
credit 2–12, 14–16, 18, 21, 22, 24,
28, 29, 31, 33, 34, 37, 40, 41,
43, 46, 53, 58, 65–67, 71, 80,
99–101, 126, 130–133, 138,
139, 155, 156, 158, 161, 167,
169, 171, 172, 180, 181, 185,
201, 203, 204, 206, 207, 218,
220, 224, 225, 229, 239–241,
244, 250–258, 265, 267,
274, 275, 277–282, 286, 288,
291–294, 299, 300, 302–304,
317, 321, 322, 324, 328–330,
332, 333, 335, 336
credit losses 295
crowdfunding 13, 31, 34, 51, 53,
55, 56, 69, 73, 74, 82, 129,
329
crowdinvesting 13, 53, 317
Index
crowdsourcing 317
crypto currency 15, 35, 51, 87, 99,
103–106, 134–137, 139, 317
crypto-exchange 105, 135, 137
currency 1–3, 6–8, 12, 27, 28, 61,
83, 103–105, 110–116, 120,
122, 125–127, 137, 138, 159,
162, 225, 304, 314, 317, 330
customer ID 12, 15, 39, 134, 135,
317, 331, 333
customer value 46, 147, 336
cyber attacks 99, 101, 102, 106
cyber technologies 98, 268, 279, 334
D
defensive strategy 32
deliberate strategy 16, 181
deposit 2, 11, 12, 42, 52, 61, 74,
103, 104, 111–113, 124, 126,
130, 137, 138, 170, 180, 184,
185, 205, 207, 214, 277, 279,
280, 287–290, 302, 304, 307,
317, 318, 323, 331
depository institution 10
development bank 11, 145, 146,
178, 183–186
differentiated supervision and
regulation 46, 336
differentiation 167, 173, 218
digital economy 4, 15, 24, 29, 51,
52, 54–56, 62, 67, 177, 180,
183, 315, 328, 330, 332, 333
digitalization of economy 315
digitalization of insurance poverty
201
digital platform 15, 22, 31, 46, 336
digital risks 207, 208
directive PSD2 37, 38, 102, 335
341
disintermediation 278
disruptive value innovation 288
distributed ledger technology 40,
333
distributed registry technology 317
diversification strategy 69
dollar 109–112, 114, 116, 122, 125,
127
double-sided platforms 86, 125
E
ecological, social, and corporate
risks/factors (esg) 87, 237, 238,
249, 250, 252, 253, 255–258
e-commerce platforms 44, 132
ecosystem 33, 37, 38, 41–46, 52,
53, 55, 101, 132, 137, 167,
209, 279, 328–331, 335, 336
ecosystem governance 145
ecosystem paradigm 43, 46, 336
ecosystem perspective (moore: 1996)
188
ecosystem value 46, 336
emotional banking 131
empirical 35, 58, 66, 67, 72, 178,
262, 263, 266, 280, 302, 315,
316, 322
Eurasian Economic Union (EAEU)
8, 23, 31, 40, 121, 123, 127,
334
euro 102, 110–114, 119, 127, 231
evolution or co-evolution 107, 129,
130, 135, 137, 322, 330
expansionism 29, 53, 54, 74, 89,
131, 178, 201, 268, 288
experimental business model 136
experimental legal regimes 332, 334
342
Index
F
factor conditions 3, 45, 218, 253
fast payment platform-marketplace
39, 331
Federal Digital Financial Assets Act
24
Federal Financial Services
Marketplace Act 81, 82
Federal Regulatory Sandbox Act
(“On Experimental Legal
Regimes in Digital Innovation
in the Russian Federation”)
332, 334
financial and credit organizations 57,
68–71, 73, 74, 209
financial crisis 78, 88, 89, 92–94,
120, 183, 185, 285, 287, 319,
320
financial cycle 8, 288, 295
financial infrastructure 39, 54, 55,
79, 84, 87, 93, 109, 116, 319,
333, 334
financial institution 5, 24, 25, 31,
37, 54–56, 62, 77, 78, 85,
101, 105, 137, 144, 151, 155,
172, 182–186, 207, 209, 210,
213, 215, 217, 218, 238, 254,
255, 301, 314, 318, 321, 332,
335
financial instrument 5, 36, 73, 78,
111, 116, 129, 181, 237, 240,
258, 293
financial intermediaries 3–6, 10, 17,
18, 33, 37, 42, 51–55, 61, 62,
103, 195, 261–264, 267, 268,
291, 314, 316–318, 321, 322,
328, 329, 331–335, 337
financial intermediation 6, 36, 46,
52, 235, 263, 268, 269, 278,
315–318, 321, 322, 336
financial market 1–11, 13, 15–18,
22–25, 28–31, 33, 34, 39,
42, 44–47, 53–55, 57, 65–74,
77–83, 86–90, 92–94, 104–
106, 113, 116, 122, 127, 133,
134, 137, 155, 156, 158, 159,
161–163, 171, 172, 177–179,
183, 215, 217, 223, 224, 227,
244, 258, 264, 273, 275, 276,
278, 285, 288, 291, 294, 295,
314–321, 323, 324, 327–337
financial products and services
platform 34, 38, 39, 50, 52,
54, 55, 316, 331
financial services regulation 17, 34,
38, 39, 41, 45, 46, 53, 55, 67,
69–73, 79, 87, 102, 130, 143,
144, 147, 148, 151, 156, 184,
189, 223, 244, 278, 295, 316,
321, 329, 330, 333, 336
financial stability 2, 4, 7, 8, 10,
22, 46, 105, 122, 160, 252,
253, 255, 257, 262, 266, 268,
273–279, 282, 286, 292, 295,
302, 303, 321, 323, 328, 332,
334, 336
financial stability methods 160, 252,
273, 277
financial stability stressors 268, 303
financial technologies 24, 25, 34, 41,
43, 50, 53–55, 67–69, 73, 74,
97, 136, 137, 156, 167, 171,
314, 330, 333
fintech 4, 33, 34, 41, 50, 53–55, 70,
129, 132, 137, 138, 207, 209,
323, 328, 329, 333
Index
fintech-company 34, 38, 53, 54, 87,
132, 156, 265, 316, 329, 330
fintech regulation 38, 136, 138, 329
flexible decision making 144
foreign direct investment (FDI) 25,
28, 29, 31, 58
fourth industrial revolution 4, 33,
46, 50, 328, 336
free zone 103
G
global banking 42, 172, 331
global crises 179, 315
global financial center (GFCs)
66–68, 71–73
globalization 1, 6, 9, 17, 21, 49, 57,
66, 77, 155, 156, 158, 183,
321, 323, 327
government regulation 61, 145
H
hierarchical system 100, 148, 151
high-tech financial products 1,
58–60, 99, 156, 167
hybrid banks 35, 329, 330
hybrid innovation 57
I
ICT ecosystem 82
ICT sector 24, 70
inflation 8, 9, 12, 13, 119–128, 214,
274, 307, 322, 323
inflation targeting 8, 120, 121, 123,
124, 126, 127
information externalities 207, 300,
304
343
infrastructure mortgage 203, 205,
206
infrastructure provider model 35, 38,
329
innovation 4, 6, 7, 31, 34, 35, 37,
45, 46, 50, 51, 56–62, 65–67,
72, 74, 78, 99, 129, 130,
137, 146, 148, 158, 269, 274,
279, 291, 293, 314, 329, 332,
334–336
innovation platform 31, 41, 136
instability 16, 17, 61, 88, 90, 92,
111, 162, 179, 181, 185, 215,
249, 277, 286, 288
insurance company 45, 53, 59,
60, 79, 80, 85, 181, 187,
189–196, 203, 205–209, 330
insurance market 187–192, 195, 317
insurance market architecture 191,
192
interdependent agents 29
inter-dependent relationships 2
internal optimization 25
internal platforms (within the firm)
25
internationalization 6, 17, 66–74,
113, 114, 116, 183, 318, 327,
330
International Monetary Fund (IMF)
3, 110, 111, 113, 119, 120,
122, 159, 163, 183, 185, 262,
265, 287, 305, 328
international monetary system 111,
116
internet infrastructure 68
internet-of-things (IoT) 34, 53, 72,
190, 195, 196
internet platforms 13, 38, 132
investment bank 2, 5, 85, 183
344
Index
linear process 58, 307
liquidity factors 92, 295, 304, 310
liquidity of bank 9, 40, 156, 162,
167, 299–304, 310
liquidity risk 88, 302, 304, 305, 310
loan 2, 5, 17, 35, 42, 44, 45, 53, 56,
59, 68, 74, 79–82, 86–88, 94,
104, 111, 112, 122, 125, 126,
130, 133, 138, 146, 147, 156,
162, 170, 172, 181, 184, 200,
201, 204, 205, 224–229, 232,
239, 242, 244, 249, 252, 265,
280, 286, 287, 293, 294, 300,
303–306, 310, 318, 331
MiFID II Directive on Financial
Instruments Markets 37, 335
mining 317
model crisis 37, 94, 288, 324, 329,
334
model drift 57
monetary policy 8, 9, 13, 103,
120–128, 172, 179, 180, 182,
294, 324
mortgage 12, 42, 44, 45, 138, 203,
205, 206, 239, 242, 244, 281,
331
multilateral development banks 145,
146
multiple micro-innovation platforms
31, 295, 330
multi-sided market model 139
multi-sided platform models 37,
194, 314, 334
M
N
macroeconomic effect 18, 262, 275,
286, 292
macro-innovation
platform-ecosystem 54
marginal costs 88, 92
market aggregation 45, 114, 134,
335
market development strategy 24, 77,
78, 238, 318
market externalities 25, 163
marketplace/community platform
39, 331
mega-regulation 315, 316, 324
microfinance organization (MFO)
79, 80, 82, 194, 223–232, 330
microinsurance 188, 189, 193–196
microloan 223–230
neo-bank 132
‘new age’ firms 33, 35, 37, 45, 78,
151, 328–330, 332, 334, 335
‘new economy’ organizations 24
new economic reality 145, 172, 329
newly industrialized countries
(NICs) 155
K
key stone player 41
L
O
objective 5, 22, 36, 51, 52, 67, 91,
133, 145, 158, 200, 266, 269,
295, 324
offensive strategy 43
open banking 35, 37, 102, 134, 335
open ecosystem 43
open innovation 134
Index
open interfaces (Open API) 39, 55,
102, 316, 317, 331
optimal bank policy 46, 192, 336
optimal business model 337
P
P2P lending 13, 129, 317
paradigm 45, 195, 235, 236, 335
paradigm shift 156
pension system 213–220
platform 15, 30, 35, 39–41, 43, 52,
54, 69, 72, 73, 82, 84, 87, 89,
90, 100, 103, 132, 134, 136,
209, 258, 317, 329, 331, 333
platform-based ecosystems 39
platform-based firms 30
platform based on distributed
ledger technologies and cloud
technology 15, 331
platform business model 35, 39, 40,
329, 331
platforms for cloud services 317
platform to remotely identify
customers 42, 331
Principles for Responsible Investments (PRI principles) 250,
257, 258, 331
private equity fund 29
product life cycle 18
product platforms 39
Q
quasi-voluntary pension provision
219, 220
R
radical innovation 78, 278
345
regional banks 13, 156, 157, 161,
166, 167, 170–173
Regtech (regulatory sandbox-test
site) 139, 334
regulation 4, 7, 8, 11, 16, 18, 22,
30, 37, 54, 62, 68, 72, 74,
79, 81, 83, 94, 103, 104,
106, 124, 134, 136–138, 156,
157, 162, 169–172, 184, 225,
232, 262, 263, 269, 275,
276, 278–280, 282, 286, 288,
290–296, 313–315, 319–324,
328, 329, 332–334
regulation of crypto market 15, 55,
104, 105, 137, 316
relationship between monetary
policy and financial stability
policy 8, 22, 122, 282
remote banking 42, 101, 156, 173,
331
renminbi 109
responsible investments 236–240,
242, 244, 249, 250, 258, 259
risk 2–4, 6–10, 12, 16–18, 24, 27,
31, 36, 40, 45, 46, 54, 61, 62,
68, 69, 72, 77, 78, 83, 85–94,
100, 102, 104–106, 111, 112,
116, 130, 132–134, 137–139,
144, 145, 149, 150, 156,
161, 162, 167, 170, 172, 180,
184, 185, 191–196, 201–209,
218, 220, 237, 239, 249–258,
261–269, 273, 275–279, 282,
288, 291–296, 299–304, 306,
309, 310, 313, 314, 321–323,
328–330, 332–336
risk management 17, 86, 88, 89,
92–94, 148, 162, 169–172,
194, 203, 204, 209, 210, 244,
346
Index
258, 262–269, 291, 301, 302,
314, 330, 332
risks and institutional stability 4
Ruble 8, 30, 122, 231
Russian banks 5, 9–11, 13, 14, 16,
43, 161, 185, 237–240, 242,
243, 258, 265, 293, 294, 330
S
segmentation 13, 23, 37, 43, 44,
50, 56, 79, 84, 85, 130, 161,
162, 173, 193, 196, 228, 231,
232, 243, 264, 277, 279, 300,
316–318
settlements in national currencies
109
stakeholder 52, 144, 148, 150, 188,
189, 192, 193, 195, 237
state-owned bank (SOB) 16,
178–183, 185, 240
strategic flexibility 74, 134, 150
Strategy of the Bank of Russia on
the development of financial
technologies 167, 333
stress test 90, 299–306, 309, 310
supply and demand 303, 305
supply chain platforms (within a
supply chain) 14, 47, 151,
173, 336
Suptech (supervision technology surveillance technology) 139,
334
sustainable banking (SB) 236, 239,
240, 242, 243
sustainable banking performance
framework (SBPF) 238–241,
244
sustainable development 36, 145,
146, 235–243, 249, 257, 279,
328, 331
T
targeting 101, 121, 124, 126
technological change 207
technology clusters 57, 316
technology platform 43, 206
traditional business model 37, 329
traditional (classic) banks 33, 34,
36, 37, 41, 46, 104, 224, 328,
329, 336
transnational banks (TNB) 21, 25,
29, 31, 155–162, 171, 172
U
umbrella strategy 148
V
virtual banking risks 99
virtual financial adviser 38, 131
virtual marketplace 50
virtual organization 98, 136, 138,
147
voluntary pension provision 215,
220
W
waves of innovation 50
World Bank 4, 14, 23, 36, 58, 159,
160, 183, 185, 329
world currency 113
world financial center 49, 330
World Trade Organization (WTO)
2, 17
Index
Y
Z
Yuan 110, 113, 114, 116
zero marginal cost (near-zero
marginal cost) 54
zone of complexity 269
zone of free trade 103
347