A path to financial integration: steps for the Eurasian Economic Union

Abstract

This paper analyzes the banking systems of the founding states of the Eurasian Economic Union (EAEU) to indentify discrepancies that may hinder the establishment of a single market for financial services. Practical contributions are derived from two dimensions. First, a comparison of the EAEU banking sectors’ structures prior to integration reveals common features such as high concentration, low level of foreign ownership and dominance of state-controlled banks. Significant heterogeneity in the development of the EAEU banking sectors, however, is observed. We expect changes towards reinforced Russian banks’ power in smaller EAEU member states. Intense cross-border competition will drive a further consolidation of domestic credit institutions and decrease the market share of state banks. Second, harmonization of banking regulations and supervisory practices is a critical starting point for moving to a single market for financial services. We report some divergences in the implementation of Basel III standards at the national levels. Russian banks’ regulatory framework is more advanced and compliant with international requirements for capitalization and liquidity. Governance and information disclosure in the EAEU banking sectors, however, remain weak. Unless regulation is strengthened and appropriate prudential tools to control bank risks are properly set, financial integration may facilitate spillover of risks across national borders and threaten the financial stability in the EAEU.