Analysis of Small and Medium Russian Banks in Dynamics

Abstract

This paper focuses on three important issues concerning the Russian banking system: its stability, prevailing patterns of national banks' performance and structural dissimilarities. To examine these issues the methodology of dynamic cluster analysis is applied. The research is based on dynamic cluster analysis of 444 Russian banks for the period of 2 years (from September 2001 to September 2003). Support is found for the hypothesis that the Russian banking sector consists of an excessive number of small banks. There are a significant number of troubled banks, which slow down the development of banking system due to higher risks associated with their activities, insolvency and high accumulated losses. Although, dynamic analysis suggests that some of these institutions are stable, this deceptive stability refers to bankruptcy state. The results argue there is a tendency to overestimate bank performance in terms of their stability and prosperity. The problems of undeveloped financial market, high affiliation with insiders and undercapitalization are serious limiting factors for the evolution of national banking system. Another finding suggests that possible root cause for the decline in its development is ineffective performance of individual financial institutions within the whole banking system. The evidence related to clustering of banks is consistent with other studies in this field. However, proposed framework provides more detailed and precise snapshot. Potential application to regulatory surveillance in commercial banking is discussed.