Econonics/ Banks and bank system

Doctor of Science (д.ю.н.), full professor Frolova E.E.

People’s Friendship University of Russia, Russian Federation

Doctor of Philisophy (к.ю.н.), Voykova N.A.

The Russian Presidential Academy of National Economy and Public Administration, Russian Federation

Bank crises: results of banking activity in the conditions of market economy and counteraction methods

Banking in this or that type exists the millennia, the term "bank" appeared in economic use quite recently – only three-four centuries ago. It is possible to claim that bank as the special institute of commodity-money economy, arose not in connection with development of the commodity-money relations at early stages of commodity production, namely during this period when the network of the special organizations regulating currency circulation and making in wider scales credit operations was required. That is bank as the specific and special credit and monetary institute, arose at such stage of economic development when without its broad help there was impossible a further functioning of the capitalist entities.

Modern information means promoted creation of a set of essentially new banking products (for example, electronic credit cards), to development of Internet banking, globalization of the financial markets. Thus banks became more democratic and available, more and more taking root into everyday life of citizens in the form of consumer crediting, to provision of services on payment of municipal accounts of phone, etc. It is natural that demand for banking services influenced changes in banking activities, but banks didn't remain passive, they actively developed and implemented the products. To a certain extent banks had impact on the social and economic device not only the certain countries, but also all world developed industrially.

One by one various risks of banking activity – both system, and local began to appear. Management of them required the top skills and faultless cleanliness of management and the office of each bank. But risks "attract" development of crises and a problem of development of the crisis phenomena are inevitable – differently banks would function in stable economy that contradicts the market nature.

Thus, us there is an important research problem of the reasons and sources of bank crises, their inevitability in the conditions of the unstable economic environment which is in turn a basis of market functioning of commercial banks.

The bank system is important part of the developed political, legal and economic industry of public life, - in the measure greatest, in our opinion, promotes socio-political stability and economic growth, and also, on the other hand, can provoke the crisis phenomena coming for the public. From what follows that socio-political instability of the state is shown also. It is represented that the instability condition in the state conducts to loss of trust of society to the state.

Considering the specified thesis, it is necessary to emphasize that this phenomenon is characteristic not only for the Russian Federation, but also for each state having the bank system. In connection with decrease in stability in the bank sphere, the depositor confidence to the credit organizations decreases also. Is reasonable to draw a conclusion that, along with loss of stability of the bank sphere, the condition of instability is shown in all spheres of life of the state, experience of functioning of modern Russia as the states with insufficiently stable, in our opinion, with economy confirms the thesis about social and legal, and not just the economic nature of a bank system and the monetary relations.

The international community and the governments of the certain states has the right to apply the measures limiting possibilities of use of bank and other types of activity in the bank sphere in the antisocial purposes. Thereby the interested states limit possibility of the reasons and the conditions, capable to generate approach of negative social, economic and political consequences for the people and all international community.

For the last 20 years the political map of the world underwent serious transformations. Exit of the East European countries from the Warsaw pact, transformation in political and economic processes resulted at the first stages in macroeconomic instability and imbalance of financial and bank systems. Against increasing banking system instability many banks were extremely susceptible to shocks in real production sector - to traditional factors of bank crises that resulted in their bankruptcy.

In financial crisis the systemic risk – risk of the losses connected with adverse changes in the market as a whole, "dominoes" caused by effect in the financial market, or a crisis of confidence among the investors, creating a situation of general illiquidity in the market is implemented. As the complex concept, financial crisis includes a number of local crises (currency, bank, share, liquidities, debt, etc.), arising on this or that mini-segment of the financial market without coordination with other its elements (in ours couples – in bank).

Bank crises are originally only local and represent one of components of financial crisis. "Having grown" in the development they cause the extremely serious macroeconomic consequences which always involve decrease in real economic growth and, as a result, sharp fall of welfare of the population of the country.

Insolvency separate, and at times and the one and only bank quite often is direct threat for real production sector as a whole that leads to loss of trust both to separate banks, and to a bank system of the country. Practice shows that bankruptcies of separately taken banks can do much bigger harm and damage to national economy of the country, than bankruptcy of the entities as banks own instability surely destabilize functioning of its payment system.

At the same time consideration and the analysis of threats which bear bank crises for national economy and represent incentive for development and enhancement of all package of measures on the crisis management by banking sector united in the most difficult mechanism.

The beginning of system bank crisis can be connected with origin even insignificant, at first sight, problems with solvency in one or several banks having key value for a bank system as a whole. Lack of sufficient means, conflict of interest of owners and managers, "gaps" in the legal environment or institutional structure and other specific reasons which weren't timely solved, are initial prerequisites of future crises. The equity mutually interlacing, availability of extensive interbank communications and considerable number of a clientele in case of bankruptcy of one credit institute can easily endanger others, entail ruin of a large number of clients and lead to system bank crisis.

system it is possible to allocate the following forms of manifestation of bank crises:

• The partial or local crisis covering or separate sectors of a bank system, or certain regions within the country.

• The latent crisis representing a situation, when the considerable part of bank institutes (mainly banks of the average level) appears poorly adapted for a specific economic situation and customer requirements, however, continues functioning with obviously high risk expectations (in the international banking practice such situation is regarded as "bank distress" – "bank depletion").

• Open form of crisis when the majority of banks (average and large level) stops payments on deposits. Example of manifestation of such form – bankruptcy of banks which to the Great depression preceded bank the panic, expressed in mass deposit withdrawals from banks (bank runs). It should be noted that the term "bank crisis" in the international practice is often applied to open forms of crisis.

Thus we defend a line item that in system bank crises, as well as in system crises as a whole, there are many positive components. Become obvious and not requiring any other proofs allowed in the theory and in practice of a mistake and miscalculations in government and a bank system. Thus there is a task of recovery and reconsideration of the managerial theory and tactics of economic development of the country.

Thus bank crises arise under influence all of new and new factors, emergence often can't be predicted them. Aggravation of crisis problems leads to public awareness of need of the state support of banks and development of governmental programs for restructuring of a bank system, forming of special mechanisms of restructuring. In turn restructuring of commercial bank assumes implementation of the actions directed on change of structure of its assets and liabilities, and also its internal creation.

Are the basic fundamental macroeconomic reasons (factors) of bank crises:

• the inflation influencing banking sector through loan interest rates, to deposits and deposits;

• general decrease in real incentives to savings and narrowing of a deposit base;

• flight of the national equities abroad;

• increase of a destrukturirovannost and disproportionality of active and passive transactions of banks;

• sharp deterioration of a condition of the national economy, connected with output gap, uncontrollable and economically unreasonable rise in prices and interest rates for loans, deterioration of solvency and creditworthness of borrowers of banks;

• uneven price fluctuations on the main and nonbasic goods, financial assets and so forth that serves as a major factor of increase of economic instability and risks in banking activity;

• some consequences of stabilization policy and sharp review of an economic course of the government of the country;

• foreign policy factors;

• market reforms, etc.

In this article the overview of foreign experience of fight against the crisis phenomena of the specified nature which entailed certain results and consequences is offered. These actions of the different countries played a big role in fight against crises around the world.

1 . Insurance of liabilities of banks. Insurance of liabilities of banks in the USA arose within two various periods. The first began in 1829 with acceptance by the State of New York of the plan for insurance, and within the next three decades five other states followed the example of New York. Except for the insurance plan of the State of Michigan which failed after short functioning, in all states insurance worked quite successfully. Nevertheless, the last of these programs ceased to exist in 1866 when a large number of representatives administrations of states of banks became national.

Sudden money withdrawal in some regions of the country became the beginning of a mass panic. The first official act Franklin Roosevelt declared national "bank vacation" which began on March 6 and four days were extended. "Bank vacation" represented the period of the moratorium on banking activity when according to the order of the president all banks for the purpose of determination of their solvency in conditions of "A great depression" were closed. To such step of the U.S. President pushed the sharp growth of "attacks" of investors on banks for the purpose of withdrawal of the savings. In 1933 stopped the activities of 4000 banks, and investors lost in total 540 396 000 dollars. Term of "bank vacation" was connected with that opening of extraordinary session of the Congress of the USA was appointed to March 9, 1933.

Events of 1933 promoted disposal of many "impractical" banks. The subsequent improvements of economic conditions also played a role in strengthening of a bank system.

In 1933 the independent Federal Corporation on Deposits insurance (to Federal Deposit Insurance Corporation, FDIC) was created. It had before herself two purposes: to insure investors and to make safe banking practice.

We assume necessary to note that banks are in the USA under double control — federal and regular. Except the mentioned state agencies, private insurance companies are engaged in insurance of many bank risks also.

In the USA there is a special legislative regulation of insurance business. Each staff has the insurance legislation and the regulating board (supervision). The uniform federal law on insurance and single federal body on supervision of an insurance activity isn't present. Each staff makes the demands to a minimum level of the equity, types of offered insurance, carries out audit of controlled insurance companies, performs general regulation of an insurance activity by licensing to brokers, agents and insurance companies.

In the romano-German system of the right (it is offered to consider on the example of Germany) there are two systems of insurance of deposits of the population in banks: obligatory and voluntary. All private credit organizations created in the territory of Germany, and also the foreign credit organizations, are obliged to bring the membership fees in Fund of obligatory protection of deposits (Gesetzliche Einlagensicherung). If there comes bankruptcy of the credit organization, the Fund pays from the means money to investors. In Germany savings on current accounts, non-term and term deposits, deposit certificates, and also customer requirements on securities are insured.

Concerning Fund of voluntary protection of investors, we find it possible to emphasize that deposits, deposits as individuals and the small entities, and large enterprise customers and public organizations insured in this Fund, are subject to automatic insurance. The size of an insurance sum on one client can reach 30 percent of an equity of serving bank.

Federal department of an insurance supervision (Bundesaufsichtsamt fur das Versicherungswesen, BAV) is independent state body which is under control to the Ministry of Finance and is headed by the President. According to the legislation of Germany, this Federal department performs the regulating function by the edition of regulations of administrative and legal nature. In case of Federal department the Insurance recommendation which members are experts in an insurance field is founded/

In the Russian Federation the model of insurance of deposits is rather oriented on American and possesses its main signs: obligation of participation in system, forming of fund of insurance at the expense of fees of banks, and also the limited amount of compensation on deposits.

The beginning of the 90th years when the Bank of Russia made attempt to control growth of money supply that led to sharp reducing the credits became an indicator of level of compliance of commercial banks to new system of insurance of deposits. Some of the countries with a transitional economy, mainly, the countries of the Central Europe and Baltic, corresponded to required criteria and, having overcome some bank crises and having reoriented the occupational sector in the direction of foreign trade, managed to develop, as a result, stable monetary and budget management. Others, in particular, the countries of the former Soviet Union, and also Bulgaria and Romania, couldn't refuse provision of the financial help to the weak entities and banks that seriously slowed down process of structural adjustment of their economy.

For trust recovery to a financial system and crediting of the companies and citizens it is necessary to provide to banks and other large financial intermediaries the right to increase the equity at the expense of the state and private sources. Also participants of a meeting urged to increase reliability of national systems of insurance of deposits and supported creation of the secondary market of a mortgage and the market the sekjyuritizirovannykh of assets in those countries where it will be acknowledged reasonable and on condition of reliability in an assessment of assets, transparency of their reflection in balance, applications of high-quality standards of the reporting.

Their connected nature became feature of stabilization measures which are taken during modern financial crisis. In the USA these measures are caused by that housing mortgage lending extends. It is forbidden to banks without government authorization to increase dividend payments and remunerations (award) to heads. In Great Britain banks obliged to keep crediting of small entrepreneurs and mortgage borrowers in amounts of 2007 within the next three years. The Government of the country has a right to appoint workers in governing bodies of banks.

In France the state guarantees to banks are caused by the counter liability crediting at a certain level of physical persons, small and average entrepreneurs, also municipalities of domicile. The authorities of France intend to regulate the income and remunerations (award) of heads of banks.

Guarantees of the Austrian authorities – 85 billion euro, - will be able to use only those banks which perform interbank transactions through specially created settlement center in the Austrian cantonal bank.

2 . State deposit guarantees. One of measures is use of the state deposit guarantees. In the Directive 94/19/EU of the European Parliament and Council of the European Union on programs for protection of bank deposits of May 30, 1994 it is noted that guaranteeing deposits is a basis of achievement of completeness of the domestic market and a necessary component of system of supervision of financial institutions owing to solidarity of all organizations of one financial market provided to them in case of improper execution of liabilities of one them them. According to the specified Directive it is established that state members of the European Community shall create and support functioning in the territory of one or several systems of guaranteeing deposits. It will allow to stop mass nature of money withdrawal from banks. Such system was used in a number of the countries with developed economy, and also from the transitional. For example, in Sweden deposits of all banks are guaranteed by the state. This guarantee – very effective measure as the state can convince investors that some problems of bank are under control of the state and isn't present need for money withdrawal. Main goal of insurance of deposits of citizens in commercial banks is protection of their deposits and removal of risk of bankruptcy of viable banks, for the purpose of prevention of bank crisis.

At the national level in the majority of the countries restructuring of bank systems which were aimed at development of long-term strategy of development of a bank system was carried out. The concept "restructuring" represents "the package of measures, applied to the credit organizations and directed on overcoming of their financial instability and recovery of solvency or on implementation of liquidation procedures of the credit organizations according to the national legal system". In many European countries in connection with crisis, the special attention was deserved by interest rates and currency rates, and also stabilization of banking sector by means of participation of the state in it. It is represented that by increase of stability there shall be a competition restriction. In Germany to three banking groups allocated certain systems of the market in which these groups and shall function. In the USA bank Act of 1933. interest payments on on-demand account were under a ban.

Approaches which are offered in modern banking practice, consider globalization of banking and financial liberalization. Respectively, the wide set of market methods which together will allow to carry out bank restructuring systemically is offered

3 . Consolidation of banks. In the course of restructuring of banks consolidation of banks can be used. It can be performed in the form of accession and merge. Accession of banks happens when one bank stops the existence, and all its assets join assets of other bank. Merge of banks – result of consolidation of two or several banks in one, thus those banks which participate in merge, lose the autonomy. Such mechanism is rather effective as allows to reduce amount of operating costs and also to help increase in amount of transactions for the purpose of profit increase. Having analysed a number of laws on anti-monopoly regulation, we will see that the most indicative is experience of the USA. There fundamental laws which determine an antimonopoly policy, the Sherman act of 1890 and Clayton's Law of 1914 are. The Sherman act determines general practice concerning monopolies, and Clayton's Law brings a prohibition on merges which can lead to formation of monopolies. This law forbids corporations, in our case to bank, to acquire shares or assets of other banks if this acquisition can significantly reduce the competition or can have intention to create monopoly.

Merge of legal entities emergence of the new legal entity by transfer is recognized to it of all rights and obligations of two or several legal entities with the termination of the last.

In case of merge of legal entities of the right and an obligation of each of reorganized legal entities pass to again arisen legal entity according to the transfer act.

In the USA in the late nineties – the beginning of the 2000th years there was a large number of merges, both banks, and banks and industrial companies. In mentioned time rather large number of the small organizations had a lack of investment resources that complicated expansion of production and didn't allow to maintain the competition. The American banks with the large equity accumulated necessary resources. Thus, merges appeared then almost the unique logical exit from the current situation.

Organization accession — the termination of one or several legal entities with transfer all of them the rights and obligations to other (existing) legal entity. Accession of one or several legal entities to other legal entity means transition of the rights and obligations of the first to this other legal entity. Considering accession from the organizational point of view, we consider necessary to note that in that case accession is cancellation of the license of attached bank and its liquidation as independent legal entity and at the same time preserving the attached bank with its re-registration and registration to it the new license or preserving the former license.

4 . Creation "bridge bank". One of methods of fight against the crisis phenomena is creation "Bridge bank" ("Most-Bank") is a technology of closing of problem bank by means of which the bank has opportunity to continue the transactions until, the final necessary decision won't be found yet. The weak bank is exposed to liquidation process. The new bank obtains the license and is controlled liquidation commission. This commission possesses a freedom of action in the determination, what assets and liabilities will be transferred to it "bridge bank". Means that the bank represents so-called "bridge" between bankruptcy of bank and time which is necessary for liquidation commission for a value assessment and sale of problem bank so that the third party had an opportunity to perform merge transaction. Also, it will provide necessary time for potential buyers that they could estimate a condition of this bank and direct the offers.

Summing up the result, we will note that lack of sufficient means, a conflict of interest of owners and managers, "gaps" in the legal environment or institutional structure, etc. the reasons which weren't timely solved, are initial prerequisites of future crises. Bank crises as a whole – the phenomena undesirable, bringing to serious all-economic and social consequences. Mechanisms of market economy and specific conditions of activities of banks do crises almost inevitable, having objective nature and the specifics created under the influence of a concrete historical stage of economic development of the country. Aggravation of crisis problems leads to public awareness of need of the state support of banks and development of governmental programs for restructuring of a bank system, forming of special mechanisms of restructuring. In turn restructuring of commercial bank assumes implementation of the actions directed on change of structure of its assets and liabilities, and also its internal creation. The complex system is necessary for prevention of development of the arising crisis phenomena in banking sector and minimization of their negative consequences crisis management.

So far practically worldwide there were ideas of feasible measures on restructuring of economy and an exit of general financial collapse. Thus despite identity of each of the countries, general approaches of world bank community to the solution of questions of anti-recessionary regulation become possible only as a result of operational coordinating of efforts and lack of economic dissociation.