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N. G. Vovchenko, T. V. Epifanova
IMPACT OF FINANCIAL GLOBALIZATION PROCESSES ON TRANSFORMATION OF RUSSIAN FINANCIAL SYSTEM
Annotation
The aim of the research reflects the influence of financial globalisation on transforming the financial system of Russia. It develops the logic of transition of financial relations under the effects of globalisation. The basis is provided for the role of globalisation as a factor of new fiscal policy, integrated financial compliance and regulaiton, as well as the provision of transparency of capital and income flows. The research illustrates the transformation of institutional structure of Russian banking system in the aims of stabilizing the financial and economic security of the country.
Keywords
Financial system sustainability; globalization; macro-microprudential economic indicators; international economic development; budgetary policy; bank activity regulation.
At the present time direction of the financial system transformation processes is being determined by pervasive interconnection of countries around the world resulted from grow in number and diversity of the cross-border transactions of financial products, services, and international capital flows , fast and wide diffusion of financial and telecommunication technologies.
For the first time members of the global community have realized how insufficient their knowledge of financial globalization and its gnosiology is, as well as how late they are in trying to understand how serious the imminent situation is. A question arises as consequence of the recurring economic crises of which national and supernational regulation model to follow. The Russian financial system goes through an exceptionally hard period. The following three groups of factors undoubtedly influence the current Russian economic situation: geopolitical tensions and uncertainty (the Ukrainian issue, sanctions, loss of access to international capital markets, the Turkish issue), steep drop in oil prices (by 62 % per annum), and structural problems and imbalance (low level of investment in infrastructure and production facilities, lack of quality reproduction of the human capital asset, high level of eco-
nomics monopolization and dependency of market on raw-materials export).
Dynamics of key macroeconomic indicators is changing down GDP, Idustrial Production Index, Fixed capital investments, Real disposable income.
The situation is worsened due to the fact that in 2008-2009 it was the global recession and economic recovery depended on joint efforts of all countries (especially China, Euro arear, USA and Russia).
While the present recession in the old market, in contrast with the situation 5 years ago, is likely to be of long-term nature (Fig. 1). In this context, the issue of development of the up-to-date group of techniques for financial processes operation is becoming more urgent in the environment of growing global cross-border flows. That means the development of new financial institutions and instruments which will make it possible both to maintain sustainable financial system operation and to derive long-term benefit and global income from financial globalization. Considering institutional and instrumental framework of its own financial system Russia must adopt the best practices of the financial system operation in the developed countries which, among other things, will allow to achieve a sustainable economic growth.
*MBPD, dollars, according to Energy Briefing: Global Crude Oil Demand & Supply. June 3, 2016.
Figure 1 — World oil demand, supply and price*
We aim to determine which impact the financial globalization processes have on transformation of the Russian financial system and to propose measures for institutional and instrumental backup of its financial and economic stability (through development of the financial globalization and macro- and microprudential indicators) as a basis for recession-resistant sustainable economic development (table 1).
Worldwide process of financial globalization may be identified as a specific phenomenon of the international economic development of the past decades determined by such developed indicators of financial globalization as financial openness, financial integration, financial involvement, international financial markets, direct foreign investments, and financial transactions of the transnational enterprises.
Financial globalization may be understood as a process (or a set of processes) which converts the spheres of financial relationships and transnational cooperation which generate transnational or intraregional financial flows and networks of activity, interrelations and power.We aim to
determine which impact the financial globalization processes have on transformation of the Russian financial system and to propose measures for institutional and instrumental backup of its financial and economic stability (through development of the financial globalization and macro and mi-croprudential indicators) as a basis for recession-resistant sustainable economic development (table 1).
Worldwide process of financial globalization may be identified as a specific phenomenon of the international economic development of the past decades determined by such developed indicators of financial globalization as financial openness, financial integration, financial involvement, international financial markets, direct foreign investments, and financial transactions of the transnational enterprises.
Financial globalization may be understood as a process (or a set of processes) which converts the spheres of financial relationships and transnational cooperation which generate transnational or intraregional financial flows and networks of activity, interrelations and power.
Table 1 — Basic Macro- and Microprudential indicators
Key Macroprudential Indicators Macroeconomic Indicators
Economic growth Compound growth rate. Slowdown of the growth rate in the selected sectors
Balance of payments Current balance. Exchange reserves adequacy. Foreign debt (with regard to debt maturity structure). Trade terms. Import and export. Capital flows (by structure and by terms)
Inflation Inflation rate (volatility)
Fiscal capacity Income level. Expenditure level. Surplus/deficit
Interest rates and currency rate Volatility of interest rates and national currency rate. Effective interest rate level in the domestic market. Exchange rate stability. Secured exchange rate. Loan-to-deposit ratio
Loan and asset growth Loan growth. Assets value growth
Financial globalization impacts Foreign trade channels of crisis expansion. Direct foreign investments
Monetary indicators Dynamics of domestic credit in real terms. Money multiplier. Deposit growth rate in real terms. Money-to-Forex reserves ratio. Excessive supply in real terms
Other factors State-directed credits and investments. Utilization of banking system resources by State. Total economic debt
Key Macroprudential Indicators Composite Microprudential Indicators
Capital adequacy Total capital adequacy ratio. Pareto principle of distribution (concentration). Capital adequacy in various bank groups
Quality of the lending institution assets Distribution of the loans provided for economy sectors. Foreign currency denominated loans. Arrears and reserves. Non-performing loans for state undertakings. Asset risk level. Tied loans
Profit indicators Return on assets. Return on equity. Income and expenditures indicators. Structural profitability indicators
Sensitivity to market risk Exchange rate risk. Interest rate risk. Equity price risk. Raw materials price risk
Principal market characteristics Market value of financial instruments, including shares. Excess return indicators. Credit ratings. Government bond yield spreads
Management quality Expenditure indicators. Net income of a solo employee. Growth in number of financial institutions
Borrower financial condition Debt-to-capital ratio; Corporate income. Other characteristics of the enterprise standing. Household debts
Liquidity Central Bank credits to financial institutions. Interbank interest rate segmentation. Deposit-to-monetary aggregate ratio. Loan-to-deposit ratio. Assets and liabilities maturity structure (asset liquidity ratios). Secondary market liquidity indicators
The concept of global financial flows can be described in relation to their key spatio-temporal dimensions such as length, extensity, intensity, depth, velocity, impact propensity, and institutionalization that enable to construct a new typology of financial globalization (namely, to distinguish fundamental (pervasive), contour, mounting, and sliding globalization). The simplified globalization typology demonstrates that this phenomenon has more than one specific type.
With reference to the specified typology, the financial system of Russia can be described as the one with a spreading financial globalization, featured, in the first place, with moderate extension and impact, rather than with velocity of its flows.
Financial globalization as a differential phenomenon affects financial system sustainability and disturbs the national strategy applied for development of the system, as well as intensifies economic development disparity and resource allocation unevenness.
The past two decades alone saw a few dozens of recessions which increased average annual GDP shrinkage to 2 %. Repeated currency and financial crises and unstable market volatility indices exemplify impact of financial globalization on financial development sustainability. This processes witness that the world is need of new approaches to resolution of this problem.
Under implementation of policy for stabilization of financial situation and in compliance with the proposed principles of financial system stability (that is availability of extensive payments and settlements system, applicable corporate management practice, fair competition, public confidence, rational use of resource, effective management, and proper performance of legal and judicial systems) the issue of quantity and quality assessment of the financial sector performance, its exposure to
risks, and its capacity to absorb shocks becomes more and more significant. The assessment is to be performed with the consideration of the macroprudential (economic growth, balance of payments, inflation, interest rates, currency rate, fiscal capacity, loan growth, globalization impacts (on the direct foreign investments, capital outflow, and financial markets dynamics correlation)) and composite microprudential (capital adequacy, quality of the landing institution assets, borrower financial condition, management quality, profit, and liquidity) indicators systematized for work.
Best practices developed for quality and quantity assessment of financial sus-tainability include a number of techniques, such as dynamic analysis of the financial sector stability indictors, development of crisis early warning system, financial system sensitivity analysis, stress testing (Figure 2), as well as forecasting of changes in the financial sector parameters, — which are yet to be adapted to Russian financial practice.
Monitoring of financial stability and availability of constant data flow describing Russian financial system with regard to international standards are required for early forecast of potential crisis situations and taking effective preventive measures.
In the environment of globalization the strategy of public finances transformation and institutional changes must aim at public finances efficiency and effectiveness provision and maximum efficiency and fullness of public resources utilization. Interactions accompanied with changes in resource, institutional and behavioral (the psychology of finance) parameters should be related to financial transformations.
Budgetary policy as a part of financial policy of the state represents a core of economic policy and serves as the means of adaptation to globalization processes.
Figure 2 — Stress Testing Mechanism
Key objectives of the budgetary policy are as follows:
- Increased importance of strategic financial planning in the budgeting process;
- Implementation of new mechanisms for result-oriented budgeting; transition from budget costs management to budget outcomes management;
- Introduction of outsourcing for budget costs reduction;
- Optimization of the budgetary institution network pursuant to their public functions and tasks;
- Enhancement of methods and forms of social support, including moneti-zation of social benefits;
- Continued tax reform aimed to induce positive structural changes in economy and social sphere; guaranteed long-term stability of the tax system;
- Guaranteed balance of budgets at all levels of the budget system subject to distribution of expenditure commitments and sources of income on a long-term basis, including such important aspect as transition to extended national ruble-related financial system without containment of growth of internal debt and current government budget deficit (Slide 8). In addition, it is necessary to develop the bond sector of financial system.
In the period of national economic transformation it is important to work out an institutional structure of the financial system that will ensure transparency of financial flows required for proper performance of financial market where free access to information determined by financial regulatory and control authorities is presupposed. Formal regulations, laws, legal acts, and their comprehension, precedents (events which have impact on formal institutions) and, after all, complementarity of institutions, their compatibility, and inter-changeability are important for the development of institutional infrastructure which shall be understood as a set of functional rules rather than organizational structure. It is essential for the rules of conduct to be accompanied with the rules of financial control. Management reform, economic growth, and fiscal sustainability are the interrelated components of successful social and economic development. The following are the conditions to be observed to achieve the said objectives:
1) Implementation of measures for property rights protection;
2) Law-enforcement and judicial reform;
3) Education and healthcare reform;
4) Financial and pension system reform;
5) Demonopolization and stimulation of competition;
6) Measures for small and medium enterprises development;
7) Conduct of cluster policy;
8) Reduction of administrative procedures.
Any reforms will come to naught without development of the modern public administration system and project and process management system based on the up-to-date technologies and quality management, and on implementation of modern result management systems. The modern administration system has a lot of prob-
lems which can be illustrated with the fact that Russia ranks 103rd of 144 countries for its qualitative administration system.
Results of the research conducted demonstrates that financial markets globalization has serious impact on Russian national banking sector, affects its stability, and increases its sensitivity to external factors as well. In 2015 Russian banks suffered from their dependence on cash assets provided by the Central Bank and, in addition, were exposed to the interest rate risk. The banking crisis cost Russian economy 1,8 % decline in GDP and overall amount of investment in banks of 1,5 trillions of rubles. The funds were allocated for bank sector decapitalization. Major banks received support while 20 % thereof had to quit the market that required extra money for banking sector restructuring. According to analysts' estimate in 2016 another 10 % of banks will also quit the market. Capital adequacy ratio is equal to 13 % that is not enough for volatility period and quite dangerous for strategic plans implementation. Bank losses amount to 19 billions of rubles (as of 2015). All the aforesaid are indicative of a large-scale banking crisis. For banks liquidity outflow is similar to a shock attack.
New Third Basel Accord is an innovative guideline for bank activity regulation (table 2). In order to maintain financial stability and consolidate competitive position, Russian lending agencies must rely in their operations on the emerging international practice. In terms of the new requirements banks must carry out the procedure of capital adequacy evaluation in relation to the general risk level as well as to have at their disposal the strategy for maintenance of capital at the proper level which complies of the requirements of regulatory authorities. In this context it is exceptionally important to consider three types of risks, i.e. market, credit, and transaction risks.
Table 2 — Structure of the New Basel Capital Accord
New Basel Capital Accord (Basel III)
Minimum requirements to capital adequacy • Minimum capital adequacy ratio requirements increased from 2 % (in Basel II) to 4 % of risk-weighted assets; • New capital adequacy requirement given protective capital buffer, equivalent to 2,5 % of cumulative risk-weighted assets Surveillance process • Increased control of the sys-temically important banks, ability of which to absorb losses must be better than of the ordinary banks Market discipline • Introduction of a countercyclical capital buffer; • Introduction of minimum 3 % leverage ratio of bank equity to its non-risk-based cumulative assets and off-balance liabilities
Banks as a key element of the world financial architecture and financial flows transparency supporting system together with the Federal Service for Financial Monitoring must oversee money laundry prevention operations following new rules and international standards. To solve this problem on the global scale, it is required to coordinate activities of the Federal Service for Financial Monitoring and the Financial Action Task Force (FATF), strictly adhere to 40 principles of FATF, as well as to coordinate with the Egmont Group and follow its principle of information exchange.
Following a general trend to transformation of the world financial architecture by international organizations it is necessary to work out a number of preventive measures required at the initial stage of the national financial systems reforms. These measures must include ensuring of transparency in decision-making processes, introduction of the Codes of Conduct for civil servants, implementation of well-established auditing, and account keeping on the basis of international standards.
It is required to design an institutional model of Russian financial system transformation with the aim to enhance its stability in the environment of financial globalization taking into consideration peculiarities of world financial architecture dynamics. The model shall make it possible to determine quantitative and qualitative
indicators of financial globalization and character of its impact on the national financial systems and allow to determine main directions and methods for consolidation of informal and formal norms, rules, standards, and code, newly established and imported as a consequence of globalization.
Such approach to the institutional transformational processes observed in the Russian financial system ensures elaboration of macro-, meso-, and microfinancial indicators or financial rules which make it possible for financial surveillance and regulatory authorities to maintain a required level of financial stability in compliance with main criteria of social and economic development of the state in the following areas: fiscal relations reforming, banking system modernization, financial flows transparency support, corruption prevention, counteraction to legalization of illegal income, and enhancement of financial supervision and regulation significance.
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