The Sequence of Bank Liberalisation: Financial Repression versus Capital Requirements in Russia
In this paper, we highlight one particular aspect of financial repression, namely the presence of high, but lowly compensated reserve requirements. Reserve requirements are widely used as a monetary policy tool aimed at maintaining systemic stability. Typically, compulsory reserves yield a low or even a zero return. In an economy with high inflation, this return is often negative in real terms, causing distorted incentives for asset allocation decisions. When this occurs, reserve requirements become a tool of financial repression.1 Empirical evidence suggests that countries with high reserve requirements grow slower and have less developed financial systems than countries with low reserve ratios (Haslag and Koo, 1999). Capital rules, on the other hand, have been shown to be able to offset risk behaviour.2 It therefore appears sensible for the regulator to substitute reserve requirements with capital rules, as she can in this way retain the benefit of increased systemic stability without incurring the cost of financial repression in terms of lower financial development. But first appearances can be deceiving. We model the interaction between reserve requirements, capital rules and banks’ risk-taking behaviour in a stylised transition-economy environment. This allows us to assess whether the reduction of financial repression indeed encourages bank gambling and whether the introduction of capital rules mitigates this effect or instead may lead to even more bank gambling.
KeywordsGambling Behaviour Capital Requirement Deposit Insurance Capital Adequacy Minimal Capital Requirement
Unable to display preview. Download preview PDF.
- Bencivenga, VR and Smith, BD. 1992: Deficits, inflation, and the banking system in developing countries: The optimal degree of financial repression. Oxford Economic Papers 44(4): 767–790.Google Scholar
- Carletti, E and Hartmann, P. 2002: Competition and stability: What’s special about banking?. Working paper no. 146, European Central Bank.Google Scholar
- Denizer, C, Desai, RM and Gueorguiev, N. 1998: The political economy of financial repression in transition economies. World Bank Policy Research paper no. 2030.Google Scholar
- Dewatripont, M and Tirole, J. 1994: The prudential regulation of banks. The MIT Press: London, England.Google Scholar
- Gropp, R and Vesala, J. 2004: Deposit insurance, moral hazard and market monitoring. Working paper no. 302, European Central Bank.Google Scholar
- Haslag, JH and Koo, J. 1999: Financial repression, financial development and economic growth. Working paper 99–02, Federal Reserve Bank of Dallas.Google Scholar
- Kane, EJ. 1989: The S&L Insurance Mess: How Did It Happen? The Urban Institute Press: Washington, DC.Google Scholar
- Karas, A and Schoors, K. 2005: Heracles or sisyphus? Finding, cleaning and reconstructing a database of Russian banks. Working paper no. 327, Ghent University.Google Scholar
- Karas, A, Pyle, W and Schoors, K. 2006: Sophisticated discipline in nascent deposit markets: Evidence from post-communist Russia. Middlebury College Working paper series 0607, Middlebury College, Department of Economics.Google Scholar
- Korhonen, I. 1997: A brief assessment of Russia’s treasury bill market. Review of Economies in Transition 3: 15–22.Google Scholar
- Odling-Smee, J. 2006: The IMF and Russia in the 1990s. IMF Staff Papers 53(1): 151–194.Google Scholar
- Schoors, K. 2002: Financial regulation in Central Europe: The role of reserve requirements and capital rules. mimeo, Ghent University.Google Scholar