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September 18, 2001
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Fixing Russia's BanksA Reminder

by Michael S. Bernstam and Alvin Rabushka

The September 17, 2001, edition of The Financial Times carried a headline story "Russia Ponders Measures to Boost Banking Sector." The government plans to hold a meeting on September 27, 2001, to explore several ideas to reform Russia's banks. It has invited the World Bank, the International Monetary Fund, and the European Bank for Reconstruction and Development to participate in the discussion.

Current ideas on the agenda include the scope of deposit insurance and who (the government or the banking consortium) should finance it. Another issue is how to make Central Bank-owned deposit banks more like commercial banks and less like extensions of the Central Bank. The goal of these reforms is to boost the role of banks in the economy, to increase lending from the current paltry 10% of GDP level.

In the absence of a coherent framework for the overhaul of the entire banking system, or rather Russia's no-banking non-system, it serves little purpose to review the pros and cons of each specific proposal. It does not seem to us that the Russian government, the World Bank, IMF, and EBRD are really serious about banking reformor else they would have raised more substantive problems.

The object of this comment is to remind interested readers that comprehensive and elaborate proposals for banking reform have long been in the public domain. We offered one proposal on pages 9098 in our book Fixing Russia's Banks: A Proposal for Growth, which was published more than three years ago in July 1998, a month before the Great Default of August 1998. An abridged concise version was also published in the Wall Street Journal and is available on this site ("How to Reverse the Upcoming Russian Bust"). Still other proposals can be located by a simple library or Internet search.

If the Russian government and its international advisers are really serious about banking reform, they can start by reviewing the relative merits and demerits of existing proposals. At least this will indicate the true scope of the work they face.